<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[ ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended
OR
[X] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from October 1, 1998 to December 31, 1998
COMMISSION FILE NUMBER: 001-14461
Entercom Communications Corp.
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 23-1701044
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation of organization)
401 CITY AVENUE, SUITE 409
BALA CYNWYD, PENNSYLVANIA 19004
(Address of principal executive offices and Zip Code)
(610) 660-5610
(Registrant's telephone number, including area code)
Former Fiscal Year: September 30
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES [ ] NO [X ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class A Common Stock, $.01 par value -
24,629,694 Shares Outstanding as of March 12, 1999
Class B Common Stock, $.01 par value -
10,531,805 Shares Outstanding as of March 12, 1999
Class C Common Stock, $.01 par value -
1,995,669 Shares Outstanding as of March 12, 1999
<PAGE> 2
ENTERCOM COMMUNICATIONS CORP.
INDEX
PAGE
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements.......................................... 1
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................. 8
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk... 13
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings............................................ 14
ITEM 2. Changes in Securities and Use of Proceeds.................... 14
ITEM 3. Defaults Upon Senior Securities.............................. 14
ITEM 4. Submission of Matters to a Vote of Security Holders.......... 14
ITEM 5. Other Information............................................ 15
ITEM 6. Exhibits and Reports on Form 8-K............................. 15
SIGNATURES ............................................................. 16
(i)
<PAGE> 3
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ENTERCOM COMMUNICATIONS CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1998 AND DECEMBER 31, 1998
(DOLLARS IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31
1998 1998
(UNAUDITED)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents ................................. $ 6,666 $ 6,469
Accounts receivable, net of allowance for doubtful
accounts ................................................ 32,524 38,511
Prepaid expenses and deposits ............................. 6,281 6,259
Assets held for sale ...................................... 5,310
Proceeds held in escrow from sale of Tampa stations ....... 75,000
Station acquisition deposits .............................. 344 327
--------- ---------
Total current assets ........................................... 51,125 126,566
--------- ---------
PROPERTY AND EQUIPMENT - AT COST
Land and land easements and land improvements ............. 5,954 6,927
Building .................................................. 3,939 4,596
Equipment ................................................. 31,979 35,804
Furniture and fixtures .................................... 7,115 7,662
Leasehold improvements .................................... 3,362 3,899
--------- ---------
52,349 58,888
Accumulated depreciation .................................. (9,679) (10,874)
--------- ---------
42,670 48,014
Capital improvements in progress ............................... 387 629
--------- ---------
Net property and equipment ..................................... 43,057 48,643
--------- ---------
RADIO BROADCASTING LICENSES AND OTHER INTANGIBLES - NET 424,716 500,545
DEFERRED CHARGES AND OTHER ASSETS - NET ........................ 4,047 5,280
--------- ---------
TOTAL .......................................................... $ 522,945 $ 681,034
========= =========
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1
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ENTERCOM COMMUNICATIONS CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1998 AND DECEMBER 31, 1998
(DOLLARS IN THOUSANDS)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31
1998 1998
-------- --------
(UNAUDITED)
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable ................................................. $ 10,919 $ 18,224
Accrued liabilities:
Salaries ....................................................... 4,052 4,322
Interest ....................................................... 1,114 1,492
Other .......................................................... 666 1,094
Long-term debt due within one year ............................... 10 10
-------- --------
Total current liabilities ........................................ 16,761 25,142
-------- --------
SENIOR DEBT ........................................................... 253,774 330,271
CONVERTIBLE SUBORDINATED NOTE
Note payable .................................................... 25,000 25,000
Accrued interest ................................................ 4,352 4,858
Cumulative adjustment to reflect indexing of convertible
subordinated note .......................................... 37,911 67,414
-------- --------
Total convertible subordinated note ............................. 67,263 97,272
MINORITY INTEREST IN EQUITY OF PARTNERSHIP ............................ 2,177 2,882
-------- --------
Total liabilities ............................................... 339,975 455,567
-------- --------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Preferred Stock .................................................
Class A common stock ............................................ 110 110
Class B common stock ............................................ 105 105
Class C common stock ............................................
