<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 September 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 (I.R.S. Employer Identification No.)
of 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 - 32,948,828 Shares Outstanding as of
November 10, 1999
Class B Common Stock, $.01 par value - 10,531,805 Shares Outstanding as of
November 10, 1999
Class C Common Stock, $.01 par value - 1,695,669 Shares Outstanding as of
November 10, 1999
<PAGE> 2
ENTERCOM COMMUNICATIONS CORP.
INDEX
<TABLE>
<CAPTION>
PAGE
PART I - FINANCIAL INFORMATION
<S> <C>
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...................................................................................19
ITEM 2. Changes in Securities and Use of Proceeds...........................................................19
ITEM 3. Defaults Upon Senior Securities.....................................................................21
ITEM 4. Submission of Matters to a Vote of Security Holders.................................................21
ITEM 5. Other Information...................................................................................21
ITEM 6. Exhibits............................................................................................21
SIGNATURES ....................................................................................................22
</TABLE>
2
<PAGE> 3
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ENTERCOM COMMUNICATIONS CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND SEPTEMBER 30, 1999
(dollars in thousands)
(unaudited)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
------------ -------------
1998 1999
---- ----
CURRENT ASSETS
<S> <C> <C>
Cash and cash equivalents $ 6,469 $ 9,805
Accounts receivable, net of allowance for doubtful accounts 38,511 50,721
Prepaid expenses and deposits 6,259 5,516
Proceeds held in escrow from sale of Tampa stations 75,000
Deferred tax assets 1,918
Station acquisition deposits 327 457
-------- --------
Total current assets 126,566 68,417
-------- --------
PROPERTY AND EQUIPMENT - AT COST
Land and land easements and land improvements 6,927 6,739
Building 4,596 4,571
Equipment 35,804 43,628
Furniture and fixtures 7,662 9,308
Leasehold improvements 3,899 5,880
-------- --------
58,888 70,126
Accumulated depreciation (10,874) (15,094)
-------- --------
48,014 55,032
Capital improvements in progress 629 1,372
-------- --------
Net property and equipment 48,643 56,404
RADIO BROADCASTING LICENSES AND OTHER INTANGIBLES - NET 500,545 548,712
DEFERRED CHARGES AND OTHER ASSETS - NET 5,280 4,218
-------- --------
TOTAL $681,034 $677,751
======== ========
</TABLE>
See notes to condensed consolidated financial statements
3
<PAGE> 4
ENTERCOM COMMUNICATIONS CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND SEPTEMBER 30, 1999
(dollars in thousands)
(unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
------------ -------------
1998 1999
---- ----
CURRENT LIABILITIES
<S> <C> <C>
Accounts payable $ 18,224 $ 18,662
Accrued liabilities:
Salaries 4,322 5,307
Interest 1,492 379
Other 1,094 250
Income taxes payable 3,983
Long-term debt due within one year 10 10
-------- --------
Total current liabilities 25,142 28,591
-------- --------
SENIOR DEBT 330,271 159,263
-------- --------
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 84,716
MINORITY INTEREST IN EQUITY OF PARTNERSHIP 2,882
-------- --------
Total liabilities 455,567 272,570
-------- --------
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 468,467
Retained earnings (deficit) 225,252 (63,449)
Unearned compensation (208)
-------- --------
Total shareholders' equity 225,467 405,181
-------- --------
TOTAL $681,034 $677,751
======== ========
</TABLE>
See notes to condensed consolidated financial statements
4
<PAGE> 5
ENTERCOM COMMUNICATIONS CORP.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1999
(dollars in thousands, except share and per share data)
(unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
-----------------
SEPTEMBER 30,
-------------
1998 1999
---- ----
<S> <C> <C>
NET REVENUES $104,599 $154,749
OPERATING EXPENSES:
Station operating expenses 69,731 100,218
Depreciation and amortization 10,186 15,314
Corporate general and administrative expenses 3,678 5,640
Net expense (income) from time brokerage agreement fees 2,399 652
------- --------
Total operating expenses 85,994 121,824
------- --------
OPERATING INCOME 18,605 32,925
OTHER EXPENSE (INCOME):
Interest expense 11,667 9,022
Adjustment to reflect indexing of the Convertible Subordinated Note (6,062)
Interest income (283) (665)
Other non-operating expense 57
(Gains) on sale of assets (8,618) (419)
------- --------
Total other expense (income) (3,239) 7,938
------- --------
INCOME BEFORE INCOME TAXES AND EXTRAORDINARY ITEM 21,844 24,987
INCOME TAXES
Income taxes - C Corporation 10,239
Income taxes - S Corporation 372 125
Deferred income taxes for conversion from an S to a C Corporation 79,845
------- --------
Total income taxes 372 90,209
------- --------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM 21,472 (65,222)
EXTRAORDINARY ITEM (NET OF TAX BENEFIT) 2,376
------- --------
NET INCOME (LOSS) $19,096 ($65,222)
======= ========
NET LOSS PER SHARE
Basic:
Loss before extraordinary item ($ 1.83)
Extraordinary item, net of taxes
--------
NET LOSS PER SHARE ($ 1.83)
========
Diluted:
Loss before extraordinary item ($ 1.83)
Extraordinary item, net of taxes
--------
NET LOSS PER SHARE ($ 1.83)
========
PRO FORMA DATA
PRO FORMA NET INCOME DATA:
Income before income taxes and extraordinary item $21,844 $ 24,987
Pro forma income taxes 5,998 9,575
------- --------
Pro forma income before extraordinary item 15,846 15,412
Extraordinary item, net of pro forma taxes 1,488
------- --------
PRO FORMA NET INCOME $14,358 $ 15,412
======= ========
PRO FORMA EARNINGS PER SHARE:
Basic:
Pro forma earnings before extraordinary item $ 0.73 $ 0.43
Extraordinary item, net of pro forma taxes 0.07
------- --------
Pro forma earnings per share $ 0.66 $ 0.43
======= ========
Diluted:
Pro forma earnings before extraordinary item $ 0.41 $ 0.43
Extraordinary item, net of pro forma taxes 0.06
-------- --------
Pro forma earnings per share $ 0.35 $ 0.43
