<PAGE> 1
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 PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________to ___________
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 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 [X] NO []
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 - 24,944,267 Shares Outstanding as of
August 11, 1999
Class B Common Stock, $.01 par value - 10,531,805 Shares Outstanding as of
August 11, 1999
Class C Common Stock, $.01 par value - 1,695,669 Shares Outstanding as of
August 11, 1999
<PAGE> 2
ENTERCOM COMMUNICATIONS CORP.
INDEX
<TABLE>
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PAGE
PART I - FINANCIAL INFORMATION
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ITEM 1. Financial Statements................................................................................ 3
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations............... 12
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk.......................................... 19
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings................................................................................... 20
ITEM 2. Changes in Securities and Use of Proceeds........................................................... 20
ITEM 3. Defaults Upon Senior Securities..................................................................... 20
ITEM 4. Submission of Matters to a Vote of Security Holders................................................. 20
ITEM 5. Other Information................................................................................... 20
ITEM 6. Exhibits............................................................................................ 20
SIGNATURES .................................................................................................... 21
</TABLE>
2
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PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ENTERCOM COMMUNICATIONS CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND JUNE 30, 1999
(dollars in thousands)
(unaudited)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
------------ --------
1998 1999
---- ----
CURRENT ASSETS
<S> <C> <C>
Cash and cash equivalents $ 6,469 $ 8,713
Accounts receivable, net of allowance for doubtful accounts 38,511 45,160
Prepaid expenses and deposits 6,259 6,402
Proceeds held in escrow from sale of Tampa stations 75,000
Deferred tax assets 1,949
Station acquisition deposits 327 142
--------- ---------
Total current assets 126,566 62,366
--------- ---------
PROPERTY AND EQUIPMENT - AT COST
Land and land easements and land improvements 6,927 6,737
Building 4,596 4,509
Equipment 35,804 39,947
Furniture and fixtures 7,662 9,049
Leasehold improvements 3,899 4,000
--------- ---------
58,888 64,242
Accumulated depreciation (10,874) (13,568)
--------- ---------
48,014 50,674
Capital improvements in progress 629 2,086
--------- ---------
Net property and equipment 48,643 52,760
RADIO BROADCASTING LICENSES AND OTHER INTANGIBLES - NET 500,545 552,282
DEFERRED CHARGES AND OTHER ASSETS - NET 5,280 4,219
--------- ---------
TOTAL $ 681,034 $ 671,627
========= =========
</TABLE>
See notes to condensed consolidated financial statements
3
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ENTERCOM COMMUNICATIONS CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND JUNE 30, 1999
(dollars in thousands)
(unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
------------ --------
1998 1999
---- ----
CURRENT LIABILITIES
<S> <C> <C>
Accounts payable $ 18,224 $ 16,568
Accrued liabilities:
Salaries 4,322 4,852
Interest 1,492 432
Other 1,094 299
Income taxes payable 2,798
Long-term debt due within one year 10 10
--------- ---------
Total current liabilities 25,142 24,959
--------- ---------
SENIOR DEBT 330,271 166,266
--------- ---------
CONVERTIBLE SUBORDINATED NOTE
Note payable 25,000
Accrued interest 4,858
Cumulative adjustment to reflect indexing of Convertible Subordinated Note 67,414
--------- ---------
Total Convertible Subordinated Note 97,272
DEFERRED TAX LIABILITY 83,516
MINORITY INTEREST IN EQUITY OF PARTNERSHIP 2,882
--------- ---------
Total liabilities 455,567 274,741
--------- ---------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Preferred Stock
Class A common stock 110 249
Class B common stock 105 105
Class C common stock 17
Additional paid-in capital 468,239
Retained earnings (deficit) 225,252 (71,501)
Unearned compensation (223)
--------- ---------
Total shareholders' equity 225,467 396,886
--------- ---------
TOTAL $ 681,034 $ 671,627
========= =========
</TABLE>
See notes to condensed consolidated financial statements
4
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ENTERCOM COMMUNICATIONS CORP.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1998 AND 1999
(dollars in thousands, except share and per share data)
(unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
----------------
JUNE 30
-------
1998 1999
---- ----
<S> <C> <C>
NET REVENUES $ 63,687 $ 95,545
OPERATING EXPENSES:
Station operating expenses 42,749 64,296
Depreciation and amortization 6,079 10,019
Corporate general and administrative expenses 2,193 3,454
Net time brokerage agreement expenses 2,273 652
------------ ------------
OPERATING INCOME 10,393 17,124
------------ ------------
OTHER EXPENSE (INCOME) ITEMS:
Interest expense 6,179 6,246
Adjustment to reflect indexing of the Convertible Subordinated Note 5,693
Interest income (180) (599)
Other non-operating expenses 57
Gains on sale of assets (8,748) (467)
------------ ------------
Total other expense (income) 3,001 5,180
------------ ------------
INCOME BEFORE INCOME TAXES AND EXTRAORDINARY ITEM 7,392 11,944
INCOME TAXES
Income taxes - C Corporation 5,249
Income taxes - S Corporation 71 125
