UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1999 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 333-60575 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 [ ] As of August 10, 1999, there were 297,976 outstanding shares of the registrant's Common Stock, $0.04 par value per share. PART I. FINANCIAL INFORMATION Item 1. FINANCIAL STATEMENTS INTEREP NATIONAL RADIO SALES, INC. CONSOLIDATED BALANCE SHEETS (in thousands except share information) June 30, December 31, 1999 1998 ------------ ------------ (unaudited) ASSETS Current assets: Cash and cash equivalents........................................................ $16,347 $32,962 Receivables, less allowance for doubtful accounts of $1,477 and $1,626 respectively..................................................................... 33,586 35,104 Representation contract buyouts receivable....................................... 8,873 11,447 Current portion of deferred representation contract costs........................ 31,864 33,742 Prepaid expenses and other current assets........................................ 1,803 1,207 ------------ ------------ Total current assets............................................................. 92,473 114,462 ------------ ------------ Fixed assets, net................................................................ 5,774 4,311 Deferred costs on representation contract purchases.............................. 45,629 45,702 Station contract rights, net..................................................... 1,219 1,681 Representation contract buyouts receivable....................................... 4,092 6,920 Other assets..................................................................... 14,115 11,432 ------------ ------------ Total assets..................................................................... $163,302 $184,508 ============ ============ June 30, December 31, 1999 1998 ------------ ------------ (unaudited) LIABILITIES AND SHAREHOLDERS' DEFICIT Current liabilities: Accounts payable and accrued expenses ........................................... $ 12,981 $16,640 Accrued interest................................................................. 5,000 4,972 Representation contract buyouts payable.......................................... 18,313 20,219 Accrued employee-related liabilities............................................. 2,563 6,520 ------------ ------------ Total current liabilities........................................................ 38,857 48,351 ------------ ------------ Long-term debt................................................................... 100,000 100,000 ------------ ------------ -2- Representation contract buyouts payable.......................................... 26,627 26,706 ------------ ------------ Other noncurrent liabilities..................................................... 5,710 10,673 ------------ ------------ Commitments and contingencies Shareholders' deficit: Common stock, $.04 par value-1,000,000 shares authorized, 334,549 shares issued.. 14 14 Additional paid-in-capital....................................................... 1,163 1,163 Accumulated deficit.............................................................. (7,060) (320) Receivable from Employee Stock Ownership Plan.................................... -- (82) Treasury stock, at cost-36,724 and 36,573 shares, respectively................... (2,009) (1,997) ------------ ------------ Total shareholders' deficit...................................................... (7,892) (1,222) ------------ ------------ Total liabilities and shareholders' deficit...................................... $163,302 $184,508 ============ ============ The accompanying Notes to Unaudited Interim Consolidated Financial Statements are an integral part of these balance sheets. -3- INTEREP NATIONAL RADIO SALES, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands) (unaudited) For the For the Three Months Six Months Ended June 30, Ended June 30, -------------- -------------- 1999 1998 1999 1998 ---- ---- ---- ----- Commission revenue ........................................ $ 24,225 $ 22,104 $ 41,736 $ 38,002 Contract termination revenue .............................. 1,237 1,850 3,742 25,966 -------- -------- -------- -------- Total revenues ............................................ 25,462 23,954 45,478 63,968 -------- -------- -------- -------- Operating expenses: Selling expenses .......................................... 16,012 14,110 30,658 27,946 General and administrative expenses ....................... 2,587 2,749 5,186 5,346 Depreciation and amortization expense ..................... 6,744 8,745 16,246 17,841 -------- -------- -------- -------- Total operating expenses .................................. 25,343 25,604 52,090 51,133 -------- -------- -------- -------- Operating income (loss) ................................... 119 (1,650) (6,612) 12,835 Interest expense, net ..................................... 2,430 1,236 4,812 2,241 -------- -------- -------- -------- (Loss) Income before (benefit) provision for income taxes .............................................. (2,311) (2,886) (11,424) 10,594 (Benefit) provision for income taxes ...................... (948) (1,183) (4,684) 4,343 -------- -------- -------- -------- Net (loss) income ......................................... (1,363) (1,703) (6,740) 6,251 -------- -------- -------- -------- Preferred stock dividend requirements and redemption premium ........................................ -- 465 -- 930 -------- -------- -------- -------- Net (loss) income applicable to common shareholders ....... $ (1,363) $ (2,168) $ (6,740) $ 5,321 ======== ======== ======== ======== The accompanying Notes to Unaudited Interim Consolidated Financial Statements are an integral part of these statements. -4- INTEREP NATIONAL RADIO SALES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (unaudited) For the Six Months Ended June 30, -------------- 1999 1998 ---- ---- Cash flows from operating activities: Net (loss) income ............................................................... $ (6,740) $ 6,251 Adjustments to reconcile (loss) income to net cash provided by operating activities: Depreciation and amortization ................................................... 16,246 17,841 Changes in assets and liabilities- Receivables...................................................................... 1,518 (9,166) Representation contracts buyout receivable ...................................... 5,402 (2,231) Prepaid expenses and other current assets ....................................... (596) (556) Other noncurrent assets ......................................................... (3,200) (379) Accounts payable and accrued expenses ........................................... (3,659) (3,018) Accrued interest ................................................................ 28 (30) Accrued employee-related liabilities ............................................ (3,957) (2,087) Other noncurrent liabilities .................................................... (4,963) 4,505 -------- -------- Net cash provided by operating activities ....................................... 79 11,130 -------- -------- Cash flows from investing activities: Additions to fixed assets ....................................................... (2,078) (392) -------- -------- Net cash used in investing activities: .......................................... (2,078) (392) -------- -------- Cash flows from financing activities: Station representation contracts payments ....................................... (14,686) (15,999) Debt repayments ................................................................. -- (10,250) Borrowings in accordance with credit agreement .................................. -- 17,148 Purchases of treasury stock ..................................................... (12) (302) Other, net ...................................................................... 82 -- -------- -------- Net cash used in financing activities ........................................... (14,616) (9,403) -------- -------- Net (decrease) increase in cash and cash equivalents ............................ (16,615) 1,335 Cash and cash equivalents, beginning of period .................................. 32,962 1,419 -------- -------- Cash and cash equivalents, end of period ........................................ $ 16,347 $ 2,754 ======== ======== Supplemental disclosures of cash flow information: Cash paid during the year for: Interest paid .............................................................. $ 4,972 $ 1,953 -5- Income taxes paid .......................................................... 1,080 118 Non-cash investing and financing activities: Station representation contracts acquired .................................. $ 12,704 $ 14,004 ======== ======== The accompanying Notes to Unaudited Interim Consolidated Financial Statements are an integral part of these statements. -6- 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 generally accepted accounting principles have been condensed or omitted. All significant intercompany transactions and balances have been eliminated. The consolidated financial statements of June 30, 1999 and 1998 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, 1998, 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, 1999. 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. Since it is common practice in the industry for rep companies not to pay a station until the corresponding receivable is paid, and since the receivable and payable are equal, except for the commissions, fees payable to stations have been offset against the related receivables from advertising agencies in the accompanying consolidated balance sheets. Representation Contract Termination Revenue and Contract Acquisition Costs The Company's station representation contracts usually renew automatically from year to year 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 representation 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 (the "Buyout Period"). Costs of obtaining station representation contracts are deferred and amortized over the Buyout Period. 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. -7- In addition, costs incurred as a result of commission rate reductions are deferred and amortized over the remaining life of the existing representation agreement. Such amortization is included in the accompanying consolidated statements of operations as a component of depreciation and amortization expense. 