UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the year ended December 31, 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 incorporation of organization) (I.R.S. Employer 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)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
<Table>
TITLE OF EACH CLASS NAME OF EXCHANGE ON WHICH REGISTERED
Class A Common Stock, par value $.01 per share New York Stock Exchange
</Table>
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
NONE
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 by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendments to this Form 10-K [ ]
As of January 31, 2002, the aggregate market value of the Class A
common stock held by non-affiliates of the registrant was $1,352,339,427 based
on the closing price of $47.85 on the New York Stock Exchange on such date.
Class A Common Stock, $.01 par value 34,829,917 Shares Outstanding as
of January 31, 2002
Class B Common Stock, $.01 par value 10,531,805 Shares Outstanding as
of January 31, 2002
DOCUMENTS INCORPORATED BY REFERENCE
None.
ENTERCOM COMMUNICATIONS CORP.
TABLE OF CONTENTS
Page
----
PART I
Item 1. Business............................................................................................. 1
Item 2. Properties and Facilities............................................................................ 16
Item 3. Legal Proceedings.................................................................................... 16
Item 4. Submission of Matters to a Vote of Security Holders.................................................. 17
PART II
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters................................ 18
Item 6. Selected Consolidated Financial Data................................................................. 18
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................ 23
Item 7A. Quantitative and Qualitative Disclosures about Market Risk........................................... 39
Item 8. Consolidated Financial Statements and Supplementary Data............................................. 39
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure................. 39
PART III
Item 10. Directors and Executive Officers of the Registrant................................................... 39
Item 11. Executive Compensation............................................................................... 42
Item 12. Security Ownership of Certain Beneficial Owners and Management....................................... 44
Item 13. Certain Relationships and Related Transactions....................................................... 46
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K...................................... 47
CERTAIN DEFINITIONS
Unless the context requires otherwise, all references in this report to
"Entercom," "we," "us," "our" and similar terms refer to Entercom Communications
Corp. and its consolidated subsidiaries, excluding Entercom Communications
Capital Trust.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This report may contain forward-looking statements and certain pro
forma information that is presented for illustrative purposes only, within the
meaning of Section 21E of the Securities Exchange Act of 1934, as amended.
Forward-looking statements are not statements of historical facts, but rather
reflect our current expectations concerning future results and events. You can
identify these forward-looking statements by our use of words such as
"anticipates," "believes," "continues," "expects," "intends," "likely," "may,"
"opportunity," "plans," "potential," "project," "will," and similar expressions
to identify forward-looking statements, whether in the negative or the
affirmative. We cannot guarantee that we actually will achieve these plans,
intentions or expectations. These forward-looking statements are subject to
risks, uncertainties and other factors, some of which are beyond our control,
which could cause actual results to differ materially from those forecast or
anticipated in such forward-looking statements. The pro forma information
reflects adjustments and is presented for comparative purposes only and does not
purport to be indicative of what has occurred or is indicative of future
operating results or financial position.
These risks, uncertainties and factors include, but are not limited to:
- the highly competitive nature of, and uncertain effect of new
technologies on, the radio broadcasting industry;
- the risks associated with our acquisition strategy generally;
i
- the control of us by Joseph M. Field and members of his
immediate family;
- our vulnerability to changes in federal legislation or
regulatory policy;
- our dependence on our Seattle radio stations; and
- the other factors described in Item 7. " Management's
Discussion and Analysis of Financial Condition and Results of
Operations."
You should not place undue reliance on these forward-looking
statements, which reflect our view only as of the date of this report. We
undertake no obligation to update these statements or publicly release the
result of any revisions to these statements to reflect events or circumstances
after the date of this report or to reflect the occurrence of unanticipated
events.
INFORMATION ABOUT STATION AND MARKET DATA
For this report:
- We obtained the following data from Duncan's Radio Market
Guide (2001 ed.):
- 2000 market rank by metro population; and
- 2000 market rank by radio revenue.
- We derived audience share and audience rank in target
demographic data from surveys of persons, listening Monday
through Sunday, 6 a.m. to 12 midnight, in the indicated
demographic, as set forth in the Fall 2001 Radio Market Report
published by The Arbitron Ratings Company.
- Our rank in the radio broadcasting industry is derived from
figures published on January 7, 2002 by BIA Consulting, Inc.
ii
PART I
ITEM 1. BUSINESS
OVERVIEW
We are one of the five largest radio broadcasting companies in the
United States based upon 2000 revenues pro forma for pending acquisitions. We
have assembled, after giving effect to the pending acquisitions of three
stations in the Denver market and two stations in the Greensboro market, a
nationwide portfolio of 100 stations in 19 markets, including 11 of the
country's top 50 radio revenue markets. Our station groups, including pending
acquisitions, rank among the top three in revenue market share in 18 of the 19
markets in which we operate. Over 85% of our revenues are derived from markets
where we ranked as either first or second in market radio revenues.
We operate a wide range of formats in geographically diverse markets
across the United States. Our largest markets, in order of our 2001 revenues,
including pro forma revenues for pending acquisitions, are Seattle, Boston,
Kansas City, Sacramento, Portland, New Orleans and Denver.
OUR ACQUISITION STRATEGY
Through our disciplined acquisition strategy, we seek to (1) build
top-three station clusters principally in large growth markets and (2) acquire
underdeveloped properties that offer the potential for significant improvements
in revenues and broadcast cash flow through the application of our operational
expertise. Although we typically focus on radio stations in top 50 markets, we
also acquire stations in top 75 markets that meet the above criteria.
OUR OPERATING STRATEGY
The principal components of our operating strategy are to:
- Develop Market Leading Station Clusters. We are among the
three largest clusters, based on 2000 revenues pro forma for
pending acquisitions, in 18 of our 19 markets. Over 85% of our
revenues are derived from markets where we are ranked as
either first or second in market radio revenues. To enhance
our competitive position, we strategically align our stations'
formats and sales efforts within each market to optimize their
performance, both individually and collectively.
- Recruit, Develop, Motivate And Retain Superior Employees. We
believe that station operators differentiate themselves from
their peers primarily through their ability to recruit,
develop, motivate and retain superior management, programming
and sales talent. Accordingly, we strive to establish a
compelling corporate culture that is attractive to superior
performers. We encourage our stations to build strong
community bonds through local and company-wide community
service programs, which facilitate strong local business
relationships and provide employees with opportunities for
enhanced job fulfillment. We offer competitive compensation
packages with performance-based incentives for our key
employees. We utilize best practices to facilitate development
and implementation of advantageous operational tools and
strategies. In addition, we provide employees with
opportunities for personal growth and advancement through
training, seminars and other educational programs.
- Build Strongly-Branded Franchises. We analyze market research
and competitive factors to identify the format opportunity,
music selection and rotation, presentation and other key
programming attributes that we believe will best position each
station to develop a distinctive identity and to strengthen
the stations' local "brand" or "franchise" value. We believe
that this will enable us to maximize our audience share and
consequently our revenues and broadcast cash flow.
- Leverage Station Clusters To Capture Greater Share Of
Advertising Revenue. We believe radio will continue to gain
revenue share from other media. As a result of deregulation in
the radio broadcasting industry, operators can now create
radio station clusters that have the critical mass of audience
reach and marketing resources necessary to pursue incremental
advertising and promotional revenues more
1
aggressively. We continue to capitalize on this opportunity by
developing specialized teams in many of our markets to work
with advertisers to create and develop marketing programs and
solutions across our multi-station market clusters. Over 85%
of our revenues are derived from markets where we ranked as
either first or second in market radio revenues. In 2001, as
in 2000, we gained revenue market share in the majority of the
markets in which we operate and for the company as a whole.
- Acquire And Develop Under-Performing Stations. We seek to
acquire and develop under-performing stations, which has often
enabled us to achieve superior same station revenue and
broadcast cash flow growth. We utilize a variety of techniques
to develop underachieving properties. These techniques
include: strategic market research and analysis; management
enhancements; improved sales training and techniques;
technical upgrades; programming and marketing enhancements;
refocused expenditures; and facility consolidations.
- Maximize Technical Capabilities. We seek to operate stations
with the strongest signals in their respective markets. In
addition, on various occasions we have identified
opportunities to acquire and upgrade low-powered or
out-of-market stations and transform them into competitive
signals, thus increasing their value significantly.
OUR CORPORATE HISTORY
Our Chairman of the Board and Chief Executive Officer, Joseph M. Field,
founded Entercom in 1968 on the conviction that FM broadcasting, then in its
infancy, would surpass AM broadcasting as the leading aural medium. In the
mid-1980's, with FM at critical mass, we began a deliberate multi-year effort to
enhance our operations at both the corporate and station levels by changing or
adjusting program formats to appeal to mainstream audiences in order to compete
for greater shares of audience and advertising dollars in our markets. With the
advent of the duopoly rules in 1992, which permitted expansion of ownership in a
market from one to two stations in each radio band, we began to "double up" in
our markets. Since the passage of the Telecommunications Act of 1996, which
permitted ownership of up to eight radio stations in most major markets, we have
pursued a creative acquisition and development strategy by which we have
acquired multiple stations in markets where we identified opportunities to
improve station operating performance and to develop market leading clusters. We
have taken advantage of the Telecommunications Act of 1996 by capitalizing on
these opportunities, as a significant amount of our growth has occurred during
the past five years.
OUR STATION PORTFOLIO
The following table sets forth selected information about our portfolio
of radio stations and gives effect to our pending acquisitions:
2000 MARKET RANK
AUDIENCE AUDIENCE
METRO RADIO YEAR TARGET SHARE RANK
MARKET/ STATION POPULATION REVENUE ACQUIRED FORMAT DEMOGRAPHIC IN TARGET DEMOGRAPHIC
--------------- ---------- ------- -------- ------ ----------- ---------------------
BOSTON, MA 8 8
WEEI-AM 1998 } Sports Talk Men 25-54 6.1 4
WVEI-AM (1) 1999
WRKO-AM 1998 Talk Adults 25-54 2.7 13 (tie)
WAAF-FM 1999 Active Rock Men 18-34 10.4 2
WQSX-FM 1999 Rhythmic Adult Contemporary Women 25-54 5.7 4
SEATTLE, WA (2) 14 13
KBSG-AM/FM 1996 Oldies Adults 25-54 4.5 5
KIRO-AM 1997 News/Talk/Sports Adults 25-54 7.7 1
KQBZ-FM 1997 Talk Men 25-54 4.7 5
KISW-FM 1997 Classic Rock Men 25-54 5.8 3
KMTT-FM 1973 Adult Rock Adults 25-54 4.1 6
2
2000 MARKET RANK
AUDIENCE AUDIENCE
METRO RADIO YEAR TARGET SHARE RANK
MARKET/ STATION POPULATION REVENUE ACQUIRED FORMAT DEMOGRAPHIC IN TARGET DEMOGRAPHIC
--------------- ---------- ------- -------- ------ ----------- ---------------------
KNWX-AM 1997 News/Business Adults 35-64 1.5 20
KNDD-FM 1996 Modern Rock Men 18-34 8.0 3
DENVER, CO 23 15
KOSI-FM pending Adult Contemporary Women 25-54 10.1 2
KKHK-FM pending Classic Rock Men 25-54 3.7 7
KEZW-AM pending Nostalgia Adults 35-64 1.8 14
PORTLAND, OR 25 22
KFXX-AM 1998 } Sports Talk Men 25-54 2.6 14
KSLM-AM (3) 1998
KGON-FM 1995 Classic Rock Men 25-54 10.0 1
KKSN-AM 1995 Nostalgia Adults 35-64 0.7 23
KKSN-FM 1998 Oldies Adults 25-54 4.8 6 (tie)
KNRK-FM 1995 Modern Rock Men 18-34 9.9 2 (tie)
KRSK-FM 1998 Hot Adult Contemporary Women 25-54 6.1 5
SACRAMENTO, CA 29 27
KCTC-AM 1998 Nostalgia Adults 35-64 1.6 17
KRXQ-FM 1997 Active Rock Men 18-34 13.1 1
KSEG-FM 1997 Classic Rock Men 25-54 6.5 4
KSSJ-FM 1997 Smooth Jazz Adults 25-54 5.9 2 (tie)
KDND-FM 1997 Contemporary Hit Radio Women 18-34 6.7 4 (tie)
KANSAS CITY, MO 30 29
KMBZ-AM 1997 News/Talk/ Sports Men 25-54 5.9 5
KUDL-FM 1998 Adult Contemporary Women 25-54 7.9 2
KYYS-FM 1997 Album Oriented Rock Men 25-54 8.1 2
WDAF-AM 1998 Country Adults 35-64 5.1 6
KWSJ-AM (4) 1999 Spanish Adults 25-54 nmf (7) nmf (7)
KXTR-AM (4) 1999 Classical Adults 25-54 0.3 23 (tie)
KQRC-FM 2000 Active Rock Men 18-34 23.2 1
KCIY-FM 2000 Smooth Jazz Adults 25-54 3.7 15
KRBZ-FM 2000 Hot Adult Contemporary Women 18-34 6.3 7
MILWAUKEE, WI 31 34
WEMP-AM 1999 Religious Adults 35-64 0.4 nmf (7)
WMYX-FM 1999 Adult Contemporary Women 25-54 10.1 2
WXSS-FM 1999 Contemporary Hit Radio Women 18-34 10.6 4
NORFOLK, VA 36 42
WPTE-FM 1999 Modern Adult Contemporary Women 25-54 5.7 7
WWDE-FM 1999 Adult Contemporary Women 25-54 12.5 1
WVKL-FM 1999 Urban Adult Contemporary Women 25-54 7.2 4
WNVZ-FM 1999 Contemporary Hit Radio Women 18-34 9.4 4
NEW ORLEANS, LA 41 40
WSMB-AM 1999 Talk Adults 35-64 0.7 19 (tie)
WWL-AM 1999 News/Talk/Sports Men 25-54 12.8 1
3
2000 MARKET RANK
AUDIENCE AUDIENCE
METRO RADIO YEAR TARGET SHARE RANK
MARKET/ STATION POPULATION REVENUE ACQUIRED FORMAT DEMOGRAPHIC IN TARGET DEMOGRAPHIC
--------------- ---------- ------- -------- ------ ----------- ---------------------
WEZB-FM 1999 Contemporary Hit Radio Women 18-34 7.9 3
WLMG-FM 1999 Adult Contemporary Women 25-54 9.1 3
WKZN-FM 1999 Hot Adult Contemporary Women 18-49 4.5 7
WTKL-FM 1999 Oldies Adults 25-54 4.8 8
GREENSBORO, NC 42 51
WMQX-FM 1999 Oldies Adults 25-54 6.7 4
WJMH-FM 1999 Urban Contemporary Adults 18-34 16.1 1
WEAL-AM 1999 Gospel Adults 35-64 1.0 17 (tie)
WQMG-FM 1999 Urban Adult Contemporary Adults 25-54 8.0 2
WKSI-FM pending Hot Adult Contemporary Women 25-54 5.6 6
WPET-AM pending Religious Adults 35-64 0.3 nmf (7)
BUFFALO, NY 45 45
WBEN-AM 1999 News/Talk Men 25-54 6.8 5
WTSS-FM 1999 Adult Contemporary Women 25-54 9.9 3 (tie)
WWKB-AM 1999 Business News Adults 35-64 0.4 25
WKSE-FM 1999 Contemporary Hit Radio Women 18-34 21.1 1
WGR-AM 1999 Sports/Talk Men 25-54 5.6 6 (tie)
WWWS-AM 1999 Urban Oldies Adults 25-54 1.0 15
MEMPHIS, TN 46 41
WMBZ-FM 1999 Modern Adult Contemporary Women 18-34 7.2 3 (tie)
WJCE-AM 1999 Nostalgia Adults 35-64 1.2 21 (tie)
WRVR-FM 1999 Adult Contemporary Women 25-54 6.8 4
ROCHESTER, NY 52 53
WBZA-FM 1998 80's - based Adult Women 25-54 4.8 7
Contemporary
WBEE-FM 1998 Country Adults 25-54 13.5 1
WBBF-AM/FM 1998 Oldies Adults 25-54 2.4 12
GREENVILLE/
SPARTANBURG, SC 58 56
WFBC-FM 1999 Contemporary Hit Radio Women 18-34 11.4 1 (tie)
WSPA-FM 1999 Adult Contemporary Women 25-54 9.7 3 tie
WYRD-AM (5) 1999 } News/Talk Adults 25-54 4.5 7
WORD-AM (5) 1999
WSPA-AM 1999 Full Service/ Talk Adults 35-64 0.7 23 (tie)
WOLI-FM (5) 1999 } 80's - based Adult Women 25-54 4.3 8
WOLT-FM (5) 1999 Contemporary
WILKES-BARRE/
SCRANTON, PA 64 71
WGBI-AM (6) 1999
WOGY-AM (6) 1999 } News/Talk/Sports Adults 35-64 2.6 7 (tie)
WILK-AM (6) 1999
4
2000 MARKET RANK
AUDIENCE AUDIENCE
METRO RADIO YEAR TARGET SHARE RANK
MARKET/STATION POPULATION REVENUE ACQUIRED FORMAT DEMOGRAPHIC IN TARGET DEMOGRAPHIC
-------------- ---------- ------- -------- ------ ----------- ---------------------
WGGI-FM (6) 1999 } Country Adults 25-54 12.2 1
WGGY-FM (6) 1999
WKRZ-FM (6) 1999 } Contemporary Hit Radio Women 18-49 16.9 1
WKRF-FM (6) 2000
WBZJ-FM (6) 1999 } 80's - based Adult Women 25-54 6.6 4
Contemporary
WBZH-FM (6) 1999
WICHITA, KS 84 72
KEYN-FM 2000 Oldies Adults 25-54 5.8 5
KFBZ-FM 2000 Hot Adult Contemporary Women 25-54 4.2 8 (tie)
KQAM-AM 2000 Sports Men 25-54 2.6 16
KFH-AM 2000 Talk Men 25-54 6.1 4
KNSS-AM 2000 News Adults 25-54 3.3 14
KDGS-FM 2000 Rhythmic Contemporary Hit Adults 18-34 9.0 2 (tie)
Radio
KWSJ-FM 2000 Smooth Jazz Women 25-54 1.8 18
GAINESVILLE/OCALA, FL 90 127
WKTK-FM 1986 Adult Contemporary Women 25-54 14.3 1
WSKY-FM 1998 News/Talk Adults 25-54 7.6 3 (tie)
MADISON, WI 120 67
WOLX-FM 2000 Oldies Adults 25-54 6.3 5
WMMM-FM 2000 Adult Alternative Adults 25-54 6.1 6
WBZU-FM 2000 80's - based Adult Women 25-54 3.0 9
Contemporary
LONGVIEW/KELSO, WA N/A N/A
KBAM-AM 1998 Country Adults 25-54 n/a n/a
KEDO-AM 1997 Oldies Adults 25-54 n/a n/a
KLYK-FM 1997 Adult Contemporary Women 25-54 n/a n/a
KRQT-FM 1998 Classic Rock Men 25-54 n/a n/a
(1) Station competes in the adjacent community of Worcester, Massachusetts
and simulcasts virtually all of the programming of WEEI-AM.
(2) We also sell substantially all of the advertising time of a sixth FM
station in the Seattle market under a joint sales agreement. On
February 1, 2002, we entered into an agreement to terminate, effective
February 28, 2002, the joint sales agreement that was due to expire on
June 30, 2002.
(3) KSLM-AM is licensed to Salem, Oregon, within the Portland market and
simulcasts KFXX-AM programming.
(4) The FCC rules require that by the end of a five-year transition period,
that ends in October 2006, we must elect to operate only one of the two
stations and surrender the other station to the FCC. However, we may be
required to make this election as early as May 2003.
(5) Each of the following groups of stations simulcast their programming:
WYRD-AM and WORD-AM; and WOLI-FM and WOLT-FM.
(6) Each of the following groups of stations simulcast their programming:
WGBI-AM, WOGY-AM and WILK-AM; WGGI-FM and WGGY-FM; WKRZ-FM and WKRF-FM;
and WBZJ-FM and WBZH-FM.
(7) Fall 2001 ratings data not statistically meaningful.
5
COMPETITION; CHANGES IN BROADCASTING INDUSTRY
The radio broadcasting industry is highly competitive. The success of
each of our stations depends largely upon its audience ratings and its share of
the overall advertising revenue within its market. Our stations compete for
listeners and advertising revenue directly with other radio stations within
their respective markets. Radio stations compete for listeners primarily on the
basis of program content that appeals to a particular demographic group. By
building a strong listener base consisting of a specific demographic group in
each of our markets, we are able to attract advertisers seeking to reach those
listeners.
The following are some of the factors that are important to a radio
station's competitive position:
- management experience;
- the station's local audience rank in its market;
- transmitter power;
- assigned frequency;
- audience characteristics;
- local program acceptance; and
- the number and characteristics of other radio stations and
other advertising media in the market area.
In addition, we attempt to improve our competitive position with
promotional campaigns aimed at the demographic groups targeted by our stations
and by sales efforts designed to attract advertisers.
Radio station operators are subject to the possibility of another
station changing programming formats to compete directly for listeners and
advertisers or launching an aggressive promotional campaign in support of an
already existing competitive format. If a competitor, particularly one with
substantial financial resources, were to attempt to compete in either these
fashions, the broadcast cash flow of our affected station could decrease due to
increased promotional and other expenses and/or lower advertising revenues.
There can be no assurance that any one of our radio stations will be able to
maintain or increase its current audience ratings and radio advertising revenue
market share.
The operation of a radio broadcast station requires a license from the
FCC. The number of radio stations that can operate in a given market is limited
by strict AM interference criteria and the availability of FM radio frequencies
allotted by the FCC to communities in that market. The number of stations that a
single entity may operate in a market is further limited by the FCC's multiple
ownership rules that regulate the number of stations serving the same area that
may be owned or controlled by a single entity. However, the FCC announced on
November 8, 2001 that it is in the process of examining and amending its rules
and policies on ownership and operation of multiple local radio stations. The
FCC has established interim rules for the review of pending applications. The
impact that these new rules will have on our business is uncertain.
Our stations compete for audiences and advertising revenues within
their respective markets directly with other radio stations, as well as with
other media such as newspapers, magazines, over-the-air and cable television,
outdoor advertising and direct mail. In addition, the radio broadcasting
industry is subject to competition from new media technologies that are being
developed or introduced such as (1) satellite-delivered digital audio radio
service, which has resulted in the near term introduction of new subscriber
based satellite radio services with numerous niche formats; (2) audio
programming by cable systems, direct broadcast satellite systems, Internet
content providers, personal communications services and other digital audio
broadcast formats; and (3) in-band on-channel digital radio, which provides
multi-channel, multi-format digital radio services in the same bandwidth
currently occupied by traditional AM and FM radio services. The FCC adopted a
plan in 1999 for the establishment of "microbroadcasting" stations, low-powered
FM stations that will be designed to serve small localized areas and that in
some localized areas may cause interference with regular broadcasts by existing
radio stations. The radio broadcasting industry historically has grown despite
the introduction of new technologies for the delivery of entertainment and
information, such as television broadcasting, cable television, audio tapes and
compact discs. A growing population and greater availability of radios,
particularly car and portable radios, have contributed to this growth. There can
be no assurances, however, that this
6
historical growth will continue or that the development or introduction in the
future of any new media technology will not have an adverse effect on the radio
broadcasting industry.
The FCC has adopted licensing and operating rules for satellite
delivered audio and in April 1997 awarded two licenses for this service.
Satellite delivered audio may provide a medium for the delivery by satellite or
supplemental terrestrial means of multiple new audio programming formats to
local and/or national audiences. XM Satellite Radio launched its commercial
service on September 25, 2001 and Sirius Satellite Radio is scheduled to launch
service in 2002. Digital technology also may be used in the future by
terrestrial radio broadcast stations either on existing or alternate
broadcasting frequencies, and the FCC has stated that it will consider making
changes to its rules to permit AM and FM radio stations to offer digital signals
following industry analysis of technical standards. In addition, the FCC has
authorized an additional 100 kHz of bandwidth for the AM band and has allotted
frequencies in this new band to certain existing AM station licensees that
applied for migration to the expanded AM band, subject to the requirement that
at the end of a transition period, those licensees return to the FCC either the
license for their existing AM band or for the expanded AM band. Upon the
completion of the migration process, it is expected that some AM stations will
have improved coverage because of reduced interference. We have not yet
evaluated the impact of the migration process on our business but do not believe
that such impact, if any, will be material.
We cannot predict what other matters might be considered in the future
by the FCC, nor can we assess in advance what impact, if any, the implementation
of any of these proposals or changes might have on our business.
FEDERAL REGULATION OF RADIO BROADCASTING
The radio broadcasting industry is subject to extensive and changing
regulation of, among other things, program content, advertising content,
technical operations and business and employment practices. The ownership,
operation and sale of radio stations are subject to the jurisdiction of the FCC.
Among other things, the FCC:
- assigns frequency bands for broadcasting;
- determines the particular frequencies, locations, operating
power, and other technical parameters of stations;
- issues, renews, revokes and modifies station licenses;
- determines whether to approve changes in ownership or control
of station licenses; and
- adopts and implements regulations and policies that directly
affect the ownership, operation and employment practices of
stations.
The FCC has the power to impose penalties for violations of its rules
or the Communications Act, including the imposition of monetary forfeitures, the
issuance of short-term licenses, the imposition of a condition on the renewal of
a license, and the revocation of operating authority.
The following is a brief summary of certain provisions of the
Communications Act and of specific FCC regulations and policies. This summary is
not a comprehensive listing of all of the regulations and policies affecting
radio stations. For further information concerning the nature and extent of
federal regulation of radio stations, you should refer to the Communications
Act, FCC rules and FCC public notices and rulings.
FCC LICENSES. Radio stations operate pursuant to renewable broadcasting
licenses that are ordinarily granted by the FCC for maximum terms of eight
years. The FCC licenses for our stations are held by some of our subsidiaries. A
station may continue to operate beyond the expiration date of its license if a
timely filed license renewal application is pending. During the periods when
renewal applications are pending, petitions to deny license renewals can be
filed by interested parties, including members of the public and interest
groups. The FCC is required to hold hearings on a station's renewal application
if a substantial or material question of fact exists as to whether the station
has served the public interest, convenience and necessity. If, as a result of an
evidentiary hearing, the FCC determines that the licensee has failed to meet
certain requirements and that no mitigating factors justify the imposition of a
lesser sanction, then the FCC may deny a license renewal application.
Historically, FCC licenses have generally been renewed. We have no reason
7
to believe that our licenses will not be renewed in the ordinary course,
although there can be no assurance to that effect. The non-renewal of one or
more of our licenses could have a material adverse effect on our business.
The FCC classifies each AM and FM station. An AM station operates on
either a clear channel, regional channel or local channel. A clear channel is
one on which AM stations are assigned to serve wide areas. Clear channel AM
stations are classified as either: Class A stations, which operate on an
unlimited time basis and are designed to render primary and secondary service
over an extended area; Class B stations, which operate on an unlimited time
basis and are designed to render service only over a primary service area; or
Class D stations, which operate either during daytime hours only, during limited
times only or on an unlimited time basis with low nighttime power. A regional
channel is one on which Class B and Class D AM stations may operate and serve
primarily a principal center of population and the rural areas contiguous to it.
A local channel is one on which AM stations operate on an unlimited time basis
and serve primarily a community and the suburban and rural areas immediately
contiguous thereto. Class C AM stations operate on a local channel and are
designed to render service only over a primary service area that may be reduced
as a consequence of interference.
The minimum and maximum facilities requirements for an FM station are
determined by its class. FM class designations depend upon the geographic zone
in which the transmitter of the FM station is located. In general, commercial FM
stations are classified as follows, in order of increasing power and antenna
height: Class A, B1, C3, B, C2, C1, CO and C. The FCC has recently adopted a new
rule that subjects Class C FM stations that do not meet certain antenna-height
parameters to an involuntary downgrade in class to Class CO under certain
circumstances.
The following table sets forth the metropolitan market served (city of
license may differ), call letters, FCC license classification, antenna height
above average terrain ("HAAT"), power, frequency and FCC license expiration date
of each of the stations that we own or operate and gives effect to our
consummation of our pending acquisitions.
FCC HAAT POWER IN EXPIRATION DATE OF
MARKET STATION CLASS (IN METERS) FREQUENCY KILOWATTS(1) FCC LICENSE
- ------ -------- ----- ----------- --------- ------------ -----------
Boston, MA WEEI-AM B * 850 kHz 50 April 1, 2006
WRKO-AM B * 680 kHz 50 April 1, 2006
WAAF-FM B 239 107.3 MHz 20 April 1, 2006
WQSX-FM B 179 93.7 MHz 34 April 1, 2006
WVEI-AM B * 1440 kHz 5 April 1, 2006
Seattle, WA KBSG-AM B * 1210 kHz 27.5-D/10-N February 1, 2006
KBSG-FM C 729 97.3 MHz 55 February 1, 2006
KIRO-AM A * 710 kHz 50 February 1, 2006
KISW-FM C 714 99.9 MHz 58 February 1, 2006
KMTT-FM C 714 103.7 MHz 58 February 1, 2006
KQBZ-FM C 714 100.7 MHz 58 February 1, 2006
KNWX-AM B * 770 kHz 50-D/5-N February 1, 2006
KNDD-FM C 714 107.7 MHz 58 February 1, 2006
Denver, CO KOSI-FM C 495 101.1 MHz 100 April 1, 2005
KKHK-FM C 495 99.5 MHz 100 April 1, 2005
KEZW-AM B * 1430 kHz 10-D/5-N April 1, 2005
Portland, OR KFXX-AM B * 910 kHz 5 February 1, 2006
KGON-FM C 386 92.3 MHz 100 February 1, 2006
KKSN-AM B * 1520 kHz 50-D/15-N February 1, 2006
KKSN-FM C 386 97.1 MHz 100 February 1, 2006
KNRK-FM C2 259 94.7 MHz 17 February 1, 2006
KRSK-FM C 576 105.1 MHz 100 February 1, 2006
KSLM-AM B * 1390 kHz 5-D/0.69-N February 1, 2006
8
FCC HAAT POWER IN EXPIRATION DATE OF
MARKET STATION CLASS (IN METERS) FREQUENCY KILOWATTS(1) FCC LICENSE
- ------ -------- ----- ----------- --------- ------------ -----------
Sacramento, CA KCTC-AM B * 1320 kHz 5 December 1, 2005
KRXQ-FM B 152 98.5 MHz 50 December 1, 2005
KSEG-FM B 152 96.9 MHz 50 December 1, 2005
KSSJ-FM B1 99 94.7 MHz 25 December 1, 2005
KDND-FM B 123 107.9 MHz 50 December 1, 2005
Kansas City, MO KMBZ-AM B * 980 kHz 5 February 1, 2005
KUDL-FM C 303 98.1 MHz 100 June 1, 2005
KYYS-FM C 308 99.7 MHz 100 February 1, 2005
WDAF-AM B * 610 kHz 5 February 1, 2005
KWSJ-AM (2) B * 1250 kHz 25-D/3.7-N June 1, 2005
KXTR-AM (2) B * 1600 kHz 10-D/1-N June 1, 2005
KQRC-FM C 322 98.9 MHz 100 February 1, 2005
KCIY-FM C1 299 106.5 MHz 100 February 1, 2005
KRBZ-FM C 300 96.5 MHz 100 February 1, 2005
Milwaukee, WI WEMP-AM B * 1250 kHz 5 December 1, 2003
WMYX-FM B 137 99.1 MHz 50 December 1, 2003
WXSS-FM B 257 103.7 MHz 19.5 December 1, 2003
Norfolk, VA WPTE-FM B 152 94..9 MHz 50 October 1, 2003
WWDE-FM B 152 101.3 MHz 50 October 1, 2003
WVKL-FM B 268 95.7 MHz 40 October 1, 2003
WNVZ-FM B 146 104.5 MHz 50 October 1, 2003
New Orleans, LA WSMB-AM B * 1350 kHz 5 June 1, 2004
WWL-AM A * 870 kHz 50 June 1, 2004
WEZB-FM C 300 97.1 MHz 100 June 1, 2004
WLMG-FM C 300 101.9 MHz 100 June 1, 2004
WKZN-FM C1 275 105.3 MHz 100 June 1, 2004
WTKL-FM C 300 95.7 MHz 100 June 1, 2004
Greensboro, NC WMQX-FM C 335 93.1 MHz 100 December 1, 2003
WJMH-FM C 367 102.1 MHz 100 December 1, 2003
WEAL-AM D * 1510 kHz 1-D December 1, 2003
WQMG-FM C 375 97.1 MHz 100 December 1, 2003
WKSI-FM C 316 98.7 MHz 100 December 1, 2003
WPET-AM D * 950 kHz 0.5-D/0.08-N December 1, 2003
Buffalo, NY WBEN-AM B * 930 kHz 5 June 1, 2006
WTSS-FM B 408 102.5 MHz 110 June 1, 2006
WWKB-AM A * 1520 kHz 50 June 1, 2006
WKSE-FM B 128 98.5 MHz 46 June 1, 2006
WGR-AM B * 550 kHz 5 June 1, 2006
WWWS-AM C * 1400 kHz 1 June 1, 2006
Memphis, TN WMBZ-FM C2 144 94.1 MHz 50 August 1, 2004
WJCE-AM B * 680 kHz 10-D/5-N August 1, 2004
WRVR-FM C1 229 104.5 MHz 100 August 1, 2004
Rochester, NY WBZA-FM B 172 98.9 MHz 37 June 1, 2006
9
FCC HAAT POWER IN EXPIRATION DATE OF
MARKET STATION CLASS (IN METERS) FREQUENCY KILOWATTS(1) FCC LICENSE
- ------ -------- ----- ----------- --------- ------------ -----------
WBEE-FM B 152 92.5 MHz 50 June 1, 2006
WBBF-AM B * 950 kHz 1 June 1, 2006
WBBF-FM A 117 93.3 MHz 4.4 June 1, 2006
Greenville/
Spartanburg, SC WFBC-FM C 564 93.7 MHz 100 December 1, 2003
WSPA-FM C 580 98.9 MHz 100 December 1, 2003
WYRD-AM B * 1330 kHz 5 December 1, 2003
WORD-AM B * 910 kHz 3.6-D/0.89-N December 1, 2003
WSPA-AM B * 950 kHz 5 December 1, 2003
WOLI-FM A 100 103.9 MHz 6 December 1, 2003
WOLT-FM A 151 103.3 MHz 2.7 December 1, 2003
Wilkes-Barre/
Scranton, PA WGBI-AM B * 910 kHz 1-D/0.5-N August 1, 2006
WOGY-AM B * 1300 kHz 5-D/0.5-N August 1, 2006
WILK-AM B * 980 kHz 5-D/1-N August 1, 2006
WGGI-FM A 100 95.9 MHz 6 August 1, 2006
WGGY-FM B 338 101.3 MHz 7 August 1, 2006
WKRZ-FM B 357 98.5 MHz 8.7 August 1, 2006
WKRF-FM A 267 107.9 MHz 0.84 August 1, 2006
WBZJ-FM A 22 102.3 MHz 5.8 August 1, 2006
WBZH-FM A 207 103.1 MHz 0.73 August 1, 2006
Wichita, KS KEYN-FM C1 307 103.7 MHz 95 June 1, 2005
KFBZ-FM C 301 105.3 MHz 100 June 1, 2005
KQAM-AM B * 1480 kHz 5-D/1-N June 1, 2005
KFH-AM B * 1330 kHz 5-D/5-N June 1, 2005
KNSS-AM C * 1240 kHz 0.63 June 1, 2005
KDGS-FM C3 100 93.9 MHz 25 June 1, 2005
KWSJ-FM C2 150 98.7 MHz 50 June 1, 2005
Gainesville/
Ocala, FL WKTK-FM C1 299 98.5 MHz 100 February 1, 2004
WSKY-FM C2 289 97.3 MHz 13.5 February 1, 2004
Madison, WI WOLX-FM B 396 94.9 MHz 37 December 1, 2004
WMMM-FM A 175 105.5 MHz 2 December 1, 2004
WBZU-FM A 74 105.1 MHz 6 December 1, 2004
Longview/Kelso, WA
KBAM-AM D * 1270 kHz 5-D/0.083-N February 1, 2006
KEDO-AM C * 1400 kHz 1 February 1, 2006
KLYK-FM A 262 105.5 MHz 0.7 February 1, 2006
KRQT-FM C3 528 107.1 MHz 0.74 February 1, 2006
* Not applicable for AM transmission facilities.
