UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period Commission File Number 1-13674
ended September 30, 1996
Katz Media Group, Inc.
(Exact name of registrant as specified in its charter)
Delaware 13-3779269
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
125 West 55th Street, New York, New York 10019
(Address of principal executive offices - Zip Code)
(212) 424-6000
(Registrant's telephone number, including area code)
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 [ ]
At November 6, 1996 -- 13,681,435 shares of the Registrant's common stock
were outstanding.
INDEX
PAGE
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Item 1 - Financial Statements
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Consolidated Balance Sheets....................................... 2
Consolidated Statements of Operations............................. 3
Consolidated Statements of Cash Flows............................. 4
Notes to Consolidated Financial Statements........................ 5-6
Item 2 - Management's Discussion and Analysis of
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Financial Condition and Results of Operations................ 7-10
Part II Other Information
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Item 1 - Legal Proceedings............................................. 10
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Signatures............................................................. 11
Financial Data Schedule............................................. .. 12
1
KATZ MEDIA GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(000's Omitted, Except Share and Per Share Information)
September 30, December 31,
------------- ------------
1996 1995
(Unaudited) (Note)
Assets
Current assets:
Cash and cash equivalents........................................$ 3,560 $ 2,350
Accounts receivable, net of allowance for doubtful
accounts of $1,300.............................................. 60,102 61,405
Deferred costs on purchases of station representation
contracts....................................................... 21,097 13,096
Prepaid expenses and other current assets ....................... 922 869
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Total current assets...................................... 85,681 77,720
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Fixed assets, net................................................... 16,363 12,437
Deferred income taxes............................................... 1,857 1,857
Deferred costs on purchases of station representation
contracts.......................................................... 65,648 39,602
Intangible assets, net.............................................. 221,037 227,726
Other assets, net................................................... 23,410 18,291
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Total assets..............................................$ 413,996 $ 377,633
------------ ----------
------------ ----------
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued liabilities.........................$ 46,048 $ 38,425
Deferred income on sales of station representation
contracts ...................................................... 12,314 10,700
Income taxes payable............................................. 3,365 3,178
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Total current liabilities...................................... 61,727 52,303
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Deferred income on sales of station representation
contracts......................................................... 4,506 3,589
Long-term debt...................................................... 194,890 179,530
Other liabilities, principally deferred rent and
representation contracts payable.................................. 44,018 34,770
Commitments and contingencies....................................... -- --
Stockholders' equity
Preferred stock, $.01 par value, 4,000,000 shares
authorized, no shares issued ................................... -- --
Common stock, $.01 par value, 26,000,000 shares
authorized, 13,665,852 shares (1996) and 13,673,700
shares (1995)................................................... 137 137
Paid-in-capital.................................................. 129,646 129,382
Carryover basis adjustment....................................... (20,047) (20,047)
Accumulated deficit.............................................. (545) (1,831)
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109,191 107,641
Treasury Stock, at cost, 14,583 shares (1996) and 33,333
shares (1995) .................................................. (88) (200)
Unearned Compensation-Restricted Stock........................... (248) --
------------ -----------
Total stockholders' equity................................. 108,855 107,441
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Total liabilities and stockholders' equity.................$ 413,996 $ 377,633
------------ -----------
Note: The consolidated balance sheet at December
31, 1995 has
been derived from audited financial
statements at that date.
The accompanying notes are an integral part of these
consolidated financial statements.
2
KATZ MEDIA GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(000's Omitted, Except Share and Per Share Information)
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
1996 1995 1996 1995
Operating revenues, net.............. $ 43,554 $ 43,611 $ 129,951 $ 133,044
Operating expenses:..................
Salaries and related costs........... 24,518 24,050 74,471 75,778
Selling, general and administrative.. 7,533 9,575 26,999 28,307
Depreciation and amortization........ 4,038 2,799 9,878 9,788
------- ------- -------- -------
Total operating expenses....... 36,089 36,424 111,348 113,873
Operating income............... 7,465 7,187 18,603 19,171
Other expense (income):..............