2. New Accounting Pronouncements In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). The Statement establishes accounting and reporting standards requiring that every derivative instrument be recorded in the balance sheet and measured at its fair value. This Statement also requires that changes in the derivative's fair value be recognized currently in earnings. To date, the Company has not, and has no present intention to, invest in any derivative instruments or participate in any hedging activities. Accordingly, the adoption of SFAS 133 will not have any effect on the Company. 3. Segment Disclosures 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 radio representation operations and related activities. The Company's management decisions are based on consolidated cash flow (defined as operating income before depreciation, amortization and management fees), general and administrative expenses of $5,186 and $5,346 for the six months ended June 30, 1999 and 1998, respectively, and EBITDA (income before interest, taxes, depreciation and amortization) of $9,634 and $30,676 for the six months ended June 30, 1999 and 1998, respectively. 4. Summarized Consolidating Financial Statements The following summarized consolidating financial statements for the three and six months ended June 30, 1999 and 1998 present the financial position, the results of operations and cash flows for the Company and the guarantor subsidiaries of the Company, and the eliminations necessary to arrive at the information for the Company on a consolidated basis. The guarantor subsidiaries are the only wholly-owned subsidiaries of the Company, direct or indirect, and have fully and unconditionally guaranteed the Company's 10.0% Senior Subordinated Notes (the "Notes") due 2008 on a joint and several basis. The Company has not presented separate financial statements and other disclosures concerning the guarantor subsidiaries of the Company because management has determined that such information is not material to investors. At June 30, 1999 Consolidated Company Guarantors Elimination Company ------- ---------- ----------- ----------- Current assets $27,709 $64,764 $ -- $92,473 Noncurrent assets 55,938 20,247 (5,356) 70,829 Current liabilities 17,040 21,817 -- 38,857 Noncurrent liabilities 104,363 27,974 -- 132,337 -8- At December 31, 1998 Consolidated Company Guarantors Elimination Company ------- ---------- ----------- ----------- Current assets $46,026 $68,436 $ -- $114,462 Noncurrent assets 15,266 60,136 (5,356) 70,046 Current liabilities 19,395 28,956 -- 48,351 Noncurrent liabilities 108,259 29,120 -- 137,379 For the three months ended June 30, 1999 Consolidated Company Guarantors Company ------- ---------- ------------ Commission revenue $ 156 $24,069 $24,255 Contract termination revenue -- 1,237 1,237 Operating (loss) income (8,472) 8,591 119 Net (loss) income (9,657) 8,294 (1,363) For the three months ended June 30, 1998 Consolidated Company Guarantors Company ------- ---------- ------------ Commission revenue $ 145 $21,959 $22,104 Contract termination revenue -- 1,850 1,850 Operating (loss) income (8,107) 6,457 (1,650) Net (loss) income (8,698) 6,995 (1,703) For the six months ended June 30, 1999 Consolidated Company Guarantors Company ------- ---------- ------------ Commission revenue $ 387 $41,349 $41,736 Contract termination revenue -- 3,742 3,742 Operating (loss) income (16,823) 10,211 (6,612) Net (loss) income (16,565) 9,825 (6,740) -9- For the six months ended June 30, 1998 Consolidated Company Guarantors Company ------- ---------- ------------ Commission revenue $ 383 $37,619 $38,002 Contract termination revenue -- 25,966 25,966 Operating (loss) income (16,289) 29,124 12,835 Net (loss) income (22,741) 28,992 6,251 -10- Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion is based upon and should be read in conjunction with the Consolidated Financial Statements, including the notes thereto, included elsewhere in this Report. Certain statements contained herein, including without limitation, statements containing the words "believes", "anticipates", "intends", "expects" and words of similar import, constitute "forward-looking statements." Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the Company or industry results to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, among others, the following: general economic and business conditions, both domestic and foreign; industry capacity; demographic changes; existing government regulations and changes in, or the failure to comply with, government regulations; liability and other claims asserted against the Company; competition; the loss of any significant customers; changes in operating strategy or development plans; the ability to attract and retain qualified personnel; the significant indebtedness of the Company; and other factors referenced in this Report. Given these uncertainties, prospective investors are cautioned not to place undue reliance on such forward-looking statements. The Company disclaims any obligation to update any such factors or to publicly announce the result of any revisions to any of the forward-looking statements contained herein to reflect future events or developments. General The Company derives substantially all of its revenues from commissions on sales of national spot radio advertising air time on behalf of radio stations represented by the Company. Generally, national spot advertising time is purchased by advertising agencies or media buying services retained by advertisers to create advertising campaigns and to place advertising