-----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, RlikzbQdy2mgAsG3PvdYtkokKjm3stNUlwTji1clOaTp4S7SxLdFZno+nib+Dgy3 u3A0VGj8WwY1YhHn0Um6Sw== 0000950130-02-005872.txt : 20020814 0000950130-02-005872.hdr.sgml : 20020814 20020814112604 ACCESSION NUMBER: 0000950130-02-005872 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20020630 FILED AS OF DATE: 20020814 FILER: COMPANY DATA: COMPANY CONFORMED NAME: INTEREP NATIONAL RADIO SALES INC CENTRAL INDEX KEY: 0000796735 STANDARD INDUSTRIAL CLASSIFICATION: RADIO BROADCASTING STATIONS [4832] IRS NUMBER: 131865151 STATE OF INCORPORATION: NY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-28395 FILM NUMBER: 02732598 BUSINESS ADDRESS: STREET 1: 100 PARK AVENUE CITY: NEW YORK STATE: NY ZIP: 10017 BUSINESS PHONE: 2129160700 MAIL ADDRESS: STREET 1: 100 PARK AVENUE CITY: NEW YORK STATE: NY ZIP: 10017 10-Q 1 d10q.txt FORM 10-Q 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, 2002 OR [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________ to ________ Commission file number 000-28395 --------- INTEREP NATIONAL RADIO SALES, INC. (Exact Name of Registrant as Specified in Its Charter) New York 13-1865151 (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 100 Park Avenue, New York, New York 10017 (Address of Principal Executive Offices) (Zip Code) (212) 916-0700 (Registrant's Telephone Number, Including Area Code) 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 [ ] The number of shares of the registrant's Common Stock outstanding as of the close of business on August 12, 2002, was 5,246,296 shares of Class A Common Stock, and 3,979,996 shares of Class B Common Stock. PART I FINANCIAL INFORMATION Item 1. FINANCIAL STATEMENTS INTEREP NATIONAL RADIO SALES, INC. CONSOLIDATED BALANCE SHEETS (in thousands, except share information)
June 30, December 31, 2002 2001 ------------ ---------------- (unaudited) ASSETS Current assets: Cash and cash equivalents ....................................................... $ 12,006 $ 11,502 Receivables, less allowance for doubtful accounts of $1,815 and $1,747, respectively .......................................................... 24,491 26,656 Representation contract buyouts receivable ...................................... 2,000 12,504 Current portion of deferred representation contract costs ....................... 30,428 40,368 Prepaid expenses and other current assets ....................................... 1,161 927 ---------- ---------- Total current assets ........................................................ 70,086 91,957 ---------- ---------- Fixed assets, net .................................................................... 3,566 3,909 Deferred representation contract costs ............................................... 64,873 64,521 Investments and other assets ......................................................... 19,152 19,342 ---------- ---------- Total assets ................................................................ $ 157,677 $ 179,729 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable and accrued expenses ........................................... $ 9,049 $ 8,606 Accrued interest ................................................................ 4,950 4,950 Representation contract buyouts payable ......................................... 13,792 33,161 Accrued employee-related liabilities ............................................ 2,547 3,741 ---------- ---------- Total current liabilities ................................................... 30,338 50,458 ---------- ---------- Long-term debt ....................................................................... 99,000 99,000 ---------- ---------- Representation contract buyouts payable .............................................. 12,576 21,267 ---------- ---------- Other noncurrent liabilities ......................................................... 4,029 4,714 ---------- ---------- Shareholders' equity: 4% Series A cumulative convertible preferred stock, $0.01 par value - 400,000 shares authorized, 110,000 shares issued and outstanding at June 30, 2002 (none issued at December 31, 2001)(aggregate liquidation preference - $11,000) ........................... 1 - Class A common stock, $0.01 par value - 20,000,000 shares authorized, 5,060,237 and 4,907,996 shares issued and outstanding at June 30, 2002 and December 31, 2001, respectively ................................................................ 51 49 Class B common stock, $0.01 par value - 10,000,000 shares authorized, 4,488,126 and 4,314,463 shares issued and outstanding at June 30, 2002 and December 31, 2001, respectively ................................................................ 45 43 Additional paid-in-capital ........................................................... 52,516 39,456 Accumulated deficit .................................................................. (40,879) (35,258) ----------- ----------- Total shareholders' equity .................................................. 11,734 4,290 ---------- ---------- Total liabilities and shareholders' equity .................................. $ 157,677 $ 179,729 ========== ========== The accompanying Notes to Unaudited Interim Consolidated Financial Statements are an integral part of these balance sheets.
2 INTEREP NATIONAL RADIO SALES, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share data) (unaudited)
For the Three Months Ended For the Six Months June 30, Ended June 30, ------------------------------ --------------------------- 2002 2001 2002 2001 ------------- ------------- ----------- ------------ Commission revenues .................................................... $ 23,704 $ 22,650 $ 41,232 $ 39,258 Contract termination revenue ........................................... 3,979 20,240 6,366 20,309 --------- --------- --------- --------- Total revenues ......................................................... 27,683 42,890 47,598 59,567 --------- --------- --------- --------- Operating expenses: Selling expenses ....................................................... 15,503 17,121 28,367 32,085 General and administrative expenses .................................... 3,098 3,242 6,294 6,422 Depreciation and amortization expense .................................. 5,980 13,815 11,900 20,322 --------- --------- --------- --------- Total operating expenses ............................................... 24,581 34,178 46,561 58,829 --------- --------- --------- --------- Operating income ....................................................... 3,102 8,712 1,037 738 Interest expense, net .................................................. 2,507 2,268 5,019 4,525 Other expense, net ..................................................... -- 586 -- 899 --------- --------- --------- --------- Income (loss) before provision (benefit) for income taxes .............. 595 5,858 (3,982) (4,686) Provision (benefit) for income taxes ................................... 284 4,622 (502) 383 --------- --------- ---------- --------- Net income (loss) applicable to common shareholders .................... $ 311 $ 1,236 $ (3,480) $ (5,069) ========= ========= ========== ========= Basic earnings (loss) per share applicable to common shareholders ........................................................... $ 0.03 $ 0.15 $ (0.37) $ (0.60) Diluted earnings (loss) per share applicable to common shareholders ........................................................... $ 0.02 $ 0.12 $ (0.37) $ (0.60) The accompanying Notes to Unaudited Interim Consolidated Financial Statements are an integral part of these statements.