Retained earnings ............................................... 182,755 225,252
-------- --------
Total shareholders' equity ...................................... 182,970 225,467
-------- --------
TOTAL ................................................................. $522,945 $681,034
======== ========
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
2
<PAGE> 5
ENTERCOM COMMUNICATIONS CORP.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED DECEMBER 31, 1997 AND 1998
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED DECEMBER 31,
-------------------------------
1997 1998
-------- --------
<S> <C> <C>
NET REVENUES ..................................................... $ 28,399 $ 47,363
OPERATING EXPENSES:
Station operating expenses .................................... 18,868 29,990
Depreciation and amortization ................................. 2,880 4,358
Corporate general and administrative expenses ................. 849 1,850
Net expense from time brokerage agreement fees ................ 1,236
-------- --------
22,597 37,434
-------- --------
OPERATING INCOME ................................................. 5,802 9,929
-------- --------
OTHER EXPENSE (INCOME) ITEMS:
Interest expense .............................................. 2,996 5,732
Adjustment to reflect indexing of convertible subordinated
note ........................................................ 14,903 29,503
Interest income ............................................... (127) (146)
Other non-operating expenses .................................. 25 723
Gains on sale of assets and other ............................. (43) (69,648)
-------- --------
Total other expense (income) .................................. 17,754 (33,836)
-------- --------
INCOME (LOSS) BEFORE INCOME TAXES ............................... (11,952) 43,765
INCOME TAXES ..................................................... 81 310
-------- --------
NET INCOME (LOSS) ................................................ $(12,033) $ 43,455
======== ========
PRO FORMA DATA
PRO FORMA NET INCOME DATA:
Income (loss) before income taxes .............................. $(11,952) $ 43,765
Pro forma income taxes ........................................ 1,121 27,842
-------- --------
PRO FORMA NET INCOME (LOSS) ...................................... $(13,073) $ 15,923
======== ========
PRO FORMA EARNINGS PER SHARE:
Basic:
Pro forma earnings (losses) ................................ $ (0.61) $ 0.64
Diluted:
Pro forma earnings (losses) ................................ $ (0.61) $ 0.64
WEIGHTED AVERAGE SHARES:
Basic ......................................................... 21,534 24,742
Diluted ....................................................... 21,534 24,742
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
3
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ENTERCOM COMMUNICATIONS CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED DECEMBER 31, 1997 AND 1998
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
DECEMBER 31,
1997 1998
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) ......................................................... $(12,033) $ 43,455
Adjustments to reconcile net income (loss) to net cash provided by operating
activities:
Depreciation .............................................................. 764 1,223
Amortization of radio broadcasting licenses, other intangibles and deferred
charges ................................................................. 2,116 3,135
Gains on dispositions and exchanges of assets ............................. (43) (69,648)
Interest on the convertible subordinated note ............................ 477 506
Adjustment to reflect indexing of convertible subordinated note ........... 14,903 29,503
Changes in assets and liabilities which provided (used) cash:
Accounts receivable .................................................... 135 (5,987)
Prepaid expenses ....................................................... 981 (115)
Accounts payable, accrued liabilities and corporate state income taxes . 16 8,381
Minority interest in equity of partnership ............................. 25 705
-------- --------
Net cash provided by operating activities .............................. 7,341 11,158
-------- --------
INVESTING ACTIVITIES:
Additions to property and equipment ....................................... (5,012) (2,400)
Proceeds from sale of property and equipment, intangibles and other
assets ................................................................. 68 75,016
Purchases of radio station assets ......................................... (15,987) (82,903)
Purchase of investment .................................................... (1,000)
Deferred charges and other assets ......................................... (50) (622)
Proceeds held in escrow from sale of Tampa stations ....................... (75,000)
Station acquisition deposits .............................................. 3,511 15
-------- --------
NET CASH USED IN INVESTING ACTIVITIES .................................. (17,470) (86,894)
-------- --------
FINANCING ACTIVITIES:
Payments of long-term debt ................................................ (3,000) (3,003)
Proceeds from issuance of long-term debt .................................. 13,000 79,500
Dividends paid ............................................................ (958)
-------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES .............................. 10,000 75,539
-------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS .................................... (129) (197)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ................................ 3,626 6,666
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD ...................................... $ 3,497 $ 6,469
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION ----
Cash paid during the period for:
Interest ................................................................ $ 2,980 $ 5,698
======== ========
Income taxes ............................................................ $ 31 $ 60
======== ========
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
4
<PAGE> 7
ENTERCOM COMMUNICATIONS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED DECEMBER 31, 1997 AND 1998
1. BASIS OF PRESENTATION
The accompanying unaudited financial statements for Entercom
Communications Corp. (formerly Entertainment Communications, Inc.) (the
"Company") have been prepared in accordance with (i) generally accepted
accounting principles for interim financial information and (ii) the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do
not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting only of normal recurring accruals)
considered necessary for a fair presentation have been included.
This Form 10-Q should be read in conjunction with the financial
statements and notes thereto included in the Company's audited financial
statements as of September 30, 1998, as presented in the Company's registration
statement on Form S-1, filed with the Securities and Exchange Commission and
dated January 28, 1999.
Operating results for the three month period ended December 31, 1998
are not necessarily indicative of the results that may be expected for the year
ending September 30, 1999. Certain prior year amounts have been reclassified to
conform with the current year's presentation, which had no effect on net income
or shareholders' equity.
The Company has filed a Form 8-K, indicating, among other things, its
change for financial reporting purposes, from a fiscal year ending September 30
to a calendar year ending December 31, effective January 1, 1999.
For the three months ended December 31, 1998, the weighted average
outstanding shares have been increased by 3,208,000 shares, which represent the
number of shares which, when multiplied by an offering price of $22.50 per
share, would be sufficient to replace the capital in excess of the current
period's earnings which was authorized for subsequent distribution to the
shareholders of the Company while the Company was an S Corporation (the "S
Corporation Shareholders"), prior to the initial public offering of 13,627,500
shares of the Company's Class A Common Stock at an offering price of $22.50 (the
"IPO").
2. ACQUISITIONS AND OTHER SIGNIFICANT EVENTS
Completed Acquisitions, Divestitures and Investments
On December 11, 1998, the Company acquired the assets of WRKO-AM and
WEEI-AM, serving the Boston radio market, from CBS Radio, Inc. ("CBS") for $82.0
million (the "First Boston Transaction"). The Company incurred transaction costs
of approximately $284,000 related to this acquisition. Broadcasting licenses and
other intangibles in the amount of $77.8 million were recorded in connection
with this transaction.