Interest expense..................... 5,127 5,007 15,261 19,965
Interest (income).................... (33) (60) (144) (194)
------- ------- -------- -------
Total other expense, net........ 5,094 4,947 15,117 19,771
Income (loss) before income tax
provision (benefit)................ 2,371 2,240 3,486 (600)
Income tax provision (benefit)....... 1,481 1,683 2,200 (450)
------- ------- -------- -------
Net income (loss) ............ $890 $557 $1,286 ($150)
------- ------- -------- -------
------- ------- -------- -------
Net income (loss) per common share... $.06 $.04 $.09 ($.01)
------- ------- -------- -------
------- ------- -------- -------
Weighted average common shares.......13,940,213 13,989,264 13,969,490 11,649,802
------- ------- -------- -------
------- ------- -------- -------
The accompanying notes are an integral part of these
consolidated financial statements.
3
KATZ MEDIA GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(000's omitted)
(Unaudited)
Nine Months Ended
September 30,
-----------------
1996 1995
---- ----
Cash flows from operating activities:
Net income (loss) before adjustments........................... $1,286 ($150)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization............................... 9,878 9,788
Amortization of debt issuance costs......................... 32 1,726
Deferred rent............................................... 1,118 781
Non-cash compensation expense for stock options............. 380 1,489
Reversal of excess provision for relocation................. (1,500) --
Changes in assets and liabilities:
(Increase) decrease in accounts receivable.................. (453) 3,418
(Increase) in other assets.................................. (2,705) (1,880)
(Increase) in deferred taxes................................ -- (599)
Decrease in accounts payable and accrued liabilities....... (615) (1,451)
Increase (decrease) in income taxes payable................. 187 (182)
Other, net.................................................. (57) (1,479)
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Total adjustments........................................... 6,265 11,611
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Net cash provided by operating activities................... 7,551 11,461
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Cash flows from investing activities:
Capital expenditures........................................ (6,123) (3,839)
Payments received on sales of station representation
contracts.................................................. 15,053 15,200
Payments made on purchases of station representation
contracts.................................................. (30,010) (24,628)
Investment in cable joint venture........................... -- (10,640)
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Net cash (used in) investing activities (21,080) (23,907)
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Cash flows from financing activities:
Credit facilities borrowing.................................... 53,700 49,000
Credit facilities repayments................................... (36,600) (48,500)
Proceeds from Bridge Notes..................................... -- 4,000
Retirement of 12 3/4% Senior Subordinated Notes................ (1,740) (470)
Retirement of other notes payable............................. -- (370)
Financing Fees................................................. (621) --
Release of escrow funds........................................ -- 2,000
Net proceeds from issuance of Common Stock..................... -- 80,475
Retirement of Bridge Notes..................................... -- (74,000)
Purchase of treasury stock .................................... -- (200)
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Net cash provided by financing activities 14,739 11,935
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Net increase (decrease) in cash and cash equivalents............. 1,210 (511)
Cash and cash equivalents, beginning of period................... 2,350 2,727
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Cash and cash equivalents, end of period.........................$ 3,560 $ 2,216
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The accompanying notes are an integral part of these
consolidated financial statements.
4
KATZ MEDIA GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Due to the seasonality of the business of Katz Media Group, Inc.
(the "Company"), operating results for the nine month period ended September 30,
1996, are not necessarily indicative of the results that may be expected for the
year ended December 31, 1996. For further information, refer to the consolidated
1995 financial statements and footnotes thereto included in the Company's Form
10-K filed March 29, 1996 (File No. 1-13674).
2. EARNINGS PER COMMON SHARE
Net income per common share is calculated by dividing net income by the
number of weighted average shares of Common Stock outstanding for the period,
adjusted for the incremental shares. Net loss per common share for the period
January 1, 1995 through September 30, 1995 is calculated by dividing net loss by
the number of weighted average shares of Common Stock outstanding adjusted to
give effect to the 5 for 3 stock split authorized in March 1995 as if it
occurred as of January 1, 1995.
3. RESTRICTED STOCK PLAN
Shares held in treasury are available for grant under the 1996 Restricted
Stock Grant Plan (the "1996 Restricted Plan") which may be increased from time
to time at the discretion of the Board of Directors.
Effective January 2, 1996, the Compensation Committee of the Board of
Directors awarded 18,750 shares of restricted stock under the 1996 Restricted
Plan to certain key executives. The market price of the Company's Common Stock
on the date of grant was $17 5/8. The restrictions on such shares lapse ratably
over a three year period. As such restrictions lapse, compensation expense will
be recognized representing the fair market value of the Company's Common Stock
on the date of grant. During the nine months ended September 30, 1996,
approximately $83,000 of related compensation expense was recognized.