3 INTEREP NATIONAL RADIO SALES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (unaudited)
For the Six Months Ended June 30, ---------------------------------- 2002 2001 ------------- -------------- Cash flows from operating activities: Net loss ..................................................................... $ (3,480) $ (5,069) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization ................................................ 11,900 20,322 Noncash compensation expense ................................................. (529) 1,377 Equity loss on investment .................................................... -- 971 Changes in assets and liabilities: Receivables .................................................................. 2,165 3,860 Representation contract buyouts receivable ................................... (2,000) (378) Prepaid expenses and other current assets .................................... (234) (374) Other noncurrent assets ...................................................... (584) (968) Accounts payable and accrued expenses ........................................ 443 (7,605) Accrued employee-related liabilities ......................................... (1,194) (5,098) Other noncurrent liabilities ................................................. (685) (121) ------------- ------------- Net cash provided by operating activities .................................... 5,802 6,917 ------------- ------------- Cash flows from investing activities: Additions to fixed assets .................................................... (345) (322) Redemption of marketable securities .......................................... -- 7,562 ------------ ------------ Net cash (used in) provided by investing activities .......................... (345) 7,240 ------------- ------------ Cash flows from financing activities: Station representation contract payments ..................................... (16,406) (25,574) Issuance of Class B common stock ............................................. 1,147 1,500 Issuance of Series A convertible preferred stock, net of issuance costs ............................................................... 10,306 -- ------------ ------------ Net cash used in financing activities ........................................ (4,953) (24,074) ------------- ------------- Net increase (decrease) in cash and cash equivalents ......................... 504 (9,917) Cash and cash equivalents, beginning of period ............................... 11,502 23,681 ------------ ------------ Cash and cash equivalents, end of period ..................................... $ 12,006 $ 13,764 ============ ============ Supplemental disclosures of cash flow information: Cash paid during the period for: Interest ................................................................ $ 4,950 $ 4,950 Income taxes ............................................................ $ 141 $ 373 Non-cash investing and financing activities: Beneficial conversion option on preferred stock ......................... $ 2,142 $ -- Settlement of station representation contracts .......................... $ 12,504 $ -- Station representation contracts acquired ............................... $ 850 $ 5,528 The accompanying Notes to Unaudited Interim Consolidated Financial Statements are an integral part of these statements.
4 INTEREP NATIONAL RADIO SALES, INC. NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share information) 1. Summary of Significant Accounting Policies Principles of Consolidation The consolidated financial statements include the accounts of Interep National Radio Sales, Inc. ("Interep"), together with its subsidiaries (collectively, the "Company"), and have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted. All significant intercompany transactions and balances have been eliminated. The consolidated financial statements as of June 30, 2002 are unaudited; however, in the opinion of management, such statements include all adjustments (consisting of normal recurring accruals) necessary for a fair presentation of the results for the periods presented. The interim financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Company's Consolidated Financial Statements for the year ended December 31, 2001, which are available upon request of the Company. Due to the seasonal nature of the Company's business, the results of operations for the interim periods are not necessarily indicative of the results that might be expected for future interim periods or for the full year ending December 31, 2002. Comprehensive Income (Loss) For the three and six months ended June 30, 2002 and 2001, the Company's comprehensive income (losses) were equal to the respective net income (losses) for each of the periods presented. Revenue Recognition The Company is a national representation ("rep") firm serving radio broadcast clients and certain internet service providers throughout the United States. Commission revenues are derived from sales of advertising time for radio stations under representation contracts. Commissions and fees are recognized in the month the advertisement is broadcast. In connection with its unwired network business, the Company collects fees for unwired network radio advertising and, after deducting its commissions, remits the fees to the respective radio stations. In instances when the Company is not legally obligated to pay a station or service provider until the corresponding receivable is paid, fees payable to stations have been offset against the related receivable from advertising agencies in the accompanying consolidated balance sheets. The Company records all commission revenues on a net basis. Commissions are recognized based on the standard broadcast calendar that ends on the last Sunday in each reporting period. The broadcast calendars for the six months ended June 30, 2002 and 2001 had 26 and 25 weeks, respectively. Representation Contract Termination Revenue and Contract Acquisition Costs The Company's station representation contracts usually renew automatically from year to year after their stated initial terms unless either party provides written notice of termination at least twelve months prior to the next automatic renewal date. In accordance with industry practice, in lieu of termination, an arrangement is normally made for the purchase of such contracts by a successor 5 representative firm. The purchase price paid by the successor representation firm is generally based upon the historic commission