Deferred income taxes for conversion from an S to a C Corporation 79,845
------------ ------------
Total income taxes 71 85,219
------------ ------------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM 7,321 (73,275)
EXTRAORDINARY ITEM (NET OF TAX BENEFIT) 2,397
------------ ------------
NET INCOME (LOSS) $ 4,924 ($ 73,275)
============ ============
NET LOSS PER SHARE
Basic:
Loss before extraordinary item ($ 2.10)
Extraordinary item, net of taxes
------------
============
NET LOSS PER SHARE ($ 2.10)
============
Diluted:
Loss before extraordinary item ($ 2.10)
Extraordinary item, net of taxes
============
NET LOSS PER SHARE ($ 2.10)
============
PRO FORMA DATA
PRO FORMA NET INCOME DATA:
Income before income taxes and extraordinary item $ 7,392 $ 11,944
Pro forma income taxes 4,972 4,539
------------ ------------
Pro forma income before extraordinary item 2,420 7,405
Extraordinary item, net of pro forma taxes 1,489
============ ============
PRO FORMA NET INCOME $ 931 $ 7,405
============ ============
PRO FORMA EARNINGS PER SHARE:
Basic:
Pro forma earnings before extraordinary item $ 0.11 $ 0.21
Extraordinary item, net of pro forma taxes 0.07
============ ============
Pro forma earnings per share $ 0.04 $ 0.21
============ ============
Diluted:
Pro forma earnings before extraordinary item $ 0.11 $ 0.21
Extraordinary item, net of pro forma taxes $ 0.07
============
Pro forma earnings per share $ 0.04 $ 0.21
============ ============
WEIGHTED AVERAGE SHARES:
Basic 21,534,000 34,836,094
Diluted 21,534,000 35,250,980
</TABLE>
See notes to condensed consolidated financial statements
5
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ENTERCOM COMMUNICATIONS CORP.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1998 AND 1999
(dollars in thousands, except share and per share data)
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------
JUNE 30
-------
1998 1999
---- ----
<S> <C> <C>
NET REVENUES $ 38,709 $ 55,946
OPERATING EXPENSES:
Station operating expenses 24,389 35,387
Depreciation and amortization 3,113 5,158
Corporate general and administrative expenses 1,093 1,653
Net time brokerage agreement expenses 1,641
------------ ------------
OPERATING INCOME 8,473 13,748
------------ ------------
OTHER EXPENSE (INCOME) ITEMS:
Interest expense 3,240 2,660
Adjustment to reflect indexing of the Convertible Subordinated Note (4,254)
Interest income (136) (55)
Other non-operating expenses 32
Gains on sale of assets (8,455) (467)
------------ ------------
Total other expense (income) (9,573) 2,138
------------ ------------
INCOME BEFORE INCOME TAXES 18,046 11,610
Income taxes - C Corporation 4,458
Income taxes - S Corporation 85
------------ ------------
NET INCOME $ 17,961 $ 7,152
============ ============
BASIC NET INCOME PER SHARE $ 0.19
============
DILUTED NET INCOME PER SHARE $ 0.19
============
PRO FORMA DATA
PRO FORMA NET INCOME DATA:
Income before income taxes $ 18,046
Pro forma income taxes 5,241
============
PRO FORMA NET INCOME $ 12,805
============
PRO FORMA EARNINGS PER SHARE:
Basic Pro forma earnings per share $ 0.59
============
Diluted Pro forma earnings per share $ 0.35
============
WEIGHTED AVERAGE SHARES:
Basic 21,534,000 37,168,280
Diluted 25,857,000 37,583,166
</TABLE>
See notes to condensed consolidated financial statements
6
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ENTERCOM COMMUNICATIONS CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1998 AND 1999
(dollars in thousands)
(unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
----------------
JUNE 30
-------
1998 1999
---- ----
OPERATING ACTIVITIES:
<S> <C> <C>
Net income (loss) $ 4,924 ($ 73,275)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation 1,872 2,726
Amortization of radio broadcasting licenses, other intangibles and deferred charges 4,207 7,293
Extraordinary items 2,401
Deferred taxes 81,567
Gain on dispositions and exchanges of assets (8,748) (467)
Non-cash stock-based compensation expense 219
Interest on Convertible Subordinated Note 944
Adjustment to reflect indexing of the Convertible Subordinated Note 5,693
Changes in assets and liabilities which provided (used) cash:
Accounts receivable (5,808) (6,649)
Prepaid expenses (1,076) (145)
Accounts payable, accrued liabilites and income taxes payable 1,371 (183)
Minority interest (2) (2,882)
--------- ---------
Net cash provided by operating activities 5,778 8,204
--------- ---------
INVESTING ACTIVITIES:
Additions to property and equipment (4,955) (4,901)
Proceeds from sale of assets 8,906 1,162
Proceeds from exchanges of radio stations 3,132
Payment for exchanges of radio stations (306)
Purchases of radio station assets (130,103) (60,968)
Deferred charges and other assets (3,163) (479)
Station acquisition deposits 924 75,187
--------- ---------
Net cash (used) provided by investing activities (125,565) 10,001
--------- ---------
FINANCING ACTIVITIES:
Net proceeds from Initial Public Offering 236,157
Proceeds from issuance of long-term debt 257,793 82,500
Payments of long-term debt (133,008) (246,505)
Dividends paid to S Corporation shareholders (2,401) (88,113)
--------- ---------
Net cash provided (used) by financing activities 122,384 (15,961)
--------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS 2,597 2,244
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 3,497 6,469
=========
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 6,094 $ 8,713
========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION ----
Cash paid during the period for:
Interest $ 4,378 $ 6,301
========= =========
Income taxes $ 198 $ 1,652
========= =========
</TABLE>
SUPPLEMENTAL DISCLOSURES ON NON-CASH INVESTING AND FINANCING ACTIVITIES -
In connection with the radio station exchange transactions completed by
the Company during the six months ended June 30, 1998, the non-cash
portion of assets recorded was $22,500.