(1) Pursuant to FCC rules and regulations, many AM radio stations are licensed
to operate at a reduced power during the nighttime broadcasting hours,
which results in reducing the radio station's coverage during the nighttime
hours of
10
operation. Both power ratings are shown, where applicable. For FM stations, the
maximum effective radiated power in the main lobe is given.
(2) The FCC rules require that by the end of a five-year transition period,
which expires in October 2006, we must elect to operate on either the 1250
kHz frequency or the 1660 kHz frequency and surrender the other frequency
to the FCC. However, we may be required to make such election as early as
May 2003.
TRANSFERS OR ASSIGNMENT OF LICENSES. The Communications Act prohibits
the assignment of broadcast licenses or the transfer of control of a broadcast
licensee without the prior approval of the FCC. In determining whether to grant
such approval, the FCC considers a number of factors pertaining to the licensee
(and proposed licensee), including:
- compliance with the various rules limiting common ownership of
media properties in a given market;
- the "character" of the licensee and those persons holding
"attributable" interests in the licensee; and
- compliance with the Communications Act's limitations on alien
ownership as well as compliance with other FCC regulations and
policies.
To obtain FCC consent to assign or transfer control of a broadcast
license, appropriate applications must be filed with the FCC. If the application
involves a "substantial change" in ownership or control, the application must be
placed on public notice for not less than 30 days during which time petitions to
deny or other objections against the application may be filed by interested
parties, including members of the public. Informal objections to assignment and
transfer of control applications may be filed any time up until the FCC acts on
the application. If the application does not involve a "substantial change" in
ownership or control, it is a "pro forma" application. The "pro forma"
application is nevertheless subject to having informal objections filed against
it. When passing on an assignment or transfer application, the FCC is prohibited
from considering whether the public interest might be served by an assignment or
transfer of the broadcast license to any party other than the assignee or
transferee specified in the application. If the FCC grants an assignment or
transfer application, interested parties have 30 days from public notice of the
grant to seek reconsideration of that grant. The FCC usually has an additional
ten days to set aside the grant on its own motion.
MULTIPLE OWNERSHIP RULES. The Communications Act and FCC rules impose
specific limits on the number of commercial radio stations an entity can own in
a single market. These rules may preclude us from acquiring certain stations we
might otherwise seek to acquire. The rules also effectively prevent us from
selling stations in a market to a buyer that has reached its ownership limit in
the market. The local radio ownership rules are as follows:
- in markets with 45 or more commercial radio stations,
ownership is limited to eight commercial stations, no more
than five of which can be either AM or FM;
- in markets with 30 to 44 commercial radio stations, ownership
is limited to seven commercial stations, no more than four of
which can be either AM or FM;
- in markets with 15 to 29 commercial radio stations, ownership
is limited to six commercial stations, no more than four of
which can be either AM or FM; and
- in markets with 14 or fewer commercial radio stations,
ownership is limited to five commercial stations or no more
than 50% of the market's total, whichever is lower, and no
more than three of which can be either AM or FM.
The FCC is also considering proposing a policy that would give special
review to a proposed transaction if it would enable a single owner to attain a
high degree of revenue concentration in a market. In connection with this, the
FCC has invited comments on the impact of concentration in public notices
concerning proposed transactions, and has delayed or refused its consent in some
cases because of revenue concentrations. On November 8, 2001, the FCC issued a
notice of proposed rulemaking regarding its rules and policies on ownership and
operation of multiple local radio stations and set specific deadlines to
expedite the resolution of pending applications. The FCC indicated that it was
undertaking a comprehensive examination of its local radio ownership rules and
policies in order to develop a framework that will be more responsive to current
marketplace realities while continuing to address its public interest concern of
promoting
11
diversity and competition. Pending a decision on the proposed rule making
proceeding, the FCC has adopted interim rules to review applications. Under the
interim rules, the FCC will continue to examine the potential competitive
effects of proposed radio station combinations and will continue to rely on a
50/70 screen to identify applications that may raise competitive concerns. Under
this screen, an application that proposes a radio station combination that would
provide one station group with 50% or more, or two station groups with 70% or
more, of the radio advertising revenue share of the relevant market will be
flagged by the FCC. The FCC will presume that an application that falls below
the screen will not raise competition concerns. If an application is flagged by
the FCC, the FCC invites public comment on applications proposing combinations
that fall above the screen and intends to carefully consider the potential
competitive impact of such proposals before acting upon them. The Notice also
set processing targets for such applications. As to applications that have been
pending for over one year, the FCC stated that its staff would make a
recommendation on the applications within 90 days of the adoption of the Notice.
For all other pending applications, the Commission staff is to issue
recommendations within six months of the adoption date.
The FCC has revised its radio/television cross-ownership rule to allow
for greater common ownership of television and radio stations. The revised
radio/television cross-ownership rule permits a single owner to own up to two
television stations, consistent with the FCC's rules on common ownership of
television stations, together with one radio station in all markets. In
addition, an owner will be permitted to own additional radio stations, not to
exceed the local ownership limits for the market, as follows:
- in markets where 20 media voices will remain after the
consummation of the proposed transaction, an owner may own an
additional 5 radio stations, or, if the owner only has one
television station, an additional 6 radio stations; and
- in markets where 10 media voices will remain after the
consummation of the proposed transaction, an owner may own an
additional 3 radio stations.
A "media voice" includes each independently-owned, full power
television and radio station and each daily newspaper, plus one voice for all
cable television systems operating in the market.
In addition to the limits on the number of radio stations that a single
owner may own, the FCC's broadcast/newspaper cross-ownership rule prohibits the
same owner from owning a broadcast station and a daily newspaper in the same
geographic market.
The FCC generally applies its ownership limits to "attributable"
interests held by an individual, corporation, partnership or other association.
In the case of corporations directly or indirectly controlling broadcast
licenses, the interests of officers, directors and those who, directly or
indirectly, have the right to vote 5% or more of the votes of the licensee
entity are generally attributable. In addition, certain passive investors are
attributable if they hold 20% or more of the votes of the licensee entity. The
FCC temporarily revoked the single majority exemption that provided that the
interest of minority holders in an entity were not attributable if a single
entity or individual held 50% or more of that entity's votes. However, the FCC
grandfathered as non-attributable those minority interests that were held as of
the date of the revocation. On December 3, 2001, the FCC reinstated the single
majority exemption for all transactions after the order.
The FCC also has a rule, known as the equity-debt-plus or EDP rule that
causes certain creditors or investors to be attributable owners of a station,
regardless of whether there is a single majority shareholder. Under this rule, a
major programming supplier or a same-market owner will be an attributable owner
of a station if the supplier or owner holds debt or equity, or both, in the
station that is greater than 33% of the value of the station's total debt plus
equity. A major programming supplier includes any programming supplier that
provides more than 15% of the station's weekly programming hours. A same-market
owner includes any attributable owner of a media company, including broadcast
stations, cable television and newspapers, located in the same market as the
station, but only if the owner is attributable under an FCC attribution rule
other than the EDP rule. The attribution rules limit the number of radio
stations we may acquire or own in any market.
ALIEN OWNERSHIP RULES. The Communications Act prohibits the issuance or
holding of broadcast licenses by aliens, including any corporation if more than
20% of its capital stock is owned or voted by aliens. In addition, the FCC
12
may prohibit any corporation from holding a broadcast license if the corporation
is directly or indirectly controlled by any other corporation of which more than
25% of the capital stock is owned of record or voted by aliens, if the FCC finds
that the prohibition is in the public interest. These restrictions apply in
modified form to other forms of business organizations, including partnerships
and LLCs. Our articles of incorporation prohibit the ownership, voting and
transfer of our capital stock in violation of the FCC restrictions, and prohibit
the issuance of capital stock or the voting rights such capital stock represents
to or for the account of aliens or corporations otherwise subject to domination
or control by aliens in excess of the FCC limits. The articles of incorporation
authorize our board of directors to enforce these prohibitions. In addition, the
articles of incorporation provide that shares of our capital stock determined by
our board of directors to be owned beneficially by an alien or an entity
directly or indirectly owned by aliens in whole or in part shall be subject to
redemption by us by action of the board of directors to the extent necessary, in
the judgment of the board of directors, to comply with these alien ownership
restrictions.
TIME BROKERAGE AGREEMENTS. Over the past few years, a number of radio
stations have entered into what have commonly been referred to as time brokerage
agreements. While these agreements may take varying forms, under a typical time
brokerage agreement, separately owned and licensed radio stations agree to enter
into cooperative arrangements of varying types, subject to compliance with the
requirements of antitrust laws and with FCC's rules and policies. Under these
arrangements, separately-owned stations could agree to function cooperatively in
programming, advertising sales and similar matters, subject to the requirement
that the licensee of each station maintain independent control over the
programming and operations of its own station. One typical type of time
brokerage agreement is a programming agreement between two separately-owned
radio stations serving a common service area, whereby the licensee of one
station provides substantial portions of the broadcast programming for airing on
the other licensee's station, subject to ultimate editorial and other controls
being exercised by the latter licensee, and sells advertising time during those
program segments.
The FCC's rules provide that a radio station that brokers more than 15%
of the weekly broadcast time on another station serving the same market will be
considered to have an attributable ownership interest in the brokered station
for purposes of FCC's multiple ownership limits. As a result, in a market where
we own a radio station, we would not be permitted to enter into a time brokerage
agreement with another radio station in the same market if we could not own the
brokered station under the multiple ownership rules, unless our programming on
the brokered station constituted 15% or less of the brokered station's
programming time on a weekly basis. FCC rules also prohibit a broadcast station
from duplicating more than 25% of its programming on another station in the same
broadcast service (i.e., AM-AM or FM-FM) through a time brokerage agreement
where the brokered and brokering stations which it owns or programs serve
substantially the same area.
PROGRAMMING AND OPERATION. The Communications Act requires broadcasters
to serve the "public interest." The FCC gradually has relaxed or eliminated many
of the more formalized procedures it had developed in the past to promote the
broadcast of certain types of programming responsive to the needs of a station's
community of license. A licensee continues to be required, however, to present
programming that is responsive to issues of the station's community of license
and to maintain records demonstrating this responsiveness. Complaints from
listeners concerning a station's programming often will be considered by the FCC
when it evaluates renewal applications of a licensee, although listener
complaints may be filed at any time, are required to be maintained in the
station's public file and generally may be considered by the FCC at any time.
Stations also must pay regulatory and application fees and follow various rules
promulgated under the Communications Act that regulate, among other things,
political advertising, sponsorship identifications, the advertisement of
contests and lotteries, obscene and indecent broadcasts, and technical
operations, including limits on human exposure to radio frequency radiation. The
FCC restricts the broadcast of indecent programming and prohibits the broadcast
of obscene programming.
On January 20, 2000, the FCC adopted new rules prohibiting employment
discrimination by broadcast stations on the basis of race, religion, color,
national origin, and gender; and requiring broadcasters to implement programs to
promote equal employment opportunities at their stations. The rules generally
require broadcast stations to disseminate information about job openings widely
so that all qualified applicants, including minorities and women, have an
adequate opportunity to compete for the job. These rules were suspended at the
beginning of 2001 in response to a January 16, 2001 decision of the Court of
Appeals for the District of Colombia that vacated the rules. On December 13,
2001, the FCC sought comments on the new proposed EEO rules. The proposed rules
require broadcasters to widely disseminate information about job openings to all
segments of the community to ensure that all qualified applicants have
sufficient opportunity to apply for the job. The proposed rules also require
sending job vacancy announcements to recruitment
13
organizations and selecting from a menu of non-vacancy specific outreach
approaches such as job fairs, internship programs, and interaction with
educational and community groups. Also, broadcasters must file an annual EEO
report with the FCC detailing their outreach efforts. Broadcasters with ten or
more full-time employees must file a statement with the FCC certifying
compliance with the EEO rules in the fourth year of the license term.
Broadcaster also must file employment information with the FCC annually for
statistical purpose. Until the FCC has issued final rules, the impact of the
pending EEO rules are unclear.
The FCC recently issued a decision holding that a broadcast station may
not deny a candidate for federal political office a request for broadcast
advertising time solely on the grounds that the amount of time requested is not
the standard length of time which the station offers to its commercial
advertisers. This decision is currently being reconsidered by the FCC. The
effect that this FCC decision will have on our programming and commercial
advertising is uncertain.
We employ a number of on-air personalities and generally enter into
employment agreements with these personalities to protect our interests in those
relationships that we believe to be valuable. The loss of some of these
personalities could result in a short-term loss of audience share, but we do not
believe that the loss would have a material adverse effect on our business.
PROPOSED AND RECENT CHANGES. Congress and the FCC may in the future
consider and adopt new laws, regulations and policies regarding a wide variety
of matters that could (1) affect, directly or indirectly, the operation,
ownership and profitability of our radio stations, (2) result in the loss of
audience share and advertising revenues for our radio stations, and (3) affect
our ability to acquire additional radio stations or to finance those
acquisitions. Such matters may include:
- regulatory fees, spectrum use fees, or other fees on FCC
licenses;
- foreign ownership of broadcast licenses;
- restatement in revised form of FCC's equal employment
opportunity rules and revisions to the FCC's rules relating to
political broadcasting, including free air time to candidates;
- technical and frequency allocation matters;
- proposals to restrict or prohibit the advertising of beer,
wine and other alcoholic beverages on radio; and
- changes in the FCC's cross-interest, multiple ownership and
attribution policies, including the definition of the local
market for multiple ownership purposes.
The FCC currently is considering standards for evaluating, authorizing,
and implementing terrestrial digital audio broadcasting technology, including
In-Band On-Channel(TM) technology for FM radio stations. The advantages of
digital audio broadcasting over traditional analog broadcasting technology
include improved sound quality and the ability to offer a greater variety of
auxiliary services. In-Band On-Channel(TM) technology would permit an FM station
to transmit radio programming in both analog and digital formats, or in digital
only formats, using the bandwidth that the radio station is currently licensed
to use. It is unclear what regulations the FCC will adopt regarding digital
audio broadcasting or In-Band On-Channel(TM) technology and what effect such
regulations would have on our business or the operations of our radio stations.
On January 20, 2000, the FCC voted to adopt rules creating a new low
power FM radio service. The new low power stations will operate at a maximum
power of between 10 and 100 watts in the existing FM commercial and
non-commercial band. Low power stations may be used by governmental and
non-profit organizations to provide noncommercial educational programming or
public safety and transportation radio services. No existing broadcaster or
other media entity, including us, will be permitted to have an ownership
interest or enter into any program or operating agreement with any low power FM
station. During the first two years of the new service, applicants must be based
in the area that they propose to serve. Applicants will not be permitted to own
more than one station nationwide during the initial two-year period. After the
initial two-year period, entities will be allowed to own up to five stations
nationwide,
14
and after three years, the limit will be raised to ten stations nationwide. A
single person or entity may not own two low power stations whose transmitters
are less than seven miles from each other. The authorizations for the new
stations will not be transferable. In April 2001, the FCC adopted third adjacent
channel interference protection standard and prohibited any applicant from
obtaining a low power FM station license if the applicant has previously engaged
in unlicensed operations of a station. The FCC has accepted applications for new
low power FM stations and issued some authorizations.
At this time it is difficult to assess the competitive impact of these
new stations. Although the new low power stations must comply with certain
technical requirements aimed at protecting existing FM radio stations from
interference, we cannot be certain of the level of interference that low power
stations will cause after they begin operating. Moreover, if low power FM
stations are licensed in the markets in which we operate, the low power stations
may compete for listeners and advertisers. The low power stations may also limit
our ability to obtain new licenses or to modify our existing facilities, or
cause interference to areas of existing service that are not protected by the
FCC's rules, any of which may have a material adverse affect on our business.
Finally, the FCC has adopted procedures for the auction of broadcast
spectrum in circumstances where two or more parties have filed for new or major
change applications that are mutually exclusive. Such procedures may limit our
efforts to modify or expand the broadcast signals of our stations.
We cannot predict what other matters might be considered in the future
by the FCC or Congress, nor can we judge in advance what impact, if any, the
implementation of any of these proposals or changes might have on our business.
FEDERAL ANTITRUST LAWS. The agencies responsible for enforcing the
federal antitrust laws, the Federal Trade Commission or the Department of
Justice, may investigate certain acquisitions. We cannot predict the outcome of
any specific Department of Justice or Federal Trade Commission investigation.
Any decision by the Federal Trade Commission or the Department of Justice to
challenge a proposed acquisition could affect our ability to consummate the
acquisition or to consummate it on the proposed terms.
For an acquisition meeting certain size thresholds, the
Hart-Scott-Rodino Act requires the parties to file Notification and Report Forms
with the Federal Trade Commission and the Department of Justice and to observe
specified waiting period requirements before consummating the acquisition. If
the investigating agency raises substantive issues in connection with a proposed
transaction, then the parties frequently engage in lengthy discussions or
negotiations with the investigating agency concerning possible means of
addressing those issues, including restructuring the proposed acquisition or
divesting assets. In addition, the investigating agency could file suit in
federal court to enjoin the acquisition or to require the divestiture of assets,
among other remedies. Acquisitions that are not required to be reported under
the Hart-Scott-Rodino Act may be investigated by the Federal Trade Commission or
the Department of Justice under the antitrust laws before or after consummation.
In addition, private parties may under certain circumstances bring legal action
to challenge an acquisition under the antitrust laws.
As part of its increased scrutiny of radio station acquisitions, the
Department of Justice has stated publicly that it believes that local marketing
agreements, joint sales agreements, time brokerage agreements and other similar
agreements customarily entered into in connection with radio station transfers
could violate the Hart-Scott-Rodino Act if such agreements take effect prior to
the expiration of the waiting period under the Hart-Scott-Rodino Act.
Furthermore, the Department of Justice has noted that joint sales agreements may
raise antitrust concerns under Section 1 of the Sherman Act and has challenged
joint sales agreements in certain locations. The Department of Justice also has
stated publicly that it has established certain revenue and audience share
concentration benchmarks with respect to radio station acquisitions, above which
a transaction may receive additional antitrust scrutiny. However, to date, the
Department of Justice has also investigated transactions that do not meet or
exceed these benchmarks, and has cleared transactions that do exceed these
benchmarks.
EMPLOYEES
On January 31, 2002, we had a staff of 1,641 full-time employees and
658 part-time employees. We are a party to collective bargaining agreements with
the American Federation of Television and Radio Artists (AFTRA), which apply to
some of our programming personnel, and we are a party to a collective bargaining
agreement with the International
15
Brotherhood of Electrical Workers (IBEW), which applies to some of our
engineering personnel. The Boston AFTRA collective bargaining agreement, as
extended, expired on September 14, 1999, the Kansas City AFTRA collective
bargaining agreement expired on September 29, 2001, and the Seattle AFTRA
collective bargaining agreement expired on January 31, 2002. We are currently
renegotiating these agreements and cannot predict the outcome of these
negotiations. The Boston IBEW collective bargaining agreement will expire on
April 30, 2002. We believe that our relations with our employees are good.
ENVIRONMENTAL
As the owner, lessee or operator of various real properties and
facilities, we are subject to various federal, state and local environmental
laws and regulations. Historically, compliance with these laws and regulations
has not had a material adverse effect on our business. There can be no
assurance, however, that compliance with existing or new environmental laws and
regulations will not require us to make significant expenditures of funds.
SEASONALITY
Seasonal revenue fluctuations are common in the radio broadcasting
industry and are due primarily to fluctuations in advertising expenditures by
retailers. Our revenues and broadcast cash flows are typically lowest in the
first calendar quarter.
ITEM 2. PROPERTIES AND FACILITIES
The types of properties required to support each of our radio stations
include offices, studios and transmitter/antenna sites. We typically lease our
studio and office space with lease terms that expire in five to ten years,
although we do own some of our facilities. A station's studios are generally
housed with its offices in downtown or business districts. We generally consider
our facilities to be suitable and of adequate size for our current and intended
purposes. We own many of our main transmitter and antenna sites and lease the
remainder of our transmitter/antenna sites with lease terms that expire,
including renewal options, in periods generally ranging up to twenty years. The
transmitter/antenna site for each station is generally located so as to provide
maximum market coverage, consistent with the station's FCC license. In general,
we do not anticipate difficulties in renewing facility or transmitter/antenna
site leases or in leasing additional space or sites if required. Our principal
executive offices are located at 401 City Avenue, Suite 409, Bala Cynwyd,
Pennsylvania 19004, in 8,574 square feet of leased office space. The lease on
this premise expires October 31, 2006.
We own substantially all of our other equipment, consisting principally
of transmitting antennae, transmitters, studio equipment and general office
equipment. The towers, antennae and other transmission equipment used by our
stations are generally in good condition, although opportunities to upgrade
facilities are continuously reviewed. Substantially all of the property that we
own secures our borrowings under our credit facility.
ITEM 3. LEGAL PROCEEDINGS
We currently and from time to time are involved in litigation
incidental to the conduct of our business. We are not a party to any lawsuit or
proceeding which, in the opinion of management, 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 our efforts to
pursue this transaction, Royce has been nonresponsive. 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. Portions of Royce's cross-complaint have
been dismissed and after a trial in November 2001, the California Superior Court
ruled that the February 1996 agreement was enforceable and that the court would
order specific performance of the agreement to sell KWOD. In addition, we are
entitled to recover damages incident to the failure of Royce to honor this
agreement but the trial on damages has been delayed by a bankruptcy filing by
Royce. On February 6, 2002, the Bankruptcy Court granted our petition to dismiss
the bankruptcy filing by Royce. We estimate that the impact of an unfavorable
outcome
16
will not materially impact our financial position, results of operations or cash
flows. 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 are now participating 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
("NAB") commenced on January 25, 2001 a legal action in the U.S. District Court
in Philadelphia, Pennsylvania, seeking declaratory relief as to the impact of
the final rule of the Copyright Office. The court in this action on August 1,
2001 upheld the Copyright Office decision. We, along with other broadcasters and
the NAB, on September 30, 2001, filed an appeal of this decision. We cannot
determine the likelihood of success of this appeal. We estimate that the impact
of an unfavorable determination will not materially impact our financial
position, results of operations or cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
fourth quarter of 2001.
17
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
PRICE RANGE OF OUR CLASS A COMMON STOCK
Our Class A common stock, $0.01 par value, is listed on The New York
Stock Exchange under the symbol "ETM."
The table below shows, for the quarters indicated, the reported high
and low trading prices of our Class A common stock on The New York Stock
Exchange.
PRICE RANGE
HIGH LOW
Calendar Year 2000
First Quarter .................... 68.69 38.13
Second Quarter ................... 50.75 35.81
Third Quarter .................... 50.56 25.31
Fourth Quarter ................... 39.81 25.31
Calendar Year 2001
First Quarter .................... 50.50 31.63
Second Quarter ................... 54.40 35.75
Third Quarter .................... 54.25 30.00
Fourth Quarter ................... 50.92 32.75
Calendar Year 2002
First Quarter (through January 31) 52.25 44.00
As of January 31, 2002, there were approximately 75 shareholders of
record of our Class A common stock. This number does not include the number of
shareholders whose shares are held of record by a broker or clearing agency but
does include each such brokerage house or clearing agency as one record holder.
Based upon available information, we believe we have approximately 5,800
beneficial owners of our Class A common stock. There are 3 shareholders of
record of our Class B common stock, $.01 par value, and no shareholders of
record of our Class C common stock, $.01 par value.
Since becoming a public company in January 1999, we have not declared
any dividends on our common stock. We have no plans to declare or pay cash
dividends in the foreseeable future because we intend to retain our earnings, if
any, to finance the expansion of our business and for general corporate
purposes. Any payment of future dividends will be at the discretion of the board
of directors and will depend upon, among other factors, our earnings, financial
condition, capital requirements, level of indebtedness, contractual
restrictions, including the provisions of our credit facility and provisions
applicable to the 6.25% Convertible Preferred Securities Term Income Deferrable
Equity Securities (TIDES) of our subsidiary trust, and other considerations that
the board of directors deems relevant.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
- - Until December 31, 1998, we operated with an October 1st to September
30th fiscal year. Effective January 1, 1999, we changed for financial
reporting purposes from a fiscal year ending September 30th to a fiscal
year ending December 31st. Accordingly, the selected historical
financial data includes information as of and for the three-month
transition period ended December 31, 1998, and, for comparison
purposes, the three months ended December 31, 1997 and the twelve
months ended December 31, 1998.
- - Immediately prior to our initial public offering in January 1999, Chase
Capital converted a 7% Subordinated Convertible Note due 2003 in the
principal amount of $25 million into 2,327,500 shares of our Class A
18
common stock and 1,995,669 shares of our Class C common stock. The
Chase Capital convertible subordinated note has been retired and we
have no further obligation with respect to the note.
- - Before completing our initial public offering, we were an S
corporation, and accordingly, we were not liable for federal and
certain state corporate income taxes. Instead, our shareholders
included our taxable income or loss in their federal and those state
income tax returns. Immediately before our initial public offering, we
converted to a C corporation, and accordingly, we were then subject to
federal and state corporate income taxes. The pro forma amounts shown
in the table reflect provisions for state and federal income taxes,
applied to income before income taxes and extraordinary item and the
effect of the adjustment to reflect indexing of the Chase Capital
convertible subordinated note (the amount of this adjustment is not tax
deductible), as if we had been taxed as a C corporation.
- - As a result of our conversion to a C corporation immediately prior to
our initial public offering, generally accepted accounting principles
required us to provide for deferred income taxes of $79.8 million to
reflect the cumulative temporary differences between book and income
tax bases of our assets and liabilities.
- - For purposes of our historical financial statements, the term pro forma
refers solely to the adjustments necessary to reflect our status as if
we were a C corporation rather than an S corporation throughout the
periods presented.
- - 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 gains (losses)
on sale of assets.
- - Broadcast cash flow margin represents broadcast cash flow as a
percentage of net revenues.
- - EBITDA before net expense (income) from time brokerage agreement fees
consists of operating income plus depreciation and amortization,
non-cash compensation expense (which is otherwise included in corporate
general and administrative expenses) and the elimination of net expense
(income) from time brokerage agreement fees and gains (losses) on sale
of assets.
- - After tax cash flow consists of income (loss) before extraordinary item
and accounting change, plus the following: depreciation and
amortization, non-cash compensation expense (which is otherwise
included in corporate general and administrative expense), deferred
taxes, the elimination, net of taxes, of equity loss from affiliate,
any gains or losses on sale of assets, investments and derivative
instruments and the elimination of any adjustments to reflect the
indexing of the convertible subordinated note. For the years and
periods prior to 2000, pro forma after tax cash flow consists of pro
forma income (loss) before extraordinary item and accounting change, to
reflect taxes as if we were a C corporation during the periods
presented.
- - The data is presented in thousands, other than income (loss) per share.
Although broadcast cash flow, EBITDA before net expense (income) from
time brokerage agreement fees 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, EBITDA before net expense (income) from time
brokerage agreement fees and after tax cash flow in isolation or as substitutes
for 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, EBITDA before net expense (income) from time brokerage
agreement fees 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.
