UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2002
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)
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [_]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class A Common Stock, $.01 par value -38,950,518 Shares Outstanding as of
May 6, 2002
Class B Common Stock, $.01 par value -10,531,805 Shares Outstanding as of
May 6, 2002
ENTERCOM COMMUNICATIONS CORP.
INDEX
Page
Part I - Financial Information
Item 1. Financial Statements .............................................. 3
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ...................................... 20
Item 3. Quantitative and Qualitative Disclosures About Market Risk ........ 25
Part II - Other Information
Item 1. Legal Proceedings ................................................. 26
Item 2. Changes in Securities and Use of Proceeds ......................... 26
Item 3. Defaults Upon Senior Securities ................................... 26
Item 4. Submission of Matters to a Vote of Security Holders ............... 26
Item 5. Other Information ................................................. 26
Item 6. Exhibits and Reports on Form 8-K .................................. 27
Signatures ..................................................................... 28
2
PART I
FINANCIAL INFORMATION
ITEM 1. Financial Information
ENTERCOM COMMUNICATIONS CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2001 AND MARCH 31, 2002
(amounts in thousands)
(unaudited)
ASSETS
DECEMBER 31, MARCH 31,
----------- --------
2001 2002
---- ----
CURRENT ASSETS:
Cash and cash equivalents $ 10,751 $ 265,172
Accounts receivable, net of allowance for doubtful accounts 64,319 57,153
Prepaid expenses and deposits 6,521 9,073
Federal and state income tax credits and deposits 933 4,718
Deferred tax assets 5,256 9,085
----------- -----------
Total current assets 87,780 345,201
----------- -----------
INVESTMENTS 13,671 14,307
----------- -----------
PROPERTY AND EQUIPMENT:
Land, land easements and land improvements 10,542 10,562
Buildings 11,631 11,636
Equipment 83,388 83,954
Furniture and fixtures 12,592 12,585
Leasehold improvements 11,514 11,527
----------- -----------
129,667 130,264
Accumulated depreciation and amortization (37,680) (40,609)
----------- -----------
91,987 89,655
Capital improvements in progress 345 1,148
----------- -----------
Net property and equipment 92,332 90,803
----------- -----------
RADIO BROADCASTING LICENSES AND OTHER INTANGIBLES - Net 1,232,612 1,020,504
----------- -----------
DEFERRED CHARGES AND OTHER ASSETS - Net 12,345 44,970
----------- -----------
TOTAL $ 1,438,740 $ 1,515,785
=========== ===========
The accompanying notes to condensed financial statements are an integral part
of these statements.
3
ENTERCOM COMMUNICATIONS CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2001 AND MARCH 31, 2002
(amounts in thousands)
(unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
DECEMBER 31, MARCH 31,
----------- --------
2001 2002
---- ----
CURRENT LIABILITIES:
Accounts payable $ 10,992 $ 13,146
Accrued liabilities:
Salaries 5,446 6,898
Interest 2,689 3,373
Other 6,536 4,880
Derivative instruments 3,529 2,866
Current portion of long-term debt 24,389 38,608
----------- -----------
Total current liabilities 53,581 69,771
----------- -----------
LONG-TERM DEBT:
Bank facility 363,625 286,406
7.625% Senior subordinated notes - 150,000
Other long-term debt 309 306
----------- -----------
Total long-term debt 363,934 436,712
----------- -----------
OTHER LONG-TERM LIABILITIES:
Deferred tax liabilities 135,974 55,602
Derivative instruments 3,516 1,503
Deferred rent 854 920
----------- -----------
Total other long-term liabilities 140,344 58,025
----------- -----------
COMPANY-OBLIGATED MANDATORILY REDEEMABLE CONVERTIBLE
PREFERRED SECURITIES OF SUBSIDIARY HOLDING SOLELY CONVERTIBLE
DEBENTURES OF THE COMPANY ("TIDES") 125,000 125,000
----------- -----------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Preferred stock - -
Class A common stock 348 389
Class B common stock 105 105
Class C common stock - -
Additional paid-in capital 751,803 952,444
Retained earnings (deficit) 5,418 (127,790)
Unearned compensation (201) (169)
Accumulated other comprehensive income (loss) (1,592) 1,298
----------- -----------
Total shareholders' equity 755,881 826,277
----------- -----------
TOTAL $ 1,438,740 $ 1,515,785
=========== ===========
The accompanying notes to condensed financial statements are an integral part
of these statements.
4
ENTERCOM COMMUNICATIONS CORP.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2001 AND 2002
(amounts in thousands, except share and per share data)
(unaudited)
THREE MONTHS ENDED
------------------
MARCH 31,
--------
2001 2002
---- ----
NET REVENUES $ 69,455 $ 74,159
------------ ------------
OPERATING EXPENSES:
Station operating expenses 46,360 48,159
Depreciation and amortization 11,280 3,391
Corporate general and administrative expenses 3,330 3,351
Net expense from time brokerage agreement fees - 2,116
Net loss (gain) on sale of assets 23 (9)
------------ ------------
Total operating expenses 60,993 57,008
------------ ------------
OPERATING INCOME 8,462 17,151
------------ ------------
OTHER EXPENSE (INCOME):
Interest expense, including amortization of deferred financing costs of $216 in
2001 and $250 in 2002 8,127 5,588
Financing cost of Company-obligated mandatorily redeemable convertible preferred
securities of subsidiary holding solely convertible debentures
of the Company 1,953 1,953
Interest income (95) (262)
Equity loss from unconsolidated affiliate 850 974
Net loss (gain) on derivative instruments 478 (607)
------------ ------------
Total other expense 11,313 7,646
------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES AND ACCOUNTING CHANGE (2,851) 9,505
INCOME TAX PROVISION (BENEFIT) (1,102) 3,837
------------ ------------
INCOME (LOSS) BEFORE ACCOUNTING CHANGE (1,749) 5,668
Cumulative effect of accounting change, net of taxes of $377 in 2001 and $92,584 in 2002 (566) (138,876)
------------ ------------
NET LOSS $ (2,315) $ (133,208)
============ ============
NET LOSS PER SHARE - BASIC:
Income (loss) before accounting change $ (0.04) $ 0.12
Cumulative effect of accounting change, net of taxes (0.01) (2.98)
------------ ------------
NET LOSS PER SHARE - BASIC $ (0.05) $ (2.86)
============ ============
NET LOSS PER SHARE - DILUTED:
Income (loss) before accounting change $ (0.04) $ 0.12
Cumulative effect of accounting change, net of taxes (0.01) (2.92)
------------ ------------
NET LOSS PER SHARE - DILUTED $ (0.05) $ (2.80)
============ ============
WEIGHTED AVERAGE SHARES:
Basic 45,250,110 46,575,279
============ ============
Diluted 45,250,110 47,613,126
============ ============
The accompanying notes to condensed financial statements are an integral part
of these statements.
5
ENTERCOM COMMUNICATIONS CORP.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
THREE MONTHS ENDED MARCH 31, 2001 AND 2002
(amounts in thousands)
(unaudited)
THREE MONTHS ENDED
------------------
MARCH 31,
--------
2001 2002
---- ----
NET LOSS $ (2,315) $ (133,208)
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX PROVISION (BENEFIT)
Unrealized gain on investments - net of tax provision of $1.2 million in 2001 and
$0.6 million in 2002 1,727 960
Unrealized loss on hedged derivatives from cumulative effect of accounting
change - net of tax benefit of $0.5 million in 2001 (685) -
Unrealized (loss) gain on hedged derivatives - net of tax benefit of $1.1 million in
2001 and tax provision of $1.3 million in 2002 (1,653) 1,930
--------- ----------
COMPREHENSIVE LOSS $ (2,926) $ (130,318)
========= ==========
The accompanying notes to condensed financial statements are an integral part
of these statements.
6
ENTERCOM COMMUNICATIONS CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2001 AND 2002
(amounts in thousands)
(unaudited)
THREE MONTHS ENDED
------------------
MARCH 31,
---------
2001 2002
---- ----
OPERATING ACTIVITIES:
Net loss $ (2,315) $(133,208)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization 11,280 3,391
Amortization of debt financing costs 216 250
Deferred taxes 3,762 7,394
Tax benefit on exercise of options 161 644
Provision for bad debts 1,130 673
Loss (gain) on disposition of assets 23 (9)
Non-cash stock-based compensation expense 164 134
Equity loss from unconsolidated affiliate 850 974
Net loss (gain) on derivative instruments 478 (607)
Cumulative effect of accounting change 566 138,876
Deferred rent - 66
Changes in assets and liabilities (net of effects of acquisitions and dispositions):
Accounts receivable 16,215 6,493
Prepaid expenses and deposits (2,384) (3,969)
Prepaid and refundable income taxes (5,212) (3,785)
Accounts payable and accrued liabilities (2,706) 2,845
--------- ---------
Net cash provided by operating activities 22,228 20,162
--------- ---------
INVESTING ACTIVITIES:
Additions to property and equipment (4,028) (1,109)
Proceeds from sale of property, equipment and other assets 106 9
Purchases of radio station assets - (20,800)
Deferred charges and other assets (333) (25)
Purchase of investments (2,804) (10)
Station acquisition deposits and costs (74) (26,181)
--------- ---------
Net cash used in investing activities (7,133) (48,116)
--------- ---------
FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt 3,078 195,500
Net proceeds from stock offering - 196,498
Payments on long-term debt (19,004) (108,504)
Deferred financing expenses related to bank facility and senior subordinated notes - (4,558)
Proceeds from issuance of common stock related to incentive plans 145 158
Proceeds from exercise of stock options 516 3,281
--------- ---------
Net cash (used in) provided by financing activities (15,265) 282,375
--------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (170) 254,421
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 13,257 10,751
--------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 13,087 $ 265,172
========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION -
Cash paid during the period for:
Interest $ 7,826 $ 5,536
========= =========
Interest on TIDES $ - $ -
========= =========
Income taxes $ 25 $ -
========= =========
The accompanying notes to condensed financial statements are an integral part
of these statements.