In connection with the Company's Initial Public Offering completed
during the six months ended June 30, 1999, the Convertible Subordinated
Note, net of deferred finance charges, in the amount of $96,400 was
converted into equity.
See notes to condensed consolidated financial statements
7
<PAGE> 8
ENTERCOM COMMUNICATIONS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 1998 AND 1999
1. BASIS OF PRESENTATION
The accompanying unaudited financial statements for Entercom
Communications Corp. (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, including 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 (the
"SEC") and dated January 28, 1999 and the transition report on Form 10-Q for the
transition period ended December 31, 1998, filed with the SEC on March 12, 1999.
On March 12, 1999, the Company filed a Form 8-K, indicating, among
other things, its change for financial reporting purposes, from a fiscal year
ended September 30 to a calendar year ending December 31, effective January 1,
1999.
Operating results for the six-month and three-month periods ended
June 30, 1999 are not necessarily indicative of the results that may be expected
for the year ending December 31, 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.
Effective January 28, 1999 (the "Revocation Date"), in
connection with the initial public offering (the "IPO") of 13,627,500 shares of
Class A Common Stock of the Company at a price of $22.50 per share, 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. The Company's
effective tax rate for state and federal income taxes for the period subsequent
to January 27, 1999 is at a combined rate of 38%, applied to taxable income
before income taxes, which is adjusted for permanent differences between tax and
book income.
On January 29, 1999, the Company's Class A Common Stock began trading
on the New York Stock Exchange. 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 $236.2 million.
As a result of the revocation of its S Corporation status and its
conversion to a C Corporation, the Company recorded a non-cash deferred income
tax expense of approximately $79.8 million to reflect the cumulative effect of
temporary differences between the tax and financial reporting bases of the
Company's assets and liabilities attributable to the period prior to its
conversion to a C Corporation.
The unaudited pro forma net income data reflect adjustments for
income taxes as if the Company had been subject to federal and state income
taxes based upon a pro forma effective tax rate of 38% applied to income before
income taxes and extraordinary item, excluding the effect of an expense
adjustment to reflect indexing of the Convertible Subordinated Note (as such
adjustment is not tax deductible) of $5.7 million for the six-month period ended
June 30, 1998 and an income adjustment to reflect indexing of the Convertible
Subordinated Note of $4.3 million for the three-month period ended June 30,
1998.
The net income (loss) per share and pro forma earnings per share are
calculated in accordance with Statement of Financial Accounting Standards No.
128 and, are based on the weighted average number of shares of Common Stock
outstanding and dilutive common equivalent shares which include stock options
and restricted stock (using the treasury stock method). For the six-month period
ended June 30,1998, the effect of the conversion of the Convertible Subordinated
Note for the calculation of the pro forma income per share was antidilutive. For
the three-month period ended June 30, 1998, the effect of the conversion of the
Convertible Subordinated Note was dilutive.
2. ACQUISITIONS AND OTHER SIGNIFICANT EVENTS
Completed Acquisitions, Divestitures and Investments
For the Three Month Transition Period Ended December 31, 1998
8
<PAGE> 9
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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 $0.3 million related to this acquisition. Broadcasting licenses
and other intangibles in the amount of $77.8 million were recorded in connection
with this transaction. The Company had operated these stations under a Time
Brokerage Agreement ("TBA") since September 1998.
On December 14, 1998, the Company acquired the assets of KSLM-AM,
serving the Salem, Oregon radio market, from Willamette Broadcasting Co. for
approximately $0.6 million. Broadcasting licenses and other intangibles in the
amount of approximately $0.5 million 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.
Completed Acquisitions and Divestitures
For the Six Months Ended June 30, 1999
On January 22, 1999, in a related party transaction, a wholly owned
subsidiary of the Company purchased a 1% limited partnership 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, owning a 99% general
partnership interest. ECI License Company, L.P. owns certain of the Company's
FCC licenses. The acquisition effectively gives the Company a 100% interest in
its FCC licenses.
On February 22, 1999, the Company purchased the assets of radio
stations WAAF-FM and WEGQ-FM in Boston and WWTM-AM in Worchester from CBS for
$58.0 million in cash (the "Second Boston Transaction"). The Company incurred
transaction costs of approximately $0.2 million related to this transaction.
Broadcasting licenses and other intangibles in the amount of $55.7 million were
recorded in connection with this transaction. The Company had operated these
stations under a TBA since September 1998 and for the three months ended March
31, 1999, the Company incurred TBA fees in the amount of $0.7million.
On April 22, 1999, the Company sold a building located in Seattle,
Washington for a cash purchase price of $1.3 million, resulting in a gain of
approximately $0.5 million.
On June 11, 1999, the Company acquired the assets of radio station
WREN-AM, serving the Kansas City, Kansas/Missouri radio market, from Mortenson
Broadcasting Company of Canton, LLC and Mortenson Broadcasting Company for the
sum of $2.8 million in cash. Broadcasting licenses in the amount of $2.5 million
were recorded in connection with this transaction.
Other Significant Events
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 has been taxed or is taxable to its S
Corporation shareholders as of the Revocation Date. The S Distribution of $88.1
million has been paid as of June 30, 1999.