======= ========
WEIGHTED AVERAGE SHARES:
Basic 21,658,000 35,623,198
Diluted 25,981,000 35,957,030
</TABLE>
See notes to condensed consolidated financial statements
5
<PAGE> 6
ENTERCOM COMMUNICATIONS CORP.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1999
(dollars in thousands, except share and per share data)
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------
SEPTEMBER 30
------------
1998 1999
---- ----
<S> <C> <C>
NET REVENUES $ 40,912 $59,204
OPERATING EXPENSES:
Station operating expenses 26,982 35,922
Depreciation and amortization 4,107 5,295
Corporate general and administrative expenses 1,485 2,186
Net expense (income) from time brokerage agreement fees 126
-------- -------
Total operating expenses 32,700 43,403
-------- -------
OPERATING INCOME 8,212 15,801
OTHER EXPENSE (INCOME):
Interest expense 5,488 2,776
Adjustment to reflect indexing of the Convertible Subordinated Note (11,755)
Interest income (103) (66)
Losses on sale of assets 130 48
-------- -------
Total other expense (income) (6,240) 2,758
-------- -------
INCOME BEFORE INCOME TAXES 14,452 13,043
INCOME TAXES
Income taxes - C Corporation 4,990
Income taxes - S Corporation 280
-------- -------
NET INCOME $ 14,172 $ 8,053
======== =======
BASIC NET INCOME PER SHARE $ 0.22
=======
DILUTED NET INCOME PER SHARE $ 0.21
=======
PRO FORMA DATA:
PRO FORMA NET INCOME DATA:
Income before income taxes $ 14,452
Pro forma income taxes 1,025
--------
PRO FORMA NET INCOME $ 13,427
========
PRO FORMA EARNINGS PER SHARE:
Basic Pro forma earnings per share $ 0.62
========
Diluted Pro forma earnings per share $ 0.08
========
WEIGHTED AVERAGE SHARES:
Basic 21,699,000 37,171,741
Diluted 26,022,000 37,505,573
</TABLE>
See notes to condensed consolidated financial statements
6
<PAGE> 7
ENTERCOM COMMUNICATIONS CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1999
(dollars in thousands)
(unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
-----------------
SEPTEMBER 30
------------
1998 1999
---- ----
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ 19,096 $ (65,222)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation 3,065 4,253
Amortization of radio broadcasting licenses, other intangibles and deferred charges 7,121 11,061
Extraordinary items 2,401
Deferred taxes 82,798
(Gain) on dispositions and exchanges of assets (8,618) (419)
Non-cash stock-based compensation expense 335
Interest on Convertible Subordinated Note 1,448
Adjustment to reflect indexing of the Convertible Subordinated Note (6,062)
Changes in assets and liabilities which provided (used) cash:
Accounts receivable (7,863) (12,210)
Prepaid expenses (1,570) 741
Accounts payable, accrued liabilites and income taxes payable 6,679 3,447
Minority interest (19) (2,882)
--------- ---------
Net cash provided by operating activities 15,678 21,902
--------- ---------
INVESTING ACTIVITIES:
Additions to property and equipment (6,171) (10,093)
Proceeds from sale of assets 9,656 1,162
Proceeds from exchanges of radio stations 3,132
Payment for exchanges of radio stations (306)
Purchases of radio station assets (136,804) (60,968)
Deferred charges and other assets (3,279) (703)
Station acquisition deposits (2,409) 74,872
--------- ---------
Net cash (used) provided by investing activities (136,181) 4,270
--------- ---------
FINANCING ACTIVITIES:
Net proceeds from Initial Public Offering 236,157
Proceeds from issuance of long-term debt 264,286 82,500
Payments of long-term debt (137,502) (253,506)
Proceeds from issuance of common stock related to an incentive plan 126
Dividends paid to S Corporation shareholders (3,112) (88,113)
--------- ---------
Net cash provided (used) by financing activities 123,672 (22,836)
--------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS 3,169 3,336
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 3,497 6,469
--------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 6,666 $ 9,805
========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION --
Cash paid during the period for:
Interest $ 8,561 $ 9,971
========= =========
Income taxes $ 262 $ 4,269
========= =========
</TABLE>
SUPPLEMENTAL DISCLOSURES ON NON-CASH INVESTING AND FINANCING ACTIVITIES -
In connection with the radio station exchange transactions completed by the
Company during the nine months ended September 30, 1998, the non-cash portion
of assets recorded was $22,500.
In connection with the Company's Initial Public Offering completed during the
nine months ended September 30, 1999, the Convertible Subordinated Note, net
of deferred finance charge, was converted into equity in the amount
of $96,400.
See notes to condensed consolidated financial statements
7
<PAGE> 8
ENTERCOM COMMUNICATIONS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 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, consisting of only normal
recurring accruals, considered necessary for a fair presentation have been
included.
This Form 10-Q should be read in conjunction with the transition
report on Form 10-Q for the transition period ended December 31, 1998, filed
with the SEC on March 12, 1999 and the financial statements and notes thereto
included in the Company's audited financial statements as of September 30, 1998,
as presented in (1) the Company's registration statement on Form S-1, in
connection with the Class A Common Stock offering filed with the Securities and
Exchange Commission (the "SEC") and dated January 28, 1999, (2) the Company's
registration statement on Form S-1, in connection with the Class A Common Stock
offering filed with the SEC and dated September 30, 1999 and (3) the Company's
registration statement on Form S-1, relating to Convertible Preferred
Securities, Term Income Deferrable Equity Securities ("TIDES"), filed with the
SEC and dated September 30, 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 nine-month and three-month periods ended
September 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 income
adjustment to reflect indexing of the Convertible Subordinated Note (as such
adjustment is not tax deductible) of $6.1million and $11.8 million for the
nine-month and the three-month periods ended September 30, 1998, respectively.