19
SELECTED FINANCIAL DATA
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
TWELVE
THREE MONTHS
YEARS ENDED MONTHS ENDED ENDED
SEPTEMBER 30, DECEMBER 31, DEC. 31,
------------- ------------ --------
1997 1998 1997 1998 1998
---- ---- ---- ---- ----
(UNAUDITED) (UNAUDITED)
OPERATING DATA:
Net revenues $ 93,862 $ 132,998 $ 28,399 $ 47,363 $ 151,962
--------- --------- -------- -------- ---------
Operating expenses (income):
Station operating expenses 61,280 88,599 18,868 29,990 99,721
Depreciation and amortization 7,685 13,066 2,880 4,358 14,544
Corporate general and administrative
expenses 3,249 4,527 849 1,850 5,528
Net expense (income) from time
brokerage agreement fees (476) 2,399 -- 1,236 3,635
Net (gains) losses on sale of assets (197,097) (8,661) (43) (69,648) (78,266)
--------- --------- -------- -------- ---------
Total operating expenses (income) (125,359) 99,930 22,554 (32,214) 45,162
--------- --------- -------- -------- ---------
Operating income 219,221 33,068 5,845 79,577 106,800
Other expense (income):
Interest expense 11,388 14,663 2,996 5,732 17,399
Financing cost of Company-obligated
mandatorily redeemable convertible
preferred securities of subsidiary
holding solely convertible
debentures of the Company -- -- -- -- --
Adjustment to reflect indexing of the
convertible subordinated note 29,070 8,841 14,903 29,503 23,441
Interest income (482) (410) (127) (146) (429)
Equity loss from unconsolidated
affiliate -- -- -- -- --
Loss on investments -- -- -- -- --
Net loss on derivative instruments -- -- -- -- --
Other non-operating expenses 1,986 82 25 723 780
--------- --------- -------- -------- ---------
Total other expense 41,962 23,176 17,797 35,812 41,191
--------- --------- -------- -------- ---------
Income (loss) before income taxes,
extraordinary item and accounting change 177,259 9,892 (11,952) 43,765 65,609
Income taxes 489 453 81 310 682
--------- --------- -------- -------- ---------
Income (loss) before extraordinary item and
accounting change 176,770 9,439 (12,033) 43,455 64,927
Extraordinary item, net of taxes -- (2,376) -- -- (2,376)
--------- --------- -------- -------- ---------
Income (loss) before accounting change 176,770 7,063 (12,033) 43,455 62,551
Cumulative effect of accounting change, net
of taxes -- -- -- -- --
--------- --------- -------- -------- ---------
Net income (loss) $ 176,770 $ 7,063 $(12,033) $ 43,455 $ 62,551
========= ========= ======== ======== =========
Net Income (Loss) Per Share - Basic:
Income (loss) before extraordinary
item and accounting change
Extraordinary item, net of taxes
Income (loss) before accounting change
Cumulative effect of accounting change,
net of taxes
Net income (loss) per share - basic
YEARS ENDED DECEMBER 31,
------------------------
1999 2000 2001
---- ---- ----
OPERATING DATA:
Net revenues $ 215,001 $ 352,025 $ 332,897
--------- --------- ---------
Operating expenses (income):
Station operating expenses 135,943 206,608 201,257
Depreciation and amortization 21,564 43,475 46,509
Corporate general and administrative
expenses 8,100 12,497 12,335
Net expense (income) from time
brokerage agreement fees 652 11 --
Net (gains) losses on sale of assets (1,986) (41,465) 16
--------- --------- ---------
Total operating expenses (income) 164,273 221,126 260,117
--------- --------- ---------
Operating income 50,728 130,899 72,780
Other expense (income):
Interest expense 11,182 37,760 27,583
Financing cost of Company-obligated
mandatorily redeemable convertible
preferred securities of subsidiary
holding solely convertible
debentures of the Company 1,845 7,813 7,813
Adjustment to reflect indexing of the
convertible subordinated note -- -- --
Interest income (3,253) (512) (262)
Equity loss from unconsolidated
affiliate -- 1,100 4,706
Loss on investments -- 5,688 2,000
Net loss on derivative instruments -- -- 912
Other non-operating expenses -- -- --
--------- --------- ---------
Total other expense 9,774 51,849 42,752
--------- --------- ---------
Income (loss) before income taxes,
extraordinary item and accounting change 40,954 79,050 30,028
Income taxes 100,913 31,796 12,194
--------- --------- ---------
Income (loss) before extraordinary item and
accounting change (59,959) 47,254 17,834
Extraordinary item, net of taxes (918) -- --
--------- --------- ---------
Income (loss) before accounting change (60,877) 47,254 17,834
Cumulative effect of accounting change, net
of taxes -- -- (566)
--------- --------- ---------
Net income (loss) $ (60,877) $ 47,254 $ 17,268
========= ========= =========
Net Income (Loss) Per Share - Basic:
Income (loss) before extraordinary
item and accounting change $ (1.58) $ 1.05 $ 0.39
Extraordinary item, net of taxes (0.03) -- --
---------- --------- ---------
Income (loss) before accounting change (1.61) 1.05 0.39
Cumulative effect of accounting change,
net of taxes -- -- (0.01)
---------- --------- ---------
Net income (loss) per share - basic $ (1.61) $ 1.05 $ 0.38
========== ========= =========
20
SELECTED FINANCIAL DATA
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
TWELVE
THREE MONTHS
YEARS ENDED MONTHS ENDED ENDED
SEPTEMBER 30, DECEMBER 31, DEC. 31,
------------- ------------ --------
1997 1998 1997 1998 1998
---- ---- ---- ---- ----
(UNAUDITED) (UNAUDITED)
Net Income (Loss) Per Share - Diluted:
Income (loss) before extraordinary
item and accounting change
Extraordinary item, net of taxes
Income (loss) before accounting change
Cumulative effect of accounting change,
net of taxes
Net income (loss) per share - diluted
Weighted average shares - basic 21,534 22,239 21,534 24,742 24,104
========= ========= ========= ========= =========
Weighted average shares - diluted 21,534 22,239 21,534 24,742 24,104
========= ========= ========= ========= =========
PRO FORMA DATA:
Income (loss) before income taxes and
extraordinary item $ 177,259 $ 9,892 $ (11,952) $ 43,765 $ 65,609
Pro forma income taxes 78,405 7,119 1,121 27,842 33,840
--------- --------- --------- --------- ---------
Pro forma income (loss) before
extraordinary item 98,854 2,773 (13,073) 15,923 31,769
--------- --------- --------- --------- ---------
Extraordinary item, net of pro
forma taxes -- (1,488) -- -- (1,488)
--------- --------- --------- --------- ---------
Pro forma net income (loss) $ 98,854 $ 1,285 $ (13,073) $ 15,923 $ 30,281
========= ========= ========= ========= =========
Pro forma basic income (loss) per share
before extraordinary item $ 4.59 $ 0.12 $ (0.61) $ 0.64 $ 1.32
========= ========= ========= ========= =========
Pro forma diluted income (loss) per share
before extraordinary item $ 4.59 $ 0.12 $ (0.61) $ 0.64 $ 1.32
========= ========= ========= ========= =========
Pro forma basic net income (loss) $ 4.59 $ 0.06 $ (0.61) $ 0.64 $ 1.26
========= ========= ========= ========= =========
Pro forma diluted net income (loss) $ 4.59 $ 0.06 $ (0.61) $ 0.64 $ 1.26
========= ========= ========= ========= =========
Weighted average common shares
outstanding - basic 21,534 22,239 21,534 24,742 24,104
Pro forma weighted average common shares
outstanding - diluted 21,534 22,239 21,534 24,742 24,104
BALANCE SHEET DATA (AT END OF PERIOD):
Cash and cash equivalents $ 3,626 $ 6,666 $ 3,497 $ 6,469 $ 6,469
Intangibles and other assets 300,029 428,763 313,889 504,825 504,825
Total assets 364,743 522,945 378,138 681,034 681,034
Senior debt, including current portion 117,000 253,784 127,000 330,281 330,281
Total shareholders' equity 179,019 182,970 166,986 225,467 225,467
OTHER DATA:
Broadcast cash flow $ 32,582 $ 44,399 $ 9,531 $ 17,373 $ 52,241
Broadcast cash flow margin 34.7% 33.4% 33.6% 36.7% 34.4%
YEARS ENDED DECEMBER 31,
------------------------
1999 2000 2001
---- ---- ----
Net Income (Loss) Per Share - Diluted:
Income (loss) before extraordinary
item and accounting change $ (1.58) $ 1.04 $ 0.39
Extraordinary item, net of taxes (0.03) -- --
----------- ----------- ----------
Income (loss) before accounting change (1.61) 1.04 0.39
Cumulative effect of accounting change,
net of taxes -- -- (0.01)
----------- ----------- ----------
Net income (loss) per share - diluted $ (1.61) $ 1.04 $ 0.38
=========== =========== ==========
Weighted average shares - basic 37,922 45,209 45,295
=========== =========== ===========
Weighted average shares - diluted 37,922 45,614 45,994
=========== =========== ===========
PRO FORMA DATA:
Income (loss) before income taxes and
extraordinary item $ 40,954
Pro forma income taxes 20,278
-----------
Pro forma income (loss) before
extraordinary item 20,676
-----------
Extraordinary item, net of pro
forma taxes (918)
-----------
Pro forma net income (loss) $ 19,758
===========
Pro forma basic income (loss) per share
before extraordinary item $ 0.55
===========
Pro forma diluted income (loss) per share
before extraordinary item $ 0.54
===========
Pro forma basic net income (loss) $ 0.52
===========
Pro forma diluted net income (loss) $ 0.51
===========
Weighted average common shares
outstanding - basic 37,922
Pro forma weighted average common shares
outstanding - diluted 38,238
BALANCE SHEET DATA (AT END OF PERIOD):
Cash and cash equivalents $ 11,262 $ 13,257 $ 10,751
Intangibles and other assets 1,225,335 1,277,609 1,244,957
Total assets 1,396,048 1,473,928 1,438,740
Senior debt, including current portion 465,770 461,260 388,323
Total shareholders' equity 686,611 735,701 755,881
OTHER DATA:
Broadcast cash flow $ 79,058 $ 145,417 $ 131,640
Broadcast cash flow margin 36.8% 41.3% 39.5%
21
SELECTED FINANCIAL DATA
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
TWELVE
THREE MONTHS
YEARS ENDED MONTHS ENDED ENDED
SEPTEMBER 30, DECEMBER 31, DEC. 31,
------------- ------------ --------
1997 1998 1997 1998 1998
---- ---- ---- ---- ----
(UNAUDITED) (UNAUDITED)
EBITDA before net expense (income)
from time brokerage agreement fees $ 29,333 $ 39,872 $ 8,682 $ 15,523 $ 46,713
After tax cash flow 16,590 21,028 5,003 7,985 24,010
Cash flows related to:
Operating activities 8,859 23,019 7,341 11,158 26,836
Investing activities (13,695) (153,651) (17,470) (86,894) (223,075)
Financing activities 3,170 133,672 10,000 75,539 199,211
YEARS ENDED DECEMBER 31,
------------------------
1999 2000 2001
---- ---- ----
EBITDA before net expense (income)
from time brokerage agreement fees $ 71,419 $ 133,577 $ 119,842
After tax cash flow 52,465 89,721 87,084
Cash flows related to:
Operating activities 40,700 69,475 85,243
Investing activities (712,323) (64,684) (17,891)
Financing activities 676,416 (2,796) (69,858)
22
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
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:
- - a station's audience share in the demographic groups targeted by
advertisers, as measured principally by quarterly reports issued by The
Arbitron Ratings Company;
- - the number of radio stations in the market competing for the same
demographic groups; and
- - the supply of and demand for radio advertising time.
In 2001, we generated 79.8% of our net revenues from local advertising,
which is sold primarily by each individual local radio station's sales staff,
and 17.9% from national spot advertising, which is sold by independent
advertising sales representatives. We generated the balance of our 2001 revenues
principally from network advertising, event revenue and rental income from tower
sites. Our most significant station operating expenses are employees'
compensation, and programming and promotional expenses.
We include revenues recognized under a time brokerage agreement or a
similar sales agreement for stations operated by us prior to acquiring the
stations in net revenues, while 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.
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 audiences. However, because
Arbitron reports ratings quarterly, any changed ratings and therefore its effect
on advertising revenues tend to lag behind the incurrence of advertising and
promotional spending. As a result of the tragic events of September 11, 2001,
radio advertising was severely curtailed for several days and the negative
effects on advertisers and radio broadcasters continued into the next quarter.
We calculate same station results by comparing the performance of
stations operated by us throughout the relevant period to the comparable
performance in the prior year's corresponding period, adjusted for significant
changes to sports contracts.
For purposes of the following discussion, pro forma net income
represents historical income before income taxes, extraordinary item and
accounting change adjusted as if we were treated as a C corporation during all
relevant periods at an effective tax rate of 38%, applied to income before
income taxes, extraordinary item and accounting change and the effect of the
adjustment to reflect indexing of the convertible subordinated note (the amount
of this adjustment is not tax deductible).
RECENT EVENT(S)
On November 29, 2001, we entered into an asset purchase agreement to
acquire the assets of WSKI-FM and WPET-AM, serving the Greensboro, North
Carolina radio market, for a purchase price of $20.8 million in cash, of which
$1.0 million was paid as a deposit on November 29, 2001. On December 5, 2001, we
began operating these stations under a time brokerage agreement. The closing of
this transaction, which is conditional upon the approval of the FCC, is expected
to occur in the first quarter of 2002 and will increase our ownership to six
radio stations in the Greensboro, North Carolina radio market.
On December 24, 2001, we entered into an agreement to acquire the
assets of KOSI-FM, KKHK-FM and KEZW-AM, serving the Denver, Colorado radio
market, for a purchase price of $180.0 million in cash, of which $18.0 million
was paid as a deposit on January 2, 2002. On February 1, 2002, we began
operating these stations under a time brokerage agreement. The time
23
brokerage agreement may run for a period of up to three years at the seller's
option. Closing of this transaction may be delayed at the option of the seller,
not to exceed three years, and is conditioned on the approval of the FCC. We
believe that we will maintain compliance with the terms of our bank facility for
which compliance is required in connection with the closing of the transaction.
On February 1, 2002, we entered into an agreement effective February
28, 2002, to terminate our joint sales agreement for KING-FM in the Seattle,
Washington radio market, that was due to expire on June 30, 2002.
RESULTS OF OPERATIONS
You should read the following discussion and analysis of our financial
condition and results in conjunction with our consolidated financial statements
and related notes included elsewhere in this report. The following results of
operations include a discussion of the year ended December 31, 2001 as compared
to the year ended December 31, 2000 and a discussion of the year ended December
31, 2000 as compared to the year ended December 31, 1999. 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. Our results of operations for the year ended December 31, 2000
as compared to the year ended December 31, 1999 were heavily impacted by our
acquisition of radio stations from Sinclair Broadcast Group, Inc. in 2000 and
1999.
YEAR ENDED DECEMBER 31, 2001 COMPARED TO THE YEAR ENDED DECEMBER 31, 2000
YEAR ENDED
DECEMBER 31, 2000 DECEMBER 31, 2001
(AMOUNTS IN THOUSANDS)
NET REVENUES $ 352,025 $332,897
Decrease of $ (19,128) or (5.4%)
-------------------------------------------------------------
Net revenues decreased 5.4% to $332.9 million for the year ended
December 31, 2001 from $352.0 million for the year ended December 31, 2000. On a
same station basis, net revenues decreased 5.9% to $332.2 million from $353.2
million. Net revenues and same station net revenues declined due to a
combination of general weakness in the advertising sector, comparisons to the
prior year in which we experienced 12.7% growth and the effect of the tragic
events of September 11, 2001, when radio advertising was severely curtailed for
several days and its negative effects continued into the next quarter. The
overall decline in net revenues was also affected by acquisitions and
divestitures. For the years ended December 31, 2001 and 2000, we acquired
stations with net revenues of $22.0 million and $10.1 million, respectively. For
the year ended December 31, 2001, we terminated sports contracts under which we
sold advertising with net revenues of $0.5 million; and for the year ended
December 31, 2000, we divested stations with net revenues of $3.2 million, plus
$2.3 million in net revenues from terminated sports contracts under which we
sold advertising.
YEAR ENDED
DECEMBER 31, 2000 DECEMBER 31, 2001
(AMOUNTS IN THOUSANDS)
STATION OPERATING EXPENSES $ 206,608 $ 201,257
Decrease of $ (5,351) or (2.6%)
-------------------------------------------------------------
Percentage of Net Revenues 58.7% 60.5%
Station operating expenses decreased 2.6% to $201.3 million for the
year ended December 31, 2001 from $206.6 million for the year ended December 31,
2000. On a same station basis, station operating expenses decreased 2.9% to
$199.3 million from $205.3 million. Station operating expenses and same station
operating expenses declined due to a decrease in sales expense as a result of a
decrease in same station net revenues and cost reduction efforts. The overall
decrease in station operating expenses was also affected by acquisitions and
divestitures. For the years ended December 31, 2001 and 2000, we acquired
stations with operating expenses of $15.1 million and $8.8 million,
respectively. For the year ended December 31, 2001, we terminated sports
contracts under which we sold advertising with operating expenses of $1.2
million; and for the year ended December 31, 2000, we divested stations with
operating expenses of $2.3 million, plus $2.4 million in operating expenses from
terminated sports contracts under which we sold advertising.
YEAR ENDED
DECEMBER 31, 2000 DECEMBER 31, 2001
(AMOUNTS IN THOUSANDS)
DEPRECIATION AND AMORTIZATION $ 43,475 $ 46,509
Increase of $ 3,034 or 7.0%
-------------------------------------------------------------
Percentage of Net Revenues 12.3% 14.0%
24
Depreciation and amortization increased 7.0% to $46.5 million for the
year ended December 31, 2001 from $43.5 million for the year ended December 31,
2000. The increase was primarily attributable to our acquisitions, net of
divestitures, since January 1, 2000. We expect that the adoption on January 1,
2002 of SFAS No. 142, "Goodwill and Other Intangible Assets", as described more
fully under "Recent Pronouncements," will materially reduce our non-cash
amortization expense for goodwill and broadcasting licenses which will have a
material impact on our financial statements because the amount currently
recorded for the amortization of goodwill and broadcasting licenses is
significant. For the years ended December 31, 2001 and 2000, the amounts of
amortization expense for goodwill and broadcasting licenses were $0.1 million
and $33.1 million and $0.1 million and $32.0 million, respectively. However,
this reduction in our non-cash amortization expense does not include any
adjustments for potential write-downs that could result based on the outcome of
the required impairment tests under the provisions of SFAS No. 142.
YEAR ENDED
DECEMBER 31, 2000 DECEMBER 31, 2001
(AMOUNTS IN THOUSANDS)
CORPORATE GENERAL AND ADMINISTRATIVE EXPENSES $ 12,497 $ 12,335
Decrease of $ (162) or (1.3%)
------------------------------------------------------------
Percentage of Net Revenues 3.6% 3.7%
Corporate general and administrative expenses decreased 1.3% to $12.3
million for the year ended December 31, 2001 from $12.5 million for the year
ended December 31, 2000. The decrease was primarily attributable to cost
reduction efforts, offset by the effect of inflation and the growth in the
number of stations. Also included for the years ended December 31, 2001 and 2000
is $0.5 million and $0.7 million, respectively, in non-cash stock-based
compensation expense.
YEAR ENDED
DECEMBER 31, 2000 DECEMBER 31, 2001
(AMOUNTS IN THOUSANDS)
INTEREST EXPENSE (INCLUDING THE FINANCING COST OF TIDES) $ 45,573 $ 35,396
Decrease of $ (10,177) or (22.3%)
-----------------------------------------------------------
Percentage of Net Revenues 12.9% 10.6%
Interest expense, including the financing cost on our 6.25% Convertible
Preferred Securities Term Income Deferrable Equity Securities (TIDES), decreased
22.3% to $35.4 million for the year ended December 31, 2001 from $45.6 million
for the year ended December 31, 2000. The decrease in interest expense was
primarily attributable to an overall decrease in outstanding indebtedness under
our bank facility and a decline in interest rates.
YEAR ENDED
DECEMBER 31, 2000 DECEMBER 31, 2001
(AMOUNTS IN THOUSANDS)
INCOME BEFORE INCOME TAXES, EXTRAORDINARY ITEM AND
ACCOUNTING CHANGE $ 79,050 $ 30,028
Decrease of $ (49,022) or (62.0%)
-----------------------------------------------------------
Percentage of Net Revenues 22.5% 9.0%
Income before income taxes, extraordinary item and accounting change
decreased 62.0% to $30.0 million for the year ended December 31, 2001 from $79.1
million for the year ended December 31, 2000. The decrease in income before
income taxes, extraordinary item and accounting change was primarily
attributable to: (1) the factors described above; (2) the decrease in gain on
sale of assets compared to the prior year's gain of $41.5 million from the
required divestiture of certain of our Kansas City radio stations; (3) the
increase in equity loss from unconsolidated affiliate of $3.6 million because
the initial investment in this affiliate was made during the later part of the
prior year; and (4) the recognition of a net loss on derivative instruments of
$0.9 million due to the application of a new accounting pronouncement.
25
YEAR ENDED
DECEMBER 31, 2000 DECEMBER 31, 2001
(AMOUNTS IN THOUSANDS)
NET INCOME $ 47,254 $ 17,268
Decrease of $ (29,986)
-------------------------------------------------------------
Net income decreased to $17.3 million for the year ended December 31,
2001 from $47.3 million for the year ended December 31, 2000. The decrease in
net income was primarily attributable to: (1) the factors described above, net
of taxes; and (2) the cumulative effect of the accounting change, net of taxes,
of $0.6 million.
YEAR ENDED
DECEMBER 31, 2000 DECEMBER 31, 2001
OTHER DATA (AMOUNTS IN THOUSANDS)
BROADCAST CASH FLOW $ 145,417 $ 131,640
Decrease of $ (13,777) or (9.5%)
----------------------------------------------------------
Broadcast cash flow decreased 9.5% to $131.6 million for the year ended
December 31, 2001 from $145.4 million for the year ended December 31, 2000. On a
same station basis, broadcast cash flow decreased 10.1% to $132.9 million from
$147.9 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. For the years ended December 31, 2001
and 2000, we acquired stations with broadcast cash flow of $7.0 million and $1.3
million, respectively. For the year ended December 31, 2001, we terminated
sports contracts under which we sold advertising and incurred a broadcast cash
flow deficit of $0.7 million and for the year ended December 31, 2000, we
divested stations with $0.9 million in broadcast cash flow, plus $0.1 million
incurred as a broadcast cash flow deficit from terminated sports contracts under
which we sold advertising.
YEAR ENDED
DECEMBER 31, 2000 DECEMBER 31, 2001
(AMOUNTS IN THOUSANDS)
BROADCAST CASH FLOW MARGIN 41.3% 39.5%
Decrease of (1.8%) or (4.3%)
------------------------------------------------------------
Our broadcast cash flow margin decreased to 39.5% for the year ended
December 31, 2001 from 41.3% for the year ended December 31, 2000. On a same
station basis, our broadcast cash flow margin decreased to 40.0% from 41.9%.
YEAR ENDED
DECEMBER 31, 2000 DECEMBER 31, 2001
(AMOUNTS IN THOUSANDS)
AFTER TAX CASH FLOW $ 89,721 $ 87,084
Decrease of $ (2,637) or (2.9%)
------------------------------------------------------------
After tax cash flow decreased 2.9% to $87.1 million for the year ended
December 31, 2001 from $89.7 million for the year ended December 31, 2000. After
tax cash flow was negatively impacted by the 9.5% decrease in broadcast cash
flow, offset by the decrease in interest expense, net of tax, and the tax
benefits from the purchase of radio station assets since January 1, 2000. The
effective tax rate during these periods was positively affected by amortization
of intangibles that were deductible for tax purposes in excess of the amounts
reflected for book purposes.
YEAR ENDED DECEMBER 31, 2000 COMPARED TO THE YEAR ENDED DECEMBER 31, 1999
YEAR ENDED
DECEMBER 31, 1999 DECEMBER 31, 2000
(AMOUNTS IN THOUSANDS)
NET REVENUES $ 215,001 $352,025
Increase of $ 137,024 or 63.7%
-----------------------------------------------------------------
26
Net revenues increased 63.7% to $352.0 million for the year ended
December 31, 2000 from $215.0 million for the year ended December 31, 1999. Of
the increase, $101.5 million was attributable to stations that we acquired or
that we were in the process of acquiring since January 1, 1999, offset by $5.2
million for stations that we divested (including $1.8 million in revenues from a
sports contract for which we discontinued selling advertising) during the same
period. On a same station basis, net revenues increased 12.7% to $338.4 million
from $300.4 million. Same station revenue growth was led by increases in
Sacramento, Milwaukee, Norfolk, Greenville and Boston due to improved selling
efforts.
YEAR ENDED
DECEMBER 31, 1999 DECEMBER 31, 2000
(AMOUNTS IN THOUSANDS)
STATION OPERATING EXPENSES $ 135,943 $ 206,608
Increase of $ 70,665 or 52.0%
---------------------------------------------------------------
Percentage of Net Revenues 63.2% 58.7%
Station operating expenses increased 52.0% to $206.6 million for the
year ended December 31, 2000 from $135.9 million for the year ended December 31,
1999. Of the increase, $63.6 million is attributable to stations that we
acquired or that we were in the process of acquiring since January 1, 1999,
offset by $6.6 million for stations that we divested (including $4.4 million in
expenses from a sports contract for which we discontinued selling advertising)
during the same period. On a same station basis, station operating expenses
increased 5.1% to $195.9 million from $186.3 million.
YEAR ENDED
DECEMBER 31, 1999 DECEMBER 31, 2000
(AMOUNTS IN THOUSANDS)
DEPRECIATION AND AMORTIZATION $ 21,564 $ 43,475
Increase of $ 21,911 or 101.6%
------------------------------------------------------------
Percentage of Net Revenues 10.0% 12.3%
Depreciation and amortization increased 101.6% to $43.5 million for the year
ended December 31, 2000 from $21.6 million for the year ended December 31, 1999.
The increase was primarily attributable to our acquisitions since January 1,
1999, offset by divestitures during the same period. We expect that the adoption
on January 1, 2002 of SFAS No. 142, "Goodwill and Other Intangible Assets", as
described more fully under "Recent Pronouncements," will materially reduce our
non-cash amortization expense for goodwill and broadcasting licenses which will
have a material impact on our financial statements because the amount currently
recorded for the amortization of goodwill and broadcasting licenses is
significant. For the years ended December 31, 2000 and 1999, the amounts of
amortization expense for goodwill and broadcasting licenses were $0.1 million
and $32.0 million and $0.1 million and $14.8 million, respectively. However,
this reduction in our non-cash amortization expense does not include any
adjustments for potential write-downs that could result based on the outcome of
the required impairment tests under the provisions of SFAS No. 142.
YEAR ENDED
DECEMBER 31, 1999 DECEMBER 31, 2000
(AMOUNTS IN THOUSANDS)
CORPORATE GENERAL AND ADMINISTRATIVE EXPENSES $ 8,100 $ 12,497
Increase of $ 4,397 or 54.3%
----------------------------------------------------------------
Percentage of Net Revenues 3.8% 3.6%
Corporate general and administrative expenses increased 54.3% to $12.5
million for the year ended December 31, 2000 from $8.1 million for the year
ended December 31, 1999. The increase was primarily attributable to higher
administrative expenses associated with supporting our growth. Also included in
the years ended December 31, 2000 and 1999 is $0.7 million and $0.5 million,
respectively, in non-cash stock-based compensation expense.
YEAR ENDED
DECEMBER 31, 1999 DECEMBER 31, 2000
(AMOUNTS IN THOUSANDS)
INTEREST EXPENSE (INCLUDING THE FINANCING COST OF TIDES) $ 13,027 $ 45,573
Increase of $ 32,546 or 249.8%
---------------------------------------------------------------
Percentage of Net Revenues 6.1% 12.9%
27
Interest expense, including the financing cost on our 6.25% Convertible
Preferred Securities Term Income Deferrable Equity Securities (TIDES), increased
249.8% to $45.6 million for the year ended December 31, 2000 from $13.0 million
for the year ended December 31, 1999. The increase in interest expense was
primarily attributable to (1) an overall increase in outstanding indebtedness
used to fund the acquisition of radio station assets, and (2) the financing cost
of the TIDES, offset by (1) a reduction in the outstanding indebtedness due to
the use of the proceeds from our October 1999 Class A Common Stock and TIDES
offerings and (2) a reduction in outstanding indebtedness due to the use of the
proceeds from the disposition of radio station assets.
YEAR ENDED
DECEMBER 31, 1999 DECEMBER 31, 2000
(AMOUNTS IN THOUSANDS)
INCOME BEFORE INCOME TAXES AND EXTRAORDINARY ITEM $ 40,954 $ 79,050
Increase of $ 38,096 or 93.0%
----------------------------------------------------------------
Percentage of Net Revenues 19.0% 22.5%
Income before income taxes and extraordinary item increased 93.0% to
$79.1 million for the year ended December 31, 2000 from $41.0 million for the
year ended December 31, 1999. The increase was primarily attributable to (1) an
increase in gains on sale of assets of $41.5 million primarily from the gain on
the disposition of two radio stations in the current period; and (2) an increase
in operating income, exclusive of the gains on sale of assets, of $40.7 million
due to increases in revenues from existing and newly acquired stations and
improved expense management from newly acquired stations, offset by: (1) an
increase of $32.5 million in net interest expense and financing costs as a
result of the factors described above under interest expense; (2) an increase in
expense of $6.8 million from the recognition of a loss on investments and an
equity loss from an unconsolidated affiliate; and (3) a decrease in interest
income of $2.7 million as a result of the absence this year of excess cash
available from our October 1999 Class A Common Stock and TIDES offerings during
the period prior to the closing on December 16, 1999, of the acquisition of 42
radio stations from Sinclair, including a radio station under a time brokerage
agreement.
EXTRAORDINARY ITEM, NET OF TAXES
The extraordinary item for the year ended December 31, 1999 resulted
from the write-off of $1.5 million ($0.9 million, net of taxes) of unamortized
finance charges due to the early extinguishment of debt. The early
extinguishment of debt resulted from the refinancing of our previous credit
facility.
YEAR ENDED
DECEMBER 31, 1999 DECEMBER 31, 2000
(AMOUNTS IN THOUSANDS)
NET INCOME (LOSS) $ (60,877) $ 47,254
Increase of $ 108,131
------------------------------------------------------------------------
Net income increased to $47.3 million for the year ended December 31,
2000 from a net loss of $60.9 million for the year ended December 31, 1999. The
increase was primarily attributable to: (1) the absence this year of an
adjustment made during the prior year to record a one-time non-cash deferred
income tax expense of $79.8 million as a result of the revocation of our S
Corporation election and our conversion to a C Corporation (we recorded this
expense to reflect the cumulative effect of temporary differences between the
tax and financial reporting bases of our assets and liabilities attributable to
our conversion to a C Corporation); (2) a net increase in gain on sale of assets
of $24.9 million, net of tax, primarily from the disposition of two radio
stations in the current period; and (3) an improvement in operating income,
excluding gains on sale of assets, of $24.4 million, net of tax, primarily as a
result of an improvement in revenues of existing and newly acquired stations and
an improvement in expense management of newly acquired stations, offset by : (1)
an increase in interest expense of $19.5 million, net of tax, for the factors
described under interest expense; (2) an increase in expense of $4.0 million,
net of tax, from the recognition of a loss on investments and an equity loss
from an unconsolidated affiliate and (3) a decrease in interest income of $1.6
million, net of tax, as a result of the absence this year of excess cash
available from our October 1999 Class A Common
28
Stock and TIDES offerings during the period prior to the closing on December 16,
1999, of the acquisition of 42 radio stations from Sinclair, including a radio
station under a time brokerage agreement.
YEAR ENDED
DECEMBER 31, 1999 DECEMBER 31, 2000
(AMOUNTS IN THOUSANDS)
NET INCOME TO PRO FORMA NET INCOME $ 19,758 $ 47,254
Increase of $ 27,496 or 139.2%
----------------------------------------------------------------
Net income increased 139.2% to $47.3 million for the year ended
December 31, 2000 from pro forma net income of $19.8 million for the year ended
December 31, 1999. The increase was primarily attributable to the factors
described under net income (loss) above, except for the adjustment to record a
one-time non-cash deferred income tax expense of $79.8 million, which is
excluded from the definition of pro forma net income.
YEAR ENDED
DECEMBER 31, 1999 DECEMBER 31, 2000
OTHER DATA (AMOUNTS IN THOUSANDS)
BROADCAST CASH FLOW $ 79,058 $ 145,417
Increase of $ 66,359 or 83.9%
-----------------------------------------------------------------
Broadcast cash flow increased 83.9% to $145.4 million for the year
ended December 31, 2000 from $79.1 million for the year ended December 31, 1999.
Of the increase, $38.0 million is attributable to stations that we acquired or
that we were in the process of acquiring since January 1, 1999 and $2.6 million
was primarily attributable to the elimination of a broadcast cash flow deficit
from a sports contract for which we discontinued selling advertising, offset by
$1.2 million for stations that we divested during the same period. On a same
station basis, broadcast cash flow increased 25.4% to $140.7 million from $112.3
million.
YEAR ENDED
DECEMBER 31, 1999 DECEMBER 31, 2000
(AMOUNTS IN THOUSANDS)
BROADCAST CASH FLOW MARGIN 36.8% 41.3%
Increase of 4.5% or 12.3%
------------------------------------------------------------------------
Our broadcast cash flow margin increased to 41.3% for the year ended
December 31, 2000 from 36.8% for the year ended December 31, 1999. The increase
is attributable to improved revenues and expense management. On a same station
basis, our broadcast cash flow margin increased to 41.6% from 37.4%.
YEAR ENDED
DECEMBER 31, 1999 DECEMBER 31, 2000
(AMOUNTS IN THOUSANDS)
AFTER TAX CASH FLOW TO PRO FORMA AFTER TAX CASH FLOW $ 52,465 $ 89,721
Increase of $ 37,256 or 71.0%
------------------------------------------------------------------------
After tax cash flow increased 71.0% to $89.7 million for the year ended
December 31, 2000 from pro forma after tax cash flow of $52.5 million for the
year ended December 31, 1999. The increase was primarily attributable to
improved operations of existing stations and the net effect of newly acquired
properties, taking into consideration pro forma income taxes as though we had
reported as a C corporation during the prior period. The amount of the deferred
income tax expense was $33.0 million for the year ended December 31, 2000 and
the amount of the pro forma deferred income tax expense was $11.0 million for
the year ended December 31,1999. The amount of the deferred income tax expense
attributable to the gains on sale of assets, loss on investments and equity loss
from an unconsolidated affiliate was $13.9 million for the year ended December
31, 2000 and $27,000 for the year ended December 31, 1999.
29
LIQUIDITY AND CAPITAL RESOURCES
We use a significant portion of our capital resources to reduce
outstanding debt and to consummate acquisitions. Acquisitions are funded from
one or a combination of the following sources: (1) our bank facility (described
below); (2) the sale of our 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. Our results of
operations for the years ended December 31, 2001 and 2000 as compared to the
years ended December 31, 2000 and 1999, respectively, were heavily impacted by
our acquisition of the radio stations from Sinclair in 2000 and 1999.
Operating Activities
Net cash flows provided by operating activities were $85.2 million for
the year ended December 31, 2001, as compared to $69.5 million and $40.7 million
for the years ended December 31, 2000 and 1999, 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 stations during those periods. For the year ended
December 31, 2001, net cash provided by operating activities increased $15.8
million as compared to the year ended December 31, 2000, primarily due to a
reduction in net cash flows utilized for working capital. For the year ended
December 31, 2000, cash flows provided by operating activities were positively
affected primarily by: (1) the acquisition of radio stations from Sinclair and
(2) other radio station acquisitions, offset by (1) the required divestiture of
two radio stations in Kansas City, excluding the station we acquired from
Sinclair and immediately sold, and (2) an increase in accounts receivable on
acquired stations, net of the Kansas City divestiture.
