- ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- 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 September 30, 2001 OR [_] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number 000-28395 INTEREP NATIONAL RADIO SALES, INC. (Exact name of registrant as specified in its charter) New York 13-1865151 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 100 Park Avenue, New York, New York 10017 (Address of principal executive offices) (Zip Code) (212) 916-0700 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_] The number of shares of the registrant's Common Stock outstanding as of the close of business on November 12, 2001, was 4,833,206 shares of Class A Common Stock, and 4,017,564 shares of Class B Common Stock. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PART I FINANCIAL INFORMATION Item 1. FINANCIAL STATEMENTS INTEREP NATIONAL RADIO SALES, INC. CONSOLIDATED BALANCE SHEETS (in thousands except share information) September 30, December 31, 2001 2000 ------------- ------------ (unaudited) ASSETS Current assets: Cash and cash equivalents................................................. $ 7,745 $ 23,681 Marketable securities..................................................... 2,403 9,965 Receivables, net of allowance for doubtful accounts of $1,563 and $1,940, respectively............................................................ 28,445 33,810 Representation contract buyouts receivable................................ 4,689 5,266 Current portion of deferred representation contract costs................. 39,381 44,240 Prepaid expenses and other current assets................................. 1,043 1,075 -------- -------- Total current assets.................................................. 83,706 118,037 -------- -------- Fixed assets, net............................................................ 4,353 5,046 Deferred representation contract costs....................................... 65,410 71,532 Representation contract buyouts receivable................................... 7,773 6,718 Investments and other assets................................................. 17,009 20,211 -------- -------- Total assets.......................................................... $178,251 $221,544 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable and accrued expenses..................................... $ 8,329 $ 16,121 Accrued interest.......................................................... 2,475 4,950 Representation contract buyouts payable................................... 22,829 36,116 Accrued employee-related liabilities...................................... 1,130 6,216 -------- -------- Total current liabilities............................................. 34,763 63,403 -------- -------- Long-term debt............................................................... 99,000 99,000 -------- -------- Representation contract buyouts payable...................................... 28,859 34,119 -------- -------- Other noncurrent liabilities................................................. 4,054 4,452 -------- -------- Shareholders' equity: Class A common stock, $0.01 par value--20,000,000 shares authorized, 4,820,100 and 4,614,143 shares issued and outstanding at September 30, 2001 and December 31, 2000, respectively................................ 48 46 Class B common stock, $0.01 par value--10,000,000 shares authorized, 4,172,870 and 3,901,486 shares issued and outstanding at September 30, 2001 and December 31, 2000, respectively................................ 42 39 Additional paid-in-capital................................................... 37,447 35,888 Accumulated deficit.......................................................... (25,962) (15,403) -------- -------- Total shareholders' equity............................................ 11,575 20,570 -------- -------- Total liabilities and shareholders' equity............................ $178,251 $221,544 ======== ======== The accompanying Notes to Unaudited Interim Consolidated Financial Statements are an integral part of these balance sheets. 2 INTEREP NATIONAL RADIO SALES, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands except per share data) (unaudited) For the Three Months For the Nine Months Ended September 30, Ended September 30, ------------------- ------------------ 2001 2000 2001 2000 ------- ------- -------- ------- Commission revenues............................. $21,641 $27,186 $ 60,899 $74,180 Contract termination revenue.................... 661 1,529 20,970 2,346 ------- ------- -------- ------- Total revenues.................................. 22,302 28,715 81,869 76,526 ------- ------- -------- ------- Operating expenses: Selling expenses................................ 13,972 17,720 46,057 50,480 General and administrative expenses............. 3,139 3,049 9,561 9,015 Depreciation and amortization expense........... 5,756 6,740 26,078 19,057 ------- ------- -------- ------- Total operating expenses........................ 22,867 27,509 81,696 78,552 ------- ------- -------- ------- Operating income (loss)......................... (565) 1,206 173 (2,026) Interest expense, net........................... 2,364 2,245 6,889 6,187 Other expense, net.............................. 2,530 -- 3,429 -- ------- ------- -------- ------- Loss before provision (benefit) for income taxes (5,459) (1,039) (10,145) (8,213) Provision (benefit) for income taxes............ 31 (345) 414 (3,245) ------- ------- -------- ------- Net loss........................................ $(5,490) $ (694) $(10,559) $(4,968) ======= ======= ======== ======= Basic and diluted loss per share................ $ (0.62) $ (0.08) $ (1.22) $ (0.52) The accompanying Notes to Unaudited Interim Consolidated Financial Statements are an integral part of these statements. 3 INTEREP NATIONAL RADIO SALES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (unaudited) For the Nine Months Ended September 30, ------------------ 2001 2000 -------- -------- Cash flows from operating activities: Net loss............................................................... $(10,559) $ (4,968) Adjustments to reconcile loss to net cash used in operating activities: Depreciation and amortization.......................................... 