<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ x ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED SEPTEMBER 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 0-21575
METRO NETWORKS, INC.
(Exact name of registrant as specified in charter)
Delaware 76-0505148
(State of incorporation) (IRS Employer Identification No.)
2800 POST OAK BLVD., SUITE 4000 77056-6199
HOUSTON, TEXAS (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (713) 407-6000
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, and (2) has been subject to such filing requirements
for the past 90 days. [ x ] Yes [ ] No
SHARES OF COMMON STOCK OUTSTANDING AT OCTOBER 31, 1998: 16,595,636
================================================================================
<PAGE>
METRO NETWORKS, INC.
INDEX
<TABLE>
<CAPTION>
Page
Number
------
<S> <C>
Part I - Financial Information
Item 1. Financial Statements (unaudited)
Consolidated Balance Sheets................................. 2
Unaudited Consolidated Statements of Earnings............... 3
Unaudited Condensed Consolidated Statements of Cash Flows... 4
Unaudited Consolidated Statement of Stockholders' Equity.... 5
Notes to Consolidated Financial Statements.................. 6
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial Condition................... 9
Part II - Other Information
Item 2. Changes in Securities and Use of Proceeds....................... 12
Item 6. Exhibits and Reports on Form 8-K................................ 13
</TABLE>
<PAGE>
Metro Networks, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
(UNAUDITED) (AUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 21,255 $ 25,087
Short-term marketable investments 496 777
Accounts receivable, net 43,892 34,113
Reciprocal receivables, net 14,237 11,113
Merchandise and scrip inventory 1,142 686
Other 3,007 703
-------- --------
Total current assets 84,029 72,479
-------- --------
PROPERTY AND EQUIPMENT
Operating equipment 38,699 30,638
Transportation equipment 773 842
Leasehold improvements 3,044 2,747
-------- --------
42,516 34,227
Less - accumulated depreciation and amortization 13,910 9,838
-------- --------
28,606 24,389
-------- --------
PURCHASED BROADCAST CONTRACTS AND OTHER INTANGIBLES,
NET OF ACCUMULATED AMORTIZATION OF $14,539 AND $11,354 17,255 17,545
OTHER ASSETS 1,145 660
-------- --------
$131,035 $115,073
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 4,605 $ 3,030
Notes payable 745 568
Reciprocal payables and accrued liabilities 13,044 10,281
Accrued liabilities 7,893 9,476
Income taxes payable 2,323 598
Current portion of long-term debt 254 420
-------- --------
Total current liabilities 28,864 24,373
LONG-TERM DEBT 274 490
OTHER 1,607 1,917
-------- --------
Total liabilities 30,745 26,780
-------- --------
STOCKHOLDERS' EQUITY
Preferred stock, $.001 par value (authorized 10,000,000 shares) 3 3
Common stock, $.001 par value (authorized 25,000,000 shares) 17 16
Additional paid-in capital 73,940 73,708
Unrealized depreciation in equity investment (659) -
Retained earnings 26,989 14,566
-------- --------
100,290 88,293
-------- --------
$131,035 $115,073
======== ========
</TABLE>
- ----------------------------------
The accompanying notes are an integral part of these financial statements.
-2-
<PAGE>
Metro Networks, Inc. and Subsidiaries
UNAUDITED CONSOLIDATED STATEMENTS OF EARNINGS
(in thousands, except per share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------------------- -----------------------------------------
1998 1997 1998 1997
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
REVENUES $44,035 $34,985 $121,340 $99,063
OPERATING COSTS AND EXPENSES
Broadcasting 22,246 16,430 62,399 48,868
Marketing 7,789 6,408 22,960 19,396
General and administrative 2,821 2,683 8,682 8,343
Depreciation 2,608 2,403 7,417 6,735
------- ------- -------- -------
35,464 27,924 101,458 83,342
------- ------- -------- -------
TOTAL OPERATING EARNINGS 8,571 7,061 19,882 15,721
OTHER (INCOME) EXPENSE
Interest income (234) (308) (695) (978)
Interest expense - 39 95 101
Other (99) (274) (223) (248)
------- ------- -------- -------
(333) (543) (823) (1,125)
------- ------- -------- -------
EARNINGS BEFORE STATE AND FEDERAL INCOME TAXES 8,904 7,604 20,705 16,846
STATE AND FEDERAL INCOME TAXES 3,562 3,058 8,282 6,814
------- ------- -------- -------
NET EARNINGS $ 5,342 $ 4,546 $ 12,423 $10,032
======= ======= ======== =======
BASIC EARNINGS PER SHARE $.32 $.27 $.75 $.61
======= ======= ======== =======
BASIC AVERAGE COMMON SHARES OUTSTANDING 16,595 16,554 16,590 16,551
======= ======= ======== =======
DILUTED EARNINGS PER SHARE $.32 $.27 $.73 $.60
======= ======= ======== =======
DILUTED AVERAGE COMMON SHARES OUTSTANDING 16,944 16,818 16,932 16,682
======= ======= ======== =======
</TABLE>
- -------------------------------------------
The accompanying notes are an integral part of these financial statements.