Investing and Financing Activities
Net cash flows used in investing activities declined to $17.9 million
for the year ended December 31, 2001, as compared to $64.7 million and $712.3
million for the years ended December 31, 2000 and 1999, respectively, primarily
as a result of the net impact of acquisitions, divestitures and capital
expenditures in the prior years. Net cash flows used by financing activities
were $69.9 million for the year ended December 31, 2001, as compared to $2.8
million for the year ended December 31, 2000 and net cash flows provided by
financing activities of $676.4 million for the year ended December 31, 1999. The
cash flows for the year ended December 31, 2001 reflect a net reduction in
outstanding debt of $72.9 million, an increase of $68.4 million as compared to
the prior year, primarily due to the absence this year of any station
acquisitions. The cash flows for the year ended December 31, 2000, reflect (1)
acquisitions and investments consummated and the related borrowings and (2) the
proceeds from the required disposition of certain of the Kansas City stations.
The cash flows for the year ended December 31, 1999, reflect (1) acquisitions
consummated and the related borrowings; (2) net proceeds from our initial public
offering and the related payment of long-term debt; (3) net proceeds from our
October 1999 Class A Common Stock and TIDES offerings and the related payment of
long-term debt; and (4) the distribution to our S corporation shareholders of
$88.1 million primarily from the funds available from the sale of our Tampa
stations.
Our business generally does not require substantial investment of
capital. Our capital expenditures totaled $9.8 million in the year ended
December 31, 2001, as compared to $9.5 million and $14.4 million in the years
ended December 31, 2000 and 1999, respectively. Despite an increase in the
average number of radio stations owned throughout this year as compared to the
average number of radio stations owned throughout the prior year, primarily from
the acquisition of radio stations in the Wichita and Madison markets during the
prior year, and despite the continued relocation of studio facilities in certain
markets, our capital expenditures increased only marginally for the year ended
December 31, 2001 as compared to the prior year.
On February 3, 1999, upon the consummation of our initial public
offering, we received net proceeds of $236.2 million, after deducting expenses,
underwriting discounts and commissions. We used these proceeds to reduce
outstanding indebtedness under our former credit facility and to pay other
corporate obligations. Shortly after reducing indebtedness under our former
credit facility, in February 1999 we borrowed approximately $58.0 million to
purchase three Boston radio stations from CBS. On October 6, 1999, we completed
our Class A Common Stock and TIDES offerings and received $276.1 million and
$120.5 million in proceeds, respectively, after deducting discounts,
commissions, fees and expenses. The proceeds were used to reduce outstanding
indebtedness. We used the net proceeds from our October 1999 Class A Common
Stock offering and the TIDES offering, together with cash on hand and proceeds
from our bank facility, to finance the $700.4 million in cash to consummate the
purchase of radio stations from Sinclair on December 16, 1999.
30
As of February 7, 2002, we have transactions pending pursuant to
agreements to purchase five radio stations in two markets having an aggregate
purchase price of $200.8 million (excluding the commitment to purchase KWOD-FM,
Sacramento, as this transaction is currently in litigation). Under these
agreements, we have funded $19.0 into escrow deposits to be applied against the
purchase price upon closing. Closing on one of these transactions can be
deferred for up to three years at the seller's option. We intend to finance the
pending acquisitions primarily from borrowings under our existing bank facility,
an amended or new bank facility and future cash flows from operations.
Additionally, we may seek to obtain other funding or additional financing from
time-to-time. Our bank facility requires that at the time of closing on these
transactions, we must be in compliance with the terms of the bank facility. We
believe that we will maintain compliance with the terms of our bank facility. If
we are not in compliance, there can be no assurance that we will be successful
in amending or entering into a new bank facility, obtaining additional financing
or that we will be able to obtain such financing on terms acceptable to us,
which could delay or impair our efforts to consummate the pending transactions.
In addition to debt service and quarterly distributions under the
TIDES, our principal liquidity requirements will be for working capital and
general corporate purposes, including capital expenditures, and acquisitions of
additional radio stations. For year 2002, we estimate that capital expenditures,
necessary for maintaining our facilities, will be between $9.0 million and $11.0
million. We are also committed to fund an investment focused on minority-owned
businesses in the amount of approximately $0.6 million as of December 31, 2001.
We believe that cash flow from operating activities, together with available
revolving and term credit borrowings under our bank facility, should be
sufficient to permit us to fund our current operations. However, in order to
finance the pending acquisitions and future acquisitions, if any, we may require
additional financing and there can be no assurance that we will be able to
obtain such financing on terms acceptable to us. As of December 31, 2001, we had
approximately $388.0 million of borrowings outstanding under our bank facility
(in addition to an outstanding letter of credit in the amount of $6.2 million),
of which most was incurred in connection with the acquisition of radio stations
from Sinclair.
We entered into our bank facility as of December 16, 1999, with a
syndicate of banks for $650.0 million in senior secured credit consisting of:
(1) $325.0 million in a reducing revolving credit facility; and (2) $325.0
million in a multi-draw term loan that was fully drawn as of September 30, 2000.
Our bank facility was established to: (1) refinance our 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 KeyBank N.A.'s
base rate plus a spread of up to 1.125%, depending on our leverage ratio.
Although we may borrow, repay and re-borrow under the revolving credit facility,
the aggregate maximum amount that we can have outstanding at any one time is
reduced on a quarterly basis beginning on September 30, 2002 in amounts that
vary from $12.2 million to $16.3 million for each loan. Under the bank facility,
the reducing revolving credit facility and multi-draw term loan mature on
September 30, 2007. 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. We expect to use the credit available under the revolving credit
facility to fund pending and future acquisitions. The amount available under the
bank facility was $255.8 million as of December 31, 2001. Our bank facility also
provides that at any time prior to December 31, 2002 we may solicit additional
incremental loans of up to $350.0 million, and we will be governed under the
same terms as the existing bank facility. However, there can be no guarantee
that, upon request, we will receive commitments for any of the incremental
loans.
On February 6, 2002, we entered into an amendment with our lenders
under our bank facility to further clarify the terms under which we can issue
subordinated debt and to modify certain terms, including the pro forma debt
service ratio financial covenant.
31
SUMMARY DISCLOSURES ABOUT CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
The following tables reflect a summary of our contractual cash
obligations and other commercial commitments as of December 31, 2001:
(AMOUNTS IN THOUSANDS)
PAYMENTS DUE BY PERIOD
LESS THAN 1 TO 3 4 TO 5 AFTER 5
CONTRACTUAL CASH OBLIGATIONS: TOTAL 1 YEAR YEARS YEARS YEARS
----------------------------- ----- ------ ----- ----- -----
Long-term debt (1) $388,323 $24,389 $121,906 $144,287 $97,741
TIDES (2) 125,000 - - - 125,000
Operating leases 57,073 6,473 12,148 10,655 27,797
Sports programming 42,978 16,718 17,760 8,500 -
On-air talent 29,046 15,171 13,368 507 -
Television advertising 4,599 1,533 3,066 - -
Other operating contracts 11,714 5,379 6,304 31 -
-------- ------- -------- -------- --------
TOTAL CONTRACTUAL CASH OBLIGATIONS $658,733 $69,663 $174,552 $163,980 $250,538
======== ======= ======== ======== ========
(1) Under our bank facility, the maturity on our outstanding debt could be
accelerated if we do not maintain certain covenants.
(2) Entercom Communications Capital Trust, our wholly-owned subsidiary pays
quarterly calendar distributions. The TIDES represent undivided
preferred beneficial ownership interest in the assets of the trust. The
trust used the proceeds from the sale of the TIDES to purchase from us
an equal amount of 6.25% Convertible Subordinated Debentures due 2014.
Under certain circumstances, the TIDES could be redeemed in cash by us
at our option or converted to equity at the holder's option.
(AMOUNTS IN THOUSANDS)
AMOUNT OF COMMITMENT EXPIRATION PER PERIOD
TOTAL
AMOUNTS LESS THAN 1 TO 3 4 TO 5 AFTER 5
COMMITTED 1 YEAR YEARS YEARS YEARS
------- ------ ------ ------ ------
OTHER COMMERCIAL COMMITMENTS
Letter of Credit (1) $6,200 $(800) $(500) $7,500 $-
Guarantee (2) 2,700 675 675 675 675
Partnership (3) 588 588 - - -
Derivatives (4) 7,045 3,529 1,613 - 1,903
------- ------ ------ ------ ------
TOTAL OTHER COMMERCIAL COMMITMENTS $16,533 $3,992 $1,788 $8,175 $2,578
======= ====== ====== ====== ======
(1) In connection with a sports contract, we are obligated to provide a
letter of credit during the term of the sports contract.
(2) We have a contingent liability to the national sales representative of
the former owner of one of our markets. This obligation is the
responsibility of our current national sales representative and arose
in connection with our acquisition of the stations involved.
(3) Under a partnership agreement, carried as an investment, we are
obligated to increase our investment.
(4) At December 31, 2001, we have interest rate transactions outstanding
where we agree 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 amount against the
variable debt. The notional amount outstanding at December 31, 2001 was
$263.0 million. The marked to market valuation is determined by using
quoted market prices from the counter-parties to these agreements.
Under certain circumstances, the interest rate transaction liability of
$7.0 million at December 31, 2001, could be due and payable prior to
the expiration of the agreements.
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RECENTLY ISSUED PRONOUNCEMENTS
In June 2001, the FASB issued SFAS No. 141, "Business Combinations,"
which addresses financial accounting and reporting for business combinations and
supersedes Accounting Principle Board ("APB") Opinion No. 16, "Business
Combinations" and FASB Statement No. 38, "Accounting for Preacquisition
Contingencies of Purchased Enterprises." Statement No. 141 applies to all
business combinations initiated after June 30, 2001 and eliminates the
pooling-of-interest method of accounting for business combinations except for
qualifying business combinations that were initiated prior to July 1, 2001.
Statement No. 141 also changes the criteria to recognize intangible assets apart
from goodwill. We adopted this statement on July 1, 2001. We have historically
used the purchase method to account for all business combinations and we do not
believe adoption of this statement will materially impact our financial
position, cash flows or results of operations.
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other
Intangible Assets" which requires that goodwill and certain intangibles not be
amortized. Instead, these assets will be reviewed annually 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 applies to goodwill and certain intangible assets acquired
prior to June 30, 2001 and was adopted by us on January 1, 2002. Because the
amount previously recorded for the amortization of goodwill and broadcasting
licenses is significant, we expect that adoption of this accounting standard
will have the impact of reducing our non-cash amortization expense for goodwill
and broadcasting licenses and will have a material impact on our financial
statements. For the years ended December 31, 1999, 2000 and 2001, the amounts of
amortization expense for goodwill and broadcasting licenses were $0.1 million
and $14.8 million, $0.1 million and $32.0 million and $0.1 million and $33.1
million, respectively. The required impairment tests of goodwill and
broadcasting licenses may result in future period write-downs.
In order to complete the transitional assessment of goodwill and
non-amortizing intangible assets impairment, we will need to: (1) identify the
reporting units; (2) determine the carrying value of each reporting unit; and
(3) determine the fair value of each reporting unit. We will have up to six
months from the date of adoption to determine the fair value of each reporting
unit and compare it to the reporting unit's carrying amount. To the extent a
reporting unit's carrying amount exceeds its fair value, the reporting unit's
goodwill and non-amortizing intangible assets may be impaired and we must
perform the second step of the transitional impairment test. In the second step,
we must compare the implied fair value of the reporting unit's goodwill,
determined by allocating the reporting unit's fair value to all of its assets
and liabilities in a manner similar to a purchase price allocation in accordance
with SFAS No. 141, to its carrying amount, both of which would be measured as of
the date of adoption. This second step is required to be completed as soon as
possible, but no later than the end of the year of adoption. Any transitional
impairment loss will be recognized as the cumulative effect of a change in
accounting principle our consolidated statement of operations. As of the date of
adoption, we have unamortized goodwill and unamortized broadcasting licenses in
the amounts of $4.2 million and $1,228.4 million, respectively. We have not yet
determined what the effect of these tests will be on our financial position,
cash flows or results of operations.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations" which applies to legal obligations associated with the
retirement of a tangible long-lived asset that results from the acquisition,
construction, or development and/or the normal operation of a long-lived asset.
Under this standard, guidance is provided on measuring and recording the
liability. We intend to adopt this statement effective January 1, 2003. We do
not believe that adoption of this statement will materially impact our financial
position, results of operations or cash flows.
In August 2001, the FASB issued SFAS No. 144 "Accounting for the
Impairment or Disposal of Long-Lived Assets" which addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
While SFAS No. 144 supercedes SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" it removes
goodwill from its scope and retains the requirements of SFAS No. 121 regarding
the recognition of impairment losses on long-lived assets held for use. SFAS No.
144 also supercedes the accounting and reporting provisions of APB Opinion No.
30, "Reporting the Results of Operations-Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
events and Transactions" for the disposal of a segment of a business. However,
it retains the requirement in Opinion 30 to report separately discontinued
operations and extends that reporting to a component of an entity that either
has been disposed of (by sale, abandonment, or in a distribution to owners) or
is classified as held for sale. SFAS No. 144 is effective for fiscal years
beginning after December 15, 2001 and interim periods within those fiscal years.
We are in the process of evaluating the impact that adoption of SFAS No. 144 may
have on our financial position, cash flows or results of operations. However,
such impact, if any, is not known or reasonably estimable at this time.
INTANGIBLES
As of December 31, 2001, approximately 85.8% of our total assets
consisted of intangible assets, such as radio broadcast licenses and goodwill,
the value of which depends significantly upon the operational results of our
business. We could not operate the radio stations without the related FCC
license for each station. FCC licenses are renewed every eight years;
consequently, we continually monitor the activities of our stations to ensure
they comply with all regulatory requirements.
33
Historically, all of our licenses have been renewed at the end of their
respective eight-year periods, and we expect that all licenses will continue to
be renewed in the future.
INFLATION
Inflation has affected our performance in terms of higher costs for
radio station operating expenses, including wages, and equipment. The exact
impact is indeterminable.
34
RISK FACTORS
Many statements contained in this report are forward-looking in nature.
These statements are based on current plans, intentions or expectations and
actual results could differ materially as we cannot guarantee that we will
achieve these plans, intentions or expectations. Among the factors that could
cause actual results to differ are the following:
WE FACE MANY UNPREDICTABLE BUSINESS RISKS, BOTH GENERAL AND SPECIFIC TO THE
RADIO BROADCASTING INDUSTRY, WHICH COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR
FUTURE OPERATIONS.
Our future operations are subject to many business risks, including
those risks that specifically influence the radio broadcasting industry, which
could have a material adverse effect on our business including:
- economic conditions, both generally and relative to the radio
broadcasting industry;
- shifts in population, demographics or audience tastes;
- the level of competition for advertising revenues with other
radio stations, satellite radio, television stations and other
entertainment and communications media;
- technological changes and innovations;
- new laws, including proposals to eliminate the tax
deductibility of certain expenses incurred by advertisers; and
- changes in governmental regulations and policies and actions
of federal regulatory bodies, including the United States
Department of Justice, the Federal Trade Commission and the
FCC.
Given the inherent unpredictability of these variables, we cannot with
any degree of certainty predict what effect, if any, these variables will have
on our future operations. Generally, advertising tends to decline during
economic recession or downturn. Consequently, our advertising revenue is likely
to be adversely affected by a recession or downturn in the United States
economy, the economy of an individual geographic market in which we own or
operate radio stations, or other events or circumstances that adversely affect
advertising activity.
OUR RADIO STATIONS MAY NOT BE ABLE TO COMPETE EFFECTIVELY IN THEIR RESPECTIVE
MARKETS FOR ADVERTISING REVENUES.
Our radio broadcasting stations are in a highly competitive business.
Our radio stations compete for audiences and advertising revenues within their
respective markets directly with other radio stations, as well as with other
media, such as newspapers, magazines, network and cable television, outdoor
advertising and direct mail. Audience ratings and market shares are subject to
change, and any change in a particular market could have a material adverse
effect on the revenue of our stations located in that market. While we already
compete in some of our markets with other stations with similar programming
formats, if another radio station in a market were to convert its programming
format to a format similar to one of our stations, if a new station were to
adopt a comparable format or if an existing competitor were to strengthen its
operations, our stations could suffer a reduction in ratings and/or advertising
revenue and could incur increased promotional and other expenses. Other radio
broadcasting companies may enter into the markets in which we operate or may
operate in the future. These companies may be larger and have more financial
resources than we have. We cannot assure you that any of our stations will be
able to maintain or increase their current audience ratings and advertising
revenues.
WE ARE DEPENDENT ON FEDERALLY-ISSUED LICENSES TO OPERATE OUR RADIO STATIONS AND
ARE SUBJECT TO EXTENSIVE FEDERAL REGULATION.
The radio broadcasting industry is subject to extensive regulation by
the FCC under the Communications Act of 1934. We are required to obtain licenses
from the FCC to operate our radio stations. Licenses are normally granted for a
term of eight years and are renewable. Although the vast majority of FCC radio
station licenses are routinely renewed, we cannot assure you that the FCC will
approve our future renewal applications or that the renewals will not include
conditions or qualifications. The non-renewal, or renewal with substantial
conditions or modifications, of one or more of our licenses could have a
material adverse effect on us.
35
We must comply with extensive FCC regulations and policies in the
ownership and operation of our radio stations. FCC regulations limit the number
of radio stations that a licensee can own in a market, which could restrict our
ability to consummate future transactions and in certain circumstances could
require us to divest some radio stations. For example, in connection with the
Sinclair Kansas City acquisition we were required to dispose of three radio
stations in Kansas City. The FCC also requires radio stations to comply with
certain technical requirements to limit interference between two or more radio
stations. If the FCC relaxes these technical requirements, it could impair the
signals transmitted by our radio stations and could have a material adverse
effect on us. Moreover, these FCC regulations and others may change over time
and we cannot assure you that those changes would not have a material adverse
effect on us.
WE MAY NOT BE SUCCESSFUL IN IDENTIFYING AND CONSUMMATING FUTURE ACQUISITIONS,
WHICH IS AN IMPORTANT ELEMENT OF OUR BUSINESS STRATEGY.
We pursue growth, in part, through the acquisition of individual radio
stations and groups of radio stations. Our consummation of all future
acquisitions will be subject to various conditions, including FCC and other
regulatory approvals. The FCC must approve any transfer of control or assignment
of broadcast licenses. In addition, acquisitions may encounter intense scrutiny
under federal and state antitrust laws. Our future acquisitions may be, subject
to notification under the Hart-Scott-Rodino Antitrust Improvements Act of 1976
and to a waiting period and possible review by the Department of Justice and the
Federal Trade Commission.
Any delays, injunctions, conditions or modifications by any of these
federal agencies could have a negative effect on us and result in the
abandonment of all or part of attractive acquisition opportunities. As a result,
under certain circumstances, all or a partial amount of our escrow deposits of
$19.0 million, made in connection with the pending acquisitions, could be
forfeited if we are unable to timely consummate all or any of our pending
acquisitions. We cannot predict whether we will be successful in identifying
future acquisition opportunities or what the consequences will be of any
acquisitions.
Depending on the nature, size and timing of future acquisitions, we may
require additional financing. We cannot assure you that additional financing
will be available to us on acceptable terms. Radio broadcasting is a rapidly
consolidating industry, with many companies seeking to consummate acquisitions
and increase their market share. In this environment, we compete and will
continue to compete with many other buyers for the acquisition of radio
stations. Some of those competitors may be able to outbid us for acquisitions
because they have greater financial resources. As a result of these and other
factors, our ability to identify and consummate future acquisitions is
uncertain.
WE MAY BE UNABLE TO EFFECTIVELY INTEGRATE OUR ACQUISITIONS.
The integration of acquisitions involves numerous risks, including:
- difficulties in the integration of operations and systems and
the management of a large and geographically diverse group of
stations;
- the diversion of management's attention from other business
concerns;
- the potential loss of key employees of acquired stations; and
- the risk of integration is higher during a period of
significant or rapid growth.
We cannot assure you that we will be able to integrate successfully any
operations, systems or management that might be acquired in the future. In
addition, in the event that the operations of a new business do not meet
expectations, we may restructure or write-off the value of some or all of the
assets of the new business.
WE HAVE SUBSTANTIAL INDEBTEDNESS THAT COULD HAVE IMPORTANT CONSEQUENCES TO YOU.
We have indebtedness that is substantial in relation to our
shareholders' equity. At December 31, 2001, we had long-term indebtedness of
$388.3 million and shareholders' equity of $755.9 million. In addition to our
obligations on our long-term indebtedness, we have quarterly interest
obligations on the debentures held by the trust that fund distributions on the
TIDES. These obligations are substantial in amount and could have a substantial
impact on you. For example, these obligations could:
36
- require us to dedicate a substantial portion of our cash flow
from operations to debt service, thereby reducing the
availability of cash flow for other purposes, including
funding future expansion and ongoing capital expenditures;
- impair our ability to obtain additional financing for working
capital, capital expenditures, acquisitions and general
corporate or other purposes;
- limit our ability to compete, expand and make capital
improvements;
- increase our vulnerability to economic downturns, limit our
ability to withstand competitive pressures and reduce our
flexibility in responding to changing business and economic
conditions; and
- limit or prohibit our ability to pay dividends and make other
distributions.
As of December 31, 2001, $255.8 million was available under our $650.0
million current bank facility. At any time prior to December 31, 2002, we may
solicit incremental loans up to $350.0 million, thereby increasing the bank
facility to $1.0 billion. The banks participating in our bank facility are not
obligated to provide such incremental loans. Moreover, under certain
circumstances, we may need to modify or enter into a new bank facility to close
on our pending or future acquisitions and we may seek to obtain other funding or
additional financing. We have no assurances that we will be able to obtain other
funding or additional financing. Any additional borrowings would further
increase the amount of our indebtedness and the associated risks.
THE COVENANTS IN OUR CREDIT FACILITY RESTRICT OUR FINANCIAL AND OPERATIONAL
FLEXIBILITY.
Our credit facility contains covenants that restrict, among other
things, our ability to borrow money, make particular types of investments or
other restricted payments, swap or sell assets, or merge or consolidate. An
event of default under our bank facility could allow the lenders to declare all
amounts outstanding to be immediately due and payable. We have pledged
substantially all of our consolidated assets and the stock of our subsidiaries
to secure the debt under our credit facility. If the amounts outstanding under
the credit facility were accelerated, the lenders could proceed against our
consolidated assets and the stock of our subsidiaries. Any event of default,
therefore, could have a material adverse effect on our business. Our bank
facility also requires us to maintain specified financial ratios. Our ability to
meet these financial ratios can be affected by operating performance or other
events beyond our control, and we cannot assure you that we will meet those
ratios. We also may incur future debt obligations in connection with future
acquisitions that might subject us to restrictive covenants that could affect
our financial and operational flexibility or subject us to other events of
default. The debt we expect to incur in connection with future acquisitions may
require us to modify or enter into a new bank facility if certain covenants in
our current bank facility would be violated, subjecting us to an event of
default.
BECAUSE OF OUR HOLDING COMPANY STRUCTURE, WE DEPEND ON OUR SUBSIDIARIES FOR CASH
FLOW, AND OUR ACCESS TO THIS CASH FLOW IS RESTRICTED.
We operate as a holding company. All of our radio stations are
currently owned and operated by our subsidiaries. Entercom Radio, our wholly
owned subsidiary, is the borrower under our credit facility and all of our
station-operating subsidiaries are subsidiaries of Entercom Radio. Further, we
guaranteed Entercom Radio's obligations under the credit facility on a senior
secured basis. Our obligations on the TIDES, which were purchased by the trust
that sells the TIDES, are subordinated to our obligations on this guarantee.
As a holding company, our only source of cash to pay our obligations,
including corporate overhead and other trade payables, are distributions from
our subsidiaries of their net earnings and cash flow. We currently expect that
the net earnings and cash flow of our subsidiaries will be retained and used by
them in their operations, including servicing their debt obligations, before
distributions are made to us. Even if our subsidiaries elect to make
distributions to us, we cannot assure you that applicable state law and
contractual restrictions, including the dividend covenants contained in our
credit facility, would permit such dividends or distributions.
OUR CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER EFFECTIVELY CONTROLS OUR
COMPANY, AND MEMBERS OF HIS IMMEDIATE FAMILY ALSO OWN A SUBSTANTIAL EQUITY
INTEREST IN US. THEIR INTERESTS MAY CONFLICT WITH YOURS.
As of January 31, 2002, Joseph M. Field, our Chairman of the Board and
Chief Executive Officer, beneficially owns
37
1,513,309 shares of our Class A common stock and 9,782,555 shares of our Class B
common stock, representing approximately 70.7% of the total voting power of all
of our outstanding common stock. As of January 31, 2002, David J. Field, our
President, Chief Operating Officer, one of our directors and the son of Joseph
M. Field, beneficially owns 2,029,143 shares of our Class A common stock and
749,250 shares of our outstanding Class B common stock, representing
approximately 6.8% of the total voting power of all of our outstanding common
stock. Collectively, Joseph M. Field and David J. Field beneficially own all of
our outstanding Class B common stock. Other members of the Field family also own
shares of Class A common stock.
Shares of Class B common stock are transferable only to Joseph M.
Field, David J. Field, certain of their family members or trusts for any of
their benefit. Upon any other transfer, shares of our Class B common stock
convert automatically into shares of our Class A common stock on a
share-for-share basis. Shares of our Class B common stock are entitled to ten
votes only when they are voted by Joseph M. Field or David J. Field, subject to
certain exceptions where they are restricted to one vote. Joseph M. Field
generally is able to control the vote on all matters submitted to the vote of
shareholders and, therefore, is able to direct our management and policies,
except with respect to those matters where the shares of our Class B common
stock are only entitled to one vote and those matters requiring a class vote
under the provisions of our articles of incorporation, bylaws or applicable law,
including, without limitation, the election of the two Class A directors.
Without the approval of Joseph M. Field, we will be unable to consummate
transactions involving an actual or potential change of control, including
transactions in which investors might otherwise receive a premium for your
shares over then current market prices.
WE DEPEND HEAVILY ON OUR SEATTLE RADIO STATIONS.
The radio stations we own or operate in Seattle generated between 20%
and 25% of our net revenues and broadcast cash flows for 2001. Accordingly we
may have greater exposure to any operating difficulties that may arise at our
Seattle stations or to adverse events or conditions that affect the Seattle
economy than if we were more geographically diverse.
WE MUST RESPOND TO THE RAPID CHANGES IN TECHNOLOGY, SERVICES AND STANDARDS THAT
CHARACTERIZE OUR INDUSTRY IN ORDER TO REMAIN COMPETITIVE.
The radio broadcasting industry is subject to rapid technological
change, evolving industry standards and the emergence of new media technologies
and services. We cannot assure you that we will have the resources to acquire
new technologies or to introduce new services that could compete with these new
technologies. Several new media technologies and services are being developed or
introduced, including the following:
- satellite delivered digital audio radio service, has resulted
in the introduction of new subscriber based satellite radio
services with numerous niche formats;
- audio programming by cable systems, direct broadcast satellite
systems, personal communications systems, Internet content
providers and other digital audio broadcast formats;
- in-band on-channel digital radio, which provides
multi-channel, multi-format digital radio services in the same
bandwidth currently occupied by traditional AM and FM radio
services; and
- low-power FM radio, which could result in additional FM radio
broadcast outlets.
We cannot predict the effect, if any, that competition arising from new
technologies or regulatory change may have on the radio broadcasting industry or
on the financial condition and results of operations of our company.
THE LOSS OF KEY PERSONNEL COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS.
Our business depends upon the continued efforts, abilities and
expertise of our executive officers and other key executives. We believe that
the loss of one or more of these individuals could have a material adverse
effect on our business.
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Under certain bank facility covenants that are measured periodically, we
may be required from time to time 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 call the rate hedging transactions, designed to mitigate our
exposure to significantly higher floating interest rates. These transactions are
referred to as a "collar" or a "swap". A collar consists of a rate cap agreement
that establishes an upper limit or "cap" for the base LIBOR rate and a rate
floor agreement that establishes a lower limit or "floor" for the base LIBOR
rate. Collar agreements covering a rate cap and a rate floor 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 December 31, 2001, we have rate
hedging transactions in place for a total notional amount of $263.0 million.
Based upon the variable-rate debt as of December 31, 2001, a 100 basis point
change in interest rates would change annual interest expense by approximately
$2.3 million.
Our credit exposure under these agreements is limited to the cost of
replacing an agreement in the event of non-performance by our counter-party. To
minimize this risk, we select high credit quality counter-parties.
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 these rate hedging transactions is affected by the change in the
three-month LIBOR rates 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. The three-month LIBOR rate at December
31, 2001 was lower than the rate at December 31, 2000. The decrease in interest
rates resulted in a net increase in market value liability of the instruments as
of December 31, 2001, despite a reduction in the remaining term under each of
the transactions. 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 effect of the adoption of this
accounting standard was reflected in the consolidated financial statements for
the year ended December 31, 2001.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our consolidated financial statements, together with related notes and the
report of Arthur Andersen LLP, our independent accountants, and Deloitte &
Touche LLP, our former independent accountants, are set forth on the pages
indicated in Item 14.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On March 23, 2001, we replaced Deloitte & Touche LLP ("Deloitte"), our
previous independent public accountants, with Arthur Andersen LLP in accordance
with a resolution of our board of directors. Deloitte previously audited our
financial statements for the years ended December 31, 1999 and December 31,
2000. The reports of Deloitte on our financial statements for the years ended
December 31, 1999 and December 31, 2000, did not contain an adverse opinion or a
disclaimer of opinion and were not qualified or modified as to uncertainty,
audit scope or accounting principles. During the same period, there were no
disagreements with Deloitte on any matter of accounting principles or practices,
financial statement disclosure or auditing scope or procedure. Please refer to
the 8-K filed on March 23, 2001.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table provides information concerning our directors and
executive officers as of January 31, 2002.
NAME AGE POSITION
Joseph M. Field....... 70 Chairman and Chief Executive Officer
David J. Field........ 39 President, Chief Operating Officer and Director
</Table>
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NAME AGE POSITION
John C. Donlevie...... 55 Executive Vice President, Secretary, General Counsel
and Director
Stephen F. Fisher..... 49 Executive Vice President and Chief Financial Officer
Herbert Kean, M.D..... 71 Director
S. Gordon Elkins...... 71 Director
Thomas H. Ginley, Jr. 77 Director
Lee Hague 55 Director
Marie H. Field........ 64 Director
David J. Berkman...... 42 Director
Michael R. Hannon..... 41 Director
Joseph M. Field founded Entercom in 1968 and has served since our
inception as our Chairman of the Board and Chief Executive Officer and was our
President until September 1998. Before entering the broadcasting business, he
practiced law for 14 years in New York (including service as an Assistant United
States Attorney) and Philadelphia. Mr. Field served on the Board of Directors of
the National Association of Broadcasters for four years as a representative of
the major radio group broadcasters. He currently serves on the Boards of
Directors of The Mary Louise Curtis Bok Foundation, the Settlement Music School,
the American Interfaith Institute, the National Liberty Museum, the Jewish
Education, The Philadelphia Orchestra, the Curtis Institute of Music and
Vocational Service (JEVS) and the Philadelphia Chamber Music Society. Mr. Field
has a B.A. from the University of Pennsylvania and an L.L.B. from Yale Law
School. He is the spouse of Marie H. Field and the father of David J. Field. Mr.
Field's term as a director expires at the 2002 annual meeting of shareholders.
David J. Field has served as our President since 1998, our Chief Operating
Officer since 1996 and one of our directors since 1995. He also served as our
Chief Financial Officer from 1992 to 1998. Mr. Field joined us in 1987 and
served as our Director of Finance and Corporate Development from 1987 to 1988,
Vice President-Finance and Corporate Development from 1988 to 1992, Vice
President-Operations and Chief Financial Officer from 1992 to 1995 and Senior
Vice-President-Operations and Chief Financial Officer from 1995 to 1996. Prior
to joining us, he was an investment banker with Goldman, Sachs & Co. Mr. Field
currently serves on the Boards of Directors of the Radio Advertising Bureau, the
Philadelphia Zoo and The Wilderness Society. He has a B.A. from Amherst College
and an M.B.A. from the Wharton School of the University of Pennsylvania. Mr.
Field is the son of Joseph M. Field and Marie H. Field. Mr. Field's term as a
director expires at the 2002 annual meeting of shareholders.
John C. Donlevie has served as our Executive Vice President, General
Counsel and one of our directors since 1989, our Secretary since 1998 and was
our Vice President-Legal and Administrative from 1984 when he joined us to 1989.
Prior to joining us, Mr. Donlevie practiced law for 11 years, most recently as
Corporate Counsel of Ecolaire Incorporated in Malvern, Pennsylvania. He has a
B.S. in Engineering from Drexel University and a J.D. from Temple University
School of Law. Mr. Donlevie's term as a director expires at the 2002 annual
meeting of shareholders.