26,078 19,057 Noncash compensation expense........................................... (509) -- Equity loss on investment.............................................. 1,561 -- Write down of internet investments..................................... 1,940 -- Changes in assets and liabilities: Receivables............................................................ 5,365 4,239 Representation contract buyouts receivable............................. (478) 4,179 Prepaid expenses and other current assets.............................. 32 (385) Other noncurrent assets................................................ (1,726) (4,133) Accounts payable and accrued expenses.................................. (7,792) (3,394) Accrued interest....................................................... (2,475) (2,500) Accrued employee-related liabilities................................... (5,086) (3,501) Other noncurrent liabilities........................................... (398) (374) -------- -------- Net cash provided by operating activities.............................. 5,953 8,220 -------- -------- Cash flows from investing activities: Additions to fixed assets.............................................. (331) (565) Increase in other investments.......................................... -- (1,340) Purchase of marketable securities...................................... -- (9,800) Redemption of marketable securities.................................... 7,562 -- -------- -------- Net cash provided by (used in) investing activities.................... 7,231 (11,705) -------- -------- Cash flows from financing activities: Station representation contract payments............................... (31,193) (24,953) Issuance of Class B common stock....................................... 2,073 -- Repayment of Series A Notes............................................ -- (1,000) Purchase of treasury stock............................................. -- (10,521) -------- -------- Net cash used in financing activities.................................. (29,120) (36,474) -------- -------- Net decrease in cash and cash equivalents.............................. (15,936) (39,959) Cash and cash equivalents, beginning of period......................... 23,681 66,725 -------- -------- Cash and cash equivalents, end of period............................... $ 7,745 $ 26,766 ======== ======== Supplemental disclosures of cash flow information: Cash paid during the period for: Interest paid....................................................... $ 9,900 $ 10,000 Income taxes paid................................................... 417 216 Non-cash investing and financing activities: Station representation contracts acquired........................... $ 12,647 $ 40,396 The accompanying Notes to Unaudited Interim Consolidated Financial Statements are an integral part of these statements. 4 INTEREP NATIONAL RADIO SALES, INC. NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS (in thousands except share information) 1. Summary of Significant Accounting Policies Principles of Consolidation The consolidated financial statements include the accounts of Interep National Radio Sales, Inc. ("Interep"), together with its subsidiaries (collectively, the "Company"), and have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted. All significant intercompany transactions and balances have been eliminated. The consolidated financial statements as of September 30, 2001 and 2000 are unaudited; however, in the opinion of management, such statements include all adjustments necessary for a fair presentation of the results for the periods presented. The interim financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Company's Consolidated Financial Statements for the year ended December 31, 2000, which are available upon request of the Company. Due to the seasonal nature of the Company's business, the results of operations for the interim periods are not necessarily indicative of the results that might be expected for future interim periods or for the full year ending December 31, 2001. Revenue Recognition The Company is a national representation ("rep") firm serving radio broadcast clients throughout the United States. Commission revenue is derived from sales of advertising time for radio stations under representation contracts. Commissions and fees are recognized in the month the advertisement is broadcast. In connection with its unwired network business, the Company collects fees for unwired network radio advertising and, after deducting its commissions, remits the fees to the respective radio stations. In instances when the Company is not legally obligated to pay a station until the corresponding receivable is paid, fees payable to stations have been offset against the related receivable from advertising agencies in the accompanying consolidated balance sheets. The Company records all commission revenues on a net basis. Commissions are recognized based on the standard broadcast calendar that ends on the last Sunday in each reporting period. The broadcast calendars for the three months ended September 30, 2001 and 2000 had 14 and 13 weeks, respectively. The broadcast calendars for the nine months ended September 30, 2001 and 2000 had 39 weeks. Representation Contract Termination Revenue and Contract Acquisition Costs The Company's station representation contracts usually renew automatically from year to year after their stated initial terms unless either party provides written notice of termination at least twelve months prior to the next automatic renewal date. In accordance with industry practice, in lieu of termination, an arrangement is normally made for the purchase of such contracts by a successor representative firm. The purchase price paid by the successor representation firm is generally based upon the historic commission income projected over the remaining contract period, plus two months. Costs of obtaining station representation contracts are deferred and amortized over the life of the new contract. Such amortization is included in the accompanying consolidated statements of operations as a component of depreciation and amortization expense. Amounts which are to be amortized during the next year are included as current assets in the accompanying consolidated balance sheets. Income earned from the loss of station representation contracts (contract termination revenue) is recognized on the effective date of the buyout agreement. 