7
ENTERCOM COMMUNICATIONS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 2000 AND 2001
1. BASIS OF PRESENTATION
The accompanying unaudited financial statements for Entercom Communications
Corp. (the "Company") have been prepared in accordance with (1) generally
accepted accounting principles for interim financial information and (2) the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do
not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, the financial statements reflect all adjustments considered
necessary for a fair statement of the results of operations and financial
position for the interim periods presented. All such adjustments are of a
normal, recurring nature.
This Form 10-Q should be read in conjunction with the financial statements
and notes thereto included in the Company's audited financial statements as of
December 31, 2001, and filed with the Securities and Exchange Commission (the
"SEC") on February 11, 2002, as part of the Company's Form 10-K.
During February 2002, the Company filed a universal shelf registration
statement with the SEC to offer up to (1) $250.0 million in aggregate offering
price of Class A Common Stock and/or Preferred Stock and (2) $250.0 million in
aggregate principal amount or initial accreted value of its debt securities
consisting of debentures, notes or other types of debt. In connection with this
registration statement, on February 27, 2002, the Company entered into separate
equity and debt underwriting agreements for equity and debt offerings that were
completed on March 5, 2002 and March 8, 2002 (See Notes 4 and 8).
Operating results for the interim periods presented are not necessarily
indicative of the results that may be expected for the full year. Certain prior
year amounts have been reclassified to conform to the current year's
presentation, which had no effect on the financial position, results of
operations or cash flows of the Company.
RECENT 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 believes that adoption of this
Statement did not have a material impact 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.
Effective January 1, 2002, the Company adopted 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. As of the date of adoption, the Company reflected
unamortized goodwill and unamortized broadcasting licenses in the amounts of
$4.2 million and $1,228.4 million, respectively. The Company has determined that
broadcasting licenses, which previously had been amortized over the maximum
period allowed of 40 years, were deemed to have indefinite useful lives.
Adoption of this accounting standard had the impact of eliminating the Company's
non-cash amortization expense for goodwill and broadcasting licenses. For
comparison purposes, for the three months ended March 31, 2001, the Company
recorded amortization expense for goodwill and broadcasting licenses of $0.1
million and $7.8 million, respectively. The Company also completed the
transitional non-amortizing intangible asset impairment test for broadcasting
licenses and recorded to the statement of operations, a $138.9 million
impairment charge, net of a deferred tax benefit of $92.6 million, under the
cumulative effect of accounting change. The amount of unamortized broadcasting
licenses reflected in the balance sheet as of March 31, 2002, after recording
the impairment charge, was $996.5 million. The amount of the broadcasting
licenses impairment charge was determined by an independent appraisal firm,
which relied primarily on a discounted cash flow approach assuming a start-up
scenario in which the only assets held by an investor were broadcasting
licenses. The Company determined the reporting unit as a radio market and
compared the carrying amount of the broadcasting
8
licenses in each market to the fair value of the market's broadcasting licenses
as determined by the independent appraiser. The required impairment tests of
broadcasting licenses may result in additional future period write-downs. The
Company has calculated the transition adjustment in accordance with tentative
accounting guidance issued by the Emerging Issues Task Force ("EITF"), and
therefore, the guidance could be subject to change. The EITF is a committee
appointed by the FASB and assigned the responsibility of answering
implementation and interpretation questions related to this new accounting
standard.
In order to complete the transitional assessment of goodwill as
required by SFAS No. 142, the Company will determine by the end of the second
quarter of 2002, the fair value of each market and compare it to the market's
carrying amount. To the extent a market's carrying amount exceeds its fair
value, an indication exists that the market's goodwill 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
market's goodwill, determined by allocating the market'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 2002. Any
transitional impairment charge will be recognized as the cumulative effect of a
change in accounting principle in the Company's consolidated statement of
operations. The Company has not yet determined what the effect of the impairment
tests related to goodwill will be on the Company's financial position, cash
flows or results of operations. The required impairment tests of goodwill may
result in future period write-downs.
The following unaudited pro forma summary presents the Company's
estimate of the effect of the adoption of SFAS No. 142 as of the beginning of
the periods presented as reported income before accounting change and net income
(loss) are adjusted to eliminate the amortization expense recognized in those
periods related to goodwill and broadcasting licenses as goodwill and
broadcasting licenses are not amortized under this new accounting standard. The
pro forma amounts for the three months ended March 31, 2001 do not include any
adjustments for potential write-downs of goodwill and broadcasting licenses
which could result based on the performance of the required impairment tests
under the provisions of SFAS No. 142. The as reported amounts for the three
months ended March 31, 2002 do not include any adjustments for potential
write-downs of goodwill which could result in a subsequent quarter of this year
based on the performance of the required impairment tests under the provisions
of SFAS No. 142.
Three Months Ended
March 31,
--------------------------------
2001 2002
--------------- ---------------
Pro Forma As Reported
Reported income (loss) before accounting change $ (1,749) $ 5,668
Add back: amortization of goodwill, net of tax
provision of $12 for the three months ended
March 31, 2001 17 -
Add back: amortization of broadcasting licenses, net of
tax provision of $3,124 for the three months
ended March 31, 2001 4,687 -
--------------- ---------------
Pro forma income before accounting change 2,955 5,668
Reported cumulative effect of accounting change, net of taxes (566) (138,876)
--------------- ---------------
Pro forma net income (loss) $ 2,389 $ (133,208)
=============== ===============
Net income (loss) per share - basic:
Reported income (loss) before accounting change $ (0.04) $ 0.12
Amortization of goodwill, net of taxes - -
Amortization of broadcasting licenses, net of taxes 0.10 -
--------------- ---------------
Pro forma income before accounting change - basic 0.06 0.12
Reported cumulative effect of accounting change, net of taxes (0.01) (2.98)
--------------- ---------------
Pro forma net income (loss) per share - basic $ 0.05 $ (2.86)
=============== ===============
Net income (loss) per share - diluted:
Reported income (loss) before accounting change $ (0.04) $ 0.12
Amortization of goodwill, net of taxes - -
Amortization of broadcasting licenses, net of taxes 0.10 -
--------------- ---------------
Pro forma income before accounting change - diluted 0.06 0.12
Reported cumulative effect of accounting change, net of taxes (0.01) (2.92)
--------------- ---------------
Pro forma net income (loss) per share - diluted $ 0.05 $ (2.80)
=============== ===============
Weighted average shares:
9
Three Months Ended
March 31,
-----------------------------------------
2001 2001
------------------- ------------------
Pro Forma As Reported
As reported and pro forma - basic 45,250,110 46,575,279
=================== ==================
As reported - diluted 45,250,110 47,613,126
=================== ==================
Pro forma - diluted 45,933,172 47,613,126
=================== ==================
Effective January 1, 2002, the Company adopted 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 certain assets such as deferred tax assets, goodwill and intangible
assets not being amortized 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. The Company believes
that the adoption of this statement did not have a material impact on the
Company's financial position, cash flows or results of operations.
2. ACQUISITION, JOINT SALES AGREEMENT AND UNAUDITED PRO FORMA SUMMARY
Acquisition for the Three Months Ended March 31, 2002
On February 8, 2002, the Company acquired from WCCB-TV, Inc., a
subsidiary of Bahakel Communications, Ltd., the assets of WOZN-FM (formerly
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
increased the Company's ownership to six radio stations in the Greensboro, North
Carolina radio market. The Company incurred goodwill of $2.7 million in
connection with this purchase in order to compete more effectively in the market
by increasing the Company's cluster share of market revenues and market cluster
ranking.
The purchase price allocation for this acquisition is based on
information available at this time and is subject to change. For this
acquisition, the aggregate purchase price including transaction costs, was
allocated as follows:
(amounts in thousands)
- --------------------------------------------------------------------------------
Asset Description Amount Asset Lives
- -------------------------------- ------------------------- -----------------
Equipment $ 297 10 to 15 years
Furniture and equipment 30 5 years
------------------------
Total tangible assets 327
------------------------
Advertiser base 1,121 5 to 11 years
Broadcasting licenses 16,690 non-amortizing
Goodwill 2,662 non-amortizing
------------------------
Total intangible assets 20,473
------------------------
Total purchase price $ 20,800
========================
Joint Sales Agreement
On February 1, 2002, the Company entered into an agreement with Classic
Radio, Inc. ("Classic") to terminate, effective February 28, 2002, the KING-FM
Joint Sales Agreement that was scheduled to expire on June 30, 2002. Under this
agreement, the Company served as the exclusive sales agent for the Classic-owned
KING-FM radio station located in Seattle Washington. The Company received all
revenues from the sale of advertising time broadcast on KING-FM and was required
to pay a monthly fee to Classic based upon calculations as defined in the
agreement. Under the terms of the JSA, the Company was responsible for all costs
incurred in selling the advertising time. Classic was responsible for all costs
incurred in operating the station.
10
Unaudited Pro Forma Summary
The following unaudited pro forma summary presents the consolidated
results of operations as if any acquisitions which occurred during the period of
January 1, 2001 through March 31, 2002, had all occurred as of January 1, 2001,
after giving effect to certain adjustments, including depreciation and
amortization of assets and interest expense on any debt incurred to fund
acquisitions which would have been incurred had such acquisitions occurred as of
January 1, 2001. For a discussion of these acquisitions, please refer to the
Company's Form 10-K filed with the Securities and Exchange Commission on
February 11, 2002, which should be read in conjunction with our condensed
consolidated financial statements and the related notes included elsewhere in
this Form 10-Q. 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 acquisitions been made as of that date or results which may
occur in the future.