-3-
<PAGE>
Metro Networks, Inc. and Subsidiaries
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------------------------
1998 1997
--------------- -----------------
<S> <C> <C>
OPERATING ACTIVITIES
Net Earnings $ 12,423 $ 10,033
Adjustments to reconcile net earnings to
cash provided by operating activities
Depreciation and amortization 7,416 6,735
Deferred federal income taxes 147 (76)
Provision for doubtful accounts 856 667
Loss on dispositions of property and equipment 25 208
Gain on change in unrealized appreciation
on marketable securities (37)
Gain on sale of marketable securities (69)
Changes in operating assets and liabilities (13,861) (8,796)
-------- --------
Cash provided by operating activities 7,006 8,665
-------- --------
INVESTING ACTIVITIES
Additions to property and equipment (7,573) (12,382)
Purchases of marketable securities (379) (832)
Proceeds from sale of property and equipment 90 86
Purchases of other investments (352) -
Proceeds from sale of marketable securities - 327
Acquisitions of companies (2,650) (6,389)
-------- --------
Cash used for investing activities (10,864) (19,190)
-------- --------
FINANCING ACTIVITIES
Repayments of long-term debt (1,143) (1,875)
Proceeds from long-term borrowing 937 769
Related party long-term debt repayments - (2,308)
Proceeds from issuance of common stock 232 93
-------- --------
Cash provided by (used) for financing activities 26 (3,321)
-------- --------
DECREASE IN CASH AND CASH EQUIVALENTS (3,832) (13,846)
CASH AND CASH EQUIVALENTS
Beginning of period 25,087 41,386
-------- --------
End of period $ 21,255 $ 27,540
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for interest $ 103 $ 66
Cash paid during the period for state and federal income $ 7,154 $ 7,184
taxes
SUPPLEMENTAL NONCASH INVESTING AND FINANCING ACTIVITIES
Property and equipment acquired through reciprocal activities $ 498 $ 1,363
</TABLE>
- -------------------------------------------
The accompanying notes are an integral part of these financial statements.
-4-
<PAGE>
Metro Networks, Inc. and Subsidiaries
UNAUDITED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
For the Nine Months Ended September 30, 1998
(in thousands, except per share data)
<TABLE>
<CAPTION>
UNREALIZED
ADDITIONAL DEPRECIATION
PREFERRED COMMON PAID-IN OF EQUITY RETAINED
DOLLAR AMOUNTS STOCK STOCK CAPITAL INVESTMENTS EARNINGS TOTAL
- -------------- --------- ------- ---------- ------------ -------- -----
<S> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1997 $ 3 $ 16 $73,708 $ - $14,566 $ 88,293
Net earnings - - - - 12,423 12,423
Change in unrealized depreciation
of equity investments - - - (659) - (659)
Issuance of stock under Stock Purchase Plan - - 211 - - 211
Issuance of stock under Stock Option Plan - 1 21 - - 22
--------- ------ ------- ------------ -------- --------
BALANCE, SEPTEMBER 30, 1998 $ 3 $ 17 $73,940 $ (659) $26,989 $100,290
========= ====== ======= ============ ======== ========
</TABLE>
<TABLE>
<CAPTION>
==============================================================
SHARES ISSUED
---------------------------------------
PREFERRED COMMON
SHARE AMOUNTS STOCK STOCK
- ------------- ---------------- -----------------
<S> <C> <C>
BALANCE, DECEMBER 31, 1997 2,549,750 16,587,058
Issuance of stock under Stock Purchase Plan - 5,281
Issuance of stock under Stock Option Plan - 3,297
--------- ----------
BALANCE, SEPTEMBER 30, 1998 2,549,750 16,595,636
========= ==========
</TABLE>
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<PAGE>
METRO NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The unaudited consolidated financial statements included herein have been
prepared by Metro Networks, Inc. (the "Company") pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information
and footnote disclosures normally included in financial statements prepared
in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations. The
information furnished in this report reflects all adjustments which, in the
opinion of management, are necessary for a fair statement of the financial
position, results of operations and cash flows as of and for the interim
periods. Such adjustments consist of items of a normal recurring nature.