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 nine-month and
three-month periods ended September 30,1998, the effect of the conversion of the
Convertible Subordinated Note for the calculation of the pro forma income per
share was dilutive.
2. ACQUISITIONS, DIVESTITURES 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 Nine Months Ended September 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 WQSX-FM (formerly 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 from September 1998 through February 1999
and incurred TBA fees in the amount of $0.7 million.
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
KKGM-AM (formerly 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 was
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.
On September 30, 1999, the Company and certain shareholders of the
Company entered into an underwriting agreement to sell 8,750,000 shares of Class
A Common Stock of which 8,000,000 shares were to be sold by the Company and
750,000 shares were to be sold by selling shareholders. The Company completed
this offering on October 6, 1999 and sold 8,000,000 shares of Class A Common
Stock at a price per share of $36.00. The net proceeds to the Company from this
offering, after deducting underwriting discounts and other offering expenses,
was approximately $276.1 million.
On September 30, 1999, the Company entered into an agreement to sell
2,500,000 Convertible Preferred Securities, Term Income Deferrable Equity
Securities ("TIDES"), including underwriters' over-allotments at an offering
price of $50.00 per security. Subject to certain deferral provisions, the trust
will pay quarterly calendar distributions, with the first distribution payable
on December 31, 1999. The TIDES represent undivided preferred beneficial
ownership interest in the assets of the trust. The trust will use the proceeds
9
<PAGE> 10
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
to purchase from the Company an equal amount of 6.25% Convertible Subordinated
Debentures due 2014. The Company will own all of the common securities issued by
the trust. The trust exists for the sole purpose of issuing the common
securities and the TIDES. The holders of the TIDES will have a preference with
respect to each distribution and amounts payable upon liquidation, redemption or
otherwise over the holders of the common securities of the trust. Each TIDES is
initially convertible into shares of the Company's Class A Common Stock at the
rate of 1.1364 shares of Class A Common Stock for each TIDES. The Company
completed this offering on October 6, 1999 and sold 2,500,000 TIDES at $50.00
per TIDES. The net proceeds to the Company from this offering, after deducting
underwriting discounts and other offering expenses, was approximately $120.3
million.
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 September 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)
-----------
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
1998 1999
---- ----
<S> <C> <C>
Net Revenues $130,683 $154,749
Income (loss) before extraordinary items and gains on sale of assets 1,542 (65,851)
Income (loss) before extraordinary items (net of tax benefits) 10,333 (65,851)
Net income (loss) 7,957 (65,851)
</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 September 30, 1999, the Company had $159.0
million of borrowings outstanding under the Credit Facility, in addition to
outstanding Letters of Credit in the amounts of $50.0 million (required in
connection with the Sinclair Transaction as discussed under Note 4 below) and
$4.9 million. The Credit Facility, exclusive of the outstanding Letters of
Credit, was paid in full on October 6, 1999 with the proceeds from the equity
and TIDES offerings described under Note 2 above.
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 was nonresponsive. On July 28, 1999, the
Company commenced a legal action seeking to enforce this agreement, and
subsequently the seller filed a cross-complaint against the Company asking for
damages, an injunction and costs and filed a separate action against our
President asking for treble damages, injunction, attorney's fees and costs. The
Company's by-laws provide for the Company to indemnify the Company's President
for this claim. The Company intends to pursue legal action against the seller
and seek dismissal of the claims filed by the seller. Accordingly, the Company
cannot determine if and when the transaction might occur.
On August 18, 1999, the Company entered into an agreement 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 $824.5 million in cash (the
"Sinclair Transaction"). The agreement with Sinclair consists of two separate
asset purchase agreements for (1) four Kansas City stations at a purchase price
of $122.0 million and (2) the remaining 42 stations in eight other markets and
other assets for a purchase price of $702.5 million. As part of the Sinclair
Transaction, the Company agreed 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 is responsible for certain capital expenditures not
to exceed $2.0 million. The Sinclair Transaction covers 46 stations (15 AM and
31 FM) in nine markets including Kansas City, Milwaukee, New Orleans, Memphis,
Buffalo, Norfolk, Greensboro/Winston-Salem/High Point, Greenville/Spartanburg
and Wilkes-Barre/ Scranton. 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
10
<PAGE> 11
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
market to eight (the Company currently owns seven). Completion of the Sinclair
Transaction is subject to several factors including FCC approval and Department
of Justice approval. If Sinclair rightfully terminates either of the agreements
due to non-performance by the Company, Sinclair may be entitled to receive
liquidated damages from the Company in the maximum amount of approximately $50.0
million. The Company expects to close on this transaction in the last quarter of
1999.
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 nine months ended September 30, 1999, the Company issued
options to purchase 858,623 shares of its Class A Common Stock at prices ranging
from $18.00 to $41.75 per share. As of September 30, 1999, the Company had
836,619 options outstanding, net of forfeitures of 22,004 options. 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
$293,000 and $123,000 for the nine-month and three-month periods ended September
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 $42,000 and $16,000 for the
nine-month and three-month periods ended September 30, 1999, respectively.
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 October 6, 1999, the Company completed an equity and TIDES
offering, as described previously in Note 2.