On December 14, 1998, the Company acquired the assets of KSLM-AM,
serving the Salem, Oregon radio market, from Willamette Broadcasting Co. for
$605,000. The Company incurred transaction costs of approximately $14,000
related to this acquisition. Broadcasting licenses and other intangibles in the
amount of $506,100 were recorded in connection with this transaction.
On December 21, 1998, the Company purchased 200,000 shares of the
common stock of USA Digital Radio, Inc., at a per share price of $5.00, for an
aggregate investment of $1.0 million. USA Digital Radio, Inc. is a developer of
in-band AM and FM digital audio broadcasting technology.
On December 22, 1998, the Company sold the assets of WLLD-FM and
WYUU-FM, serving the Tampa, Florida radio market to CBS for $75.0 million (the
"Tampa Transaction"), resulting in a gain of approximately $69.6 million.
5
<PAGE> 8
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Pending Acquisitions
In August 1998, the Company entered into an agreement with CBS
pursuant to which it agreed to purchase WAAF-FM and WEGQ-FM in Boston and
WWTM-AM in Worchester for $58.0 million in cash (the "Second Boston
Transaction"). In September, 1998, the Company began operating these stations
under a time brokerage agreement ("TBA"). On February 22, 1999, the Company
consummated the Second Boston Transaction.
On December 9, 1998, the Company entered into an agreement to acquire
WREN-AM, a radio station serving Kansas City, Kansas, from Mortenson
Broadcasting Company of Canton, LLC and Mortenson Broadcasting Company for the
sum of $2.8 million. It is anticipated that this transaction will close in the
first half of the calendar year 1999.
The following unaudited pro forma summary presents the consolidated
results of operations as if the transactions which occurred during the period of
October 1, 1997 through December 31, 1998 had all occurred as of October 1,
1997, after giving effect to certain adjustments, including depreciation and
amortization of assets and interest expense on any debt incurred to fund the
acquisitions which would have been incurred had such acquisitions and other
transactions occurred as of October 1, 1997. These unaudited pro forma results
have been prepared for comparative purposes only and do not purport to be
indicative of (i) what would have occurred had the acquisitions and other
transactions been made as of that date or (ii)results which may occur in the
future.
<TABLE>
<CAPTION>
(UNAUDITED)
PERIODS ENDED DECEMBER 31,
--------------------------
1997 1998
---- ----
<S> <C> <C>
Net revenues ...................... $ 37,725 $ 47,363
Loss before gains on sale of assets $(15,185) $(26,078)
Net income (loss) ................. $ 54,506 $(26,078)
</TABLE>
3. DEBT
The Company has a senior secured Credit Facility (the "Credit
Facility") with a syndicate of banks which allows the Company to borrow up to
$350.0 million on a reducing, revolving basis. Availability under the Credit
Facility reduces quarterly beginning June 30, 2000, in amounts which vary from
$4.4 million to $17.5 million. As of December 31, 1998, the Company had
approximately $330.0 million of borrowings outstanding under the Credit
Facility. The current outstanding indebtedness under the Credit Facility was not
reduced by the $75.0 million proceeds from the Tampa Transaction as these funds
were being held in escrow in a qualified intermediary account.
In connection with the Company's IPO which was completed on February
3, 1999, the Company received approximately $236.1 million in net proceeds which
was used to repay revolving indebtedness outstanding under the Credit Facility.
As of March 5, 1999, the Company had revolving indebtedness outstanding under
the Credit Facility of approximately $147.5 million, which included $58.0
million in connection with the consummation of the Second Boston Transaction.
See Note 5, Subsequent Events.
4. COMMITMENTS AND CONTINGENCIES
Acquisitions
The Company entered into a preliminary agreement on February 6, 1996,
to acquire the assets of radio station KWOD-FM, Sacramento, California, from
Royce International Broadcasting Corporation, subject to approval by the FCC,
for a purchase price of $25.0 million. Notwithstanding efforts by the Company to
pursue this transaction, the seller has been nonresponsive. Accordingly, the
Company cannot determine if and when the transaction might occur.
6
<PAGE> 9
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Contingencies
The Company is subject to various outstanding claims which arose in
the ordinary course of business and to other legal proceedings. In the opinion
of management, any liability of the Company which may arise out of or with
respect to these matters will not materially affect the financial position,
results of operations or cash flows of the Company.
5. SUBSEQUENT EVENTS
On February 3, 1999, the Company completed the IPO, pursuant to which
13,627,500 shares of Class A Common Stock were sold to the public at a price of
$22.50 per share. Of the 13,627,500 shares sold, the Company sold 11,300,000 and
Chase Capital Partners ("Chase Capital"), the sole selling shareholder, sold
2,327,500 shares. The net proceeds to the Company, after deducting underwriting
discounts and other offering expenses was approximately $236.1 million. In
connection with the IPO, the following events occurred:
Effective January 28, 1999 (the "Revocation Date"), the Company
revoked its S Corporation status with the Internal Revenue Service and therefore
the last day the Company was taxed as an S Corporation was January 27, 1999. As
a result, all of the Company's net income after January 27, 1999 will be taxed
to the Company rather than taxed to the Company's shareholders.