THREE MONTHS ENDED
------------------
MARCH 31,
---------
(amounts in thousands, except per share)
(Unaudited)
---------
2001 2002
---- ----
Pro Forma Pro Forma
--------- ---------
Net revenues $ 70,078 $ 74,159
=============== ===============
Income (loss) before accounting change $ (2,224) $ 5,508
=============== ===============
Cumulative effect of accounting change, net of taxes $ (566) $ (138,876)
=============== ===============
Net loss $ (2,790) $ (133,368)
=============== ===============
Net loss per share - basic $ (0.06) $ (2.86)
=============== ===============
Net loss per share - diluted $ (0.06) $ (2.80)
=============== ===============
3. SENIOR DEBT
The Company has a bank credit agreement (the "Bank Facility") with a
syndicate of banks which provides for senior secured credit of $650.0 million
consisting of: (1) a $325.0 million reducing revolving credit facility
("Revolver") and (2) a $325.0 million multi-draw term loan ("Term Loan"). The
Revolver and Term Loan, which mature on September 30, 2007, each reduce on a
quarterly basis beginning September 30, 2002, in quarterly amounts that vary
from $12.2 million to $16.3 million for each loan. As of March 31, 2002, the
Company had $325.0 million of borrowings outstanding under the Bank Facility's
Term Loan, in addition to $6.2 million in an outstanding Letter of Credit. The
Company used a portion of the March 5, 2002 equity offering's net proceeds (Note
8), to reduce indebtedness outstanding in the amount of $93.5 million under the
Revolver. 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. 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
operating cash flow to the pro forma debt service ratio financial covenant. The
Bank Facility also provides that any time prior to December 31, 2002 the Company
may solicit incremental loans up to $350.0 million, thereby increasing the Bank
Facility to a total of $1.0 billion. These incremental loans are subject to
syndicate approval and are governed under the same terms as the existing Bank
Facility.
The Company enters into interest rate transactions with different banks
to diversify its risk associated with interest rate fluctuations against the
variable rate debt under the Bank Facility and to comply with certain covenants
under the Bank Facility. Under these transactions, the Company agrees with other
parties to exchange, at specified intervals, the difference between fixed rate
and floating rate interest amounts calculated by reference to an agreed notional
principal amount against the variable debt. The total notional amount of these
transactions was $155.0 million as of March 31, 2002. These agreements, with
initial terms that vary from 2 years to 7 years, effectively fix the interest at
rates that vary from 5.8% to 8.5% on current borrowings equal to the total
notional amount.
4. SENIOR SUBORDINATED NOTES
On February 27, 2002, the Company's wholly owned subsidiary, Entercom
Radio, LLC, entered into an underwriting agreement to sell $150.0 million of
7.625% Senior Subordinated Notes ("Notes") due March 1, 2014. The Company
completed this offering on March 5, 2002 and received net proceeds of $145.8
million. There were approximately $4.2 million in deferred offering costs
recorded in connection with the sale, which are being amortized to interest
expense over the life of the Notes using the effective interest rate method. The
proceeds of the Notes will be
11
used to finance pending acquisitions and for general corporate purposes,
including future acquisitions and working capital needs.
Interest on the Notes, which are in denominations of $1,000 each, will
accrue at the rate of 7.625% per annum and will be payable semi-annually in
arrears on March 1 and September 1, commencing on September 1, 2002. The Company
may redeem the notes on and after March 1, 2007 at an initial redemption price
of 103.813% of their principal amount plus accrued interest. In addition, before
March 1, 2005, the Company may redeem up to 35% of the Notes at a redemption
price of 107.625% of their principal amount plus accrued interest using proceeds
of specified equity offerings. The Notes are unsecured and rank junior to our
senior indebtedness. In addition to the parent, Entercom Communications Corp.,
all of the Company's subsidiaries have fully and unconditionally guaranteed
these Notes ("Subsidiary Guarantors"). Under certain covenants, the Subsidiary
Guarantors are restricted from paying dividends or distributions in excess of
amounts defined under the Notes and the Subsidiary Guarantors cannot incur
additional indebtedness if the Leverage Ratio of Entercom Radio, LLC exceeds a
specified level.
5. CONVERTIBLE PREFERRED SECURITIES
On October 6, 1999, the Company sold 2,500,000 Convertible Preferred
Securities, Term Income Deferrable Equity Securities ("TIDES"), including
underwriters' over-allotments at an offering price of $50.00 per 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 trust pays quarterly calendar distributions. The first distribution was paid
on December 31, 1999. The TIDES represent undivided preferred beneficial
ownership interest in the assets of the trust. The trust used the proceeds to
purchase from the Company an equal amount of 6.25% Convertible Subordinated
Debentures due 2014. The Company owns all of the common securities issued by the
trust. The trust exists for the sole purpose of issuing the common securities
and the TIDES. The trust is a wholly-owned subsidiary of the Company, with the
sole assets of the trust consisting of the $125.0 million aggregate principal
amount of the Company's 6.25% Convertible Subordinated Debentures due September
30, 2014. The Company has entered into several contractual arrangements for the
purpose of fully, irrevocably and unconditionally guaranteeing the trust's
obligations under the TIDES. The holders of the TIDES have a preference with
respect to each distribution and amount payable upon liquidation, redemption or
otherwise over the holders of the common securities of the trust. Each TIDES is
convertible into shares of the Company's Class A Common Stock at the rate of
1.1364 shares of Class A Common Stock for each TIDES. As of March 31, 2002,
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.
6. DERIVATIVE AND HEDGING ACTIVITIES
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 that does not qualify as a
hedge is marked to fair value through the statement of operations. The Company
formally documents all relationships between hedging instruments and hedged
items, as well as its risk-management objective and strategy for undertaking
various hedge transactions. This process includes relating all derivatives that
are designated as fair value or cash flow hedges to specific assets and
liabilities on the balance sheet or to specific firm commitments or forecasted
transactions. The Company also formally assesses, both at the inception of the
hedge and on an ongoing basis, whether each derivative is highly effective in
offsetting changes in fair values or cash flows of the hedged item. If it is
determined that a derivative is not highly effective as a hedge or if a
derivative ceases to be a highly effective hedge, the Company will discontinue
hedge accounting prospectively.
For those derivatives that did not qualify for hedge accounting treatment
with an aggregate notional amount of $30.0 million, the Company recorded to the
statement of operations for the three months ended March 31, 2001: (1) a $0.4
million loss under the cumulative effect of accounting change as an accumulated
transition adjustment and (2) a $0.8 million loss under loss on derivative
instruments as the adjustment for this period. For those derivatives designated
as cash flow hedges that qualify for hedge accounting treatment with an
aggregate notional amount of $233.0 million, the Company recorded: (1) the
ineffective amount of the hedges to the statement of operations as a $0.6
million loss under the cumulative effect of accounting change as an accumulated
transition adjustment and as a $0.3 million gain under loss on derivative
instruments as the adjustment for this period and (2) the effective amount of
the hedges to other comprehensive loss, as a $1.1 million loss as an accumulated
transition adjustment and as a $2.8 million loss to unrealized loss on hedged
derivatives as the adjustment for this period.
12
For the three months ended March 31, 2002, the Company recorded to the
statement of operations for those derivatives that did not qualify for hedge
accounting treatment with an aggregate notional amount of $30.0 million, a $0.4
million gain under gain on derivative instruments. For those derivatives
designated as cash flow hedges that qualify for hedge accounting treatment with
an aggregate notional amount of $125.0 million, the Company recorded the
ineffective amount of the hedges to the statement of operations as a $0.2
million gain and the effective amount of the hedges to the statement of other
comprehensive income as a $3.2 million gain to unrealized gain on hedged
derivatives. The Company expects to record a $2.0 million gain on hedged
derivatives as a reclassification to the statement of operations during the next
twelve months from the transition adjustments that were recorded in other
comprehensive loss.
7. COMMITMENTS AND CONTINGENCIES
Pending 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. On April 30, 2002 the
California Superior Court issued an Interlocutory Judgment ordering, among other
things (i) that Royce sign all documents necessary to transfer the assets
relating to KWOD to the Company and to complete such transfer in exchange for
the $25.0 million purchase price, less the amount of the Company's damages to be
determined by the court, (ii) the Company to place $24.8 million in cash and a
$7.5 million irrevocable standby letter of credit in an escrow account pending
the transfer of the KWOD assets, the determination of the Company's damages and
the outcome of Royce's appeal, and (iii) a time Brokerage Agreement commence on
May 10, 2002 under which the Company will program and sell most of the broadcast
time on KWOD. Royce has filed a petition in the California appeals court
challenging this Interlocutory Judgment. The Court of Appeals has issued a
temporary stay of the Interlocutory Judgment until May 21, 2002. 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 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.
On February 12, 2002, the Company entered into an agreement with
subsidiaries of Emmis Communications Corporation ("Emmis") to acquire the assets
of KALC-FM, serving the Denver, Colorado radio market, for a purchase price of
$88.0 million in cash, of which the Company paid $8.8 million as a deposit on
February 15, 2002. On March 15, 2002, the Company began operating this station
under a time brokerage agreement. This transaction closed on May 1, 2002. Upon
the expected completion of the acquisition of the three radio stations described
in the Tribune transaction in the previous paragraph, the Company will own four
radio stations serving the Denver, Colorado radio market.
Contingencies
In October 1999, The Radio Music License Committee, of which the Company is
a participant, filed a motion in the New York courts against Broadcast Music,
Inc. commencing a rate-making proceeding, on behalf of the radio industry,
seeking a determination of fair and reasonable industry-wide license fees. The
Company is currently operating under interim license agreements for the period
commencing January 1, 1997 at the rates and terms reflected in prior agreements.
