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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to ___________
COMMISSION FILE NUMBER: 001-14461
Entercom Communications Corp.
----------------------------------------
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 23-1701044
(State or other jurisdiction of (I.R.S. Employer
incorporation of organization) Identification No.)
401 CITY AVENUE, SUITE 409
BALA CYNWYD, PENNSYLVANIA 19004
(Address of principal executive offices and Zip Code)
(610) 660-5610
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES [X] NO [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class A Common Stock, $.01 par value - 34,781,574 Shares Outstanding
as of August 7, 2001
Class B Common Stock, $.01 par value - 10,531,805 Shares Outstanding
as of August 7, 2001
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ENTERCOM COMMUNICATIONS CORP.
INDEX
PAGE
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements................................................................................ 3
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................................................ 13
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk.......................................... 19
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings................................................................................... 20
ITEM 2. Changes in Securities and Use of Proceeds........................................................... 20
ITEM 3. Defaults Upon Senior Securities..................................................................... 20
ITEM 4. Submission of Matters to a Vote of Security Holders................................................. 20
ITEM 5. Other Information................................................................................... 21
ITEM 6. Exhibits and Reports on Form 8-K.................................................................... 21
SIGNATURES .................................................................................................... 23
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PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ENTERCOM COMMUNICATIONS CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2000 AND JUNE 30, 2001
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
ASSETS
DECEMBER 31, JUNE 30,
------------ --------
2000 2001
----------- -----------
CURRENT ASSETS
Cash and cash equivalents $ 13,257 $ 13,012
Accounts receivable, net of allowance for doubtful accounts 70,937 74,357
Prepaid expenses and deposits 3,852 4,615
Prepaid and refundable federal and state income taxes 705 3,945
Deferred tax assets 1,499 4,030
Station deposits and acquisition costs 688 819
----------- -----------
Total current assets 90,938 100,778
----------- -----------
INVESTMENTS 12,116 17,205
----------- -----------
PROPERTY AND EQUIPMENT - AT COST
Land, land easements and land improvements 10,082 10,180
Buildings 10,404 10,509
Equipment 77,409 80,422
Furniture and fixtures 12,125 12,486
Leasehold improvements 8,967 11,366
----------- -----------
118,987 124,963
Accumulated depreciation and amortization (26,532) (31,885)
----------- -----------
92,455 93,078
Capital improvements in progress 1,498 656
----------- -----------
Net property and equipment 93,953 93,734
----------- -----------
RADIO BROADCASTING LICENSES AND OTHER INTANGIBLES - NET 1,265,816 1,249,222
----------- -----------
DEFERRED CHARGES AND OTHER ASSETS - NET 11,105 10,527
----------- -----------
TOTAL $ 1,473,928 $ 1,471,466
=========== ===========
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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ENTERCOM COMMUNICATIONS CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2000 AND JUNE 30, 2001
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
LIABILITIES AND SHAREHOLDERS' EQUITY
DECEMBER 31, JUNE 30,
------------ --------
2000 2001
---- ----
CURRENT LIABILITIES
Accounts payable $ 18,967 $ 13,870
Accrued liabilities:
Salaries 6,042 5,984
Interest 1,744 3,928
Other 1,017 831
Derivative instruments -- 5,564
Long-term debt due within one year 11 13
----------- -----------
Total current liabilities 27,781 30,190
----------- -----------
SENIOR DEBT 461,249 436,317
DEFERRED TAX LIABILITIES 124,197 134,304
----------- -----------
Total liabilities 613,227 600,811
----------- -----------
COMPANY-OBLIGATED MANDATORILY REDEEMABLE CONVERTIBLE
PREFERRED SECURITIES OF SUBSIDIARY HOLDING SOLELY CONVERTIBLE
DEBENTURES OF THE COMPANY ("TIDES") 125,000 125,000
----------- -----------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Preferred stock -- --
Class A common stock 342 348
Class B common stock 105 105
Class C common stock 5 --
Additional paid-in capital 747,442 750,103
Accumulated deficit (11,850) (4,301)
Unearned compensation (329) (265)
Accumulated other comprehensive loss (14) (335)
----------- -----------
Total shareholders' equity 735,701 745,655
----------- -----------
TOTAL $ 1,473,928 $ 1,471,466
=========== ===========
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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ENTERCOM COMMUNICATIONS CORP.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2000 AND 2001
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
SIX MONTHS ENDED
----------------
JUNE 30,
--------
2000 2001
---- ----
NET REVENUES $ 167,818 $ 164,081
------------ ------------
OPERATING EXPENSES:
Station operating expenses 101,752 100,416
Depreciation and amortization 21,114 23,004
Corporate general and administrative expenses 6,474 6,459
Net expense from time brokerage agreement fees 5 --
Net loss on sale of assets 7 15
------------ ------------
Total operating expenses 129,352 129,894
------------ ------------
OPERATING INCOME 38,466 34,187
------------ ------------
OTHER EXPENSE (INCOME):
Interest expense 19,024 14,993
Financing cost of Company-obligated mandatorily redeemable convertible
preferred securities of subsidiary holding solely convertible debentures
of the Company 3,906 3,906
Interest income (207) (189)
Equity loss from unconsolidated affiliate -- 1,880
Net gain on derivative instruments -- (79)
------------ ------------
Total other expense 22,723 20,511
------------ ------------
INCOME BEFORE INCOME TAXES & ACCOUNTING CHANGE 15,743 13,676
INCOME TAXES 6,366 5,561
------------ ------------
INCOME BEFORE ACCOUNTING CHANGE 9,377 8,115
Cumulative effect of accounting change, net of taxes of $377 -- (566)
------------ ------------
NET INCOME $ 9,377 $ 7,549
============ ============
NET INCOME PER SHARE - BASIC:
Income before accounting change $ 0.21 $ 0.18
Cumulative effect of accounting change, net of taxes -- (0.01)
------------ ------------
NET INCOME PER SHARE - BASIC $ 0.21 $ 0.17
============ ============
NET INCOME PER SHARE - DILUTED:
Income before accounting change $ 0.21 $ 0.17
Cumulative effect of accounting change, net of taxes -- (0.01)
------------ ------------
NET INCOME PER SHARE - DILUTED $ 0.21 $ 0.16
============ ============
WEIGHTED AVERAGE SHARES:
Basic 45,194,597 45,266,003
Diluted 45,492,165 46,048,783
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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ENTERCOM COMMUNICATIONS CORP.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2000 AND 2001
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED
------------------
JUNE 30,
--------
2000 2001
---- ----
NET REVENUES $ 96,941 $ 94,626
------------ ------------
OPERATING EXPENSES:
Station operating expenses 55,559 54,056
Depreciation and amortization 10,637 11,508
Corporate general and administrative expenses 3,307 3,129
Net expense from time brokerage agreement fees 1 --
Net gain on sale of assets -- (8)
------------ ------------
Total operating expenses 69,504 68,685
------------ ------------
OPERATING INCOME 27,437 25,941
------------ ------------
OTHER EXPENSE (INCOME) ITEMS:
Interest expense 9,634 7,082
Financing cost of Company-obligated mandatorily redeemable convertible preferred
securities of subsidiary holding solely convertible debentures
of the Company 1,953 1,953
Interest income (101) (94)
Equity loss from unconsolidated affiliate -- 1,030
Net gain on derivative instruments -- (557)
------------ ------------
Total other expense 11,486 9,414
------------ ------------
INCOME BEFORE INCOME TAXES 15,951 16,527
INCOME TAXES 6,488 6,663
------------ ------------
NET INCOME $ 9,463 $ 9,864
============ ============
NET INCOME PER SHARE:
NET INCOME PER SHARE - BASIC $ 0.21 $ 0.22
============ ============
NET INCOME PER SHARE - DILUTED $ .21 $ 0.21
============ ============
WEIGHTED AVERAGE SHARES:
Basic 45,201,185 45,281,669
Diluted 45,506,460 46,168,373
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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ENTERCOM COMMUNICATIONS CORP.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
SIX MONTHS ENDED JUNE 30, 2000 AND 2001
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
SIX MONTHS ENDED
----------------
JUNE 30,
--------
2000 2001
------- -------
NET INCOME $ 9,377 $ 7,549
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX BENEFIT OR PROVISION
Unrealized gain (loss) on investments - net of tax benefit of $229 in 2000 and
tax provision of $1,666 in 2001 (343) 2,499
Unrealized loss on hedged derivatives from cumulative effect of accounting change - net
of tax benefit of $457 -- (685)
Unrealized loss on hedged derivatives - net of tax benefit of $1,423 -- (2,135)
------- -------
COMPREHENSIVE INCOME $ 9,034 $ 7,228
======= =======
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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ENTERCOM COMMUNICATIONS CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2000 AND 2001
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
SIX MONTHS ENDED