with radio stations and other media. The Company receives commissions from its client radio stations based on the national spot radio advertising billings of the station, net of the standard advertising agency and media buying services commissions (typically 15%). Commission rates are negotiated and set forth in a client's representation contract. Since commissions are based on the prices paid to radio stations for spots, the Company's revenue base is constantly adjusted for inflation. The Company's operating results generally are dependent on (i) increases and decreases in the size of the total national spot radio advertising market, (ii) changes in the Company's share of this market, (iii) acquisitions and terminations of representation contracts and (iv) the Company's operating expense levels. The effect of these factors on the Company's financial condition and results of operations has varied from period to period. Total United States national spot radio advertising annual revenues have grown from approximately $1.1 billion to approximately $2.0 billion during the six years ended December 31, 1998. The performance of the national spot radio advertising market is influenced by a number of factors, including, but not limited to, general economic conditions, consumer attitudes and spending patterns, the share of total advertising spent on radio and the share of total radio advertising represented by national spot radio. The Company's share of the national spot advertising market changes as a result of increases and decreases in the amount of national spot advertising broadcast on the Company's client stations. Moreover, the Company's market share increases as the Company acquires representation contracts with new client stations, and decreases if current client station representation contracts are terminated. Thus, the Company's ability to attract new clients, while retaining existing clients, significantly affects its market share. In this regard, the value of representation contracts which 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 enactment of the Telecommunications Act of 1996. Accordingly, -11- in recent years, the Company's rep contract acquisition activity has increased and the Company has devoted a significant amount of its resources to acquiring representation contracts. At the same time, there has been an increase in the amount of revenue received by the Company on the termination of representation contracts. The decision to acquire a representation contract is based on the market share opportunity presented and an analysis of the costs and net benefits to be derived. The Company continuously seeks opportunities to acquire additional representation contracts on attractive terms, while maintaining its current clients. The Company's ability to acquire and maintain representation contracts has had, and will continue to have, a significant impact on its revenues and cash flows. Following industry practice, the Company acts as the exclusive national rep firm for each of its client radio stations pursuant to a written contract. If a station terminates its contract prior to the scheduled termination date, the station is obligated to pay the Company, as required by the contract or in accordance with industry practice, an amount approximately equal to the commissions the Company would have earned during the unexpired term of the canceled contract, plus an additional two months of "spill over" commissions (representing commissions earned on advertising placed or committed to prior to the contract termination but broadcast thereafter). In practice, these amounts are usually paid by the successor rep firm which signs a new contract with the station and assumes the responsibility for payment to the former rep firm. Such payments are usually made in equal monthly installments over a period consisting of one-half the number of months remaining under the terminated contract. For example, if the Company acquires the representation contract of a station which is terminating its contract with a competing rep firm with a remaining unexpired term of 12 months, the total obligation would be 14 months of commissions payable in seven equal monthly installments. The Company recognizes revenue resulting from the termination of a contract with a client as of the effective date of the termination. In this regard, when a contract is terminated, the unamortized portion, if any, of the expense originally incurred on acquisition of such contract is written-off entirely. With respect to its entry into a representation contract with a new client, the Company amortizes the contract acquisition cost incurred in equal monthly installments over the life of the new contract. As a result, the Company's operating income is affected, negatively or positively, by the acquisition or loss of client stations. The Company has been unable to identify a method to forecast any trends in buyout activity, or in the amount of revenue or expense 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 months preceding the date of termination (the "trailing period"). The amount recognized by the Company as contract termination revenue in any period is not, however, indicative of such revenue that may be realized in any future period from contract terminations. 