Back to GetFilings.com
1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 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 incorporation of organization) (I.R.S. Employer Identification No.)
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)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
TITLE OF EACH CLASS NAME OF EXCHANGE ON WHICH REGISTERED
------------------- ------------------------------------
Class A Common Stock, par value $.01 per share New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
NONE
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 by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendments to this Form 10-K. [ ]
As of March 15, 2000, the aggregate market value of the Class A common
stock held by non-affiliates of the registrant was $43.875 based on the closing
price on the New York Stock Exchange on such date.
Class A Common Stock, $.01 par value 33,261,202 Shares Outstanding as of
March 15, 2000
Class B Common Stock, $.01 par value 10,531,805 Shares Outstanding as of
March 15, 2000
Class C Common Stock, $.01 par value 1,396,836 Shares Outstanding as of March
15, 2000
DOCUMENT INCORPORATED BY REFERENCE
Proxy Statement for the 2000 Annual Meeting of Stockholders
2
ENTERCOM COMMUNICATIONS CORP.
TABLE OF CONTENTS
Page
----
PART I
Item 1. Business............................................................. 1
Item 2. Properties and Facilities............................................ 14
Item 3. Legal Proceedings.................................................... 15
Item 4. Submission of Matters to a Vote of Security Holders.................. 15
PART II
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters 16
Item 6. Selected Financial Data.............................................. 17
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................ 20
Item 7a. Quantitative and Qualitative Disclosures about Market Risk........... 33
Item 8. Financial Statements and Supplementary Data.......................... 34
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure................................................. 34
PART III
Item 10. Directors and Executive Officers of the Registrant................... 34
Item 11. Executive Compensation............................................... 34
Item 12. Security Ownership of Certain Beneficial Owners and Management....... 34
Item 13. Certain Relationships and Related Transactions....................... 34
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K...... 35
CERTAIN DEFINITIONS
Unless the context requires otherwise, all references in this report to
"Entercom," "we," "us," "our" and similar terms refer to Entercom Communications
Corp. and its consolidated subsidiaries, excluding Entercom Communications
Capital Trust.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This report may contain forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934. Forward-looking statements
are not statements of historical facts, but rather reflect our current
expectations concerning future results and events. We use the words "believes,"
"expects," "intends," "plans," "anticipates," "likely," "will" and similar
expressions to identify forward-looking statements. These forward-looking
statements are subject to risks, uncertainties and other factors, some of which
are beyond our control, that could cause actual results to differ materially
from those forecast or anticipated in such forward-looking statements.
These risks, uncertainties and factors include, but are not limited to:
- our successful integration of the 42 radio stations that we acquired
(including one station that we are operating under a time brokerage
agreement) from various subsidiaries of Sinclair Broadcast Group,
Inc. on December 16, 1999;
- the possibility that our acquisition of the four stations from
Sinclair in the Kansas City market will not be consummated;
- the risks associated with our acquisition strategy generally;
- the highly competitive nature of, and uncertain effect of new
technologies on, the radio broadcasting industry;
- our dependence on our Seattle radio stations;
- our continued control by Joseph M. Field and members of his
immediate family;
i
3
- our vulnerability to changes in federal legislation or regulatory
policy; and
- the other factors described in "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations."
You should not place undue reliance on these forward-looking statements,
which reflect our view only as of the date of this report. We undertake no
obligation to update these statements or publicly release the result of any
revisions to these statements to reflect events or circumstances after the date
of this report or to reflect the occurrence of unanticipated events.
INFORMATION ABOUT STATION AND MARKET DATA
For this report:
- We obtained the following data from Duncan's Radio Market
Guide (1999 ed.):
- 1998 market rank by metro population; and
- 1998 market rank by radio revenue.
- We derived audience share and audience rank in target
demographic data from surveys of persons, listening Monday
through Sunday, 6 a.m. to 12 midnight, in the indicated
demographic, as set forth in the Fall 1999 Radio Market Report
published by The Arbitron Ratings Company.
- Our rank in the radio broadcasting industry is derived from
figures recently published by BIA Consulting, Inc.
ii
4
PART I
ITEM 1. BUSINESS
OVERVIEW
Entercom has positioned itself as one of the fastest growing radio
broadcasting companies in terms of same station performance. In 1998, we
exceeded our prior year same station revenue by 16.7% and our same station
broadcast cash flow by 33.2%. In 1999, that trend accelerated with same station
revenue growth of 18.3% and same station broadcast cash flow growth of 41.9%.
We are the fourth largest radio broadcasting company in the United States
based on 1999 gross revenues, after giving effect to all completed transactions
and acquisitions awaiting approval at the Federal Communications Commission. We
have assembled a nationwide portfolio of 96 owned or operated stations,
including acquisitions that are pending. This portfolio consists of 96 stations
(60 FM and 36 AM stations) in 17 markets, including 12 of the country's top 50
markets. Our station groups rank among the three largest clusters in 16 of our
17 markets.
OUR STATION PORTFOLIO
We have built a highly consolidated portfolio of radio stations
concentrated primarily in top 50 markets with above average growth
characteristics. Including pending acquisitions, prior to our required
divestiture of three stations in Kansas City, 66 of our 96 radio stations are in
12 of the top 50 markets. We generated 98.1% of our 1999 net revenues from the
12 top 50 markets in which we operate. Radio advertising revenues in these 12
markets have grown at a revenue weighted compound annual growth rate of 11.2%
from 1993 to 1998, which exceeded both the revenue weighted compound annual
growth rate of the top 50 markets and the average annual growth rate of the
aggregate radio industry
Our current portfolio of stations includes a significant number of
recently acquired stations that we believe are underdeveloped. We believe that
these underdeveloped stations offer the opportunity for substantial broadcast
cash flow growth. In the aggregate, the 81 stations which we commenced operating
on or after January 1, 1997 operated at a broadcast cash flow margin of 32.1%
during the fiscal year ended December 31, 1999. By comparison, in the aggregate,
the nine stations which we commenced operating prior to 1997 operated at a
broadcast cash flow margin of 52.0% during the fiscal year ended December 31,
1999.
Our portfolio of radio stations is geographically diverse and offers a
wide variety of programming formats. We believe that geographic diversity will
reduce the effect of economic downturn in specific markets, while our wide range
of programming formats lessens the impact of changes in listening preferences.
Furthermore, because of the size of our station portfolio, we are not overly
dependent on the performance of any one station.
OUR ACQUISITION STRATEGY
In December 1999, we acquired 41 radio stations from Sinclair, 26 FM and
15 AM, in eight markets, including six of the country's top 50 markets. The
purchase price for the 41 stations was $700.4 million. As part of this
acquisition, we entered into a time brokerage agreement for one additional
station in Wilkes-Barre/Scranton, Pennsylvania, WKRF-FM, pending FCC approval.
We also entered into an asset purchase agreement with Sinclair, dated as of
August 20, 1999, to purchase four radio stations in the Kansas City market for
an aggregate purchase price of $122.0 million. In connection with the Sinclair
Kansas City acquisition, federal broadcasting regulations require us to divest
three stations in the Kansas City market, where we already own seven stations.
To comply with these regulations, we will either swap three Kansas City stations
for stations in other markets, or if it appears more desirable, we will sell
three stations for cash or pursue a combination of swaps and sales. As a result
of the required Kansas City dispositions, our portfolio of stations could be
reduced to 93.
On February 23, 2000, we acquired five stations, 2 FM and 3 AM, from the
Wichita Stations Trust, in Wichita, Kansas for $8.0 million. In addition, on
February 17, 2000 and March 10, 2000 we entered into separate asset purchase
agreements with an individual seller to purchase two additional radio stations
in Wichita for a total of $5.2 million. We expect to consummate this transaction
in the second quarter of 2000. Further, on February 17, 2000, we entered into an
agreement with WHYZ Radio, LP to enhance our existing cluster of seven stations
in Greenville/Spartanburg, South Carolina, by purchasing an additional station
for $1.5 million. We expect to consummate this transaction in the second quarter
of 2000.
Since October 1, 1996, in over 20 transactions, including the Sinclair
acquisition, we have acquired or agreed to acquire 91 radio stations and have
divested or will divest, for strategic or regulatory reasons, 14 radio stations.
Through our disciplined acquisition strategy, we seek to (1) build top-three
station clusters principally in large growth markets and (2) acquire
underdeveloped properties that offer the potential for significant improvements
in revenues and broadcast cash flow through the application of our operational,
administrative and engineering expertise. Although our focus has been on radio
stations in top 50 markets, we also consider acquiring stations in top 75
markets to the extent we believe we can apply our acquisition strategy in those
markets.
1
5
OUR OPERATING STRATEGY
The principal components of our operating strategy are to:
- Develop Market Leading Station Clusters. We are among the three
largest clusters, based on gross revenues, in 16 of our 17 markets.
To enhance our competitive position, we strategically align our
stations' formats and sales efforts within each market to optimize
their performance, both individually and collectively. We seek to
maximize the ratings, revenue and broadcast cash flow of our radio
stations by tailoring their programming to optimize aggregate
audience delivery.
- Acquire And Develop, Underperforming Stations. We seek to acquire
and develop underperforming stations, which has enabled us to build
a long-term track record of achieving superior same station revenue
and broadcast cash flow growth. We utilize a variety of techniques
to develop underachieving properties. These techniques include:
strategic market research and analysis; management enhancements;
expenditure reductions; improved sales training and techniques;
technical upgrades; programming and marketing enhancements; and
facility consolidations.
- Build Strongly-Branded Franchises. We analyze market research and
competitive factors to identify the format opportunity, music
selection and rotation, presentation and other key programming
attributes that we believe will best position each station to
develop a distinctive identity and to strengthen the stations' local
"brand" or "franchise" value. We believe that this will enable us to
maximize our audience share and consequently, our revenues and
broadcast cash flow.
- Leverage Station Clusters To Capture Greater Share Of Advertising
Revenue. We believe radio will continue to gain revenue share from
other media as a result of deregulation in the broadcasting
industry, which allows broadcasters to create larger clusters in
their markets and offers advertisers a means to reach larger
audiences in a cost-effective manner. As a result of deregulation in
the radio broadcasting industry, operators can now create radio
station clusters that have the critical mass of audience reach and
marketing resources necessary to pursue incremental advertising and
promotional revenues more aggressively. We have begun to capitalize
on this opportunity by developing specialized teams in many of our
markets to work with non-traditional radio advertisers to create and
develop marketing programs and solutions.
- Maximize Technical Capabilities. We seek to operate stations with
the strongest signals in their respective markets. In addition, on
various occasions we have identified opportunities to acquire and
upgrade low-powered or out-of-market stations and transform them
into competitive signals, thus increasing their value significantly.
- Recruit, Develop, Motivate And Retain Superior Employees. We believe
that station operators differentiate themselves from their peers
primarily through their ability to recruit, develop, motivate and
retain superior management, programming and sales talent.
Accordingly, we strive to establish a compelling corporate culture
that is attractive to superior performers. We encourage our stations
to build strong community bonds through local and company-wide
community service programs, which facilitate strong local business
relationships and provide employees with opportunities for enhanced
job fulfillment. We offer competitive pay packages with
performance-based incentives for our key employees. In addition, we
provide employees with opportunities for personal growth and
advancement through extensive training, seminars and other
educational programs.
OUR CORPORATE HISTORY
Our Chairman of the Board and Chief Executive Officer, Joseph M. Field,
founded Entercom in 1968 on the conviction that FM broadcasting, then in its
infancy, would surpass AM broadcasting as the leading aural medium. In the
mid-1980's, with FM at critical mass, we began a deliberate multi-year effort to
enhance our operations at both the corporate and station levels by changing or
adjusting program formats to appeal to mainstream audiences in order to compete
for greater shares of audience and advertising dollars in our markets. With the
advent of the duopoly rules in 1992, which permitted expansion of ownership in a
market from one to two stations in each radio medium, we began to "double up" in
our markets. Since the passage of the Telecommunications Act of 1996, which
permitted ownership of up to eight radio stations in most major markets, we have
pursued a creative acquisition and development strategy by which we have swapped
developed stand-alone FM stations in various markets in exchange for clusters of
underdeveloped stations in other large growth markets where there was greater
opportunity to develop market leading clusters.
The following table sets forth selected information about our portfolio of
radio stations and gives effect to our consummation of our pending acquisitions.