----------------
JUNE 30,
--------
2000 2001
---- ----
OPERATING ACTIVITIES:
Net income $ 9,377 $ 7,549
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 21,114 23,004
Deferred taxes 9,095 7,790
Tax benefit on exercise of options (192) (597)
Provision for bad debts 1,635 1,675
Non-cash stock-based compensation expense 491 335
Loss on disposition of assets 7 15
Equity loss from unconsolidated affiliate -- 1,880
Net gain on derivative instruments -- (79)
Cumulative effect of accounting change -- 943
Changes in assets and liabilities which (used) provided cash:
Accounts receivable (26,435) (5,095)
Prepaid expenses 575 (763)
Prepaid and refundable income taxes (2,221) (2,643)
Accounts payable and accrued liabilities (1,284) (3,157)
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 12,162 30,857
-------- --------
INVESTING ACTIVITIES:
Additions to property and equipment (4,483) (5,344)
Proceeds from sale of property and equipment 21 118
Purchases of radio station assets (13,183) --
Deferred charges and other assets (692) (402)
Purchase of investments (5,926) (2,804)
Station acquisition costs (731) (131)
-------- --------
NET CASH USED IN INVESTING ACTIVITIES (24,994) (8,563)
-------- --------
FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt 22,000 5,078
Payments on long-term debt (10,506) (30,008)
Proceeds from issuance of common stock related to incentive plans 492 279
Proceeds from exercise of stock options 536 2,112
-------- --------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 12,522 (22,539)
-------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS (310) (245)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 11,262 13,257
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 10,952 $ 13,012
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION --
Cash paid during the period for:
Interest $ 20,484 $ 14,763
======== ========
Interest on TIDES $ 3,906 $ 3,906
======== ========
Income taxes $ 440 $ 35
======== ========
SUPPLEMENTAL DISCLOSURES ON NON-CASH INVESTING AND FINANCING ACTIVITIES -
In connection with the issuance of certain awards of Restricted Stock during the
six months ended June 30, 2000, the Company issued 5,000 shares of Class A
Common Stock and increased its additional paid-in-capital by $266.
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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ENTERCOM COMMUNICATIONS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 2000 AND 2001
1. BASIS OF PRESENTATION
The accompanying unaudited financial statements for Entercom
Communications Corp. (the "Company") have been prepared in accordance with (1)
generally accepted accounting principles for interim financial information and
(2) the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly,
they do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the opinion
of management, all adjustments, consisting of only normal recurring accruals,
considered necessary for a fair presentation have been included.
This Form 10-Q should be read in conjunction with the financial
statements and notes thereto included in the Company's audited financial
statements as of December 31, 2000, and filed with the Securities and Exchange
Commission (the "SEC") on March 21, 2001, as part of the Company's Form 10-K.
Operating results for the interim periods presented are not
necessarily indicative of the results that may be expected for the full fiscal
year. Certain prior year amounts have been reclassified to conform to the
current year's presentation, which had no effect on the financial position,
results of operations or cash flows of the Company.
Effective January 1, 2001, the Company adopted the Financial
Accounting Standards Board's ("FASB") Statement of Accounting Standards ("SFAS")
No. 133 entitled "Accounting for Derivative and Hedging Activities," that was
amended by SFAS No. 137 and SFAS No. 138. SFAS No. 133 established accounting
and reporting standards for (1) derivative instruments, including certain
derivative instruments embedded in other contracts, which are collectively
referred to as derivatives and (2) hedging activities. The accounting for
changes in the fair value of a derivative depends on the intended use of the
derivative and the resulting designation. All derivatives, whether designated in
hedging relationships or not, are required to be recorded on the balance sheet
at fair value. If the derivative is designated as a fair value hedge, the
changes in the fair value of the derivative and the hedged item are recognized
in the statement of operations. If the derivative is designated as a cash flow
hedge, changes in the fair value of the derivative are recorded in other
comprehensive income (loss) and are recognized in the statement of operations
when the hedged item affects net income (loss). SFAS No. 133 defines new
requirements for designation and documentation of hedging relationships as well
as on going effectiveness assessments in order to use hedge accounting under
this standard. A derivative that does not qualify as a hedge is marked to fair
value through the statement of operations. The Company formally documents all
relationships between hedging instruments and hedged items, as well as its
risk-management objective and strategy for undertaking various hedge
transactions. This process includes relating all derivatives that are designated
as fair value or cash flow hedges to specific assets and liabilities on the
balance sheet or to specific firm commitments or forecasted transactions. The
Company also formally assesses, both at the inception of the hedge and on an
ongoing basis, whether each derivative is highly effective in offsetting changes
in fair values or cash flows of the hedged item. If it is determined that a
derivative is not highly effective as a hedge or if a derivative ceases to be a
highly effective hedge, the Company will discontinue hedge accounting
prospectively.
For those derivatives that did not qualify for hedge accounting
treatment with an aggregate notional amount of $30.0 million, the Company
recorded to the statement of operations: (1) for the six months ended June 30,
2001, a $0.4 million loss under the cumulative effect of accounting change as an
accumulated transition adjustment and (2) for the six months and three months
ended June 30, 2001, a $0.4 million loss and a $0.4 million gain, respectively,
under gain on derivative instruments. For those derivatives designated as cash
flow hedges that qualify for hedge accounting treatment with an aggregate
notional amount of $233.0 million, the Company recorded: (1) the ineffective
amount of the hedges to the statement of operations for the six months ended
June 30, 2001, as a $0.6 million loss under the cumulative effect of accounting
change as an accumulated transition adjustment and for the six months and three
months ended June 30, 2001, as a $0.5 million gain and a $0.2 million gain,
respectively, under gain on derivative instruments and (2) the effective amount
of the hedges to the statement of other comprehensive income for the six months
ended June 30, 2001, as a $1.1 million loss under the cumulative effect of
accounting change as an accumulated transition adjustment and as a $3.5 million
loss to unrealized loss on hedged derivatives. The Company has calculated the
transition and current period adjustments in accordance with tentative
accounting guidance issued by the Derivatives Implementation Group ("DIG"), and
therefore, the guidance could be subject to change. The DIG is a committee
appointed by the FASB and assigned the responsibility of answering
implementation and interpretation questions related to this new accounting
standard.
In June 2001, the FASB issued SFAS No. 142 "Goodwill and Other
Intangible Assets" that requires the use of a nonamortization approach to
account for purchased goodwill and certain intangibles. Under a nonamortization
approach, goodwill and certain intangibles will not be amortized into results of
operations, but instead would be reviewed for impairment and written down and
charged to results of operations only in the periods in which the recorded value
of goodwill and certain intangibles is more than its fair value. This statement,
which applies to goodwill and intangible assets acquired prior to June 30, 2001,
will be adopted by the Company on January 1, 2002. The Company expects that
adoption of this accounting standard will have the impact of reducing our
amortization of goodwill and intangibles commencing January 1, 2002. However,
impairment reviews may result in future periodic write-downs.
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2. UNAUDITED PRO FORMA INFORMATION FOR ACQUISITIONS AND DISPOSITIONS
The following unaudited pro forma summary presents the consolidated
results of operations as if the transactions which occurred during the period of
January 1, 2000 through June 30, 2001, had all occurred as of January 1, 2000,
after giving effect to certain adjustments, including depreciation and
amortization of assets and interest expense on any debt incurred to fund
acquisitions, net of dispositions, which would have been incurred had such
acquisitions, divestitures and other events occurred as of January 1, 2000. For
a discussion of these acquisitions, dispositions and other events, please refer
to the Company's Form 10-K filed with the Securities and Exchange Commission on
March 21, 2001. In addition, the effect of the accounting change for derivative
and hedging activities was not included as an adjustment for purposes of this
presentation. These unaudited pro forma results have been prepared for
comparative purposes only and do not purport to be indicative of (1) what would
have occurred had the acquisitions and other transactions been made as of that
date or (2) results which may occur in the future.