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 the consolidation of ownership in the radio broadcast industry that has followed the enactment of the Telecommunications Act of 1996 has increased buyout activity and amounts, the impact of such activity on the Company's revenues and income is expected to be uncertain, due to the variables of contract length and commission generation. While the commission revenue generated under a representation contract during a trailing period is used in the calculation of the payments to be made by the Company on its acquisition of such contract, such revenue should not be relied on as an indication of the future commission revenue to be generated by the Company under that contract. Such revenue will depend on a number of factors, including the amount of national spot advertising broadcast by the station involved. This, in turn, will be affected by factors such as general and local economic conditions, consumer attitudes and spending patterns, the share of total advertising spent on radio and the share of total radio advertising represented by national spot radio. During 1999, the Company entered the Internet advertising business. Revenue and expenses from this business will be affected by the level of advertising on the Internet generally, the prices -12- obtained for advertising on Internet web sites and the Company's ability to obtain contracts from high-traffic Internet web sites and from Internet advertisers. The Company's 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 the Company's marketing, sales and sales support functions. Corporate expenses include items such as corporate management, corporate communications, financial services, advertising and promotion expenses, Internet advertising development expenses and employee benefit plan contributions. The Company's business normally follows the pattern of advertising expenditures in general and 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 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 the level of revenues of the Company, 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 June 30, 1999 Compared to Three Months Ended June 30, 1998 Commission Revenue. Commission revenue in the second quarter of 1999 increased to $24.2 million, or 9.6%, from $22.1 million in the comparable quarter in 1998. This increase is attributable to the fact that commissions generated from new client representation contracts (primarily the ABC radio stations) exceeded the loss of commission revenue from terminated representation contracts (primarily Nationwide Communications), as well as a general increase in national spot advertising on client stations. The Company entered the Internet advertising business during 1999, with sales of $37,000 during the quarter ended June 30, 1999. Contract Termination Revenue. Contract termination revenue decreased 33.1%, to $1.2 million, during the second quarter of 1999, as compared to $1.9 million in the comparable 1998 period, a decrease of $0.7 million. This decrease resulted from the lower contract values of stations lost during the current period as compared to the prior period. Selling Expenses. Selling expenses for the second quarter of 1999 increased to $16.0 million from $14.1 million during the same period of 1998. This increase of $1.9 million, or approximately 13.5%, was primarily due to employee compensation increases associated with the growth in commission revenue. Costs relating to the Company's entry into the Internet advertising business were $0.4 million during the second quarter of 1999. General and Administrative Expenses. General and administrative expenses declined $0.1 million to $2.6 million for the second quarter of 1999, from $2.7 million in the comparable quarter in 1998. This reduction was primarily the result of the relocation of the Company's back office operations to Florida. Depreciation and Amortization. Depreciation and amortization declined by $2.0 million in the second quarter of 1999, to $6.7 million, from $8.7 million in the second quarter of 1998. This decrease of approximately 22.9% was due primarily to the completion of the amortization of certain representation contracts. -13- Operating Income (Loss). Operating loss decreased by $1.8 million, or 107%, for the second quarter of 1999, compared with the second quarter of 1998, as a result of improved performance and lower amortization. Interest Expense, net. Interest expense, net increased approximately $1.2 million, or approximately 97%, to $2.4 million for the second quarter of 1999, compared to $1.2 million for the second quarter of 1998. This increase primarily resulted from interest charges associated with the Company's issuance of its Notes (as defined below) in July 1998. Benefit for Income Taxes. The benefit for income taxes declined by approximately $0.3 million, to $0.9 million, for the quarter ended June 30, 1999, compared to $1.2 million for the second quarter of 1998. This decrease is a direct result of the loss before taxes. Net Income (Loss). The Company's net loss of approximately $1.4 million for the second quarter of 1999, a $0.3 million reduction from the $1.7 million net loss for the comparable period in 1998, is attributable to the factors discussed above. Six Months Ended June 30, 1999 Compared to Six Months Ended June 30, 1998 Commission Revenue. Commission revenue in the first half of 1999 increased to $41.7 million, or 9.8%, from $38.0 million in the