.
Prior to the IPO, Chase Capital, which held a Convertible
Subordinated Promissory Note of the Company (the "Convertible Subordinated
Note") in the principal 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.
9
<PAGE> 10
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Unaudited Pro Forma Information for Acquisitions and Divestitures
The following unaudited pro forma summary presents the consolidated
results of operations as if the acquisition and divestiture transactions which
occurred during the period of January 1,1998 through June 30, 1999 had all
occurred as of January 1, 1998, 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 January 1, 1998. 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)
-----------
SIX MONTHS ENDED JUNE 30,
-------------------------
1998 1999
---- ----
<S> <C> <C>
Net Revenues $82,148 $95,545
Loss before extraordinary items and gains on sale of assets (9,023) (73,938)
Loss before extraordinary items (net of tax benefits) (2,448) (73,938)
Net loss (4,845) (73,938)
</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 June 30, 1999, the Company had $166.0
million of borrowings outstanding under the Credit Facility, in addition to an
outstanding Letter of Credit in the amount of $4.9 million.
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. On July 28,
1999, the Company commenced a legal action seeking to enforce this agreement.
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. SHAREHOLDERS' EQUITY
During the six months ended June 30, 1999, the Company issued options
to purchase 823,609 shares of its Class A Common Stock at prices ranging from
$18.00 to $34.00 per share. All of the options become exercisable over a
four-year period. In connection with the grant of options with exercise prices
below fair market value at the time of grant, the Company recognized
compensation expense in the amounts of approximately $170,000 and $118,000 for
the six-month and three-month periods ended June 30, 1999, respectively.
On January 28, 1999, the Company issued certain Restricted Stock
awards, consisting of rights to 11,112 shares of Class A Common Stock, to two
directors. Such shares vest ratably on each of the next four anniversary dates
of the grant. In connection with these awards, the Company recognized
compensation expense in the amounts of approximately $26,000 and $16,000 for the
six-month and three-month periods ended June 30, 1999, respectively.
10
<PAGE> 11
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED
On May 11, 1999, Chase Capital converted 300,000 shares of Class C
Common Stock to 300,000 shares of Class A Common Stock.
6. SUBSEQUENT EVENTS
On July 28, 1999, the Company entered into a letter of intent to
purchase from Sinclair Broadcast Group ("Sinclair") all of Sinclair's radio
properties (with the exception of its St. Louis cluster) and to purchase 300,000
shares of USA Digital Radio Inc. for a purchase price of $821.5 million in cash
(the "Sinclair Transaction"). As part of the Sinclair Transaction, the Company
will agree to spend $5.0 million in television advertising time for the
promotion of the Company's radio stations on Sinclair's TV stations over a five
year period, and will be responsible for certain capital expenditures not to
exceed $2.0 million. The Sinclair Transaction covers 43 stations (12 AM and 31
FM) in nine markets including Kansas City, Milwaukee, New Orleans, Memphis,
Buffalo, Norfolk, Greensboro/Winston-Salem/High Point, Greenville/Spartanburg
and Scranton/Wilkes-Barre. Seven of the nine markets rank among the top 50
markets in the United States. The Company will be required to sell or exchange
certain radio stations in the Kansas City market in order to meet regulatory
requirements limiting the number of stations the Company may own in this market
to eight (the Company currently owns seven). Completion of the Sinclair
Transaction is subject to several factors including approval by the Boards of
Directors of both companies, FCC approval, Department of Justice approval, the
Company's due diligence and completion of definitive documentation. The Company
expects to close on this transaction in the last quarter of 1999.
11
<PAGE> 12
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, owns and operates 42 stations, 25 FM and
17 AM, in eight markets, including five of the country's top 30 radio
advertising markets. 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. However, on March 12, 1999, the
Company 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. All references herein,
with the exception of specific references to fiscal year periods, are based on
the Company's calendar year ending on December 31.
A radio broadcasting company's revenues are derived primarily from the
sale of broadcasting time to local and national advertisers. These 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 change
in ratings, and any corresponding change in advertising revenues, tend to lag
behind the incurrence of advertising and promotional spending.
Radio broadcasting companies often derive revenues from TBAs and Joint
Sales Agreements ("JSAs"). In a TBA, a 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 realized 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 of pro forma net income before
extraordinary items minus net gain on sale of assets (net of tax), plus the
following: depreciation, amortization, non-cash stock-based compensation
expense, the amount of the adjustment to reflect indexing of the Convertible
Subordinated Note (or minus the income 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
12
<PAGE> 13
may not be comparable to similarly titled measures of other companies.
The Company calculates "same station" growth by comparing the
performance of stations operated by the Company (including operation under a TBA
or JSA) throughout a relevant period to the performance of those same stations
(whether or not operated by the Company) in the prior year's corresponding
period, excluding the effect of barter revenues and expenses and divested
stations. "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 and extraordinary items, 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 before income taxes, including
permanent differences between tax and book income, and extraordinary items,
excluding the effect of an expense adjustment to reflect indexing of the
Convertible Subordinated Note (as such adjustment is not tax-deductible) of $5.7
million for the six months ended June 30, 1998 and an income adjustment to
reflect indexing of the Convertible Subordinated Note for the three months ended
June 30, 1998 of $4.3 million 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
six months ended June 30, 1999 and June 30, 1998, 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.