5 Earnings (Loss) Per Share Basic earnings (loss) per share for each of the respective periods has been computed by dividing the net income (loss) by the weighted average number of common shares outstanding during the period which was 8,825,817 and 8,849,390 for the three months ended September 30, 2001 and 2000, respectively, and 8,620,906 and 9,572,311 for the nine months ended September 30, 2001 and 2000, respectively. Diluted earnings per share would reflect the potential dilution that could occur if the outstanding options to purchase common stock were exercised. For the three and nine months ended September 30, 2001 and 2000, the exercise of outstanding options would have an antidilutive effect and therefore have been excluded from the calculation. New Accounting Pronouncements Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities," was issued in June 1998 and was subsequently amended by SFAS No. 138 issued in June 2000. These statements require companies to record derivatives on the balance sheet as assets and liabilities, measured at fair value. Depending on the use of a derivative and whether it has been designated and qualifies as a hedge, gains or losses resulting from changes in the value of the derivative would be recognized currently in earnings or reported as a component of other comprehensive income. The effective date of SFAS No. 133 was delayed to fiscal years beginning after June 15, 2000, with earlier adoption encouraged. The Company does not use derivative instruments and therefore the adoption of these statements did not have any impact on its financial position or results of operations. SFAS No. 142, "Goodwill and Other Intangible Assets," was issued in June 2001. This Statement addresses financial accounting and reporting for acquired goodwill and other intangible assets and supersedes APB Opinion No. 17, "Intangible Assets". It addresses how intangible assets that are acquired individually or with a group of other assets (but not those acquired in a business combination) should be accounted for in financial statements upon their acquisition. This Statement also addresses how goodwill and other intangible assets should be accounted for after they have been initially recognized in the financial statements. With the adoption of this Statement, goodwill is no longer subject to amortization over its estimated useful life. Rather, goodwill will be subject to at least an annual assessment for impairment by applying a fair-value-based test. Similarly, goodwill associated with equity method investments is no longer amortized. Equity method goodwill is not, however, subject to the new impairment rules. Effective January 1, 2002, the Company will cease amortization of its existing goodwill. The Company is in the process of assessing the impact of adopting the new impairment rules and may incur an impairment charge in accordance with the adoption of this Statement. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 2. Segment Reporting In 1998, the Company adopted Statement of Financial Accounting Standards No. 131, "Disclosure about Segments of an Enterprise and Related Information." The Statement requires the Company to report segment financial information consistent with the presentation made to the Company's management for decision making purposes. The Company is managed as one segment and all revenues are derived solely from representation operations and related activities. The Company's management decisions are based on operating cash flow (defined as operating income before depreciation, amortization, and management fees), general and administrative expenses of $9,561 and $9,015 for the nine months ended September 30, 2001 and 2000, respectively, and operating EBITDA (income before interest, taxes, depreciation and amortization and excluding contract termination revenue and noncash compensation charges from option repricing) of $4,772 and $14,685, respectively. 6 3. Acquisitions and Investments In December 2000, the Company invested $3 million in Cybereps, Inc. increasing its ownership percentage from 16% to 51%. The Company has recorded an equity loss on the investment of $1,561 for the nine months ended September 30, 2001. In addition, the Company has recorded amortization expense of $678 for the nine months ended September 30, 2001, representing amortization of the excess of the cash investment over the underlying equity interest in Cybereps. This excess is being amortized over a five-year period. The Company has accounted for this investment using the equity method of accounting, as it is unable to exercise effective control due to minority shareholders participating in significant decisions in the ordinary course of business. As of September 30, 2001, the carrying value of the Company's investment in Cybereps was $2.9 million. In September 1999, the Company acquired substantially all of the assets of Morrison and Abraham, Inc., a promotion and marketing consulting service to the radio broadcasting industry, for approximately $1 million paid upon closing and a maximum of $3 million to be paid contingent upon certain future performance measures over the next five years. The performance measures were met for the years ended December 31, 2000 and 1999 and therefore, the Company has paid an additional $1.5 million. The acquisition has been accounted for by the purchase method; accordingly, operating results are included in the accompanying statement of operations from the date of purchase. The acquired