Prior to the revocation of its S Corporation status, the Company
declared a dividend (the "S Distribution"), conditioned upon consummation of the
IPO, payable to its former S Corporation Shareholders in the amount of $88.1
million, which the Company estimated would be the undistributed balance of the
income of the Company which had been taxed or is taxable to its S Corporation
Shareholders as of the Revocation Date. On March 2, 1999, the Company
distributed $75.0 million to its S Corporation Shareholders as partial payment
of the S Distribution. The Company anticipates paying the remaining $13.1
million in April, 1999.
As a result of the revocation of its S Corporation status and its
resulting treatment as a C Corporation, the Company will record a non-cash
deferred tax expense of approximately $81.7 million in the quarter ending March
31, 1999, resulting from the recording of a deferred income tax asset of $4.3
million and a deferred income tax liability of $86.0 million.
Prior to the IPO, Chase Capital, which held a Convertible
Subordinated Promissory Note of the Company (the "Convertible Subordinated
Note") with principal in the amount of $25.0 million, converted the Convertible
Subordinated Note into 2,327,500 shares of Class A Common Stock and 1,995,669
shares of Class C Common Stock (the "Chase Conversion"). At the time of the
Chase Conversion, the market value of the shares into which the Convertible
Subordinated Note was convertible, was approximately $97.3 million (the
principal amount of the Convertible Subordinated Note plus accrued interest
amounted to approximately $29.9 million, and the cumulative adjustment to
reflect indexing of the Convertible Subordinated Note was approximately $67.4
million). The Convertible Subordinated Note has been retired and there is no
further obligation due.
On January 22, 1999, in a related party transaction, the Company
purchased a 1% minority interest in ECI License Company, L.P. for $3.4 million.
ECI License Company, L.P. is a limited partnership in which the Company is the
general partner and owns a 99% interest. ECI License Company, L.P. owns certain
of the Company's FCC licenses.
In August 1998, the Company entered into an agreement with CBS
pursuant to which it agreed to purchase WAAF-FM and WEGQ-FM in Boston and
WWTM-AM in Worchester for $58.0 million in cash (the "Second Boston
Transaction"). In September, 1998, the Company began operating these stations
under a TBA. On February 22, 1999, the Company consummated the Second Boston
Transaction.
7
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This report contains, in addition to historical information,
statements by the Company with regard to its expectations as to financial
results and other aspects of its business that involve risks and uncertainties
and may constitute forward looking statements within the meaning of Section 27A
of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. Such statements reflect management's current
views and are based on certain assumptions. Actual results could differ
materially from those currently anticipated as a result of a number of factors,
including, but not limited to, the following: (i) the highly competitive nature
of, and new technologies in, the radio broadcasting industry; (ii) the Company's
dependence upon its Seattle radio stations; (iii) the risks associated with the
Company's acquisition strategy; (iv) the control of the Company by Joseph M.
Field and David J. Field; (v) the Company's vulnerability to changes in federal
legislation or FCC regulatory policy; and (vi) those matters discussed under
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
GENERAL
The Company, founded in 1968, will own and operate 42 stations, 25 FM
and 17 AM, in eight markets, including five of the country's top 30 radio
advertising markets, upon completion of all pending acquisitions. The Company
has built the largest radio station clusters, based on gross revenues, in
Seattle and Kansas City, and has the second or third largest cluster in each of
its other markets.
The following discussion and analysis of financial condition and
results of the Company should be read in conjunction with the unaudited interim
consolidated financial statements and related notes thereto of the Company
included elsewhere in this report. Historically, the Company has operated with
an October 1st to September 30th fiscal year. All references herein, with the
exception of specific references to calendar year periods, are based on the
Company's fiscal year ending on September 30. The Company has filed a Form 8-K
reflecting, among other things, its change for financial reporting purposes to a
calendar year of January 1 to December 31, effective January 1, 1999. The
Company plans to change to a calendar year for tax reporting purposes, effective
on January 1, 2000.
A radio broadcasting company's revenues are derived primarily from
the sale of broadcasting time to local and national advertisers. Those revenues
are largely determined by the advertising rates that a radio station is able to
charge and the number of advertisements that can be broadcast without
jeopardizing listener levels. Advertising rates are primarily based on three
factors: (i) a station's audience share in the demographic groups targeted by
advertisers, as measured principally by quarterly reports issued by the Arbitron
Ratings Company ("Arbitron"); (ii) the number of radio stations in the market
competing for the same demographic groups; and (iii) the supply of and demand
for radio advertising time.
Several factors may adversely affect a radio broadcasting company's
performance in any given period. In the radio broadcasting industry, seasonal
revenue fluctuations are common and are due primarily to variations in
advertising expenditures by local and national advertisers. Typically, revenues
are lowest in the first calendar quarter of the year. The Company generally
incurs advertising and promotional expenses to increase "listenership" and
Arbitron ratings. However, since Arbitron reports ratings quarterly, any
increased ratings, and any corresponding increased advertising revenues, tend to
lag behind the incurrence of such advertising and promotional spending.
