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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 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 May 10, 2002, was 5,152,401 shares of Class A Common
Stock, and 4,073,891 shares of Class B Common Stock.
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PART I
FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
INTEREP NATIONAL RADIO SALES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands except share information)
March 31, December 31,
2002 2001
----------- ------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents..................................................... $ 5,942 $ 11,502
Receivables, net of allowance for doubtful accounts of $1,714 and $1,747,
respectively................................................................ 23,532 26,656
Representation contract buyouts receivable.................................... -- 12,504
Current portion of deferred representation contract costs..................... 35,177 40,368
Prepaid expenses and other current assets..................................... 1,124 927
-------- --------
Total current assets...................................................... 65,775 91,957
-------- --------
Fixed assets, net................................................................ 3,660 3,909
Deferred representation contract costs........................................... 64,572 64,521
Investments and other assets..................................................... 20,246 19,342
-------- --------
Total assets.............................................................. $154,253 $179,729
-------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses......................................... $ 10,824 $ 8,606
Accrued interest.............................................................. 2,475 4,950
Representation contract buyouts payable....................................... 15,673 33,161
Accrued employee-related liabilities.......................................... 3,085 3,741
-------- --------
Total current liabilities................................................. 32,057 50,458
-------- --------
Long-term debt................................................................... 99,000 99,000
-------- --------
Representation contract buyouts payable.......................................... 18,762 21,267
-------- --------
Other noncurrent liabilities..................................................... 4,296 4,714
-------- --------
Shareholders' equity:
Class A common stock, $0.01 par value--20,000,000 shares authorized,
5,060,237 and 4,907,996 shares issued and outstanding at March 31, 2002 and
December 31, 2001, respectively............................................. 51 49
Class B common stock, $0.01 par value--10,000,000 shares authorized,
4,328,506 and 4,314,463 shares issued and outstanding at March 31, 2002 and
December 31, 2001, respectively............................................. 43 43
Additional paid-in-capital....................................................... 39,093 39,456
Accumulated deficit.............................................................. (39,049) (35,258)
-------- --------
Total shareholders' equity................................................ 138 4,290
-------- --------
Total liabilities and shareholders' equity................................ $154,253 $179,729
======== ========
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
Ended March 31,
-------------------
2002 2001
------- --------
Commission revenues................................... $17,528 $ 16,608
Contract termination revenue.......................... 2,387 69
------- --------
Total revenues........................................ 19,915 16,677
------- --------
Operating expenses:
Selling expenses...................................... 12,864 14,964
General and administrative expenses................... 3,196 3,180
Depreciation and amortization expense................. 5,920 6,507
------- --------
Total operating expenses.............................. 21,980 24,651
------- --------
Operating loss........................................ (2,065) (7,974)
Interest expense, net................................. 2,512 2,257
Other expense, net.................................... -- 313
------- --------
Loss before benefit for income taxes.................. (4,577) (10,544)
Benefit for income taxes.............................. (786) (4,239)
------- --------
Net loss.............................................. $(3,791) $ (6,305)
======= ========
Basic and diluted loss per share...................... $ (0.41) $ (0.74)
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 Three Months
Ended March 31,
-------------------
2002 2001
- - -------- --------
Cash flows from operating activities:
Net loss............................................................... $ (3,791) $ (6,305)
Adjustments to reconcile loss to net cash used in operating activities:
Depreciation and amortization.......................................... 5,920 6,507
Noncash compensation expense........................................... (920) 350
Equity loss on investment.............................................. -- 385
Changes in assets and liabilities:
Receivables............................................................ 3,124 8,067
Representation contract buyouts receivable............................. 12,504 1,028
Prepaid expenses and other current assets.............................. (197) (251)
Other noncurrent assets................................................ (1,158) (4,441)
Accounts payable and accrued expenses.................................. 2,218 (6,974)
Accrued interest....................................................... (2,475) (2,475)
Accrued employee-related liabilities................................... (656) (4,609)
Other noncurrent liabilities........................................... (418) (133)
-------- --------
Net cash provided by (used in) operating activities.................... 14,151 (8,851)
-------- --------
Cash flows from investing activities:
Additions to fixed assets.............................................. (101) (211)
Increase in other investments.......................................... -- (575)
-------- --------
Net cash used in investing activities.................................. (101) (786)
-------- --------
Cash flows from financing activities:
Station representation contract payments............................... (20,169) (7,144)
Issuance of Class B common stock....................................... 559 --
-------- --------
Net cash used in financing activities.................................. (19,610) (7,144)
-------- --------
Net decrease in cash and cash equivalents.............................. (5,560) (16,781)
Cash and cash equivalents, beginning of period......................... 11,502 23,681
-------- --------
Cash and cash equivalents, end of period............................... $ 5,942 $ 6,900
-------- --------
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest paid....................................................... $ 4,950 $ 4,950
Income taxes paid................................................... 74 --
Non-cash investing and financing activities:
Station representation contracts acquired........................... $ 176 $ 2,798
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 March 31, 2002 and 2001 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, 2001, 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, 2002.