income projected over the remaining contract period, plus two months. Costs of obtaining station representation contracts are deferred and amortized over the life of the new contract. Such amortization is included in the accompanying consolidated statements of operations as a component of depreciation and amortization expense. Amounts which are to be amortized during the next year are included as current assets in the accompanying consolidated balance sheets. Income earned from the loss of station representation contracts (contract termination revenue) is recognized on the effective date of the buyout agreement. Earnings (Loss) Per Share Basic earnings (loss) per share applicable to common shareholders for each of the respective periods has been computed by dividing the net income (loss) by the weighted average number of common shares outstanding during the period , amounting to 9,390,497 and 8,516,027 for the three months ended June 30, 2002 and 2001, respectively, and 9,307,935 and 8,517,325 for the six months ended June 30, 2002 and 2001, respectively. Diluted earnings per share applicable to common shareholders reflects the potential dilution that could occur if the outstanding options to purchase common stock were exercised, utilizing the treasury stock method, and also assumes conversion of outstanding convertible preferred stock into shares of common stock at the stated rate of conversion (Note 5). For the six months ended June 30, 2002 and 2001, the exercise of outstanding options would have an anti-dilutive effect and therefore have been excluded from the calculation. For the purposes of determining diluted earnings per share applicable to common shareholders for the three months ended June 30, 2002 and 2001, 3,115,422 and 1,766,987 shares have been assumed to be converted, respectively. Restructuring Charges A strategic restructuring program was undertaken in 2001 in response to difficult economic conditions and to further ensure the Company's competitive position. In 2001, the Company recognized restructuring charges of $3,471, which were primarily comprised of termination benefits. The restructuring program resulted in the termination of approximately 53 employees. At December 31, 2001, the remaining accrual was approximately $2,917. During the six months ended June 30, 2002, the Company paid approximately $1,373 of termination benefits. As of June 30, 2002, the remaining accrual was $1,544, of which $1,149 is included in accrued employee related liabilities and $395 is included in other noncurrent liabilities. New Accounting Pronouncements Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets," was issued in June 2001. This Statement addresses financial accounting and reporting for acquired goodwill and other intangible assets and supersedes APB Opinion No. 17, "Intangible Assets". It addresses how intangible assets that are acquired individually or with a group of other assets (but not those acquired in a business combination) should be accounted for in financial statements upon their acquisition. This Statement also addresses how goodwill and other intangible assets should be accounted for after they have been initially recognized in the financial statements. With the adoption of this Statement, goodwill is no longer subject to amortization over its estimated useful life. Rather, goodwill will be subject to at least an annual assessment for impairment by applying a fair-value-based test. Similarly, goodwill associated with equity method investments is no longer amortized. Equity method goodwill is not, however, subject to the new impairment rules. The Company currently does not have any goodwill on its books, therefore the adoption of this statement did not have a significant impact on the Company's financial position and results of operations. 6 In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" which addresses financial accounting and reporting for the impairment or disposal of long-lived assets and supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of", and the accounting and reporting provisions of APB Opinion No. 30, "Reporting the Results of Operations" for the disposal of a segment of a business. SFAS No. 144 is effective for fiscal years beginning after December 15, 2001, with earlier application encouraged. The Company adopted SFAS No. 144 as of January 1, 2002. The adoption of the Statement did not have a significant impact on the Company's financial position and results of operations. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Reclassification Certain reclassifications have been made to prior period financial statements to conform to the current period's presentation. 2. Segment Reporting The Company is managed as one segment and all revenues are derived from representation operations and related activities. The Company's management decisions are based on operating EBITDA, defined as operating income or loss before interest, taxes, depreciation and amortization and excluding contract termination revenue and a non-cash option re-pricing charge. Operating EBITDA is not a measure of performance calculated in accordance with accounting principles generally accepted in the United States, but the management believes it is useful in evaluating the Company's performance, in addition to the data presented herein. 3. Acquisitions and Investments In December 2000, the Company invested $3,000 in Cybereps, Inc. and thus increased its ownership percentage from 16% to 51%. In October 2001, the Company assumed effective control of Cybereps' operations and consolidated its results from that date. The operating loss included in the accompanying statement of operations for the six months ended June 30, 2002 is approximately $660, compared to $899 of equity loss included in other income for the six months ended June 30, 2001. The Company has investments in affiliates, which are accounted for using the cost method of accounting as the Company does not have the ability to exercise significant influence over operating and financial policies of these affiliates. The total carrying value of these investments was $2,500 and $2,600 as of June 30, 2002 and December 31, 2001, respectively, representing a range of ownership from 8% to 16% of the affiliated companies. 4. Stock Options In April 2000, the Company granted options to purchase shares of Class A common stock at an exercise price of $8.77. In December 2000, the Company repriced these options to an exercise price 7 of $2.81 which represented the fair market value on the date of the repricing. In accordance with accounting principles generally accepted in the United States, the Company has adopted variable plan accounting for these options from the date of the repricing. For the six months ended June 30, 2002 and 2001, the Company has recorded $(529) and $1,377, respectively, to selling expenses as a result of the repricing. 