It does not give effect to the required disposition of three stations in Kansas
City, which we are seeking to swap for stations in other markets. If we cannot
arrange suitable swaps, we will sell these stations for cash.
2
6
1998 MARKET RANK AUDIENCE AUDIENCE
--------------------- SHARE RANK
METRO RADIO YEAR TARGET IN TARGET IN TARGET
MARKET(1)/STATION POPULATION REVENUE ACQUIRED FORMAT DEMOGRAPHIC DEMOGRAPHIC DEMOGRAPHIC
- ----------------- ---------- ------- -------- ------ ----------- ----------- -----------
BOSTON, MA........... 8 10
WEEI-AM 1998 Sports Talk Men 25-54 7.3 3
WWTM-AM(2) 1999
WRKO-AM 1998 Talk Adults 25-54 2.9 14
WAAF-FM 1999 Active Rock Men 18-34 8.8 3
WQSX-FM 1999 Rhythmic AC Women 25-54 6.1 4
SEATTLE, WA(3)....... 14 13
KBSG-AM/FM 1996 Oldies Adults 25-54 6.8 1
KIRO-AM 1997 News/Talk/Sports Men 25-54 6.1 2
KQBZ-FM 1997 Talk Adults 25-54 2.3 18
KISW-FM 1997 Active Rock Men 25-54 7.6 1
KMTT-FM 1973 Adult Rock Adults 25-54 4.6 6
KNWX-AM 1997 Business Adults 35-64 .8 22
KNDD-FM 1996 Modern Rock Men 18-34 10.0 1
PORTLAND, OR......... 25 20
KFXX-AM 1998 Sports Talk Men 25-54 2.6 14
KSLM-AM(4) 1998
KGON-FM 1995 Classic Rock Men 25-54 9.4 1
KKSN-AM 1995 Nostalgia Adults 35-64 1.7 12
KKSN-FM 1998 Oldies Adults 25-54 7.0 4
KNRK-FM 1995 Modern Rock Men 18-34 7.7 3
KRSK-FM 1998 Hot Adult Contemporary Women 18-34 6.9 5
SACRAMENTO, CA....... 28 28
KCTC-AM 1998 Nostalgia Adults 35-64 2.6 13
KRXQ-FM 1997 Active Rock Men 18-34 17.3 1
KSEG-FM 1997 Classic Rock Men 24-54 9.8 1
KSSJ-FM 1997 Smooth Jazz Adults 25-54 6.1 4
KDND-FM 1997 Contemporary Hit Radio Women 18-34 9.9 1
KANSAS CITY, MO...... 30 29
KCMO-AM 1997 Talk Adults 25-54 2.2 17
KCMO-FM 1997 Oldies Adults 25-54 5.5 8
KMBZ-AM 1997 News/Talk/ Sports Men 25-54 5.1 6
KUDL-FM 1998 Adult Contemporary Women 25-54 10.1 1
KYYS-FM 1997 Album Oriented Rock Men 25-54 8.2 2
WDAF-AM 1998 Country Adults 35-64 5.8 4(tie)
KKGM-AM 1999 Sports Talk Men 25-54 n/a n/a
KCFX-FM pending Classic Hits Adults 25-54 6.4 3(tie)
KQRC-FM pending Active Rock Men 18-34 23.1 1
KCIY-FM pending Smooth Jazz Adults 25-54 4.9 11
KXTR-FM pending Classical Adults 25-54 2.6 14(tie)
MILWAUKEE, WI ....... 31 33
WEMP-AM 1999 Religious Adults 35-64 n/a n/a
WMYX-FM 1999 Adult Contemporary Women 25-54 8.8 2
WXSS-FM 1999 Contemporary Hit Radio Women 18-34 17.4 1
3
7
1998 MARKET RANK AUDIENCE AUDIENCE
--------------------- SHARE RANK
METRO RADIO YEAR TARGET IN TARGET IN TARGET
MARKET(1)/STATION POPULATION REVENUE ACQUIRED FORMAT DEMOGRAPHIC DEMOGRAPHIC DEMOGRAPHIC
- ----------------- ---------- ------- -------- ------ ----------- ----------- -----------
NORFOLK, VA.......... 36 44
WPTE-FM 1999 Modern Adult Adults 18-34 7.1 4
Contemporary
WWDE-FM 1999 Adult Contemporary Women 25-54 9.3 1
WVKL-FM 1999 Oldies Adults 25-54 5.6 7(tie)
WNVZ-FM 1999 Contemporary Hit Radio Women 18-34 13.6 2
NEW ORLEANS, LA...... 41 39
WSMB-AM 1999 Talk/Sports Men 25-54 .8 17(tie)
WWL-AM 1999 News/Talk/Sports Men 25-54 9.4 1(tie)
WEZB-FM 1999 Contemporary Hit Radio Women 18-34 7.9 5
WLMG-FM 1999 Soft Adult Contemporary Women 25-54 9.0 4
WLTS-FM 1999 Adult Contemporary Women 25-54 9.2 3
WTKL-FM 1999 Oldies Adults 25-54 6.6 5
GREENSBORO, NC....... 42 50
WMQX-FM 1999 Oldies Adults 25-54 6.3 6
WJMH-FM 1999 Urban Adults 18-34 13.1 1
WEAL-AM 1999 Gospel Adults 35-64 1.7 11
WQMG-FM 1999 Urban Adult Contemporary Adults 25-54 9.5 1
BUFFALO, NY.......... 43 41
WBEN-AM 1999 News/Talk Men 25-54 5.2 6
WMJQ-FM 1999 Adult Contemporary Women 25-54 10.5 5
WWKB-AM 1999 Sports Men 25-54 2.9 12
WKSE-FM 1999 Contemporary Hit Radio Women 18-34 16.3 1
WGR-AM 1999 Sports Men 25-54 5.2 6(tie)
WWWS-AM 1999 Urban Oldies Adults 25-54 2.0 12
MEMPHIS, TN.......... 46 40
WOGY-FM 1999 Country Adults 25-54 2.9 11
WJCE-AM 1999 Urban Oldies Women 25-54 4.3 19(tie)
WRVR-FM 1999 Soft Adult Contemporary Women 25-54 8.3 3(tie)
ROCHESTER, NY........ 50 55
WBBF-FM 1998 Oldies Adults 25-54 5.2 8
WBEE-FM 1998 Country Adults 25-54 8.7 3(tie)
WEZO-AM 1998 Nostalgia Adults 35-64 .9 17
WQRV-FM 1998 Classic Hits Adults 25-54 2.2 11(tie)
4
8
1998 MARKET RANK AUDIENCE AUDIENCE
--------------------- SHARE RANK
METRO RADIO YEAR TARGET IN TARGET IN TARGET
MARKET(1)/STATION POPULATION REVENUE ACQUIRED FORMAT DEMOGRAPHIC DEMOGRAPHIC DEMOGRAPHIC
- ----------------- ---------- ------- -------- ------ ----------- ----------- -----------
GREENVILLE/
SPARTANBURG, SC...... 58 61
WFBC-FM 1999 Contemporary Hit Radio Women 18-49 11.8 1
WSPA-FM 1999 Soft Adult Contemporary Women 25-54 10.9 1(tie)
WYRD-AM(5) 1999 News/Talk Adults 25-54 1.7 11(tie)
WORD-AM(5) 1999
WSPA-AM 1999 Full Service/Talk Adults 25-54 .7 16(tie)
WOLI-FM(5) 1999 Oldies Adults 25-54 3.8 9
WOLT-FM(5) 1999
WHYZ-AM pending Talk n/a n/a n/a
WILKES-BARRE/
SCRANTON, PA........ 64 69
WGBI-AM(7) 1999
WILP-AM(7) 1999 News/Talk/Sports Adults 35-64 5.0 6
WILK-AM(7) 1999
WGGI-FM(7) 1999 Country Adults 25-54 8.6 4
WGGY-FM(7) 1999
WKRZ-FM(7) 1999 Contemporary Hit Radio Adults 18-49 17.1 1
WKRF-FM(6)(7) 1999
WWFH-FM(7) 1999 Soft Hits Women 25-54 2.4 9
WSHG-FM(7) 1999
GAINESVILLE/OCALA, FL 98 124
WKTK-FM 1986 Adult Contemporary Women 25-54 9.7 1
WSKY-FM 1998 News/Talk Adults 25-54 3.4 9
WITCHITA, KS......... 102 73
KEYN-FM 2000 Oldies Adults 25-54 8.8 2
KWCY-FM(8) 2000 Country Adults 25-54 -- (8) -- (8)
KQAM-AM 2000 Sports Men 25-54 3.8 9(tie)
KFH-AM 2000 Talk Adults 25-54 5.5 8(tie)
KNSS-AM 2000 News Adults 25-54 2.3 14(tie)
KDGS-FM pending Urban Adults 25-54 4.8 10
KAYY-FM pending Soft Adult Contemporary Adults 18-34 4.5 7
LONGVIEW/KELSO, OR... N/A N/A
KBAM-AM 1998 Country Adults 25-54 n/a n/a
KEDO-AM 1997 Oldies Adults 25-54 n/a n/a
KLYK-FM 1997 Adult Contemporary Women 25-54 n/a n/a
KRQT-FM 1998 Classic Rock Men 25-54 n/a n/a
(1) Our stations are in some instances licensed to communities other than the
named principal community for the market.
(2) Station competes in the adjacent community of Worcester, Massachusetts and
simulcasts virtually all of the programming of WEEI-AM.
(3) We also sell substantially all of the advertising time of a sixth FM
station in the Seattle market under a joint sales agreement.
(4) KSLM-AM is licensed to Salem, Oregon, within the Portland market and
simulcasts KFXX-AM programming.
5
9
(5) WYRD-AM and WORD-AM simulcast their programming and WOLI-FM and WOLT-FM
simulcast their programming.
(6) Operated under a time brokerage agreement with Sinclair pending FCC
approval of the acquisition.
(7) WGBI-AM, WILP-AM and WILK-AM simulcast their programming; WGGI-FM and
WGGY-FM simulcast their programming; WWFH-FM and WSHG-FM simulcast their
programming and WKRZ-FM and WKRF-FM simulcast their programming.
(8) The format and call letters were changed on March 15, 2000, from Jazz to
Country and from KWSJ-FM to KWCY-FM, respectively.
COMPETITION; CHANGES IN BROADCASTING INDUSTRY
The radio broadcasting industry is highly competitive. The success of each
of our stations depends largely upon its audience ratings and its share of the
overall advertising revenue within its market. Our stations compete for
listeners and advertising revenue directly with other radio stations within
their respective markets. Radio stations compete for listeners primarily on the
basis of program content that appeals to a particular demographic group. By
building a strong listener base consisting of a specific demographic group in
each of our markets, we are able to attract advertisers seeking to reach those
listeners.
The following are some of the factors that are important to a radio
station's competitive position:
- management experience;
- the station's local audience rank in its market;
- transmitter power;
- assigned frequency;
- audience characteristics;
- local program acceptance; and
- the number and characteristics of other radio stations and other
advertising media in the market area.
In addition, we attempt to improve our competitive position with
promotional campaigns aimed at the demographic groups targeted by our stations
and by sales efforts designed to attract advertisers. Recent changes in the
Communications Act and the FCC's policies and rules permit increased ownership
and operation of multiple local radio stations.
Despite the competitiveness within the radio broadcasting industry, some
barriers to entry exist. The operation of a radio broadcast station requires a
license from the FCC. The number of radio stations that can operate in a given
market is limited by strict AM interference criteria and the availability of FM
radio frequencies allotted by the FCC to communities in that market. The number
of stations that a single entity may operate in a market is further limited by
the FCC's multiple ownership rules that regulate the number of stations serving
the same area that may be owned and controlled by a single entity.
Our stations also compete for audiences and advertising revenues within
their respective markets directly with other radio stations, as well as with
other media such as newspapers, magazines, network and cable television, outdoor
advertising and direct mail. In addition, the radio broadcasting industry is
subject to competition from new media technologies that are being developed or
introduced such as (1) satellite delivered audio radio service, which could
result in the introduction of new satellite radio services with sound quality
equivalent to that of compact discs and (2) audio programming by cable systems,
Internet content providers, personal communications services and other digital
audio broadcast formats. The FCC adopted a plan earlier this year for the
establishment of "microbroadcasting" stations, low-powered FM stations that will
be designed to serve small localized areas and that in some localized areas may
cause interference with regular broadcast by existing radio stations. The radio
broadcasting industry historically has grown despite the introduction of new
technologies for the delivery of entertainment and information, such as
television broadcasting, cable television, audio tapes and compact discs. A
growing population and greater availability of radios, particularly car and
portable radios, have contributed to this growth. We cannot assure you, however,
that this historical growth will continue or that the development or
introduction in the future of any new media technology will not have an adverse
effect on the radio broadcasting industry.