SIX MONTHS ENDED JUNE 30, 1999 V. JUNE 30, 1998
<TABLE>
<CAPTION>
Six Months Ended
June 30, 1998 June 30, 1999
(Dollar amounts in thousands)
<S> <C> <C>
Net Revenues $63,687 $95,545
Increase of $31,858 or 50.0%
------------------------------------------------------------
</TABLE>
Of the increase in net revenues, $25.8 million is attributable to
stations acquired or that were in the process of being acquired since January 1,
1998, offset by $2.3 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 15.5% to $94.5 million from $81.9 million.
<TABLE>
<CAPTION>
Six Months Ended
----------------
June 30, 1998 June 30, 1999
(Dollar amounts in thousands)
<S> <C> <C>
Station Operating Expenses $42,749 $64,296
Increase of $21,547 or 50.4%
------------------------------------------------------------
Percentage of Net Revenues 67.1% 67.3%
</TABLE>
Of the increase in station operating expenses, $20.4 million is
attributable to stations acquired or that were in the process of being acquired
since January 1, 1998, offset by $1.8 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 6.4% to $63.3million from $59.6
million.
<TABLE>
<CAPTION>
Six Months Ended
June 30, 1998 June 30, 1999
(Dollar amounts in thousands)
<S> <C> <C>
Corporate, General and Administrative Expenses $2,193 $3,454
Increase of $1,261 or 57.5%
------------------------------------------------------------
Percentage of Net Revenues 3.4% 3.6%
</TABLE>
The increase in corporate expenses was mainly attributable to higher
administrative expenses associated with supporting the Company's growth, and
increasing staff and expenses to operate as a public company. Also included in
the current period is $0.2 million in non-cash stock-based compensation expense.
13
<PAGE> 14
<TABLE>
<CAPTION>
Six Months Ended
June 30, 1998 June 30, 1999
(Dollar amounts in thousands)
<S> <C> <C>
Depreciation and Amortization $6,079 $10,019
Increase of $3,940 or 64.8%
------------------------------------------------------------
Percentage of Net Revenues 9.5% 10.5%
</TABLE>
The increase in depreciation and amortization was mainly attributable to the
Company's acquisitions net of divestitures since January 1, 1998.
<TABLE>
<CAPTION>
Six Months Ended
June 30, 1998 June 30, 1999
(Dollar amounts in thousands)
<S> <C> <C>
Interest Expense $6,179 $6,246
Increase of $67 or 1.1%
------------------------------------------------------------
Percentage of Net Revenues 9.7% 6.5%
</TABLE>
The increase in interest expense was mainly attributable to indebtedness
incurred in connection with the Company's acquisitions offset by the proceeds
from the IPO which were used to reduce debt.
<TABLE>
<CAPTION>
Six Months Ended
June 30, 1998 June 30, 1999
(Dollar amounts in thousands)
<S> <C> <C>
Income Before Income Taxes & Extraordinary Item $7,392 $11,944
Increase of $4,552
------------------------------------------------------------
Percentage of Net Revenues 11.6% 12.5%
</TABLE>
The net change from the prior year is affected by: (i) a decrease in income
of $8.3 million due to a decrease in income from gains on sale of assets; (ii)
an increase in income of $5.7 million due to a decrease in expense for the
adjustment to reflect indexing of the Convertible Subordinated Note; (iii) an
increase in income of $5.1 million due to increases in revenues from existing
stations and improved revenues and expense management from newly acquired
stations; and (iv) an increase in income of $1.6 million due to a decrease in
net time brokerage agreement expenses.
<TABLE>
<CAPTION>
Other Data Six Months Ended
June 30, 1998 June 30, 1999
(Dollar amounts in thousands)
<S> <C> <C>
Pro Forma Net Income $931 $7,405
Increase of $6,475
------------------------------------------------------------
</TABLE>
The net change from the prior year is affected by: (i) an increase in
income of $3.2 million, net of tax, is primarily attributable to an improvement
in operating income due to increases in revenues from existing stations and
improved revenues and expense management from newly acquired stations; (ii) an
increase in income of $0.6 due to the difference between a $5.7 million decrease
in the expense for the adjustment to reflect indexing of the Convertible
Subordinated Note and a $5.1 million, net of tax, decrease in income from gains
on sale of assets; (iii) an increase in income of $1.5 million, net of tax, due
to a decrease in the extraordinary expense; and (iv) an increase in income of
$1.0 million, net of tax, due to a decrease in net time brokerage agreement
expense.
<TABLE>
<CAPTION>
Six Months Ended
June 30, 1998 June 30, 1999
(Dollar amounts in thousands)
<S> <C> <C>
Broadcast Cash Flow $20,938 $31,249
Increase of $10,311 or 49.2%
------------------------------------------------------------
</TABLE>
Of the increase in broadcast cash flow, $5.4 million is attributable
to stations acquired or that were in the process of being acquired since January
1, 1998, offset by $0.5 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 39.9 % to $31.2 million from $22.3 million.
14
<PAGE> 15
<TABLE>
<CAPTION>
Six Months Ended
June 30, 1998 June 30, 1999
(Dollar amounts in thousands)
<S> <C> <C>
Broadcast Cash Flow Margin 32.9% 32.7%
------------------------------------------------------------
</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 33.0%
from 27.2%.