On November 4, 1999, the Company purchased 480,000 shares of common
stock of Tickets.com Inc. at a purchase price of $12.50 per share, for a total
purchase price of $6,000,000. The shares were purchased in an initial public
offering through a directed share program. In connection with the purchase, the
Company executed lock-up agreements with Tickets.com Inc. and its lead
underwriters, pursuant to which the Company has agreed not to sell any of its
shares in Tickets.com Inc. for a period of 240 days from November 3, 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: (1) the highly competitive nature of, and new technologies in,
the radio broadcasting industry; (2) the Company's dependence upon its Seattle
radio stations; (3) the risks associated with the Company's acquisition
strategy; (4) the control of the Company by Joseph M. Field and David J. Field;
(5) the Company's vulnerability to changes in federal legislation or FCC
regulatory policy; and (6) 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 on a pro forma basis to
include those stations being purchased from Sinclair, 88 stations, 56 FM and 32
AM, in 16 markets, including 12 of the country's top 50 radio advertising
markets. The Company's station groups rank among the three largest clusters,
based on Duncan's 1998 gross revenues, in 15 of the Company's 16 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: (1) 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"); (2) the number of radio stations in the market
competing for the same demographic groups; and (3) 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 to operate
radio stations that it has agreed to acquire prior to the time that the
acquisition is completed. Revenues realized under TBAs 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 and a station owned and operated by the Company.
In the following analysis, management discusses broadcast cash flow and
pro forma after-tax cash flow. Neither broadcast cash flow nor pro forma
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, corporate general and
administrative expenses and net expense (income) from time brokerage agreement
fees. Pro forma after-tax cash flow consists of pro forma income before
extraordinary item minus gains (plus losses) on sale of assets (net of tax),
plus the following: depreciation and amortization, non-cash compensation expense
(which is included in corporate general and administrative expenses), the amount
of the expense adjustment to reflect indexing of the Convertible Subordinated
Note (or minus the income adjustment to reflect indexing of the Convertible
Subordinated Note) and 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 pro forma after-tax cash flow are
frequently used as bases for evaluating radio broadcasting businesses, although
the Company's measures of broadcast cash flow and pro forma after-tax cash flow
may not be comparable to similarly titled measures of other companies.
12
<PAGE> 13
The Company calculates "same station" growth by comparing the
performance of stations operated by the Company (including operation under a
TBA) 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, (1) pro forma net income represents
historical income before income taxes and extraordinary item, 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 item,
excluding the effect of an income adjustment to reflect indexing of the
Convertible Subordinated Note (as such adjustment is not taxable) of $6.1
million and $11.8 million for the nine-month and three-month periods ended
September 30, 1998, respectively and (2) 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
nine months ended September 30, 1999 and September 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.
NINE MONTHS ENDED SEPTEMBER 30, 1999 V. SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
Nine Months Ended
-----------------
September 30, 1998 September 30, 1999
(Dollar amounts in thousands)
<S> <C> <C> <C>
NET REVENUES $104,599 $154,749
Increase of $ 50,150 or 47.9%
------------------------------------------------------------
</TABLE>
Net revenues increased 47.9% to $154.7 million for the nine months
ended September 30, 1999 from $104.6 million for the nine months ended September
30, 1998. Of the increase, $36.7 million is attributable to stations acquired or
that were in the process of being acquired since January 1, 1998, offset by $3.0
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 18.0% to
$153.2 million from $130.0 million. Same station revenue growth was led by
increases in Boston, Seattle and Kansas City due to improved selling efforts. A
strategic realignment of our station formats in Sacramento resulted in
significant gains in ratings and revenues.
<TABLE>
<CAPTION>
Nine Months Ended
-----------------
September 30, 1998 September 30, 1999
(Dollar amounts in thousands)
<S> <C> <C> <C>
STATION OPERATING EXPENSES $69,731 $100,218
Increase of $30,487 or 43.7%
------------------------------------------------------------
Percentage of Net Revenues 66.7% 64.8%
</TABLE>
Station operating expenses increased 43.7% to $100.2 million for the
nine months ended September 30, 1999 from $69.7 million for the nine months
ended September 30, 1998. Of the increase in station operating expenses, $26.6
million is attributable to stations acquired or that were in the process of
being acquired since January 1, 1998, 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, station operating expenses increased 6.3% to $98.8
million from $93.0 million.
<TABLE>
<CAPTION>
Nine Months Ended
-----------------
September 30, 1998 September 30, 1999
(Dollar amounts in thousands)
<S> <C> <C> <C>
DEPRECIATION AND AMORTIZATION $10,186 $15,314
Increase of $ 5,128 or 50.3%
------------------------------------------------------------
Percentage of Net Revenues 9.7% 9.9%
</TABLE>
Depreciation and amortization increased 50.3% to $15.3 million for the
nine months ended September 30, 1999 from $10.2 million for the nine months
ended September 30, 1998. The increase in depreciation and amortization was
mainly attributable to the Company's acquisitions net of divestitures since
January 1, 1998.
<TABLE>
<CAPTION>
Nine Months Ended
-----------------
September 30, 1998 September 30, 1999
(Dollar amounts in thousands)
<S> <C> <C> <C>
CORPORATE, GENERAL AND ADMINISTRATIVE EXPENSES $3,678 $5,640
Increase of $1,962 or 53.3%
------------------------------------------------------------
Percentage of Net Revenues 3.5% 3.6%
</TABLE>
Corporate general and administrative expenses increased 53.3% to $5.6
million for the nine months ended September 30, 1999 from $3.7 million for the
nine months ended September 30, 1998. The increase in corporate expenses was
mainly
13
<PAGE> 14
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 $0.3 million in non-cash
stock-based compensation expense.