Stephen F. Fisher has served as our Senior Vice President and Chief
Financial Officer from 1998 to 2000. In 2000 he became Executive Vice President
and Chief Financial Officer. From 1994 to 1998, he was a Managing Director with
a private equity firm located in Bala Cynwyd, Pennsylvania. From 1978 to 1994,
Mr. Fisher held numerous operational and financial management positions with
Westinghouse Broadcasting Company (now part of Viacom Inc.), including the
positions of Executive Vice President, General Manager of their Los Angeles news
radio station and Controller of the Radio Group. He has an M.A. from Bob Jones
University and an M.B.A. from the University of South Carolina.
Herbert Kean, M.D. has served as one of our directors since our inception.
In addition, he served as our Secretary from our inception until 1984. Dr. Kean
is currently a medical physician in private practice in the Philadelphia area.
He has a B.S. from the University of Pennsylvania and an M.D. from Hahnemann
University. He is a clinical professor at Thomas Jefferson University Medical
College and Chairman of the Public Health Committee of the Philadelphia County
Medical Society. Dr. Kean's term as a director expires at the 2002 annual
meeting of shareholders
S. Gordon Elkins has served as one of our directors since 1978. He was a
partner in the law firm of Stradley, Ronon, Stevens & Young from September 1962
through January 1999 and currently is affiliated with the firm. Mr. Elkins has a
B.S. from Temple University, graduating first in his class, and an L.L.B. from
Yale Law School. Mr. Elkins' term as a director expires at the 2002 annual
meeting of shareholders.
40
Thomas H. Ginley, Jr., M.D. has served as one of our directors since 1971
and previously served as our Secretary from 1984 to 1998. Dr. Ginley is
President and a director of the A & T Development Corporation and Treasurer and
a director of Vanessa Noel Couture, Inc. Dr. Ginley is also a gemologist and
president of Gem Treasury International Inc. He is a diplomat of the National
Board as well as a fellow of the American College of Surgeons. Dr. Ginley has an
M.D. from Georgetown University. Dr. Ginley's term as a director expires at the
2002 annual meeting of shareholders.
Lee Hague has served as one of our directors since 1980. Mr. Hague is
currently the Chairman of the Board and Chief Executive Officer of Aspect
Holdings Inc. Prior to joining Aspect Holdings Inc. in 1998, he served as
President of Hague & Company over a period of 20 years. He has served as an
independent consultant to various broadcasting groups and provides financial
advisory and media brokerage services to the industry. Mr. Hague has over 20
years' experience in the radio industry. He has a B.S. from Northwestern
University and an M.M. from the J.L. Kellogg Graduate School of Management,
Northwestern University. Mr. Hague's term as a director expires at the 2002
annual meeting of shareholders.
Marie H. Field has served as one of our directors since 1989. She served
for over 25 years as a teacher in public and private schools in New York and
Philadelphia. Mrs. Field serves on the Board of Directors of the Ovarian Cancer
Research Fund in New York, the Board of Overseers of the University of
Pennsylvania School of Social Work, the Education Board of the National Liberty
Museum and the Board of Project Forward Leap. She has a B.A. from Barnard
College. Mrs. Field is the spouse of Joseph M. Field and the mother of David J.
Field. Mrs. Field's term as a director expires at the 2002 annual meeting of
shareholders.
David J. Berkman has served as one of our directors since the consummation
of our initial public offering in January 1999. He is the Managing Partner of
Liberty Associated Partners, LP, a venture capital firm primarily engaged in the
telecommunications, media and internet market segments. Liberty Associated
Partners, LP was founded by principals of The Associated Group, Inc., which
prior to its sale in 2000 was a multi-billion dollar publicly-traded owner and
operator of communications related businesses of which Mr. Berkman was Executive
Vice President. He also currently serves on the Boards of Directors of Internet
Capital Group, Inc., Clearwire, Inc., V-Span, Inc., the Philadelphia Regional
Performing Arts Center and the Franklin Institute. Mr. Berkman has a B.S. from
the Wharton School of the University of Pennsylvania. Mr. Berkman's term as a
director expires at the 2002 annual meeting of shareholders.
Michael R. Hannon has served as one of our directors since December 1998.
He is a Partner of J.P. Morgan Partners (JPMP), a partnership with over $20
billion under management. JPMP invests in a wide variety of international
private equity opportunities including management buyouts, growth equity, and
venture capital situations. JPMP's chief limited partner is J.P. Morgan Chase &
Co., one of the largest bank holding companies in the United States. Mr. Hannon
worked at Morgan Stanley & Co. Incorporated prior to joining JPMP in 1988. He
received his B.A. degree from Yale University and an M.B.A. from Columbia
Business School. He is currently on the board of directors of Telecorp PCS,
Telesystem International Wireless and several privately-held media and telecom
firms. Mr. Hannon's term as a director expires at the 2002 annual meeting of
shareholders.
Committees of the Board of Directors
Our board has adopted certain standing committees including: (1) audit,
(2) compensation, and (3) nominating.
Audit Committee. The audit committee consists of Messrs. Berkman,
Hague and Elkins, each of whom is independent as the term independence is
defined in Section 3.03.01 (B)(2)(a) and (3) of the listing standards of the New
York Stock Exchange. The audit committee met five times in 2001. The
responsibilities of the audit committee include:
- recommending to the board of directors the independent public
accountants to conduct the annual audit of our financial statements;
- reviewing the proposed scope of the audit and approving the audit
fees to be paid;
- reviewing our accounting and financial controls with the independent
public accountants and our financial and accounting staff; and
- reviewing and discussing financial statements with management.
Compensation Committee. Our compensation committee consists of Mr.
Hannon and Doctors Ginley and Kean. Our compensation committee met once in 2001.
The compensation committee conducts a general review of our compensation
41
plans to ensure that they meet corporate objectives, including review and
approval of all compensation paid to our executive officers. The
responsibilities of the compensation committee also include administering and
interpreting our Employee Stock Purchase Plan and the Entercom 1998 Equity
Compensation Plan, including selecting the officers, employees and other
qualified recipients that will be granted awards under the Entercom 1998 Equity
Compensation Plan.
Nominating Committee. Our nominating committee consists of David
Berkman, Lee Hague and Michael Hannon and met four times in 2001. The nominating
committee is responsible for the recommendation of criteria for selection of
board members and assisting the board in identifying candidates for the board.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires our officers
and directors, and persons who own more than ten percent of a registered class
of our equity securities ("Reporting Persons"), to file reports of beneficial
ownership and changes in beneficial ownership (Forms 3, 4 and 5) of our equity
securities with the Commission and the New York Stock Exchange. Officers,
directors and greater than ten percent shareholders are required by the
Commission to furnish us with copies of all Section 16(a) reports they file.
Based solely on our review of Forms 3, 4 and 5 and amendments thereto
furnished to us, we believe that all of our Reporting Persons were in compliance
with all Section 16(a) filing requirements for 2001, except a Form 4 for Mr.
Kean was filed late.
ITEM 11. EXECUTIVE COMPENSATION
The following table provides summary information concerning compensation
paid to or earned by our Chief Executive Officer and our other most highly
compensated executive officers for services rendered during the years ended
1999, 2000 and 2001 (the "Named Executive Officers"):
Summary Compensation Table
LONG-TERM
COMPENSATION
------------
NUMBER OF
SECURITIES
ANNUAL COMPENSATION UNDERLYING
--------------------- OTHER ANNUAL OPTIONS
NAME AND PRINCIPAL POSITION PERIOD SALARY BONUS(1) COMPENSATION GRANTED
--------------------------- ------ ------ -------- ------------ -------
Joseph M. Field, Chairman of the Board and 1999 $563,320 $250,000 (2) 372,223
Chief Executive Officer 2000 600,000 400,000 100,000
2001 600,000 267,000 100,000
David J. Field, President and Chief 1999 350,000 200,000 (2) 258,334
Operating Officer 2000 450,000 350,000 100,000
2001 450,000 267,000 100,000
Stephen F. Fisher, Executive Vice President 1999 250,000 150,000 (2) 116,667
and Chief Financial Officer 2000 300,000 200,000 75,000
2001 300,000 175,000 50,000
John C. Donlevie, Executive Vice President, 1999 225,000 125,000 (2) 115,556
Secretary and General Counsel 2000 265,000 150,000 25,000
2001 265,000 100,000 25,000
- ----------
(1) Includes amounts accrued during the year presented but paid in the
subsequent year.
42
(2) Value of perquisites and other personal benefits paid does not exceed the
lesser of $50,000 or 10% of the total annual salary and bonus reported for
the Named Executive Officer and, therefore, is not required to be
disclosed pursuant to rules of the Commission.
STOCK OPTION TABLES
Our Named Executive Officers are eligible to receive stock option grants
under the Entercom 1998 Equity Compensation Plan. The following table contains
information concerning the stock option grants made to each of the Named
Executive Officers, discussed above, during the year ended December 31, 2001:
STOCK OPTION GRANTS FOR YEAR ENDED DECEMBER 31, 2001
POTENTIAL REALIZABLE VALUE
NUMBER OF PERCENTAGE OF AT ASSUMED ANNUAL RATES
SECURITIES TOTAL OPTIONS EXERCISE MARKET OF STOCK PRICE APPRECIATION
UNDERLYING GRANTED TO OR PRICE FOR OPTIONS TERMS($)
OPTIONS EMPLOYEES IN BASE ON GRANT EXPIRATION --------------------
NAME GRANTED YEAR(%) PRICE($) DATE($) DATE 5% 10%
---- ------- ------- -------- -------- ---- -- ---
Joseph M. Field 100,000 11.6% $40.00 $40.00 01/09/11 $2,515,579 $6,374,970
David J. Field 100,000 11.6% $40.00 $40.00 01/09/11 $2,515,579 $6,374,970
Stephen F. Fisher 50,000 5.8% $40.00 $40.00 01/09/11 $1,257,789 $3,187,485
John C. Donlevie 25,000 2.9% $40.00 $40.00 01/09/11 $ 628,895 $1,593,742
- ----------
(1) The 5% and 10% assumed annual rates of compounded stock price appreciation
are mandated by the rules of the Commission. There can be no assurance
that the actual stock price appreciation over the ten-year option term
will be at the assumed 5% and 10% levels or at any other defined level.
Unless the market price of our Class A common stock appreciates over the
option term, no value will be realized from the option grants. The
potential realizable value is calculated by assuming that the fair market
value of our Class A common stock on the date of grant of the options
appreciates at the indicated rate for the entire term of the option and
that the option is exercised at the exercise price and sold on the last
day at the appreciated price.
The following table sets forth information concerning each option
exercised by the Named Executive Officers during the year ended December 31,
2001 and option holdings at December 31, 2001 by the Named Executive Officers:
STOCK OPTION EXERCISES AND YEAR-END VALUE
NUMBER OF SHARES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT
SHARES OPTIONS AT YEAR END YEAR END(1)
ACQUIRED VALUE (#) ($)
ON EXERCISE REALIZED --------------------------- ---------------------------
NAME (#) ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- --- --- ----------- ------------- ----------- -------------
Joseph M. Field -- -- 211,112 361,111 $3,846,205 $5,958,678
David J. Field -- -- 154,168 304,166 $2,884,939 $4,997,375
Stephen F. Fisher 5,000 $158,450 72,084 164,583 $ 698,716 $1,994,001
John C. Donlevie -- -- 64,028 101,528 $1,121,709 $1,649,834
- ----------
(1) Value is determined by subtracting the exercise price from the fair market
value of our Class A common stock multiplied by the number of shares
underlying the options. Fair market value is based on the New York Stock
Exchange closing price of our Class A common stock on December 29, 2001 of
$50.00 per share. Options which are not in the money, of which there were
none, are not considered for purposes of this computation.
43
EMPLOYEE STOCK PURCHASE PLAN
A total of up to 1,850,000 shares of our Class A common stock may be
issued under the Employee Stock Purchase Plan, subject to adjustment. Under our
Employee Stock Purchase Plan, we will withhold a specified percentage (not to
exceed 10%) of the compensation paid to each participant, and the amount
withheld (and any additional amount contributed by the participant which
together with payroll withholdings does not exceed 10% of the participant's
compensation) will be used to purchase our Class A common stock on the last day
of each purchase period. The purchase price will be the value of the stock on
the last day of the purchase period less a discount not to exceed 15% as
determined by the compensation committee in advance of the purchase period. The
length of each purchase period shall be specified by the compensation committee.
The maximum value of shares that a participant in the Employee Stock Purchase
Plan may purchase during any calendar year is $25,000.
EMPLOYMENT AGREEMENTS
JOSEPH M. FIELD EMPLOYMENT AGREEMENT. We have entered into an employment
agreement with Joseph M. Field pursuant to which Mr. Field serves as our Chief
Executive Officer. The employment agreement may be terminated upon written
notice no less than 30 days prior to the end of any calendar year. Mr. Field's
salary for the year 2001 was $600,000. The board of directors may approve
additional salary, bonuses, fees, or other compensation. Absent our express
prior written consent, Mr. Field is prohibited, in the event of his termination
by resignation or for cause, for a period of two years following the termination
of the employment agreement, from engaging in any broadcast business that we
compete with in any standard metropolitan statistical area in which we are then
operating a broadcast property.
DAVID J. FIELD EMPLOYMENT AGREEMENT. We have entered into an employment
agreement with David J. Field, pursuant to which Mr. Field serves as our
President and Chief Operating Officer. The employment agreement provides that
Mr. Field's employment may be terminated at will by either party (1) immediately
if good cause for termination exists, or (2) upon thirty days notice in the
absence of good cause. Pursuant to this employment agreement, Mr. Field's salary
for the year 2001 was $450,000. The board of directors may approve additional
salary, bonuses, fees, or other compensation.
JOHN C. DONLEVIE EMPLOYMENT AGREEMENT. We have entered into an employment
agreement with John C. Donlevie pursuant to which Mr. Donlevie serves as our
Executive Vice President, Secretary and General Counsel. The employment
agreement provides that Mr. Donlevie's employment may be terminated at will by
either party (1) immediately if good cause for termination exists, or (2) upon
thirty days notice in the absence of good cause. Pursuant to this employment
agreement, Mr. Donlevie's salary for the year 2001 was $265,000. The board of
directors may approve additional salary, bonuses, fees, or other compensation.
STEPHEN F. FISHER EMPLOYMENT AGREEMENT. The employment agreement with
Stephen F. Fisher, pursuant to which Mr. Fisher serves as our Chief Financial
Officer and Executive Vice President, has been terminated as of December 31,
2001 and we are in the process of negotiating a new agreement.
DIRECTOR COMPENSATION
All of our non-employee directors receive a fee of $1,000 for each board
meeting that they attend in person, $500 for each committee meeting that they
attend in person and $250 for each telephonic meeting of the board or a
committee. Employee directors are not entitled to receive additional
compensation for their services as directors. In addition, during the first
quarter of 2001, Marie H. Field, S. Gordon Elkins, Lee Hague, Thomas H. Ginley,
Jr., M.D., Herbert Kean, M.D., Michael R. Hannon and David J. Berkman received
stock options under the Entercom 1998 Equity Compensation Plan.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of January 31, 2002
regarding the beneficial ownership of our common stock by:
- each person known by us to beneficially own more than 5% percent of
any class of our common stock;
- each of our directors and Named Executive Officers; and
- all of our directors and executive officers as a group.
Each shareholder possesses sole voting and investment power with respect
to the shares listed, unless otherwise noted.
44
COMMON STOCK
------------
CLASS A(1) CLASS B(2)
---------- ----------
NUMBER OF NUMBER OF PERCENT PERCENT
SHARES PERCENT SHARES PERCENT OF TOTAL OF TOTAL
BENEFICIALLY OF BENEFICIALLY OF ECONOMIC VOTING
NAME OF BENEFICIAL OWNER OWNED(3) CLASS OWNED(3) CLASS INTEREST POWER
------------------------ -------- ----- -------- ----- -------- -----
Joseph M. Field (4)(5) ............. 1,513,309 4.3% 9,782,555 92.9% 24.7% 70.7%
David J. Field (4)(6) .............. 2,029,143 5.8 749,250 7.1 6.1 6.8
John C. Donlevie ................... 91,702 * -- -- * *
Stephen F. Fisher .................. 97,143 * -- -- * *
Herbert Kean, M.D .................. 1,060,116 3.0 -- -- 2.3 *
S. Gordon Elkins (4)(7) ............ 2,519,003 7.2 -- -- 5.6 1.8
Thomas H. Ginley, M.D. (8) ......... 711,859 2.0 -- -- 1.6 *
Lee Hague .......................... 11,251 * -- -- * *
Marie H. Field (4)(9) .............. 1,513,309 4.3 380,000 3.6 4.2 1.4
Michael R. Hannon (10) ............. 7,804 * -- -- * *
David J. Berkman ................... 9,584 * -- -- * *
Putnam Investments, LLC (11)
One Post Office Square
Boston, MA 02109 ................... 3,568,856 10.2 -- -- 7.9 2.6
All directors and executive officers
as a group (11 persons) ............ 5,367,594 15.1 10,531,805 100 34.5 78.6
- ----------
* Less than one percent.
(1) For the purpose of calculating the percentage of Class A common stock held
by each shareholder, the total number of shares of Class A common stock
outstanding does not include the shares of Class A common stock issuable
upon conversion of the outstanding shares of Class B common stock. The
number of shares of Class A common stock also includes all issued shares
of restricted stock.
(2) The Class A common stock and the Class B common stock vote together as a
single class on all matters submitted to a vote of shareholders. Each
share of Class A common stock is entitled to one vote. Each share of Class
B common stock is entitled to ten votes, except: (a) any share not voted
by either Joseph M. Field or David J. Field is entitled to one vote; (b)
the holders of Class A common stock, voting as a separate class, are
entitled to elect two directors; (c) each share of Class B common stock is
entitled to one vote with respect to any "going private" transactions
under the Exchange Act; and (d) as required by law. The shares of Class B
common stock are convertible in whole or in part, at the option of the
holder, subject to certain conditions, into the same number of shares of
Class A common stock.
(3) Shares beneficially owned and percentage ownership are based on 34,829,917
shares of Class A common stock and 10,531,805 shares of Class B common
stock outstanding as of January 31, 2002. The number of shares of Class A
common stock also includes all issued shares of restricted stock.
(4) The address of these shareholders is 401 City Avenue, Suite 409, Bala
Cynwyd, Pennsylvania 19004.
(5) Includes (a) 1,069,330 shares of Class A common stock beneficially owned
by Marie H. Field, wife of Joseph M. Field, (b) 380,000 shares of Class B
common stock beneficially owned by Marie H. Field, (c) 38,578 shares of
Class A common stock held of record by Joseph M. Field as trustee of a
trust for the benefit of a sister of Marie H. Field, (d) 106,549 shares of
Class A common stock beneficially owned by Joseph M. Field as a director
and officer of the Joseph and Marie Field Foundation, (e) 291,668 shares
of Class A common stock which may be acquired through the exercise of
options and (f) 7,084 shares of Class A common stock which may be acquired
by Marie H. Field, wife of Joseph M. Field, through the exercise of
options. The total economic interest and total voting power of Mr. Field
includes 380,000 shares of Class B common stock owned by Marie H. Field
which Mr. Field has the power to vote pursuant to a revocable proxy. See
Note 2 above.
45
(6) Includes (a) 306,094 shares of Class A common stock held of record by
David J. Field as co-trustee of a trust for the benefit of Nancy E. Field,
(b) 513,876 shares of Class A common stock held of record by David J.
Field as co-trustee of a trust for the benefit of David J. Field and his
children and (c) 996,572 shares of Class A common stock held of record by
David J. Field as co-trustee of two trusts for the benefit of the
descendants of David J. Field and Nancy E. Field and (d) 212,501 shares of
Class A common stock which may be acquired through the exercise of
options.
(7) Includes (a) 996,572 shares of Class A common stock held of record by Mr.
Elkins as co-trustee of two trusts for the benefit of the descendants of
David J. Field and Nancy E. Field, respectively (b) 513,876 shares of
Class A common stock held of record by Mr. Elkins as co-trustee of a trust
for the benefit of David J. Field and his children, (c) 613,150 shares of
Class A common stock held of record by Mr. Elkins as co-trustee of a trust
for the benefit of Nancy E. Field and her children, (d) 277,994 shares of
Class A common stock held of record by Mr. Elkins as trustee of a trust
for the benefit of Marie H. Field, (e) 106,549 shares of Class A common
stock beneficially owned by Mr. Elkins as a director and officer of the
Joseph and Marie Field Foundation and (f) 7,084 shares of Class A common
stock which may be acquired through the exercise of options.
(8) Includes (a) 556,775 shares of Class A common stock held by Dr. Ginley in
joint tenancy with his spouse, of which 250,000 shares are pledged to Bear
Stearns & Co. pursuant to a pre-paid forward purchase contract, (b) 74,000
shares of Class A common stock owned of record by his spouse, all of which
are pledged to Bear Stearns & Co. pursuant to a pre-paid forward purchase
contract, (c) 74,000 shares of Class A common stock held of record by his
spouse as co-trustee of two trusts for the benefit of their children, of
which 37,000 shares are pledged to Bear Stearns & Co. pursuant to a
pre-paid forward purchase contract and (d) 7,084 shares of Class A common
stock which may be acquired through the exercise of options.
(9) Includes (a) 147,368 shares of Class A common stock held of record by
Marie H. Field as co-trustee of a trust for the benefit of David J. Field,
(b) 306,094 shares of Class A common stock held of record by Marie H.
Field as co-trustee of a trust for the benefit of Nancy E. Field, (c)
38,578 shares of Class A common stock held of record by Joseph M. Field,
husband of Marie H. Field, as trustee of a trust for the benefit of a
sister of Marie H. Field, (d) 106,549 shares of Class A common stock
beneficially owned by Marie H. Field as a director and officer of the
Joseph and Marie Field Foundation, (e) 7,084 shares of Class A common
stock which may be acquired through the exercise of options and (f)
291,668 shares of Class A common stock which may be acquired by Joseph M.
Field, husband of Marie H. Field, through the exercise of options. Does
not include 9,402,555 shares of Class B common stock held by Joseph M.
Field, Marie H. Field's spouse. See Note 2 above.
(10) Includes 7,084 shares of Class A common stock which may be acquired
through the exercise of options.
(11) Includes 3,287,176 shares owned by Putnam Investment Management, LLC,
281,680 shares owned by The Putnam Advisory Company, LLC and 1,965,000
shares owned by Putnam New Opportunities Fund, each affiliates of Putnam
Investments, LLC. Putnam Investments LLC, has shared voting power with
respect to 58,200 shares and shared investment power with respect to all
3,568,856 shares. Putnam Investment Management, LLC exercises sole voting
power over none of the shares, but has shared investment power with
respect to 3,287,176 shares. The Putnam Advisory Company, LLC exercises
shared voting power over 58,200 shares and shared investment power over
281,680 shares.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
S. Gordon Elkins, one of our directors, is affiliated with the law firm of
Stradley, Ronon, Stevens & Young. This firm has served as our outside counsel on
various matters. For the years ended December 31, 1999, 2000 and 2001, we
incurred legal fees from Stradley, Ronon, Stevens & Young in the amounts of $0.2
million, $0.1 million and $0.1 million, respectively.
46
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Report:
Page
----
1. Consolidated Financial Statements
Report of Independent Public Accountants 49
Independent Auditors' Report 50
Consolidated Financial Statements
Balance Sheets as of December 31, 2000 and December 31, 2001 51
Statements of Operations for the Years Ended December 31, 1999, 2000 and 2001 53
Statements of Comprehensive Income (Loss) for the Years Ended December 31, 1999, 2000 and 2001 55
Statements of Shareholders' Equity for the Years Ended December 31, 1999, 2000 and 2001 56
Statements of Cash Flows for the Years Ended December 31, 1999, 2000 and 2001 57
Notes to Consolidated Financial Statements 59
2. Consolidated Financial Statement Schedule
Schedule II - Valuation and Qualifying Accounts 87
3. Index to Exhibits 88
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION PAGE
- ------ ----------- ----
3.01 Amended and Restated Articles of Incorporation of the Registrant (2)
3.02 Form of Amended and Restated Bylaws of the Registrant (2)
4.01 Form of Indenture for the Convertible Subordinated Debentures due
2014 among Entercom Communications Corp., as issuer, and Wilmington
Trust Company, as indenture trustee (4)
10.01 Registration Rights Agreement, dated as of May 21, 1996, between the
Registrant and Chase Equity Associates, L.P.(2)
10.02 Employment Agreement, dated June 25, 1993, between the Registrant
and Joseph M. Field, as amended (2)
10.03 Employment Agreement, dated December 17, 1998, between the
Registrant and David J. Field, as amended (2)
10.04 Employment Agreement, dated December 17, 1998, between the
Registrant and John C. Donlevie, as amended (2)
10.05 Employment Agreement, dated November 13, 1998, between the
Registrant and Stephen F. Fisher (2)
10.06 Entercom 1998 Equity Compensation Plan (2)
10.07 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) (3)
10.08 Credit Agreement, dated as of December 16, 1999, by and 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. (6)
10.09 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,
47
EXHIBIT
NUMBER DESCRIPTION PAGE
- ------ ----------- ----
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 Willkes-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.) (5)
10.10 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.) (5)
10.11 Second Amendment to the Credit Agreement between Entercom Radio,
LLC, the borrower, Entercom 94 Communications Corp., the parent, Key
Corporate Capital, administrative agent, Bank of America,
syndication agent and the financial institutions listed on the
signature pages. (1) 90
21.01 Information Regarding Subsidiaries of the Registrant (1) 101
23.01 Consent of Arthur Andersen LLP (1) 103
23.02 Consent of Deloitte & Touche LLP (1) 104
(1) Filed herewith.
(2) Incorporated by reference to our Registration Statement on Form S-1. (File
No. 333-61381)
(3) Incorporated by reference to our Quarterly Report on Form 10-Q. (File No.
001-14461)
(4) Incorporated by reference to our Registration Statement on Form S-1. (File
No. 333-86843)
(5) Incorporated by reference to our Registration Statement on Form S-1. (File
No. 333-86397)
(6) Incorporated by reference to our Current Report on Form 8-K. (File No.
001-14461)
(b) Reports filed on Form 8-K
No reports of Form 8-K were filed by us during the fourth quarter of the
year ended December 31, 2001.
48
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Entercom Communications Corp.:
We have audited the accompanying consolidated balance sheet of Entercom
Communications Corp. (a Pennsylvania corporation) and subsidiaries as of
December 31, 2001, and the related consolidated statements of operations,
comprehensive income (loss), shareholders' equity, and cash flows for the year
then ended. These financial statements and schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Entercom
Communications Corp. and subsidiaries as of December 31, 2001, and the results
of their operations and their cash flows for the year then ended in conformity
with accounting principles generally accepted in the United States.
As discussed in Note 2 of the notes to consolidated financial statements,
effective January 1, 2001, the Company changed its accounting for derivative
instruments and hedging activities pursuant to the provisions of Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Hedging
Activities."
Our audit was made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index of
financial statements is presented for purposes of complying with the Securities
and Exchange Commission's rules and is not part of the basic financial
statements. This schedule has been subjected to the auditing procedures applied
in the audit of the basic financial statements and, in our opinion, fairly
states in all material respects the financial data required to be set forth
therein in relation to the basic financial statements taken as whole.
ARTHUR ANDERSEN LLP
Philadelphia, Pennsylvania
February 1, 2002 (except with respect to the matter discussed in Note 17, as to
which the date is February 6, 2002)
49
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
Entercom Communications Corp.:
We have audited the accompanying consolidated balance sheet of Entercom
Communications Corp. and subsidiaries as of December 31, 2000, and the related
consolidated statements of operations, comprehensive income (loss),
shareholders' equity, and cash flows for each of the two years in the period
ended December 31, 2000. Our audits also included the financial statement
schedule listed in the Index at Item 14 (a) 2 for each of the two years in the
period ended December 31, 2000. These financial statements and the financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and the
financial statement schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Entercom Communications Corp.
and subsidiaries at December 31, 2000, and the results of their operations and
their cash flows for each of the two years in the period ended December 31,
2000, in conformity with accounting principles generally accepted in the United
States of America. Also, in our opinion, such financial statement schedule for
each of the two years in the period ended December 31, 2000, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
DELOITTE & TOUCHE LLP
Philadelphia, Pennsylvania
February 14, 2001
50
CONSOLIDATED FINANCIAL STATEMENTS OF ENTERCOM COMMUNICATIONS CORP.