5. Shareholders' Equity In May 2002, the Company amended its certificate of incorporation for the purpose of establishing a series of preferred stock referred to as Series A Convertible Preferred Stock (the "Series A Stock"), with the authorization to issue up to 400,000 shares. The Series A Stock has a face value of $100 per share and a liquidation preference in such amount in priority over the Company's Class A and Class B common stock. Each share of the Series A Stock may be converted at the option of the holder at any time into 25 shares of Class A common stock at an initial conversion price of $4.00 per share (subject to anti-dilution adjustments). If the market price of the Company's Class A common stock is $8.00 or more for 30 consecutive trading days, the Series A Stock will automatically be converted into share of Class A common stock at the then applicable conversion price. The Series A Stock bears a 4% annual cumulative dividend that may be paid in cash or in kind in additional shares of the Series A Stock. Holders of shares of the Series A Stock vote on an "as converted" basis, together with the holders of Class A and Class B common stock. During the quarter ended June 30, 2002, the Company completed a series of private placements to issue 110,000 units for an aggregate purchase price of $11,000. Each unit consists of one share of Series A Stock and 6.25 warrants to acquire an equal number of shares of Class A common stock. The warrants are exercisable at any time from the date of grant and expire five years from the date of grant. The Company incurred approximately $697 in legal and other costs directly related to the private placements. In March 2002, the Company issued 164,117 shares of Class B common stock to the Interep Stock Growth Plan for net cash proceeds of $558. Additionally, in June 2002, the Company issued 159,620 shares of Class B common stock to the Interep Stock Growth Plan for net cash proceeds of $589. During 2001, the Company issued 680,330 shares of Class B common stock to the Interep Stock Growth Plan for net cash proceeds of $2,800. The shares were issued at the current fair market value on the date of issuance. 6. Commitments and Contingencies The Company may be involved in various legal actions from time to time arising in the normal course of business. In the opinion of management, there are no matters outstanding that would have a material adverse effect on the consolidated financial position or results of operations of the Company. In 2000, certain clients of the Company were served summons and complaints (on separate matters) for alleged breaches of various national sales representation agreements. The Company had agreed to indemnify its clients from and against any loss, liability, cost or expense incurred in the actions. In the first quarter of 2002, the Company entered into a settlement agreement regarding these contract acquisition claims. The settlement resulted in the offset of approximately $12,500 in representation contract buyout receivables and payables as well as additional contract termination revenue of $2,400. In addition, the settlement agreement includes amended payment schedules for approximately $10,000 in contract representation payables previously recorded. 8 In June 2002, the Company reached a settlement with Entravision Communications Corporation in regard to the termination of its contract. As a result the Company recorded approximately $2,000, or $0.16 per common share on a diluted basis, in contract termination revenue during the quarter ended June 30, 2002. Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with our Consolidated Financial Statements, including the notes thereto, included elsewhere in this Report. Throughout this Quarterly Report, when we refer to "Interep" or "the Company," we refer collectively to Interep National Radio Sales, Inc. and all of our subsidiaries unless the context indicates otherwise or as otherwise noted. Important Note Regarding Forward Looking Statements Some of the statements made in this Quarterly Report are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are not statements of historical fact, but instead represent our belief about future events. In some cases, you can identify forward-looking statements by terminology such as "may," "will," "should," "expects," "plans," "anticipates," "believes," "estimates," "predicts," "potential," "continue," or the negative of these terms or other comparable terminology. These statements are based on many assumptions and involve known and unknown risks and uncertainties that are inherently uncertain and beyond our control. These risks and uncertainties may cause our or our industry's actual results, levels of activity, performance or achievements to be materially different than any expressed or implied by these forward-looking statements. Although we believe that the expectations in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. You should review the factors noted in Management's Discussion and Analysis of Financial Condition and Results of Operation - Certain Factors That May Affect Our Results of Operations for a discussion of some of the things that could cause actual results to differ from those expressed in our forward-looking statements. Overview We derive a substantial majority of our revenues from commissions on sales by us of national spot radio advertising airtime for the radio stations we represent. Generally, advertising agencies or media buying services retained by advertisers purchase national spot advertising time. We receive commissions from our client radio stations based on the national spot radio advertising billings of the station, net of standard advertising agency and media buying services commissions. We enter into written representation contracts with our clients, which include negotiated commission rates. Because commissions are based on the prices paid to radio stations for spots, our revenue base is automatically adjusted for inflation. Our operating results generally depend on: o changes in advertising expenditures; o increases and decreases in the size of the total national spot radio advertising market; o changes in our share of this market; 9 o acquisitions and terminations of representation contracts; and o operating expense levels. The effect of these factors on our financial condition and results of operations varies from period to period. A number of factors influence the performance of the national spot radio advertising market, including, but not limited to, general economic conditions, consumer attitudes and spending patterns, the amount spent on advertising generally, the share of total advertising spent on radio and the share of total radio advertising represented by national spot radio. In this regard, we, like other media businesses, have been adversely affected by a sluggish economy generally, and the events of September 11, 2001, in particular, which we believe have contributed to a temporary decrease in the amount spent on advertising. Our share of the national spot advertising market changes as a result of increases and decreases in the amount of national spot advertising broadcast by our clients. Moreover, our market share