SIX MONTHS ENDED
JUNE 30,
--------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE)
2000 2001
---- ----
PRO FORMA ACTUAL
Net Revenues $170,888 $ 164,081
======== =========
Income before loss on sale of assets and accounting change $ 8,401 $ 8,130
======== =========
Cumulative effect of accounting change, net of taxes $ -- $ (566)
======== =========
Net income $ 8,397 $ 7,549
======== =========
Net income per share - basic $ 0.19 $ 0.17
======== =========
Net income per share - diluted $ 0.18 $ 0.16
======== =========
3. DEBT
The Company has a bank credit agreement (the "Bank Facility") with a
syndicate of banks which provides for senior secured credit of $650.0 million
consisting of: (1) a $325.0 million reducing revolving credit facility
("Revolver") and (2) a $325.0 million multi-draw term loan ("Term Loan"). The
Revolver and Term Loan, which mature on September 30, 2007, each reduce on a
quarterly basis beginning September 30, 2002, in quarterly amounts that vary
from $12.2 million to $16.3 million for each loan. As of June 30, 2001, the
Company had $436.0 million of borrowings outstanding under the Bank Facility
($111.0 million under the Revolver and $325.0 million under the Term Loan), in
addition to an outstanding Letter of Credit in the amount of $5.8 million. In
connection with a recent amendment to the Bank Facility, the period through
which the Company may solicit additional incremental loans up to $350.0 million,
subject to syndicate approval, and such additional loans to be governed under
the same terms as the Term Loan, has been extended to December 31, 2002.
The Company enters into interest rate transactions with different
banks to diversify its risk associated with interest rate fluctuations against
the variable rate debt under the Bank Facility and to comply with certain
covenants under the Bank Facility. These transactions are accounted for in
accordance with SFAS No. 133 as described under Note 1, above. Under these
transactions, the Company agrees with other parties to exchange, at specified
intervals, the difference between fixed rate and floating rate interest amounts
calculated by reference to an agreed notional principal amount against the
variable debt. The total notional amount of these transactions was $263.0
million as of June 30, 2001. These agreements, with initial terms that vary from
2 years to 7 years, effectively fix the interest at rates that vary from 5.8% to
8.5% on current borrowings equal to the total notional amount.
4. COMMITMENTS AND CONTINGENCIES
Pending Acquisition
The Company entered into a preliminary agreement on February 6, 1996,
to acquire the assets of radio station KWOD-FM, Sacramento, California, from
Royce International Broadcasting Corporation ("Royce"), subject to approval by
the FCC, for a purchase price of $25.0 million. Notwithstanding efforts by the
Company to pursue this transaction, Royce has been non-responsive. On July 28,
1999, the Company commenced a legal action seeking to enforce this agreement,
and subsequently Royce filed a cross-complaint against the Company asking for
treble damages, an injunction, attorney's fees and costs and filed a separate
action against the Company's President. This separate action against the
Company's President was dismissed without leave to amend in February 2000. The
Company is pursuing legal action against Royce and seeking dismissal of the
cross-complaint. The Company estimates that the impact of an unfavorable outcome
will not materially
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impact the financial position, results of operations or cash flows of the
Company. However, the Company cannot determine if and when the transaction might
occur.
Contingencies
In October 1999, The Radio Music License Committee, of which the
Company is a participant, filed a motion in the New York courts against
Broadcast Music, Inc. commencing a rate-making proceeding, on behalf of the
radio industry, seeking a determination of fair and reasonable industry-wide
license fees. The Company is currently operating under interim license
agreements for the period commencing January 1, 1997, at the rates and terms
reflected in prior agreements. The Company's management estimates that the
impact of an unfavorable outcome of the motion will not materially impact the
financial position, results of operations or cash flows of the Company.
In December 2000, the U.S. Copyright Office, under the Digital
Millennium Copyright Act, issued a final rule that AM and FM radio broadcast
signals transmitted simultaneously over a digital communications network are
subject to the sound recording copyright owner's exclusive right of performance.
This would result in the imposition of license fees for Internet streaming and
other digital media. As a result of this decision, the Company must now
participate in an arbitration proceeding at the U.S. Copyright Office to
determine the amount of the fees that are due from the use of sound recordings
in Internet streaming. The Company, along with other broadcasters and the
National Association of Broadcasters, previously commenced a legal action in New
York challenging the imposition of these license fees. In addition, the Company
has commenced a legal action, together with other radio broadcasters, seeking
declaratory relief as to the impact of the final rule of the Copyright Office.
The court in this action has recently upheld the Copyright Office decision. The
Company has not made a determination whether it intends to pursue an appeal of
this decision. If an appeal is filed, the Company cannot determine the
likelihood of success. The Company's management estimates that the impact of an
unfavorable determination will not materially impact the financial position,
results of operations or cash flows of the Company.
The Company is subject to various outstanding claims which arose in
the ordinary course of business and to other legal proceedings. In the opinion
of management, any liability of the Company which may arise out of or with
respect to these matters will not materially affect the financial position,
results of operations or cash flows of the Company.
5. CONVERTIBLE PREFERRED SECURITIES
On October 6, 1999, the Company sold 2,500,000 Convertible
Preferred Securities, Term Income Deferrable Equity Securities ("TIDES"),
including underwriters' over-allotments, at an offering price of $50.00 per
TIDES. The net proceeds to the Company, after deducting underwriting discounts
and other offering expenses, were $120.5 million. Subject to certain deferral
provisions, the trust pays quarterly calendar distributions. The first
distribution was paid on December 31, 1999. The TIDES represent undivided
preferred beneficial ownership interest in the assets of the trust. The trust
used the proceeds to purchase from the Company an equal amount of 6.25%
Convertible Subordinated Debentures due 2014. The Company owns all of the common
securities issued by the trust. The trust exists for the sole purpose of issuing
the common securities and the TIDES. The trust is a wholly-owned subsidiary of
the Company, with the sole assets of the trust consisting of the $125.0 million
aggregate principal amount of the Company's 6.25% Convertible Subordinated
Debentures due September 30, 2014. The Company has entered into several
contractual arrangements for the purpose of fully, irrevocably and
unconditionally guaranteeing the trust's obligations under the TIDES. The
holders of the TIDES have a preference with respect to each distribution and
amount payable upon liquidation, redemption or otherwise over the holders of the
common securities of the trust. Each TIDES is convertible into shares of the
Company's Class A Common Stock at the rate of 1.1364 shares of Class A Common
Stock for each TIDES. As of June 30, 2001, there were 2.5 million TIDES
outstanding as no holder of the TIDES had converted their shares into Class A
Common Stock.
6. SHAREHOLDERS' EQUITY
During the six months ended June 30, 2000 and 2001, the Company
issued non-qualified options to purchase 624,940 shares and 815,500 shares,
respectively, of its Class A Common Stock at prices ranging from $40.25 to
$59.44 and $40.00 to $52.05, respectively, per share. All of the options vest
ratably on the first four anniversary dates of their respective dates of grant.
In connection with the grant of options to employees with exercise prices below
fair market value at the time of grant and the grant of performance-based
options, the Company recognized non-cash stock-based compensation expense in the
amount of $428,000 and $271,000 for the six months ended June 30, 2000 and 2001,
respectively and $255,000 and $139,000 for the three months ended June 30, 2000
and 2001, respectively.
During the six months ended June 30, 2000, the Company issued
Restricted Stock awards, consisting of rights to 5,000 shares of Class A Common
Stock. Such shares vest ratably on the first four anniversary dates of their
respective dates of grant. In connection with awards in 1999 and with this
award, the Company recognized non-cash stock-based compensation expense in the
amounts of $63,000 and $64,000 for the six months ended June 30, 2000 and 2001,
respectively and $32,000 for each of the three months ended June 30, 2000 and
2001.
During February and May of 2001, J.P. Morgan Partners, formerly known
as Chase Capital, converted all remaining 495,669 shares of Class C Common Stock
to 495,669 shares of Class A Common Stock.
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On May 4, 2001, the shareholders of the Company approved an amendment
to the Company's 1998 Equity Compensation Plan to increase the number of shares
issuable under the plan by 2.5 million shares.