ENTERCOM COMMUNICATIONS CORP.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2000 AND 2001
(AMOUNTS IN THOUSANDS)
ASSETS
DECEMBER 31,
---------------------------
2000 2001
----------- -----------
CURRENT ASSETS:
Cash and cash equivalents $ 13,257 $ 10,751
Accounts receivable (net of allowance for doubtful accounts of $2,206
in 2000 and $2,201 in 2001) 70,937 64,319
Prepaid expenses and deposits 3,852 6,521
Prepaid and refundable taxes 705 933
Deferred tax assets 1,499 5,256
----------- -----------
Total current assets 90,250 87,780
----------- -----------
INVESTMENTS 12,116 13,671
----------- -----------
PROPERTY AND EQUIPMENT:
Land, land easements and land improvements 10,082 10,542
Building 10,404 11,631
Equipment 77,409 83,388
Furniture and fixtures 12,125 12,592
Leasehold improvements 8,967 11,514
----------- -----------
118,987 129,667
Accumulated depreciation and amortization (26,532) (37,680)
----------- -----------
92,455 91,987
Capital improvements in progress 1,498 345
----------- -----------
Net property and equipment 93,953 92,332
----------- -----------
RADIO BROADCASTING LICENSES AND OTHER INTANGIBLES
Net of accumulated amortization of $62,952 in 2000 and $96,156 in 2001 1,265,816 1,232,612
----------- -----------
DEFERRED CHARGES AND OTHER ASSETS
Net of accumulated amortization of $2,219 in 2000 and $4,161 in 2001 11,793 12,345
----------- -----------
TOTAL $ 1,473,928 $ 1,438,740
=========== ===========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
51
ENTERCOM COMMUNICATIONS CORP.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2000 AND 2001
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
LIABILITIES AND SHAREHOLDERS' EQUITY
DECEMBER 31,
----------------------------
2000 2001
----------- -----------
CURRENT LIABILITIES:
Accounts payable $ 18,967 $ 10,992
Accrued liabilities:
Salaries and related benefits 6,042 5,446
Interest 1,744 2,689
Other 1,017 6,536
Derivative instruments -- 3,529
Current portion of long-term debt 11 24,389
----------- -----------
Total current liabilities 27,781 53,581
----------- -----------
SENIOR DEBT 461,249 363,934
----------- -----------
OTHER LONG-TERM LIABILITIES
Deferred tax liabilities 124,197 135,974
Derivative instruments -- 3,516
Deferred rent -- 854
----------- -----------
Total other liabilities 124,197 140,344
----------- -----------
Total liabilities 613,227 557,859
----------- -----------
COMPANY-OBLIGATED MANDATORILY REDEEMABLE CONVERTIBLE
PREFERRED SECURITIES OF SUBSIDIARY HOLDING SOLELY CONVERTIBLE
DEBENTURES OF THE COMPANY ("TIDES") 125,000 125,000
----------- -----------
COMMITMENTS AND CONTINGENCIES (NOTE 11)
SHAREHOLDERS' EQUITY:
Preferred Stock $.01 par value; authorized 25,000,000 shares; none issued -- --
Class A common stock $.01 par value; voting; authorized 200,000,000 shares;
issued and outstanding 34,212,384 in 2000 and 34,821,553 in 2001 342 348
Class B common stock $.01 par value; voting; authorized 75,000,000 shares;
issued and outstanding 10,531,805 in 2000 and 2001 105 105
Class C common stock $.01 par value; nonvoting; authorized 50,000,000 shares;
issued and outstanding 495,669 in 2000 5 --
Additional paid-in capital 747,442 751,803
Retained earnings (deficit) (11,850) 5,418
Unearned compensation (329) (201)
Accumulated other comprehensive loss (14) (1,592)
----------- -----------
Total shareholders' equity 735,701 755,881
----------- -----------
TOTAL $ 1,473,928 $ 1,438,740
=========== ===========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
52
ENTERCOM COMMUNICATIONS CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1999, 2000 AND 2001
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
YEARS ENDED DECEMBER 31,
--------------------------------------------
1999 2000 2001
------------ ------------ ------------
NET REVENUES $ 215,001 $ 352,025 $ 332,897
------------ ------------ ------------
OPERATING EXPENSES (INCOME):
Station operating expenses 135,943 206,608 201,257
Depreciation and amortization 21,564 43,475 46,509
Corporate general and administrative expenses 8,100 12,497 12,335
Net expense from time brokerage agreement fees 652 11 --
(Gain) loss on sale of assets (1,986) (41,465) 16
------------ ------------ ------------
Total operating expenses 164,273 221,126 260,117
------------ ------------ ------------
OPERATING INCOME 50,728 130,899 72,780
------------ ------------ ------------
OTHER EXPENSE (INCOME):
Interest expense 11,182 37,760 27,583
Financing cost of Company-obligated mandatorily redeemable
convertible preferred securities of subsidiary holding solely
convertible debentures of the Company 1,845 7,813 7,813
Interest income (3,253) (512) (262)
Equity loss from unconsolidated affiliate -- 1,100 4,706
Net loss on derivative instruments -- -- 912
Loss on investments -- 5,688 2,000
------------ ------------ ------------
Total other expense 9,774 51,849 42,752
------------ ------------ ------------
INCOME BEFORE INCOME TAXES, EXTRAORDINARY
ITEM AND ACCOUNTING CHANGE 40,954 79,050 30,028
INCOME TAXES:
Income Taxes - C Corporation 20,943 31,796 12,194
Income Taxes - S Corporation 125 -- --
Deferred income taxes for conversion from an S to a C Corporation 79,845 -- --
------------ ------------ ------------
Total income taxes 100,913 31,796 12,194
------------ ------------ ------------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM AND
ACCOUNTING CHANGE (59,959) 47,254 17,834
EXTRAORDINARY ITEM:
Debt extinguishment, net of taxes of $612 (918) -- --
------------ ------------ ------------
INCOME (LOSS) BEFORE ACCOUNTING CHANGE (60,877) 47,254 17,834
Cumulative effect of accounting change, net of taxes of $377 -- -- (566)
------------ ------------ ------------
NET INCOME (LOSS) $ (60,877) $ 47,254 $ 17,268
============ ============ ============
53
ENTERCOM COMMUNICATIONS CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1999, 2000 AND 2001
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
YEARS ENDED DECEMBER 31,
--------------------------------------------
1999 2000 2001
------------ ------------ ------------
NET INCOME (LOSS) PER SHARE - BASIC:
Income (loss) before extraordinary item and accounting change $ (1.58) $ 1.05 $ 0.39
Extraordinary item, net of taxes (0.03) -- --
------------ ------------ ------------
Income (loss) before accounting change (1.61) 1.05 0.39
Cumulative effect of accounting change, net of taxes -- -- (0.01)
------------ ------------ ------------
NET INCOME (LOSS) PER SHARE - BASIC $ (1.61) $ 1.05 $ 0.38
============ ============ ============
NET INCOME (LOSS) PER SHARE - DILUTED:
Income (loss) before extraordinary item and accounting change $ (1.58) $ 1.04 $ 0.39
Extraordinary item, net of taxes (0.03) -- --
------------ ------------ ------------
Income (loss) before accounting change (1.61) 1.04 0.39
Cumulative effect of accounting change, net of taxes -- -- (0.01)
------------ ------------ ------------
NET INCOME (LOSS) PER SHARE - DILUTED $ (1.61) $ 1.04 $ 0.38
============ ============ ============
WEIGHTED AVERAGE SHARES:
Basic 37,921,623 45,209,036 45,294,776
============ ============ ============
Diluted 37,921,623 45,613,829 45,994,349
============ ============ ============
PRO FORMA NET INCOME DATA:
Income before income taxes, extraordinary item and accounting change $ 40,954
Pro forma income taxes 20,278
------------
Pro forma income before extraordinary item and accounting change 20,676
Extraordinary item, net of pro forma taxes (918)
------------
PRO FORMA NET INCOME $ 19,758
============
PRO FORMA NET INCOME PER SHARE - BASIC:
Pro forma income before extraordinary item and accounting change $ 0.55
Extraordinary item, net of pro forma taxes (0.03)
------------
NET INCOME PER SHARE - BASIC $ 0.52
============
PRO FORMA NET INCOME PER SHARE - DILUTED:
Pro forma income before extraordinary item and accounting change $ 0.54
Extraordinary item, net of pro forma taxes (0.03)
------------
NET INCOME PER SHARE - DILUTED $ 0.51
============
PRO FORMA WEIGHTED AVERAGE SHARES:
Basic 37,921,623
============
Diluted 38,237,723
============
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
54
ENTERCOM COMMUNICATIONS CORP.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
YEARS ENDED DECEMBER 31, 1999, 2000 AND 2001
(AMOUNTS IN THOUSANDS)
YEARS ENDED DECEMBER 31,
--------------------------------
1999 2000 2001
-------- -------- --------
NET INCOME (LOSS) $(60,877) $ 47,254 $ 17,268
OTHER COMPREHENSIVE INCOME (LOSS), (NET OF TAX
BENEFIT OR PROVISION):
Unrealized income (loss) on investments - net of tax provision of $320 in 1999;
tax benefit of $357 in 2000 and tax provision of $1,024 in 2001 522 (536) 1,536
Unrealized net loss on hedged derivatives from cumulative effect of accounting
change - net of tax benefit of $457 in 2001 -- -- (685)
Unrealized net loss on hedged derivatives - net of tax benefit of $1,619 in 2001 -- -- (2,429)
-------- -------- --------
COMPREHENSIVE INCOME (LOSS) $(60,355) $ 46,718 $ 15,690
======== ======== ========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
55
ENTERCOM COMMUNICATIONS CORP.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1999, 2000 AND 2001
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
COMMON STOCK
----------------------------------------------------------------
CLASS A CLASS B CLASS C
------- ------- -------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
------ ------ ------ ------ ------ ------
Balance, December 31, 1998 11,002,194 $110 10,531,805 $105 -- $ --
Net loss -- -- -- -- -- --
Dividends -- -- -- -- -- --
Transfer of S Corporation retained
earnings to paid-in capital -- -- -- -- -- --
Sale of Common Stock A 11,300,000 113 -- -- -- --
Conversion of Convertible Subordinated
Note to Common Stock A and C 2,327,500 23 -- -- 1,995,669 20
Conversion of Common Stock C to Common Stock A 598,833 6 -- -- (598,833) (6)
Compensation expense related to granting of stock options -- -- -- -- -- --
Issuance of Common Stock A related to an incentive plan 11,682 1 -- -- -- --
Sale of Common Stock A 8,000,000 80 -- -- -- --
Compensation expense related to granting of restricted stock 11,112 -- -- -- -- --
Net unrealized gain on investments -- -- -- -- -- --
---------- ---- ---------- ---- ---------- ----
Balance, December 31, 1999 33,251,321 333 10,531,805 105 1,396,836 14
Net income -- -- -- -- -- --
Conversion of Common Stock C to Common Stock A 901,167 9 -- -- (901,167) (9)
Compensation expense related to granting of stock options -- -- -- -- -- --
Compensation expense related to granting of restricted stock 5,000 -- -- -- -- --
Issuance of Common Stock A related to an incentive plan 28,247 -- -- -- -- --
Exercise of stock options 26,649 -- -- -- -- --
Net unrealized loss on investments -- -- -- -- -- --
---------- ---- ---------- ---- ---------- ----
Balance, December 31, 2000 34,212,384 342 10,531,805 105 495,669 5
Net income -- -- -- -- -- --
Conversion of Common Stock C to Common Stock A 495,669 5 -- -- (495,669) (5)
Compensation expense related to granting of stock options -- -- -- -- -- --
Compensation expense related to granting of restricted stock -- -- -- -- -- --
Issuance of Common Stock A related to an incentive plan 15,807 -- -- -- -- --
Exercise of stock options 97,693 1 -- -- -- --
Net unrealized gain on investments -- -- -- -- -- --
Net unrealized loss on hedged derivatives -- -- -- -- -- --
---------- ---- ---------- ---- ---------- ----
Balance, December 31, 2001 34,821,553 $348 10,531,805 $105 -- $ --
========== ==== ========== ==== ========== ====
ACCUMULATED
OTHER
COMPRE-
ADDITIONAL RETAINED UNEARNED HENSIVE
PAID-IN EARNINGS COMPEN- INCOME
CAPITAL (DEFICIT) SATION (LOSS) TOTAL
-------- --------- -------- ------- ---------
Balance, December 31, 1998 $ -- $ 225,252 $ -- $ -- $ 225,467
Net loss -- (60,877) -- -- (60,877)
Dividends -- (88,113) -- -- (88,113)
Transfer of S Corporation retained
earnings to paid-in capital 135,366 (135,366) -- -- --
Sale of Common Stock A 236,044 -- -- -- 236,157
Conversion of Convertible Subordinated
Note to Common Stock A and C 96,387 -- -- -- 96,430
Conversion of Common Stock C to Common Stock A -- -- -- -- --
Compensation expense related to granting of stock options 402 -- -- -- 402
Issuance of Common Stock A related to an incentive plan 464 -- -- -- 465
Sale of Common Stock A 276,020 -- -- -- 276,100
Compensation expense related to granting of restricted stock 250 -- (192) -- 58
Net unrealized gain on investments -- -- -- 522 522
-------- --------- ----- ------- ---------
Balance, December 31, 1999 744,933 (59,104) (192) 522 686,611
Net income -- 47,254 -- -- 47,254
Conversion of Common Stock C to Common Stock A -- -- -- -- --
Compensation expense related to granting of stock options 528 -- -- -- 528
Compensation expense related to granting of restricted stock 266 -- (137) -- 129
Issuance of Common Stock A related to an incentive plan 899 -- -- -- 899
Exercise of stock options 816 -- -- -- 816
Net unrealized loss on investments -- -- -- (536) (536)
-------- --------- ----- ------- ---------
Balance, December 31, 2000 747,442 (11,850) (329) (14) 735,701
Net income -- 17,268 -- -- 17,268
Conversion of Common Stock C to Common Stock A -- -- -- -- --
Compensation expense related to granting of stock options 408 -- -- -- 408
Compensation expense related to granting of restricted stock -- -- 128 -- 128
Issuance of Common Stock A related to an incentive plan 549 -- -- -- 549
Exercise of stock options 3,404 -- -- -- 3,405
Net unrealized gain on investments -- -- -- 1,536 1,536
Net unrealized loss on hedged derivatives -- -- -- (3,114) (3,114)
-------- --------- ----- ------- ---------
Balance, December 31, 2001 $751,803 $ 5,418 $(201) $(1,592) $ 755,881
======== ========= ===== ======= =========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
56
ENTERCOM COMMUNICATIONS CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999, 2000 AND 2001
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
YEARS ENDED DECEMBER 31,
------------------------------------------
1999 2000 2001
---------- ---------- ----------
OPERATING ACTIVITIES:
Net income (loss) $ (60,877) $ 47,254 $ 17,268
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 21,564 43,475 46,509
Extraordinary items 1,530 -- --
Deferred taxes 89,374 32,993 16,242
Tax benefit on exercise of options -- 239 875
Provision for bad debts 2,000 3,670 3,449
(Gain) loss on dispositions and exchanges of assets (1,986) (41,465) 16
Non-cash stock-based compensation expense 461 657 536
Equity loss from unconsolidated affiliate -- 1,100 4,706
Loss on investments -- 5,688 2,000
Net loss on derivative instruments -- -- 912
Cumulative effect of accounting change, net of tax -- -- 566
Deferred rent -- -- 854
Changes in assets and liabilities (net of effects of acquisitions
and dispositions):
Accounts receivable (14,458) (22,681) 3,169
Prepaid expenses and deposits 1,054 (1,451) (2,669)
Prepaid and refundable income taxes -- (935) 647
Accounts payable and accrued liabilities 2,038 931 (9,837)
---------- ---------- ----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 40,700 69,475 85,243
---------- ---------- ----------
INVESTING ACTIVITIES:
Additions to property and equipment (14,357) (9,532) (9,820)
Acquisition of limited partnership interest (3,138) -- --
Proceeds from sale of property, equipment, intangibles and other assets 2,781 57,196 141
Purchases of radio station assets (763,068) (100,733) --
Proceeds held in escrow from sale of Tampa stations 75,000 -- --
Deferred charges and other assets (656) (2,212) (626)
Purchases of investments (8,000) (9,927) (5,721)
Proceeds from investments -- -- 21
Station acquisition deposits (885) 524 (1,886)
---------- ---------- ----------
NET CASH USED IN INVESTING ACTIVITIES (712,323) (64,684) (17,891)
---------- ---------- ----------
FINANCING ACTIVITIES:
Net proceeds from initial public offering 236,157 -- --
Net proceeds from stock offering 276,100 -- --
Net proceeds from issuance of Company-obligated mandatorily
redeemable convertible preferred securities of subsidiary holding
solely convertible debentures of the Company ("TIDES") 125,000 -- --
Deferred financing expenses related to TIDES and long-term debt (8,683) -- --
Proceeds from issuance of long-term debt 551,000 47,000 7,078
Payments of long-term debt (415,509) (51,511) (80,015)
Proceeds from issuance of common stock related to an incentive plan 464 899 549
Proceeds from the exercise of stock options -- 816 2,530
Dividends paid to S Corporation shareholders (88,113) -- --
---------- ---------- ----------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 676,416 (2,796) (69,858)
---------- ---------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 4,793 1,995 (2,506)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 6,469 11,262 13,257
---------- ---------- ----------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 11,262 $ 13,257 $ 10,751
========== ========== ==========
57
ENTERCOM COMMUNICATIONS CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999, 2000 AND 2001
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
YEARS ENDED DECEMBER 31,
------------------------------------------
1999 2000 2001
---------- ---------- ----------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION -
Cash paid (refunded) during the period for:
Interest $ 11,187 $ 37,201 $ 26,522
========== ========== ==========
Interest on TIDES $ 1,845 $ 7,813 $ 7,813
========== ========== ==========
Income taxes $ 10,851 $ (472) $ 55
========== ========== ==========
SUPPLEMENTAL DISCLOSURES ON NON-CASH INVESTING AND FINANCING ACTIVITIES -
In connection with the Company's initial public offering completed by the
Company during the year ended December 31,1999, the Convertible Subordinated
Note, net of deferred finance charges, was converted into equity in the amount
of $96,400.
In connection with the issuance of certain awards of Restricted Stock for 11,112
shares and 5,000 shares of Class A Common Stock for the years ended December 31,
1999 and 2000, respectively, the Company increased its additional
paid-in-capital by $250 and $266 for the years ended December 31, 1999 and 2000,
respectively.
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
58
ENTERCOM COMMUNICATIONS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION AND ORGANIZATION
Nature of Business - Entercom Communications Corp. (the "Company") is a
radio broadcasting company operating one reportable business segment whose
business is devoted to acquiring, developing and operating radio broadcast
properties throughout the United States. The segment disclosure is consistent
with the management decision-making process that determines the allocation of
resources and the measuring of performance. The Company owns, operates, or
expects to acquire under pending transactions, 100 radio stations in the
following markets: Boston, Seattle, Denver, Portland, Sacramento, Kansas City,
Milwaukee, Norfolk, New Orleans, Greensboro, Buffalo, Memphis, Rochester,
Greenville/Spartanburg, Wilkes-Barre/Scranton, Wichita, Madison, and
Longview/Kelso and Gainesville/Ocala. The pending transactions are described
more fully under Note 11, Commitments and Contingencies.
2. SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation - The accompanying consolidated financial
statements include the accounts of the Company, its former general partnership
interest, its former limited partnership interest (acquired on January 22,
1999), and its subsidiaries, all of which are wholly-owned. All inter-company
transactions and balances have been eliminated in consolidation.
Management's Use of Estimates - The preparation of consolidated
financial statements, in accordance with generally accepted accounting
principles, requires the Company to make estimates and assumptions that affect
the reported amounts of assets and liabilities, and the disclosure of contingent
assets and liabilities, as of the date of the consolidated financial statements,
and the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Income Taxes - The Company accounts for income taxes under Statement of
Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes".
SFAS No. 109 requires the liability method of accounting for deferred income
taxes. Deferred income taxes are recognized for all temporary differences
between the tax and financial reporting bases of the Company's assets and
liabilities based on enacted tax laws and statutory tax rates applicable to the
periods in which the differences are expected to affect taxable income.
For periods prior to January 28, 1999, the Company was taxed as an S
Corporation for federal and certain state income taxes. As an S Corporation, the
Company's shareholders were obligated for payment of the income taxes on their
proportionate share of the Company's taxable income. Effective on January 28,
1999, in connection with the Company's initial public offering (the "IPO"), the
shareholders' revoked their S Corporation election with the Internal Revenue
Service. As a result, all of the Company's taxable income subsequent to January
27, 1999 was taxed to the Company. Concurrent with and as a result of the
revocation of its S Corporation election and its conversion to a C Corporation,
the Company recorded a non-cash deferred income tax expense of approximately
$79.8 million to reflect the cumulative effect of temporary differences between
the tax and financial reporting bases of the Company's assets and liabilities
attributable to the period prior to its conversion to a C Corporation. Upon the
closing on the acquisition of the radio properties from Sinclair on December 16,
1999, the Company recorded a non-cash deferred income tax expense of
approximately $3.9 million. This amount reflected an increase in the Company's
effective tax rate from 38% to 40% and its effect on previously reported
temporary differences between the tax and financial reporting bases of the
Company's assets and liabilities.
Property and Equipment - Property and equipment are carried at cost.
Major additions or improvements are capitalized, while repairs and maintenance
are charged to expense. Upon sale or retirement, the related cost and
accumulated depreciation are removed from the accounts and any gain or loss is
recognized in the statement of operations. Depreciation and amortization on
property and equipment is determined on a straight-line basis. The estimated
useful lives for depreciation are as follows:
Land improvements............................................... 10 years
Building........................................................ 20 years
Equipment....................................................... 5-20 years
Furniture and fixtures.......................................... 5-10 years
Leasehold improvements ......................................... Lease term
For the years ended December 31, 1999, 2000 and 2001, the depreciation
and amortization expense for property and equipment was $5.9 million,
$10.0 million and $11.3 million, respectively.
59
Revenue Recognition - Revenue from the sale of commercial broadcast
time to advertisers is recognized when the commercials are broadcast. Revenues
presented in the financial statements are reflected on a net basis, after the
deduction of advertising agency fees by the advertising agencies, usually at a
rate of 15% of gross revenues. Promotional fees are recognized as services are
rendered. All revenue is recognized in accordance with the Securities and
Exchange Commission's ("SEC") Staff Accounting Bulletin, SAB 101, Revenue
Recognition in Financial Statements, which summarizes the SEC's views in
applying generally accepted accounting principles to revenue recognition.
Concentration of Risk - In 2001, Seattle generated approximately 22% of
the Company's net revenues.
Concentration of Credit Risk - The Company's revenues and accounts
receivable relate primarily to the sale of advertising within the radio
stations' broadcast areas. Credit is extended based on an evaluation of the
customers' financial condition, and generally, collateral is not required.
Credit losses are provided for in the financial statements and consistently have
been within management's expectations. The Company also maintains deposit
accounts with financial institutions. At times, such deposits may exceed FDIC
insurance limits.
Impairment of Long-Lived Assets - In accordance with SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of", the Company evaluates the recoverability of its long-lived
assets which include broadcasting licenses, property and equipment, other
intangibles, deferred charges, and other assets whenever events or changes in
circumstance indicate that the carrying amount may not be recoverable. If
indications are that the carrying amount of the asset is not recoverable, the
Company will estimate the future cash flows expected to result from use of the
asset and its eventual disposition. If the sum of the expected future cash flows
(non-discounted and without interest charges) is less than the carrying amount
of the asset, the Company would recognize an impairment loss. The impairment
loss recognized would be measured as the amount by which the carrying amount of
the asset exceeds its estimated fair value. As of December 31, 2001, management
believes that no impairment losses are required.
Deferred Charges - The costs related to the issuance of debt are
capitalized and accounted for as amortization expense over the lives of the
related debt. During the years ended December 31, 1999, 2000 and 2001, the
Company recognized amortization of debt issuance costs, exclusive of
extraordinary expense for the extinguishment of debt, of $0.3 million, $0.9
million, and $0.9 million, respectively, which amounts are included in
amortization expense in the accompanying consolidated statements of operations.
Corporate General and Administrative Expense - Corporate general and
administrative expense consists of corporate overhead costs not specifically
allocable to any of the Company's individual business properties.
Net Expense from Time Brokerage Agreement ("TBA") Fees - Net expense
from TBA fees consists of fees paid by the Company under agreements which permit
an acquirer to program and market stations prior to acquisition. The Company
sometimes enters into such agreements prior to the consummation of station
acquisitions and dispositions. Under the TBA's relating to the Company's
acquisitions, the expense from TBA fees was approximately $0.7 million for the
year ended December 31, 1999. Amounts reflected in net revenues and station
expenses from operations under TBA's, excluding expense from TBA fees, were
approximately $1.7 million and $1.2 million, $0.9 million and $0.6 million and
$0.2 million and $0.1 million for the years ended December 31, 1999, 2000 and
2001, respectively.
Barter Transactions - The Company provides advertising broadcast time
in exchange for certain products, supplies, and services. The terms of the
exchanges generally permit the Company to preempt such broadcast time in favor
of advertisers who purchase time on regular terms. The Company includes the
value of such exchanges in both broadcasting revenues and operating costs and
expenses. Barter valuation is based upon management's estimate of fair value of
the products, supplies and services received. For the years ended December 31,
1999, 2000 and 2001, barter transactions amounted to approximately $1.8 million,
$3.2 million and $3.8 million, respectively.
Cash and Cash Equivalents - Cash and cash equivalents consist primarily
of amounts held on deposit with financial institutions, including investments
held in financial institutions, in immediately available money market accounts.
Derivative Financial Instruments - Periodically, the Company enters
into derivative financial instruments, including interest rate exchange
agreements ("Swaps") and interest rate collar agreements ("Collars") to manage
its exposure to fluctuations in interest rates as required under the Company's
bank facility. Under a Swap agreement, the Company pays a fixed rate on the
notional amount to a bank and the bank pays to the Company a variable rate on
the notional amount equal to a base LIBOR rate. A rate collar agreement
establishes two separate agreements: an upper limit or "cap" for the base LIBOR
rate and a lower limit or "floor" for the base LIBOR rate. The Company's
derivative activities, all of which are for purposes other than trading, are
initiated within the guidelines of corporate risk-management policies. As
derivative contracts are initiated, the Company designates the instruments
individually as hedges of underlying financial instruments or anticipated
transactions. Management reviews the correlation and effectiveness of its
derivatives on a periodic basis. Any fees associated with these
60
derivatives are amortized over their term. Under these derivatives, the
differentials to be received or paid are recognized as an adjustment to interest
expense over the life of the contract. Gains and losses on termination of these
instruments are recognized as interest expense when terminated. The fair value
of these instruments and the changes in the fair value, as a result of changes
in market interest rates along with a decline in the remaining term of each of
the transactions, are recognized in these consolidated financial statements in
accordance with SFAS No. 133.
Effective January 1, 2001, the Company adopted SFAS No. 133
"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
which 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 for the year ended December 31, 2001:
(1) a $0.4 million loss under the cumulative effect of accounting change as an
accumulated transition adjustment and (2) a $1.5 million loss under loss 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 for the year ended December 31, 2001: (1)
the ineffective amount of the hedges to the statement of operations as a $0.6
million loss under the cumulative effect of accounting change as an accumulated
transition adjustment and as a $0.6 million gain under loss on derivative
instruments and (2) the effective amount of the hedges to the statement of other
comprehensive income as a $1.1 million loss under the cumulative effect of
accounting change as an accumulated transition adjustment and as a $4.1 million
loss to unrealized loss on hedged derivatives. The Company expects that any
reclassification to earnings during the next twelve months from the transition
adjustments that were recorded in other comprehensive income will not be
material.
Incentive Compensation Plans - The Company accounts for stock
compensation in accordance with the requirements of Accounting Principles Board
("APB") Opinion No. 25, "Accounting for Stock Issued to Employees" and related
Interpretations. SFAS No. 123, "Accounting for Stock-Based Compensation",
requires disclosure of the pro forma effects on net income and net income per
share had the fair value recognition provisions of SFAS No. 123 been adopted
(See Note 15). The Company also adopted Financial Accounting Standards Board
Interpretation No. 44, "Accounting for Certain Transactions involving Stock
Compensation", effective July 1, 2000.
Investments - Investments are composed of equity securities recorded
in the financial statements in the amounts of $12.1 million and $13.7 million as
of December 31, 2000 and December 31, 2001, respectively (see Note 5). The
Company's investment strategy is to seek long-term strategic investments to
enhance its core business. The Company is currently limited to an initial
aggregate investment, at cost, of $50.0 million under its existing Bank
Facility. The Company accounts for these investments as follows:
Investments Carried Under the Equity Method - For those investments
where the Company has the ability to exercise significant influence over the
operating and financial policies of the investee, the investment is accounted
for under the equity method of accounting in accordance with APB No 18, "The
Equity Method of Accounting for Investments in Common Stock."
Investments Carried at Fair Value or Cost - For those investments
where the Company does not have a significant influence, the investments are
carried at fair value based upon quoted market prices or historical cost when
quoted market prices are unavailable. The net unrealized income or losses on
these investments, net of tax, are reported in the statements of comprehensive
income (loss) and as a separate component of shareholders' equity. For the years
ended December 31, 1999, 2000 and 2001, the amount of unrealized income on these
investments was $0.5 million (net of income tax provision of $0.3 million), the
amount of unrealized loss on these investments was $0.5 million (net of income
tax benefit of $0.4 million) and the amount of the unrealized income on these
investments was $1.5 million (net of income tax provision of $1.0 million),
respectively. When the Company has determined that the value of the investment
is other than temporarily impaired, the
61
Company recognizes through the statement of operations a loss on investment. For
the year ended December 31, 1999, there were no realized losses on investments.
For the years ended December 31, 2000 and 2001, the Company recorded realized
losses of $3.4 million (net of an income tax benefit of $2.2 million) and $1.2
million (net of an income tax benefit of $0.8 million), respectively, in the
statement of operations under loss on investments.
Intangible Assets - Intangible assets consist primarily of Federal
Communications Commission broadcast licenses and are amortized on a
straight-line basis over 40 years. In June 2001, the Financial Accounting
Standards Board ("FASB") issued Statement of Accounting Standards ("SFAS") No.
142, "Goodwill and Other Intangible Assets". The effect of this statement as
described below under recent accounting pronouncements, will have a material
impact on the Company's financial position and results of operations.
New Accounting Pronouncements - In June 2001, the FASB issued SFAS No.
141, "Business Combinations." Statement No. 141 addresses financial accounting
and reporting for business combinations and supersedes Accounting Principle
Board ("APB") Opinion No. 16, "Business Combinations" and FASB Statement No. 38,
"Accounting for Preacquisition Contingencies of Purchased Enterprises."
Statement No. 141 is effective for all business combinations initiated after
June 30, 2001 and eliminates the pooling-of-interest method of accounting for
business combinations except for qualifying business combinations that were
initiated prior to July 1, 2001. Statement No. 141 also changes the criteria to
recognize intangible assets apart from goodwill. The Company adopted this
Statement on July 1, 2001. The Company has historically used the purchase method
to account for all business combinations and the Company does not believe
adoption of this Statement will materially impact the Company's financial
position, cash flows or results of operations.
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other
Intangible Assets" that requires that goodwill and certain intangibles will not
be amortized. Instead, these assets will be reviewed annually 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 applies to goodwill and certain intangible assets acquired
prior to June 30, 2001 and will be adopted by the Company on January 1, 2002. We
expect that adoption of this accounting standard will have the impact of
reducing the Company's non-cash amortization expense for goodwill and
broadcasting licenses and will have a material impact on the Company's financial
statements as the amount previously recorded for the amortization of goodwill
and broadcasting licenses is significant. For the years ended December 31, 1999,
2000 and 2001, the amounts of amortization expense for goodwill and broadcasting
licenses were $0.1 million and $14.8 million, $0.1 million and $32.0 million and
$0.1 million and $33.1 million, respectively. The required impairment tests of
goodwill and broadcasting licenses may result in future period write-downs.
In order to complete the transitional assessment of goodwill and
non-amortizing intangible assets impairment, the Company will need to: (1)
identify the reporting units; (2) determine the carrying value of each reporting
unit; and (3) determine the fair value of each reporting unit. The Company will
have up to six months from the date of adoption to determine the fair value of
each reporting unit and compare it to the reporting unit's carrying amount. To
the extent a reporting unit's carrying amount exceeds its fair value, an
indication exists that the reporting unit's goodwill and non-amortizing
intangible assets may be impaired and the Company must perform the second step
of the transitional impairment test. In the second step, the Company must
compare the implied fair value of the reporting unit's goodwill, determined by
allocating the reporting unit's fair value to all of its assets and liabilities
in a manner similar to a purchase price allocation in accordance with SFAS No.
141, to its carrying amount, both of which would be measured as of the date of
adoption. This second step is required to be completed as soon as possible, but
no later than the end of the year of adoption. Any transitional impairment loss
will be recognized as the cumulative effect of a change in accounting principle
in the Company's consolidated statement of operations. As of the date of
adoption, the Company has net unamortized goodwill and unamortized broadcasting
licenses in the amounts of $4.2 million and $1,228.4 million, respectively. The
Company has not yet determined what the effect of the impairment tests will be
on the Company's financial position, cash flows or results of operations.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations" that applies to legal obligations associated with the
retirement of a tangible long-lived asset that results from the acquisition,
construction, or development and/or the normal operation of a long-lived asset.
Under this standard, guidance is provided on measuring and recording the
liability. Adoption of this Statement by the Company will be effective on
January 1, 2003. The Company does not believe that the adoption of this
Statement will materially impact the Company's financial position, cash flows or
results of operations.
In August 2001, the FASB issued SFAS No. 144 "Accounting for the
Impairment or Disposal of Long-Lived Assets" that addresses financial accounting
and reporting for the impairment or disposal of long-lived assets. While SFAS
No. 144 supercedes SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of" it removes goodwill from its
scope and retains the requirements of SFAS No. 121 regarding the recognition of
impairment losses on long-lived assets held for use. SFAS No. 144 also
supercedes the accounting and reporting provisions of APB Opinion No. 30,
"Reporting the Results of Operations-Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
events and Transactions" for the disposal of a segment of a business. However,
it retains the requirement in Opinion 30 to report separately discontinued
operations and extends that reporting to a component of an entity that either
has been disposed of (by sale, abandonment, or in a distribution to owners) or
62
is classified as held for sale. SFAS No. 144 is effective for fiscal years
beginning after December 15, 2001 and interim periods within those fiscal years.
The Company is in the process of evaluating the impact that adoption of
SFAS No. 144 may have on the Company's financial position, cash flows or results
of operations. However, such impact, if any, is not known or reasonably
estimable at this time.
Reclassifications - Certain reclassifications have been made to the
prior years' financial statements to conform to the current year presentation.
3. ACQUISITIONS, DIVESTITURES, JOINT SALES AGREEMENT AND PRO FORMA SUMMARY
The Company consummated acquisitions of radio stations under the
purchase method of accounting (unless otherwise noted below), and the purchase
price, including transaction costs, was allocated to the assets based upon their
respective fair values as determined as of the purchase dates. Gains on exchange
transactions are determined based on the excess of the estimated fair value of
the station assets acquired, plus any cash received, over the Company's carrying
basis in the station assets exchanged plus cash paid by the Company, all less
transaction costs.
ACQUISITIONS AND DIVESTITURES FOR THE YEAR ENDED DECEMBER 31, 1999
On January 22, 1999, in a related party transaction, a wholly-owned
subsidiary of the Company purchased a 1% limited partnership interest in ECI
License Company, L.P. ("Partnership") for $3.4 million in cash. ECI License
Company, L.P. was a limited partnership in which the Company was the general
partner, owning a 99% general partnership interest. The Partnership owned
certain of the Company's FCC licenses. The acquisition effectively gave the
Company a 100% interest in its FCC licenses. On December 31, 1999, the
Partnership was merged into the Company and the Partnership along with the
entity holding the 1% limited partnership interest was dissolved.
On February 22, 1999, the Company acquired the assets of WAAF-FM and
WQSX-FM in Boston and WVEI-AM (formerly WWTM-AM) in Worchester from CBS for
$58.0 million in cash. The Company incurred transaction costs of approximately
$0.2 million related to this acquisition. Broadcasting licenses and other
intangibles in the amount of $55.7 million were recorded in connection with this
transaction. The Company had operated these stations under a TBA since September
1998.
On June 11, 1999, the Company acquired the assets of KXTR-AM (formerly
KKGM-AM), serving the Kansas City, Kansas/Missouri radio market from Mortenson
Broadcasting Company of Canton, LLC for the sum of $2.8 million in cash.
Broadcasting licenses and other intangibles in the amount of $2.5 million were
recorded in connection with this transaction.
On August 20, 1999, the Company entered into an agreement with Sinclair
Broadcast Group ("Sinclair") which consisted of two separate asset purchase
agreements for the purchase of: (1) Sinclair's 42 stations in eight markets and
other assets for which the purchase price was $702.5 million ("First Sinclair
Transaction") and (2) Sinclair's four Kansas City stations for which the
purchase price was $122.0 million ("Sinclair Kansas City"). On December 16,
1999, under the First Sinclair Transaction, the Company acquired 41 of
Sinclair's radio properties for a purchase price of $700.4 million in cash. This
transaction included 26 FM and 15 AM radio stations in eight markets including
Milwaukee, New Orleans, Memphis, Buffalo, Norfolk, Greensboro/Winston-Salem/High
Point, Greenville/Spartanburg and Wilkes-Barre/Scranton. The Company also began
operations at WKRF-FM in the Wilkes-Barre/Scranton market on December 16, 1999
under a TBA. In addition, the Company was responsible for certain capital
expenditures of approximately $2.5 million, for which the Company fulfilled its
obligation as of December 31, 2000. In connection with the First Sinclair
Transaction, the Company recorded broadcasting licenses and other intangibles in
the amount of $668.8 million and incurred transaction costs in the amount of
$1.7 million. On July 20, 2000, the Company completed the acquisition of
Sinclair Kansas City and on November 3, 2000, the Company completed the
acquisition of WKRF-FM (see below).