<TABLE>
<CAPTION>
Six Months Ended
June 30, 1998 June 30, 1999
(Dollar amounts in thousands)
<S> <C> <C>
Pro Forma After-Tax Cash Flow $9,563 $20,215
Increase of $10,652 or 111.4%
------------------------------------------------------------
</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 during the periods presented. The amount
of the deferred pro forma income tax expense was $3.0 million and $3.2 million
for the six months ended June 30, 1999 and 1998, respectively.
THREE MONTHS ENDED JUNE 30, 1999 V. JUNE 30, 1998
<TABLE>
<CAPTION>
Three Months Ended
June 30, 1998 June 30, 1999
(Dollar amounts in thousands)
<S> <C> <C>
Net Revenues $38,709 $55,946
Increase of $17,237 or 44.5%
------------------------------------------------------------
</TABLE>
Of the increase in net revenues, $13.7million is attributable to
stations acquired or that were in the process of being acquired since January 1,
1998, 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, net revenues
increased 14.8% to $55.4 million from $48.3 million.
<TABLE>
<CAPTION>
Three Months Ended
June 30, 1998 June 30, 1999
(Dollar amounts in thousands)
<S> <C> <C>
Station Operating Expenses $24,389 $35,387
Increase of $10,998 or 45.1%
------------------------------------------------------------
Percentage of Net Revenues 63.0% 63.3%
</TABLE>
Of the increase in station operating expenses, $9.9 million is
attributable to stations acquired or that were in the process of being acquired
since January 1, 1998, offset by $1.0 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 4.4% to $34.9 million from $33.4
million.
<TABLE>
<CAPTION>
Three Months Ended
June 30, 1998 June 30, 1999
(Dollar amounts in thousands)
<S> <C> <C>
Corporate, General and Administrative Expenses $1,093 $1,653
Increase of $560 or 51.2%
------------------------------------------------------------
Percentage of Net Revenues 2.8% 3.0%
</TABLE>
15
<PAGE> 16
The increase in corporate expenses was mainly attributable to higher
administrative expenses associated with supporting the Company's growth and
increasing staff and expenses to operate as a public company. Also included in
the current period is $0.2 million in non-cash stock-based compensation expense.
<TABLE>
<CAPTION>
Three Months Ended
June 30, 1998 June 30, 1999
(Dollar amounts in thousands)
<S> <C> <C>
Depreciation and Amortization $3,113 $5,158
Increase of $2,045 or 65.7%
------------------------------------------------------------
Percentage of Net Revenues 8.0% 9.2%
</TABLE>
The increase in depreciation and amortization was mainly attributable to
the Company's acquisitions net of divestitures since January 1, 1998.
<TABLE>
<CAPTION>
Three Months Ended
June 30, 1998 June 30, 1999
(Dollar amounts in thousands)
<S> <C> <C>
Interest Expense $3,240 $2,660
Decrease of ($580)or (17.9%)
------------------------------------------------------------
Percentage of Net Revenues 8.4% 4.8%
</TABLE>
The decrease in interest expense was mainly attributable to indebtedness
incurred in connection with the Company's acquisitions net of the proceeds from
the IPO which was used to reduce debt.
<TABLE>
<CAPTION>
Three Months Ended
June 30, 1998 June 30, 1999
(Dollar amounts in thousands)
<S> <C> <C>
Income From Operations Before Income Taxes $18,046 $11,610
Decrease of ($6,436)
------------------------------------------------------------
Percentage of Net Revenues 46.6% 20.8%
</TABLE>
The net change from the prior year is affected by: (i) a decrease in income
of $8.0 million due to a decrease in income from gains on sale of assets; (ii) a
decrease in income of $4.3 million due to a decrease in the income adjustment to
reflect indexing of the Convertible Subordinated Note; (iii) an increase in
income of $3.4 million as an improvement in operating income due to increases in
revenues from existing stations and improved revenues and expense management
from newly acquired stations; and (iv) an increase in income of $1.6 million due
to a decrease in net time brokerage agreement expenses.
<TABLE>
<CAPTION>
Other Data Three Months Ended
June 30, 1998 June 30, 1999
(Dollar amounts in thousands)
<S> <C> <C>
Pro Forma Net Income $12,805 $0
Decrease of ($12,805)
------------------------------------------------------------
</TABLE>
The net change from the prior year is affected by: (i) a decrease in income
of $4.9 million, net of taxes, as a decrease in revenues from gains on the sale
of assets; (ii) a decrease in income of $4.3 million as an income adjustment to
reflect indexing of the Convertible Subordinated Note; (iii) an increase in
income of $2.3 million, net of tax, as an improvement in operating income due to
increases in revenues from existing stations and improved revenues and expense
management from
16
<PAGE> 17
newly acquired stations; and (iv) an increase in income of $1.0
million, net of tax, as a reduction in net time brokerage agreement expenses.
<TABLE>
<CAPTION>
Three Months Ended
June 30, 1998 June 30, 1999
(Dollar amounts in thousands)
<S> <C> <C>
Broadcast Cash Flow $14,320 $20,559
Increase of $6,239 or 43.6%
------------------------------------------------------------
</TABLE>
Of the increase in broadcast cash flow, $3.8 million is attributable
to stations acquired or that were in the process of being acquired since January
1, 1998, offset by $0.2 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 38.1 % to $20.5 million from $14.9 million.
<TABLE>
<CAPTION>
Three Months Ended
June 30, 1998 June 30, 1999
(Dollar amounts in thousands)
<S> <C> <C>
Broadcast Cash Flow Margin 37.0% 36.7%
------------------------------------------------------------
</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 37.0%
from 30.7%.