assets include fixed assets, current assets and rights to certain service agreements. The excess of cost over the fair market value of the assets acquired is being amortized over a five-year period. The Company has investments in affiliates, which are accounted for using the cost method of accounting as the Company does not have the ability to exercise significant influence over operating and financial policies of these affiliates. The total carrying value of these investments was $2.5 million and $4.1 million as of September 30, 2001 and December 31, 2000, respectively, representing a range of ownership from 8% to 16% of the affiliated companies. During the quarter ended September 30, 2001, the Company recorded an other than temporary write down of $1.9 million to reflect these investments at their net realizable value. This amount has been included in Other expense, net on the accompanying statement of operations. 4. Stock Options In April 2000, the Company granted options to purchase 775,300 shares of Class A common stock at an exercise price of $8.77. In December 2000, the Company repriced these options to an exercise price of $2.81 which represented the fair market value on the date of the repricing. In accordance with generally accepted accounting principles, the Company has adopted variable plan accounting for these options from the date of the repricing. For the nine months ended September 30, 2001, the Company has recorded a credit to selling expenses of $509, reflecting the decrease in share price from $3.50 at December 31, 2000 to $2.85 at September 30, 2001. 5. Shareholders' Equity In June 2001, the Company issued 308,641 shares of Class B common stock to the Interep Stock Growth Plan for net cash proceeds of $1.5 million. The shares were issued at the current fair market value on the date of issuance. In September 2001, the Company issued 142,450 shares of Class B common stock to the Interep Stock Growth Plan for net cash proceeds of $500,000. The shares were issued at the current fair market value on the date of issuance in each case. 6. Commitments and Contingencies The Company may be involved in various legal actions from time to time arising in the normal course of business. In the opinion of management, there are no matters outstanding that would have a material adverse effect on the consolidated financial position or results of operations of the Company. 7 In 2000, certain clients of the Company were served summons and complaints (on separate matters) for alleged breaches of various national sales representation agreements. The Company has agreed to indemnify its clients from and against any loss, liability, cost or expense incurred in the actions. Management believes the defendants have meritorious factual and legal defenses to the actions and intends to vigorously defend the claims. In December 1999, the Company's representation agreement with Clear Channel Communications was terminated. In April 2000, the Company filed an action in the Supreme Court of the State of New York seeking damages arising out of Clear Channel's alleged breach of contract of its national sales representation agreement with the Company. As of March 31, 2001, the Company had $6.3 million of current deferred costs on representation contract purchases and $9.4 million of current representation contract buyout payables resulting from the purchase of the Clear Channel representation agreement in 1996. In May 2001, the Company entered into a settlement agreement with Clear Channel. The settlement agreement resulted in a cash payment to the Company as well as the forgiveness of the remaining payables. These amounts are reported as contract termination revenue in the accompanying statement of operations. In addition, the Company wrote off the remaining current deferred representation contract costs through amortization expense. Item 2. Management's Discussion and Analysis of Financial Conditions and Results of Operations The following discussion is based upon and should be read in conjunction with our Consolidated Financial Statements, including the notes thereto, included elsewhere in this Report. Throughout this Quarterly Report, when we refer to "Interep" or "the Company," we refer collectively to Interep National Radio Sales, Inc. and all of our subsidiaries unless the context indicates otherwise or as otherwise noted. Important Note Regarding Forward Looking Statements Some of the statements made in this Quarterly Report are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are not statements of historical fact, but instead represent our belief about future events. In some cases, you can identify forward-looking statements by terminology such as "may," "will," "should," "expects," "plans," "anticipates," "believes," "estimates," "predicts," "potential," "continue," or the negative of these terms or other comparable terminology. These statements are based on many assumptions and involve known and unknown risks and uncertainties that are inherently uncertain and beyond our control. These risks and uncertainties may cause our or our industry's actual results, levels of activity, performance or achievements to be materially different than any expressed or implied by these forward-looking statements. Although we believe that the expectations in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. You should review the factors noted in Management's Discussion and Analysis of Financial Condition and Results of Operation--Certain Factors That May Affect Our Results of Operations for a discussion of some of the things that could cause actual results to differ from those expressed in our forward-looking statements. Overview We derive a substantial majority of our revenues from commissions on sales by us of national spot radio advertising air time for the radio stations we represent. Generally, advertising agencies or media buying services retained by advertisers purchase national spot advertising time. We receive commissions from our client radio stations based on the national spot radio advertising billings