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 March 31, 2002 and 2001 had 13 and 12 weeks,
respectively.
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 9,225,373 and 8,515,629
for the three months ended March 31, 2002 and 2001, 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
months ended March 31, 2002 and 2001, the exercise of outstanding options would
have an antidilutive effect and therefore have been excluded from the
calculation.
Restructuring Charges
A strategic restructuring program was undertaken in 2001 in response to
difficult economic conditions and to further ensure the Company's competitive
position. In 2001, the Company recognized restructuring charges of $3,471,
which were primarily comprised of termination benefits. The restructuring
program resulted in the termination of approximately 53 employees. At December
31, 2001, the remaining accrual was approximately $2,917. During the three
months ended March 31, 2002, the Company paid approximately $716 of termination
benefits. As of March 31, 2002, the remaining accrual was $2,201, of which
$1,720 is included in accrued employee related liabilities and $481 is included
in other noncurrent liabilities.
New Accounting Pronouncements
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. 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 from radio representation operations and related activities. The
Company's management decisions are based on operating EBITDA, defined as
operating income or loss before interest, taxes, depreciation and amortization
and excluding contract termination revenue and a non-cash option re-pricing
charge. Operating EBITDA is not a measure of performance calculated in
accordance with generally accepted accounting principles, but the Company
believes it is useful in evaluating the performance of Interep, in addition to
the GAAP data presented herein.
6
3. Acquisitions and Investments
In December 2000, the Company invested $3,000 in Cybereps, Inc. and thus
increased its ownership percentage from 16% to 51%. In October 2001, the
Company assumed effective control of Cybereps' operations and consolidated its
results from that date. The operating loss included in the accompanying
statement of operations for the three months ended March 31, 2002 is
approximately $329, compared to $385 of equity loss included in other income
for the three months ended March 31, 2001.
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 $2,500 as of
March 31, 2002, representing a range of ownership from 8% to 16% of the
affiliated companies.
4. Stock Options
In April 2000, the Company granted options to purchase 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 three
months ended March 31, 2002 and 2001, the Company has recorded $(920) and $350
to selling expenses as a result of the repricing.
5. Shareholders' Equity
In March 2002, the Company issued 164,117 shares of Class B common stock to
the Interep Stock Growth Plan for net cash proceeds of $558. During 2001, the
Company issued 680,330 shares of Class B common stock to the Interep Stock
Growth Plan for net cash proceeds of $2,800. The shares were issued at the
current fair market value on the date of issuance.
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.
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. In
the first quarter of 2002, the Company entered into a settlement agreement
regarding these contract acquisition claims. The settlement resulted in the
offset of approximately $12,800 in representation contract buyout receivables
and payables as well as additional contract termination revenue of $2,400. In
addition, the settlement agreement includes amended payment schedules for
approximately $10,000 in contract representation payables previously recorded.
7. Subsequent Event
In May 2002, we issued $5,000 of units in a private placement. Each unit
consists of one share of $100 face value, 4% pay-in-kind, Series A Convertible
Preferred Stock and 6.25 warrants to purchase the same number of shares of our
Class A common stock. Each share of Preferred Stock is convertible into 25
shares of our Class A common stock.
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.
7
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 airtime 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
automatically adjusted for inflation.
Our operating results generally depend on:
. changes in advertising expenditures;
. 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 sluggish economy
generally, and the events of September 11, 2001, in particular, which we
believe have contributed to a temporary 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
8
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 added Internet advertising to our sales representation
business. Revenues and expenses from the Internet advertising portion of our
business will be affected by the level of advertising on the Internet generally
and the portion of that advertising that we can direct to our clients, the
traffic volume at our client's websites, the prices obtained for advertising on
the Internet and our ability to obtain additional 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 in which we had a minority interest, thereby increasing our
ownership percentage from 16% to 51%. In October 2001, we assumed effective
control of Cybereps' operations and consolidated its results from that date.
Accordingly, the operations of Cybereps are included in the revenue and expense
accounts for the three months ended March 31, 2002, whereas our share of the
operating results for the three months ended March 31, 2001 are included in
Other expenses, net.
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 generally 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 political 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.
9
Results of Operations
Three Months Ended March 31, 2002 Compared to Three Months Ended March 31,
2001
Commission revenues. Commission revenues for the first quarter of 2002
increased to $17.5 million from $16.6 million for the first quarter of 2001, or
approximately 5.5%. This $0.9 million increase was primarily attributable to
the inclusion, in the current period, of the commission revenue earned by our
Internet operations. In the prior year, our share of the Internet loss was
reported on the equity basis, under the caption "Other expense, net".