The Company's management estimates that the impact of an unfavorable outcome of
the motion will not materially impact the financial position, results of
operations or cash flows of the Company.
In December 2000, the U.S. Copyright Office, under the Digital Millennium
Copyright Act, issued a final rule that AM and FM radio broadcast signals
transmitted simultaneously over a digital communications network, are subject to
the sound recording copyright owner's exclusive right of performance. This would
result in the imposition of license fees for Internet streaming and other
digital media. As a result of this decision, the Company 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. In
February 2002, the arbitration panel issued its decision setting the license
fees for the use of sound recordings in Internet streaming. A number of
broadcasters have petitioned the U.S. Copyright Office for a review of this
decision. 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,
13
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. This appeal is
pending. 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 is subject to various outstanding claims which arose in the
ordinary course of business and to other legal proceedings. In the opinion of
management, any liability of the Company which may arise out of or with respect
to these matters will not materially affect the financial position, results of
operations or cash flows of the Company.
8. SHAREHOLDERS' EQUITY
On February 27, 2002, the Company entered into an underwriting
agreement to sell 3,500,000 shares of Class A Common Stock. The Company
completed this offering on March 5, 2002 and sold 3,500,000 shares of Class A
Common Stock at a price per share of $51.25. The underwriting agreement included
an option by the underwriters to purchase within 30 days up to 525,000
additional shares of Class A Common Stock to cover over-allotments. On March 6,
2002, the underwriters exercised their option to purchase 525,000 shares of
Class A Common Stock at a price per share of $51.25 and the Company completed
this offering on March 8, 2002. The net proceeds to the Company for both
offerings, after deducting underwriting discounts and other offering expenses,
were approximately $196.5 million. The Company used a portion of these proceeds
in the amount of $93.5 million to reduce the Company's outstanding indebtedness
under the Bank Facility's Revolver.
During the three months ended March 31, 2001 and 20021, the Company
issued non-qualified options to purchase 788,500 shares and 1,141,932 shares,
respectively, of its Class A Common Stock at prices ranging from $40.00 to
$43.53 and $48.00 to $55.61, respectively, per share. All of the options become
exercisable over a four-year period. In connection with the grant of options
with exercise prices below fair market value at the time of grant and the grant
of performance-based options, the Company recognized non-cash stock-based
compensation expense in the amount of $132,000 and $102,000 for the three months
ended March 31, 2001 and 2002, respectively.
In connection with awards in 1999 and 2000 of Restricted Stock which
vest ratably on each of the next four anniversary dates of the grant, the
Company recognized non-cash stock-based compensation expense in the amount of
$32,000 for each of the three months ended March 31, 2001 and 2002,
respectively.
9. NET INCOME PER SHARE
The net income per share ("EPS") is calculated in accordance with
Statement of Financial Accounting Standards No. 128, "Earnings Per Share" which
requires presentation of basic net income per share and diluted net income per
share. Basic net income per share excludes dilution and is computed by dividing
net income available to common shareholders by the weighted average number of
common shares outstanding for the period. Diluted net income per share is
computed in the same manner as basic net income after assuming issuance of
common stock for all potentially dilutive equivalent shares, which includes (1)
stock options (using the treasury stock method) and (2) the Term Income
Deferrable Equity Securities ("TIDES") after eliminating from net income the
interest expense, net of taxes, on the TIDES. Anti-dilutive instruments are not
considered in this calculation. For the three months ended March 31, 2001, the
effect of the stock options and the effect of the TIDES, which is convertible
into 2,841,000 shares of Class A Common Stock, were not included in the
calculation of net loss per share as they were anti-dilutive. For the three
months ended March 31, 2002, stock options were included in the calculation of
income before accounting change and net loss per share as they were dilutive and
the TIDES, which are convertible into 2,841,000 shares of Class A Common Stock,
were not included in the calculation of net loss per share as their effect were
anti-dilutive.
THREE MONTHS ENDED
------------------
(amounts in thousands, except share and per share data)
MARCH 31, 2001 MARCH 31, 2002
-------------- --------------
Loss Shares EPS Income/(Loss) Shares EPS
---- ------ --- ------------ ------ ---
Basic net loss per share:
Income (loss) before accounting change $ (1,749) 45,250,110 $ (0.04) $ 5,668 46,575,279 $ 0.12
Cumulative effect of accounting
change, net of taxes (566) - (0.01) (138,876) - (2.98)
--------- ---------- -------- ----------- ---------- --------
Net loss $ (2,315) 45,250,110 $ (0.05) $ (133,208) 46,575,279 $ (2.86)
========= ======== =========== ========
Impact of options - 1,037,847
---------- ----------
Diluted net loss per share:
Income (loss) before accounting change $ (1,749) 45,250,110 $ (0.04) $ 5,668 47,613,126 $ 0.12
Cumulative effect of accounting
change, net of taxes (566) - (0.01) $ (138,876) - $ (2.92)
--------- ---------- -------- ----------- ---------- --------
Net loss $ (2,315) 45,250,110 $ (0.05) $ (133,208) 47,613,126 $ (2.80)
========= ========== ======== =========== ========== ========
14
Options to purchase 3,457,500 shares of common stock were outstanding
as of March 31, 2001, but were excluded from the computation of diluted net loss
per share as their effect were anti-dilutive. Options to purchase 82,678 shares
of common stock at a range of $51.38 to $57.63 were outstanding as of March 31,
2002, but were excluded from the computation of diluted net loss per share as
the options' exercise price were greater than the average market price of the
common stock for the three months ended March 31, 2002.
10. 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 3, and is the borrower of the Company's 7.625%
Senior Subordinated Notes, described in Note 4, with Entercom Communications
Corp. and subsidiaries as the guarantor. Radio holds the various subsidiary
companies that own the operating assets, including broadcasting licenses,
permits, authorizations and cash royalties. Entercom Communications Capital
Trust, the holder of the TIDES, described in Note 5, 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. Under the Notes,
Radio is permitted to make distributions to Entercom Communications Corp. in an
amount, as defined, that is required to pay Entercom Communications Corp's
overhead costs and other costs associated with conducting the operations of
Radio and Entercom Communications Corp's payment of 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, 2001 and March 31, 2002 and
for the three months ended March 31, 2001 and 2002.
Balance Sheets 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' EQUITY:
Current liabilities $ 9,732 $ - $ 43,849 $ - $ 53,581
Long-term 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
Preferred stock - - - - -
Class A and B common stock 453 - - - 453
Additional paid-in capital 751,803 - - - 751,803
Retained earnings (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
============== ============== ============== ============ =============
15
Statements of Operations for the Three Months Ended March 31, 2001
---------------------------------------------------------------------------
Entercom
Entercom Communications
Communications Capital Entercom
Corp. Trust Radio, LLC Eliminations Total
-------------- -------------- -------------- ------------ -------------
NET REVENUES $ 131 $ 1,953 $ 69,455 $ (2,084) $ 69,455
-------------- -------------- -------------- ------------ -------------
OPERATING EXPENSES (INCOME):
Station operating expenses - - 46,491 (131) 46,360
Depreciation and amortization 251 - 11,029 - 11,280
Corporate general and administrative expenses 3,308 - 22 - 3,330
Net (gain) loss on sale of assets (6) - 29 - 23
-------------- -------------- -------------- ------------ -------------
Total operating expenses 3,553 57,571 (131) 60,993
-------------- -------------- -------------- ------------ -------------
OPERATING INCOME (LOSS) (3,422) 1,953 11,884 (1,953) 8,462
-------------- -------------- -------------- ------------ -------------
OTHER EXPENSE (INCOME):
Interest expense - - 8,127 - 8,127
Financing cost of TIDES 1,953 1,953 - (1,953) 1,953
Interest income - - (95) - (95)
Equity loss from unconsolidated affiliate - - 850 - 850
Net loss on derivative instruments - - 478 - 478
-------------- -------------- -------------- ------------ -------------
Total other expense 1,953 1,953 9,360 (1,953) 11,313
-------------- -------------- -------------- ------------ -------------
INCOME (LOSS) BEFORE INCOME TAXES
AND ACCOUNTING CHANGE (5,375) - 2,524 - (2,851)
INCOME TAX PROVISION (BENEFIT) (2,150) - 1,048 - (1,102)
-------------- -------------- -------------- ------------ -------------
INCOME (LOSS) BEFORE ACCOUNTING
CHANGE (3,225) - 1,476 - (1,749)
Cumulative effect of accounting
change, net of taxes of $377 - - (566) - (566)
-------------- -------------- -------------- ------------ -------------
NET INCOME (LOSS) $ (3,225) $ - $ 910 $ - $ (2,315)
============== ============== ============== ============ =============
Statements of Cash Flows for the Three Months Ended March 31, 2001
---------------------------------------------------------------------------
Entercom
Entercom Communications
Communications Capital Entercom
Corp. Trust Radio, LLC Eliminations Total
-------------- -------------- -------------- ------------ -------------
OPERATING ACTIVITIES:
Net cash provided by operating activities $ 112 $ - $ 22,116 $ - $ 22,228
-------------- -------------- -------------- ------------ -------------