Radio broadcasting companies often derive revenues from TBAs and
Joint Sales Agreements ("JSAs"). In a TBA, a licensed radio station operator
will enter into an agreement to provide a substantial amount of the broadcast
programming for a radio station that is owned by a separate licensee. In a JSA,
a licensed radio station operator agrees to sell commercial advertising for a
radio station that is owned by a separate licensee. Typically, the Company uses
TBAs and JSAs to operate radio stations that it has agreed to acquire prior to
the time that the acquisition is completed. Revenues recognized under TBAs or
JSAs for stations operated by the Company prior to acquiring the stations are
included in net revenues, and operating expenses associated with these stations
are reflected in station operating expenses. Consequently, there is no
difference in the method of revenue and operating expense recognition between a
station operated by the Company under a TBA or JSA and a station owned and
operated by the Company.
In the following analysis, management discusses broadcast cash flow
and after-tax cash flow. Neither broadcast cash flow nor after-tax cash flow
purports to represent net income, operating income or net cash provided by
operating activities, as those terms are defined under generally accepted
accounting principles, and they should not be considered in isolation or as a
substitute for such measurements. Broadcast cash flow consists of operating
income before depreciation, amortization, net expense (income) from TBA fees and
corporate expenses. After-tax cash flow consists
8
<PAGE> 11
of pro forma net income minus net gains on sale of assets (net of tax) and plus
the following: depreciation, amortization, the amount of the adjustment to
reflect indexing of the Convertible Subordinated Note and the amount of the
deferred tax provision (or minus the deferred tax benefit). In part due to the
non-capital-intensive nature of the radio broadcasting industry and the high
level of non-cash depreciation and amortization expense, broadcast cash flow and
after-tax cash flow are frequently used as bases for evaluating radio
broadcasting businesses, although the Company's measures of broadcast cash flow
and after-tax cash flow may not be comparable to similarly titled measures of
other companies.
The Company calculates "same station" growth by (i) comparing the
performance of stations operated by the Company (including operation under a TBA
or JSA) throughout a relevant quarter to the performance of those same stations
(whether or not operated by the Company) in the prior year's corresponding
quarter, excluding the effect of barter revenues and expenses and divested
stations and (ii) averaging such growth rates for the period presented. "Same
station broadcast cash flow margin" is the broadcast cash flow margin of the
stations included in the Company's same station calculations. For purposes of
the following discussion, (i) pro forma net income represents historical income
before income taxes, adjusted as if the Company were treated as a C Corporation
during all relevant periods at an effective tax rate of 38%, applied to income
from operations before income taxes , excluding the effect of the adjustment to
reflect indexing of the Convertible Subordinated Note (as such adjustment is not
tax-deductible) of $14.9 million and $29.5 million for the quarters ending
December 31, 1997 and 1998, respectively, and (ii) broadcast cash flow margin
represents broadcast cash flow as a percentage of net revenues.
RESULTS OF OPERATIONS
The following presents the results of operations of the Company for the
three months ended December 31, 1998 and December 31, 1997, and should be read
in conjunction with the condensed consolidated financial statements of the
Company and the related notes included elsewhere in this Form 10-Q.
THREE MONTHS ENDED DECEMBER 31, 1998 V. DECEMBER 31, 1997
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------------------------------
DECEMBER 31, 1998 DECEMBER 31, 1997
(Dollar amounts in thousands)
<S> <C> <C>
NET REVENUES $ 47,363 $ 28,399
Increase of $ 18,964 or 66.8 %
</TABLE>
Of the increase in net revenues, $17.9 million is attributable to
stations acquired or that were in the process of being acquired since October 1,
1997, offset by $2.7 million for stations divested or that were in the process
of being divested during the same period. On a same station basis, net revenues
increased 16.5% from $40.3 million to $46.9 million.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------------------------------
DECEMBER 31, 1998 DECEMBER 31, 1997
(Dollar amounts in thousands)
<S> <C> <C>
STATION OPERATING EXPENSES $ 29,990 $ 18,868
Increase of $ 11,122 or 58.9%
Percentage of Net Revenues 63.3% 66.4%
</TABLE>
Of the increase in station operating expenses, $11.3 million is
attributable to stations acquired or that were in the process of being acquired
since October 1, 1997, offset by $1.6 million for stations divested or that were
in the process of being divested during the same period. On a same station
basis, station operating expenses increased 3.4% to $29.4 million from $28.4
million.