ACQUISITIONS AND DIVESTITURES FOR THE YEAR ENDED DECEMBER 31, 2000
On February 23, 2000, the Company acquired from the Wichita Stations
Trust ("Wichita Trust") a trust formed for the benefit of Capstar Broadcasting
Corporation as required by federal regulations, all of the assets related to
radio stations KEYN-FM, KFBZ-FM (formerly KWCY-FM, formerly KWSJ-FM), KQAM-AM,
KFH-AM and KNSS-AM, serving the Wichita, Kansas radio for $8.0 million in cash.
Broadcasting licenses and other intangibles in the amount of $6.3 million were
recorded in connection with this transaction. With the acquisition of the two
radio stations described below, the Company owns 7 radio stations serving the
Wichita, Kansas radio market.
On May 31, 2000, the Company acquired under two separate asset purchase
agreements from Gary and Ann Violet, substantially all of the assets related to
radio stations KWSJ-FM (formerly KAYY-FM) and KDGS-FM, serving the Wichita,
Kansas radio market for a total of $5.1 million in cash. Broadcasting licenses
and other intangibles in the amount of $4.8 million were recorded in connection
with this transaction.
63
On July 20, 2000, the Company acquired from Sinclair, the assets of
Sinclair Kansas City, consisting of KCFX-FM, KQRC-FM, KCIY-FM and KRBZ-FM
(formerly KXTR-FM), serving the Kansas City radio market, where the Company
already owned seven radio stations, for $126.6 million in cash. Including this
transaction, the Company completed the acquisition of 45 of 46 radio stations
from Sinclair. In connection with the purchase of the four Kansas City radio
stations, federal broadcasting regulations required the Company to divest three
stations in the Kansas City radio market. To comply with these regulations, on
July 20, 2000, the Company sold to Susquehanna Radio Corp. ("Susquehanna") three
stations for cash (see below). The Company did not record the purchase of assets
for KCFX-FM as this Kansas City radio station was acquired from Sinclair and
sold to Susquehanna on the same date. Broadcasting licenses and other
intangibles in the amount of $69.5 million and transaction costs in the amount
of $0.6 million were recorded in connection with this transaction.
In connection with the divestiture of the Kansas City radio stations
required by federal broadcasting regulations, on July 20, 2000, the Company sold
to Susquehanna for $113.0 million in cash, the assets of three radio stations
serving the Kansas City radio market, KCMO-AM, KCMO-FM and KCFX-FM. The Company
recorded a gain of $41.5 million from the sale of KCMO-AM and KCMO-FM, radio
stations previously owned by the Company. No gain or loss was recognized from
the July 20, 2000, purchase and sale of KCFX-FM.
On August 31, 2000, the Company acquired from Woodward Communications,
Inc. the assets of WOLX-FM, WMMM-FM and WBZU-FM (formerly WYZM-FM), serving the
Madison, Wisconsin radio market for a purchase price of $14.6 million in cash.
Broadcasting licenses and other intangibles in the amount of $12.8 million were
recorded in connection with this transaction.
On October 2, 2000, the Company upgraded WSKY-FM, serving the
Gainesville/Ocala, Florida radio market, to a Class C-2 license from a Class A
license at a cost of $0.9 million in cash. This upgrade, together with the May
7, 1998 purchase of assets of WSKY-FM from Gator Broadcasting Co. ("Gator") for
$2.0 million in cash, completed the transaction with Gator.
On November 3, 2000, the Company completed the acquisition from
Sinclair of all of the assets related to radio station WKRF-FM, serving the
Wilkes-Barre/Scranton, Pennsylvania radio market, where the Company already owns
eight radio stations, for $0.6 million in cash. With this acquisition, the
Company completed the purchase of all of the radio stations under agreement with
Sinclair.
JOINT SALES AGREEMENT
Effective July 1, 1997, the Company entered into a Joint Sales
Agreement ("JSA") with Classic Radio, Inc. ("Classic"), whereby the Company
serves as the exclusive sales agent for the Classic-owned KING-FM radio station
located in Seattle Washington. This agreement is a continuation of a
relationship under a prior JSA that expired on June 30, 1997. Under the JSA,
which continues through June 30, 2002, the Company receives all revenues from
the sale of advertising time broadcast on KING-FM and is required to pay a
monthly fee to Classic based upon calculations as defined in the agreement.
Under the terms of the JSA, the Company is responsible for all costs incurred in
selling the advertising time. Classic is responsible for all costs incurred in
operating the station. Net revenues and expenses incurred by the Company under
this contract during the years ended December 31, 1999, 2000 and 2001, were $3.9
million and $2.3 million, $4.0 million and $2.4 million and $3.3 million and
$4.2 million, respectively. On February 1, 2002, the Company entered into an
agreement with Classic to terminate the JSA effective February 28, 2002.
UNAUDITED PRO FORMA SUMMARY
The following unaudited pro forma summary presents the consolidated
results of operations as if all acquisitions, divestitures and changes to sports
contracts which occurred during the period of January 1, 2000 through December
31, 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 the acquisitions which would have been
incurred had such acquisitions and other transactions occurred as of January 1,
2000. These unaudited pro forma results have been prepared for comparative
purposes only and do not purport to be indicative of what would have occurred
had the acquisition and other transactions been made as of that date or results
which may occur in the future.
64
YEARS ENDED DECEMBER 31,
------------------------
2000 2001
---- ----
(AMOUNTS IN THOUSANDS, EXCEPT PER
SHARE DATA)
PRO FORMA PRO FORMA
Net revenues $ 353,204 $ 332,398
========= =========
Income before (gain) loss on sales of assets and accounting change 25,944 23,214
========= =========
Cumulative effect of accounting change, net of taxes -- (566)
========= =========
Net income 46,750 18,068
========= =========
Net income per share - basic 1.03 0.40
========= =========
Net income per share - diluted $ 1.02 $ 0.39
========= =========
4. RADIO BROADCASTING LICENSES AND OTHER INTANGIBLES
Radio broadcasting licenses and other intangibles consist of the
following:
DECEMBER 31,
------------
2000 2001
---- ----
(AMOUNTS IN THOUSANDS)
Broadcast licenses $ 1,323,985 $ 1,323,985
Other intangibles 4,783 4,783
----------- -----------
Subtotal 1,328,768 1,328,768
Less accumulated amortization (62,952) (96,156)
----------- -----------
Total radio broadcasting licenses and other intangibles $ 1,265,816 $ 1,232,612
=========== ===========
5. INVESTMENTS
The following table summarizes the Company's equity investment
in an unconsolidated affiliate, Local Media Internet Venture, Inc. ("LMIV") and
other investments carried at the lower of fair value or cost:
INVESTMENTS
-----------
LMIV OTHER TOTAL
---- ----- -----
(AMOUNTS IN THOUSANDS)
Balance as of December 31, 1999 $ -- $ 9,870 $ 9,870
Acquisition of new investments 3,008 6,733 9,741
Additional investment -- 137 137
Fair value or cost adjustments -- (6,532) (6,532)
Equity loss from unconsolidated affiliate (1,100) -- (1,100)
-------- -------- --------
Balance as of December 31, 2000 1,908 10,208 12,116
Additional investment 5,711 10 5,721
Fair value or cost adjustments -- 560 560
Distributions (20) (20)
Equity loss from unconsolidated affiliate (4,706) -- (4,706)
-------- -------- --------
Balance as of December 31, 2001 $ 2,913 $ 10,758 $ 13,671
======== ======== ========
65
During the year ended December 31, 2001, the Company recorded a
reduction of $2.0 million in the valuation of holdings in the stock of an
unrelated Internet company. This amount is reflected as a loss on investments in
the statement of operations.
During the year ended December 31, 2000, the Company acquired a 32%
interest in LMIV, a company formed with other radio broadcasters in a venture
whose purpose is to enhance the synergies and opportunities between radio and
the Internet. As of December 31, 2000 and 2001, the Company's cumulative
investment in LMIV was $3.0 million and $8.7 million, respectively, and for the
years ended December 31, 2000 and 2001, the Company recorded losses of $0.7
million, and $2.8 million, net of income tax benefits of $0.4 million and $1.9
million, respectively, in the statement of operations under equity loss from
unconsolidated affiliate.
This investment is accounted for under the equity method of accounting.
The Company's equity interest in operating losses of this operation is recorded
in the statement of operations as "Equity loss from unconsolidated affiliate".
6. DEFERRED CHARGES AND OTHER ASSETS
Deferred charges and other assets consist of the following:
DECEMBER 31,
------------
2000 2001
---- ----
(AMOUNTS IN THOUSANDS)
Debt issuance costs less accumulated amortization of $932
and $1,796 in 2000 and 2001, respectively $ 7,946 $ 7,081
Software costs less accumulated amortization of $667
and $1,635 in 2000 and 2001, respectively 2,084 1,726
Station deposits and acquisition costs 688 2,574
Leasehold premium less accumulated amortization of $461
and $567 in 2000 and 2001, respectively 1,062 955
Other deferred charges less accumulated amortization of $9
and $14 in 2000 and 2001, respectively 13 9
------- -------
$11,793 $12,345
======= =======
7. INCOME TAXES
Income tax expense, is summarized as follows:
YEARS ENDED DECEMBER 31,
------------------------
1999 2000 2001
---- ---- ----
(AMOUNTS IN THOUSANDS)
Federal $ 9,083 $ (967) $ (3,269)
State 1,844 (230) (779)
-------- -------- --------
Total current 10,927 (1,197) (4,048)
====== ====== ======
Federal 78,202 26,643 12,811
State 11,172 6,350 3,054
-------- -------- --------
Total deferred 89,374 32,993 15,865
-------- -------- --------
Total income taxes $100,301 $ 31,796 $ 11,817
======== ======== ========
Approximately $0.6 million of benefit for income taxes was allocated to
an extraordinary item in connection with the early extinguishment of debt in the
accompanying consolidated statements of operations for the year ended December
31, 1999
66
(Actual and Pro Forma). Approximately $0.4 million of benefit for income taxes
was allocated to a cumulative effect of accounting change in the accompanying
consolidated statements of operations for the year ended December 31, 2001.
The Company revoked its S Corporation election on January 28, 1999. The
last day the Company was taxed as an S Corporation was January 27, 1999. As a
result of the revocation of its S Corporation election and conversion to a C
Corporation, the Company recorded a non-cash deferred income tax expense of
approximately $79.8 million to reflect the cumulative effect of temporary
differences between the tax and financial reporting bases of the Company's
assets and liabilities attributable to the period prior to its conversion to a C
Corporation.
Upon closing the acquisition of radio properties from Sinclair on
December 16, 1999, the Company recorded a non-cash deferred income tax expense
of approximately $3.9 million. This amount reflects an increase in the Company's
effective tax rate from 38% to 40% and its effect on previously reported
temporary differences between the tax and financial reporting bases of the
Company's assets and liabilities as a result of adding facilities in additional
states which on average have higher income tax rates. The adjustment is
reflected in results for the year ended December 31, 1999.
Income tax expense computed using the United States federal statutory
rates is reconciled to the reported income tax provisions as follows:
YEARS ENDED DECEMBER 31,
------------------------
1999 2000 2001
---- ---- ----
(AMOUNTS IN THOUSANDS)
Federal statutory income tax rate 35% 35% 35%
Computed tax expense at federal statutory rates
on income before income taxes $ 14,344 $ 27,668 $ 10,180
State income taxes (net of federal tax benefit) 1,834 3,953 1,454
S Corporation termination and conversion to a C Corporation 79,845 -- --
Deferred state income tax rate adjustment 3,891 -- --
Nondeductible expenses and other 387 175 183
-------- -------- --------
Income tax provision $100,301 $ 31,796 $ 11,817
======== ======== ========
The tax effects of significant temporary differences that compromise
the net deferred tax assets and liabilities are as follows:
DECEMBER 31,
------------
2000 2001
---- ----
(AMOUNTS IN THOUSANDS)
Current deferred tax assets (liabilities):
Employee benefits $ 460 $ 1,215
Provision for doubtful accounts 454 452
Net operating loss carry-forwards -- 2,261
Derivative financial instruments -- 1,412
Other 585 (83)
--------- ---------
Total net current assets 1,499 5,256
--------- ---------
Noncurrent deferred tax assets (liabilities):
Property and equipment and intangibles (125,234) (145,368)
Employee benefits 1,037 --
Investments -- 3,722
Net operating loss carry-forwards -- 4,103
Option exercises and restricted stock -- 942
Derivative financial instruments -- 392
Other -- 235
67
<Table>
--------- ---------
Total net non-current liabilities (124,197) (135,974)
--------- ---------
Net deferred tax liabilities $(122,698) $(130,718)
========= =========
</Table>
The Company has net operating loss carryforwards for federal and state
income tax filing purposes of $15.9 million as of December 31, 2001, that begin
to expire in 2019 if not utilized. The tax benefit of these carryforwards is
included in the net deferred tax liabilities balance as of December 31, 2001.
8. DEBT
(A) SENIOR DEBT
Senior debt consists of the following:
DECEMBER 31,
------------
2000 2001
---- ----
(AMOUNTS IN THOUSANDS)
Notes payable, due September 30, 2007 $ 461,000 $ 388,000
--------- ---------
Other 260 323
Total 461,260 388,323
Amounts due within one year (11) (24,389)
--------- ---------
$ 461,249 $ 363,934
========= =========
The Company's Credit Agreement was refinanced on December 16, 1999,
under a new bank credit agreement (the "Bank Facility") with Banc of America
Securities LLC as the lead and syndication agent and Key Corporate Capital Inc.,
as administrative agent. The Bank Facility 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"), which was fully drawn as of September 29, 2000. The Bank Facility is
secured by (1) a pledge of 100% of the Company's capital stock and other equity
interest in all subsidiaries; (2) a security interest in all present and future
assets and properties, and (3) a security interest in all major tangible and
intangible personal property assets of the Company and any future subsidiaries
as well as a negative pledge on all real property. Under the terms of the Bank
Facility, the Company is restricted from the distribution of any dividends. The
Bank Facility requires the Company to comply with certain financial covenants
and leverage ratios that are defined terms within the agreement and that include
but are not limited to the following: (1) Total Debt to Operating Cash Flow, (2)
Operating Cash Flow to Interest Expense, (3) Operating Cash Flow to Pro Forma
Debt Service and (4) Operating Cash Flow to Fixed Charges. Management believes
the Company is in compliance with all of the terms of the agreement.
The availability under the Revolver and Term Loan, which mature on
September 30, 2007, reduces on a quarterly basis beginning September 30, 2002 in
quarterly amounts that vary from $12.2 million to $16.3 million for each Loan.
The Company has the option to elect to pay interest at a rate equal to LIBOR (in
increments with durations of 1, 2, 3 or 6 months) plus 0.75% or the prime rate.
Upon the occurrence of certain events, the Company's borrowing costs can
increase to a maximum of LIBOR plus 2.375% or prime plus 1.125%. The interest
payable on LIBOR rate is payable at the end of the selected duration but not
less frequently than every three months and on prime rates is payable at the end
of each calendar quarter. The weighted average interest rate under the Credit
Agreement at December 31, 2000 and 2001 was 7.7% and 2.8%, respectively. The
Company also pays a commitment fee that varies depending on certain financial
covenants and the amount of the unused commitment, from 0.25% or 0.5% per annum,
on the average unused balance of the Bank Facility. The amount available under
the $650.0 million Bank Facility as of December 31, 2001, was $255.8 million. In
connection with a recent amendment to the Bank Facility, the period through
which the Company may solicit incremental loans up to $350.0 million, thereby
increasing the Bank Facility to a total of $1.0 billion, has been extended to
December 31, 2002. This incremental borrowing is subject to syndicate approval
and is governed under the same terms as the existing Bank Facility.
(B) INTEREST RATE TRANSACTIONS
The Company enters into interest rate transactions to diversify its
risk associated with interest rate fluctuations against the variable debt
discussed in 8 (A) above and to comply with certain covenants under the Bank
Facility. These transactions are accounted for in accordance with SFAS No. 133
as described in Note 2. Under these transactions, the Company agrees with other
68
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 December 31, 2000 and 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.
(C) AGGREGATE PRINCIPAL MATURITIES
Aggregate principal maturities on Senior debt are as follows (amounts
in thousands):
Years ending December 31:
2002 $ 24,389
2003 56,890
2004 65,016
2005 65,018
2006 79,269
2007 through 2021 97,741
--------
Total $388,323
========
The extraordinary charge for the year ended December 31, 1999, is the
result of a write-off of $0.9 million, net of a pro forma tax benefit, of
unamortized finance charges resulting from the early extinguishment of long-term
debt.
(D) OUTSTANDING LETTER OF CREDIT
The Company is required to maintain a letter of credit in connection
with a sports contract that expires on November 15, 2005. As of December 31,
2001, the amount of the outstanding letter of credit was $6.2 million.
9. 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 security. The
net proceeds to the Company after deducting underwriting discounts and other
offering expenses, was $120.5 million. Subject to certain deferral provisions,
the holder of the TIDES, Entercom Communications Capital Trust ("trust"), a
wholly-owned subsidiary of the Company, 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 ("Debenture"). Upon the due
date of the Debentures, the Company will pay the outstanding amount due to the
trust and the trust will redeem all of the outstanding TIDES. 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's sole assets
consists 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 amounts 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. The Company completed this offering on
October 6, 1999, and issued 2,500,000 TIDES at $50.00 per TIDES. As of December
31, 2001, there were 2.5 million outstanding TIDES as no holder of the TIDES had
converted their shares into Class A Common Stock. The Company may elect after
October 3, 2002, to redeem the notes in accordance with the terms of the TIDES.
The TIDES are convertible into Class A Common Stock at $44.00 per share.
10. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value of financial instruments is determined using
the best available market information and appropriate valuation methodologies.
However, considerable judgement is necessary in interpreting market data to
develop the estimates of fair value. Accordingly, the estimates presented are
not necessarily indicative of the amounts that the Company could realize in a
current market exchange or the value that ultimately will be realized upon
maturity or disposition. Additionally, because of the variety of valuation
techniques permitted under SFAS No. 107, "Disclosures about Fair Value of
Financial Instruments," comparability of fair values among entities may not be
meaningful. The use of different market assumptions or estimation methodologies
may have a material effect on the estimated fair value amounts.
69
The following methods and assumptions were used to estimate the fair
value of financial instruments for which it was practicable to estimate that
value:
Cash and cash equivalents, accounts receivable and accounts payable,
including accrued liabilities: The carrying amounts of these assets and
liabilities approximates fair value because of the short maturity of these
instruments.
Investments: Management believes that the carrying amounts of the
investments approximates fair value.
Long-term debt: The amounts outstanding under the credit facility bear
interest at current market rates and the carrying amounts approximate fair
market value as of December 31, 2000 and 2001.
Interest rate swaps and collars: The fair values for the interest rate
swap and collar contracts were estimated by obtaining quotations from brokers.
The fair value is an estimate of the amount that the Company would receive (pay)
at the reporting date if the contract was transferred to another party or
cancelled by either party. As of December 31, 2000 and 2001, the fair values of
these contracts were liabilities of $2.1 million and $7.0 million, respectively.
TIDES: The fair values of the Company's Convertible Preferred
Securities, Term Income Deferrable Equity Securities as of December 31, 2000 and
December 31, 2001, were $113.8 million and $153.1 million, respectively, which
were based on available market prices. As of December 31, 2000 and December 31,
2001, the carrying value of the TIDES was $125.0 million.
Outstanding Letter of Credit: The Company had a letter of credit
outstanding in the amount of $5.8 million and $6.2 million as of December 31,
2000 and 2001, respectively. The Company does not believe it is practicable to
estimate the fair value of this financial instrument and does not expect any
material loss from the resolution since performance is not likely to be
required.
11. COMMITMENTS AND CONTINGENCIES
ACQUISITIONS
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 the Company's
efforts 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. Portions of Royce's
cross-complaint have been dismissed and after a trial in November 2001, the
California Superior Court ruled that the February 1996 agreement was enforceable
and that the court would order specific performance of the agreement to sell
KWOD. The Company is entitled to recover damages incident to the failure of
Royce to honor this agreement but the trial on damages has been delayed by a
bankruptcy filing by Royce. On February 6, 2002, the Bankruptcy Court granted
our petition to dismiss the bankruptcy filing by Royce. The Company estimates
that the impact of an unfavorable outcome will not materially impact the
Company's financial position, results of operations or cash flows. The Company
cannot determine if and when the transaction might occur.
On November 29, 2001, the Company entered into an asset purchase
agreement with WCCB-TV, Inc., a subsidiary of Bahakel Communications, Ltd., to
acquire the assets of WKSI-FM and WPET-AM, serving the Greensboro, North
Carolina radio market, for a purchase price of $20.8 million in cash, of which
$1.0 million was paid as a deposit on November 29, 2001. On December 5, 2001,
the Company began operating these stations under a time brokerage agreement. The
closing of this transaction, which is conditional upon the approval of the FCC,
is expected in the first quarter of 2002 and will increase the Company's
ownership to six radio stations in the Greensboro, North Carolina radio market.
On December 24, 2001, the Company entered into an option agreement with
Tribune Denver Radio, Inc. and Tribune Broadcasting Company ("Tribune") to
acquire the assets of KOSI-FM, KKHK-FM and KEZW-AM, serving the Denver, Colorado
radio market, for a purchase price of $180.0 million in cash, of which $18.0
million was paid as a deposit on January 2, 2002. On February 1, 2002, the
Company began operating these stations under a time brokerage agreement. The
time brokerage agreement may run for a period of up to three years at Tribune's
option. Closing of this transaction may be delayed at the option of the seller,
not to exceed three years, and is conditioned on the approval of the FCC.
Management believes that the Company will maintain compliance with the terms of
the Company's bank facility for which compliance is required in connection with
the closing of the transaction.
70
OTHER
As of December 31, 2001, the Company is committed to invest an
additional amount of $0.6 million in an investment fund focused on
minority-owned businesses.
Rental expense is incurred principally for office and broadcasting
facilities. Rental expense during the years ended December 31, 1999, 2000 and
2001 was approximately $3.7 million, $6.3 million and $7.1 million,
respectively.
The Company also has various commitments under the following types of
contracts: (1) operating leases; (2) sports programming; (3) on-air talent; (4)
television advertising; and (5) other operating contracts with aggregate minimum
annual commitments as of December 31, 2001 as follows:
OPERATING SPORTS ON-AIR TELEVISION OTHER
LEASES PROGRAMMING TALENT ADVERTISING CONTRACTS
------ ----------- ------ ----------- ---------
(AMOUNTS IN THOUSANDS)
Years ending December 31:
2002 $ 6,473 $16,718 $15,171 $ 1,533 $ 5,379
2003 6,175 9,450 9,807 1,533 4,484
2004 5,973 8,310 3,561 1,533 1,820
2005 5,550 8,500 419 -- 31
2006 5,105 -- 88 -- --
2007 through 2021 27,797 -- -- -- --
------- ------- ------- ------- -------
$57,073 $42,978 $29,046 $ 4,599 $11,714
======= ======= ======= ======= =======
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 believes 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 is participating
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 ("NAB") commenced on January 25, 2001 a legal action
in the U.S. District Court of Philadelphia, Pennsylvania, seeking declaratory
relief as to the impact of the final rule of the Copyright Office. The court in
this action on August 1, 2001, upheld the Copyright Office decision. The
Company, along with other broadcasters and the NAB, on September 30, 2001, filed
an appeal of this decision. However, the Company cannot determine the likelihood
of success. The Company's management believes 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 has a contingent liability to the national sales
representative of the former owner of one of the Company's markets in the amount
of $2.7 million. This obligation is the responsibility of the Company's current
national sales representative and arose in connection with the Company's
acquisition of the stations involved.
The Company is subject to various outstanding claims that arose in the
ordinary course of business and to other legal proceedings. In the opinion of
management, any liability of the Company that may arise out of or with respect
to these matters will not materially adversely affect the financial position,
results of operations or cash flows of the Company.
12. GUARANTOR FINANCIAL INFORMATION
Entercom Radio, LLC ("Radio"), a wholly-owned subsidiary of Entercom
Communications Corp., is the borrower of the Company's senior debt under the
Bank Facility, described in Note 8, with Entercom Communications Corp. as the
guarantor.
71
Radio is comprised primarily of the operating assets, including Federal
Communications Commission licenses, permits, authorizations and cash royalties.
Entercom Communications Capital Trust, the holder of the TIDES, described in
Note 9, is a wholly-owned subsidiary of Entercom Communications Corp and is the
holder of 6.25% Convertible Subordinated Debentures due from Entercom
Communications Corp.
Under the bank facility, Radio is permitted to make distributions to
Entercom Communications Corp. in an amount that is required to pay Entercom
Communications Corp.'s reasonable overhead costs, other costs associated with
conducting the operations of Radio and interest on the TIDES.
The following tables set forth condensed consolidating financial
information for Entercom Communications Corp., Entercom Communications Capital
Trust and Entercom Radio, LLC, as of December 31, 2000 and 2001 and for the
years ended December 31, 1999, 2000 and 2001.