increases as we acquire representation contracts with new client stations and decreases if current client representation contracts are terminated. Thus, our ability to attract new clients and to retain existing clients significantly affects our market share. The value of representation contracts that have been acquired or terminated during the last few years has tended to increase due to a number of factors, including the consolidation of ownership in the radio broadcast industry following the passage of the Telecommunications Act of 1996. In recent years, we have increased our representation contract acquisition activity, and we have devoted a significant amount of our resources to these acquisitions. At the same time, we have received an increased amount of contract termination revenue. We base our decisions to acquire a representation contract on the market share opportunity presented and on an analysis of the costs and net benefits to be derived. We continuously seek opportunities to acquire additional representation contracts on attractive terms as a means of expanding our business and market share, while maintaining our current clients. Our ability to acquire and maintain representation contracts has had, and will continue to have, a significant impact on our revenues and cash flows. We recognize revenues on a contract termination as of the effective date of the termination. When a contract is terminated, we write off in full the unamortized portion, if any, of the expense we originally incurred on our acquisition of the contract. When we enter into a representation contract with a new client, we amortize the contract acquisition cost in equal monthly installments over the life of the new contract. As a result, our operating income is affected, negatively or positively, by the acquisition or loss of client stations. We are unable to forecast any trends in contract buyout activity, or in the amount of revenues or expenses that will likely be associated with buyouts during a particular period. Generally, the amount of revenue resulting from the buyout of a representation contract depends on the length of the remaining term of the contract and the revenue generated under the contract during the 12-month "trailing period" preceding the date of termination. The amount recognized by us as contract termination revenue in any period is not, however, indicative of contract termination revenue that may be realized in any future period. Historically, the level of buyout activity has varied from period to period. Additionally, the length of the remaining terms, and the commission revenue generation, of the contracts which are terminated in any period vary to a considerable extent. Accordingly, while buyout activity and the size of buyout payments has increased since 1996, their impact on our revenues and income is uncertain, due to the variables of contract length and commission generation. 10 During 1999, we added Internet advertising to our sales representation business. Revenues and expenses from the Internet advertising portion of our business will be affected by the level of advertising on the Internet generally and the portion of that advertising that we can direct to our clients, the traffic volume at our client's websites, the prices obtained for advertising on the Internet and our ability to obtain additional contracts from high-traffic Internet websites and Internet advertisers. In December 2000, we merged our Interep Interactive business with Cybereps, Inc., an Internet advertising representation and marketing firm in which we had a minority interest, thereby increasing our ownership percentage from 16% to 51%. In October 2001, we assumed effective control of Cybereps' operations and have consolidated its results from that date. Accordingly, the operations of Cybereps are included in the revenue and expense accounts for the six months ended June 30, 2002 and the three months ended June 30, 2002, whereas our share of the operating results for the six months ended June 30, 2001 and the three months ended June 30, 2001 are included in Other expenses, net. Our selling and corporate expense levels are dependent on management decisions regarding operating and staffing levels and on inflation. Selling expenses represent all costs associated with our marketing, sales and sales support functions. Corporate expenses include items such as corporate management, corporate communications, financial services, advertising and promotion expenses and employee benefit plan contributions. Our business generally follows the pattern of advertising expenditures in general. It is seasonal to the extent that radio advertising spending increases during the fourth calendar quarter in connection with the Christmas season and tends to be weaker during the first calendar quarter. Radio advertising also generally increases during the second and third quarters due to holiday-related advertising, school vacations and back-to-school sales. Additionally, radio tends to experience increases in the amount of advertising revenues as a result of special events such as political election campaigns. Furthermore, the level of advertising revenues of radio stations, and therefore our level of revenues, is susceptible to prevailing general and local economic conditions and the corresponding increases or decreases in the budgets of advertisers, as well as market conditions and trends affecting advertising expenditures in specific industries. Results of Operations Three Months Ended June 30, 2002 Compared to Three Months Ended June 30, 2001 Commission revenues. Commission revenues for the second quarter of 2002 increased to $23.7 million from $22.7 million for the second quarter of 2001, or approximately 4.7%. This $1.0 million increase was primarily attributable to the inclusion, in the current period, of the commission revenue earned by our Internet advertising representation operations. In the prior year, our share of the Internet loss was reported on the equity basis, under the caption "Other expense, net". Contract termination revenue. Contract termination revenue in the second quarter of 2002 decreased by $16.2 million, or 80.3%, to $4.0 million from $20.2 million in the second quarter of 2001. This decrease is primarily attributable to contract termination revenue in the second quarter of 2001 resulting from the agreement reached in that period with Clear Channel Communications regarding termination revenue on rep contracts with us that had previously terminated. Selling expenses. Selling expenses for the second quarter of 2002 decreased to $15.5 million from $17.1 million in the second quarter of 2001. This decrease of $1.6 million, or approximately 9.5%, was primarily due to the continuing benefits of the strategic restructuring program undertaken in the fourth quarter of 2001, offset by the operating expenses incurred by our Internet advertising representation operations. In the prior year our share of the Internet loss was reported on the equity basis, 11 under the caption "Other expense, net". In