9
<PAGE> 12
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------------------------------
DECEMBER 31, 1998 DECEMBER 31, 1997
(Dollar amounts in thousands)
<S> <C> <C>
CORPORATE, GENERAL AND ADMINISTRATIVE EXPENSES $ 1,850 $ 849
Increase of $ 1,001 or 117.9 %
Percentage of Net Revenues 3.9 % 3.0 %
</TABLE>
The increase in corporate expenses was mainly attributable to higher
administrative expenses associated with supporting the Company's growth and
increasing staff in anticipation of operation as a public company.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------------------------------
DECEMBER 31, 1998 DECEMBER 31, 1997
(Dollar amounts in thousands)
<S> <C> <C>
DEPRECIATION AND AMORTIZATION $ 4,358 $ 2,880
Increase of $ 1,478 or 51.3 %
Percentage of Net Revenues 9.2 % 10.1 %
</TABLE>
The increase in depreciation and amortization was mainly attributable
to the Company's acquisitions net of divestitures since October 1, 1997.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------------------------------
DECEMBER 31, 1998 DECEMBER 31, 1997
(Dollar amounts in thousands)
<S> <C> <C>
INTEREST EXPENSE $ 5,732 $ 2,996
Increase of $ 2,736 or 91.3 %
Percentage of Net Revenues 12.1 % 10.6 %
</TABLE>
The increase in interest expense was mainly attributable to
indebtedness incurred in connection with the Company's acquisitions.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------------------------------
DECEMBER 31, 1998 DECEMBER 31, 1997
(Dollar amounts in thousands)
<S> <C> <C>
INCOME (LOSS) BEFORE INCOME TAXES $ 43,765 $ (11,952)
Increase of $ 55,717 or 466.2 %
</TABLE>
Of the increase, $69.6 million is attributable to an increase in gain
on the sale of assets and $14.6 million is attributable to an increase in
expense resulting from an adjustment to reflect indexing of the Convertible
Subordinated Note. The gains on the sale of assets are derived from the
Company's disposition of stations in the Tampa radio market during the quarter
ended December 31, 1998. The Company does not expect such significant gains on
the sale of assets to continue in the future.
10
<PAGE> 13
<TABLE>
<CAPTION>
OTHER DATA THREE MONTHS ENDED
--------------------------------------------------
DECEMBER 31, 1998 DECEMBER 31, 1997
(Dollar amounts in thousands)
<S> <C> <C>
PRO FORMA NET INCOME $ 15,923 $ (13,073)
Increase of $ 28,996 or 221.8 %
</TABLE>
The increase in pro forma net income is primarily attributable to gains, net
of taxes of $43.2 million on the sale of assets, derived from the Company's
disposition of stations in the Tampa radio market during the quarter ended
December 31, 1998. In addition, pro forma net income was adversely effected by
$14.6 million attributable to an adjustment to reflect indexing of the
Convertible Subordinated Note.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------------------------------
DECEMBER 31, 1998 DECEMBER 31, 1997
(Dollar amounts in thousands)
<S> <C> <C>
BROADCAST CASH FLOW $ 17,373 $ 9,531
Increase of $ 7,842 or 82.3 %
</TABLE>
Of the increase in broadcast cash flow, $6.9 million is attributable to
stations acquired or that were in the process of being acquired since October 1,
1997, offset by $1.1 million for stations divested or that were in the process
of being divested during the same period. On a same station basis, broadcast
cash flow increased 48.0% to $17.5 million from $11.8 million.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------------------------------
DECEMBER 31, 1998 DECEMBER 31, 1997
(Dollar amounts in thousands)
<S> <C> <C>
BROADCAST CASH FLOW MARGIN 36.6% 33.6%
</TABLE>
The increase in broadcast cash flow margin is attributable to improved
revenues and expense management associated with newly acquired stations. On a
same station basis, the Company's broadcast cash flow margin increased to 37.4%
from 29.4%.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------------------------------
DECEMBER 31, 1998 DECEMBER 31, 1997
(Dollar amounts in thousands)
<S> <C> <C>
PRO FORMA AFTER-TAX CASH FLOW $7,985 $5,003
Increase of $2,982 or 59.6 %
</TABLE>
The increase in pro forma after-tax cash flow is attributable to improved
operations of existing stations and the net effect of newly acquired properties,
taking into consideration pro forma income taxes as though the Company had
reported as a C corporation.
11
<PAGE> 14
LIQUIDITY AND CAPITAL RESOURCES
The Company uses a significant portion of its capital resources to consummate
acquisitions. These acquisitions are funded from one or a combination of the
following sources: (i) the Credit Facility (described below), (ii) the swapping
of Company-owned radio stations in transactions which qualify as "like-kind"
exchanges under Section 1031 of the Internal Revenue Code and (iii)
internally-generated cash flow.
Net cash flows provided by operating activities were $11.2 million and $7.3
million for the quarters ended December 31, 1998 and 1997, respectively. Changes
in the Company's net cash flows from operating activities are primarily a result
of changes in advertising revenues and station operating expenses which are
affected by the acquisition and disposition of stations during those periods.
Net cash flows used in investing activities were $86.9 million and $17.5
million for the quarters ended December 31, 1998 and 1997, respectively. Net
cash flows provided by financing activities were $75.5 million and $10.0 million
for the quarters ended December 31, 1998 and 1997, respectively. These cash
flows reflect the acquisitions consummated in the relevant periods and the
related borrowings.
On February 3, 1999, upon the consummation of the IPO, the Company received
net proceeds of approximately $236.1 million, after deduction of discounts,
commissions, fees and expenses. The proceeds were used to reduce outstanding
indebtedness under the Credit Facility. Additionally, the Company has committed
to pay (i) $88. million to its former S Corporation Shareholders, and on
March 2, 1999, distributed $75.0 million as partial payment of the S
Distribution, (ii) $58.0 million to fund the Second Boston Transaction, which
was consummated on February 22, 1999 and (iii) $2.7 million to fund the
remaining balance of the purchase price for the acquisition of WREN-AM.