<TABLE>
<CAPTION>
Nine Months Ended
-----------------
September 30, 1998 September 30, 1999
(Dollar amounts in thousands)
<S> <C> <C> <C>
INTEREST EXPENSE $11,667 $9,022
Decrease of $(2,645) or (22.7%)
------------------------------------------------------------
Percentage of Net Revenues 11.2% 5.8%
</TABLE>
Interest expense decreased 22.7% to $9.0 million for the nine months
ended September 30, 1999 from $11.7 million for the nine months ended September
30, 1998. The decrease in interest expense was mainly attributable to a
reduction in outstanding indebtedness from the proceeds of the IPO, partially
offset by an increase in debt used to fund the acquisition of radio station
assets.
<TABLE>
<CAPTION>
Nine Months Ended
-----------------
September 30, 1998 September 30, 1999
(Dollar amounts in thousands)
<S> <C> <C> <C>
INCOME BEFORE INCOME TAXES & EXTRAORDINARY ITEM $21,844 $24,987
Increase of $ 3,143 or 14.4%
------------------------------------------------------------
Percentage of Net Revenues 20.9% 16.1%
</TABLE>
Income before income taxes and extraordinary item increased 14.4% to
$25.0 million for the nine months ended September 30, 1999 from $21.8 million
for the nine months ended September 30, 1998. The net change from the prior year
is affected by (1) an increase in income of $12.6 million due to increases in
revenues from existing stations and improved revenues and expense management
from newly acquired stations; (2) a decrease in income of $6.1 million resulting
from the conversion of the Convertible Subordinated Note which in the prior
period had provided a $6.1 million increase in income to reflect indexing; (3) a
decrease in income of $8.2 million due to a decrease in gains on sale of assets;
(4) a increase in income of $2.6 million due to a decrease in interest expense
for the reasons described under interest expense; and (5) an increase in income
of $1.7 million due to a decrease in net expense (income) from time brokerage
agreement fees.
<TABLE>
<CAPTION>
OTHER DATA Nine Months Ended
-----------------
September 30, 1998 September 30, 1999
(Dollar amounts in thousands)
<S> <C> <C> <C>
PRO FORMA NET INCOME $14,358 $15,412
Increase of $1,054 or 7.3%
------------------------------------------------------------
</TABLE>
As a result of the factors described above, pro forma net income
increased 7.3% to $15.4 million for the nine months ended September 30, 1999
from $14.4 million for the nine months ended September 30, 1998. The net change
from the prior year is affected by (1) an increase in income of $7.8 million due
to increases in revenues from existing stations and improved revenues and
expense management from newly acquired stations (2) a decrease in income of $6.1
million resulting from the conversion of the Convertible Subordinated Note which
in the prior period had provided a $6.1 million increase in income to reflect
indexing; (3) a decrease in income of $5.1million due to a decrease in gains on
sale of assets; (4) a increase in income of $1.6 million due to a decrease in
interest expense for the reasons described under interest expense; and.(5) an
increase in income of $1.1 million due to a decrease in net expense (income)
from time brokerage agreement fees.
<TABLE>
<CAPTION>
Nine Months Ended
-----------------
September 30, 1998 September 30, 1999
(Dollar amounts in thousands)
<S> <C> <C> <C>
BROADCAST CASH FLOW $34,868 $54,531
Increase of $19,663 or 56.4%
------------------------------------------------------------
</TABLE>
Broadcast cash flow increased 56.4% to $54.5 million for the nine
months ended September 30, 1999 from $34.9 million for the nine months ended
September 30, 1998. Of the increase, $10.0 million is attributable to stations
acquired or that were in the process of being acquired since January 1, 1998,
offset by $0.3 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 47.4% to $54.5 million from $36.9 million.
<TABLE>
<CAPTION>
Nine Months Ended
-----------------
September 30, 1998 September 30, 1999
(Dollar amounts in thousands)
<S> <C> <C>
BROADCAST CASH FLOW MARGIN 33.3% 35.2%
------------------------------------------------------------
</TABLE>
14
<PAGE> 15
The broadcast cash flow margin increased to 35.2% for the nine months
ended September 30, 1999 from 33.3% for the nine months ended September 30,
1998. The increase in broadcast cash flow margin is attributable to improved
revenues and expense management. On a same station basis, the Company's
broadcast cash flow margin increased to 35.5% from 28.4%.
<TABLE>
<CAPTION>
Nine Months Ended
-----------------
September 30, 1998 September 30, 1999
(Dollar amounts in thousands)
<S> <C> <C> <C>
PRO FORMA AFTER-TAX CASH FLOW $16,025 $35,072
Increase of $19,047 or 118.9%
------------------------------------------------------------
</TABLE>
Pro forma after-tax cash flow increased 118.9% to $35.1 million for
the nine months ended September 30, 1999 from $16.0 million for the nine months
ended September 30, 1998. The increase 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 $4.2 million and $3.7 million for the nine months ended
September 30, 1999 and 1998, respectively. The amount of the deferred pro forma
income tax expense, excluding the effect of any gains or losses on sale of
assets, was $4.5 million and $3.7 million for the nine months ended September
30, 1999 and 1998, respectively.
THREE MONTHS ENDED SEPTEMBER 30, 1999 V. SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
Three Months Ended
------------------
September 30, 1998 September 30, 1999
(Dollar amounts in thousands)
<S> <C> <C> <C>
NET REVENUES $40,912 $59,204
Increase of $18,292 or 44.7%
-------------------------------------------------------------
</TABLE>
Net revenues increased 44.7% to $59.2 million for the three months
ended September 30, 1999 from $40.9 million for the three months ended September
30, 1998.Of the increase in net revenues, $12.0 million is attributable to
stations acquired or that were in the process of being acquired since January 1,
1998, offset by $0.8 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 22.2% to $58.8 million from $48.1 million. Same station revenue growth
was led by increases in Boston, Seattle and Kansas City due to improved selling
efforts. A strategic realignment of our station formats resulted in significant
gains in revenues for this quarter.