comparable period in 1998. This increase is attributable to the fact that commissions generated from new client representation contracts (primarily the ABC radio stations) exceeded the loss of commission revenue from terminated representation contracts (primarily Nationwide Communications), as well as a general increase in national spot advertising on client stations. The Company entered the Internet advertising business during 1999, with sales of $37,000 during the period ended June 30, 1999. Contract Termination Revenue. Contract termination revenue decreased 85.6%, to $3.7 million, during the first six months of 1999, as compared to $26.0 million in the comparable 1998 period, a decrease of $22.2 million. This decrease is attributable to the fact that a substantial amount of contract termination revenue was generated in the first quarter of 1998 as a result of the termination of the Company's representation contracts with stations owned by SFX Broadcasting, Inc., when SFX was acquired by an affiliate of a competitor of the Company. The loss of representation contracts during the first six months of 1999 was not as significant. The value of representation contracts acquired or terminated during the last few years has generally tended to increase, due to a number of factors, including the consolidation of ownership in the radio broadcast industry following the enactment of the Telecommunications Act of 1996. Selling Expenses. Selling expenses for the first six months of 1999 increased to $30.7 million from $27.9 million during the same period of 1998. This increase of $2.8 million, or approximately 9.7%, was primarily due to employee compensation increases associated with the growth in commission revenue. Costs relating to the Company's entry into the Internet advertising business were $0.5 million during the first six months of 1999. General and Administrative Expenses. General and administrative expenses declined $0.1 million to $5.2 million for the first half of 1999, from $5.3 million in the comparable period in 1998. This reduction was primarily the result of the relocation of the Company's back office operations to Florida. Depreciation and Amortization. Depreciation and amortization declined by $1.6 million in the first half of 1999, to $16.2 million, from $17.8 million in the first half of 1998. This decrease of approximately 8.9% was due primarily to the completion of the amortization of certain representation contracts. -14- Operating Income (Loss). Operating income decreased by $19.4 million, or 152%, for the first half of 1999 compared with the comparable period in 1998. This decline was essentially attributable to the reduction in contract termination revenue discussed above. Interest Expense, net. Interest expense, net increased approximately $2.6 million, or approximately 115%, to $4.8 million for the six months ended June 30, 1999, compared to $2.2 million for the same period in 1998. This increase primarily resulted from interest charges associated with the Company's issuance of its Notes in July 1998. Provision (Benefit) for Income Taxes. The provision for income taxes declined by $9.0 million for the first half of 1999 compared to the first half of 1998 as a result of the decline in contract termination revenue in 1999 discussed above. Net Income (Loss). The Company's net loss of approximately $6.7 million for the six months ended June 30, 1999, a $13.0 million reduction from the $6.3 million net income for the comparable period in 1998, is primarily attributable to the reduction in contract termination revenue discussed above. Liquidity and Capital Resources The Company's cash requirements have been primarily funded by cash provided from operations and, historically, bank debt. Cash provided by operating activities for the six months ended June 30, 1999 amounted to $0.1 million. Due to the seasonality of the Company's business, the first quarter is the Company's weakest quarter and the fourth quarter is stronger than the second and third quarters. Net cash used in investing activities is attributable to capital expenditures. Capital expenditures of $2.1 million during the six months ended June 30, 1999 were primarily for computer equipment and upgrades. Overall cash used for financing activities of $14.6 million during the first six months of 1999 was primarily used for acquisitions of station representation contracts. In general, as the Company acquires new representation contracts, it uses more cash and, as its contracts are terminated, it receives additional cash. For the reasons noted in "General" above, the Company is not able to predict the amount of cash it will require for contract acquisitions, or the cash it will receive on contract terminations, from period to period. The Company believes, however, that based on its historical performance, it will generate sufficient cash from operations and borrowings to fund its foreseeable contract acquisition payment requirements. In July 1998, the Company issued $100.0 million aggregate principal amount of 10% Senior Subordinated Notes due July 1, 2008 (the "Notes"). A portion of the net proceeds of this issuance was used to repay the then outstanding balance of the Company's bank debt. Additionally, the Company redeemed all of the outstanding shares of the Company's Series A Preferred Stock and Series B Preferred Stock, together with all of