addition, for the three months ended June 30, 2002 and 2001, the Company has recorded $391 and $1,027, respectively, to selling expenses as a result of the repricing of its stock options due to its variable plan accounting. General and administrative expenses. General and administrative expenses for the second quarter of 2002 were virtually unchanged from the second quarter of 2001. Operating EBITDA. Operating EBITDA increased by $2.2 million, or 66.7%, for the second quarter of 2002 to $5.5 million, from $3.3 million for the second quarter of 2001, for the reasons discussed above. Operating EBITDA is operating income or loss before interest, taxes, depreciation and amortization and excludes contract termination revenue and a non-cash option re-pricing charge. Operating EBITDA is not a measure of performance calculated in accordance with accounting principles generally accepted in the United States, but we believe it is useful in evaluating the performance of Interep, in addition to the GAAP data presented. Depreciation and amortization expense. Depreciation and amortization expense decreased $7.8 million, or 56.7%, during the second quarter of 2002, to $6.0 million from $13.8 million in the second quarter of 2001. This decrease was primarily the result of the write-off, in the second quarter of 2001, of the remaining deferred costs, amounting to $6.3 million, related to the terminated contract with Clear Channel. Operating income. Operating income decreased by $5.6 million, or 64.4%, for the second quarter of 2002 to $3.1 million, as compared to $8.7 million for the second quarter of 2001, for the reasons discussed above. Interest expense, net. Interest expense, net, increased $0.2 million, or 10.5%, to $2.5 million for the second quarter of 2002, from $2.3 million for the second quarter of 2001. This increase primarily resulted from a reduction in the amount of cash invested and lower interest rates. Other expense, net. Other expense, net, for 2001 primarily consisted of our share of the equity loss incurred by Cybereps, Inc. See discussion of commission revenues, selling expenses and general and administrative expenses, above. See also Note 3 to the Notes to the Unaudited Interim Consolidated Financial Statements included elsewhere in this Report. Provision for income taxes. The provision for income taxes decreased by $4.3 million, or 93.9%, to $0.3 million for the first quarter of 2002, from $4.6 million for the second quarter of 2001, as a result of the decreased operating income. Net income. Our net income after tax declined $0.9 million, or 74.8%, to $0.3 million for the second quarter of 2002, from $1.2 million for the second quarter of 2001. The decrease was attributable to the reasons discussed above. Six Months Ended June 30, 2002 Compared to Six Months Ended June 30, 2001 Commission revenues. Commission revenues for the first half of 2002 increased to $41.2 million from $39.3 million for the first half of 2001, or approximately 5.0%. This $1.9 million increase was primarily attributable to the inclusion, in the current period, of the commission revenue earned by our Internet advertising representation operations. In the prior year, our share of the Internet loss was reported on the equity basis, under the caption "Other expense, net". Additionally, our comparative revenue was affected by the fact that the first quarter of 2002 had 13 broadcast weeks, as compared to 12 broadcast 12 weeks during the first quarter of 2001, and, accordingly, there were 26 weeks in the first half of 2002 compared to 25 weeks in the first half of 2001. Contract termination revenue. Contract termination revenue in the first half of 2002 decreased by $13.9 million, or 68.7%, to $6.4 million from $20.3 million in the first half of 2001. This decrease is primarily attributable to contract termination revenue in the second quarter of 2001 resulting from the agreement reached in that period with Clear Channel Communications regarding termination revenue on rep contracts with us that had previously terminated. Selling expenses. Selling expenses for the first half of 2002 decreased to $28.4 million from $32.1 million in the first half of 2001. This decrease of $3.7 million, or approximately 11.6%, was primarily due to the continuing benefits of the strategic restructuring program undertaken in the fourth quarter of 2001, offset by the operating expenses incurred by our Internet advertising representation operations. In the prior year our share of the Internet loss was reported on the equity basis, under the caption "Other expense, net". In addition, for the six months ended June 30, 2002 and 2001, the Company has recorded $(529) and $1,377, respectively, to selling expenses as a result of the repricing of its stock options due to its variable plan accounting. General and administrative expenses. General and administrative expenses for the first half of 2002 were virtually unchanged from the first half of 2001. Operating EBITDA. Operating EBITDA increased by $3.9 million for the first half of 2002 to $6.0 million, from $2.1 million for the first half of 2001, for the reasons discussed above. Operating EBITDA is operating income or loss before interest, taxes, depreciation and amortization and excludes contract termination revenue and a non-cash option re-pricing charge. Operating EBITDA is not a measure of performance calculated in accordance with accounting principles generally accepted in the United States, but we believe it is useful in evaluating the performance of Interep, in addition to the GAAP data presented. Depreciation and amortization expense. Depreciation and amortization expense decreased $8.4 million, or 41.4%, during the first half of 2002, to $11.9 million from $20.3 million in the first half of 2001. This decrease was primarily the result of the write-off, in the second quarter of 2001, of the remaining deferred costs, amounting to $6.3 million, related to the terminated contract with Clear Channel. Operating income. Operating income increased by $0.3 million, or 40.5%, for the first half of 2002 to $1.0 million, as compared to $0.7 million for the first half of 2001, for the reasons discussed above. Interest expense, net. Interest expense, net, increased $0.5 million, or 10.9%, to $5.0 million for the first half of 2002, from $4.5 million for the first half of 2001. This increase primarily resulted from a reduction in the amount of cash invested and lower interest rates. Other expense, net. Other expense, net, for 2001 primarily consists of our share of the equity loss incurred by Cybereps, Inc. See discussion of commission revenues, selling expenses and general and administrative expenses, above. See also Note 3 to the Notes to the Unaudited Interim Consolidated Financial Statements included elsewhere in this Report. 