-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, CXwhXFHZqFDqV9Q9GzsFuPqM5A2f58eZkMDdZCpA1VRKjXwucTLmExmP9YzYpY38 s6m5aMC6WD3F47BUL1J9Iw== 0000893220-99-000904.txt : 19990812 0000893220-99-000904.hdr.sgml : 19990812 ACCESSION NUMBER: 0000893220-99-000904 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990811 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ENTERCOM COMMUNICATIONS CORP CENTRAL INDEX KEY: 0001067837 STANDARD INDUSTRIAL CLASSIFICATION: RADIO BROADCASTING STATIONS [4832] IRS NUMBER: 231701044 STATE OF INCORPORATION: PA FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-14461 FILM NUMBER: 99683668 BUSINESS ADDRESS: STREET 1: 401 CITY AVENUE STREET 2: SUITE 409 CITY: BALA CYNWYD STATE: PA ZIP: 19004 BUSINESS PHONE: 6106605610 MAIL ADDRESS: STREET 1: 401 CITY AVENUE STREET 2: SUITE 409 CITY: BALA CYNWYD STATE: PA ZIP: 19004 10-Q 1 FORM 10-Q ENTERCOM COMMUNICATIONS CORP. 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 2 ENTERCOM COMMUNICATIONS CORP. INDEX
PAGE PART I - FINANCIAL INFORMATION 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
2 3 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
DECEMBER 31, JUNE 30, ------------ -------- 1998 1999 ---- ---- CURRENT ASSETS 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 ========= =========
See notes to condensed consolidated financial statements 3 4 ENTERCOM COMMUNICATIONS CORP. CONDENSED CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1998 AND JUNE 30, 1999 (dollars in thousands) (unaudited) LIABILITIES AND SHAREHOLDERS' EQUITY
DECEMBER 31, JUNE 30, ------------ -------- 1998 1999 ---- ---- CURRENT LIABILITIES 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 ========= =========
See notes to condensed consolidated financial statements 4 5 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)
SIX MONTHS ENDED ---------------- JUNE 30 ------- 1998 1999 ---- ---- 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
See notes to condensed consolidated financial statements 5 6 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)
THREE MONTHS ENDED ------------------ JUNE 30 ------- 1998 1999 ---- ---- 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
See notes to condensed consolidated financial statements 6 7 ENTERCOM COMMUNICATIONS CORP. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS SIX MONTHS ENDED JUNE 30, 1998 AND 1999 (dollars in thousands) (unaudited)
SIX MONTHS ENDED ---------------- JUNE 30 ------- 1998 1999 ---- ---- OPERATING ACTIVITIES: 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 ========= =========
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 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 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 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.
(unaudited) ----------- SIX MONTHS ENDED JUNE 30, ------------------------- 1998 1999 ---- ---- 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)
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 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 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 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
Six Months Ended June 30, 1998 June 30, 1999 (Dollar amounts in thousands) Net Revenues $63,687 $95,545 Increase of $31,858 or 50.0% ------------------------------------------------------------
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.
Six Months Ended ---------------- June 30, 1998 June 30, 1999 (Dollar amounts in thousands) Station Operating Expenses $42,749 $64,296 Increase of $21,547 or 50.4% ------------------------------------------------------------ Percentage of Net Revenues 67.1% 67.3%
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.
Six Months Ended June 30, 1998 June 30, 1999 (Dollar amounts in thousands) Corporate, General and Administrative Expenses $2,193 $3,454 Increase of $1,261 or 57.5% ------------------------------------------------------------ Percentage of Net Revenues 3.4% 3.6%
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 14
Six Months Ended June 30, 1998 June 30, 1999 (Dollar amounts in thousands) Depreciation and Amortization $6,079 $10,019 Increase of $3,940 or 64.8% ------------------------------------------------------------ Percentage of Net Revenues 9.5% 10.5%
The increase in depreciation and amortization was mainly attributable to the Company's acquisitions net of divestitures since January 1, 1998.
Six Months Ended June 30, 1998 June 30, 1999 (Dollar amounts in thousands) Interest Expense $6,179 $6,246 Increase of $67 or 1.1% ------------------------------------------------------------ Percentage of Net Revenues 9.7% 6.5%
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.