<TABLE>
<CAPTION>
Three Months Ended
------------------
September 30, 1998 September 30, 1999
(Dollar amounts in thousands)
<S> <C> <C> <C>
STATION OPERATING EXPENSES $26,982 $35,922
Increase of $ 8,940 or 33.1%
-------------------------------------------------------------
Percentage of Net Revenues 66.0% 60.7%
</TABLE>
Station operating expenses increased 33.1% to $35.9 million for the
three months ended September 30, 1999 from $27.0 million for the three months
ended September 30, 1998. Of the increase in station operating expenses, $8.1
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 that
divested or that were in the process of being divested during the same period.
On a same station basis, station operating expenses increased 6.1% to $35.5
million from $33.5 million.
<TABLE>
<CAPTION>
Three Months Ended
------------------
September 30, 1998 September 30, 1999
(Dollar amounts in thousands)
<S> <C> <C> <C>
DEPRECIATION AND AMORTIZATION $4,107 $5,295
Increase of $1,188 or 28.9%
-------------------------------------------------------------
Percentage of Net Revenues 10.0% 8.9%
</TABLE>
15
<PAGE> 16
Depreciation and amortization increased 28.9% to $5.3 million for the
three months ended September 30, 1999 from $4.1 million for the three months
ended September 30, 1998. 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
------------------
September 30, 1998 September 30, 1999
(Dollar amounts in thousands)
<S> <C> <C> <C>
CORPORATE, GENERAL AND ADMINISTRATIVE EXPENSES $1,485 $2,186
Increase of $ 701 or 47.2%
-------------------------------------------------------------
Percentage of Net Revenues 3.6% 3.7%
</TABLE>
Corporate general and administrative expenses increased 47.2% to $2.2
million for the three months ended September 30, 1999 from $1.5 million for the
three months ended September 30, 1998. 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 $0.1 million in non-cash
stock-based compensation expense.
<TABLE>
<CAPTION>
Three Months Ended
------------------
September 30, 1998 September 30, 1999
(Dollar amounts in thousands)
<S> <C> <C> <C>
INTEREST EXPENSE $5,488 $2,776
Decrease of ($2,712) or (49.4%)
-------------------------------------------------------------
Percentage of Net Revenues 13.4% 4.7%
</TABLE>
Interest expense decreased 49.4% to $2.8 million for the three months
ended September 30, 1999 from $5.5 million for the three months ended September
30, 1998. The decrease in interest expense was mainly attributable to a
reduction in outstanding indebtedness from the proceeds of the IPO, partially
offset by an increase in debt to fund the acquisition of radio station assets.
<TABLE>
<CAPTION>
Three Months Ended
------------------
September 30, 1998 September 30, 1999
(Dollar amounts in thousands)
<S> <C> <C> <C>
INCOME BEFORE INCOME TAXES $14,452 $13,043
Decrease of ($1,409) or (9.7%)
-------------------------------------------------------------
Percentage of Net Revenues 35.3% 22.0%
</TABLE>
Income before income taxes decreased 9.7% to $13.0 million for the
three months ended September 30, 1999 from $14.5 million for the three months
ended September 30, 1998. The net change from the prior year is affected by (1)
an increase in income of $7.6 million due to increases in revenues from existing
stations and improved revenues and expense management from newly acquired
stations (2) a decrease in income of $11.8 million resulting from the conversion
of the Convertible Subordinated Note which in the prior period had provided a
$11.8 million increase in income to reflect indexing; and (3) a increase in
income of $2.7 million due to a decrease in interest expense for the reasons
described under interest expense.
<TABLE>
<CAPTION>
Three Months Ended
------------------
September 30, 1998 September 30, 1999
(Dollar amounts in thousands)
<S> <C> <C> <C>
NET INCOME $14,172 $8,053
Decrease of ($6,119) or (43.2%)
-------------------------------------------------------------
Percentage of Net Revenues 34.6% 13.6%
</TABLE>
As a result of the factors described above, net income decreased to
$8.1 million for the three months ended September 30, 1999 from $14.2 million
for the three months ended September 30, 1998. The net change is caused by (1) a
decrease in income due to an increase of $4.7 million in tax expense as the
Company terminated its S election prior to the IPO and is now subject to federal
and state corporate income taxes rather than only some state taxes in the prior
period; (2) an increase in income of $7.6 million, excluding the effect of tax,
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; (3) a decrease in income of $11.8 million
resulting from the conversion of the Convertible Subordinated Note which in the
16
<PAGE> 17
prior period had provided a $11.8 million increase in income to reflect
indexing; and (4) an increase in income of $2.7 million ,excluding the effect
of tax, due to a decrease in interest expense for the reasons described under
interest expense.
OTHER DATA
<TABLE>
<CAPTION>
Three Months Ended
------------------
September 30, 1998 September 30, 1999
(Dollar amounts in thousands)
<S> <C> <C> <C>
BROADCAST CASH FLOW $13,930 $23,282
Increase of $9,352 or 67.1%
-------------------------------------------------------------
</TABLE>
Broadcast cash flow increased 67.1% to $23.3 million for the three
months ended September 30, 1999 from $13.9 million for the three months ended
September 30, 1998. Of the increase in broadcast cash flow, $3.9 million is
attributable to stations acquired or that were in the process of being acquired
since January 1, 1998, increased by a deficit of $0.2 million for stations that
divested or that were in the process of being divested during the same period.
On a same station basis, broadcast cash flow increased 59.0% to $23.2 million
from $14.6 million.
<TABLE>
<CAPTION>
Three Months Ended
-------------------
September 30, 1998 September 30, 1999
(Dollar amounts in thousands)
<S> <C> <C> <C>
BROADCAST CASH FLOW MARGIN Increase of 34.0% 39.3%
-------------------------------------------------------------
</TABLE>
The broadcast cash flow margin increased to 39.3% for the three months
ended September 30, 1999 from 34.0% for the three months ended September 30,
1998. The increase in broadcast cash flow margin is attributable to improved
revenues and expense management. On a same station basis, the Company's
broadcast cash flow margin increased to 39.6% from 30.4%.