INVESTING ACTIVITIES:
Additions to property and equipment (135) - (3,893) - (4,028)
Proceeds from sale of property, equipment
and other assets - - 106 - 106
Deferred charges and other assets - - (333) - (333)
Purchase of investments - - (2,804) - (2,804)
Station acquisition deposits and costs - - (74) - (74)
-------------- -------------- -------------- ------------ -------------
Net cash used in investing activities (135) - (6,998) - (7,133)
-------------- -------------- -------------- ------------ -------------
FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt - - 3,078 - 3,078
Payments of long-term debt - - (19,004) - (19,004)
Proceeds from issuance of common stock
related to incentive plans - - 145 - 145
Proceeds from exercise of stock options - - 516 - 516
-------------- -------------- -------------- ------------ -------------
Net cash used in financing activities - - (15,265) - (15,265)
-------------- -------------- -------------- ------------ -------------
16
Statements of Cash Flows for the Three Months Ended March 31, 2001
---------------------------------------------------------------------------
Entercom
Entercom Communications
Communications Capital Entercom
Corp. Trust Radio, LLC Eliminations Total
-------------- -------------- -------------- ------------ -------------
Net decrease in cash and cash equivalents (23) - (147) - (170)
Cash and cash equivalents, beginning of period 24 - 13,233 - 13,257
-------------- -------------- -------------- ------------ -------------
Cash and cash equivalents, end of period $ 1 $ - $ 13,086 $ - $ 13,087
============== ============== ============== ============ =============
Balance Sheets as of March 31, 2002
---------------------------------------------------------------------------
Entercom
Entercom Communications
Communications Capital Entercom
Corp. Trust Radio, LLC Eliminations Total
-------------- -------------- -------------- ------------ -------------
ASSETS:
Current assets $ 3,828 $ - $ 341,373 $ - $ 345,201
Net property and equipment 903 - 89,900 - 90,803
Radio broadcasting licenses and
other intangibles -Net - - 1,020,504 - 1,020,504
Other long-term assets 664,805 128,866 58,134 (792,528) 59,277
-------------- -------------- -------------- ------------ -------------
Total assets $ 669,536 $ 128,866 $ 1,509,911 $ (792,528) $ 1,515,785
============== ============== ============== ============ =============
LIABILITIES AND
SHAREHOLDERS' EQUITY:
Current liabilities $ 9,565 $ - $ 60,206 $ - $ 69,771
Long-term debt - - 436,712 - 436,712
Other long-term liabilities 920 3,866 716,901 (663,662) 58,025
-------------- -------------- -------------- ------------ -------------
Total liabilities 10,485 3,866 1,213,819 (663,662) 564,508
-------------- -------------- -------------- ------------ -------------
TIDES 128,866 125,000 - (128,866) 125,000
-------------- -------------- -------------- ------------ -------------
Shareholders' equity
Preferred stock - - - - -
Class A and B common stock 494 - - - 494
Additional paid-in capital 952,444 - - - 952,444
Retained earnings (deficit) (422,584) - 294,794 - (127,790)
Unearned compensation (169) - - - (169)
Accumulated other comprehensive income - - 1,298 - 1,298
-------------- -------------- -------------- ------------ -------------
Total shareholders' equity 530,185 - 296,092 - 826,277
-------------- -------------- -------------- ------------ -------------
Total liabilities and shareholders' equity $ 669,536 $ 128,866 $ 1,509,911 $ (792,528) $ 1,515,785
============== ============== ============== ============ =============
Statements of Operations for the Three Months Ended March 31, 2002
---------------------------------------------------------------------------
Entercom
Entercom Communications
Communications Capital Entercom
Corp. Trust Radio, LLC Eliminations Total
NET REVENUES $ 134 $ 1,953 $ 74,159 $ (2,087) $ 74,159
-------------- -------------- -------------- ------------ -------------
OPERATING EXPENSES (INCOME):
Station operating expenses - - 48,293 (134) 48,159
Depreciation and amortization 261 - 3,130 - 3,391
Corporate general and administrative expenses 3,332 - 19 - 3,351
Net expense from time brokerage agreement fees - - 2,116 - 2,116
Net gain on sale of assets - - (9) - (9)
-------------- -------------- -------------- ------------ -------------
Total operating expenses 3,593 53,549 (134) 57,008
-------------- -------------- -------------- ------------ -------------
OPERATING INCOME (LOSS) (3,459) 1,953 20,610 (1,953) 17,151
-------------- -------------- -------------- ------------ -------------
OTHER EXPENSE (INCOME):
Interest expense - - 5,588 - 5,588
Financing cost of TIDES 1,953 1,953 - (1,953) 1,953
17
Statements of Operations for the Three Months Ended March 31, 2002
---------------------------------------------------------------------------
Entercom
Entercom Communications
Communications Capital Entercom
Corp. Trust Radio, LLC Eliminations Total
Interest income (14) - (248) - (262)
Equity loss from unconsolidated affiliate - - 974 - 974
Net loss on derivative instruments - - (607) - (607)
-------------- -------------- -------------- ------------ -------------
Total other expense 1,939 1,953 5,707 (1,953) 7,646
-------------- -------------- -------------- ------------ -------------
INCOME (LOSS) BEFORE INCOME TAXES
AND ACCOUNTING CHANGE (5,398) - 14,903 - 9,505
INCOME TAXES PROVISION (BENEFIT) (2,159) - 5,996 - 3,837
-------------- -------------- -------------- ------------ -------------
INCOME (LOSS) BEFORE ACCOUNTING
CHANGE (3,239) - 8,907 - 5,668
Cumulative effect of accounting
change, net of taxes of $92,584 - - (138,876) - (138,876)
-------------- -------------- -------------- ------------ -------------
NET LOSS $ (3,239) $ - $ (129,969) $ - $ (133,208)
============== ============== ============== ============ =============
Statements of Cash Flows for the Three Months Ended March 31, 2002
---------------------------------------------------------------------------
Entercom
Entercom Communications
Communications Capital Entercom
Corp. Trust Radio, LLC Eliminations Total
-------------- -------------- -------------- ------------ -------------
OPERATING ACTIVITIES:
Net cash provided by operating
activities $ 84 $ - $ 20,078 $ - $ 20,162
-------------- -------------- -------------- ------------ -------------
INVESTING ACTIVITIES:
Additions to property and equipment (15) - (1,094) - (1,109)
Proceeds from sale of property, equipment
and other assets - - 9 - 9
Purchases of radio station assets - - (20,800) - (20,800)
Deferred charges and other assets - - (25) - (25)
Purchase of investments - - (10) - (10)
Station acquisition deposits and costs - - (26,181) - (26,181)
Net inter-company loans (196,567) - 196,567 - -
-------------- -------------- -------------- ------------ -------------
Net cash (used in) provided by
investing activities (196,582) - 148,466 - (48,116)
-------------- -------------- -------------- ------------ -------------
FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt - - 195,500 - 195,500
Net proceeds from stock offering 196,498 - - - 196,498
Payments on long-term debt - - (108,504) - (108,504)
Deferred financing expenses related to bank
facility and senior subordinated notes - - (4,558) - (4,558)
Proceeds from issuance of common stock
related to incentive plans - - 158 - 158
Proceeds from exercise of stock options - - 3,281 - 3,281
-------------- -------------- -------------- ------------ -------------
Net cash provided by financing activities 196,498 - 85,877 - 282,375
-------------- -------------- -------------- ------------ -------------
Net decrease in cash and cash equivalents - - 254,421 - 254,421
Cash and cash equivalents, beginning of period 1 - 10,750 - 10,751
-------------- -------------- -------------- ------------ -------------
Cash and cash equivalents, end of period $ 1 $ - $ 265,171 $ - $ 265,172
============== ============== ============== ============ =============
11. SUBSEQUENT EVENTS
18
On April 24, 2002, the Company announced that the agreement with The
Baseball Club of Seattle, L.P. for the rights to broadcast the Seattle Mariners
Baseball Club on the Company's Seattle radio station will not be renewed upon
expiration of the agreement on October 31, 2002.
On April 26, 2002, the Company entered into an asset purchase agreement
with ABC, Inc. to sell the assets of KQAM-AM, serving the Wichita, Kansas radio
market, for $2.0 million in cash. Closing of this transaction, which is
conditional upon the approval of the FCC, is expected in the third quarter of
2002 and will decrease the Company's ownership to six radio stations in the
Wichita, Kansas radio market.
On April 30, 2002 the California Superior Court issued an Interlocutory
Judgment ordering, among other things (i) that Royce sign all documents
necessary to transfer the assets relating to KWOD to the Company and to complete
such transfer in exchange for the $25.0 million purchase price, less the amount
of the Company's damages to be determined by the court, (ii) the Company to
place $24.8 million in cash and a $7.5 million irrevocable standby letter of
credit in an escrow account pending the transfer of the KWOD assets, the
determination of the Company's damages and the outcome of Royce's appeal, and
(iii) a time Brokerage Agreement commence on May 10, 2002 under which the
Company will program and sell most of the broadcast time on KWOD. Royce has
filed a petition in the California appeals court challenging this Interlocutory
Judgment. The Court of Appeals has issued a temporary stay of the Interlocutory
Judgment until May 21, 2002. 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 May 1, 2002, the Company acquired the assets of KALC-FM in Denver,
Colorado, from Emmis for $88.0 million in cash, of which $8.8 million was paid
as a deposit on February 15, 2002. Upon the expected completion of the
acquisition of the three radio stations described in the Tribune transaction
under Note 7, the Company will own four radio stations serving the Denver,
Colorado radio market.
On May 2, 2002, the Board of Directors approved the appointment of
David J. Field, currently President and Chief Operating Officer, as Chief
Executive Officer. This title was formerly held by the Chairman of the Board,
Joseph M. Field, who will continue as Chairman of the Board.