Additionally, our comparative revenue was affected by the fact that the first
quarter of 2002 had 13 weeks, as compared to 12 weeks during the first quarter
of 2001.
Contract termination revenue. Contract termination revenue in the first
quarter of 2002 increased by $2.3 million, to $2.4 million, from $0.1 million
in the first quarter of 2001. This increase was primarily attributable to
settlement of the Katz litigation. See Note 6 to the Notes to the Unaudited
Interim Consolidated Financial Statements included elsewhere in this Report.
Selling expenses. Selling expenses for the first quarter of 2002 decreased
to $12.9 million from $15.0 million in the first quarter of 2001. This decrease
of $2.1 million, or approximately 14.0%, was primarily due to the strategic
restructuring program undertaken in the fourth quarter of 2001 and the stock
option repricing, offset in part by the operating expenses incurred by our
Internet operations. In the prior year our share of the Internet loss was
reported on the equity basis, under the caption "Other expense, net".
General and administrative expenses. General and administrative expenses for
the first quarter of 2002 were virtually unchanged from the first quarter of
2001.
Operating EBITDA. Operating EBITDA increased by $1.7 million for the first
quarter of 2002 to $0.5 million, from a loss of $1.2 million for the first
quarter of 2001, for the reasons discussed above. Operating EBITDA is operating
income or loss before interest, taxes, depreciation and amortization and
excludes contract termination revenue and a non-cash option re-pricing charge.
Operating EBITDA is not a measure of performance calculated in accordance with
generally accepted accounting principles, but we believe it is useful in
evaluating the performance of Interep, in addition to the GAAP data presented
herein.
Depreciation and amortization expense. Depreciation and amortization expense
decreased $0.6 million, or 9.0%, during the first quarter of 2002, to $5.9
million from $6.5 million in the first quarter of 2001. This decrease was
primarily due to new representation contracts terminated during the past 12
months.
Operating loss. Operating loss decreased by $5.9 million, or 73.8%, for the
first quarter of 2002 to $2.1 million, as compared to the loss of $8.0 million
during the first quarter of 2001, for the reasons discussed above.
Interest expense, net. Interest expense, net, increased $0.2 million, or
8.7%, to $2.5 million for the first quarter of 2002, from $2.3 million for the
first quarter of 2001. This increase primarily resulted from a reduction in the
amount of cash invested and lower interest rates.
Other expense, net. Other expense, net, for 2001 primarily consisted of our
share of the equity loss incurred by Cybereps, Inc. See discussion of
commission revenues, selling expenses and general and administrative expenses,
above. See also Note 3 to the Notes to the Unaudited Interim Consolidated
Financial Statements included elsewhere in this Report.
Benefit for income taxes. The benefit for income taxes decreased by 81.4%,
to $0.8 million, for the first quarter of 2002 from $4.2 million for the first
quarter of 2002, as a result of the decreased operating loss.
Net loss. Our net loss after tax declined $2.5 million, or 39.9%, to $3.8
million for the first quarter of 2002, from $6.3 million for the first quarter
of 2001. This improvement is attributable to the reasons discussed above. Due
to the seasonality of our business, the first quarter is normally our weakest
quarter.
10
Liquidity and Capital Resources
Our cash requirements have been primarily funded by cash provided from
operations and financing transactions. In December 1999 we closed our initial
public offering, which resulted in net proceeds of $46.8 million. At March 31,
2002, we had cash and cash equivalents of $5.9 million and working capital of
$33.7 million. In May 2002, we issued $5 million of units in a private
placement. Each unit consists of one share of $100 face value, 4% pay-in-kind,
Series A Convertible Preferred Stock and 6.25 warrants to purchase the same
number of shares of our Class A common stock. Each share of Preferred Stock is
convertible into 25 shares of our Class A common stock. Each warrant is
exerciseable during the next five years at an exercise price of $4.00 per share.
Cash provided by operating activities during the first quarter of 2002 was
$14.2 million, as compared to cash used by operating activities of $8.8 million
during the first quarter of 2001. This fluctuation was primarily attributable
to representation contract buyouts in 2002 and increased payables and accrued
expenses in 2002, as compared to a reduction in such items in 2001. As noted
above, the first quarter is normally our weakest quarter due to the seasonality
of our business. See Note 6 to the Notes to the Unaudited Interim Consolidated
Financial Statements included elsewhere in this Report.
Net cash used in investing activities is attributable to capital
expenditures in 2002 and included investments in private companies in 2001. Net
cash used in investing activities was $0.1 million during the first quarter of
2002.