The FCC has adopted licensing and operating rules for satellite delivered
audio and in April 1997 awarded two licenses for this service. Satellite
delivered audio may provide a medium for the delivery by satellite or
terrestrial means of multiple new audio programming formats to local and/or
national audiences. Digital technology also may be used in the future by
terrestrial radio broadcast stations either on existing or alternate
broadcasting frequencies, and the FCC has stated that it will consider making
changes to its rules to permit AM and FM radio stations to offer digital sound
following industry analysis of technical standards. In addition, the FCC has
6
10
authorized an additional 100 kHz of bandwidth for the AM band and has allotted
frequencies in this new band to certain existing AM station licensees that
applied for migration to the expanded AM band, subject to the requirement that
at the end of a transition period, those licensees return to the FCC either the
license for their existing AM band station or the license for the expanded AM
band station.
We cannot predict what other matters might be considered in the future by
the FCC, nor can we assess in advance what impact, if any, the implementation of
any of these proposals or changes might have on our business.
FEDERAL REGULATION OF RADIO BROADCASTING
The radio broadcasting industry is subject to extensive and changing
regulation of, among other things, program content, advertising content,
technical operations and business and employment practices. The ownership,
operation and sale of radio stations are subject to the jurisdiction of the FCC.
Among other things, the FCC:
- assigns frequency bands for broadcasting;
- determines the particular frequencies, locations and operating power
of stations;
- issues, renews, revokes and modifies station licenses;
- determines whether to approve changes in ownership or control of
station licenses;
- regulates equipment used by stations; and
- adopts and implements regulations and policies that directly affect
the ownership, operation and employment practices of stations.
The FCC has the power to impose penalties for violations of its rules or
the Communications Act, including the imposition of monetary forfeitures, the
issuance of short-term licenses, the imposition of a condition on the renewal of
a license, and the revocation of operating authority.
The following is a brief summary of certain provisions of the
Communications Act and of specific FCC regulations and policies. This summary is
not a comprehensive listing of all of the regulations and policies affecting
radio stations. Reference should be made to the Communications Act, FCC rules,
and the public notices and rulings of the FCC for further information concerning
the nature and extent of federal regulation of radio stations.
FCC LICENSES. Radio stations operate pursuant to renewable broadcasting
licenses that are ordinarily granted by the FCC for maximum terms of eight
years. The FCC licenses for our stations are held by some of our subsidiaries.
During the periods when renewal applications are pending, petitions to deny
license renewals can be filed by interested parties, including members of the
public. The FCC is required to hold hearings on a station's renewal application
if a substantial or material question of fact exists as to whether the station
has served the public interest, convenience and necessity. If, as a result of an
evidentiary hearing, the FCC determines that the licensee has failed to meet
certain requirements and that no mitigating factors justify the imposition of a
lesser sanction, then the FCC may deny a license renewal application.
Historically, FCC licenses have generally been renewed. We have no reason to
believe that our licenses will not be renewed in the ordinary course, although
there can be no assurance to that effect. The non-renewal of one or more of our
licenses could have a material adverse effect on our business.
The FCC classifies each AM and FM station. An AM station operates on
either a clear channel, regional channel or local channel. A clear channel is
one on which AM stations are assigned to serve wide areas. Clear channel AM
stations are classified as either: Class A stations, which operate on an
unlimited time basis and are designated to render primary and secondary service
over an extended area; Class B stations, which operate on an unlimited time
basis and are designed to render service only over a primary service area; or
Class D stations, which operate either during daytime hours only, during limited
times only or on an unlimited time basis with low nighttime power. A regional
channel is one on which Class B and Class D AM stations may operate and serve
primarily a principal center of population and the rural areas contiguous to it.
A local channel is one on which AM stations operate on an unlimited time basis
and serve primarily a community and the suburban and rural areas immediately
contiguous thereto. Class C AM stations operate on a local channel and are
designed to render service only over a primary service area that may be reduced
as a consequence of interference.
The minimum and maximum facilities requirements for an FM station are
determined by its class. FM class designations depend upon the geographic zone
in which the transmitter of the FM station is located. In general, commercial FM
stations are classified as follows, in order of increasing power and antenna
height: Class A, B1, C3, B, C2, C1 and C.
7
11
The following table sets forth the market, call letters, FCC license
classification, antenna height above average terrain ("HAAT"), power, frequency
and FCC license expiration date (a station may continue to operate beyond the
expiration date if a timely filed license renewal application is pending) of
each of the stations that we own or operate and gives effect to our consummation
of our pending acquisitions. The table does not give effect to the required
divestiture of three Kansas City stations.
FCC HAAT POWER IN EXPIRATION DATE OF
MARKET(1) STATION CLASS (IN METERS) FREQUENCY KILOWATTS(2) FCC LICENSE
- --------- ------- ----- ----------- --------- ------------ -----------
Boston, MA...... WEEI-AM B * 850 kHz 50 April 1, 2006
WRKO-AM B * 680 kHz 50 April 1, 2006
WAAF-FM B 239 107.3 MHz 20 April 1, 2006
WQSX-FM B 179 93.7 MHz 34 April 1, 2006
WWTM-AM B * 1440 kHz 5 April 1, 2006
Seattle, WA..... KBSG-AM B * 1210 kHz 27.5-D February 1, 2006
10.0-N
KBSG-FM C 729 97.3 MHz 55 February 1, 2006
KIRO-AM A * 710 kHz 50 February 1, 2006
KISW-FM C 350 99.9 MHz 100 February 1, 2006
KMTT-FM C 714 103.7 MHz 58 February 1, 2006
KQBZ-FM C 714 100.7 MHz 58 February 1, 2006
KNWX-AM B * 770 kHz 50-D February 1, 2006
5-N
KNDD-FM C 714 107.7 MHz 58 February 1, 2006
Portland, OR.... KFXX-AM B * 910 kHz 5 February 1, 2006
KGON-FM C 386 92.3 MHz 100 February 1, 2006
KKSN-AM B * 1520 kHz 50-D February 1, 2006
15-N
KKSN- FM C 386 97.1 MHz 100 February 1, 2006
KNRK-FM C2 259 94.7 MHz 17 February 1, 2006
KRSK-FM C 561 105.1 MHz 100 February 1, 2006
KSLM-AM B * 1390 kHz 5-D February 1, 2006
0.69-N
Sacramento, CA.. KCTC-AM B * 1320 kHz 5 December 1, 2005
KRXQ-FM B 151 98.5 MHz 50 December 1, 2005
KSEG-FM B 152 96.9 MHz 50 December 1, 2005
KSSJ-FM B1 99 94.7 MHz 25 December 1, 2005
KDND-FM B 123 107.9 MHz 50 December 1, 2005
Kansas City, MO. KCMO-AM B * 710 kHz 10-D February 1, 2005
5-N
KCMO-FM C 322 94.9 MHz 100 February 1, 2005
KMBZ-AM B * 980 kHz 5 February 1, 2005
KUDL-FM C 303 98.1 MHz 100 June 1, 2005
KYYS-FM C 308 99.7 MHz 100 February 1, 2005
WDAF-AM B * 610 kHz 5 February 1, 2005
KKGM-AM(3) B * 1250 kHz 25-D June 1, 2005
3.7-N
KCFX-FM(4) C1 303 101.1 MHz 87.0 February 1, 2005
KQRC-FM(4) C 322 98.9 MHz 100.0 February 1, 2005
KCIY-FM(4) C1 299 101 MHz 100.0 February 1, 2005
KXTR-FM(4) C 300 96.5 MHz 99.0 February 1, 2005
Milwaukee, WI... WEMP-AM B * 1250 kHz 5.0 December 1, 2003
WMYX-FM B 137 99.1 MHz 50.0 December 1, 2003
WXSS-FM B 256 103.7 MHz 19.5 December 1, 2003
Norfolk, VA..... WPTE-FM B 152 94..9 MHz 50.0 October 1, 2003
WWDE-FM B 152 101.3 MHz 50.0 October 1, 2003
WVKL-FM B 268 95.7 MHz 40.0 October 1, 2003
WNVZ-FM B 146 104.5 MHz 49.0 October 1, 2003
8
12
FCC HAAT POWER IN EXPIRATION DATE OF
MARKET(1) STATION CLASS (IN METERS) FREQUENCY KILOWATTS(2) FCC LICENSE
- --------- ------- ----- ----------- --------- ------------ -----------
New Orleans, LA. WSMB-AM B * 1350 kHz 5.0 June 1, 2004
WWL-AM A * 870 kHz 50.0 June 1, 2004
WEZB-FM C 300 97.1 MHz 100.0 June 1, 2004
WLMG-FM C 300 101.9 MHz 100.0 June 1, 2004
WLTS-FM C1 275 105.3 MHz 100.0 June 1, 2004
WTKL-FM C 300 95.7 MHz 100.0 June 1, 2004
Greensboro, NC.. WMQX-FM C 335 93.1 MHz 99.0 December 1, 2003
WJMH-FM C 483 101.9 MHz 99.0 December 1, 2003
WEAL-AM D * 1500 kHz 1.0 December 1, 2003
WQMG-FM C 376 97.1 MHz 99.0 December 1, 2003
Buffalo, NY..... WBEN-AM B * 930 kHz 5.0 June 1, 2006
WMJQ-FM B 408 102.5 MHz 110.0 June 1, 2006
WWKB-AM A * 1520 kHz 50.0 June 1, 2006
WKSE-FM B 128 98.8 MHz 46.0 June 1, 2006
WGR-AM B * 550 kHz 5.0 June 1, 2006
WWWS-AM C * 1400 kHz 1.0 June 1, 2006
Memphis, TN..... WOGY-FM C2 141 94.1 MHz 50.0 August 1, 2004
WJCE-AM B * 680 kHz 10.0 August 1, 2004
WRVR-FM C1 299 104.5 MHz 100.0 August 1, 2004
Rochester, NY... WBBF-FM B 172 98.9 MHz 37 June 1, 2006
WBEE-FM B 152 92.5 MHz 50 June 1, 2006
WEZO-AM B * 950 kHz 1 June 1, 2006
WQRV-FM A 119 93.3 MHz 4 June 1, 2006
Greenville/
Spartanburg, SC WFBC-FM C 564 93.7 MHz 100.0 December 1, 2003
WSPA-FM C 580 98.9 MHz 100.0 December 1, 2003
WYRD-AM B 184 1330 kHz 5.0 December 1, 2003
WORD-AM B * 910 kHz 3.6 December 1, 2003
WSPA-AM B * 950 kHz 5.0 December 1, 2003
WOLI-FM A 100 103.9 MHz 6 December 1, 2003
WOLT-FM A 151 103.3 MHz 2.7 December 1, 2003
WHYZ-AM(4) B * 1070 kHz 50-D December 1, 2003
1.5-N
Wilkes-Barre/
Scranton, PA.. WGBI-AM B * 91.0 kHz 1.0-D August 1, 2006
.5-N
WGGI-FM A 100 95.9 MHz 6.0 August 1, 2006
WKRZ-FM B 357 98.5 MHz 8.7 August 1, 2006
WWFH-FM A 207 103.1 MHz .73 August 1, 2006
WILP-AM B * 1300 kHz 5.0 August 1, 2006
WKRF-FM A 267 107.9 MHz .84 August 1, 2006
WSHG-FM A 22 102.3 MHz 5.8 August 1, 2006
WILK-AM B * 980 kHz 5.0 August 1, 2006
WGGY-FM B 338 101.3 MHz 7.0 August 1, 2006
Gainesville/
Ocala, FL..... WKTK-FM C1 299 98.5 MHz 100 February 1, 2004
WSKY-FM(5) C2 289 97.3 MHz 13.5 February 1, 2004
9
13
FCC HAAT POWER IN EXPIRATION DATE OF
MARKET(1) STATION CLASS (IN METERS) FREQUENCY KILOWATTS(2) FCC LICENSE
- --------- ------- ----- ----------- --------- ------------ -----------
Witchita, KS.... KEYN-FM C1 262 103.7 MHz 95 June, 1 2005
KWCY-FM C 301 105.3 MHz 100 June 1, 2005
KQAM-AM B * 1480 kHz 5.0-D June 1, 2005
1.0-N
KFH-AM B * 1330 kHz 5.0-D June 1, 2005
5.0-N
KNSS-AM C * 1240 kHz .63-D June 1, 2005
.63-N
KDGS-FM(4) C3 100 93.9 MHz 25 June 1, 2005
KAYY-FM(4) C2 150 98.7 MHz 50 June 1, 2005
Longview/Kelso,
WA............ KBAM-AM D * 1270 kHz 5-D February 1, 2006
0.083-N
KEDO-AM C * 1400 kHz 1 February 1, 2006
KLYK-FM A 262 105.5 MHz 0.7 February 1, 2006
KRQT-FM C3 528 107.1 MHz 0.74 February 1, 2006
* Not applicable for AM transmission facilities.