<TABLE>
<CAPTION>
Three Months Ended
------------------
September 30, 1998 September 30, 1999
(Dollar amounts in thousands)
<S> <C> <C> <C>
PRO FORMA AFTER-TAX CASH FLOW $6,462 $14,857
Increase of $8,395 or 129.9%
-------------------------------------------------------------
</TABLE>
Pro forma after-tax cash flow increased 129.9% to $14.9 million for the
three months ended September 30, 1999 from $6.5 million for the three months
ended September 30, 1998. 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 $1.1 million and
$0.6 million for the three months ended September 30, 1999 and 1998,
respectively. The amount of the deferred pro forma income tax expense, excluding
the effect of any gains or losses on sale of assets, was $1.4 million and $0.7
million for the three months ended September 30, 1999 and 1998, respectively.
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: (1) the Credit Facility (described below), (2) the
swapping of Company-owned radio stations in transactions which qualify as
"like-kind" exchanges under Section 1031 of the Internal Revenue Code and (3)
internally-generated cash flow. For the Sinclair Transaction, the Company will
use the net proceeds from the TIDES offering and the Class A Common Stock
offering, together with cash on hand and proceeds from an amended or replacement
credit facility, to finance the purchase price for the SinclairTransaction.
Net cash flows provided by operating activities were $21.9 million and
$15.7 million for the nine months ended September 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 $4.3 million for
the nine months ended September 30, 1999 and net cash flows used by investing
activities were $136.2 million for the nine months ended September 30, 1998. Net
cash flows used by financing activities were $22.8 million for the nine months
ended September 30, 1999 and net cash flows provided by financing activities
17
<PAGE> 18
were $123.7 million for the nine months ended September 30, 1998. The cash flows
for the nine months ended September 30, 1999 reflect (1) acquisitions
consummated in the period and the related borrowings, (2) proceeds from the IPO
and the related payment of long-term debt and (3) the payment of the S
Distribution. The cash flows for the nine months ended September 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 and to pay other corporate obligations.
Shortly after reducing indebtedness under the credit facility, in February 1999
the Company borrowed approximately $58.0 million to purchase three Boston radio
stations from CBS.
On October 6, 1999, the Company completed an equity and TIDES offering
and received $276.1 million and $120.3 million, respectively, after deduction of
discounts, commissions, fees and expenses. As of September 30, 1999, the Company
had approximately $159.0 million of borrowings outstanding under the Credit
Facility in addition to outstanding Letters of Credit in the amounts of $4.9
million and $50.0 million (required in connection with the Sinclair
Transaction). Amounts outstanding under the Credit Facility, exclusive of the
outstanding Letters of Credit, were paid in full on October 6, 1999 with the
proceeds from the equity and TIDES offerings.
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 $10.5 million and $12.5 million. These
estimates do not include the incremental capital expenditures that may be
incurred in connection with the Sinclair Transaction. These capital expenditures
include studio consolidations in many of our markets, providing us with
operational improvements from which we will receive long-term benefits.
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,
exclusive of the Sinclair acquisition. In order to fund the $824.5 million in
cash required to consummate the Sinclair Transaction, the Company expects to pay
approximately $120.3 million from the net proceeds of the TIDES offering and
approximately $276.1 million from the net proceeds of the Class A Common Stock
offering. However, the Company will be required to raise an additional $428.1
million through borrowing to fund the balance of the Sinclair Transaction
purchase price. Our existing credit facility would provide approximately $186.1
million of this amount, but the Company will need to amend or replace the
facility to increase funds available under it by approximately $242.0 million.
The Company has pending commitment letters from a group of lenders to amend or
replace our present credit facility .
Upon the closing of the Sinclair Transaction, anticipated in the fourth
quarter of 1999, the Company will record a non-cash deferred income tax expense
of approximately $4.2 million. This amount reflects an increase in the Company's
effective tax rate from 38% to 40% and its effect on previously reported
temporary differences between the tax and financial reporting bases of the
Company's assets and liabilities. The increase in the Company's effective tax
rate is the result of adding facilities in additional states which on average
have higher income tax rates than in those states in which the Company currently
operates.
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:
(1) refinance existing indebtedness of the Company: (2) provide working capital;
and (3) 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.
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.
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
programming, up-to-date news and other information and perform a variety of
administrative services including accounting, financial reporting, advertiser
spot scheduling, payroll and invoicing. Most of these information
18
<PAGE> 19
technology systems, such as Marketron, Columbine, Ultipro, Solomon, NT 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.
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 is currently completing Year 2000 remediation efforts and
the Company has developed a contingency plan for dealing with Year 2000 issues
caused by systems external to the Company. 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. Based on the Company's experience to date, Management
estimates that the remaining costs to respond to the year 2000 issues will not
be material and these costs will be expensed as incurred.
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 September 30, 1999
was higher than the rate at June 30, 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.