the outstanding shares of Common Stock subject to redemption. The Company also entered into an agreement with two banks to provide the Company with a $10.0 million revolving credit facility. The Company believes that its liquidity resulting from the transactions described above, together with anticipated cash from continuing operations, should be sufficient to fund its operations and anticipated needs for required representation contract acquisition payments, and to make required payments of principal and interest under its new credit facility and 10.0% annual interest payments on the Notes. The Company may not, however, generate sufficient cash flow for these purposes or to repay the Notes at maturity. The Company's ability to fund its operations and required contract buyout payments and to make scheduled principal and interest payments will depend on its future performance, which, to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond -15- its control. The Company may also need to refinance all or a portion of the Notes on or prior to maturity. There can be no assurance that the Company will be able to effect any such refinancing on commercially reasonable terms or at all. Year 2000 Assessment Many computer systems experience problems handling dates beyond the year 1999. Therefore, some computer hardware and software will need to be modified prior to the year 2000 in order to remain functional. During 1998, the Company completed an assessment of its internal readiness to implement Year 2000 compliant systems on a timely basis. The Company currently utilizes software systems for its accounting, billing and database management functions, among others, which were developed by third parties or developed by the Company using third party software development tools. These third parties have advised the Company that such systems are Year 2000 compliant or, in some cases, will be made Year 2000 compliant through the installation of software patches or upgrades. The Company completed implementation of programming changes needed to make its systems Year 2000 compliant during the first quarter of 1999 and does not believe that the related cost will have a material adverse effect on the Company. The Company estimates that its expenditures for Year 2000 compliance implementation during 1999 could be $250,000. There can be no assurance, however, that there will not be a delay in, or increased costs associated with, the implementation of such changes, and any inability to implement such changes could have a material adverse effect on the Company. The Company has not completed its assessment of the Year 2000 compliance of its radio station clients, nor of the possible consequences to the Company of the failure of one or more of its radio station clients to become Year 2000 compliant on a timely basis. It is possible that if a substantial number of the Company's radio station clients failed to implement Year 2000 compliant billing or payment systems, for example, their payments to the Company of commissions on the sale of radio advertising time might be disrupted, which might adversely affect the Company's cash flow. The Company will discuss these matters with its key radio station clients during 1999 to attempt to ascertain whether and to what extent such problems are likely to occur. It is not clear, however, what measures (if any) the Company could take to deal with such eventualities while still maintaining client relationships. The Company has been advised by its principal suppliers of data base information services and payroll services that those services will be Year 2000 compliant on a timely basis. The Company does not believe that it has other relationships with vendors or suppliers which, if disrupted due to the failure of such vendors and suppliers to deal adequately with their own Year 2000 compliance issues, would have a material adverse effect on the Company. Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is exposed to market risk from changes in interest rates that may adversely affect its results of operations and financial condition. The Company seeks to minimize the risks from these interest rate fluctuations through its regular operating and financing activities. The Company's policy is not to use financial instruments for trading or other speculative purposes. The Company is not currently a party to any financial instruments. PART II. OTHER INFORMATION Item 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits. The Exhibits filed with this Report are listed on the Exhibit Index immediately following the signature page. -16- (b) Reports on Form 8-K. No Reports on Form 8-K were filed during the three months ended June 30, 1999. -17- 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. INTEREP NATIONAL RADIO SALES, INC. August 13, 1999 By WILLIAM J. McENTEE, JR. --------------------------------------- William J. McEntee, Jr. Vice President and Chief Financial Officer -18- EXHIBIT INDEX 10.1 Amendment No. 2 to Revolving Line of Credit Agreement, dated as of March 31, 1999, among the Registrant, its subsidiaries, BankBoston, N.A., and Summit Bank 10.2 Accession Agreement, dated as of March 15, 1999, among the Registrant, its subsidiaries, American Radio Sales, Inc., BankBoston, N.A., and Summit Bank 10.3 Pledge Amendment, dated as of March 15, 1999, by the Registrant 27.1 Financial Data Schedule