7. NET INCOME PER SHARE
The net income per share ("EPS") is calculated in accordance with
Statement of Financial Accounting Standards No. 128, "Earnings Per Share" which
requires presentation of basic net income per share and diluted net income per
share. Basic net income per share excludes dilution and is computed by dividing
net income available to common shareholders by the weighted average number of
common shares outstanding for the period. Diluted net income per share is
computed in the same manner as basic net income after assuming issuance of
common stock for all potentially dilutive equivalent shares, which includes (1)
stock options (using the treasury stock method) and (2) the Term Income
Deferrable Equity Securities ("TIDES") after eliminating from net income the
interest expense, net of taxes, on the TIDES. Anti-dilutive instruments are not
considered in this calculation. For the six-month and three-month periods ended
June 30, 2001 and 2000, the effect of the stock options in the calculation of
net income per share was dilutive and the effect of the TIDES in the calculation
of net income per share was anti-dilutive.
SIX MONTHS ENDED
----------------
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
JUNE 30, 2000 JUNE 30, 2001
------------- -------------
INCOME SHARES EPS INCOME SHARES EPS
------ ------ --- ------ ------ ---
Basic net income per share:
Income before accounting change $ 9,377 45,194,597 $ 0.21 $ 8,115 45,266,003 $ 0.18
Cumulative effect of accounting
change, net of taxes $ -- -- $ -- $ (566) -- $ (0.01)
------- ---------- ------- ------- ---------- ---------
Net income $ 9,377 45,194,597 $ 0.21 $ 7,549 45,266,003 $ 0.17
======= =========
Impact of options $ -- 297,568 $ -- 782,780
------- ---------- ------- ----------
Diluted net income per share:
Net income $ 9,377 45,492,165 $ 0.21 $ 7,549 46,048,783 $ 0.16
======= ========== ======= ======= ========== =========
For the six months ended June 30, 2001 and 2000, outstanding options to
purchase 651,335 and 101,766 shares, respectively, of Class A Common Stock at
option exercise prices ranging from $45.53 to $59.44 and from $48.75 to $59.44
per share, respectively, were excluded from the computation of diluted net
income per share as the options' exercise price was greater than the average
market price of the stock.
THREE MONTHS ENDED
------------------
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
JUNE 30, 2000 JUNE 30, 2001
------------- -------------
INCOME SHARES EPS INCOME SHARES EPS
------ ------ --- ------ ------ ---
Basic net income per share:
Net income $ 9,463 45,201,185 $ 0.21 $ 9,864 45,281,669 $ 0.22
====== =======
Impact of options $ -- 305,275 $ -- 886,704
------- ---------- ------- ----------
Diluted net income per share:
Net income $ 9,463 45,506,460 $ 0.21 $ 9,864 46,168,373 $ 0.21
======= ========== ====== ======= ========== =======
For the three months ended June 30, 2001 and 2000, outstanding options
to purchase 99,585 and 110,906 shares, respectively, of Class A Common Stock at
option exercise prices ranging from $47.96 to $59.44 and from $48.75 to $59.44
per share, respectively, were excluded from the computation of diluted net
income per share as the options' exercise price was greater than the average
market price of the stock.
12
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This report contains, in addition to historical information, statements
by us with regard to our expectations as to financial results and other aspects
of our business that involve risks and uncertainties and may constitute forward
looking statements within the meaning of Section 27A of the Securities Act of
1933 and Section 21E of the Securities Exchange Act of 1934. These statements
reflect our current views and are based on certain assumptions. Actual results
could differ materially from those currently anticipated as a result of a number
of factors, including, but not limited to, the following: (1) the highly
competitive nature of, and new technologies in, the radio broadcasting industry;
(2) our dependence upon our Seattle radio stations; (3) the risks associated
with our acquisition strategy generally; (4) the control of us by Joseph M.
Field and members of his immediate family; (5) our vulnerability to changes in
federal legislation or regulatory policies; (6) those matters discussed below;
and (7) the risks disclosed in our reports previously filed with the Securities
and Exchange Commission.
GENERAL
Founded in 1968, we are the fifth largest radio broadcasting company in
the United States based upon revenues derived from the latest edition of BIA
Consulting, Inc. We have assembled a nationwide portfolio of 95 stations in 18
markets. Based upon Duncan's Radio Market Guide (2001 ed.), we operate in 11 of
the country's top 50 radio markets and our station groups rank among the top
three in revenue market share in 15 of the 16 measured markets in which we
operate.
A radio broadcasting company derives its revenues primarily from the
sale of broadcasting time to local and national advertisers. The advertising
rates that a radio station is able to charge and the number of advertisements
that can be broadcast without jeopardizing listener levels largely determine
those revenues. Advertising rates are primarily based on three factors: (1) a
station's audience share in the demographic groups targeted by advertisers, as
measured principally by quarterly reports issued by the Arbitron Ratings
Company; (2) the number of radio stations in the market competing for the same
demographic groups; and (3) the supply of and demand for radio advertising time.
Several factors may adversely affect a radio broadcasting company's
performance in any given period. In the radio broadcasting industry, seasonal
revenue fluctuations are common and are due primarily to variations in
advertising expenditures by local and national advertisers. Typically, revenues
are lowest in the first calendar quarter of the year. We generally incur
advertising and promotional expenses to increase "listenership" and Arbitron
ratings. However, since Arbitron reports ratings quarterly, any increased
ratings and therefore increased advertising revenues tend to lag behind the
incurrence of advertising and promotional spending.
We include revenues recognized under a time brokerage agreement or a
similar sales agreement for stations operated by us in net revenues and we
reflect operating expenses associated with these stations in station operating
expenses. Consequently, there is no difference in the method of revenue and
operating expense recognition between a station operated by us under a time
brokerage agreement or similar sales agreement and a station owned and operated
by us.
In the following analysis, we discuss broadcast cash flow, broadcast
cash flow margin and after tax cash flow. Broadcast cash flow consists of
operating income before depreciation and amortization, net expense (income) from
time brokerage agreement fees, corporate general and administrative expenses and
gain or loss on sale of assets. Broadcast cash flow margin represents broadcast
cash flow as a percentage of net revenues. After tax cash flow consists of
income before accounting change, plus the following: depreciation and
amortization, non-cash compensation expense (which is otherwise included in
corporate general and administrative expenses), deferred tax provision and the
elimination of any gain or loss, net of current tax, on sale of assets,
investments and derivative instruments. Although broadcast cash flow, broadcast
cash flow margin and after tax cash flow are not measures of performance or
liquidity calculated in accordance with generally accepted accounting
principles, we believe that these measures are useful to an investor in
evaluating our performance because they are widely used in the broadcast
industry to measure a radio company's operating performance. However, you should
not consider broadcast cash flow, broadcast cash flow margin and after tax cash
flow in isolation or as substitutes for net income, operating income, cash flows
from operating activities or any other measure for determining our operating
performance or liquidity that is calculated in accordance with generally
accepted accounting principles. In addition, because broadcast cash flow,
broadcast cash flow margin and after tax cash flow are not calculated in
accordance with generally accepted accounting principles, they are not
necessarily comparable to similarly titled measures employed by other companies.
We calculate "same station" results by comparing the performance of
stations operated by us throughout a relevant period to the comparable
performance in the prior year's corresponding period, adjusted for significant
changes to sports contracts and excluding the effect of barter revenues and
expenses. "Same station broadcast cash flow margin" is the broadcast cash flow
margin of the stations included in our same station calculations.
RESULTS OF OPERATIONS
The following presents the results of our operations for the six month
and the three month periods ended June 30, 2001 and June 30, 2000, and should be
read in conjunction with our condensed consolidated financial statements and the
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14
related notes included elsewhere in this Form 10-Q. Our results of operations
represent the operations of the radio stations owned or operated pursuant to
time brokerage agreements or joint sales agreements during the relevant periods.
SIX MONTHS ENDED JUNE 30, 2001 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 2000
SIX MONTHS ENDED
----------------
JUNE 30, 2000 JUNE 30, 2001
(AMOUNTS IN THOUSANDS)
NET REVENUES $167,818 $164,081
Decrease of $3,737 or 2.2%
-------------------------------------------------------------------
Net revenues decreased 2.2% to $164.1 million for the six months ended
June 30, 2001 from $167.8 million for the six months ended June 30, 2000. On a
same station basis, net revenues decreased 4.1% to $162.4 million from $169.3
million. Same station net revenues declined due to a general weakness in the
advertising sector coupled with comparisons to the prior year's period in which
we experienced an exceptionally strong growth rate of approximately 18%. The
overall decline in net revenues was affected by acquisitions and divestitures.