of the station, net of standard advertising agency and media buying services commissions. We enter into written representation contracts with our clients, which include negotiated commission rates. Because commissions are based on the prices paid to radio stations for spots, our revenue base is regularly and automatically adjusted for inflation. Our operating results generally depend on: . changes in advertising expenditures; 8 . increases and decreases in the size of the total national spot radio advertising market; . changes in our share of this market; . acquisitions and terminations of representation contracts; and . operating expense levels. The effect of these factors on our financial condition and results of operations varies from period to period. A number of factors influence the performance of the national spot radio advertising market, including, but not limited to, general economic conditions, consumer attitudes and spending patterns, the amount spent on advertising generally, the share of total advertising spent on radio and the share of total radio advertising represented by national spot radio. In this regard, we, like other media businesses, have been adversely affected by a slowing economy generally, and the events of September 11, 2001, in particular, which we believe have contributed to a decrease in the amount spent on advertising. Our share of the national spot advertising market changes as a result of increases and decreases in the amount of national spot advertising broadcast by our clients. Moreover, our market share increases as we acquire representation contracts with new client stations and decreases if current client representation contracts are terminated. Thus, our ability to attract new clients and to retain existing clients significantly affects our market share. The value of representation contracts that have been acquired or terminated during the last few years has tended to increase due to a number of factors, including the consolidation of ownership in the radio broadcast industry following the passage of the Telecommunications Act of 1996. In recent years, we have increased our representation contract acquisition activity, and we have devoted a significant amount of our resources to these acquisitions. At the same time, we have received an increased amount of contract termination revenue. We base our decisions to acquire a representation contract on the market share opportunity presented and an analysis of the costs and net benefits to be derived. We continuously seek opportunities to acquire additional representation contracts on attractive terms, while maintaining our current clients. Our ability to acquire and maintain representation contracts has had, and will continue to have, a significant impact on our revenues and cash flows. We recognize revenues on a contract termination as of the effective date of the termination. When a contract is terminated, we write off in full the unamortized portion, if any, of the expense we originally incurred on our acquisition of the contract. When we enter into a representation contract with a new client, we amortize the contract acquisition cost in equal monthly installments over the life of the new contract. As a result, our operating income is affected, negatively or positively, by the acquisition or loss of client stations. We are unable to forecast any trends in contract buyout activity, or in the amount of revenues or expenses that will likely be associated with buyouts during a particular period. Generally, the amount of revenue resulting from the buyout of a representation contract depends on the length of the remaining term of the contract and the revenue generated under the contract during the 12-month "trailing period" preceding the date of termination. The amount recognized by us as contract termination revenue in any period is not, however, indicative of contract termination revenue that may be realized in any future period. Historically, the level of buyout activity has varied from period to period. Additionally, the length of the remaining terms, and the commission revenue generation, of the contracts which are terminated in any period vary to a considerable extent. Accordingly, while buyout activity and the size of buyout payments has increased since 1996, their impact on our revenues and income is expected to be uncertain, due to the variables of contract length and commission generation. During 1999, we entered the Internet advertising business. Revenues and expenses from this business will be affected by the level of advertising on the Internet generally, the prices obtained for advertising on the Internet and our ability to obtain contracts from high-traffic Internet websites and from Internet advertisers. In December 2000, we merged our Interep Interactive business with Cybereps, Inc., an Internet advertising and marketing firm founded in 1996, in which we had a minority interest. See Note 3, "Acquisitions and Investments," in the Notes to the Unaudited Interim Consolidated Financial Statements included elsewhere in this Report. 9 Our selling and corporate expense levels are dependent on management decisions regarding operating and staffing levels and on inflation. Selling expenses represent all costs associated with our marketing, sales and sales support functions. Corporate expenses include items such as corporate management, corporate communications, financial services, advertising and promotion expenses and employee benefit plan contributions. Our business normally follows the pattern of advertising expenditures in general. It is seasonal to the extent that radio advertising spending increases during the fourth calendar quarter in connection with the Christmas season and tends to be weaker during the first calendar quarter. Radio advertising also generally increases during the second and third quarters due to holiday-related advertising, school vacations and back-to-school sales. Additionally, radio tends to experience increases in the amount of advertising revenues as a result of special