(1) Metropolitan market served; city of license may differ.
(2) Pursuant to FCC rules and regulations, many AM radio stations are licensed
to operate at a reduced power during the nighttime broadcasting hours,
which results in reducing the radio station's coverage during the
nighttime hours of operation. Both power ratings are shown, where
applicable. For FM stations, the maximum effective radiated power in the
main lobe is given.
(3) KKGM-AM also has a construction permit to broadcast with call letters
KWSJ-AM at 1660 kHz in the expanded AM band with 10 kw-D and 1 kw-N. The
FCC rules require that at the end of a five year transition period we must
elect to operate on either the 1250 kHz frequency or the 1660 kHz
frequency and surrender the other frequency to the FCC.
(4) Acquisition pending.
(5) WSKY-FM has operated since June 1998 with the facilities shown. A license
application for these facilities has been filed with the FCC.
TRANSFERS OR ASSIGNMENT OF LICENSES. The Communications Act prohibits the
assignment of broadcast licenses or the transfer of control of a broadcast
licensee without the prior approval of the FCC. In determining whether to grant
such approval, the FCC considers a number of factors pertaining to the licensee
(and proposed licensee), including:
- compliance with the various rules limiting common ownership of media
properties in a given market;
- the "character" of the licensee and those persons holding
"attributable" interests in the licensee; and
- compliance with the Communications Act's limitations on alien
ownership as well as compliance with other FCC regulations and
policies.
To obtain FCC consent to assign or transfer control of a broadcast
license, appropriate applications must be filed with the FCC. If the application
involves a "substantial change" in ownership or control, the application must be
placed on public notice for not less than 30 days during which time petitions to
deny or other objections against the application may be filed by interested
parties, including members of the public. If the application does not involve a
"substantial change" in ownership or control, it is a "pro forma" application.
The "pro forma" application is nevertheless subject to having informal
objections filed against it. When passing on an assignment or transfer
application, the FCC is prohibited from considering whether the public interest
might be served by an assignment or transfer of the broadcast license to any
party other than the assignee or transferee specified in the application.
MULTIPLE OWNERSHIP RULES. The Communications Act and FCC rules impose
specific limits on the number of commercial radio stations an entity can own in
a single market. These rules preclude us from acquiring certain stations we
might otherwise seek to acquire, including the acquisition of more than one
additional radio station in Kansas City, where we already own seven stations.
The rules also effectively prevent us from selling stations in a market to a
buyer that has reached its ownership limit in the market. The local radio
ownership rules are as follows:
10
14
- in markets with 45 or more commercial radio stations, ownership is
limited to eight commercial stations, no more than five of which can
be either AM or FM;
- in markets with 30 to 44 commercial radio stations, ownership is
limited to seven commercial stations, no more than four of which can
be either AM or FM;
- in markets with 15 to 29 commercial radio stations, ownership is
limited to six commercial stations, no more than four of which can
be either AM or FM; and
- in markets with 14 or fewer commercial radio stations, ownership is
limited to five commercial stations or no more than 50% of the
market's total, whichever is lower, and no more than three of which
can be either AM or FM.
The FCC is also reportedly considering proposing a policy that would give
special review to a proposed transaction if it would enable a single owner to
attain a high degree of revenue concentration in a market. In connection with
this, the FCC has invited comment on the impact of concentration in public
notices concerning proposed transactions, and has delayed or refused its consent
in some cases because of revenue concentrations.
The FCC recently revised its radio/television cross-ownership rule to
allow for greater common ownership of television and radio stations. The revised
radio/television cross-ownership rule permits a single owner to own up to two
television stations, consistent with the FCC's rules on common ownership of
television stations, together with one radio station in all markets. In
addition, an owner will be permitted to own additional radio stations, not to
exceed the local ownership limits for the market, as follows:
- in markets where 20 media voices will remain, an owner may own an
additional 5 radio stations, or, if the owner only has one
television station, an additional 6 radio stations; and
- in markets where 10 media voices will remain, an owner may own an
additional 3 radio stations.
A "media voice" includes each independently-owned, full power television
and radio station and each daily newspaper, plus one voice for all cable
television systems operating in the market.
In addition to the limits on the number of radio stations that a single
owner may own, the FCC's broadcast/newspaper cross-ownership rule prohibits the
same owner from owning a broadcast station and a daily newspaper in the same
geographic market. The FCC generally applies its ownership limits to
"attributable" interests held by an individual, corporation, partnership or
other association. In the case of corporations directly or indirectly
controlling broadcast licenses, the interests of officers, directors and those
who, directly or indirectly, have the right to vote 5% or more of the
corporation's voting stock are generally attributable. In addition, certain
passive investors are attributable if they hold 20% or more of the corporation's
voting stock. If a single individual or entity controls more than 50% of a
corporation's voting stock, however, the interests of other shareholders are
generally not attributable unless the shareholders are also officers or
directors of the corporation.
The FCC recently adopted a new rule, known as the equity-debt-plus or EDP
rule that causes certain creditors or investors to be attributable owners of a
station, regardless of whether there is a single majority shareholder. Under
this new rule, a major programming supplier or a same-market owner will be an
attributable owner of a station if the supplier or owner holds debt or equity,
or both, in the station that is greater than 33% of the value of the station's
total debt plus equity. A major programming supplier includes any programming
supplier that provides more than 15% of the station's weekly programming hours.
A same-market owner includes any attributable owner of a media company,
including broadcast stations, cable television and newspapers, located in the
same market as the station, but only if the owner is attributable under an FCC
attribution rule other than the EDP rule. If attribution under the
equity-debt-plus rule results in a violation of the FCC's multiple ownership
rules, each affected party must come into compliance with those rules, by
reducing or eliminating the party's interest in the affected media outlets or
obtaining a waiver from the FCC, no later than August 5, 2000. The attribution
rules limit the number of radio stations we may acquire or own in any market.
ALIEN OWNERSHIP RULES. The Communications Act prohibits the issuance or
holding of broadcast licenses by aliens, including any corporation if more than
20% of its capital stock is owned or voted by aliens. In addition, the FCC may
prohibit any corporation from holding a broadcast license if the corporation is
directly or indirectly controlled by any other corporation of which more than
25% of the capital stock is owned of record or voted by aliens, if the FCC finds
that the prohibition is in the public interest. Our articles of incorporation
prohibit the ownership, voting and transfer of our capital stock in violation of
the FCC restrictions, and prohibit the issuance of capital stock or the voting
rights such capital stock represents to or for the account of aliens or
corporations otherwise subject to domination or control by aliens in excess of
the FCC limits. The articles of incorporation authorize our board of directors
to enforce these prohibitions. In addition, the articles of incorporation
provide that shares of our capital stock determined by our board of directors to
be owned beneficially by an alien or an entity directly or indirectly owned by
aliens in whole or in part shall be subject to redemption by us by
11
15
action of the board of directors to the extent necessary, in the judgment of the
board of directors, to comply with these alien ownership restrictions.
TIME BROKERAGE AGREEMENTS. Over the past few years, a number of radio
stations have entered into what have commonly been referred to as time brokerage
agreements. While these agreements may take varying forms, under a typical time
brokerage agreement, separately owned and licensed radio stations agree to enter
into cooperative arrangements of varying types, subject to compliance with the
requirements of antitrust laws and with FCC's rules and policies. Under these
arrangements, separately-owned stations could agree to function cooperatively in
programming, advertising sales and similar matters, subject to the requirement
that the licensee of each station maintain independent control over the
programming and operations of its own station. One typical type of time
brokerage agreement is a programming agreement between two separately-owned
radio stations serving a common service area, whereby the licensee of one
station provides substantial portions of the broadcast programming for airing on
the other licensee's station, subject to ultimate editorial and other controls
being exercised by the latter licensee, and sells advertising time during those
program segments.
The FCC's rules provide that a radio station that brokers more than 15% of
the weekly broadcast time on another station serving the same market will be
considered to have an attributable ownership interest in the brokered station
for purposes of FCC's multiple ownership limits. As a result, in a market where
we own a radio station, we would not be permitted to enter into a time brokerage
agreement with another radio station in the same market if we could not own the
brokered station under the multiple ownership rules, unless our programming on
the brokered station constituted 15% or less of the brokered station's
programming time on a weekly basis. FCC rules also prohibit a broadcast station
from duplicating more than 25% of its programming on another station in the same
broadcast service (i.e., AM-AM or FM-FM) through a time brokerage agreement
where the brokered and brokering stations which it owns or programs serve
substantially the same area.
PROGRAMMING AND OPERATION. The Communications Act requires broadcasters to
serve the "public interest." The FCC gradually has relaxed or eliminated many of
the more formalized procedures it had developed in the past to promote the
broadcast of certain types of programming responsive to the needs of a station's
community of license. A licensee continues to be required, however, to present
programming that is responsive to issues of the station's community of license
and to maintain records demonstrating this responsiveness. Complaints from
listeners concerning a station's programming often will be considered by the FCC
when it evaluates renewal applications of a licensee, although listener
complaints may be filed at any time, are required to be maintained in the
station's public file and generally may be considered by the FCC at any time.
Stations also must pay regulatory and application fees and follow various rules
promulgated under the Communications Act that regulate, among other things,
political advertising, sponsorship identifications, the advertisement of
contests and lotteries, obscene and indecent broadcasts, and technical
operations, including limits on human exposure to radio frequency radiation.
On January 20, 2000, the FCC adopted new rules prohibiting employment
discrimination by broadcast stations on the basis of race, religion, color,
national origin, and gender; and requiring broadcasters to implement programs to
promote equal employment opportunities at their stations. The rules generally
require broadcast stations to disseminate information about job openings widely
so that all qualified applicants, including minorities and women, have an
adequate opportunity to compete for the job. Broadcasters may fulfill this
requirement by sending the station's job vacancy information to organizations
that request it, participating in community outreach programs, or designing an
alternative recruitment program. Broadcasters with five or more full-time
employees must place in their public files annually a report detailing their
recruitment efforts and must file a statement with the FCC certifying compliance
with the rules every two years. Broadcasters with ten or more full-time
employees must file their annual reports with the FCC midway through their
license term. Broadcasters also must file employment information with the FCC
annually for statistical purposes. These new equal employment opportunity rules
are designed to replace the FCC's prior rules, some of which were held
unconstitutional by the U.S. Court of Appeals for the District of Colombia
Circuit.
The FCC recently issued a decision holding that a broadcast station may
not deny a candidate for federal political office a request for broadcast
advertising time solely on the grounds that the amount of time requested is not
the standard length of time which the station offers to its commercial
advertisers. This decision is currently being reconsidered by the FCC. The
effect that this FCC decision will have on our programming and commercial
advertising is uncertain.
We employ a number of on-air personalities and generally enter into
employment agreements with these personalities to protect our interests in those
relationships that we believe to be valuable. The loss of some of these
personalities could result in a short-term loss of audience share, but we do not
believe that the loss would have a material adverse effect on our business.