Cash used for financing activities of $19.6 million during the first quarter
of 2002 was used for representation contract acquisition payments of $20.2
million, offset by $0.6 million from the sale of additional stock to our 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.
We do not have any written options on financial assets, nor do we have any
special purpose entities. We have not guaranteed any obligations of our
unconsolidated investments.
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 junior 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.
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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. In this regard, we believe that the cost-saving restructuring we
implemented in 2001 should contribute to an improvement in cash flow. Moreover,
the improvement in radio advertising pacings experienced in the first quarter
of 2002 may be indicative of an improving revenue trend that should also have a
positive effect on liquidity and cash flow. At the same time, as noted above,
we recently obtained $5 million of new equity financing, and we are continuing
to seek additional debt and equity financing to enhance our working capital
position.
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 consequences of these events are uncertain, they
could have a material adverse effect on general economic conditions,
consumer confidence, advertising and the media industry and may continue
to do so in the future.
. 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.
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. Competition could harm our business. Our only significant competitor is
Katz Media Group, Inc., 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.
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
Katz Media Group, Inc., our principal competitor, and certain of its
subsidiaries (together, "Katz"), instituted separate actions against four of
our radio station clients in the New York Supreme Court, County of New York,
from 1999 to 2001. In each case, our client (or its predecessor) was formerly
represented by Katz, and Katz sued for monetary damages for alleged breaches of
the representation agreement between Katz and the client stemming from the
termination of the agreement by the client when it opted to retain us as its
rep firm. In each case, we had agreed to indemnify our client against any
liabilities that may arise from such termination, including customary
termination payments and the costs of the litigation. The dispute in each case
primarily concerned whether termination payments were owed to Katz, and, if so,
the amount of such payments. In the first quarter of 2002, the Company entered
into a settlement agreement regarding these contract acquisition claims. The
terms of the settlement provide that various contract termination payments
payable by both parties to each other will be offset, leaving a balance payable
by Interep to Katz, which will be paid in installments through 2005.
Item 2. Changes in Securities and Use of Proceeds
In March 2002, we issued 164,117 shares of our Class B common stock to our
Stock Growth Plan and Trust for net cash proceeds of approximately $558,000.
One share of Class B common stock is convertible into one share of Class A
common stock. We believe the issuance of these shares is exempt from
registration under the Securities Act of 1933 pursuant to Section 4(2) thereof.
In May 2002, we issued preferred stock and warrants in connection with a
private equity financing. See Item 5 below.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
In May 2002, we issued 50,000 units consisting of one share of Series A
Convertible Preferred Stock ("Series A Stock") and 6.25 warrants to acquire the
same number of shares of our Class A common stock ("Warrants") for an aggregate
purchase price of $5 million. We will use the proceeds for working capital.
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The Series A Stock has a face amount of $100 per share and a liquidation
preference in such amount in priority over our Class A common stock and Class B
common stock. Each share of the Series A Stock may be converted at the option
of the holder at any time into 25 shares of our Class A common stock at an
initial conversion price of $4.00 per share (subject to anti-dilution
adjustment). If the market price of our Class A Common Stock is $8.00 or more
for 30 consecutive trading days, the Series A Stock will automatically be
converted into shares of our Class A Common Stock at the then applicable
conversion price. The Series A Stock bears a 4% annual cumulative dividend that
we can pay in cash or in kind in additional shares of the Series A Stock.
Holders of shares of the Series A Stock vote, on an "as converted basis",
together with the holders of our Class A and Class B common stock on all
matters and would vote alone as a class if changes to the rights or status of
the Series A Stock were proposed by us.
Each warrant is immediately exercisable for one share of our Class A common
Stock at a strike price of $4.00 per share (subject to anti-dilution
adjustment). The Warrants expire on the fifth anniversary of their date of
issuance.
Item 6. Exhibits and Reports on Form 8-K.
(A) Documents Filed as Part of this Report
Exhibit No. Description
- ----------- -----------
3.1 Certificate of Amendment of the Restated Certificate of Incorporation (filed herewith)
4.1 Form of Warrant (filed herewith)
10.1 Form of Stock Purchase Agreement (filed herewith)
10.2 Form of Registration Rights Agreement (filed herewith)
99.1 Press release issued on May 8, 2002 (filed herewith)
99.2 Letter, dated May 15, 2002, from Interep to the SEC regarding Arthur Andersen LLP (filed herewith)
(B) Reports on Form 8-K
None.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized in the City of New York, State of New
York.
May 15, 2002
INTEREP NATIONAL RADIO SALES, INC.
By: /s/ WILLIAM J. MCENTEE, JR.
-----------------------------
William J. McEntee, Jr.
Vice President and Chief
Financial Officer
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