Since January 1, 2000, we acquired stations with net revenues of $10.2 million
for the six months ended June 30, 2001 as compared to $1.6 million for the six
months ended June 30, 2000 and we divested stations with net revenues of $3.2
million for the six months ended June 30, 2000 (including $0.2 million in
revenues from a sports contract for which we discontinued selling advertising).
SIX MONTHS ENDED
----------------
JUNE 30, 2000 JUNE 30, 2001
(AMOUNTS IN THOUSANDS)
STATION OPERATING EXPENSES $101,752 $100,416
Decrease of $1,336 or 1.3%
-------------------------------------------------------------------
Percentage of Net Revenues 60.6% 61.2%
Station operating expenses decreased 1.3% to $100.4 million for the six
months ended June 30, 2001 from $101.8 million for the six months ended June 30,
2000. On a same station basis, station operating expenses decreased 3.7% to
$98.7 million from $102.6 million. Same station operating expenses declined due
to: (1) a decrease in sales expense as a result of a decrease in same station
net revenues and (2) cost reduction efforts. The overall decrease in station
operating expenses was affected by acquisitions and divestitures. Since January
1, 2000, we acquired stations with operating expenses of $7.5 million for the
six months ended June 30, 2001 as compared to $1.8 million for the six months
ended June 30, 2000 and divested stations with operating expenses of $1.7
million for the six months ended June 30, 2000 (including $0.5 million in
expense reductions from a sports contract for which we discontinued selling
advertising).
SIX MONTHS ENDED
----------------
JUNE 30, 2000 JUNE 30, 2001
(AMOUNTS IN THOUSANDS)
DEPRECIATION AND AMORTIZATION $21,114 $23,004
Increase of $1,890 or 9.0%
-------------------------------------------------------------------
Percentage of Net Revenues 12.6% 14.0%
Depreciation and amortization increased 9.0% to $23.0 million for the
six months ended June 30, 2001 from $21.1 million for the six months ended June
30, 2000. The increase was primarily attributable to our acquisitions, net of
divestitures, since January 1, 2000.
SIX MONTHS ENDED
----------------
JUNE 30, 2000 JUNE 30, 2001
(AMOUNTS IN THOUSANDS)
CORPORATE GENERAL AND ADMINISTRATIVE EXPENSES $6,474 $6,459
Decrease of $15 or 0.2%
-------------------------------------------------------------------
Percentage of Net Revenues 3.9% 3.9%
Corporate general and administrative expenses remained at $6.5 million
for the six month periods ended June 30, 2001 and 2000, which was primarily
attributable to cost reduction efforts during the current period, offset by the
effect of inflation. Also included is non-cash stock-based compensation expense
of $0.3 million and $0.5 million for the six months ended June 30, 2001 and
2000, respectively.
14
15
SIX MONTHS ENDED
----------------
JUNE 30, 2000 JUNE 30, 2001
(AMOUNTS IN THOUSANDS)
INTEREST EXPENSE (INCLUDING FINANCING COST OF TIDES) $22,930 $18,899
Decrease of $4,031 or 17.6%
-------------------------------------------------------------------
Percentage of Net Revenues 13.7% 11.5%
Interest expense, including the financing cost of our 6.25% Convertible
Preferred Securities Term Income Deferrable Equity Securities (TIDES), decreased
17.6% to $18.9 million for the six months ended June 30, 2001 from $22.9 million
for the six months ended June 30, 2000. The decrease in interest expense was
primarily attributable to an overall decrease in outstanding indebtedness and a
decline in interest rates.
SIX MONTHS ENDED
----------------
JUNE 30, 2000 JUNE 30, 2001
(AMOUNTS IN THOUSANDS)
INCOME BEFORE INCOME TAXES AND ACCOUNTING CHANGE $15,743 $13,676
Decrease of $2,067 or 13.1%
-------------------------------------------------------------------
Percentage of Net Revenues 9.4% 8.3%
Income before income taxes and accounting change decreased 13.1% to
$13.7 million for the six months ended June 30, 2001 from $15.7 million for the
six months ended June 30, 2000. The decrease in income before income tax and
accounting change was primarily attributable to: (1) the decrease in net
revenues of $3.7 million; (2) the increase in depreciation and amortization of
$1.9 million due to acquisitions, net of divestitures, since January 1, 2000;
and (3) the equity loss from unconsolidated affiliate of $1.9 million, offset by
a reduction in interest expense of $4.0 million.
SIX MONTHS ENDED
----------------
JUNE 30, 2000 JUNE 30, 2001
(AMOUNTS IN THOUSANDS)
NET INCOME $9,377 $7,549
Decrease of $1,828 or 19.5%
-------------------------------------------------------------------
Percentage of Net Revenues 5.6% 4.6%
Net income decreased 19.5% to $7.5 million for the six months ended
June 30, 2001 from $9.4 million for the six months ended June 30, 2000. The
decrease in net income was primarily attributable to: (1) all of the factors
described above and (2) the cumulative effect of the accounting change, net of
taxes, of $0.6 million.
OTHER DATA SIX MONTHS ENDED
----------------
JUNE 30, 2000 JUNE 30, 2001
(AMOUNTS IN THOUSANDS)
BROADCAST CASH FLOW $66,066 $63,665
Decrease of $2,401 or 3.6%
-------------------------------------------------------------------
Broadcast cash flow decreased 3.6% to $63.7 million for the six months
ended June 30, 2001 from $66.1 million for the six months ended June 30, 2000.
On a same station basis, broadcast cash flow decreased 4.6% to $63.7 million
from $66.7 million as same station net revenues declined, offset by a decline in
same station operating expenses. The overall decline in broadcast cash flow was
affected by acquisitions and divestitures. Since January 1, 2000, we acquired
stations with broadcast cash flow of $2.7 million for the six months ended June
30, 2001 as compared to a broadcast cash flow deficit of $0.2 million for the
six months ended June 30, 2000 and we divested stations that had broadcast cash
flow of $1.5 million for the six months ended June 30, 2000 (including $0.7
million in broadcast cash flow from a sports contract for which we discontinued
selling advertising).
SIX MONTHS ENDED
----------------
JUNE 30, 2000 JUNE 30, 2001
BROADCAST CASH FLOW MARGIN 39.4% 38.8%
Decrease of 0.6% or 1.5%
-------------------------------------------------------------------
The broadcast cash flow margin decreased to 38.8% for the six months
ended June 30, 2001 from 39.4% for the six months ended June 30, 2000. On a same
station basis, our broadcast cash flow margin decreased to 39.2% from 39.4%. The
decrease is primarily attributable to the same reasons that same station net
revenues declined, offset by the decline in same station operating expenses.
15
16
SIX MONTHS ENDED
----------------
JUNE 30, 2000 JUNE 30, 2001
(AMOUNTS IN THOUSANDS)
AFTER TAX CASH FLOW $40,084 $41,465
Increase of $1,381 or 3.4%
-------------------------------------------------------------------
After tax cash flow increased 3.4% to $41.5 million for the six months
ended June 30, 2001 from $40.1 million for the six months ended June 30, 2000.
Despite the decrease in broadcast cash flow, after tax cash flow was positively
affected by: (1) the decrease in interest expense, net of tax, due to the
overall decrease in outstanding indebtedness and the decline in interest rates
and (2) the tax benefits from the purchase of radio station assets, net of
dispositions, since January 1, 2000. The amount of the deferred income tax
expense, excluding the deferred tax benefit from the accounting change, was $8.6
million for the six months ended June 30, 2001 and $9.1 million for the six
months ended June 30, 2000.
The amount of deferred income tax expense reported above may differ
from the amount used for purposes of computing after tax cash flow because the
amount of deferred income tax expense used in computing after tax cash flow is
affected by the elimination of current taxes on gains or losses from the sale of
assets, investments and derivative instruments.