<TABLE>
<CAPTION>
Three Months Ended
June 30, 1998 June 30, 1999
(Dollar amounts in thousands)
<S> <C> <C>
Pro Forma After-Tax Cash Flow $6,822 $13,815
Increase of $6,993 or 102.5%
------------------------------------------------------------
</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 during the periods presented. The amount of the
deferred pro forma income tax expense was $1.8 million and $3.6 million for the
three months ended June 30, 1999 and 1998, respectively
17
<PAGE> 18
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 $8.2 million and $5.8
million for the six months ended June 30, 1999 and 1998, respectively. Changes
in the Company's net cash flows provided by 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 provided by investing activities were $10.0 million for the
six months ended June 30, 1999 and net cash flows used by investing activities
were $125.6 million for the six months ended June 30, 1998. Net cash flows used
by financing activities were $16.0 million for the six months ended June 30,
1999 and net cash flows provided by financing activities were $122.4 million for
the six months ended June 30, 1998. The cash flows for the six months ended June
30, 1999 reflect (i) acquisitions consummated in the period and the related
borrowings, (ii) proceeds from the IPO and the related payment of long-term debt
and (iii) the payment of the S Distribution. The cash flows for the six months
ended June 30,1998 reflect refinancing of the Company's Credit Facility and
acquisitions consummated in the period together with the related borrowings.
On February 3, 1999, upon the consummation of the IPO, the Company received
net proceeds of $236.2 million, after deduction of discounts, commissions, fees
and expenses. The proceeds were used to reduce outstanding indebtedness under
the Credit Facility. Additionally, subsequent to the IPO and as of June 30,
1999, the Company has paid: (i) the S Distribution of $88.1 million to its
former S Corporation shareholders; (ii) $3.1 million to retire a note payable in
connection with the purchase of the 1% minority interest in ECI License Company,
L.P.; and (iii) $2.7 million to acquire WREN-AM, serving the Kansas
City/Missouri radio market.
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 $6.5 million and $7.5 million. The majority
of non-maintenance capital expenditures relates to studio consolidation which
should result in future operating efficiencies. 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 and July 20, 1999, with a syndicate of banks, for a
$350.0 million revolving credit facility, subject to compliance with certain
financial ratios and covenants. 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 re-borrow under the Credit Facility, the aggregate maximum
amount that the Company may 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 June 30, 1999, the Company had approximately $166.0 million of
borrowings outstanding under the Credit Facility in addition to an outstanding
letter of credit in the amount of $4.9 million.
The Company expects to finance the Sinclair Transaction through a
combination of its existing Credit Facility, additional debt and/or equity.
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. In June, 1999, the FASB issued SFAS No. 137 which
extends the effective date of SFAS No. 133 to fiscal quarters of fiscal years
beginning after June 15, 2000 and should not be applied retroactively to
financial statements of prior periods. Management has not completed a full
evaluation of the applicability of SFAS No. 133.
18
<PAGE> 19
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. Information and
non-information technology systems that do not properly recognize and process
date sensitive information when the year changes to "2000" or "00" could
generate erroneous data or cause such systems to fail ("Year 2000 Issues"). All
of the Company's 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.
Due to (i) the preventive measures being taken in response to the
Company's assessment, (ii) the relatively small degree to which the radio
broadcasting industry, as compared to other industries, depends on older large
computer systems or interfaces with third party computer systems, (iii) the fact
that most of the Company's automated administrative services can, if needed, be
performed manually and (iv) the fact that most of the Company's radio stations
are equipped with emergency power systems, 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 believes that it is difficult to fully assess the risks of the
Year 2000 Issues due to the numerous uncertainties surrounding the issue.
Management believes that the Company's primary risks are external to the Company
and relate to the Year 2000 readiness of its third party suppliers. The
inability of such third party suppliers to adequately address the Year 2000
Issues on a timely basis could result in a material financial risk, including
loss of revenue, substantial unanticipated costs and service interruptions. The
Company plans to continue its efforts to survey all work with such third party
suppliers to address all significant Year 2000 Issues in a timely manner.
The Company expects to have completed its Year 2000 remediation efforts by
the end of the third quarter of 1999. Additionally, the Company will develop a
contingency plan for addressing Year 2000 Issues caused by systems external to
the Company by the end of the third quarter of 1999. Since most of the Year 2000
compliance achieved by the Company to date has been done through the normal
information systems upgrading process, separate costs have not been allocated to
the Year 2000 Issues.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
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. Certain of the swap agreements grant
the bank 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 or an increase in the unrecognized gain by the Company,
while any decrease in the three-month LIBOR rate results in an increase in the
amount of unrecognized loss or a decrease in an unrecognized gain 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 June 30, 1999 was
higher than the rate at March 31, 1999. This increase resulted in unrecognized
gains by the Company from the Rate Hedging Transactions.
See also additional disclosures regarding "Liquidity and Capital Resources"
made under Item 2, above.