PROPOSED AND RECENT CHANGES. Congress and the FCC may in the future
consider and adopt new laws, regulations and policies regarding a wide variety
of matters that could (1) affect, directly or indirectly, the operation,
ownership and profitability of our radio stations, (2) result in the loss of
audience share and advertising revenues for our radio stations, and (3) affect
our ability to acquire additional radio stations or to finance those
acquisitions. Such matters may include:
- regulatory fees, spectrum use fees, or other fees on FCC licenses;
12
16
- foreign ownership of broadcast licenses;
- restatement in revised form of FCC's equal employment opportunity
rules and revisions to the FCC's rules relating to political
broadcasting;
- technical and frequency allocation matters;
- proposals to restrict or prohibit the advertising of beer, wine and
other alcoholic beverages on radio; and
- changes in the FCC's cross-interest, multiple ownership and
attribution policies.
In January 1995, the FCC adopted rules to allocate spectrum for satellite
digital audio radio service. Satellite digital audio radio service systems
potentially could provide for regional or nationwide distribution of radio
programming with fidelity comparable to compact discs. The FCC has issued two
authorizations to launch and operate satellite digital audio radio service.
The FCC currently is considering standards for evaluating, authorizing,
and implementing terrestrial digital audio broadcasting technology, including
In-Band On-Channel(TM) technology for FM radio stations. The advantages of
digital audio broadcasting over traditional analog broadcasting technology
include improved sound quality and the ability to offer a greater variety of
auxiliary services. In-Band On-Channel(TM) technology would permit an FM station
to transmit radio programming in both analog and digital formats, or in digital
only formats, using the bandwidth that the radio station is currently licensed
to use. It is unclear what regulations the FCC will adopt regarding digital
audio broadcasting or In-Band On-Channel(TM) technology and what effect such
regulations would have on our business or the operations of our radio stations.
The FCC has authorized an additional 100 kHz of bandwidth for the AM band
and on March 17, 1997, adopted an allotment plan for the expanded band, which
identified the 88 AM radio stations selected to move into the band. At the end
of a five-year transition period, those licensees will be required to return to
the FCC either the license for their existing AM band station or the license for
the expanded AM band station.
On January 20, 2000, the FCC voted to adopt rules creating a new low power
FM radio service. The new low power stations will operate at a maximum power of
between 10 and 100 watts in the existing FM commercial and non-commercial band.
Low power stations may be used by governmental and non-profit organizations to
provide noncommercial educational programming or public safety and
transportation radio services. No existing broadcaster or other media entity,
including us, will be permitted to have an ownership interest or enter into any
program or operating agreement with any low power FM station. During the first
two years of the new service, applicants must be based in the area that they
propose to serve. Applicants will not be permitted to own more than one station
nationwide during the initial two year period. After the initial two year
period, entities will be allowed to own up to five stations nationwide, and
after three years, the limit will be raised to ten stations nationwide. A single
person or entity may not own two low power stations whose transmitters are less
than seven miles from each other. The authorizations for the new stations will
not be transferable. The FCC has stated that it intends to begin accepting
applications for new stations in the next several months.
At this time it is difficult to assess the competitive impact of these new
stations. Although the new low power stations must comply with certain technical
requirements aimed at protecting existing FM radio stations from interference,
we cannot be certain of the level of interference that low power stations will
cause after they begin operating. Moreover, if low power FM stations are
licensed in the markets in which we operate, the low power stations may compete
for listeners and advertisers. The low power stations may also limit our ability
to obtain new licenses or to modify our existing facilities, or cause
interference to areas of existing service that are not protected by the FCC's
rules, any of which may have a material adverse affect on our business.
Finally, the FCC has adopted procedures for the auction of broadcast
spectrum in circumstances where two or more parties have filed for new or major
change applications which are mutually exclusive. Such procedures may limit our
efforts to modify or expand the broadcast signals of our stations.
We cannot predict what other matters might be considered in the future by
the FCC or Congress, nor can we judge in advance what impact, if any, the
implementation of any of these proposals or changes might have on our business.
FEDERAL ANTITRUST LAWS. The agencies responsible for enforcing the federal
antitrust laws, the Federal Trade Commission or the Department of Justice, may
investigate certain acquisitions. We cannot predict the outcome of any specific
Department of Justice or Federal Trade Commission investigation. Any decision by
the Federal Trade Commission or the Department of Justice to challenge a
proposed acquisition could affect our ability to consummate the acquisition or
to consummate it on the proposed terms.
For an acquisition meeting certain size thresholds, the Hart-Scott-Rodino
Act requires the parties to file Notification and Report Forms with the Federal
Trade Commission and the Department of Justice and to observe specified waiting
period requirements before consummating the acquisition. If the investigating
agency raises substantive issues in connection with a proposed transaction, then
the
13
17
parties frequently engage in lengthy discussions or negotiations with the
investigating agency concerning possible means of addressing those issues,
including restructuring the proposed acquisition or divesting assets. In
addition, the investigating agency could file suit in federal court to enjoin
the acquisition or to require the divestiture of assets, among other remedies.
Acquisitions that are not required to be reported under the Hart-Scott-Rodino
Act may be investigated by the Federal Trade Commission or the Department of
Justice under the antitrust laws before or after consummation. In addition,
private parties may under certain circumstances bring legal action to challenge
an acquisition under the antitrust laws.
The consummation of the Sinclair acquisition in the Kansas City market is
subject to the notification filing requirements and applicable waiting periods
of the Department of Justice and the Federal Trade Commission, and we filed the
applicable Hart-Scott-Rodino notice. On September 24, 1999, we received a
"second request" from the Department of Justice with respect to the Kansas City
acquisition. Although we believe that the concerns of the Department of Justice
will be resolved by our disposition of three stations in the Kansas City market
that we are required to make in order to comply with FCC rules, we cannot assure
you that this will be the case.
As part of its increased scrutiny of radio station acquisitions, the
Department of Justice has stated publicly that it believes that local marketing
agreements, joint sales agreements, time brokerage agreements and other similar
agreements customarily entered into in connection with radio station transfers
could violate the Hart-Scott-Rodino Act if such agreements take effect prior to
the expiration of the waiting period under the Hart-Scott-Rodino Act.
Furthermore, the Department of Justice has noted that joint sales agreements may
raise antitrust concerns under Section 1 of the Sherman Act and has challenged
joint sales agreements in certain locations. The Department of Justice also has
stated publicly that it has established certain revenue and audience share
concentration benchmarks with respect to radio station acquisitions, above which
a transaction may receive additional antitrust scrutiny. However, to date, the
Department of Justice has also investigated transactions that do not meet or
exceed these benchmarks, and has cleared transactions that do exceed these
benchmarks. There can be no assurance of what action the Department of Justice
may take with respect to our acquisition of four stations from Sinclair in the
Kansas City market.
EMPLOYEES
On February 29, 2000, we had a staff of 1,503 full-time employees and 636
part-time employees. We are a party to collective bargaining agreements with the
American Federation of Television and Radio Artists (AFTRA), which apply to some
of our programming personnel and with the International Brotherhood of
Electrical Workers which applies to some of our engineering personnel. These
collective bargaining agreements expire at various times over the next three
years. Our Boston AFTRA collective bargaining agreement, as extended, expired on
September 14, 1999. The Seattle AFTRA collective bargaining agreement expired
December 31, 1999. We are currently renegotiating these agreements and cannot
predict the outcome of these negotiations. We believe that our relations with
our employees are good.
ENVIRONMENTAL
As the owner, lessee or operator of various real properties and
facilities, we are subject to various federal, state and local environmental
laws and regulations. Historically, compliance with these laws and regulations
has not had a material adverse effect on our business. There can be no
assurance, however, that compliance with existing or new environmental laws and
regulations will not require us to make significant expenditures of funds.
SEASONALITY
Seasonal revenue fluctuations are common in the radio broadcasting
industry and are due primarily to fluctuations in advertising expenditures by
retailers. Our revenues and broadcast cash flows are typically lowest in the
first calendar quarter.
ITEM 2. PROPERTIES AND FACILITIES
The types of properties required to support each of our radio stations
include offices, studios and transmitter/antenna sites. We typically lease our
studio and office space with lease terms that expire in five to ten years,
although we do own some of our facilities. A station's studios are generally
housed with its offices in downtown or business districts. We generally consider
our facilities to be suitable and of adequate size for our current and intended
purposes. We own a majority of our main transmitter and antenna sites and lease
the remainder of our transmitter/antenna sites with lease terms that expire,
including renewal options, in periods generally ranging up to twenty years. The
transmitter/antenna site for each station is generally located so as to provide
maximum market coverage, consistent with the station's FCC license. In general,
we do not anticipate difficulties in renewing facility or transmitter/antenna
site leases or in leasing additional space or sites if required.
We own substantially all of our other equipment, consisting principally of
transmitting antennae, transmitters, studio equipment and general office
equipment. The towers, antennae and other transmission equipment used by our
stations are generally in good condition,
14
18
although opportunities to upgrade facilities are continuously reviewed.
Substantially all of the property that we own secures our borrowings under our
credit facility.
ITEM 3. LEGAL PROCEEDINGS
We currently and from time to time are involved in litigation incidental
to the conduct of our business, but we are not a party to any lawsuit or
proceeding which, in the opinion of management, is likely to have a material
adverse effect on us.
We 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 our efforts to pursue this
transaction, the seller was nonresponsive. On July 28, 1999, we commenced a
legal action seeking to enforce this agreement, and subsequently the seller
filed a cross-complaint against us asking for damages, an injunction and costs
and filed a separate action against our president. This separate action against
our president was dismissed without leave to amend in February 2000. We intend
to pursue our legal action against the seller and seek dismissal of the
cross-complaint. However, we cannot determine if and when the transaction might
occur.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of 1999.
15
19
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
PRICE RANGE OF OUR CLASS A COMMON STOCK
Our Class A common stock is listed on The New York Stock Exchange under
the symbol "ETM."
The table below shows, for the quarters indicated, the reported high and
low trading prices of our Class A common stock on The New York Stock Exchange.
PRICE RANGE
------------------
HIGH LOW
------- ---------
Calendar Year 1999
First Quarter (beginning January 29) $35.38 $28.31
Second Quarter 42.75 31.75
Third Quarter 41.94 35.00
Fourth Quarter 67.75 35.13
Calendar Year 2000
First Quarter (through March 10 ) 68.69 38.13
The initial public offering of our Class A common stock was priced on
January 28, 1999 at a price of $22.50 per share.
As of March 15, 2000, there were approximately 45 shareholders of record
of our Class A common stock, $.01 par value. This number does not include the
number of shareholders whose shares are held of record by a broker or clearing
agency but does include each such brokerage house or clearing agency as one
record holder. Based upon available information, we believe we have
approximately 6,000 beneficial owners of our Class A common stock. There are 3
shareholders of record of our Class B common stock, $.01 par value, and 2
shareholders of record of our Class C common stock, $.01 par value.
Since becoming a public company in January 1999, we have not declared any
dividends on our common stock. We have no plans to declare or pay cash dividends
in the foreseeable future because we intend to retain our earnings, if any, to
finance the expansion of our business and for general corporate purposes. Any
payment of future dividends will be at the discretion of the board of directors
and will depend upon, among other factors, our earnings, financial condition,
capital requirements, level of indebtedness, contractual restrictions, including
the provisions of our credit facility and provisions applicable to the 6 -1/4%
Convertible Preferred Securities Term Income Deferrable Equity Securities
(TIDES) of our subsidiary trust, and other considerations that the board of
directors deems relevant.
On February 3, 1999, we sold 11,300,000 shares of our Class A common stock
and one of our shareholders sold 2,327,500 shares of our Class A common stock in
our initial public offering pursuant to a Registration Statement on Form S-1
(Registration No. 333-61381), which was declared effective by the Commission on
January 28, 1999. Credit Suisse First Boston Corporation was the managing
underwriter. The net proceeds were approximately $236.2 million, all of which we
used to reduce outstanding indebtedness under our credit facility and to pay
other corporate obligations.
On October 6, 1999, we sold 8,000,000 shares of our Class A Common Stock
and some of our shareholders sold an aggregate of 750,000 shares of our Class A
common stock pursuant to a Registration Statement on Form S-1 (Registration No.
333-86397), which was declared effective by the Commission on September 30,
1999. Credit Suisse First Boston Corporation was the managing underwriter. The
net proceeds were approximately $276.1 million, all of which was used to reduce
outstanding debt and to fund the Sinclair acquisition.
On October 6, 1999, we sold $125.0 million in aggregate principal amount
of TIDES pursuant to a Registration Statement on Form S-1 (Registration No.