THREE MONTHS ENDED JUNE 30, 2001 COMPARED TO THE THREE MONTHS ENDED JUNE 30,
2000
THREE MONTHS ENDED
------------------
JUNE 30, 2000 JUNE 30, 2001
(AMOUNTS IN THOUSANDS)
NET REVENUES $96,941 $94,626
Decrease of $2,315 or 2.4%
-------------------------------------------------------------------
Net revenues decreased 2.4% to $94.6 million for the three months ended
June 30, 2001 from $96.9 million for the three months ended June 30, 2000. On a
same station basis, net revenues decreased 4.1% to $93.8 million from $97.8
million. Same station net revenues declined due to a general weakness in the
advertising sector coupled with comparisons to the prior year's period in which
we experienced an exceptionally strong growth rate of approximately 17%. The
overall decline in net revenues was affected by acquisitions and divestitures.
Since April 1, 2000, we acquired stations with net revenues of $5.0 million for
the three months ended June 30, 2001 as compared to $0.5 million for the three
months ended June 30, 2000 and we divested stations with net revenues of $1.7
million for the three months ended June 30, 2000.
THREE MONTHS ENDED
------------------
JUNE 30, 2000 JUNE 30, 2001
(AMOUNTS IN THOUSANDS)
STATION OPERATING EXPENSES $55,559 $54,056
Decrease of $1,503 or 2.7%
-------------------------------------------------------------------
Percentage of Net Revenues 57.3% 57.1%
Station operating expenses decreased 2.7% to $54.1 million for the
three months ended June 30, 2001 from $55.6 million for the three months ended
June 30, 2000. On a same station basis, station operating expenses decreased
4.2% to $53.2 million from $55.5 million. Same station operating expenses
declined due to: (1) a decrease in sales expense as a result of a decrease in
same station net revenues and (2) cost reduction efforts. The overall decrease
in station operating expenses was affected by acquisitions and divestitures.
Since April 1, 2000, we acquired stations with operating expenses of $2.9
million for the three months ended June 30, 2001 as compared to $0.4 million for
the three months ended June 30, 2000 and divested stations with operating
expenses of $1.2 million for the three months ended June 30, 2000.
THREE MONTHS ENDED
------------------
JUNE 30, 2000 JUNE 30, 2001
(AMOUNTS IN THOUSANDS)
DEPRECIATION AND AMORTIZATION $10,637 $11,508
Increase of $871 or 8.2%
-------------------------------------------------------------------
Percentage of Net Revenues 11.0% 12.2%
Depreciation and amortization increased 8.2% to $11.5 million for the
three months ended June 30, 2001 from $10.6 million for the three months ended
June 30, 2000. The increase was primarily attributable to our acquisitions, net
of divestitures, since April 1, 2000.
16
17
THREE MONTHS ENDED
------------------
JUNE 30, 2000 JUNE 30, 2001
(AMOUNTS IN THOUSANDS)
CORPORATE GENERAL AND ADMINISTRATIVE EXPENSES $3,307 $3,129
Decrease of $178 or 5.4%
-------------------------------------------------------------------
Percentage of Net Revenues 3.4% 3.3%
Corporate general and administrative expenses decreased 5.4% to $3.1
million for the three months ended June 30, 2001 from $3.3 million for the three
months ended June 30, 2000. The decrease was primarily attributable to cost
reduction efforts. Also included is non-cash stock-based compensation expense of
$0.2 million and $0.3 million for the three months ended June 30, 2001 and 2000,
respectively.
THREE MONTHS ENDED
------------------
JUNE 30, 2000 JUNE 30, 2001
(AMOUNTS IN THOUSANDS)
INTEREST EXPENSE (INCLUDING FINANCING COST OF TIDES) $11,587 $9,035
Decrease of $2,552 or 22.0%
-------------------------------------------------------------------
Percentage of Net Revenues 12.0% 9.5%
Interest expense, including the financing cost of our 6.25% Convertible
Preferred Securities Term Income Deferrable Equity Securities (TIDES), decreased
22.0% to $9.0 million for the three months ended June 30, 2001 from $11.6
million for the three months ended June 30, 2000. The decrease in interest
expense was primarily attributable to an overall decrease in outstanding
indebtedness and a decline in interest rates.
THREE MONTHS ENDED
------------------
JUNE 30, 2000 JUNE 30, 2001
(AMOUNTS IN THOUSANDS)
INCOME BEFORE INCOME TAXES $15,951 $16,527
Increase of $576 or 3.6%
-------------------------------------------------------------------
Percentage of Net Revenues 16.5% 17.5%
Income before income taxes increased 3.6% to $16.5 million for the
three months ended June 30, 2001 from $16.0 million for the three months ended
June 30, 2000. The increase in income before income tax was primarily
attributable to: (1) the decrease in interest expense of $2.6 million; (2) the
recognition of a net gain on derivative instruments of $0.6 million primarily
due to an increase in a non-hedged derivative's value as a result of a rise in
the yield of a forward-looking interest rate curve, offset by (1) a reduction in
operating income of $1.5 million and (2) an equity loss from unconsolidated
affiliates of $1.0 million.
THREE MONTHS ENDED
------------------
JUNE 30, 2000 JUNE 30, 2001
(AMOUNTS IN THOUSANDS)
NET INCOME $9,463 $9,864
Increase of $401 or 4.2%
-------------------------------------------------------------------
Percentage of Net Revenues 9.8% 10.4%
Net income increased 4.2% to $9.9 million for the three months ended
June 30, 2001 from $9.5 million for the three months ended June 30, 2000. The
increase in net income was primarily attributable to all of the reasons
described above.
OTHER DATA THREE MONTHS ENDED
------------------
JUNE 30, 2000 JUNE 30, 2001
(AMOUNTS IN THOUSANDS)
BROADCAST CASH FLOW $41,382 $40,570
Decrease of $812 or 2.0%
-------------------------------------------------------------------
Broadcast cash flow decreased 2.0% to $40.6 million for the three
months ended June 30, 2001 from $41.4 million for the three months ended June
30, 2000. On a same station basis, broadcast cash flow decreased 4.0% to $40.6
million from $42.3 million as same station net revenues declined, offset by a
decline in same station operating expenses. The overall decline in broadcast
cash flow was affected by acquisitions and divestitures. Since April 1, 2000, we
acquired stations that had broadcast cash flow of $2.1 million for the three
months ended June 30, 2001 as compared to $0.1 million
17
18
for the three months ended June 30, 2000, offset by divested stations that had
broadcast cash flow of $0.5 million for the three months ended June 30, 2000.
THREE MONTHS ENDED
------------------
JUNE 30, 2000 JUNE 30, 2001
BROADCAST CASH FLOW MARGIN 42.7% 42.9%
Increase of 0.2% or 0.5%
-------------------------------------------------------------------
The broadcast cash flow margin increased 0.5% to 42.9% for the three
months ended June 30, 2001 from 42.7% for the three months ended June 30, 2000.
On a same station basis, our broadcast cash flow margin increased to 43.3% from
43.2% primarily due to the disposition of stations in the prior year with lower
broadcast cash flow margins.
THREE MONTHS ENDED
------------------
JUNE 30, 2000 JUNE 30, 2001
(AMOUNTS IN THOUSANDS)
AFTER TAX CASH FLOW $25,116 $26,383
Increase of $1,267 or 5.0%
-------------------------------------------------------------------
After tax cash flow increased 5.0% to $26.4 million for the three
months ended June 30, 2001 from $25.1 million for the three months ended June
30, 2000. After tax cash flow was positively affected by: (1) the decrease in
interest expense, net of tax, due to the overall decrease in outstanding
indebtedness and the decline in interest rates and (2) the tax benefits from the
purchase of radio station assets since April 1, 2000. The amount of the deferred
income tax expense was $4.8 million for the three months ended June 30, 2001 and
$4.7 million for the three months ended June 30, 2000.
The amount of deferred income tax expense reported above may differ
from the amount used for purposes of computing after tax cash flow because the
amount of deferred income tax expense used in computing after tax cash flow is
affected by the elimination of current taxes on gains or losses from the sale of
assets, investments and derivative instruments.
LIQUIDITY AND CAPITAL RESOURCES
We use a significant portion of our capital resources to consummate
acquisitions. These acquisitions are funded from one or a combination of the
following sources: (1) our bank facility (described below); (2) the sale of
securities; (3) the swapping of our radio stations in transactions which qualify
as "like-kind" exchanges under Section 1031 of the Internal Revenue Code and (4)
internally-generated cash flow.