19
<PAGE> 20
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None to report.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None to report.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None to report.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None to report.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------ -----------
<S> <C>
3.01 Amended and Restated Articles of Incorporation of the Registrant**
3.02 Amended and Restated Bylaws of the Registrant**
4.01 Lock-up Release Agreement, dated as of May 6, 1999, between the Registrant, Chase
Equity Associates L.P. and Credit Suisse First Boston Corporation.*
10.01 Registration rights Agreement, dated as of May 21, 1996, between the Registrant and
Chase Equity Associates, L.P.**
10.02 Employment Agreement, dated June 25, 1993, between the Registrant and Joseph M. Field,
as amended**
10.03 Employment Agreement, dated December 17, 1998, between the Registrant and David J.
Field, as amended**
10.04 Employment Agreement, dated December 17, 1998, between the Registrant and John C.
Donlevie, as amended**
10.05 Employment Agreement, dated November 13, 1998, between the Registrant and Stephen F.
Fisher**
10.06 Entercom 1998 Equity Compensation Plan**
10.09 Loan Agreement, dated as of February 13, 1998, among the Registrant, Key Corporate Capital, Inc., as
administrative agent, bank of America, national Trust and Savings Association, as syndication agent, and
certain banks listed therein, as amended by the First Amendment to Loan Agreement dated October 8, 1998**
27.01 Financial Data Schedule*
</TABLE>
* 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 three
months ended June 30,1999.
20
<PAGE> 21
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: August 11, 1999 /s/ JOSEPH M. FIELD
-------------------------------------
Name: Joseph M. Field
Title: Chief Executive Officer
Date: August 11, 1999 /s/ DAVID J. FIELD
-------------------------------------
Name: David J. Field
Title: President and
Chief Operating Officer
Date: August 11, 1999 /s/ STEPHEN F. FISHER
-------------------------------------
Name: Stephen F. Fisher
Title: Senior Vice President and
Chief Financial Officer
21
<PAGE> 1
EXHIBIT 4.01
LOCK-UP RELEASE AGREEMENT
Reference is hereby made to the January 7, 1999 agreement (the "Lock-Up
Agreement") between Chase Equity Associates, L.P. ("Chase"), Entercom
Communications Corp. (the "Company") and Credit Suisse First Boston Corporation
("Credit Suisse"), as Representatives of the Several Underwriters, BT Alex.
Brown Incorporated, Goldman Sachs & Co. Morgan Stanley & Co. Incorporated (the
"Underwriters"), whereby Chase agreed that for a period of 180 days after the
initial public offering of the Class A Common Stock of the Company, Chase will
not offer, sell, contract to sell, pledge or otherwise dispose of directly or
indirectly, and shares of Class A Common Stock of the Company or securities
convertible into or exchangeable or exercisable for any shares of Class A Common
Stock.
Chase has expressed a desire to sell 300,000 shares of Class A Common Stock
of the Company (upon conversion from Class C Common Stock of the Company). It is
hereby agreed as follows:
1) The Underwriters will release Chase from the restrictions set forth in
the Lock-up Agreement, solely with respect to the sale of 300,000
shares of Class A Common Stock of the Company (upon conversion from
Class C Common Stock of the Company) (the "Initial Block Sale") in
accordance with the terms of this Agreement. Such sale shall be in a
block sale to Credit Suisse and Credit Suisse shall cause to be filed
and/or executed, all documents necessary to effect the Initial Block
Sale;
2) Chase hereby agrees that following the Initial Block Sale, all future
sales or other dispositions by Chase of Class A Common Stock of the
Company, with the exception of sales pursuant to the exercise of
Chase's registration rights as contained in the Registration Rights
Agreement dated as of May 21, 1996 by and between the Company and
Chase, shall be made exclusively through a nationally recognized
underwriter as designated from time to time by the Company;
3) For purposes of the Initial Block Sale by Chase pursuant to Paragraph
1 above, the Company hereby agrees to waive any purchase rights it may
have with respect to such sale, under the terms of either the
Convertible Subordinated Note Purchase Agreement dated as of May 21,
1996 by and between the Company and Chase or the Registration Rights
Agreement dated as of May 21, 1996 by and between the Company and
Chase.
[SIGNATURE PAGE TO FOLLOW]
<PAGE> 2
IN WITNESS WHEREOF, the parties have caused this Lock-Up Release Agreement
to be duly executed by their respective offices as of the 6th day of May, 1999.
CHASE EQUITY ASSOCIATES L.P.
By: CHASE CAPITAL PARTNERS,
ITS GENERAL PARTNER
By: /s/ Michael R. Hannon
-------------------------
Name: Michael R. Hannon
Title: General Partner
ENTERCOM COMMUNICATIONS CORP.
By: /s/ John C. Donlevie
-------------------------------
Name: John C. Donlevie
Title: Executive Vice President
CREDIT SUISSE FIRST BOSTON CORPORATION
By: /s/ Ernesto Cruz
--------------------------------
Name: Ernesto Cruz
Title: Managing Director
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 8,713
<SECURITIES> 0
<RECEIVABLES> 45,160
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 62,366
<PP&E> 64,242
<DEPRECIATION> 13,568
<TOTAL-ASSETS> 671,627
<CURRENT-LIABILITIES> 24,959
<BONDS> 166,266
0
0
<COMMON> 371
<OTHER-SE> (71,504)
<TOTAL-LIABILITY-AND-EQUITY> 671,627
<SALES> 0
<TOTAL-REVENUES> 95,545
<CGS> 74,967
<TOTAL-COSTS> 74,967
<OTHER-EXPENSES> 3,454
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,246
<INCOME-PRETAX> 11,944
<INCOME-TAX> 85,219
<INCOME-CONTINUING> (73,275)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (73,275)
<EPS-BASIC> (2.10)
<EPS-DILUTED> (2.10)
</TABLE>