events such as presidential election campaigns. Furthermore, the level of advertising revenues of radio stations, and therefore our level of revenues, is susceptible to prevailing general and local economic conditions and the corresponding increases or decreases in the budgets of advertisers, as well as market conditions and trends affecting advertising expenditures in specific industries. Results of Operations Three Months Ended September 30, 2001 Compared to Three Months Ended September 30, 2000 Commission revenue. Commission revenue for the third quarter of 2001 declined from $27.2 million in the third quarter of 2000 to $21.6 million, or approximately 20.4%. This $5.5 million decrease was primarily attributable to a sharp decline in national spot radio advertising on client stations, including cancellations resulting from the events of September 11, 2001, as well as the substantial reduction in advertising by Internet companies. These factors more than offset the fact that the broadcast calendar for the third quarter of 2001 consisted of 14 weeks compared to 13 weeks in the third quarter of 2000. Additionally, effective in 2001, revenues and expenses relating to our Internet advertising business were transferred to the operations of Cybereps, Inc., and are included in "Other expense, net" as a loss in equity investments. Contract termination revenue. Contract termination revenue in the third quarter of 2001 decreased to $0.7 million from $1.5 million in the third quarter of 2000. This decrease was attributable to fewer contracts being terminated in the third quarter of 2001 than in the comparable 2000 period. Selling expenses. Selling expenses for the third quarter of 2001 decreased to $14.0 million from $17.7 million in the third quarter of 2000. This decrease of $3.7 million, or approximately 21.1%, was primarily due to an option repricing credit and a reduction in performance-based compensation. Additionally, effective in 2001, revenues and expenses relating to our Internet advertising business were transferred to the operations of Cybereps, Inc., and are included in "Other expense, net" as a loss in equity investments. General and administrative expenses. General and administrative expenses for the third quarters of 2001 and 2000 were virtually unchanged. Depreciation and amortization expense. Depreciation and amortization expense in the third quarter of 2001 decreased to $5.8 million, or 14.6%, from $6.7 million in the third quarter of 2000. This decrease was due primarily to the completion of the amortization of certain representation contracts. Operating income (loss). Operating loss was $0.6 million for the third quarter of 2001, as compared to income of $1.2 million during the third quarter of 2000, a decline of $1.8 million for the reasons discussed above. Interest expense, net. Interest expense, net, increased $0.1 million, or 5.3%, to $2.4 million for the third quarter of 2001 from $2.3 million for the third quarter of 2000. This increase primarily resulted from a reduction in the amount of interest earned on our cash reserves, which partially offsets the interest expense on our Senior Subordinated Notes. 10 Other expense, net. Other expense, net, primarily consists of our share of the equity loss incurred by Cybereps, Inc. as well as a $1.9 million writedown of certain internet investments. See Note 3 to the Notes to the Unaudited Interim Consolidated Financial Statements included elsewhere in this Report. Provision (benefit) for income taxes. The provision for income taxes for the third quarter of 2001 was less than $0.1 million, compared to a benefit of $0.3 million for the comparable 2000 period. For the third quarter of 2001, the federal tax benefits resulting from the Company's taxable loss position have been fully reserved. The provision of less than $0.1 million reflects the Company's current obligation related to state income taxes. Net loss. Our net loss after tax was $5.5 million for the third quarter of 2001, compared to a $0.7 million loss for the third quarter of 2000. The $4.8 million difference was attributable to the factors discussed above. Nine Months Ended September 30, 2001 Compared to Nine Months Ended September 30, 2000 Commission revenues. Commission revenues for the first nine months of 2001 declined to $60.9 million, or 17.9%, from $74.2 million for the first nine months of 2000. This $13.3 million decrease was primarily attributable to a sharp decline in national spot radio advertising on client stations, including cancellations resulting from the events of September 11, 2001 as well as the substantial reduction in advertising by Internet companies. The broadcast calendars for the first nine months of 2001 and 2000 were both 39 weeks. Additionally, effective in 2001, revenues and expenses relating to our Internet advertising business were transferred to the operations of Cybereps, Inc., and are included in "Other expense, net" as a loss in equity investments. Contract termination revenue. Contract termination revenue in the first nine months of 2001 increased to $21.0 million from $2.3 million in the first nine months of 2000. This increase of approximately $18.6 million was primarily attributable to the settlement with Clear Channel Communications regarding contract termination revenue on their previously terminated representation contracts with us. Selling expenses. Selling expenses for the first nine months of 2001 decreased to $46.1 million from $50.5 million in the first nine months of 2000. This decrease of $4.4 million, or 8.8%, was primarily due to an option repricing credit and a reduction in performance-based compensation offset by expenditures for an expanded new selling initiative that began in the second quarter of 2001. Additionally, effective in 2001, revenues and expenses relating to our Internet advertising business were transferred to the operations of Cybereps, Inc., and are included in "Other expense, net" as a loss in equity investments. General and administrative expenses. General and administrative expenses for the first nine months