Net cash flows provided by operating activities were $30.9 million and
$12.2 million for the six months ended June 30, 2001 and 2000, respectively.
Changes in our net cash flows provided by operating activities are primarily a
result of changes in advertising revenues and station operating expenses, which
are affected by the acquisition and disposition of radio stations during those
periods. For the six months ended June 30, 2001, cash flows provided by
operating activities were only marginally affected, as compared to the previous
year, by a $5.1 million increase in accounts receivable. For the six months
ended June 30, 2000, significant acquisitions on December 16, 1999, had a major
impact on the net cash flows primarily due to an increase in accounts receivable
of $26.4 million.
Net cash flows used in investing activities were $8.6 million and
$25.0 million for the six months ended June 30, 2001 and 2000, respectively. Net
cash flows used in financing activities were $22.5 million for the six months
ended June 30, 2001 and net cash flows provided by financing activities were
$12.5 million for the six months ended June 30, 2000. The cash flows for the six
months ended June 30, 2001 reflect additions to property and equipment,
investments consummated and the net increase in payments of long-term debt. The
cash flows for the six months ended June 30, 2000 reflect acquisitions and
investments consummated and the net increase in borrowings.
During the six months ended June 30, 2001, we reduced our outstanding
debt by $24.9 million. We also increased the amount of investments by $2.8
million. As of June 30, 2001, we had $436.0 million of borrowings outstanding
under our bank facility in addition to an outstanding letter of credit in the
amount of $5.8 million. We expect to use the credit available under the
revolving credit facility to fund future acquisitions.
In addition to debt service and quarterly distributions under the
TIDES, our principal liquidity requirements are for working capital and general
corporate purposes, including capital expenditures, and, if appropriate
opportunities arise, acquisitions of additional radio stations. Capital
expenditures for the six months ended June 30, 2001, were $5.3 million, which
included the balance of a $2.0 million commitment as of December 31, 2000, to
fund construction of a studio relocation project. We estimate that additional
capital expenditures for the balance of the fiscal year 2001 will be between
$4.0 and $6.0 million. We believe that cash from operating activities, together
with available revolving borrowings under our bank facility, should be
sufficient to permit us to meet our financial obligations and fund our
operations. However, we may require additional financing for future
acquisitions, if any, and we cannot assure you that we will be able to obtain
such financing on terms considered favorable by us.
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19
We entered into our bank facility as of December 16, 1999, with a
syndicate of banks for $650.0 million in senior credit consisting of: (1) $325.0
million in a reducing revolving credit facility, $111.0 million of which was
drawn as of June 30, 2001 and (2) $325.0 million in a multi-draw term loan that
was fully drawn as of June 30, 2000. Our bank facility was established to: (1)
refinance existing indebtedness; (2) provide working capital; and (3) fund
corporate acquisitions. At our election, interest on any outstanding principal
accrues at a rate based on either LIBOR plus a spread that ranges from 0.75% to
2.375% or on the prime rate plus a spread of up to 1.125%, depending on our
leverage ratio. Under the bank facility, the reducing revolving credit facility
and the multi-draw term loan mature on September 30, 2007 and reduce on a
quarterly basis beginning September 30, 2002 in quarterly amounts that vary from
$12.2 million to $16.3 million for each loan. Our bank facility requires us to
comply with certain financial covenants and leverage ratios that are defined
terms within the agreement. We believe we are in compliance with the covenants
and leverage ratios. Under our bank facility, as amended, the period through
which we may solicit additional incremental loans up to $350.0 million, subject
to syndicate approval, and such additional loans to be governed under the same
terms as the Term Loan, has been extended to December 31, 2002.
RECENT PRONOUNCEMENTS
Effective January 1, 2001, we adopted the Financial Accounting
Standards Board's ("FASB") Statement of Accounting Standards ("SFAS") No. 133
entitled "Accounting for Derivative and Hedging Activities," that was amended by
SFAS No. 137 and SFAS No. 138. SFAS No. 133 established accounting and reporting
standards for (1) derivative instruments, including certain derivative
instruments embedded in other contracts, which are collectively referred to as
derivatives and (2) hedging activities. The accounting for changes in the fair
value of a derivative depends on the intended use of the derivative and the
resulting designation. All derivatives, whether designated in hedging
relationships or not, are required to be recorded on the balance sheet at fair
value. If the derivative is designated as a fair value hedge, the changes in the
fair value of the derivative and the hedged item are recognized in the statement
of operations. If the derivative is designated as a cash flow hedge, changes in
the fair value of the derivative are recorded in other comprehensive income and
are recognized in the statement of operations when the hedged item affects net
income. SFAS No. 133 defines new requirements for designation and documentation
of hedging relationships as well as on going effectiveness assessments in order
to use hedge accounting under this standard. A derivative that does not qualify
as a hedge is marked to fair value through the statement of operations. We
formally document all relationships between hedging instruments and hedged
items, as well as its risk-management objective and strategy for undertaking
various hedge transactions. This process includes relating all derivatives that
are designated as fair value or cash flow hedges to specific assets and
liabilities on the balance sheet or to specific firm commitments or forecasted
transactions. We also formally assess, both at the inception of the hedge and on
an ongoing basis, whether each derivative is highly effective in offsetting
changes in fair values or cash flows of the hedged item. If it is determined
that a derivative is not highly effective as a hedge or if a derivative ceases
to be a highly effective hedge, we will discontinue hedge accounting
prospectively.
In June 2001, the FASB issued SFAS No. 142 "Goodwill and Other
Intangible Assets" that requires the use of a nonamortization approach to
account for purchased goodwill and certain intangibles. Under a nonamortization
approach, goodwill and certain intangibles will not be amortized into results of
operations, but instead would be reviewed for impairment and written down and
charged to results of operations only in the periods in which the recorded value
of goodwill and certain intangibles is more than its fair value. This statement,
which applies to goodwill and intangible assets acquired prior to June 30, 2001,
will be adopted by us on January 1, 2002. We expect that adoption of this
accounting standard will have the impact of reducing our amortization of
goodwill and intangibles commencing January 1, 2002. However, impairment reviews
may result in future periodic write-downs.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our bank facility requires us to protect ourselves from interest rate
fluctuations through the use of derivative rate hedging instruments. As a
result, we have entered into various interest rate transactions with various
banks, which we define as "Rate Hedging Transactions", designed to mitigate our
exposure to significantly higher floating interest rates. A rate cap agreement
establishes an upper limit or "cap" for the base LIBOR rate and a rate floor
agreement establishes a lower limit or "floor" for the base LIBOR rate. Several
of the agreements cover a rate cap and a rate floor and have been entered into
simultaneously with the same bank. Swap agreements require that we pay a fixed
rate of interest on the notional amount to a bank and the bank pay to us a
variable rate equal to three-month LIBOR. As of June 30, 2001, we have Rate
Hedging Transactions in place for a total notional amount of $263.0 million.
All of the Rate Hedging Transactions are tied to the three-month LIBOR
interest rate, which may fluctuate significantly on a daily basis. The valuation
of each of the Rate Hedging Transactions is affected by the change in the
three-month LIBOR rate and the remaining term of the agreement. Any increase in
the three-month LIBOR rate results in a more favorable valuation, while any
decrease in the three-month LIBOR rate results in a less favorable valuation for
each of the Rate Hedging Transactions. For the six months ended June 30, 2001,
exclusive of the accounting change, we recognized net gains in the statement of
operations and net losses in the statement of other comprehensive income as
these net gains and losses were negatively affected by a decrease in the
three-month LIBOR rate at June 30, 2001, as compared to December 31, 2000,
offset by a reduction in the average remaining period under each of the
outstanding Rate Hedging Transactions.
See also additional disclosures regarding "Liquidity and Capital Resources"
made under Item 2, above.
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PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are from time to time involved in litigation incidental to the
conduct of our business, but we are not a party to any lawsuit or proceeding
which, in our opinion, is likely to have a material adverse effect on us.