13 Provision (benefit) for income taxes. The benefit for income taxes for the first half of 2002 was $0.5 million, compared to a provision of $0.4 million for the comparable 2001 period, reflecting change in the taxable profit for the periods. Net loss. Our net loss after tax declined $1.6 million, or 31.3%, to $3.5 million for the first half of 2002, from $5.1 million for the first half of 2001. The change was attributable to the reasons discussed above. Liquidity and Capital Resources Our cash requirements have been primarily funded by cash provided from operations and financing transactions. In December 1999 we closed our initial public offering, which resulted in net proceeds of $46.8 million. At June 30, 2002, we had cash and cash equivalents of $12.0 million and working capital of $39.7 million. In the second quarter of 2002, we issued $11.0 million of units in a private placement. Each unit consists of one share of $100 face value, 4% pay-in-kind, Series A Convertible Preferred Stock and 6.25 warrants to purchase the same number of shares of our Class A common stock. Each share of Preferred Stock is convertible into 25 shares of our Class A common stock. Each warrant is exerciseable during the next five years at an exercise price of $4.00 per share. Cash provided by operating activities during the first half of 2002 was $5.8 million, as compared to $6.9 million during the first half of 2001. This fluctuation was primarily attributable to representation contract buyouts, the reduction in payables and accrued expenses and increased collections in trade accounts receivable in 2002. The first half of the year is normally weaker than the second half due to the seasonality of our business. Net cash provided by (used in) investing activities is attributable to the purchase and sale of marketable securities and capital expenditures. Net cash used in investing activities during the first 6 months of 2002 was $0.3 million, which consisted solely of capital expenditures. Net cash provided by investing activities was $7.2 million during the first six months of 2001, reflecting $7.5 million from the redemption of marketable securities and $0.3 million of capital expenditures. Cash used for financing activities of $5.0 million during the first half of 2002 was used for representation contract acquisition payments of $16.4 million, offset by $11.4 million from the issuance of units referred to above, net of issuance costs, and the sale of additional stock to our Stock Growth Plan. In general, as we acquire new representation contracts, we use more cash and, as our contracts are terminated, we receive additional cash. For the reasons noted above in "Overview", we are not able to predict the amount of cash we will require for contract acquisitions, or the cash we will receive on contract terminations, from period to period. We do not have any written options on financial assets, nor do we have any special purpose entities. We have not guaranteed any obligations of our unconsolidated investments In July 1998 we issued 10% Senior Subordinated Notes in the aggregate principal amount of $100.0 million due July 1, 2008. Interest on the Senior Subordinated Notes is payable in semi-annual payments of $5.0 million. The Senior Subordinated Notes, while guaranteed by our subsidiaries, are unsecured and junior to certain other indebtedness. We used a portion of the net proceeds from the issuance of the Senior Subordinated Notes to repay the then outstanding balance of our bank debt. 14 Additionally, we redeemed all of the outstanding shares of our then outstanding Series A preferred stock and Series B preferred stock, together with all of the associated shares of common stock then subject to redemption. We issued the Senior Subordinated Notes under an indenture that limits our ability to engage in various activities. Among other things, we are generally not able to pay any dividends to our shareholders, other than dividends payable in shares of common stock; we can only incur additional indebtedness under limited circumstances, and certain types of mergers, asset sales and changes of control either are not permitted or permit the note holders to demand immediate redemption of their Senior Subordinated Notes. The Senior Subordinated Notes may not be redeemed by us prior to July 1, 2003, except that we may redeem up to 30% of the Senior Subordinated Notes with the proceeds of equity offerings. If certain events occurred which would be deemed to involve a change of control under the indenture, we would be required to offer to repurchase all of the Senior Subordinated Notes at a price equal to 101% of their aggregate principal, plus unpaid interest. We believe that the liquidity resulting from our initial public offering and the transactions described above, together with anticipated cash from continuing operations, should be sufficient to fund our operations and anticipated needs for required representation contract acquisition payments, and to make the required 10% annual interest payments on our Senior Subordinated Notes, for at least the next 12 months. We may not, however, generate sufficient cash flow for these purposes or to repay the notes at maturity. In this regard, we believe that the cost-saving restructuring we implemented in 2001 should contribute to an improvement in cash flow. Moreover, the improvement in radio advertising pacings experienced in the first half of 2002 may be indicative of an improving revenue trend that should also have a positive effect on liquidity and cash flow. At the same time, as noted above, we recently obtained $11.0 million of new equity financing, and we are continuing to seek additional debt and equity financing to enhance our working capital position. Our ability to fund our operations and required contract acquisition payments and to make scheduled principal and interest payments will depend on our future performance, which, to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control. We may also need to refinance all or a portion of our Senior Subordinated Notes on or prior to maturity. There can be no assurance that we will be able to effect any such refinancing on commercially reasonable terms, if at all. Certain Factors That May Affect Our Results of Operations The following factors are some, but not all, of the variables that may have an impact on our results of operations: o Changes in the ownership of our radio station clients, in the demand for radio advertising, in our expenses, in the types of services offered by our competitors, and in general economic factors may adversely affect our ability to generate the same levels of revenue and operating results. o Advertising tends to be seasonal in nature as advertisers typically spend less on radio advertising during the first calendar quarter. o The terrorist attacks that occurred in New York City and Washington, D.C. on September 11, 2001, and the subsequent military actions taken by the United States 15 and its allies in response, have caused uncertainty. While the full consequences of these events remain uncertain, they could continue to have a material adverse effect on general economic conditions, consumer confidence, advertising and the media industry. o The termination of a representation contract will increase