In addition to debt service, the Company's principal liquidity requirements
are for working capital and general corporate purposes, including capital
expenditures, and, if appropriate opportunities arise, acquisitions of
additional radio stations. For calendar 1999, management anticipates maintenance
capital expenditures to be between $1.0 million and $1.5 million and total
capital expenditures to be between $3.5 million and $5.0 million. Management
believes that cash from operating activities, together with available revolving
credit borrowings under the Credit Facility, should be sufficient to permit the
Company to meet its financial obligations and fund its operations. However, the
Company may require additional financing for future acquisitions, if any, and
there can be no assurance that it would be able to obtain such financing on
terms considered to be favorable by management.
The Company entered into the Credit Facility, dated as of February 13, 1998,
as amended October 8, 1998, with a syndicate of banks, for a $350.0 million
revolving credit facility, subject to compliance with certain financial ratios.
The Credit Facility was established to: (i) refinance existing indebtedness of
the Company, (ii) provide working capital and (iii) fund corporate acquisitions.
At the Company's election, interest on any outstanding principal accrues at a
rate based on either LIBOR plus a spread which ranges from 0.5% to 2.125% or on
KeyBank N.A.'s base rate plus a spread of up to 0.875%, depending on the
Company's leverage ratio. Although the Company may borrow, repay and reborrow
under the Credit Facility, the aggregate maximum amount that the Company can
have outstanding at any one time is reduced on a quarterly basis beginning on
June 30, 2000. The final maturity date for the Credit Facility is February 13,
2006. The Credit Facility requires the Company to comply with certain financial
covenants and leverage ratios, with which management believes the Company is in
compliance.
As of December 31, 1998, the Company had approximately $330.0 million of
borrowings outstanding under the Credit Facility; approximately $77.0 million of
such indebtedness was incurred in connection with the First Boston Transaction
and the remainder was incurred to fund other acquisitions and for general
corporate purposes. As of March 5, 1999, the Company had revolving indebtedness
outstanding under the Credit Facility of $147.5 million, which included $58.0
million in connection with the Second Boston Transaction.
The Credit Facility requires the Company to protect itself from interest rate
fluctuations through the use of derivative rate hedging instruments. As a
result, the Company has entered into various convertible rate cap and interest
rate swap transactions with various banks (the "Rate Hedging Transactions")
designed to mitigate the Company's exposure to significantly higher floating
interest rates. A rate cap agreement establishes an upper limit or "cap" for the
base LIBOR rate. Swap agreements require that the Company pay a fixed rate of
interest on the notional amount to a bank and the bank pay to the Company a
variable rate equal to three-month LIBOR interest rate. Certain of the swap
agreements grant the bank
12
<PAGE> 15
the option to terminate the transaction prior to its respective expiration date
in certain limited circumstances. Currently, the Company has Rate Hedging
Transactions in place for a total notional amount of $129.0 million.
All of the Rate Hedging Transactions are tied to the three-month LIBOR
interest rate, which may fluctuate daily, and which may fluctuate significantly.
Any increase in the three-month LIBOR rate results in a decrease in the amount
of unrecognized loss by the Company, while any decrease in the three-month LIBOR
rate results in an increase in the amount of unrecognized loss by the Company.
An increase in the three-month LIBOR rate results in a more favorable valuation
of each of the Rate Hedging Transactions. Correspondingly, a decrease in the
three-month LIBOR rate results in a less favorable valuation of each of the Rate
Hedging Transactions. The three-month LIBOR rate at December 31, 1998 was higher
than the rate at September 30, 1998. This increase resulted in lower
unrecognized losses by the Company from the Rate Hedging Transactions.
RECENT PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133 entitled "Accounting for
Derivative Instruments and Hedging Activities," which establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts (collectively referred to as
"derivatives"), and for hedging activities. It requires that an entity recognize
all derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. The accounting for changes
in the fair value of a derivative depends on the intended use of the derivative
and the resulting designation. This statement is effective for all fiscal
quarters of fiscal years beginning after June 15, 1999, and should not be
applied retroactively to financial statements of prior periods. Management has
not yet determined what effect, if any, this statement will have on the Company.
IMPACT OF YEAR 2000 ISSUES
The Company relies, directly and indirectly, on information technology
systems to operate its radio stations, provide its radio stations with
up-to-date news and perform a variety of administrative services including
accounting, financial reporting, advertiser spot scheduling, payroll and
invoicing. Most of these information technology systems, such as Marketron,
Columbine, Ultipro, Solomon and Novell, are standard commercial software
products used both throughout the radio broadcasting industry and in other
industries. The Company also uses non-information technology systems, such as
microchips for dating and other automated functions. All of these technology
systems could potentially be affected by Year 2000 Issues.
In order to minimize the risk of Year 2000 related losses, the Company is
conducting a comprehensive assessment of its Year 2000 Issues. This assessment
consists of (i) an analysis of all of the information and non-information
technology systems that the Company uses, including the circulation of Year 2000
compliance questionnaires to the chief engineers of each of the Company's
stations, requiring them to evaluate their respective station's preparedness for
Year 2000 Issues and (ii) an inquiry as to the Year 2000 status of third parties
material to the Company's operations, including the transmission of letters to
all key service providers requesting written confirmation of their Year 2000
readiness.
Although the Company is still in the process of assessment, the Company has
determined that most of the technology systems it uses internally are Year 2000
compliant. Management believes that, while difficult to fully assess, Year 2000
Issues should not have a material adverse effect on the Company's broadcast
operations.