The results of operations for the interim periods are not necessarily
indicative of the results of operations expected for the full fiscal year
or for any other future period. Certain reclassifications have been made
to prior year amounts to conform to current year presentation. These
financial statements should be read in conjunction with the financial
statements and the notes thereto included in the Company's December 31,
1997 Annual Report on Form 10K.
2. ACQUISITIONS
On March 2, 1998, the Company acquired all of the outstanding common stock
of Traffic Patrol Broadcasting, Inc. ("TPB"), a Texas corporation. TPB
provides traffic reporting services to a network of broadcast affiliates
serving the Dallas/Ft. Worth, Texas area. The consideration for the stock
included cash of approximately $1,200,000.
On June 25, 1998, the Company acquired certain assets of Florida Traffic
Watch, Inc., which provides broadcast traffic reporting to the Tampa and
Fort Myers markets. The purchase price consisted of a cash payment of
$1,260,000 and additional future contingent consideration.
3. RELATED PARTY TRANSACTIONS
Prior to the October 1996 Public Offering, the Company entered into certain
reciprocal arrangements with unrelated third parties as a result of which
the Company received goods and services for the benefit of the controlling
shareholder. The reciprocal arrangements obligate the Company to provide
commercial airtime, provide other goods and services, and make cash
disbursements to such third parties in exchange for the goods and services
received by the Company. The dollar values of such arrangements have
typically been calculated based upon the Company's estimate of the fair
market value of the commercial airtime inventory involved on a basis
similar to others in the broadcast industry. As of September 30, 1998, the
Company was obligated to provide
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<PAGE>
approximately $504,000 of commercial airtime, goods and services and cash
under these reciprocal arrangements.
4. EARNING PER COMMON SHARE
The following is a reconciliation of the numerators and denominators of the
basic and diluted computations for the quarters and nine months ended
September 30, 1998 and 1997 (in thousands, except per share data).
<TABLE>
<CAPTION>
FOR THE QUARTERS ENDED
-------------------------------------------------------------
WEIGHTED
AVERAGE SHARES PER SHARE
INCOME OUTSTANDING AMOUNT
---------- --------------- -----------
<S> <C> <C> <C>
SEPTEMBER 30, 1998:
- -------------------
BASIC EPS
Income available to common stockholders $5,342 16,595 $0.32
EFFECT OF DILUTIVE SECURITIES
Options -- 349 --
------ ------ -----
DILUTED EPS
Income available to stockholders plus assumed conversion $5,342 16,944 $0.32
====== ====== =====
SEPTEMBER 30, 1997:
- -------------------
BASIC EPS
Income available to common stockholders $4,546 16,554 $0.27
EFFECT OF DILUTIVE SECURITIES
Options -- 264 --
------ ------ -----
DILUTED EPS
Income available to stockholders plus assumed conversion $4,546 16,818 $0.27
====== ====== =====
</TABLE>
-7-
<PAGE>
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
-------------------------------------------------------------
WEIGHTED
AVERAGE SHARES PER SHARE
INCOME OUTSTANDING AMOUNT
---------- --------------- -------------
<S> <C> <C> <C>
SEPTEMBER 30, 1998:
- -------------------
BASIC EPS
Income available to common stockholders $12,423 16,590 $0.75
EFFECT OF DILUTIVE SECURITIES
Options -- 342 .02
------- ------ -----
DILUTED EPS
Income available to stockholders plus assumed conversion $12,423 16,932 $0.73
======= ====== =====
SEPTEMBER 30, 1997:
- -------------------
BASIC EPS
Income available to common stockholders $10,032 16,551 $0.61
EFFECT OF DILUTIVE SECURITIES
Options -- 131 .01
------- ------ -----
DILUTED EPS
Income available to stockholders plus assumed conversion $10,032 16,682 $0.60
======= ====== =====
</TABLE>
-8-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998
------------------------------------------------------
RESULTS OF OPERATIONS
Revenues increased by $9.1 million to $44.0 million, or 25.9%, in the third
quarter of 1998 and $22.3 million to $121.3 million, or 22.5%, for the first
nine months of 1998. The increase in revenue is primarily due to increased
sales of commercial airtime inventory. Revenues from reciprocal agreements were
$1.9 million and $5.7 million in the third quarter and first nine months of
1998, compared to $1.5 million and $4.2 million for the same periods of last
year. As a percentage of total revenues, revenues from reciprocal agreements
increased to 4.3% and 4.7% of total revenues for the third quarter and first
nine months of 1998 compared to 4.2% for the same periods last year.