AS OF DECEMBER 31, 2001
-----------------------
ENTERCOM
ENTERCOM COMMUNICATIONS
COMMUNICATIONS CAPITAL ENTERCOM
CORP. TRUST RADIO, LLC ELIMINATIONS TOTAL
----- ----- ---------- ------------ -----
ASSETS:
CURRENT ASSETS $ 5,127 $ -- $ 82,653 $ -- $ 87,780
NET PROPERTY AND EQUIPMENT 956 -- 91,376 -- 92,332
RADIO BROADCASTING LICENSES
AND OTHER INTANGIBLES -NET -- -- 1,232,612 -- 1,232,612
OTHER LONG-TERM ASSETS 468,238 128,866 24,704 (595,792) 26,016
----------- ----------- ----------- ----------- -----------
TOTAL ASSETS $ 474,321 $ 128,866 $ 1,431,345 $ (595,792) $ 1,438,740
=========== =========== =========== =========== ===========
LIABILITIES AND
SHAREHOLDERS'S EQUITY:
CURRENT LIABILITIES $ 9,732 $ -- $ 43,849 $ -- $ 53,581
SENIOR DEBT -- -- 363,934 -- 363,934
OTHER LONG-TERM LIABILITIES 854 3,866 602,550 (466,926) 140,344
----------- ----------- ----------- ----------- -----------
TOTAL LIABILITIES 10,586 3,866 1,010,333 (466,926) 557,859
----------- ----------- ----------- ----------- -----------
TIDES 128,866 125,000 -- (128,866) 125,000
----------- ----------- ----------- ----------- -----------
SHAREHOLDERS' EQUITY
Class A and B common stock 453 -- -- -- 453
Additional paid-in capital 751,803 -- -- -- 751,803
Accumulated deficit (417,186) -- 422,604 -- 5,418
Unearned compensation (201) -- -- -- (201)
Accumulated other comprehensive loss -- -- (1,592) -- (1,592)
----------- ----------- ----------- ----------- -----------
Total shareholders' equity 334,869 -- 421,012 -- 755,881
----------- ----------- ----------- ----------- -----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 474,321 $ 128,866 $ 1,431,345 $ (595,792) $ 1,438,740
=========== =========== =========== =========== ===========
72
YEAR ENDED DECEMBER 31, 2001
----------------------------
ENTERCOM
ENTERCOM COMMUNICATIONS
COMMUNICATIONS CAPITAL ENTERCOM
CORP. TRUST RADIO, LLC ELIMINATIONS TOTAL
----------- ----------- ----------- ----------- -----------
NET REVENUES $ 523 $ 7,813 $ 332,897 $ (8,336) $ 332,897
----------- ----------- ----------- ----------- -----------
OPERATING EXPENSES (INCOME):
Station operating expenses -- -- 201,780 (523) 201,257
Depreciation and amortization 1,040 -- 45,469 -- 46,509
Corporate general and administrative
expenses 12,281 -- 54 -- 12,335
(Gain) loss on sale of assets (6) -- 22 -- 16
----------- ----------- ----------- ----------- -----------
Total operating expenses 13,315 247,325 (523) 260,117
----------- ----------- ----------- ----------- -----------
OPERATING INCOME (12,792) 7,813 85,572 (7,813) 72,780
----------- ----------- ----------- ----------- -----------
OTHER EXPENSE (INCOME):
Interest expense -- -- 27,583 -- 27,583
Financing cost of TIDES 7,813 7,813 -- (7,813) 7,813
Interest income -- -- (262) -- (262)
Equity loss from unconsolidated affiliate -- -- 4,706 -- 4,706
Net loss on derivative instruments -- -- 912 -- 912
Loss on investments -- -- 2,000 -- 2,000
----------- ----------- ----------- ----------- -----------
Total other expense 7,813 7,813 34,939 (7,813) 42,752
----------- ----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE INCOME
TAXES AND ACCOUNTING CHANGE (20,605) -- 50,633 -- 30,028
INCOME TAXES (8,242) -- 20,436 -- 12,194
----------- ----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE
ACCOUNTING CHANGE (12,363) -- 30,197 -- 17,834
Cumulative effect of accounting
change, net of taxes of $377 -- -- (566) -- (566)
----------- ----------- ----------- ----------- -----------
NET INCOME (LOSS) $ (12,363) $ -- $ 29,631 $ -- $ 17,268
=========== =========== =========== =========== ===========
YEAR ENDED DECEMBER 31, 2001
----------------------------
ENTERCOM
ENTERCOM COMMUNICATIONS
COMMUNICATIONS CAPITAL ENTERCOM
CORP. TRUST RADIO, LLC ELIMINATIONS TOTAL
----- ----- ---------- ------------ -----
OPERATING ACTIVITIES:
NET CASH PROVIDED BY OPERATING
ACTIVITIES $ 153 $ -- $ 84,215 $ -- $ 84,368
----------- --------- ----------- --------- --------
INVESTING ACTIVITIES:
Additions to property and equipment (176) -- (9,644) -- (9,820)
Proceeds from sale of property, equipment,
intangibles and other assets -- -- 141 -- 141
Deferred charges and other assets -- -- (626) -- (626)
Purchases of investments -- -- (5,721) -- (5,721)
Proceeds from investments -- -- 21 -- 21
73
Station acquisition deposits -- -- (1,886) -- (1,886)
----------- --------- ----------- --------- --------
NET CASH USED IN INVESTING ACTIVITIES (176) -- (17,715) -- (17,891)
----------- --------- ----------- --------- --------
FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt -- -- 7,078 -- 7,078
Payments of long-term debt -- -- (80,015) -- (80,015)
Proceeds from issuance of common stock
related to an incentive plan -- -- 549 -- 549
Proceeds from the exercise of stock
options -- -- 3,405 -- 3,405
----------- --------- ----------- --------- --------
NET CASH USED IN FINANCING ACTIVITIES -- -- (68,983) -- (68,983)
----------- --------- ----------- --------- --------
Net decrease in cash and cash equivalents (23) -- (2,483) -- (2,506)
Cash and cash equivalents, beginning of year 24 -- 13,233 -- 13,257
----------- --------- ----------- --------- --------
Cash and cash equivalents, end of year $ 1 $ -- $ 10,750 $ -- $ 10,751
=========== ========= =========== ========= ========
AS OF DECEMBER 31, 2000
-----------------------
ENTERCOM
ENTERCOM COMMUNICATIONS
COMMUNICATIONS CAPITAL ENTERCOM
CORP. TRUST RADIO, LLC ELIMINATIONS TOTAL
----- ----- ---------- ------------ -----
ASSETS:
CURRENT ASSETS $ 688 $ -- $ 89,562 $ -- $ 90,250
NET PROPERTY AND EQUIPMENT 1,017 -- 92,936 -- 93,953
RADIO BROADCASTING LICENSES
AND OTHER INTANGIBLES -NET -- -- 1,265,816 -- 1,265,816
OTHER LONG-TERM ASSETS 483,149 128,866 22,116 (610,222) 23,909
----------- ----------- ----------- ----------- -----------
TOTAL ASSETS $ 484,854 $ 128,866 $ 1,470,430 $ (610,222) $ 1,473,928
=========== =========== =========== =========== ===========
LIABILITIES AND
SHAREHOLDERS'S EQUITY:
CURRENT LIABILITIES $ 5,005 $ -- $ 22,776 $ -- $ 27,781
SENIOR DEBT -- -- 461,249 -- 461,249
OTHER LONG-TERM LIABILITIES -- 3,866 601,687 (481,356) 124,197
----------- ----------- ----------- ----------- -----------
TOTAL LIABILITIES 5,005 3,866 1,085,712 (481,356) 613,227
----------- ----------- ----------- ----------- -----------
TIDES 128,866 125,000 -- (128,866) 125,000
----------- ----------- ----------- ----------- -----------
SHAREHOLDERS' EQUITY
Class A, B and C common stock 452 -- -- -- 452
Additional paid-in capital 747,442 -- -- -- 747,442
Accumulated deficit (396,582) -- 384,732 -- (11,850)
Unearned compensation (329) -- -- -- (329)
Accumulated other comprehensive loss -- -- (14) -- (14)
----------- ----------- ----------- ----------- -----------
Total shareholders' equity 350,983 -- 384,718 -- 735,701
----------- ----------- ----------- ----------- -----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 484,854 $ 128,866 $ 1,470,430 $ (610,222) $ 1,473,928
=========== =========== =========== =========== ===========
74
YEAR ENDED DECEMBER 31, 2000
----------------------------
ENTERCOM
ENTERCOM COMMUNICATIONS
COMMUNICATIONS CAPITAL ENTERCOM
CORP. TRUST RADIO, LLC ELIMINATIONS TOTAL
----- ----- ---------- ------------ -----
NET REVENUES $ 528 $ 7,813 $ 352,001 $ (8,317) $ 352,025
----------- ----------- ----------- ----------- -----------
OPERATING EXPENSES (INCOME):
Station operating expenses -- -- 207,112 (504) 206,608
Depreciation and amortization 468 -- 43,007 -- 43,475
Corporate general and administrative
expenses 12,498 -- (1) -- 12,497
Net expense from time brokerage agreement
fees -- -- 11 -- 11
Gain on sale of assets -- -- (41,465) -- (41,465)
----------- ----------- ----------- ----------- -----------
Total operating expenses 12,966 -- 208,664 (504) 221,126
----------- ----------- ----------- ----------- -----------
OPERATING INCOME (12,438) 7,813 143,337 (7,813) 130,899
----------- ----------- ----------- ----------- -----------
OTHER EXPENSE (INCOME):
Interest expense -- -- 37,760 -- 37,760
Financing cost of TIDES 7,813 7,813 -- (7,813) 7,813
Interest income -- -- (512) -- (512)
Equity loss from unconsolidated affiliate -- -- 1,100 -- 1,100
Loss on investments -- -- 5,688 -- 5,688
----------- ----------- ----------- ----------- -----------
Total other expense 7,813 7,813 44,036 (7,813) 51,849
----------- ----------- ----------- ----------- -----------
INCOME BEFORE INCOME TAXES (20,251) -- 99,301 -- 79,050
INCOME TAXES (8,100) -- 39,896 -- 31,796
----------- ----------- ----------- ----------- -----------
NET INCOME (LOSS) $ (12,151) $ -- $ 59,405 $ -- $ 47,254
=========== =========== =========== =========== ===========
YEAR ENDED DECEMBER 31, 2000
----------------------------
ENTERCOM
ENTERCOM COMMUNICATIONS
COMMUNICATIONS CAPITAL ENTERCOM
CORP. TRUST RADIO, LLC ELIMINATIONS TOTAL
----- ----- ---------- ------------ -----
OPERATING ACTIVITIES:
----------- ---------- ----------- ---------- -----------
NET CASH PROVIDED BY OPERATING
ACTIVITIES $ 379 $ -- $ 69,096 $ -- $ 69,475
----------- ---------- ----------- ---------- -----------
INVESTING ACTIVITIES:
Additions to property and equipment (357) -- (9,175) -- (9,532)
Proceeds from sale of property, equipment,
intangibles and other assets -- -- 57,196 -- 57,196
Deferred charges and other assets -- -- (2,212) -- (2,212)
Purchases of radio station assets -- -- (100,733) -- (100,733)
Purchases of investments -- -- (9,927) -- (9,927)
Station acquisition deposits -- -- 524 -- 524
----------- ---------- ----------- ---------- -----------
NET CASH USED IN INVESTING ACTIVITIES (357) -- (64,327) -- (64,684)
----------- ---------- ----------- ---------- -----------
FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt -- -- 47,000 -- 47,000
Payments of long-term debt -- -- (51,511) -- (51,511)
Proceeds from issuance of common stock
related to an incentive plan -- -- 899 -- 899
75
Proceeds from the exercise of stock
options -- -- 816 -- 816
----------- ----------- ------------ ---------- -----------
NET CASH USED IN FINANCING ACTIVITIES -- -- (2,796) -- (2,796)
----------- ----------- ------------ ---------- -----------
Net increase in cash and cash equivalents 22 1,973 1,995
Cash and cash equivalents, beginning of year 2 11,260 11,262
----------- ----------- ------------ ---------- -----------
Cash and cash equivalents, end of year $ 24 $ -- $ 13,233 $ -- $ 13,257
=========== =========== ============ ========== ===========
YEAR ENDED DECEMBER 31, 1999
ENTERCOM
ENTERCOM COMMUNICATIONS
COMMUNICATIONS CAPITAL ENTERCOM
CORP. TRUST RADIO, LLC ELIMINATIONS TOTAL
----- ----- ---------- ------------ -----
NET REVENUES $ 10,737 $ 1,845 $ 214,320 $ (11,901) $ 215,001
----------- ----------- ----------- ----------- -----------
OPERATING EXPENSES (INCOME):
Station operating expenses -- -- 135,981 (38) 135,943
Depreciation and amortization 443 -- 21,121 -- 21,564
Corporate general and administrative
expenses 8,138 -- (38) -- 8,100
Net expense from time brokerage agreement
fees -- -- 652 -- 652
(Gain) loss on sale of assets 48 -- (2,034) -- (1,986)
----------- ----------- ----------- ----------- -----------
Total operating expenses 8,629 -- 155,682 (38) 164,273
----------- ----------- ----------- ----------- -----------
OPERATING INCOME (LOSS) 2,108 1,845 58,638 (11,863) 50,728
----------- ----------- ----------- ----------- -----------
OTHER EXPENSE (INCOME):
Interest expense 8,961 -- 2,221 -- 11,182
Financing cost of TIDES 1,845 1,845 -- (1,845) 1,845
Interest income (642) -- (2,611) -- (3,253)
Inter-company charges 6,528 -- 3,490 (10,018) --
----------- ----------- ----------- ----------- -----------
Total other expense 16,692 1,845 3,100 (11,863) 9,774
----------- ----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES
AND EXTRAORDINARY ITEM (14,584) -- 55,538 -- 40,954
INCOME TAXES:
Income Taxes - C Corporation (1,272) -- 22,215 -- 20,943
Income Taxes - S Corporation 125 -- -- -- 125
Deferred income taxes for conversion from
an S to a C Corporation 79,845 -- -- -- 79,845
----------- ----------- ----------- ----------- -----------
Total income taxes 78,698 -- 22,215 -- 100,913
----------- ----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE
EXTRAORDINARY ITEM (93,282) -- 33,323 -- (59,959)
EXTRAORDINARY ITEM:
Debt extinguishment, net of taxes of $612 (918) -- -- -- (918)
----------- ----------- ----------- ----------- -----------
NET INCOME (LOSS) $ (94,200) $ -- $ 33,323 $ -- $ (60,877)
=========== =========== =========== =========== ===========
76
YEAR ENDED DECEMBER 31, 1999
ENTERCOM
ENTERCOM COMMUNICATIONS
COMMUNICATIONS CAPITAL ENTERCOM
CORP. TRUST RADIO, LLC ELIMINATIONS TOTAL
----- ----- ---------- ------------ -----
OPERATING ACTIVITIES:
----------- ---------- ----------- ---------- -----------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES $ (2,888) $ -- $ 43,588 $ -- $ 40,700
----------- ---------- ----------- ---------- -----------
INVESTING ACTIVITIES:
Additions to property and equipment (471) -- (13,886) -- (14,357)
Acquisition of limited partnership
interest -- -- (3,138) -- (3,138)
Proceeds from sale of property, equipment,
intangibles and other assets -- -- 2,781 -- 2,781
Purchases of radio station assets -- -- (763,068) -- (763,068)
Proceeds held in escrow from sale of
Tampa stations -- -- 75,000 -- 75,000
Deferred charges and other assets -- -- (656) -- (656)
Purchases of investments 1,000 -- (9,000) -- (8,000)
Station acquisition deposits -- -- (885) -- (885)
----------- ---------- ----------- ---------- -----------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES 529 -- (712,852) -- (712,323)
----------- ---------- ----------- ---------- -----------
FINANCING ACTIVITIES:
Net proceeds from initial public offering -- -- 236,157 -- 236,157
Net proceeds from stock offering -- -- 276,100 -- 276,100
Net proceeds from issuance of TIDES -- -- 125,000 -- 125,000
Deferred financing expenses related to
TIDES and long-term debt -- -- (8,683) -- (8,683)
Proceeds from issuance of long-term debt -- -- 551,000 -- 551,000
Payments of long-term debt -- -- (415,509) -- (415,509)
Proceeds from issuance of common stock
related to an incentive plan -- -- 464 -- 464
Dividends paid to S Corporation
shareholders -- -- (88,113) -- (88,113)
----------- ---------- ----------- ---------- -----------
NET CASH PROVIDED BY FINANCING
ACTIVITIES -- -- 676,416 -- 676,416
----------- ---------- ----------- ---------- -----------
Net increase (decrease) in cash and cash
equivalents (2,359) -- 7,152 -- 4,793
Cash and cash equivalents, beginning of year 2,361 -- 4,108 -- 6,469
----------- ---------- ----------- ---------- -----------
Cash and cash equivalents, end of year $ 2 $ -- $ 11,260 $ -- $ 11,262
=========== ========== =========== ========== ===========
13. SHAREHOLDERS' EQUITY
On June 24, 1998, the Board of Directors and the shareholders of the
Company approved the Company's amended and restated Articles of Incorporation to
provide for, among other things, an increase in the aggregate number of shares
which the Company has authority to issue to 350,000,000 shares, par value $.01
per share, consisting of the following: (1) 200,000,000 shares of Class A Common
Stock; (2) 75,000,000 shares of Class B Common Stock; (3) 50,000,000 shares of
Class C Common Stock and (4) 25,000,000 shares of Preferred Stock. Such change
occurred just prior to the effective date of the Company's initial public
offering. The rights of each share of Common Stock are essentially identical
other than with respect to voting rights. The Class A Common Stock entitles the
holders thereof to one vote per share, the Class B Common Stock entitles the
holders thereof to ten votes per share, subject to certain exceptions and the
Class C Common Stock has no voting rights, except as otherwise required by law.
Subject to any necessary approval of the Federal Communications Commission, the
Class B Common Stock and the Class C Common Stock are convertible in whole or in
part at any time into Class A Common Stock on a share-for-share basis. There are
also no liquidation preferences for any class of stock.
77
Prior to the revocation of its S Corporation election, the Company
declared a dividend conditioned upon consummation of the IPO, payable to its
former S Corporation shareholders in the amount of $88.1 million, which the
Company estimated would be the undistributed balance of the income of the
Company which has been taxed or was taxable to its S Corporation shareholders as
of the Revocation Date. The S Corporation Distribution of $88.1 million was paid
as of June 30, 1999. No dividends have been paid by the Company after the
Revocation Date relating to the Company's activities as a C Corporation.
On January 29, 1999, the Company's Class A common stock began trading
on the New York Stock Exchange. On February 3, 1999, the Company completed the
IPO, pursuant to which 13,627,500 shares of Class A Common Stock were sold to
the public at a price of $22.50 per share. Of the 13,627,500 shares sold, the
Company sold 11,300,000 and Chase Capital Partners ("Chase Capital"), the sole
selling shareholder, sold 2,327,500 shares. The net proceeds to the Company,
after deducting underwriting discounts and other offering expenses were
approximately $236.2 million.
On September 30, 1999, the Company and certain shareholders of the
Company entered into an underwriting agreement to sell 8,750,000 shares of Class
A Common Stock of which 8,000,000 shares were sold by the Company and 750,000
shares were sold by selling shareholders. The Company completed this offering on
October 6, 1999 and sold 8,000,000 shares of Class A Common Stock at a price per
share of $36.00. The net proceeds to the Company after deducting underwriting
discounts and other offering expenses, was $276.1 million.
During the years ended December 31, 2000 and 2001, J.P. Morgan
Partners, formerly known as Chase Capital, converted 901,167 shares and all of
the 495,669 remaining shares, respectively, from shares of Class C Common Stock
to shares of Class A Common Stock.
14. EMPLOYEE SAVINGS AND BENEFIT PLANS
The Company sponsors a 401(k) savings plan that includes a provision
under which the Company contributes 50% of the amount of any eligible employee's
contribution to the plan up to a maximum employer contribution of 3% of an
employee's compensation. The maximum eligible employee contribution under the
plan was $10,000, $10,500 and $10,500 for the plan years ended December 31,
1999, 2000 and 2001, respectively. The Company may at its discretion suspend
future matching contributions. The Company contributed approximately $0.8
million, $1.5 million and $1.4 million under the 401(k) plan for the years ended
December 31, 1999, 2000 and 2001, respectively.
15. STOCK OPTIONS AND RESTRICTED STOCK
The Company accounts for stock-based compensation plans under APB
Opinion No. 25 for employees and under FASB No. 123 for non-employees. On June
24, 1998, the Company adopted an Equity Compensation Plan (the "Compensation
Plan"). The Compensation Plan allows officers (including those also serving as
directors) and other employees, non-employee directors and key advisors and
consultants, selected by a Committee of Board of Directors, to receive incentive
stock options, nonqualified stock options, restricted stock and stock
appreciation rights in the Common Stock of the Company. All of the restricted
stock and options vest over a four-year period and the options expire ten years
from the date of grant. The Company has reserved 2.5 million shares plus 10% of
the combined classes of Common Stock outstanding at the time of grant for
issuance under the Compensation Plan. The Company recognized non-cash
compensation expense (1) for the granting of restricted stock and (2) for
options granted where the option price is less than the market value of shares
on the grant date and for options issued to non-employees. For the year ended
December 31, 1999, the Company issued 11,112 shares of restricted stock and
1,426,523 in options of which 1,150,961 options were issued at market value at
the date of grant and 275,562 options were issued with an exercise price at 80%
of the market value at the date of grant. For the year ended December 31, 2000,
the Company issued 5,000 shares of restricted stock and 1,430,250 in options, of
which 1,380,250 in options were issued at market value at the date of grant and
50,000 in options were issued at less that market value at the date of grant.
For the year ended December 31, 2001, the Company issued 862,249 in options, of
which all options were issued at market value at the date of grant. For the year
ended December 31, 1999, the Company recognized non-cash stock-based
compensation expense of $0.4 million for options granted at prices below market
value and for options issued to non-employees and $0.1 million for restricted
stock. For the year ended December 31, 2000, the Company recognized non-cash
stock-based compensation expense of $0.5 million for options granted at prices
below market value and $0.1 million for restricted stock. For the year ended
December 31, 2001, the Company recognized non-cash stock-based compensation
expense of $0.4 million for options granted at prices below market value and
$0.1 million for restricted stock. As of December 31, 2001, the Company will
recognize non-cash compensation expense in future periods of $0.5 million and
$0.1 million for the years ended December 31, 2002 and 2003, respectively.
A summary of the status of the Company's stock options granted and
changes during the year is presented below:
78
DECEMBER 31, 1999 DECEMBER 31, 2000 DECEMBER 31, 2001
---------------------------- ---------------------------- ----------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
---------- -------------- ---------- -------------- ---------- --------------
Outstanding at beginning of year -- $ -- 1,404,519 $ 31.83 2,723,396 $ 33.76
Granted 1,426,523 31.69 1,430,250 35.34 862,249 40.37
Exercised -- -- (26,649) 21.66 (97,693) 25.90
Cancelled (22,004) 22.50 (84,724) 32.12 (202,504) 37.09
---------- ---------- ----------
Outstanding at end of year 1,404,519 $ 31.83 2,723,396 $ 33.76 3,285,448 $ 35.52
========== ========== ==========
Options exercisable as of year end -- -- 331,580 $ 32.85 883,680 $ 34.10
========== ========== ========== ========== ========== ==========
Weighted-average fair value of
options granted during the
year, net of cancellations $ 31.83 $ 35.54 $ 41.36
========== ========== ==========
The following table summarizes information about stock options
outstanding as of December 31, 2001:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------------- ----------------------------------
WEIGHTED WEIGHTED NUMBER OF
NUMBER AVERAGE AVERAGE OPTIONS WEIGHTED
OUTSTANDING AT REMAINING EXERCISE EXERCISABLE AT AVERAGE
EXERCISE PRICES DECEMBER 31, 2001 CONTRACTUAL LIFE PRICE DECEMBER 31, 2001 EXERCISE PRICE
- ----------------------------------------------------------------------------------------------------------------------
$ 18.00 - $ 22.50 638,326 7.1 $ 20.67 292,308 $ 20.60
25.75 - 27.75 674,872 8.9 27.74 155,334 27.74
28.19 - 39.50 80,125 8.2 33.16 27,688 33.50
40.00 - 40.00 740,250 9.0 40.00 - -
40.25 - 43.94 474,975 8.3 42.87 110,900 42.91
44.00 - 45.66 32,500 9.4 45.19 1,250 44.38
$ 46.88 - $ 59.44 644,400 7.9 47.63 296,200 47.47
---------------- ---------------
3,285,448 8.3 $ 33.76 883,680 $ 34.10
================ ============== ======= =============== ============
As of December 31, 2001, approximately 7.0 million shares of the
Company's Class A Common Stock were authorized for awards under the plan, of
which approximately 3.6 million shares remained available for future award.
The fair value of the options was estimated at the date of grant using
a Black-Scholes option-pricing model with the following weighted-average
assumptions for 1999, 2000 and 2001: expected stock volatility of 34%, 63% and
74%, respectively; dividend yields of 0%; risk-free interest rates of 5.0%, 6.5%
and 5.0%, respectively; and expected lives of six years, five years and five
years, respectively, from the date of grant. Had the Company determined
compensation cost for the Equity Compensation Plan based on the fair value as of
the grant dates for awards in 1999, 2000 and 2001 consistent with the provisions
of SFAS No. 123, the Company's net income (loss) and net income (loss) per share
would have been reduced to the pro forma amounts indicated below:
YEARS ENDED DECEMBER 31,
-----------------------------------------
1999 2000 2001
-------- -------- --------
(AMOUNT IN THOUSANDS, EXCEPT PER SHARE DATA)
Income (loss) before extraordinary item and accounting change $(59,959) $ 47,254 $ 17,834
Extraordinary item, net of taxes of $612 (918) -- --
-------- -------- --------
Income (loss) before accounting change - as reported (60,877) 47,254 17,834
Cumulative effect of accounting change, net of taxes of $377 -- -- (566)
-------- -------- --------
Net income (loss) - as reported (60,877) 47,254 17,268
79
Compensation expense, net of taxes of $908, $3,304 and $6,414 in 1999,
2000 and 2001, respectively 1,362 4,955 9,622
-------- -------- --------
Net income (loss) - pro forma $(62,239) $ 42,299 $ 7,646
======== ======== ========
Basic net income (loss) per share - as reported $ (1.61) $ 1.05 $ 0.38
======== ======== ========
Basic net income (loss) per share - pro forma $ (1.64) $ 0.94 $ 0.17
======== ======== ========
Diluted net income (loss) per share - as reported $ (1.61) $ 1.04 $ 0.38
======== ======== ========
Diluted net income (loss) per share - pro forma $ (1.64) $ 0.93 $ 0.17
======== ======== ========
On June 24, 1998, the Company adopted an Employee Stock Purchase Plan
(the "Purchase Plan"). The Purchase Plan allows the participants to purchase
shares of the Company's Class A Common Stock at a purchase price equal to 85% of
the market value of such shares on the purchase date. Under the plan, the
purchase of stock is limited to the lesser of an amount not to exceed 10% of an
employee's annual gross earnings or an annual maximum limitation of $25,000 per
employee. Pursuant to this plan, the Company will not record compensation
expense on the difference between the market value and the purchase price as
this plan is designed to meet the requirements of Section 423(b) of the Internal
Revenue Code. During the years ended December 31, 1999, 2000 and 2001, employees
purchased 11,682 shares, 28,247 shares and 15,807 shares of Class A Common
Stock, respectively. The shares of Common Stock reserved for issuance under the
Purchase Plan was 1,850,000, leaving a balance of shares available for purchase
as of December 31, 2001 of 1,794,264.
16. NET INCOME (LOSS) AND PRO FORMA NET INCOME PER COMMON SHARE
Net Income (Loss) and Pro Forma Net Income (Loss) Per Common Share -
Net income (loss) and pro forma net income (loss) per share are calculated in
accordance with SFAS No. 128, "Earnings Per Share" which requires presentation
of basic net income (loss) per share and diluted net income (loss) per share.
Basic net income (loss) per share excludes dilution and is computed by dividing
net income (loss) available to common shareholders by the weighted average
number of common shares outstanding for the period. Diluted net income (loss)
per share is computed in the same manner as basic net income (loss) after
assuming issuance of common stock for all potentially dilutive equivalent
shares, which includes (1) stock options (using the treasury stock method) and
(2) 2.5 million Term Income Deferrable Equity Securities ("TIDES") convertible
into 2.8 million shares of Class A Common Stock, after eliminating from net
income (loss) the interest expense, net of taxes, on the TIDES. Anti-dilutive
instruments are not considered in this calculation. For the year ended December
31, 1999, (1) the effect of the TIDES and stock options was anti-dilutive in the
calculation of the net loss per share and (2) the effect of the TIDES was
anti-dilutive and the effect of the stock options was dilutive in the
calculation of pro forma net income per share. For the years ended December 31,
2000 and 2001, the effect of the TIDES was anti-dilutive and the effect of the
stock options was dilutive in the calculation of net income per share.
The amounts used in calculating net income (loss) per share are as
follows:
YEAR ENDED DECEMBER 31, 1999
-------------------------------------------
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER
SHARE DATA)
INCOME SHARES EPS
---------- ---------- -----
Basic net loss per share:
Loss before extraordinary item and accounting change $ (59,959) 37,921,623 $(1.58)
Extraordinary item, net of taxes (918) -- (0.03)
---------- ---------- ------
Loss before accounting change (60,877) 37,921,623 (1.61)
Cumulative effect of accounting change, net of taxes -- -- --
---------- ---------- ------
Net loss (60,877) 37,921,623 $(1.61)
======
Impact of options -- --
Diluted net loss per share:
---------- ----------
Net loss $ (60,877) 37,921,623 $(1.61)
========== ========== ======
Options to purchase 1,404,519 shares of common stock were outstanding
as of December 31, 1999, but were excluded from the computation of diluted loss
per share as their effect was anti-dilutive.
80
YEAR ENDED DECEMBER 31, 2000
-------------------------------------------
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER
SHARE DATA)
INCOME SHARES EPS
---------- ---------- -----
Basic net income per share:
Net income $ 47,254 45,209,036 $1.05
=====
Impact of options -- 404,793
Diluted net income per share:
---------- ----------
Net income $ 47,254 45,613,829 $1.04
========== ========== =====
Options to purchase 1,143,400 shares of common stock at a range of
$42.44 to $59.44 were outstanding during 2000, but were excluded from the
computation of diluted net income per share because the options' exercise price
was greater than the average market price of the common stock during 2000.
YEAR ENDED DECEMBER 31, 2001
-------------------------------------------
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER
SHARE DATA)
INCOME SHARES EPS
---------- ---------- -----
Basic net income per share:
Income before accounting change $ 17,834 45,294,776 $0.39
Cumulative effect of accounting change, net of taxes (566) -- (0.01)
---------- ---------- -----
Net income 17,268 45,294,776 $0.38
=====
Impact of options -- 699,573
Diluted net income per share:
---------- ----------
Net income $ 17,268 45,994,349 $0.38
========== ========== =====
Options to purchase 784,339 shares of common stock at a range of $43.85
to $59.44 were outstanding during 2001, but were excluded from the computation
of diluted net income per share because the options' exercise price was greater
than the average market price of the common stock during 2001.
The amounts used in calculating pro forma net income per share are as
follows:
YEAR ENDED DECEMBER 31, 1999
-------------------------------------------
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER
SHARE DATA)
(UNAUDITED)
INCOME SHARES EPS
---------- ---------- -----
Basic pro forma net income per share:
Pro forma income before extraordinary item $ 20,676 37,921,623 $0.55
Extraordinary item, net of taxes (918) -- (0.03)
---------- ---------- -----
Pro forma net income 19,758 37,921,623 $0.52
=====
Impact of options -- 316,100
Diluted pro forma net income per share:
---------- ----------
Pro forma net income $ 19,758 38,237,723 $0.51
========== ========== =====
During the year 1999, no options were excluded from the computation of
pro forma diluted net income per share.
81
Unaudited Pro Forma Adjustments - The unaudited pro forma net income
data reflect adjustments for income taxes as if the Company had been subject to
federal and state income taxes based upon a pro forma effective tax rate of 38%
applied to income before income taxes, extraordinary item and accounting change.
17. SUBSEQUENT EVENTS
On February 1, 2002, the Company entered into an agreement to
terminate, effective February 28, 2002, the KING-FM Joint Sales Agreement that
was scheduled to expire on June 30, 2002 (Note 3). KING-FM serves the Seattle,
Washington radio market.
On February 6, 2002, the Company entered into a Second Amendment under
the Bank Facility to further clarify the terms under which the Company can issue
subordinated debt and to modify certain terms, including the pro forma debt
service ratio financial covenant.
82
18. QUARTERLY FINANCIAL DATA (UNAUDITED)
QUARTERS ENDED
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
-------------------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
--------- -------- ------------ -----------
1999:
Net revenues $ 39,599 $ 55,946 $ 59,204 $ 60,252
Operating income 3,376 14,215 15,753 17,384
Income (loss) before extraordinary item (80,427) 7,152 8,053 5,263
Net income (loss) $(80,427) $ 7,152 $ 8,053 $ 4,345
Basic income (loss) before extraordinary item $ (2.48) $ 0.19 $ 0.22 $ 0.12
======== ======== ======== ========
Basic net income (loss) per share $ (2.48) $ 0.19 $ 0.22 $ 0.10
======== ======== ======== ========
Weighted basic average common shares outstanding 32,478 37,168 37,172 44,742
======== ======== ======== ========
Diluted income (loss) before extraordinary item $ (2.48) $ 0.19 $ 0.21 $ 0.12
======== ======== ======== ========
Diluted net income (loss) per share $ (2.48) $ 0.19 $ 0.21 $ 0.10
======== ======== ======== ========
Weighted diluted average common and common
equivalents shares outstanding 32,478 37,583 37,506 45,143
======== ======== ======== ========
2000:
Net revenues $ 70,877 $ 96,941 $ 92,462 $ 91,745
Operating income 11,029 27,437 66,697 25,736
Net income (loss) $ (86) $ 9,463 $ 33,186 $ 4,691
Basic net income (loss) per share $ (0.00) $ 0.21 $ 0.73 $ 0.10
======== ======== ======== ========
Weighted basic average common shares outstanding 45,188 45,201 45,215 45,231
======== ======== ======== ========
Diluted net income (loss) per share $ (0.00) $ 0.21 $ 0.71 $ 0.10
======== ======== ======== ========
Weighted diluted average common and common
equivalents shares outstanding 45,188 45,506 48,410 45,461
======== ======== ======== ========
2001:
Net revenues $ 69,455 $ 94,626 $ 85,136 $ 83,680
Operating income 8,246 25,941 17,910 20,683
Income (loss) before accounting change (1,749) 9,864 4,076 5,643
Net income (loss) $ (2,315) $ 9,864 $ 4,076 $ 5,643
Basic income (loss) before accounting change $ (0.04) $ 0.22 $ 0.09 $ 0.12
======== ======== ======== ========
Basic net income (loss) per share $ (0.05) $ 0.22 $ 0.09 $ 0.12
======== ======== ======== ========
Weighted basic average common shares outstanding 45,250 45,282 45,315 45,331
======== ======== ======== ========
Diluted income (loss) before accounting change $ (0.04) $ 0.21 $ 0.09 $ 0.12
======== ======== ======== ========
Diluted net income (loss) per share $ (0.05) $ 0.21 $ 0.09 $ 0.12
======== ======== ======== ========
Weighted diluted average common and common
equivalents shares outstanding 45,250 46,168 45,977 45,898
======== ======== ======== ========
83
Basic and diluted net income (loss) per common share for the year ended
December 31, 1999, differs from the sum of basic and diluted net income (loss)
per common share for the quarters during the respective year due to the
different periods used to calculate net income (loss) and weighted average
shares outstanding. Diluted net income per common share for the year ended
December 31, 2000, differs from the sum of diluted net income (loss) per common
share for the quarters during the respective year due to the dilutive effect of
the assumed conversion of the TIDES during the third quarter of the year (TIDES
were anti-dilutive for all other quarters of the year). Diluted net income per
common share for the year ended December 31, 2001, differs from the sum of
diluted net income per common share for the quarters during the respective year
due to the different periods used to calculate net income and weighted average
shares outstanding.
.
84
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
and Exchange Act of 1934, we have duly caused this report to be signed on our
behalf by the undersigned, thereunto duly authorized, in Bala Cynwyd,
Pennsylvania, on February 6, 2002.
ENTERCOM COMMUNICATIONS CORP.
By: /s/ JOSEPH M. FIELD
-------------------
Joseph M. Field
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities and Exchange Act of 1934, this
report has been signed by the following persons in the capacities and on the
dates indicated.
SIGNATURE CAPACITY DATE
--------- -------- ----
/s/ JOSEPH M. FIELD Chairman of the Board and Chief February 6, 2002
Executive Officer (Principal
- ------------------------------------ Executive Officer)
Joseph M. Field
/s/ DAVID J. FIELD President, Chief Operating February 6, 2002
Officer and a Director
- ------------------------------------
David J. Field
/s/JOHN C. DONLEVIE Executive Vice President, February 6, 2002
Secretary, General Counsel and
- ------------------------------------ a Director
John C. Donlevie
/s/ STEPHEN F. FISHER Executive Vice President and Chief February 6, 2002
Financial Officer (Principal
Financial and Accounting
- ------------------------------------ Officer)
Stephen F. Fisher
/s/ MARIE H. FIELD February 6, 2002
Director
- ------------------------------------
Marie H. Field
/s/ HERBERT KEAN, M.D.
Director February 6, 2002
- ------------------------------------
Herbert Kean, M.D.
/s/ LEE HAGUE
Director February 6, 2002
- ------------------------------------
Lee Hague
85
/s/ THOMAS H. GINLEY, JR., M.D.
Director February 6, 2002
- ------------------------------------
Thomas H. Ginley, Jr. M.D.
/s/ S. GORDON ELKINS
Director February 6, 2002
- ------------------------------------
S. Gordon Elkins
/s/ MICHAEL R. HANNON
Director February 6, 2002
- ------------------------------------
Michael R. Hannon
/s/ DAVID J. BERKMAN
Director February 6, 2002
- ------------------------------------
David J. Berkman
86
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
ENTERCOM COMMUNICATIONS CORP.
YEARS ENDED DECEMBER 31, 1999, 2000 AND 2001
Additions
Balance at Charged to Deductions Balance at
Beginning Costs and From End of
Allowance for Doubtful Accounts Period Expenses Reserves Period
- ------------------------------- ----------- ----------- ------------ -----------
December 31, 1999 $ 593,000 $ 2,000,000 $(1,164,000) $ 1,429,000
December 31, 2000 1,429,000 3,670,000 (2,893,000) 2,206,000
December 31, 2001 2,206,000 3,449,000 (3,454,000) 2,201,000
87
INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION PAGE
- -------------- ----------- ----
3.01 Amended and Restated Articles of Incorporation of the Registrant(2)
3.02 Form of Amended and Restated Bylaws of the Registrant(2)
4.01 Form of Indenture for the Convertible Subordinated Debentures due 2014 among Entercom
Communications Corp., as issuer, and Wilmington Trust Company, as indenture trustee (4)
10.01 Registration Rights Agreement, dated as of May 21, 1996, between the Registrant and
Chase Equity Associates, L.P.(2)
10.02 Employment Agreement, dated June 25, 1993, between the Registrant and Joseph M. Field,
as amended(2)
10.03 Employment Agreement, dated December 17, 1998, between the Registrant and David J.
Field, as amended(2)
10.04 Employment Agreement, dated December 17, 1998, between the Registrant and John C.
Donlevie, as amended(2)
10.05 Employment Agreement, dated November 13, 1998, between the Registrant and Stephen F.
Fisher(2)
10.06 Entercom 1998 Equity Compensation Plan(2)
10.07 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) (3)
10.08 Credit Agreement, dated as of December 16, 1999, by and 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.(6)
10.09 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 Willkes-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.)(5)
10.10 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.)(5)
10.11 Second Amendment to the Credit Agreement between Entercom Radio, LLC, the borrower,
Entercom Communications Corp., the parent, Key Corporate Capital, administrative agent,
Bank of America, syndication agent and the financial institutions listed on the
signature pages. (1) 90
21.01 Information Regarding Subsidiaries of the Registrant (1) 101
23.01 Consent of Arthur Andersen LLP (1) 103
23.02 Consent of Deloitte & Touche LLP (1) 104
(1) Filed herewith.
(2) Incorporated by reference to our Registration Statement on Form S-1. (File
No. 333-61381)
(3) Incorporated by reference to our Quarterly Report on Form 10-Q. (File No.
001-14461)
(4) Incorporated by reference to our Registration Statement on Form S-1. (File
No. 333-86843)
(5) Incorporated by reference to our Registration Statement on Form S-1. (File
No. 333-86397)
(6) Incorporated by reference to our Current Report on Form 8-K. (File No.
001-14461)
(b) Reports on Form 8-K
88
No reports of Form 8-K were filed by us during the fourth quarter of
the year ended December 31, 2001.
89