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None to report.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On September 30, 1999, the Company and certain shareholders of the
Company entered into an agreement to sell an aggregate of 8,750,000 shares of
Class A Common Stock of which 8,000,000 shares were to be sold by the Company
and 750,000 shares were to be sold by selling shareholders. On October 6, 1999,
the Company sold 8,000,000 of its Class A Common Stock, $.01 par value and the
selling shareholders sold 750,000 shares of Class A Common Stock, $.01 par
value. Credit Suisse First Boston Corporation, Deutsche Bank Alex. Brown,
Goldman, Sachs & Co., and Morgan Stanley Dean Witter were the managing
underwriters of the offering. The number of shares registered, the aggregate
price of the shares registered, the shares sold and the aggregate offering price
19
<PAGE> 20
of the shares sold by the Company and the selling shareholders ("Selling
Shareholders") of the Company in the offering were as follows:
<TABLE>
<CAPTION>
Aggregate Aggregate
--------- ---------
Number of Shares Price of Shares Number of Shares Price of Shares
---------------- --------------- ---------------- ---------------
Registered Registered Sold Sold
---------- ---------- ---- ----
<S> <C> <C> <C> <C>
The Company 8,000,000 $288,000,000 8,000,000 $288,000,000
Selling Shareholders 750,000 $ 27,000,000 750,000 $ 27,000,000
</TABLE>
The Company incurred the following estimated expenses with respect to
the offering during the period from July 1999 through September 30, 1999. These
expenses include estimated expenses of $25,000 to the law firm of Stradley Ronon
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>
Underwriters' Total Company
Underwriting Discounts ------------- -------------
and Commissions Finders' Fees Expenses Other Expenses Expenses
--------------- ------------- -------- -------------- --------
<S> <C> <C> <C> <C>
$10,800,000 $0 $0 $1,100,000 $11,900,000
</TABLE>
The net proceeds from the offering to the Company after deducting the
foregoing discounts, commissions, fees and expenses were approximately
$276.1million. The Company has used some of the proceeds to repay existing
revolving indebtedness outstanding under the Credit Facility, with the balance
to be applied to the Sinclair Transaction
On September 30, 1999, the Company entered into an agreement to sell
2,500,000 TIDES, at an offering price of $50.00 per security. On October 6, 1999
the Company consummated this offering. Credit Suisse First Boston, Banc of
America Securities LLC and Deutsche Bank Alex. Brown, were the managing
underwriters of the offering. The number of TIDES registered, the aggregate
price of the TIDES registered, the number of TIDES sold and the aggregate
offering price of the TIDES sold by the Company in the offering were as follows:
<TABLE>
<CAPTION>
Aggregate
---------
Number of TIDES Price of TIDES Number of TIDES Aggregate
--------------- -------------- --------------- ---------
Registered Registered Sold Price of TIDES Sold
---------- ---------- ---- -------------------
<S> <C> <C> <C> <C>
The Company 2,500,000 $125,000,000 2,500,000 $125,000,000
</TABLE>
The Company incurred the following expenses with respect to the
offering during the period from July 1999 through September 30, 1999. These
expenses include estimated expenses of $25,000 to the law firm of Stradley Ronon
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>
Underwriters' Total Company
Underwriting Discounts ------------- -------------
and Commissions Finders' Fees Expenses Other Expenses Expenses
--------------- ------------- -------- -------------- --------
<S> <C> <C> <C> <C>
$3,750,000 $0 $0 $1,000,000 $4,750,000
</TABLE>
The net proceeds from the offering to the Company after deducting the
foregoing discounts, commissions, fees and expenses were approximately $120.3
million. The Company has used some of the proceeds to repay existing revolving
indebtedness outstanding under the Credit Facility, with the balance to be
applied to the Sinclair Transaction.
20
<PAGE> 21
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
The Company filed a Form 8-K on August 18, 1999, disclosing the Company's
intended consummation of the Sinclair Transaction.
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.**
4.03 Form of Indenture for the Convertible Subordinated Debentures due 2014 among
Entercom Communications Corp., as issuer and Wilmington Trust Company, as indenture trustee**
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**
10.07 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**
10.08 Amended and Restated Asset Purchase Agreement, dated as of August 20, 1999, among the Registrant,
Sinclair Communications, Inc., WCGV, Inc., Sinclair Radio of Milwaukee Licensee, LLC, Sinclair Radio of
New Orleans Licensee, LLC, Sinclair Radio of Memphis, Inc., Sinclair Radio of Memphis Licensee, Inc.,
Sinclair Properties, LLC, Sinclair Radio of Norfolk/Greensboro Licensee, L.P., Sinclair Radio of Buffalo,
Inc., Sinclair Radio of Buffalo Licensee, LLC, WLFL, Inc., Sinclair Radio of Greenville Licensee, Inc.,
Sinclair Radio of Wilkes-Barre, Inc and Sinclair Radio of Wilkes-Barre Licensee, LLC.**
10.09 Asset Purchase Agreement, dated as of August 20, 1999, among the Registrant, Sinclair Communications,
Inc. Sinclair Media III, Inc. and Sinclair Radio of Kansas City License, LLC.**
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) Other than the Form 8-K described in Item 5 above, the company did not
file any other reports on Form 8-K during the three months ended
September 30,1999.
21
<PAGE> 22
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: November 10, 1999 /s/ Joseph M. Field
------------------------------
Name: Joseph M. Field
Title: Chief Executive Officer
Date: November 10, 1999 /s/ David J. Field
------------------------------
Name: David J. Field
Title: President and Chief Operating Officer
Date: November 10, 1999 /s/ Stephen F. Fisher
------------------------------
Name: Stephen F. Fisher
Title: Senior Vice President and
Chief Financial Officer
22
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 9,805
<SECURITIES> 0
<RECEIVABLES> 50,721
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 68,417
<PP&E> 70,126
<DEPRECIATION> 15,094
<TOTAL-ASSETS> 677,751
<CURRENT-LIABILITIES> 28,591
<BONDS> 159,263
0
0
<COMMON> 371
<OTHER-SE> (63,449)
<TOTAL-LIABILITY-AND-EQUITY> 677,751
<SALES> 0
<TOTAL-REVENUES> 154,749
<CGS> 116,184
<TOTAL-COSTS> 116,184
<OTHER-EXPENSES> 5,640
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 9,022
<INCOME-PRETAX> 24,987
<INCOME-TAX> 90,209
<INCOME-CONTINUING> (65,222)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (65,222)
<EPS-BASIC> (1.83)
<EPS-DILUTED> (1.83)
</TABLE>