333-86843), which was declared effective by the Commission on September 30,
1999. Credit Suisse First Boston Corporation was the managing underwriter. The
net proceeds were approximately $120.5 million, all of which was used to reduce
outstanding debt and to fund the Sinclair acquisition.
RECENT SALES OF UNREGISTERED SECURITIES
In January 1999, we effected a 185 for one stock split of our outstanding
shares of voting and non-voting common stock. Each share of prior common stock
held by Joseph M. Field, our Chairman of the Board and Chief Executive Officer,
and David J. Field, our President and Chief Operating Officer, was exchanged for
one share of Class B common stock and each share of prior common stock held by
all other shareholders was exchanged for one share of Class A common stock.
16
20
On January 28, 1999, we converted a 7% Subordinated Convertible Note due
2003 in the principal amount of $25 million held by Chase Equity Associates,
L.P., an affiliate of Chase Capital Partners, into 2,327,500 shares of Class A
common stock and 1,995,669 shares of Class C common stock.
Both transactions were intended to be exempt from the registration
requirements of the Securities Act by virtue of Section 3(a)(9) thereof.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
- Historically, we operated with an October 1st to September 30th
fiscal year. Effective January 1, 1999, we changed for financial
reporting purposes from a fiscal year ending September 30th to a
fiscal year ending December 31st. Accordingly, the selected
historical financial data includes information as of and for the
three month transition period ended December 31, 1998, the three
months ended December 31, 1997 and, for comparison purposes, the
twelve months ended December 31, 1998.
- Immediately prior to our initial public offering, Chase Capital
converted a 7% Subordinated Convertible Note due 2003 in the
principal amount of $25 million into 2,327,500 shares of our Class A
common stock and 1,995,669 shares of our Class C common stock. The
Chase Capital convertible subordinated note has been retired and we
have no further obligation with respect to the note.
- Before completing our initial public offering, we were an S
corporation, and accordingly, we were not liable for federal and
certain state corporate income taxes. Instead, our shareholders
included our taxable income or loss in their federal and those state
income tax returns. Immediately before our initial public offering,
we became a C corporation, and accordingly, we are now subject to
federal and state corporate income taxes. The pro forma amounts
shown in the table reflect provisions for state and federal income
taxes, applied to income before income taxes and extraordinary item
and the effect of the adjustment to reflect indexing of the Chase
Capital convertible subordinated note (the amount of this adjustment
is not tax deductible), as if we had been taxed as a C corporation.
- As a result of our becoming a C corporation immediately prior to our
initial public offering, generally accepted accounting principles
required us to provide for deferred income taxes of $79.8 million to
reflect the cumulative temporary differences between book and income
tax bases of our assets and liabilities.
- For purposes of our historical financial statements, the term "pro
forma" refers solely to the adjustments necessary to reflect our
status as if we were a C corporation rather than an S corporation as
of the beginning of the periods presented.
- All per share data gives effect to our recapitalization, which we
consummated immediately prior to our initial public offering. In the
recapitalization, we effected a 185 for one stock split and the
exchange of our prior common stock for Class A common stock and
Class B common stock.
- Broadcast cash flow consists of operating income before depreciation
and amortization, corporate general and administrative expenses, net
expense (income) from time brokerage agreement fees and gains on
sale of assets.
- Broadcast cash flow margin represents broadcast cash flow as a
percentage of net revenue.
- EBITDA before net expense (income) from time brokerage agreement
fees consists of operating income plus depreciation and
amortization, non-cash compensation expense (which is otherwise
included in corporate general and administrative expenses), net
expense (income) from time brokerage agreement fees and gains on
sale of assets.
- Pro forma after-tax cash flow consists of pro forma income before
extraordinary item minus gains on sale of assets (net of tax) plus
the following: depreciation and amortization, non-cash compensation
expense (which is otherwise included in corporate general and
administrative expense), adjustment to reflect indexing of the
convertible subordinated note and deferred tax provision (or minus
deferred tax benefit).
- The data is presented in thousands, other than earnings per share.
Although broadcast cash flow, EBITDA before net expense (income) from time
brokerage agreement fees and pro forma after-tax cash flow are not measures of
performance or liquidity calculated in accordance with generally accepted
accounting principles, we believe that these measures are useful to an investor
in evaluating our performance because they are widely used in the broadcast
industry to measure a radio company's operating performance. However, you should
not consider broadcast cash flow, EBITDA before net expense
17
21
(income) from time brokerage agreement fees and pro forma after-tax cash flow in
isolation or as substitutes for operating income, cash flows from operating
activities or any other measure for determining our operating performance or
liquidity that is calculated in accordance with generally accepted accounting
principles. In addition, because broadcast cash flow, EBITDA before net expense
(income) from time brokerage agreement fees and pro forma after-tax cash flow
are not calculated in accordance with generally accepted accounting principles,
they are not necessarily comparable to similarly titled measures employed by
other companies.
18
22
YEAR ENDED SEPTEMBER 30,
-----------------------------------------------------------------------
1995 1996 1997 1998
-------- --------- --------- ---------
OPERATING DATA:
Net revenues ............................. $ 35,893 $ 48,675 $ 93,862 $ 132,998
Operating expenses (income):
Station operating expenses ............. 24,061 31,659 61,280 88,599
Depreciation and amortization .......... 2,225 2,960 7,685 13,066
Corporate general and
administrative expenses .............. 2,535 2,872 3,249 4,527
Net expense (income) from time
brokerage agreement fees ............. 603 (879) (476) 2,399
(Gains) on sale of assets .............. (228) (119) (197,097) (8,661)
-------- --------- --------- ---------
Total operating expenses (income) ... 29,196 36,493 (125,359) 99,930
-------- --------- --------- ---------
Operating income ......................... 6,697 12,182 219,221 33,068
Other expense (income):
Interest expense ....................... 1,992 5,196 11,388 14,663
Financing cost of Entercom --
obligated mandatorily redeemable
convertible preferred securities of
Entercom Communications Capital
Trust................................. -- -- -- --
Adjustment to reflect indexing of
the convertible subordinated
note.................................. -- -- 29,070 8,841
Interest income ........................ -- -- (482) (410)
Other non-operating expenses (income) .. (100) (67) 1,986 82
-------- --------- --------- ---------
Total other expense (income) ........ 1,892 5,129 41,962 23,176
-------- --------- --------- ---------
Income (loss) before income taxes
and extraordinary item ................. $ 4,805 $ 7,053 $ 177,259 $ 9,892
Income taxes ............................. 270 274 489 453
-------- --------- --------- ---------
Income (loss) before extraordinary item... 4,535 6,779 176,770 9,439
Extraordinary item, net of taxes ......... 334 539 -- 2,376
-------- --------- --------- ---------
Net income (loss) ........................ $ 4,201 $ 6,240 $ 176,770 $ 7,063
======== ========= ========= =========
PRO FORMA DATA:
Income (loss) before income taxes
and extraordinary item ................. $ 4,805 $ 7,053 $ 177,259 $ 9,892
Pro forma income taxes ................... 1,826 2,680 78,405 7,119
-------- --------- --------- ---------
Pro forma income (loss) before
extraordinary item ..................... 2,979 4,373 98,854 2,773
Extraordinary item, net of pro forma
taxes .................................. 219 348 -- 1,488
-------- --------- --------- ---------
Pro forma net income (loss) .............. $ 2,760 $ 4,025 $ 98,854 $ 1,285
======== ========= ========= =========
Pro forma earnings (loss) per share
before extraordinary item .............. $ 0.14 $ 0.20 $ 4.59 $ 0.12
Pro forma diluted earnings (loss)
per share before extraordinary item .... $ 0.14 $ 0.20 $ 4.59 $ 0.12
Weighted average common shares
outstanding -- basic ................... 21,534 21,534 21,534 22,239
Weighted average common shares
outstanding -- diluted ................. 21,534 21,534 21,534 22,239
BALANCE SHEET DATA (AT END OF
PERIOD):
Cash and cash equivalents .............. $ 1,564 $ 5,292 $ 3,626 $ 6,666
Intangibles and other assets ........... 29,548 119,269 300,029 428,763
Total assets ........................... 52,209 150,575 364,743 522,945
Senior debt, including current portion . 46,554 111,000 117,000 253,784
Total shareholders' equity ............. 828 5,079 179,019 182,970
OTHER DATA:
Broadcast cash flow .................... $ 11,832 $ 17,016 $ 32,582 $ 44,399
Broadcast cash flow margin ............. 33.0% 35.0% 34.7% 33.4%
EBITDA before net expense (income) from
time brokerage agreement fees......... $ 9,297 $ 14,144 $ 29,333 $ 39,872
Pro forma after-tax cash flow .......... 4,526 7,311 16,590 21,028
Cash flows related to:
Operating activities ................. 1,182 12,773 8,859 23,019
Investing activities ................. (28,636) (96,502) (13,695) (153,651)
Financing activities ................. 27,505 87,457 3,170 133,672
TWELVE MONTHS
THREE MONTHS ENDED ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
------------------------------ ----------- -------------
1997 1998 1998 1999
--------- --------- --------- -----------
OPERATING DATA:
Net revenues ............................. $ 28,399 $ 47,363 $ 151,962 $ 215,001
Operating expenses (income):
Station operating expenses ............. 18,868 29,990 99,721 135,943
Depreciation and amortization .......... 2,880 4,358 14,544 21,564
Corporate general and
administrative expenses .............. 849 1,850 5,528 8,100
Net expense (income) from time
brokerage agreement fees ............. -- 1,236 3,635 652
(Gains) on sale of assets .............. (43) (69,648) (78,266) (1,986)
--------- --------- --------- -----------
Total operating expenses (income) ... 22,554 (32,214) 45,162 164,273
--------- --------- --------- -----------
Operating income ......................... 5,845 79,577 106,800 50,728
Other expense (income):
Interest expense ....................... 2,996 5,732 17,399 11,182
Financing cost of Entercom -- obligated
mandatorily redeemable convertible
preferred securities of Entercom
Communications Capital Trust ......... -- -- -- 1,845
Adjustment to reflect indexing of
the convertible subordinated note .... 14,903 29,503 23,441 --
Interest income ........................ (127) (146) (429) (3,253)
Other non-operating expenses (income) .. 25 723 780 --
--------- --------- --------- -----------
Total other expense (income) ........ 17,797 35,812 41,191 9,774
--------- --------- --------- -----------
Income (loss) before income taxes
and extraordinary item ................. $ (11,952) $ 43,765 $ 65,609 $ 40,954
Income taxes ............................. 81 310 682 100,913
--------- --------- --------- -----------
Income (loss) before extraordinary item .. (12,033) 43,455 64,927 (59,959)
Extraordinary item, net of taxes ......... -- -- 2,376 918
--------- --------- --------- -----------
Net income (loss) ........................ $ (12,033) $ 43,455 $ 62,551 $ (60,877)
========= ========= ========= ===========
PRO FORMA DATA:
Income (loss) before income taxes
and extraordinary item ................. $ (11,952) $ 43,765 $ 65,609 $ 40,954
Pro forma income taxes ................... 1,121 27,842 33,840 20,278
--------- --------- --------- -----------
Pro forma income (loss) before
extraordinary item ..................... (13,073) 15,923 31,769 20,676
Extraordinary item, net of pro forma
taxes .................................. -- -- 1,488 918
--------- --------- --------- -----------
Pro forma net income (loss) .............. $ (13,073) $ 15,923 $ 30,281 $ 19,758
========= ========= ========= ===========
Pro forma earnings (loss) per share
before extraordinary item .............. $ (0.61) $ 0.64 $ 1.32 $ 0.55
Pro forma diluted earnings (loss)
per share before extraordinary item .... $ (0.61) $ 0.64 $ 1.32 $ 0.54
Weighted average common shares
outstanding -- basic ................... 21,534 24,742 24,104 37,922
Weighted average common shares
outstanding -- diluted ................. 21,534 24,742 24,104 38,238
BALANCE SHEET DATA (AT END OF PERIOD):
Cash and cash equivalents .............. $ 3,497 $ 6,469 $ 6,469 $ 11,262
Intangibles and other assets ........... 313,889 504,825 504,825 1,225,335
Total assets ........................... 378,138 681,034 681,034 1,396,048
Senior debt, including current portion . 127,000 330,281 330,281 465,770
Total shareholders' equity ............. 166,986 225,467 225,467 686,611
OTHER DATA:
Broadcast cash flow .................... $ 9,531 $ 17,373 $ 52,241 $ 79,058
Broadcast cash flow margin ............. 33.6% 36.7% 34.4% 36.8%
EBITDA before net expense
(income) from time brokerage
agreement fees........................ $ 8,682 $ 15,523 $ 46,713 $ 71,419
Pro forma after-tax cash flow .......... 5,003 7,985 24,010 52,465
Cash flows related to:
Operating activities ................. 7,341 11,158 26,836 40,700
Investing activities ................. (17,470) (86,894) (223,075) (712,323)
Financing activities ................. 10,000 75,539 199,211 676,416
19
23
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
A radio broadcasting company derives its revenues primarily from the sale
of broadcasting time to local and national advertisers. The advertising rates
that a radio station is able to charge and the number of advertisements that can
be broadcast without jeopardizing listener levels largely determine those
revenues. Advertising rates are primarily based on three factors:
- a station's audience share in the demographic groups targeted by
advertisers, as measured principally by quarterly reports issued by
The Arbitron Ratings Company;
- the number of radio stations in the market competing for the same
demographic groups; and
- the supply of and demand for radio advertising time.