We entered into a preliminary agreement on February 6, 1996, to acquire
the assets of radio station KWOD-FM, Sacramento, California, from Royce
International Broadcasting Corporation ("Royce"), subject to approval by the
FCC, for a purchase price of $25.0 million. Notwithstanding efforts by us to
pursue this transaction, Royce has been non-responsive. On July 28, 1999, we
commenced a legal action seeking to enforce this agreement, and subsequently
Royce filed a cross-complaint against us asking for treble damages, an
injunction, attorney's fees and costs and filed a separate action against our
President. This separate action against our President was dismissed without
leave to amend in February 2000. We are pursuing legal action against Royce and
seeking dismissal of the cross-complaint. We estimate that the impact of an
unfavorable outcome will not materially impact our financial position, results
of operations or cash flows. However, we cannot determine if and when the
transaction might occur.
In October 1999, The Radio Music License Committee, of which we are a
participant, filed a motion in the New York courts against Broadcast Music, Inc.
commencing a rate-making proceeding, on behalf of the radio industry, seeking a
determination of fair and reasonable industry-wide license fees. We are
currently operating under interim license agreements for the period commencing
January 1, 1997 at the rates and terms reflected in prior agreements. We
estimate that the impact of an unfavorable outcome of the motion will not
materially impact our financial position, results of operations or cash flows.
In December 2000, the U.S. Copyright Office, under the Digital
Millennium Copyright Act, issued a final rule that AM and FM radio broadcast
signals transmitted simultaneously over a digital communications network, are
subject to the sound recording copyright owner's exclusive right of performance.
This would result in the imposition of license fees for Internet streaming and
other digital media. As a result of this decision, we must now participate in an
arbitration proceeding at the U.S. Copyright Office to determine the amount of
the fees that are due from the use of sound recordings in Internet streaming.
We, along with other broadcasters and the National Association of Broadcasters,
previously commenced a legal action in New York challenging the imposition of
these license fees. In addition, we have commenced a legal action, together with
other radio broadcasters, seeking declaratory relief as to the impact of the
final rule of the Copyright Office. The court in this action has recently upheld
the Copyright Office decision. We have not made a determination whether we
intend to pursue an appeal of this decision. If an appeal is filed, we cannot
determine the likelihood of success. We estimate that the impact of an
unfavorable determination will not materially impact our financial position,
results of operations or cash flows.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None to report.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None to report.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) On May 4, 2001, the Company held its annual shareholders'
meeting.
(b) At our annual shareholders' meeting, (i) David J. Berkman and
Michael Hannon were elected as Class A directors for one-year
terms and (ii) Joseph M. Field, David J. Field, John C.
Donlevie, Herbert Kean, S. Gordon Elkins, Thomas H. Ginley,
Jr., Lee Hague and Marie Field were elected as directors for
one-year terms.
(c) The following matters were voted on and approved at our annual
shareholders' meeting: (i) the election of Class A directors;
(ii) the election of all remaining directors; (iii) the
ratification of the appointment of Arthur Andersen LLP as
independent auditors; and (iv) the approval of the First
Amendment to the Entercom 1998 Equity Compensation Plan to
increase the number of shares issuable under such plan by
2,500,000 shares. The results of voting at the annual meeting
of the shareholders were as follows:
Proposal No. 1 (Election of Class A Directors)
Nominee For Withheld
------- --- --------
David J. Berkman 29,404,107 1,000,074
Michael R. Hannon 29,385,407 1,018,774
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Proposal No. 2 (Election of Remaining Directors)
Nominee For Withheld
------- --- --------
Joseph M. Field 130,730,676 4,991,555
David J. Field 130,726,822 4,995,409
John C. Donlevie 130,726,894 4,995,337
Herbert Kean 134,734,978 987,253
S. Gordon Elkins 134,465,997 1,256,234
Thomas H. Ginley, Jr. 134,488,597 1,233,634
Lee Hague 134,735,024 987,207
Marie H. Field 134,711,108 1,011,123
Proposal No. 3 (Ratification of Appointment of Arthur Andersen LLP as
Independent Auditors for the year ending December 31, 2001)
For Against Abstain
--- ------- -------
135,654,405 65,765 2,061
Proposal No. 4 (Approval of the First Amendment to the Entercom 1998
Equity Compensation Plan to increase the number of shares issuable
under such plan by 2,500,000 shares)
For Against Abstain
--- ------- -------
120,442,795 14,096,292 5,516
ITEM 5. OTHER INFORMATION
None to report.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
Number Description
- ------ -----------
3.01 Amended and Restated Articles of Incorporation of the Registrant (1)
3.02 Form of Amended and Restated Bylaws of the Registrant (1)
10.01 Employment Agreement, dated June 25, 1993, between the Registrant and
Joseph M. Field, as amended (1)
10.02 Employment Agreement, dated December 17, 1998, between the Registrant
and David J. Field, as amended (1)
10.03 Employment Agreement, dated December 17, 1998, between the Registrant
and John C. Donlevie, as amended (1)
10.04 Employment Agreement, dated November 13, 1998, between the Registrant
and Stephen F. Fisher (1)
10.05 Asset Purchase Agreement, dated as of May 11, 2000, among the
Registrant, Entercom Kansas City, LLC, Entercom Kansas City License,
LLC, and Susquehanna Radio Corp. (See table of contents for list of
omitted schedules and exhibits, which the Registrant hereby agrees to
furnish supplementally to the Securities and Exchange Commission upon
request) (2)
10.06 Credit Agreement, dated as of December 16, 1999, among Entercom Radio,
LLC, as the Borrower, the Registrant, as a Guarantor, Banc of America
Securities LLC, as Sole Lead Arranger and Book Manager, Key Corporate
Capital, Inc., as Administrative Agent, and Co-Documentation Agent,
Bank of America, N.A., as Syndication Agent, and Co-Documentation Agent
and the Financial Institutions listed therein (4)
10.07 First Amendment to Credit Agreement, dated as of May 31, 2001, among
Entercom Radio, LLC, as the Borrower, the Registrant, as a Guarantor,
Banc of America Securities LLC, as Sole Lead Arranger and Book Manager,
Key Corporate Capital, Inc., as Administrative Agent, and
Co-Documentation Agent, Bank of America, N.A., as Syndication Agent,
and Co-Documentation Agent and the Financial Institutions listed
therein (5)
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10.08 Amended and Restated Asset Purchase Agreement, dated as of August 20,
1999, among the Registrant, Sinclair Communications, Inc., WCGV, Inc.,
Sinclair Radio of Milwaukee Licensee, LLC, Sinclair Radio of New
Orleans Licensee, LLC, Sinclair Radio of Memphis, Inc., Sinclair Radio
of Memphis Licensee, Inc., Sinclair Properties, LLC, Sinclair Radio of
Norfolk/Greensboro Licensee, L.P., Sinclair Radio of Buffalo, Inc.,
Sinclair Radio of Buffalo Licensee, LLC, WLFL, Inc., Sinclair Radio of
Greenville Licensee, Inc., Sinclair Radio of Wilkes-Barre, Inc. and
Sinclair Radio of Wilkes-Barre Licensee, LLC. (See table of contents
for list of omitted schedules and exhibits, which the Registrant hereby
agrees to furnish supplementally to the Securities and Exchange
Commission upon request) (3)
10.09 Asset Purchase Agreement, dated as of August 20, 1999, among the
Registrant, Sinclair Communications, Inc., Sinclair Media III, Inc. and
Sinclair Radio of Kansas City Licensee, LLC. (See table of contents for
list of omitted schedules and exhibits, which the Registrant hereby
agrees to furnish supplementally to the Securities and Exchange
Commission upon request (3)
- ----------
(1) Incorporated by reference to the Registrant's Registration Statement on
Form S-1 (File No. 333-61381)
(2) Incorporated by reference to the Registrant's Quarterly Report on Form
10Q. (File No. 001-14461)
(3) Incorporated by reference to the Registrant's Registration Statement on
Form S-1. (File No. 333-86397)
(4) Incorporated by reference to the Registrant's Current Report on Form
8-K. (File No. 001-14461)
(5) Filed herewith.
(b) Reports filed on Form 8-K
None to report
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ENTERCOM COMMUNICATIONS CORP.
(Registrant)
Date: August 13, 2001 /s/ Joseph M. Field
--------------------
Name: Joseph M. Field
Title: Chief Executive Officer
Date: August 13, 2001 /s/ David J. Field
-------------------
Name: David J. Field
Title: President and Chief Operating
Officer
Date: August 13, 2001 /s/ Stephen F. Fisher
---------------------
Name: Stephen F. Fisher
Title: Executive Vice President and Chief
Financial Officer
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