19
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
This report contains, in addition to historical information, statements
by us with regard to our expectations as to financial results and other aspects
of our business that involve risks and uncertainties and may constitute forward
looking statements within the meaning of Section 27A of the Securities Act of
1933 and Section 21E of the Securities Exchange Act of 1934. These statements
reflect our current views and are based on certain assumptions. Actual results
could differ materially from those currently anticipated as a result of a number
of factors, including, but not limited to, the following: (1) the highly
competitive nature of, and new technologies in, the radio broadcasting industry;
(2) the risks associated with our acquisition strategy generally; (3) the
control of us by Joseph M. Field and members of his immediate family; (4) our
vulnerability to changes in federal legislation or regulatory policies; (5) our
dependence upon our Seattle radio stations; and (6) those matters discussed
below. All statements other than statements of historical fact are
"forward-looking statements" for purposes of federal and state securities laws,
including any projections of earnings, revenues or other financial items; any
statements of the plans, strategies and objectives of management for future
operations; any statements concerning proposed new services or developments; any
statements regarding future economic conditions or performance; any statements
of belief; and any statements of assumptions underlying any of the foregoing.
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.
General
We are one of the five largest radio broadcasting companies in the
United States based upon 2001 revenues pro forma for completed and pending
acquisitions as derived from the latest edition of BIA Consulting, Inc. We
operate in 19 markets, including Boston, Seattle, Denver, Portland, Sacramento,
Kansas City, Milwaukee, Norfolk, New Orleans, Memphis, Buffalo, Greensboro,
Rochester, Greenville/Spartanburg, Wilkes-Barre/Scranton, Wichita, Madison,
Gainesville/Ocala and Longview/Kelso (WA).
A radio broadcasting company derives its revenues primarily from the
sale of broadcasting time to local and national advertisers. The advertising
rates that a radio station is able to charge and the number of advertisements
that can be broadcast without jeopardizing listener levels largely determine
those revenues. Advertising rates are primarily based on three factors: (1) a
station's audience share in the demographic groups targeted by advertisers, as
measured principally by quarterly reports issued by the Arbitron Ratings
Company; (2) the number of radio stations in the market competing for the same
demographic groups; and (3) the supply of and demand for radio advertising time.
Several factors may adversely affect a radio broadcasting company's
performance in any given period. In the radio broadcasting industry, seasonal
revenue fluctuations are common and are due primarily to variations in
advertising expenditures by local and national advertisers. Typically, revenues
are lowest in the first calendar quarter of the year. We generally incur
advertising and promotional expenses to increase 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.
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.
In the following analysis, we discuss broadcast cash flow, broadcast
cash flow margin and after tax cash flow. Broadcast cash flow consists of
operating income before depreciation and amortization, net expense (income) from
time brokerage agreement fees, corporate general and administrative expenses and
gain or loss on sale of assets. Broadcast cash flow margin represents broadcast
cash flow as a percentage of net revenues. After tax cash flow consists of
income (loss) before accounting change, plus the following: depreciation and
amortization, non-cash compensation expense (which is otherwise included in
corporate general and administrative expenses), deferred taxes, the elimination,
net of current taxes, of equity loss from unconsolidated affiliate, any gains or
losses on sale of assets, investments and derivative instruments. Although
broadcast cash flow, broadcast cash flow margin and after tax cash flow are not
measures of performance or liquidity calculated in accordance with generally
accepted accounting principles, we believe that these measures are useful to an
investor in evaluating our performance because they are widely used in the
broadcast industry to measure a radio company's operating performance. However,
you should not consider broadcast cash flow, broadcast cash flow margin and
after tax cash flow in isolation or as substitutes for net income, operating
income, cash flows from operating activities or any other measure for
determining our operating performance or liquidity that is calculated in
accordance with generally accepted accounting principles. In addition, because
broadcast cash flow, broadcast cash flow margin and after tax cash flow are not
calculated in accordance with generally accepted accounting principles, they are
not necessarily comparable to similarly titled measures employed by other
companies.
20
We calculate same station growth by comparing the performance of
stations operated by us throughout a relevant period to the comparable
performance in the prior year's corresponding period, adjusted for significant
changes to sports contracts. "Same station broadcast cash flow margin" is the
broadcast cash flow margin of the stations included in our same station
calculations.
Critical Accounting Policies
Our discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires us to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities as of the date
of the financial statements, and the amount of reported revenues and expenses
during the reporting period. We base our estimates on historical experience and
various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily available
from other sources. Actual results may differ from these estimates under
different circumstances or using different assumptions.
We consider the following policies to be important in understanding the
judgments involved in preparing our financial statements and the uncertainties
that could affect our results of operations, financial condition or cash flows.
Revenue Recognition
We recognize revenue from the sale of commercial broadcast time to
advertisers when the commercials are broadcast, subject to meeting certain
conditions such as persuasive evidence that an arrangement exists, the price is
fixed and determinable, and collection is reasonably assured. These criteria are
generally met at the time an advertisement is broadcast, and the revenue is
recorded net of advertising agency commission.
Allowance for Doubtful Accounts
We must make estimates to our allowance for doubtful accounts for
estimated losses resulting from our customers' inability to make payments. We
specifically review historical write-off activity by market, large customer
concentrations, customer creditworthiness and changes in our customer payment
terms when evaluating the adequacy of the allowance for doubtful accounts. If
the financial condition of our customers were to deteriorate, resulting in an
impairment of their ability to make payments, then additional allowances may be
required.
Goodwill and Intangible Assets
We have made acquisitions in the past for which a significant amount of
the purchase price was allocated to broadcast licenses, goodwill and other
intangible assets. As of December 31, 2001, we had approximately $1.2 billion in
intangible assets, which represented approximately 86% of our total assets. The
fair value of these assets is dependent on the performance of our stations. In
assessing the recoverability of our intangible assets, we must conduct annual
impairment testing required by SFAS No. 142, which requires us to determine the
fair value and could require us to write down the carrying value of our
broadcasting licenses and goodwill and other intangible assets in future
periods. We completed the transitional non-amortizing intangible asset
impairment test for broadcasting licenses and recorded to the statement of
operations, a $138.9 million impairment charge, net of a deferred tax benefit of
$92.6 million, under the cumulative effect of accounting change for the three
months ended March 31, 2002. As of March 31, 2002, we had approximately $1.0
billion in intangible assets, which represents approximately 67% of our total
assets.
Contingencies and Litigation
On an on-going basis, we evaluate our exposure related to contingencies
and litigation and record a liability when available information indicates that
a liability is probable and estimable. We also disclose significant matters that
are reasonably possible to result in a loss or are probable but not estimable.
Estimation of Effective Tax Rates
We evaluate our effective tax rates regularly and adjust rates when
appropriate based on currently available information relative to statutory
rates, apportionment factors and the applicable taxable income in the
jurisdictions in which we operate, among other factors.
Recent Events
On December 24, 2001, we entered into an agreement to acquire the
assets of KOSI-FM, KKHK-FM and KEZW-AM from Tribune Denver Radio, Inc., 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 brokerage agreement may run for a period of
21
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.
Effective January 1, 2002, we adopted SFAS No. 142, "Goodwill and Other
Intangible Assets" that requires that goodwill and certain other intangibles
will not be amortized. Amortization of costs associated with the acquisition of
radio stations has historically been a significant factor in determining our
overall profitability. However, with the adoption of SFAS No. 142, the impact of
amortization is expected to be greatly reduced in 2002 and in future periods.
Effective on January 1, 2002, we discontinued the amortization of broadcasting
licenses and goodwill under the provisions of SFAS No. 142. The amortization
expense for broadcasting licenses and goodwill for the three months ended March
31, 2001 was $7.9 million. In addition, under the provisions of SFAS No.142 we
completed the transitional non-amortizing intangible asset impairment test for
broadcasting licenses and recorded to the statement of operations, a $138.9
million charge, net of a deferred tax benefit, under the cumulative effect of
accounting change for the three months ended March 31, 2002.
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.
On February 8, 2002, we acquired from WCCB-TV, Inc., a subsidiary of
Bahakel Communications, Ltd., the assets of WOZN-FM (formerly 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, we began operating these stations under
a time brokerage agreement. The closing of this transaction increases our
ownership to six radio stations in the Greensboro, North Carolina radio market.
We recorded goodwill of $2.6 million in connection with this purchase in order
to compete more effectively in the market by increasing our cluster share of
market revenues and market cluster ranking.
On February 12, 2002, we entered into an agreement with subsidiaries of
Emmis Communications Corporation to acquire the assets of KALC-FM, serving the
Denver, Colorado radio market, for a purchase price of $88.0 million in cash, of
which we paid $8.8 million as a deposit on February 15, 2002. On March 15, 2002,
we began operating this station under a time brokerage agreement. This
transaction closed on May 1, 2002.
On February 27, 2002, we entered into an underwriting agreement to sell
3,500,000 shares of Class A Common Stock. We completed this offering on March 5,
2002 and sold 3,500,000 shares of Class A Common Stock at a price per share of
$51.25. The underwriting agreement included an option by the underwriters to
purchase within 30 days up to 525,000 additional shares of Class A Common Stock
to cover over-allotments. On March 6, 2002, the underwriters exercised their
option to purchase 525,000 shares of Class A Common Stock at a price per share
of $51.25 and we completed this offering on March 8, 2002. The net proceeds to
us for both offerings, after deducting underwriting discounts and other offering
expenses, were approximately $196.5 million. We used a portion of these proceeds
in the amount of $93.5 million to reduce our outstanding indebtedness under the
Bank Facility's Revolver.
On February 27, 2002, we entered into an underwriting agreement to sell
$150.0 million of 7.625% senior subordinated notes due March 1, 2014. We
completed this offering on March 5, 2002 and received net proceeds of $145.8
million. There were approximately $4.2 million in deferred offering costs
recorded in connection with the sale, which are being amortized to interest
expense over the life of the notes using the effective interest rate method. The
proceeds of the notes will be used to finance pending acquisitions and for
general corporate purposes, including future acquisitions and working capital.
Results of Operations
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. The following is a discussion of our
results of operations for the three months ended March 31, 2002 and March 31,
2001, and should be read in conjunction with our condensed consolidated
financial statements and the related notes included elsewhere in this Form 10-Q.