In fiscal 1999, we generated 75.7% of our gross revenues from local
advertising, which is sold primarily by each individual local radio station's
sales staff, and 24.3% from national spot advertising, which is sold by
independent advertising sales representatives. We generated the balance of our
1999 revenues principally from network advertising and rental income from tower
sites.
We include revenues recognized under a time brokerage agreement or a
similar sales agreement for stations operated by us prior to acquiring the
stations in net revenues, while we reflect operating expenses associated with
these stations in station operating expenses. Consequently, there is no
difference in the method of revenue and operating expense recognition between a
station operated by us under a time brokerage agreement or similar sales
agreement and a station owned and operated by us.
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. We generally incur
advertising and promotional expenses to increase "listenership" and Arbitron
ratings. However, because Arbitron reports ratings quarterly, any increased
ratings and therefore increased advertising revenues tend to lag behind the
incurrence of advertising and promotional spending.
We calculate "same station" growth by (1) comparing the performance of
stations operated by us throughout a relevant period to the performance of those
same stations (whether or not operated by us) in the prior year's corresponding
period, excluding the effect of barter revenues and expenses and discontinued
operations and (2) averaging those growth rates for the period presented. "Same
station broadcast cash flow margin" is the broadcast cash flow margin of the
stations included in our same station calculations. For purposes of the
following discussion, pro forma net income represents historical income before
income taxes and extraordinary item adjusted as if we were treated as a C
corporation during all relevant periods at an effective tax rate of 38%, applied
to income before income taxes and extraordinary item and the effect of the
adjustment to reflect indexing of the convertible subordinated note (the amount
of this adjustment is not tax deductible), and excluding extraordinary item, net
of pro forma taxes.
RESULTS OF OPERATIONS
You should read the following discussion and analysis of our financial
condition and results in conjunction with our consolidated financial statements
and related notes included elsewhere in this report. Historically, we operated
with an October 1st to September 30th fiscal year. Effective January 1, 1999, we
changed for financial reporting purposes from a fiscal year ending September
30th to a fiscal year ending December 31st. Accordingly, the following results
of operations include a discussion of the year ended December 31, 1999 compared
to the twelve months ended December 31, 1998 and a discussion of the year ended
September 30, 1998 compared to the year ended September 30, 1997. In addition,
the following results of operations includes a discussion of the three-month
transition period ended December 31, 1998 compared to the three months ended
December 31, 1997. Our results of operations represent the operations of the
radio stations owned or operated pursuant to time brokerage agreements or joint
sales agreements during the relevant periods.
YEAR ENDED DECEMBER 31, 1999 COMPARED TO TWELVE MONTHS ENDED DECEMBER 31, 1998
TWELVE MONTHS ENDED vs. YEAR ENDED
----------------------------------
DECEMBER 31, 1998 DECEMBER 31, 1999
(DOLLAR AMOUNTS IN THOUSANDS)
NET REVENUES $ 151,962 $ 215,001
Increase of $ 63,039 or 41.5%
-----------------------------------------------------------------------------
20
24
Net revenues increased 41.5% to $215.0 million for the year ended December
31, 1999 from $152.0 million for the twelve months ended December 31, 1998. Of
the increase, $40.0 million is attributable to stations acquired or that we were
in the process of acquiring since January 1, 1998, offset by $3.0 million for
stations that we divested or that we were in the process divesting during the
same period. On a same station basis, net revenues increased 18.3% to $209.2
million from $176.9 million. Same station revenue growth was led by increases in
Boston and Seattle due to improved selling efforts. A strategic realignment of
station formats in Sacramento resulted in significant gains in ratings and
revenues.
TWELVE MONTHS ENDED vs. YEAR ENDED
----------------------------------
DECEMBER 31, 1998 DECEMBER 31, 1999
(DOLLAR AMOUNTS IN THOUSANDS)
STATION OPERATING EXPENSES $ 99,721 $ 135,943
Increase of $ 36,222 or 36.3%
----------------------------------------------------------------------------
Percentage of Net Revenues 65.6% 63.2%
Station operating expenses increased 36.3% to $135.9 million for the
year ended December 31, 1999 from $99.7 million for the twelve months ended
December 31, 1998. Of the increase, $31.1 million is attributable to stations
that we acquired or that we were in the process of acquiring since January 1,
1998, offset by $2.9 million for stations that we divested or that we were in
the process of divesting during the same period. On a same station basis,
station operating expenses increased 7.7% to $131.7 million from $122.3 million.
TWELVE MONTHS ENDED vs. YEAR ENDED
----------------------------------
DECEMBER 31, 1998 DECEMBER 31, 1999
(DOLLAR AMOUNTS IN THOUSANDS)
DEPRECIATION AND AMORTIZATION $ 14,544 $ 21,564
Increase of $ 7,020 or 48.3%
----------------------------------------------------------------------------
Percentage of Net Revenues 9.6% 10.0%
Depreciation and amortization increased 48.3% to $21.6 million for the
year ended December 31, 1999 from $14.5 million for the twelve months ended
December 31, 1998. The increase was mainly attributable to our acquisitions net
of divestitures since January 1, 1998.
TWELVE MONTHS ENDED vs. YEAR ENDED
----------------------------------
DECEMBER 31, 1998 DECEMBER 31, 1999
(DOLLAR AMOUNTS IN THOUSANDS)
CORPORATE, GENERAL AND
ADMINISTRATIVE EXPENSES $ 5,528 $ 8,100
Increase of $ 2,572 or 46.5%
----------------------------------------------------------------------------
Percentage of Net Revenues 3.6% 3.8%
Corporate general and administrative expenses increased 46.5% to $8.1
million for the year ended December 31, 1999 from $5.5 million for the twelve
months ended December 31, 1998. The increase was mainly attributable to higher
administrative expenses associated with supporting our growth and increasing
staff and expenses to operate as a public company. Also included in the year
ended December 31, 1999 is $0.5 million in non-cash stock-based compensation
expense. We anticipate recording non-cash compensation expense of approximately
$0.6 million for each of the next three years and $0.2 million in the fourth
year.
TWELVE MONTHS ENDED vs. YEAR ENDED
----------------------------------
DECEMBER 31, 1998 DECEMBER 31, 1999
(DOLLAR AMOUNTS IN THOUSANDS)
INTEREST EXPENSE $ 17,399 $ 13,027
Decrease of $ (4,372) or (25.1)%
----------------------------------------------------------------------------
Percentage of Net Revenues 11.4% 6.1%
Interest expense decreased 25.1% to $13.0 million for the year ended
December 31, 1999 from $17.4 million for the twelve months ended December 31,
1998. The decrease was mainly attributable to (1) a reduction in outstanding
indebtedness due to the use of the proceeds of our initial public offering and
the proceeds of our October 1999 Class A Common Stock and TIDES offerings and
(2) a reduction due to the elimination of the 7% stated interest on the
conversion of the convertible subordinated note, offset by an increase in debt
used to fund the acquisition of radio station assets and the interest expense on
the TIDES.
21
25
TWELVE MONTHS ENDED vs. YEAR ENDED
----------------------------------
DECEMBER 31, 1998 DECEMBER 31, 1999
(DOLLAR AMOUNTS IN THOUSANDS)
INCOME BEFORE INCOME TAXES AND
EXTRAORDINARY ITEM $ 65,609 $ 40,954
Decrease of $ (24,655) or (37.6)%
----------------------------------------------------------------------------
Percentage of Net Revenues 43.2% 19.0%
Income before income taxes and extraordinary item decreased 37.6% to $41.0
million for the year ended December 31, 1999 from $65.6 million for the twelve
months ended December 31, 1998. Of the decrease, $76.3 million is attributable
to a decrease in gains on sale of assets, offset by: (1) $17.2 million due to
increases in revenues from existing stations and improved revenues and expense
management from newly acquired stations; (2) $23.4 million resulting from the
conversion of the convertible subordinated note, which in the prior period had
caused a $23.4 million decrease in income to reflect indexing; (3) $4.4 million
due to a decrease in interest expense for the reasons described under interest
expense; (5) $3.0 million due to a decrease in net expense (income) from time
brokerage agreement fees; and (6) an increase in interest income of $2.8 million
as a result of excess cash available from our October 1999 Class A Common Stock
and TIDES offerings during the period prior to the closing of the Sinclair
acquisition.
EXTRAORDINARY ITEM, NET OF TAXES
The extraordinary item for the year ended December 31, 1999 resulted from
the write-off of $1.5 million ($0.9 million, net of taxes) of unamortized
finance charges due to the early extinguishment of debt. The early
extinguishment of debt resulted from the refinancing of our previous credit
facility.
The extraordinary item for the twelve months ended December 31, 1998
resulted from the write-off of $2.4 million ($1.5 million, net of taxes) of
unamortized finance charges due to the early extinguishment of debt. The early
extinguishment of debt resulted from the refinancing of our previous credit
facility.
TWELVE MONTHS ENDED vs. YEAR ENDED
----------------------------------
DECEMBER 31, 1998 DECEMBER 31, 1999
(DOLLAR AMOUNTS IN THOUSANDS)
PRO FORMA NET INCOME $ 30,281 $ 19,758
Decrease of $ (10,523) or (34.8)%
----------------------------------------------------------------------------
As a result of the factors described above, pro forma net income decreased
34.8% to $19.8 million for the year ended December 31, 1999 from $30.3 million
for the twelve months ended December 31, 1998. Of the decrease, $46.8 million,
net of tax, is attributable to a decrease in gains on sale of assets, offset by:
(1) $10.5 million, net of tax, due to increases in revenues from existing
stations and improved revenues and expense management from newly acquired
stations; (2) $23.4 million resulting from the conversion of the convertible
subordinated note, which in the prior period had caused a $23.4 million decrease
in income to reflect indexing; (3) $2.7 million, net of tax, due to a decrease
in interest expense for the reasons described under interest expense; (4) $1.8
million, net of tax, due to a decrease in net expense (income) from time
brokerage agreement fees; and (5) an increase in interest income of $1.7
million, net of tax, as a result of excess cash available from our October 1999
Class A Common Stock and TIDES offerings during the period prior to the Sinclair
acquisition.
TWELVE MONTHS ENDED vs. YEAR ENDED
----------------------------------
DECEMBER 31, 1998 DECEMBER 31, 1999
OTHER DATA (DOLLAR AMOUNTS IN THOUSANDS)
BROADCAST CASH FLOW $ 52,241 $ 79,058
Increase of $ 26,817 or 51.3%
----------------------------------------------------------------------------
Broadcast cash flow increased 51.3% to $79.1 million for the year ended
December 31, 1999 from $52.2 million for the twelve months ended December 31,
1998. Of the increase, $7.7 million is attributable to stations that we acquired
or that we were in the process of acquiring since January 1, 1998, offset by
$0.1 million for stations that we divested or that we were in the process of
divesting during the same period. On a same station basis, broadcast cash flow
increased 41.9% to $77.5 million from $54.6 million.