4. RECENT DEVELOPMENTS AND OTHER
On September 6, 1996, the Company, through Katz Media Services, Inc., a
newly-formed, wholly-owned subsidiary, as borrower, established a new senior
secured Revolving Credit Facility (the "Interim Credit Facility") with a group
of lenders for which The First National Bank of Boston acts as agent. The
Interim Credit Facility provides for borrowings of up to $35.0 million and
matures on March 31, 1998. A portion of the facility, $5.0 million, is reserved
to cover interest payments over the term of the facility. The balance of the
facility is available for acquisitions, contract buyouts and general corporate
purposes.
5
Borrowings under the Interim Credit Facility bear interest at the Company's
option at either 150 basis points over the Base Rate (as defined) or 250 basis
points over the Eurodollar Rate (as defined). In addition, the Company pays a
commitment fee of 0.5% per annum on the average daily balance of the unused
commitments.
The Interim Credit Facility contains customary affirmative and negative
covenants and events of default.
In connection with the Interim Credit Facility, the Company amended the
terms of its existing Credit Agreement to advance the final maturity from
September 30, 1999 to June 30, 1999.
During the quarter ended September 30, 1996, the Company reevaluated the
economic feasibility of its plan to sublet a portion of its headquarter
facilities. Upon reevaluation, the Company has determined that such a program is
not economically feasible and accordingly, has reversed the related $1.5 million
accrual which had been established in 1995. This reversal has been reflected as
a component of selling, general and administrative expense in the accompanying
financial statements.
6
KATZ MEDIA GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
General
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The following discussion is based upon and should be read in conjunction
with the Consolidated Financial Statements, including the notes thereto,
included elsewhere herein.
The net operating revenues of the Company are derived from commissions on
the sale of national spot advertising air time for radio and television clients.
Commission rates are negotiated and set forth in the client's individual
representation contracts. The key to the Company's success is the maintenance of
its current representation contracts with client stations and the acquisition of
new representation contracts. The primary operating expenses of the Company are
employee salaries, rents, commission-related payments to employees, data
processing expenses, and depreciation and amortization. The Company's financial
results have been impacted by three significant factors: (i) trends in
advertising expenditures, (ii) buyouts and sales of station representation
contracts, including those resulting from changes in ownership of stations and
(iii) acquisitions of representation firms. The effect of these factors on the
Company's financial condition and results of operations have varied from period
to period. Recent changes in regulations affecting ownership of broadcast
stations have led to and are likely to continue to lead to larger station groups
under common ownership, which has the effect of increasing the level and
frequency of buyouts of representation contracts. Most recently, this has
resulted in a net increase in the number of radio station clients and a net
decrease in the number of television station clients represented by the Company.
The Company continues to pursue the representation of additional client stations
and groups in each of the media where it provides services.
This quarterly report on Form 10-Q contains forward looking statements that
involve risks and uncertainties, including those associated with the effect of
national and regional economic conditions, the ability of the Company to obtain
new clients and retain existing clients, changes in ownership of client stations
and client stations of the Company's competitors, other developments at clients
of the Company, the ability of the Company to realize cost reductions from its
cost containment efforts, and developments from recent changes in the regulatory
environment for its clients.
Business
- --------
The Company operates as a single segment business and is the only full
service media representation firm in the United States serving multiple types of
electronic media, with leading market shares in the representation of radio and
television stations and cable systems. During the third quarter of 1996 the
Company's percentage composition of gross billings (representing the aggregate
dollar amount of advertising placed on client stations or systems) by broadcast
media was as follows: 55.2% for television; 39.2% for radio; and 5.6% for cable
and international (on a 100% owned basis). Gross billings during the third
quarter of 1996 compared to third quarter 1995 decreased 21.9% for television
primarily reflecting the decreased national spot advertising sales, increased
14.9% for radio generally as a result of new client additions, and decreased
13.6% for cable and international (on a 100% owned basis) generally as a result
of lost client stations in the international market. The composition of gross
billings by broadcast media during the third quarter of 1995 was 63.6% for
television, 30.7% for radio, and 5.7% for cable and international (on a 100%
owned basis).
Results of Operations - Three Months Ended September 30, 1996
- -------------------------------------------------------------
Net operating revenues for the third quarter of 1996 were comparable to
those of the third quarter of 1995, where both totaled $43.6 million.