The Company expects to have completed its Year 2000 remediation efforts by
the end of the second quarter of 1999. Additionally, the Company will develop a
contingency plan for dealing with Year 2000 Issues caused by systems external to
the Company by the end of the third quarter of fiscal 1999. Since most of the
Year 2000 compliance achieved by the Company to date has been done through the
normal upgrading process, separate costs have not been allocated to the Year
2000 Issue.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Required disclosure in this item is made above under "Management's Discussion
and Analysis of Financial Condition and Results of Operations-Liquidity and
Capital Resources".
13
<PAGE> 16
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None to report.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On January 29, 1999, the Company commenced the IPO of its Class A common
stock, $.01 par value. The registration statement relating to this offering
(File No. 333-61381) was declared effective on January 28, 1999. Credit Suisse
First Boston Corporation, BT Alex. Brown, Goldman, Sachs & Co., and Morgan
Stanley Dean Witter were the managing underwriters of the IPO. On February 3,
1999, the Company consummated the IPO. The number of shares registered, the
aggregate price of the offering amount registered, the amount sold and the
aggregate offering price of the amount sold by the Company and Chase Capital,
as the sole selling shareholder of the Company in the IPO, were as follows:
<TABLE>
<CAPTION>
Shares of Class A Aggregate
----------------- ---------
Common Price of Shares Amount of Shares Aggregate
------ --------------- ---------------- ---------
Registered Registered Sold Price of Shares Sold
---------- ---------- ---- --------------------
<S> <C> <C> <C> <C>
The Company 11,300,000 $254,250,000 11,300,000 $254,250,000
The Selling Shareholder 2,327,500 $52,368,750 2,327,500 $52,368,750
</TABLE>
The Company incurred the following expenses with respect to the IPO during the
period from May 1998 through February 3, 1999. These expenses include the
payment of $46,772.45 to the law firm of Stradley Ronin Stevens & Young, LLP, a
firm with which S. Gordon Elkins, a director of the Company, is affiliated.
Except for the payment of this expense, none of the following expenses were
direct or indirect payments to directors, officers, general partners of the
Company or their affiliates or to persons owning 10% or more of any class of
equity securities of the Company or to affiliates of the Company:
<TABLE>
<CAPTION>
Underwriting Discounts Underwriters' Total Company
and Commissions Finders' Fees Expenses Other Expenses Expenses
- -------------------------- ----------------- ------------------- ---------------------- ------------------
<S> <C> <C> <C> <C>
$15,255,000 $0 $0 $2,860,900 $18,115,900
</TABLE>
The net proceeds from the IPO to the Company after deducting the foregoing
discounts, commissions, fees and expenses were $236,134,100. All of these
proceeds have been used by the Company since the IPO to repay existing revolving
indebtedness outstanding under the Credit Facility.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None to report.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None to report.
14
<PAGE> 17
ITEM 5. OTHER INFORMATION
The Company has filed a Form 8-K on March 12, 1999, reflecting its change for
financial reporting purposes, from a fiscal year of October 1 to September 30,
to a calendar year of January 1 to December 31, effective January 1, 1999; and
disclosing the consummation of the Second Boston Transaction.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
Number Description
- ------ -----------
3.01 Amended and Restated Articles of Incorporation of the Registrant**
3.02 Amended and Restated Bylaws of the Registrant**
10.01 Employment Agreement, dated December 17, 1998, between the
Registrant and David J. Field**
10.02 Employment Agreement, dated June 25, 1993, between the Registrant
and Joseph M. Field**
10.03 Employment Agreement, dated November 13, 1998, between the
Registrant and Stephen F. Fisher**
10.04 Employment Agreement, dated December 17, 1998, between the
Registrant and John C. Donlevie**
27.01 Financial Data Schedule*
- ----------
* Filed herewith.
** Incorporated by reference to the Company's Registration Statement
on Form S-1 (File No. 333-61381).
(b) The Company did not file any reports on Form 8-K during the fiscal quarter
ended December 31, 1998.
15
<PAGE> 18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ENTERCOM COMMUNICATIONS CORP.
(Registrant)
Date: March 12, 1999 /s/ Joseph M. Field
--------------------------------------------
Name: Joseph M. Field
Title: Chief Executive Officer
Date: March 12, 1999 /s/ David J. Field
--------------------------------------------
Name: David J. Field
Title: President and Chief Operating Officer
Date: March 12, 1999 /s/ Stephen F. Fisher
--------------------------------------------
Name: Stephen F. Fisher
Title: Senior Vice President and
Chief Financial Officer
16
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> OCT-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 6469
<SECURITIES> 0
<RECEIVABLES> 38511
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 126566
<PP&E> 58888
<DEPRECIATION> 10874
<TOTAL-ASSETS> 681034
<CURRENT-LIABILITIES> 25142
<BONDS> 355271
0
0
<COMMON> 215
<OTHER-SE> 225252
<TOTAL-LIABILITY-AND-EQUITY> 681034
<SALES> 0
<TOTAL-REVENUES> 47363
<CGS> 35584
<TOTAL-COSTS> 35584
<OTHER-EXPENSES> 1850
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 35235
<INCOME-PRETAX> 43765
<INCOME-TAX> 310
<INCOME-CONTINUING> 43455
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 43455
<EPS-PRIMARY> .64
<EPS-DILUTED> .64
</TABLE>