Several factors affected our results of operations for the three months
ended March 31, 2002 that did not affect the corresponding period of the prior
year. During the three months ended March 31, 2002: (1) we began operating four
stations in Denver under two different time brokerage agreements that
contributed to higher net revenues, station operating expenses and net expense
from time brokerage fees; (2) we acquired two radio stations in Greensboro on
February 8, 2002, that we began operating under a time brokerage agreement on
December 5, 2001, for approximately $20.8 million, that contributed to higher
net revenues, station operating expenses, depreciation and amortization and
interest expense; (3) we terminated effective February 28, 2002, our joint sales
agreement for KING-FM in Seattle, that contributed to lower net revenues and
station operating expenses; (4) we did not renew our rights to broadcast the
Boston Celtics nor sell the advertising in these broadcasts under a contract
that expired during the second quarter of 2001, that contributed to lower net
revenues and lower station operating expenses; and (5) we received net proceeds
of $196.5 million from an equity offering and net proceeds of $145.8 million
from a senior subordinated note offering, the proceeds of which were used for
reducing outstanding indebtedness under our Revolver, for investing purposes
until such time as the funds will be needed for pending and future acquisitions,
and for general corporate purposes.
22
Three months ended March 31, 2002 compared to the three months ended March 31,
2001
Net Revenues: Net revenues increased 6.8% to $74.2 million for the three months
ended March 31, 2002 from $69.5 million for the three months ended March 31,
2001. On a same station basis, net revenues increased 2.5% to $70.5 million from
$68.8 million. Same station net revenues increased due to a marginal improvement
in the advertising sector of the economy and strong performance of our market
clusters which exceeded their combined market growth rates. The overall increase
in net revenues for the three months ended March 31, 2002 was affected by
acquisitions of stations during this period with net revenues of $3.7 million.
Station Operating Expenses: Station operating expenses increased 3.9% to $48.2
million for the three months ended March 31, 2002 from $46.4 million for the
three months ended March 31, 2001. On a same station basis, station operating
expenses increased 0.9% to $45.7 million from $45.3 million. Same station
operating expenses marginally increased due to an increase in same station net
revenues for the reasons described above, offset by cost reduction efforts. The
overall increase in station operating expenses for the three months ended March
31, 2002 was affected during this period by acquisitions of stations with
station operating expenses of $2.2 million.
Depreciation and Amortization Expenses: Depreciation and amortization expenses
decreased 69.9% to $3.4 million for the three months ended March 31, 2002 from
$11.3 million for the three months ended March 31, 2001. The decrease was mainly
attributable to the adoption on January 1, 2002 of SFAS No. 142, "Goodwill and
Other Intangible Assets," as described more fully in the footnotes to the
condensed financial statements under Recent Accounting Pronouncements. Adoption
of this accounting standard had the impact of eliminating our amortization
expense for goodwill and broadcasting licenses. For comparison purposes, for the
three months ended March 31, 2001, we recorded amortization expense for goodwill
and broadcasting licenses of $0.1 million and $7.8 million, respectively. We
also completed the transitional non-amortizing intangible asset impairment test
for broadcasting licenses and recorded to the statement of operations, a $138.9
million charge, net of a deferred tax benefit of $92.6 million, under the
cumulative effect of accounting change.
Corporate General and Administrative Expenses: Corporate general and
administrative expenses increased 0.1% to $3.4 million for the three months
ended March 31, 2002 from $3.3 million for the three months ended March 31,
2001. These expenses remained relatively flat due to certain cost containment
measures, despite an increase in the number of stations owned or operated during
this period as compared to the prior period. Also included is non-cash
stock-based compensation expense of $0.1 million and $0.2 million for the three
months ended March 31, 2002 and 2001, respectively.
Interest Expense: Interest expense, including the financing cost of our 6.25%
Convertible Preferred Securities Term Income Deferrable Equity Securities
(TIDES), decreased 25.2% to $7.5 million for the three months ended March 31,
2002 from $10.1 million for the three months ended March 31, 2001. The decrease
in interest expense was mainly attributable to (1) the expiration on January 11,
2002 of derivatives designated as cash flow hedges with a total notional amount
of $108.0 million that effectively fixed our variable rate debt at 6.3%; (2) a
decrease of $93.5 million in our indebtedness outstanding on March 5, 2002 from
a portion of the cash proceeds from our equity offering; (3) a reduction in
interest rates subsequent to the three months ended March 31, 2001, offset by
the increase in interest expense from the $150.0 million 7.625% Senior
Subordinated Notes issued on March 5, 2002.
Income (Loss) Before Income Taxes and Accounting Change: Income before income
tax and accounting change increased to $9.5 million for the three months ended
March 31, 2002 from a loss before income taxes and accounting change of $2.9
million for the three months ended March 31, 2001. The increase in the income
before income taxes and accounting change is mainly attributable to: (1) the
impact of eliminating our amortization expense for goodwill and broadcasting
licenses of $7.9 million and (2) a reduction in interest expense as a result of
the factors described above under interest expense.
Net Loss: Net loss increased to $133.2 million for the three months ended March
31, 2002 from $2.3 million for the three months ended March 31, 2001. The
increase in net loss is mainly attributable to (1) the factors described above,
net of taxes; and (2) a $138.9 million impairment charge, net of a deferred tax
benefit, under the cumulative effect of accounting change as an accumulated
transition adjustment attributable to the adoption on January 1, 2002 of SFAS
No. 142, "Goodwill and Other Intangible Assets."
Other Data
Broadcast Cash Flow: Broadcast cash flow increased 12.6% to $26.0 million for
the three months ended March 31, 2002 from $23.1 million for the three months
ended March 31, 2001. On a same station basis, broadcast cash flow increased
5.6% to $24.8 million from $23.5 million for the same reasons that same station
net revenues increased, which are described above under net revenues. The
increase in broadcast cash flow for the three months ended March 31, 2002 was
affected by acquisitions of stations during this period with broadcast cash flow
of $1.5 million.
Broadcast Cash Flow Margin: The broadcast cash flow margin increased to 35.1%
for the three months ended March 31, 2002 from 33.3% for the three months ended
March 31, 2001. On a same station basis, our broadcast cash flow margin
increased to 35.2% from 34.1%. The increase is primarily attributable to the
same reasons that same station net revenues and same station broadcast cash flow
increased, which are described above.
23
After Tax Cash Flow: After tax cash flow increased 11.5% to $16.8 million for
the three months ended March 31, 2002 from $15.1 million for the three months
ended March 31, 2001. The increase in after tax cash flow was positively
affected by: (1) the increase in broadcast cash flow for the reasons described
under net revenues; (2) the decrease in interest expense, net of tax, for the
reasons described above under interest expense; and (3) the tax benefits from
the purchase of radio station assets in February 2002.
Liquidity and Capital Resources
We use a significant portion of our capital resources to consummate
acquisitions. These acquisitions are funded from one or a combination of the
following sources: (1) our bank facility (described below); (2) the sale of
securities; (3) the swapping of our radio stations in transactions which qualify
as "like-kind" exchanges under Section 1031 of the Internal Revenue Code and (4)
internally-generated cash flow.
Net cash flows provided by operating activities were $20.2 million and
$22.2 million for the three months ended March 31, 2002 and 2001, respectively.
Changes in our net cash flows provided by operating activities are primarily a
result of changes in advertising revenues and station operating expenses, which
are affected by the acquisition and disposition of radio stations during those
periods. For the three months ended March 31, 2002, cash flows provided by
operating activities were positively affected by: (1) an improvement in net
revenues, net of station operating expenses; (2) a reduction in trade accounts
receivables due to the seasonality of the business as first quarter net revenues
are typically lower than the prior year's fourth quarter net revenues, offset by
an increase in trade accounts receivable as a result of new stations owned or
operated by us during this period. For the three months ended March 31, 2001,
cash flows were positively affected by a decrease of $16.2 million in
outstanding accounts receivable due to the seasonality of the business and to
improved collection efforts.
Net cash flows used in investing activities were $48.1 million and $7.1
million for the three months ended March 31, 2002 and 2001, respectively. Net
cash flows provided by financing activities were $282.4 million for the three
months ended March 31, 2002 and net cash flows used in financing activities were
$15.3 million for the three months ended March 31, 2001. The cash flows for the
three months ended March 31, 2002 reflect acquisitions of radio station assets,
deposits for pending acquisitions and the consummation of debt and equity
offerings, net of a reduction in outstanding indebtedness. The cash flows for
the three months ended March 31, 2001 reflect additions to property and
equipment and the net decrease in outstanding indebtedness.
During February 2002, we filed a universal shelf registration statement
with the SEC to offer up to (1) $250.0 million in aggregate offering price of
Class A common stock and/or preferred stock and (2) $250.0 million in aggregate
principal amount or initial accreted value of its debt securities consisting of
debentures, notes or other types of debt. Under this shelf registration
statement, on February 27, 2002, we entered into separate equity and debt
underwriting agreements for equity and debt offerings and filed prospectus
supplements with the SEC. We completed the equity offering on March 5, 2002 and
March 8, 2002 and issued $206.3 million in Class A common stock at a price per
share of $51.25 and completed the debt offering on March 5, 2002, and issued
$150.0 million in 7.625% senior subordinated notes. We received net proceeds of
approximately $196.5 million under the equity offerings and incurred offering
expenses of approximately $8.6 million. We received net proceeds of
approximately $145.8 million under the debt offering and incurred offering
expenses of approximately $4.3 million. We used a portion of the net proceeds
from the March 5, 2002 equity offering to reduce $93.5 million of our
outstanding indebtedness under our credit facility.