Operating expenses, excluding depreciation and amortization, decreased $1.6
million, or approximately 4.7%, from $33.6 million in the third quarter of 1995
as compared to $32.0 million in the third quarter of 1996. Salaries and related
costs increased by $0.5 million, or approximately 1.9%, when compared to the
third quarter of 1995. Selling, general and administrative expense decreased by
$2.0 million when compared to the third quarter of 1995, primarily related to
7
the reversal of the $1.5 million accrual of costs (reflected in the fourth
quarter of 1995) related to the Company's plan to reduce its headquarters
facility requirements, which the Company has determined is no longer
economically feasible. Operating expenses, excluding depreciation and
amortization as well as the reversal of $1.5 million in relocation reserves, as
a percentage of net operating revenues, decreased marginally from 77.1% in the
third quarter of 1995 to 77.0% in the third quarter of 1996.
Depreciation and amortization increased by $1.2 million, or 44.3%, for the
third quarter of 1996 compared to the third quarter of 1995, primarily due to
the relatively higher amounts of amortization for representation contracts
acquired in the second half of 1995 and 1996.
Operating income for the third quarter of 1996 increased by $0.3 million
compared to the third quarter of 1995 as a result of the operating components
discussed above.
Interest expense, net, increased by $0.1 million for the third quarter of
1996 compared to the third quarter of 1995, primarily attributable to increased
borrowings, offset by lower interest rates.
Income before income tax provision totaled $2.4 million for the third
quarter of 1996, compared to $2.2 million for the third quarter of 1995. This
result was primarily due to the components listed above.
The difference between the effective tax rate of 62.5% compared to the U.S.
statutory rate of 35% in the third quarter of 1996 was primarily attributable to
goodwill amortization, other nondeductible expenses and state income taxes.
Results of Operations - Nine Months Ended September 30, 1996
- ------------------------------------------------------------
Net operating revenues for the first nine months of 1996 totaled $130.0
million, a decrease of approximately $3.0 million, or 2.3%, compared to net
operating revenues of $133.0 million for the first nine months of 1995. This
decrease primarily reflects the July 1995 transfer of United Television, Inc.
stations ($3.5 million of operating revenues in the first seven months of 1995)
to a new representation firm in which the Company will receive a profit
distribution rather than report revenues and associated expenses, partially
offset by increased operating revenues for client stations acquired in the
second half of 1995 and early 1996.
Operating expenses, excluding depreciation and amortization, decreased from
$104.1 million for the first nine months of 1995 to $101.5 million for the first
nine months of 1996, a decrease of $2.6 million, or 2.5%. This decrease was
primarily attributable to the one time reversal of $1.5 million in relocation
accrual discussed above. The remaining $1.1 million of reduction in expenses was
primarily attributable to decreased compensation reflecting the transfer of the
United Television, Inc. stations and other items, offset by the start-up costs
associated with the new Sentry Radio division and the establishment of the
Company's interactive internet media representation subsidiary, Katz Millennium
Marketing.
Depreciation and amortization increased by $0.1 million, or a 0.9%, for the
first nine months of 1996 compared to the first nine months of 1995, due to
relatively higher amounts of amortization for representation contracts acquired
in the second half of 1995 and early 1996 offset by amortization expense related
to non-compete agreements arising from the August 1994 acquisition of Katz Media
Corporation which became fully amortized during the first nine months of 1995.
Operating income for the first nine months of 1996 decreased by $0.6
million, or 3.0%, compared to the first nine months of 1995, as a result of the
components discussed above.
Interest expense, net, aggregated $15.1 million for the first nine months
of 1996, compared to $19.8 million for the first nine months of 1995. The 1995
figure includes $4.7 million of interest and amortized deferred financing costs
related to the debt which was reduced or satisfied with the net proceeds of the
Company's initial public offering in April 1995.
Income before income tax provision totaled $3.5 million for the first nine
months of 1996, compared to a loss of $0.6 million for the comparable period of
1995. This result was primarily due to the components listed above.
8
The difference between the effective tax rate of 63.1% compared to the U.S.
statutory rate of 35% for the first nine months of 1996 was primarily
attributable to permanent differences between the book and taxable income
related to goodwill amortization, other nondeductible expenses and state income
taxes.
Liquidity and Capital Resources
- -------------------------------
Cash provided by operating activities in the first nine months of 1996 as
compared to the first nine months of 1995 decreased $3.9 million. This decrease
in cash provided by operating activities was due to the net change in working
capital.
Net cash used in investing activities during the first nine months of 1996
aggregated $21.1 million, a decrease of $2.8 million compared to net cash used
in investing activities during the first nine months of 1995 of $23.9 million.