of 2001 increased by $0.5 million, or 6.1%, to $9.6 million from $9.1 million for the first nine months of 2000. This increase of 6.1% is attributable primarily to litigation expenses incurred in the first nine months of 2001. Depreciation and amortization expense. Depreciation and amortization expense in the first nine months of 2001 increased by $7.0 million, or 36.8%, to $26.1 million from $19.1 million in the first nine months of 2000. This increase was primarily due to the write-off of $6.3 million of remaining deferred costs related to our terminated contract with Clear Channel. See Note 6 to the Notes to the Unaudited Interim Consolidated Financial Statements included elsewhere in this Report. Operating income (loss). Operating income was $0.2 million for the first nine months of 2001, as compared to a loss of $2.0 million for the first nine months of 2000, an improvement of $2.2 million for the reasons discussed above. Interest expense, net. Interest expense, net, for the first nine months of 2001 increased by $0.7 million, or 11.4%, to $6.9 million from $6.2 million for the first nine months of 2000. This increase primarily resulted from a reduction in the amount of interest earned on our cash reserves, which partially offsets the interest expense on our Senior Subordinated Notes. 11 Other expense, net. Other expense, net, primarily consists of our share of the equity loss incurred by Cybereps, Inc., as well as a $1.9 million writedown of certain internet investments. See Note 3 to the Notes to the Unaudited Interim Consolidated Financial Statements included elsewhere in this Report. Provision (benefit) for income taxes. The provision for income taxes for the first nine months of 2001 was $0.4 million, compared to a benefit of $3.2 million for the comparable 2000 period. For the first nine months of 2001, federal tax benefits resulting from the Company's taxable loss position have been fully reserved. The provision of $0.4 million reflects the Company's current obligation related to state income taxes. Net loss. Our net loss after tax was $10.6 million for the first nine months of 2001, compared to a $5.0 million loss for the first nine months of 2000. The $5.6 million, or 113%, increase was attributable to the reasons discussed above. Liquidity and Capital Resources Our cash requirements have been primarily funded by cash provided from operations and financing transactions. At September 30, 2001, we had cash and cash equivalents of $7.7 million, marketable securities of $2.4 million and working capital of $48.9 million. Cash provided by operating activities during the first nine months of 2001 was $6.0 million, as compared to $8.2 million during the first nine months of 2000. This fluctuation was primarily attributable to the decline in revenue. Net cash provided by (used in) investing activities is attributable to the purchase and sale of marketable securities, capital expenditures and investments in private companies. Net cash provided by investing activities was $7.2 million during the first nine months of 2001, reflecting $7.5 million from the redemption of marketable securities, offset by $0.3 million of capital expenditures. Net cash used for financing activities of $29.1 million during the first nine months of 2001 consisted of $31.2 million used for acquisitions of representation contracts, offset by $2.1 million in proceeds from the issuance of common stock to our employees' Stock Growth Plan. In general, as we acquire new representation contracts, we use more cash and, as our contracts are terminated, we receive additional cash. For the reasons noted above in "Overview," we are not able to predict the amount of cash we will require for contract acquisitions, or the cash we will receive on contract terminations, from period to period. In July 1998 we issued 10% Senior Subordinated Notes in the aggregate principal amount of $100.0 million due July 1, 2008. Interest on the Senior Subordinated Notes is payable in semi-annual payments of $5.0 million. The Senior Subordinated Notes, while guaranteed by our subsidiaries, are unsecured and are junior in right of payment to any amounts outstanding under the revolving credit agreement described below, as well as to certain other indebtedness. We used a portion of the net proceeds from the issuance of the Senior Subordinated Notes to repay the then outstanding balance of our bank debt. Additionally, we redeemed all of the outstanding shares of our then outstanding Series A preferred stock and Series B preferred stock, together with all of the associated shares of common stock then subject to redemption. We issued the Senior Subordinated Notes under an indenture that limits our ability to engage in various activities. Among other things: we are generally not able to pay any dividends to our shareholders, other than dividends payable in shares of common stock; we can only incur additional indebtedness under limited circumstances; and certain types of mergers, asset sales and changes of control either are not permitted or permit the note holders to demand immediate redemption of their Senior Subordinated Notes. The Senior Subordinated Notes may not be redeemed by us prior to July 1, 2003, except that we may redeem up to 30% of the Senior Subordinated Notes with the proceeds of equity offerings. If certain events occurred which would be deemed to involve a change of control under the indenture, we would be required to offer to repurchase all of the Senior Subordinated Notes at a price equal to 101% of their aggregate principal, plus unpaid interest. 