Prior to the offerings, we were notified by Moody's Investor Services and
Standard and Poor's that each agency had evaluated our debt and issued an
upgrade to our credit rating. Management believes that any future upgrade or
downgrade would not have a significant impact on our future liquidity. The
effect of a change in the credit rating includes, but is not limited to,
interest rate changes under any future bank facilities, debentures, notes or
other types of debt.
As of March 31, 2002, we had $265.2 million in cash and cash equivalents,
primarily as a result of the offerings described above. During the three months
ended March 31, 2002, we increased our net outstanding debt by $87.0 million. We
also acquired radio station assets and increased our acquisition deposits and
costs in the amount of $47.0 million. As of March 31, 2002, we had $325.0
million of borrowings outstanding under our bank facility in addition to an
outstanding letter of credit in the amount of $6.2 million and $150.0 million in
senior subordinated notes. We expect to use the credit available of $318.8
million under the revolving credit facility, subject to defined revolving
commitment reductions as described below, and cash on hand to fund pending and
future acquisitions.
Under our universal shelf registration statement, since we did not issue
the full amount available, we may from time to time offer and issue debentures,
notes, bonds and other evidence of indebtedness in the amount of $100.0 million
and shares of Class A common stock and/or preferred stock in the aggregate
offering price of $43.7 million. Unless otherwise described in future prospectus
supplements, we intend to use the net proceeds from the sale of securities
registered under this universal shelf registration statement for general
corporate purposes, which may include additions to working capital, capital
expenditures, repayment or redemption of existing indebtedness, pending
acquisitions or future acquisitions.
In addition to debt service and quarterly distributions under the TIDES,
our principal liquidity requirements are for working capital and general
corporate purposes, including capital expenditures, and, if appropriate
opportunities arise, acquisitions of additional radio stations. Capital
expenditures for the three months ended March 31, 2002, were
24
$1.1 million. We estimate that an additional amount of capital expenditures for
the balance of 2002 will be between $7.0 and $9.0 million. We believe that cash
on hand and cash from operating activities, together with available revolving
borrowings under our bank facility, should be sufficient to permit us to meet
our financial obligations and fund our operations. However, we may require
additional financing for future acquisitions, if any, and we cannot assure you
that we will be able to obtain such financing on terms considered favorable by
us.
We entered into our bank facility as of December 16, 1999, with a syndicate
of banks for $650.0 million in senior credit consisting of: (1) $325.0 million
in a reducing revolving credit facility and (2) $325.0 million in a multi-draw
term loan that was fully drawn as of September 29, 2000. Our bank facility was
established to: (1) refinance existing indebtedness; (2) provide working
capital; and (3) fund corporate acquisitions. At our election, interest on any
outstanding principal accrues at a rate based on either LIBOR plus a spread that
ranges from 0.75% to 2.375% or on the prime rate plus a spread of up to 1.125%,
depending on our leverage ratio. Under the bank facility, the reducing revolving
credit facility and the multi-draw term loan mature on September 30, 2007 and
reduce on a quarterly basis beginning September 30, 2002 in amounts that vary
from $12.2 million to $16.3 million for each loan. We anticipate that we will
meet these quarterly debt reduction commitments through one or more of the
following: (1) cash flows from operations; (2) additional borrowings under the
Revolver; (3) cash on hand; and (4) other debt or equity offerings. The bank
facility requires that we comply with certain financial covenants and leverage
ratios that are defined terms within the agreement and compliance with these
terms affects our ability to draw down under the revolver. Certain of these
financial covenants and leverage ratios 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 we are in compliance
with all of the terms of the agreement. The bank facility also provides that
through December 31, 2002, we may solicit incremental loans up to $350.0
million, thereby increasing the bank facility to a total of $1.0 billion. This
incremental borrowing is subject to syndicate approval and is governed under the
same terms as the existing bank facility.
Recent Accounting Pronouncement
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.
Adoption of this Statement by us will be effective on January 1, 2003. We do not
believe that the adoption of this statement will materially impact our financial
position, cash flows or results of operations.
ITEM 3. 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 March 31, 2002, we have rate
hedging transactions in place for a total notional amount of $155.0 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 March 31, 2002 was
marginally lower as compared to the rate at December 31, 2001. The decrease in
market value liability of the instruments as of March 31, 2002, was due to: (1)
a reduction in the remaining term under each of the transactions, including the
expiration of $108.0 million in rate hedging transactions and (2) an increase in
the forward-looking interest rate curve, offset by the marginal decrease in the
three-month LIBOR rate at March 31, 2002. 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.
See also additional disclosures regarding "Liquidity and Capital Resources"
made under Item 2, above.
25
PART II
OTHER INFORMATION
ITEM 1. Legal Proceedings
We are from time to time involved in litigation incidental to the conduct
of our business, but we are not a party to any lawsuit or proceeding that, in
our opinion, is likely to have a material adverse effect on us.
We entered into a preliminary agreement on February 6, 1996, to acquire the
assets of radio station KWOD-FM, Sacramento, California, from Royce
International Broadcasting Corporation ("Royce"), subject to approval by the
FCC, for a purchase price of $25.0 million. Notwithstanding our efforts to
pursue this transaction, Royce has been non-responsive. On July 28, 1999, we
commenced a legal action seeking to enforce this agreement, and subsequently
Royce filed a cross-complaint against us asking for treble damages, an
injunction, attorney's fees and costs. 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. On April 30, 2002 the California Superior Court
issued an Interlocutory Judgment ordering, among other things (i) that Royce
sign all documents necessary to transfer the assets relating to KWOD to us and
to complete such transfer in exchange for the $25.0 million purchase price, less
the amount of our damages to be determined by the court, (ii) us to place $24.8
million in cash and a $7.5 million irrevocable standby letter of credit in an
escrow account pending the transfer of the KWOD assets, the determination of our
damages and the outcome of Royce's appeal, and (iii) a time Brokerage Agreement
commence on May 10, 2002 under which we will program and sell most of the
broadcast time on KWOD. Royce has filed a petition in the California appeals
court challenging this Interlocutory Judgment. The Court of Appeals has issued a
temporary stay of the Interlocutory Judgment until May 21, 2002. We estimate
that the impact of an unfavorable outcome 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. In
February 2002, the arbitration panel issued its decision setting the license
fees for the use of sound recordings in Internet streaming. A number of
broadcasters have petitioned the U.S. Copyright Office for a review of this
decision. 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. This appeal is pending. 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 2. Changes in Securities and Use of Proceeds
None to report.
ITEM 3. Defaults Upon Senior Securities
None to report.
ITEM 4. Submission of Matters to a Vote of Security Holders
None to report.
ITEM 5. Other Information
26
None to report.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit
Number Description
------ -----------
3.01 Amended and Restated Articles of Incorporation of Entercom
Communications Corp. (1)
3.02 Amended and Restated Bylaws of Entercom Communications
Corp. (7)
4.01 Indenture for the Convertible Subordinated Debentures due
2014 amount Entercom Communications Corp., as issuer, and
Wilmington Trust Company, as indenture trustee (3)
4.02 Indenture dated as of March 5, 2002 by and among Entercom
Radio, LLC and Entercom Capital, Inc., as co-issuers, the
Guarantors named therein and HSBC Bank USA, as trustee (7).
4.03 First Supplemental Indenture dated as of March 5, 2002 by
and among Entercom Radio, LLC and Entercom Capital, Inc.,
as co-issuers, the Guarantors named therein and HSBC Bank
USA, as trustee (7).
10.01 Registration Rights Agreement, dated as of May 21, 1996,
between the Registrant and Chase Equity Associates, L.P.
(1)
10.02 Employment Agreement, dated June 25, 1993, between the
Registrant and Joseph M. Field, as amended (1)
10.03 Employment Agreement, dated December 17, 1998, between the
Registrant and David J. Field, as amended (1)
10.04 Employment Agreement, dated December 17, 1998, between the
Registrant and John C. Donlevie, as amended (1)
10.05 Employment Agreement, dated November 13, 1998, between the
Registrant and Stephen F. Fisher (1)
10.06 Entercom 1998 Equity Compensation Plan (1)
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). (6)
10.08 Credit Agreement, dated as of December 16, 1999, among
Entercom Radio, LLC, as the Borrower, the Registrant, as a
Guarantor, Banc of America Securities LLC, as Sole Lead
Arranger and Book Manager, Key Corporate Capital, Inc., as
Administrative Agent, and Co-Documentation Agent, Bank of
America, N.A., as Syndication Agent, and Co-Documentation
Agent and the Financial Institutions listed therein. (4)
10.09 First Amendment dated May 31, 2001 to the Credit Agreement
dated December 16, 1999 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. (2)
10.10 Second Amendment dated February 6, 2002 to the Credit
Agreement dated December 16, 1999 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. (5)
(1) Incorporated by reference to our Registration Statement on Form S-1
(File No. 333-61381).
(2) Incorporated by reference to our Quarterly Report on Form 10-Q for
the quarter ended June 30, 2001 (File No. 001-14461).
(3) Incorporated by reference to our Registration Statement on Form S-1
(File No. 333-86843).
(4) Incorporated by reference to our Report on Form 8-K (File No.
001-14461).
(5) Incorporated by reference to our Annual Report on Form 10-K for the
year ended 2001 (File No. 001-14461) (5).
(6) Incorporated by reference to our Quarterly Report on Form 10-Q for
the quarter ended March 31, 2000 (File No. 001-14461).
(7) Filed herewith.
(b) Reports filed on Form 8-K
None to report.
27
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ENTERCOM COMMUNICATIONS CORP.
(Registrant)
Date: May 10, 2002 /s/ David J. Field
-------------------
Name: David J. Field
Title: President and Chief Executive
Officer
Date: May 10, 2002 /s/ Stephen F. Fisher
---------------------
Name: Stephen F. Fisher
Title: Executive Vice President and Chief
Financial Officer (Principal Financial
and Accounting Officer)
28