This decrease in cash used in investing activities was mainly a result of the
$10.7 million investment in National Cable Communications, L.P., the Cable Joint
Venture, which occurred in the first quarter of 1995, offset by the net
increases in purchases of station representation contracts of $5.5 million and
increased capital expenditures of $2.3 million in the first nine months of 1996
as compared to the first nine months of 1995.
Cash flows from financing activities provided $14.7 million during 1996
versus $11.9 million during 1995. Excluding the effects of the April 11, 1995
initial public offering, the cash provided by financing activities increased by
$13.3 million in the first nine months of 1996 as compared to the first nine
months of 1995, primarily as a result of increased borrowings on the Company's
credit agreements offset in part by the repurchase of a portion of Katz Media
Corporation's 12 3/4% Senior Subordinated Notes due 2002.
The following table reconciles operating income to EBITDA for the three and
nine months periods ending September 30, 1996 and 1995:
Three Months Ended Nine Months Ended
September 30, September 30,
1996 1995 1996 1995
---- ---- ---- ----
Operating Income............. $ 7,465 $ 7,187 $18,603 $19,171
Depreciation and Amortization 4,038 2,799 9,878 9,788
Non-cash rent expense........ 328 317 1,118 917
Stock option compensation
(credit) charge............. (216) 760 380 1,489
Reversal of provision for
relocation (1,500) - (1,500) -
------- ----- ------- ------
EBITDA....................... $10,115 $11,063 $28,479 $31,365
------- ----- ------- ------
------- ----- ------- ------
EBITDA for the third quarter of 1996 decreased $1.0 million, or 8.6%, to
$10.1 million as compared to $11.1 million for the third quarter of 1995. This
decrease as compared to the moderate increase in operating income was primarily
attributable to lower non-cash compensation expense related to stock options
($0.2 million of compensation income in the third quarter of 1996 compared to an
expense of $0.8 million in the third quarter of 1995), and the $1.5 million
reversal of the provision for relocation relating to the Company's plan to
reduce its headquarters facility requirements in the 1996 period. As a result,
the EBITDA margin decreased from 25.4% in the third quarter of 1995 to 23.2% in
the third quarter of 1996.
EBITDA for the first nine months of 1996 decreased $2.9 million, or 9.2, to
$28.5 million as compared to $31.4 million for the first nine months of 1995.
This decrease, as compared to the 3.0% decrease in operating income, was
primarily attributable to lower non-cash compensation expense related to stock
options ($0.4 million in the first nine months of 1996 compared to $1.5 million
in the comparable 1995 period) and the $1.5 million reversal of the provision
for relocations relating to the Company's plan to reduce its headquarters
facility requirements in the 1996 period. As a result, the EBITDA margin
decreased from 23.6% in the first nine months of 1995 to 21.9% in the first nine
months of 1996.
9
The Company continuously seeks opportunities to acquire additional
representation contracts on attractive terms, and at the same time looks to
maintain its current client roster. In addition, the recent changes in ownership
of broadcast properties have fueled changes in client engagements among
independent media representation firms. These changes and the Company's ability
to acquire and maintain representation contracts can cause fluctuations in the
Company's revenues and cash flows from period to period.
The Company's working capital requirements have historically been primarily
provided by operations plus borrowings under the Company's Credit Agreements,
including the Interim Credit Facility established in September 1996 providing
for revolving credit loans of up to $35.0 million.
PART II Other Information
-----------------
Item 1 - Legal Proceedings
The Company, from time to time, is involved in litigation by former
employees and other litigation incidenetal to the conduct of its business. The
Company is not a party to any lawsuit or proceeding which, in the opinion of
management, is likely to have a material adverse effect on the Company.
Items 2-5
There are no reportable items under Part II, Items 2-5.
Item 6 - Exhibits and Reports on form 8-K
(b) Reports on Form 8-K
Report filed September 13, 1996 relating to the Interim Credit Facility
referred to in Note 3 of Notes to Consolidated Financial Statements included
elsewhere herein.
10
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: November 14, 1996 KATZ MEDIA GROUP, INC.
By: /s/ Thomas F. Olson By: /s/ Richard E. Vendig
------------------------- -----------------------
Thomas F. Olson Richard E. Vendig
President and Chief Senior Vice President
Executive Officer and Director Chief Financial &
Administrative Officer,
Treasurer
11