our results of operations for the fiscal quarter in which the termination occurs due to the termination payments that are usually required to be paid, but will negatively affect our results in later quarters due to the loss of commission revenues. Hence, our results of operations on a quarterly basis are not predictable and are subject to significant fluctuations. o We depend heavily on our key personnel, including our Chief Executive Officer Ralph C. Guild and the President of our Marketing Division Marc Guild, and our inability to retain them could adversely affect our business. o We rely on a limited number of clients for a significant portion of our revenues. o Our significant indebtedness from our Senior Subordinated Notes may burden our operations, which could make us more vulnerable to general adverse economic and industry conditions, make it more difficult to obtain additional financing when needed, reduce our cash flow from operations to make payments of principal and interest and make it more difficult to react to changes in our business and industry. o We may need additional financing for our future capital needs, which may not be available on favorable terms, if at all. o Competition could harm our business. Our only significant competitor is Katz Media Group, Inc., which is a subsidiary of a major radio station group that has significantly greater financial and other resources than do we. In addition, radio must compete for a share of advertisers' total advertising budgets with other advertising media such as television, cable, print, outdoor advertising and the Internet. o Acquisitions and strategic investments could adversely affect our business. o Our Internet business may suffer if the market for Internet advertising fails to develop or continues to weaken. Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We are exposed to market risk from changes in interest rates that may adversely affect our results of operations and financial condition. We seek to minimize the risks from these interest rate fluctuations through our regular operating and financing activities. Our policy is not to use financial instruments for trading or other speculative purposes. We are not currently a party to any financial instruments. 16 PART II OTHER INFORMATION Item 1. LEGAL PROCEEDINGS None. Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS In May and June 2002, we sold an aggregate of 110,000 units consisting of one share of Series A Convertible Preferred Stock ("Series A Preferred Stock") and 6.25 warrants to acquire the same number of shares of our Class A common stock ("Warrants") for an aggregate purchase price of $11 million. We will use the proceeds for working capital. We also issued warrants to acquire 5,000 shares of our Class A common stock to a placement agent in connection with the sale of 10,000 units. These securities were sold as a private placement in reliance on Regulation D of the Securities Act of 1933, as amended. The Series A Preferred Stock has a face amount of $100 per share and a liquidation preference in such amount in priority over our Class A common stock and Class B common stock. Each share of the Series A Preferred Stock may be converted at the option of the holder at any time into 25 shares of our Class A common stock at an initial conversion price of $4.00 per share (subject to anti-dilution adjustment). If the market price of our Class A Common Stock is $8.00 or more for 30 consecutive trading days, the Series A Preferred Stock will automatically be converted into shares of our Class A Common Stock at the then applicable conversion price. The Series A Preferred Stock bears a 4% annual cumulative dividend that we can pay in cash or in kind in additional shares of the Series A Preferred Stock. Holders of shares of the Series A Preferred Stock vote, on an "as converted basis", together with the holders of our Class A and Class B common stock on all matters and would vote alone as a class if changes to the rights or status of the Series A Preferred Stock were proposed by us. Each warrant is immediately exercisable for one share of our Class A common Stock at a strike price of $4.00 per share (subject to anti-dilution adjustment). The Warrants expire on the fifth anniversary of their date of issuance. Item 3. DEFAULTS UPON SENIOR SECURITIES None. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. Item 5. OTHER INFORMATION None. Item 6. EXHIBITS AND REPORTS ON FORM 8-K. (A) Documents Filed as Part of this Report Exhibit No. Description ----------- ------------------------------------------------------- 3.1 Certificate of Amendment of the Restated Certificate of 17 Incorporation (1) 4.1 Form of Warrant (1) 10.1 Form of Stock Purchase Agreement (1) 10.2 Form of Registration Rights Agreement (1) 99.1 Statement required pursuant to 18 U.S.C.ss. 1350 (filed herewith) - ------------------------- (1) Incorporated by reference to our Quarterly Report on Form 10-Q for our fiscal quarter ended March 31, 2002, filed with the Commission on May 15, 2002. 18 (B) Reports on Form 8-K We have filed the following current reports on Form 8-K since the beginning of our second fiscal quarter: Financial Date of Report Items Reported Statements Filed - -------------- --------------------------------------------- ---------------- June 3, 2002 Private placement of Series A Preferred Stock No and Warrants June 12, 2002 Private placement of Series A Preferred Stock No and Warrants June 26, 2002 Change in certifying accountant No July 3, 2002 Unaudited pro forma consolidated balance sheet Yes as of May 31, 2002 19 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 in the City of New York, State of New York. August 14, 2002 INTEREP NATIONAL RADIO SALES, INC. By: /s/ WILLIAM J. MCENTEE, JR. --------------------------- William J. McEntee, Jr. Vice President and Chief Financial Officer 20 EX-99.1 3 dex991.txt STATEMENT REQUIRED PURSUANT TO 18 USC Exhibit 99.1 Statement of Chief Executive Officer and Chief Financial Officer Regarding Periodic Reports Filed Under the Securities Exchange Act of 1934 The undersigned Chief Executive Officer and Chief Financial Officer of Interep National Radio Sales, Inc. (the "Company") certify that: 1. This statement is being filed pursuant to 18 U.S.C. ss. 1350. 2. This statement accompanies the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2002 (the "Quarterly Report"), which contains unaudited financial statements of the Company for such fiscal quarter. 3. The Quarterly Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, and the information contained in the Quarterly Report fairly presents, in all material respects, the financial condition and results of operations of the Company. This statement has been signed by the following persons in the capacities indicated on August 14, 2002. /s/ Ralph C. Guild /s/ William J. McEntee, Jr. - ----------------------------------- ----------------------------------- Ralph C. Guild William J. McEntee, Jr. Chief Executive Officer Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----