Total operating costs (broadcasting and marketing costs) increased by $7.2
million to $30.0 million, or 31.5%, and $17.1 million to $85.4 million, or
25.0%, respectively, in the third quarter and first nine months of 1998, when
compared to the same periods last year. As a percentage of revenues, total
operating costs were 68.2% and 70.3% in the third quarter and first nine months
of 1998, compared to 65.3% and 68.9% for the same periods last year. The
increase in costs are primarily due to the Company's introduction of its Metro
Source service, continued development of its Expanded Radio Services and Metro
Television Services and various acquisitions which the Company completed in 1997
and 1998.
General and administrative expenses increased $.1 million in the third
quarter and increased $.3 million to $8.7 million, or 4.1%, for the first nine
months of 1998 when compared to the same period last year. As a percentage of
revenues, general and administrative expenses decreased to 6.4% and 7.2% in the
third quarter and first nine months of 1998, compared to 7.7% and 8.4% for the
same period last year.
Earnings before interest income, interest expense, taxes, depreciation and
amortization (EBITDA) increased by $1.5 million, or 15.8%, to $11.3 million in
the third quarter compared to $9.7 million in third quarter of 1997. For the
nine months ended September 30, 1998, EBITDA increased approximately $4.8
million, or 21.2% to $27.5 million, compared to $22.7 million for the same
period last year. The increase in EBITDA was primarily attributable to
continued revenue growth. EBITDA as a percentage of revenue was 25.6% and 22.7%
for the third quarter and nine months ended September 30, 1998, respectively.
The Company recorded third quarter 1998 net income of $5.3 million,
compared to $4.5 million in the third quarter of 1997, or an increase of 17.5%.
Diluted earnings per share for the three months and nine months ended September
30, 1998 were $.32 and $.73, respectively.
-9-
<PAGE>
FINANCIAL CONDITION
Cash and cash equivalents decreased $3.9 million from $25.1 million to
$21.2 million for the nine months ended September 30, 1998. Cash provided by
operating activities decreased $1.7 million to $7.0 million for the nine months
ended September 30, 1998, when compared to the same period last year, primarily
due to changes in operating assets and liabilities for the period. Cash used
for investing activities decreased by $8.3 million to $10.9 million for the
first nine months of 1998 when compared to the same period last year, primarily
due to a decrease in acquisitions and capital purchases of property and
equipment. Cash used for financing activities decreased by $3.3 million due
primarily to a reduction in long-term debt repayments.
The maximum aggregate permitted borrowings under the Credit Agreement is
$30.0 million. As of September 30, 1998, the Company had no debt outstanding
under the Credit Agreement.
YEAR 2000
Background. The Year 2000 issue refers to the inability of certain date-
sensitive computer chips, software and systems to recognize a two-digit date
field as belonging to the 21st century. Many computer software programs, as
well as certain hardware and equipment containing date sensitive data, were
structured to utilize a two-digit date field. Accordingly, these programs may
not be able to properly recognize dates in the Year 2000 or later, which could
result in significant system and equipment failures. This is a significant
issue for most, if not all companies, with far reaching implications, some of
which cannot be anticipated or predicted with any degree or certainty. The
Company recognizes that it must take action to ensure that its operations will
not be adversely impacted by Year 2000 software failures.
The Company's State of Readiness: The Company is currently in the planning
stages of acquiring and/or developing new data processing systems throughout the
organization for management, operational and, certain financial information.
These systems are expected to be free of any Year 2000 limitations and the
Company expects these systems to be operational by the Year 2000.
In addition, the Company has acquired and is implementing a new financial
information system which is free of any Year 2000 limitations.
The Company is completing a plan to evaluate the effect of the Year 2000
problem on the Company's most significant customers and suppliers, and thus
indirectly on the Company. This evaluation is expected to be complete by
December 31, 1998. At this time, the Company has not assessed the potential
adverse effect on the Company with respect to customers and suppliers.