Six Months Ended June 30, 1998 June 30, 1999 (Dollar amounts in thousands) Income Before Income Taxes & Extraordinary Item $7,392 $11,944 Increase of $4,552 ------------------------------------------------------------ Percentage of Net Revenues 11.6% 12.5%
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.
Other Data Six Months Ended June 30, 1998 June 30, 1999 (Dollar amounts in thousands) Pro Forma Net Income $931 $7,405 Increase of $6,475 ------------------------------------------------------------
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.
Six Months Ended June 30, 1998 June 30, 1999 (Dollar amounts in thousands) Broadcast Cash Flow $20,938 $31,249 Increase of $10,311 or 49.2% ------------------------------------------------------------
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 15
Six Months Ended June 30, 1998 June 30, 1999 (Dollar amounts in thousands) Broadcast Cash Flow Margin 32.9% 32.7% ------------------------------------------------------------
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%.
Six Months Ended June 30, 1998 June 30, 1999 (Dollar amounts in thousands) Pro Forma After-Tax Cash Flow $9,563 $20,215 Increase of $10,652 or 111.4% ------------------------------------------------------------
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
Three Months Ended June 30, 1998 June 30, 1999 (Dollar amounts in thousands) Net Revenues $38,709 $55,946 Increase of $17,237 or 44.5% ------------------------------------------------------------
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.
Three Months Ended June 30, 1998 June 30, 1999 (Dollar amounts in thousands) Station Operating Expenses $24,389 $35,387 Increase of $10,998 or 45.1% ------------------------------------------------------------ Percentage of Net Revenues 63.0% 63.3%
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.
Three Months Ended June 30, 1998 June 30, 1999 (Dollar amounts in thousands) Corporate, General and Administrative Expenses $1,093 $1,653 Increase of $560 or 51.2% ------------------------------------------------------------ Percentage of Net Revenues 2.8% 3.0%
15 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.
Three Months Ended June 30, 1998 June 30, 1999 (Dollar amounts in thousands) Depreciation and Amortization $3,113 $5,158 Increase of $2,045 or 65.7% ------------------------------------------------------------ Percentage of Net Revenues 8.0% 9.2%
The increase in depreciation and amortization was mainly attributable to the Company's acquisitions net of divestitures since January 1, 1998.
Three Months Ended June 30, 1998 June 30, 1999 (Dollar amounts in thousands) Interest Expense $3,240 $2,660 Decrease of ($580)or (17.9%) ------------------------------------------------------------ Percentage of Net Revenues 8.4% 4.8%
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.
Three Months Ended June 30, 1998 June 30, 1999 (Dollar amounts in thousands) Income From Operations Before Income Taxes $18,046 $11,610 Decrease of ($6,436) ------------------------------------------------------------ Percentage of Net Revenues 46.6% 20.8%
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.
Other Data Three Months Ended June 30, 1998 June 30, 1999 (Dollar amounts in thousands) Pro Forma Net Income $12,805 $0 Decrease of ($12,805) ------------------------------------------------------------
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 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.
Three Months Ended June 30, 1998 June 30, 1999 (Dollar amounts in thousands) Broadcast Cash Flow $14,320 $20,559 Increase of $6,239 or 43.6% ------------------------------------------------------------
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.
Three Months Ended June 30, 1998 June 30, 1999 (Dollar amounts in thousands) Broadcast Cash Flow Margin 37.0% 36.7% ------------------------------------------------------------
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%.
Three Months Ended June 30, 1998 June 30, 1999 (Dollar amounts in thousands) Pro Forma After-Tax Cash Flow $6,822 $13,815 Increase of $6,993 or 102.5% ------------------------------------------------------------
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 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 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 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
Exhibit Number Description - ------ ----------- 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*
* 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 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 EX-4.01 2 LOCK-UP RELEASE AGREEMENT, DATED AS OF MAY 6, 1999 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] 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 EX-27.01 3 FINANCIAL DATA SCHEDULE
5 1,000 YEAR DEC-31-1999 JAN-01-1999 JUN-30-1999 8,713 0 45,160 0 0 62,366 64,242 13,568 671,627 24,959 166,266 0 0 371 (71,504) 671,627 0 95,545 74,967 74,967 3,454 0 6,246 11,944 85,219 (73,275) 0 0 0 (73,275) (2.10) (2.10)
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