12 We believe that the liquidity resulting from our initial public offering and the transactions described above, together with anticipated cash from continuing operations, should be sufficient to fund our operations and anticipated needs for required representation contract acquisition payments, and to make the required 10% annual interest payments on our Senior Subordinated Notes, for at least the next 12 months. We may not, however, generate sufficient cash flow for these purposes or to repay the notes at maturity. Our ability to fund our operations and required contract acquisition payments and to make scheduled principal and interest payments will depend on our future performance, which, to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control. We may also need to refinance all or a portion of our Senior Subordinated Notes on or prior to maturity. There can be no assurance that we will be able to effect any such refinancing on commercially reasonable terms, if at all. Certain Factors That May Affect Our Results of Operations The following factors are some, but not all, of the variables that may have an impact on our results of operations: . Changes in the ownership of our radio station clients, in the demand for radio advertising, in our expenses, in the types of services offered by our competitors, and in general economic factors may adversely affect our ability to generate the same levels of revenue and operating results. . Advertising tends to be seasonal in nature as advertisers typically spend less on radio advertising during the first calendar quarter. . The terrorist attacks that occurred in New York City and Washington, D.C. on September 11, 2001, and the subsequent military actions taken by the United States and its allies in response, have caused significant uncertainty. While the short and long term consequences of these events are uncertain, they could have a material adverse effect on general economic conditions, consumer confidence, advertising and the media industry. . The termination of a representation contract will increase our results of operations for the fiscal quarter in which the termination occurs due to the termination payments that are usually required to be paid, but will negatively affect our results in later quarters due to the loss of commission revenues. Hence, our results of operations on a quarterly basis are not predictable and are subject to significant fluctuations. . We depend heavily on our key personnel, including our Chief Executive Officer Ralph C. Guild and the President of our Marketing Division Marc Guild, and our inability to retain them could adversely affect our business. . We rely on a limited number of clients for a significant portion of our revenues. . Our significant indebtedness from our Senior Subordinated Notes may burden our operations, which could make us more vulnerable to general adverse economic and industry conditions, make it more difficult to obtain additional financing when needed, reduce our cash flow from operations to make payments of principal and interest and make it more difficult to react to changes in our business and industry. . We may need additional financing for our future capital needs, which may not be available on favorable terms, if at all. . Competition could harm our business. Our only significant competitor is Katz Media Corporation, which is a subsidiary of a major radio station group that has significantly greater financial and other resources than do we. In addition, radio must compete for a share of advertisers' total advertising budgets with other advertising media such as television, cable, print, outdoor advertising and the Internet. . Acquisitions and strategic investments could adversely affect our business. . Our Internet business may suffer if the market for Internet advertising fails to develop or continues to weaken. Item 3. Quantitative and Qualitative Disclosures About Market Risk We are exposed to market risk from changes in interest rates that may adversely affect our results of operations and financial condition. We seek to minimize the risks from these interest rate fluctuations through our regular operating and financing activities. Our policy is not to use financial instruments for trading or other speculative purposes. We are not currently a party to any financial instruments. 13 PART II OTHER INFORMATION Item 1. Legal Proceedings None. Item 2. Changes in Securities and Use of Proceeds In September 2001, we issued 142,450 shares of our Class B common stock to our Stock Growth Plan and Trust at a price of $3.51 per share for net cash proceeds of $500,000. The purchase price per share represented the average closing sales price of our Class A common stock on the Nasdaq National Market for the 20-day trading period ending immediately prior to the date the shares were issued. We believe the issuance of these shares is exempt pursuant to Section 4(2) of the Securities Act of 1933. Item 3. Defaults Upon Senior Securities None. Item 4. Submission of Matters to a Vote of Security Holders We held our annual meeting of shareholders on August 16, 2001, for the purpose of electing two directors to our Board of Directors for a term of three years and ratifying the appointment of Arthur Anderesen LLP as our independent auditors for the 2001 fiscal year. Leslie D. Goldberg and John E. Palmer were elected to serve on the Board of Directors until our annual meeting of shareholders in 2004; Ralph C. Guild, Marc G. Guild and Howard M. Brenner are still serving their existing terms as directors. Messrs. Goldberg and Palmer were elected as directors by a vote of 37,516,787 votes in favor of their election and 101,325 votes against. The votes cast in favor of Messrs. Goldberg and Palmer represented 99.7% of the total number of votes cast. The proposal to ratify the appointment of Arthur Andersen LLP as our independent auditors for the 2001 fiscal year was approved by a vote of 37,615,262 votes in favor of the proposal, 800 votes against and 2,050 abstentions. The votes cast in favor of the proposal represented 99.9% of the total number of votes cast. Item 5. Other Information None. Item 6. Exhibits and Reports on Form 8-K. (A) Documents Filed as Part of this Report None. (B) Reports on Form 8-K None. 14 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 in the City of New York, State of New York. INTEREP NATIONAL RADIO SALES, INC. By: /S/ WILLIAM J. MCENTEE, JR. ----------------------------------- William J. McEntee, Jr. Vice President and Chief Financial Officer November 14, 2001 15