The total cost associated with the Company becoming Year 2000 compliant is
expected to be between $100,000 and $200,000.
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Embedded Technology: The Company has focused its assessments to date on
the information technology systems. To date the Company's assessments indicate
that, due to the nature of the company's operations, the non-information
technology systems (i.e., embedded technology such as micro-controllers) do not
represent a significant area of risk relative to Year 2000 readiness. The
Company's operations do not include capital intensive equipment with embedded
micro-controllers.
Contingency Plan: The Company has not, to date, implemented a Year 2000
contingency plan. As explained above, the Company has initiated action to
identify and resolve Year 2000 problems. The Company will develop and implement
a contingency plan in the event the Company's present course of action to solve
the Year 2000 problem should fall behind schedule.
The cost and time estimated for the Year 2000 problem are based on the
Company's best estimates. There can be no guarantee that these estimates will
be achieved and that planned results will be achieved. Risks include, but are
not limited to, the retention of internal and external resources dedicated to
the problem and the timely delivery of software corrections from external
vendors.
-11-
<PAGE>
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
Pursuant to a Registration Statement on Form S-1 (Commission File
No. 333-6311) declared effective by the Securities and Exchange Commission
on October 16, 1996, the Company sold 4,650,000 shares (including 1,050,000
shares pursuant to the exercise of an over allotment option) of its Common
Stock, par value $.001 per share (the "Common Stock") in an initial public
offering (the "Offering"). An additional 3,600,000 shares of the Common
Stock was sold by a selling stockholder in the offering. The offering
price of the Common Stock was $16.00 per share, resulting in an aggregate
offering price of $74,400,000 for the account of the Company and
$57,600,000 for the account of the selling stockholder. After underwriting
discounts, the proceeds to the Company from the Offering was $69,192,000
and the proceeds to the selling stockholder was $53,568,000. All of the
shares registered in the Offering were sold.
The Offering closed on October 22, 1996, and the managing
underwriters for the Offering were Goldman, Sachs & Co., CS First Boston
and Donaldson, Lufkin & Jenrette Securities Corporation.
The amount of expenses incurred for the Company's account in
connection with the Offering were as follows:
<TABLE>
<CAPTION>
<S> <C>
Underwriters discounts $5,208,000
Other expenses 1,428,000
----------
Total $6,636,000
==========
</TABLE>
Of these amounts, none were direct or indirect payments to
officers, directors or their associates, or persons owning 10% or more of
any class of equity securities of the Company and all were direct or
indirect payment to others.
The net offering proceeds to the Company were used $10,655,000 for
the acquisition of other businesses, $6,536,000 for the purchase and
installation of machinery and equipment, $29,811,000 for the repayment of
indebtedness, and $1,900,000 for working capital.
Of these amounts, none were direct or indirect payments to
officers, directors or their associates, or persons owning 10% or more of
any class of equity securities of the Company and all were direct or
indirect payment to others.
-12-
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
Exhibit
No.
-------
27.1 Financial Data Schedule.
No reports were filed on Form 8-K during the three-month
period ended September 30, 1998.
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<PAGE>
SIGNATURE
---------
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.
METRO NETWORKS, INC.
--------------------
(Registrant)
Dated: November 13, 1998 By: /S/Timothy D. McMillin
----------------- ---------------------------------
Timothy D. McMillin
Senior Vice President
Chief Financial Officer
(Principal Financial and Accounting
Officer and Duly Authorized Officer)
-14-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 21,255
<SECURITIES> 496
<RECEIVABLES> 58,129
<ALLOWANCES> 0
<INVENTORY> 1,142
<CURRENT-ASSETS> 84,029
<PP&E> 42,516
<DEPRECIATION> 13,910
<TOTAL-ASSETS> 131,035
<CURRENT-LIABILITIES> 28,864
<BONDS> 0
0
3
<COMMON> 17
<OTHER-SE> 100,270
<TOTAL-LIABILITY-AND-EQUITY> 131,035
<SALES> 121,340
<TOTAL-REVENUES> 121,340
<CGS> 85,359
<TOTAL-COSTS> 101,458
<OTHER-EXPENSES> (918)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 95
<INCOME-PRETAX> 20,705
<INCOME-TAX> 8,282
<INCOME-CONTINUING> 12,423
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 12,423
<EPS-PRIMARY> .75
<EPS-DILUTED> .73
</TABLE>