TWELVE MONTHS ENDED vs. YEAR ENDED
----------------------------------
DECEMBER 31, 1998 DECEMBER 31, 1999
(DOLLAR AMOUNTS IN THOUSANDS)
BROADCAST CASH FLOW MARGIN 34.4% 36.8%
Increase of 2.4% or 7.0%
----------------------------------------------------------------------------
22
26
Our broadcast cash flow margin increased to 36.8% for the year ended
December 31, 1999 from 34.4% for the twelve months ended December 31, 1998. The
increase is attributable to improved revenues and expense management. On a same
station basis, our broadcast cash flow margin increased to 37.1% from 30.9%.
TWELVE MONTHS ENDED VS. YEAR ENDED
----------------------------------
DECEMBER 31, 1998 DECEMBER 31, 1999
(DOLLAR AMOUNTS IN THOUSANDS)
PRO FORMA AFTER-TAX CASH FLOW $ 24,010 $ 52,465
Increase of $ 28,455 or 118.5%
------------------------------------------------------------------
Pro forma after-tax cash flow increased 118.5% to $52.5 million for the
year ended December 31, 1999 from $24.0 million for the twelve months ended
December 31, 1998. The increase is attributable to improved operations of
existing stations and the net effect of newly acquired properties, taking into
consideration pro forma income taxes as though we had reported as a C
corporation during the periods presented. The amount of the deferred pro forma
income tax expense was $11.0 million for the year ended December 31, 1999 and
$5.7 million for the twelve months ended December 31, 1998.
THREE MONTHS ENDED DECEMBER 31, 1998 COMPARED TO THREE MONTHS ENDED DECEMBER 31,
1997
THREE MONTHS ENDED
------------------
DECEMBER 31, 1997 DECEMBER 31, 1998
(DOLLAR AMOUNTS IN THOUSANDS)
NET REVENUES $ 28,399 $ 47,363
Increase of $ 18,964 or 66.8%
--------------------------------------------------------------------
Net revenues increased 66.8% to $47.4 million for the three months
ended December 31, 1998 from $28.4 million for the three months ended December
31, 1997. Of the increase, $17.9 million is attributable to stations that we
acquired or that we were in the process of acquiring since October 1, 1997,
offset by $2.7 million for stations that we divested or that we were in the
process of divesting during the same period. On a same station basis, net
revenues increased 16.5% to $46.9 million from $40.3 million. Same station
revenue growth was led by increases in Boston, Seattle, Kansas City and Portland
due to improved selling efforts.
THREE MONTHS ENDED
------------------
DECEMBER 31, 1997 DECEMBER 31, 1998
(DOLLAR AMOUNTS IN THOUSANDS)
STATION OPERATING EXPENSES $ 18,868 $ 29,990
Increase of $ 11,122 or 58.9%
----------------------------------------------------------------------------
Percentage of Net Revenues 66.4% 63.3%
Station operating expenses increased 58.9% to $30.0 million for the
three months ended December 31, 1998 from $18.9 million for the three months
ended December 31, 1997. Of the increase, $11.3 million is attributable to
stations that we acquired or that we were in the process of acquiring since
October 1, 1997, offset by $1.6 million for stations that we divested or that
were in the process of divesting during the same period. On a same station
basis, station operating expenses increased 3.4 % to $29.4 million from $28.4
million.
THREE MONTHS ENDED
------------------
DECEMBER 31, 1997 DECEMBER 31, 1998
(DOLLAR AMOUNTS IN THOUSANDS)
DEPRECIATION AND AMORTIZATION $ 2,880 $ 4,358
Increase of $ 1,478 or 51.3%
----------------------------------------------------------------------------
Percentage of Net Revenues 10.1% 9.2%
Depreciation and amortization increased 51.3% to $4.4 million for the
three months ended December 31, 1998 from $2.9 million for the three months
ended December 31, 1997. The increase was mainly attributable to our
acquisitions net of divestitures since October 1, 1997.
THREE MONTHS ENDED
------------------
DECEMBER 31, 1997 DECEMBER 31, 1998
(DOLLAR AMOUNTS IN THOUSANDS)
CORPORATE, GENERAL AND ADMINISTRATIVE EXPENSES $ 849 $ 1,850
Increase of $ 1,001 or 117.9%
----------------------------------------------------------------------------
Percentage of Net Revenues 3.0% 3.9%
23
27
Corporate general and administrative expenses increased 117.9% to $1.9
million for the three months ended December 31, 1998 from $0.8 million for the
three months ended December 31, 1997. The increase was mainly attributable to
higher administrative expenses associated with supporting our growth and
increasing staff and expenses in anticipation of operating as a public company.
THREE MONTHS ENDED
------------------
DECEMBER 31, 1997 DECEMBER 31, 1998
(DOLLAR AMOUNTS IN THOUSANDS)
INTEREST EXPENSE $ 2,996 $ 5,732
Increase of $ 2,736 or 91.3%
----------------------------------------------------------------------------
Percentage of Net Revenues 10.5% 12.1%
Interest expense increased 91.3% to $5.7 million for the three months
ended December 31, 1998 from $3.0 million for the three months ended December
31, 1997. The increase was mainly attributable to indebtedness that we incurred
in connection with acquisitions.
THREE MONTHS ENDED
------------------
DECEMBER 31, 1997 DECEMBER 31, 1998
(DOLLAR AMOUNTS IN THOUSANDS)
INCOME (LOSS) BEFORE INCOME TAXES AND EXTRAORDINARY ITEM $ (11,952) $ 43,765
Increase of $ 55,717
---------------------------------------------------------------------------
Percentage of Net Revenues (42.1)% 92.4%
Income (loss) before income taxes and extraordinary item increased to
$43.8 million for the three months ended December 31, 1998 from a loss of $12.0
million for the three months ended December 31, 1997. Of the increase, $69.6
million is attributable to gains on the sale of assets from our disposition of
stations in the Tampa radio market during the three months ended December 31,
1998, offset by $14.6 million which is attributable to an increase in expense
resulting from an adjustment to reflect indexing of the convertible subordinated
note.
THREE MONTHS ENDED
------------------
DECEMBER 31, 1997 DECEMBER 31, 1998
OTHER DATA (DOLLAR AMOUNTS IN THOUSANDS)
PRO FORMA NET INCOME (LOSS) $ (13,073) $ 15,923
Increase of $ 28,996
----------------------------------------------------------------------------
As a result of the factors described above, pro forma net income (loss)
increased to $15.9 million for the three months ended December 31, 1998 from a
loss of $13.1 million for the three months ended December 31, 1997. Of the
increase, $43.2 million is attributable to gains on the sale of assets from the
disposition of stations in the Tampa radio market during the three months ended
December 31, 1998, offset by $14.6 million which is attributable to an increase
in expense resulting from an adjustment to reflect indexing of the convertible
subordinated note. We do not expect to recognize such significant gains on the
sale of assets in the future.
THREE MONTHS ENDED
------------------
DECEMBER 31, 1997 DECEMBER 31, 1998
(DOLLAR AMOUNTS IN THOUSANDS)
BROADCAST CASH FLOW $ 9,531 $ 17,373
Increase of $ 7,842 or 82.3%
----------------------------------------------------------------------------
Broadcast cash flow increased 82.3% to $17.4 million for the three
months ended December 31, 1998 from $9.5 million for the three months ended
December 31, 1997. Of the increase, $6.9 million is attributable to stations
that we acquired or that we were in the process of acquiring since October 1,
1997, offset by $1.1 million for stations that we divested or that we were in
the process of divesting during the same period. On a same station basis,
broadcast cash flow increased 48.0% to $17.5 million from $11.8 million.
THREE MONTHS ENDED
------------------
DECEMBER 31, 1997 DECEMBER 31, 1998
(DOLLAR AMOUNTS IN THOUSANDS)
BROADCAST CASH FLOW MARGIN 33.6% 36.7%
Increase of 3.1% or 9.3%
----------------------------------------------------------------------------
The broadcast cash flow margin increased to 36.7% for the three months
ended December 31, 1998 from 33.6% for the three months ended December 31, 1997.
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, our broadcast cash flow margin increased to 37.4 % from 29.4%.
24
28
THREE MONTHS ENDED
------------------
DECEMBER 31, 1997 DECEMBER 31, 1998
(DOLLAR AMOUNTS IN THOUSANDS)
PRO FORMA AFTER TAX CASH FLOW $ 5,003 $ 7,985
Increase of $ 2,982 or 59.6%
------------------------------------------------------------------------
Pro forma after-tax cash flow increased 59.6% to $8.0 million for the
three months ended December 31, 1998 from $5.0 million for the three months
ended December 31, 1997. The increase is attributable to improved operations of
existing stations and the net effect of newly acquired properties, taking into
consideration pro forma income taxes as though we had reported as a C
corporation during the periods presented. The amount of the deferred pro forma
income tax expense was $0.2 million and $0.3 million for the three months ended
December 31, 1998 and 1997, respectively.
YEAR ENDED SEPTEMBER 30, 1998 COMPARED TO SEPTEMBER 30, 1997
YEAR ENDED SEPTEMBER 30,
------------------------
1997 1998
(DOLLAR AMOUNTS IN THOUSANDS)
NET REVENUES $ 93,862 $ 132,998
Increase of $ 39,136 or 41.7%
------------------------------------------------------------------------
Net revenues increased 41.7% to $133.0 million for the year ended
September 30, 1998 from $93.9 million for the year ended September 30, 1997. Of
the increase, $20.3 million is attributable to stations that we acquired or that
we were in the process of acquiring since October 1, 1996, offset by $5.8
million for stations that we divested or that we were in the process of
divesting during the same period. On a same station basis, net revenues
increased 16.3% to $128.5 million from $110.5 million, largely due to stronger
selling efforts and radio advertising market growth. Same station revenue growth
was led by substantial increases in Seattle, Kansas City and Portland.
YEAR ENDED SEPTEMBER 30,
------------------------
1997 1998
(DOLLAR AMOUNTS IN THOUSANDS)
STATION OPERATING EXPENSES $ 61,280 $ 88,599
Increase of $ 27,319 or 44.6%
------------------------------------------------------------------------
Percentage of Net Revenues 65.3% 66.6%
Station operating expenses increased 44.6% to $88.6 million for the
year ended September 30, 1998 from $61.3 million for the year ended September
30, 1997. Of the increase, $13.2 million is attributable to stations that we
acquired or that we were in the process of acquiring since October 1, 1996,
offset by $4.4 million for stations that we divested or that we were in the
process of divesting during the same period. On a same station basis, station
operating expenses increased 11.2 % to $84.7 million for the year ended
September 30, 1998 from $76.2 million for the year ended September 30, 1997.
YEAR ENDED SEPTEMBER 30,
------------------------
1997 1998
(DOLLAR AMOUNTS IN THOUSANDS)
DEPRECIATION AND AMORTIZATION $ 7,685 $ 13,066
Increase of $ 5,381 or 70.0%
---------------------------------------------------------------------
Percentage of Net Revenues 8.2% 9.8%
Depreciation and amortization increased 70.0% to $13.1 million for the
year ended September 30, 1998 from $7.7 million for the year ended September 30,
1997. The increase was primarily attributable to our acquisitions net of
divestitures during the period beginning October 1, 1996.
YEAR ENDED SEPTEMBER 30,
------------------------
1997 1998
(DOLLAR AMOUNTS IN THOUSANDS)
CORPORATE, GENERAL AND ADMINISTRATIVE EXPENSES $ 3,249 $ 4,527
Increase of $ 1,278 or 39.3%
--------------------------------------------------------------------------
Percentage of Net Revenues 3.5% 3.4%
Corporate general and administrative expenses increased 39.3% to $4.5
million for the year ended September 30, 1998 from $3.3 million for the year
ended September 30, 1997. The increase was primarily attributable to higher
administrative expenses associated with
25
29
supporting our growth. We recorded a non-cash compensation expense of
approximately $0.4 million in fiscal year 1999 and we will record approximately
$0.4 million in non-cash compensation expense in each of the following three
fiscal years in connection with our issuance of 11,112 shares of restricted
stock and 275,562 options, at an exercise price of $18.00.
YEAR ENDED SEPTEMBER 30,
------------------------
1997 1998
(DOLLAR AMOUNTS IN THOUSANDS)
INTEREST EXPENSE $ 11,388 $ 14,663
Increase of $ 3,275 or 28.8%
--------------------------------------------------------------------------
Percentage of Net Revenues 12.1% 11.0%
Interest expense increased 28.8% to $14.7 million for the year ended
September 30, 1998 from $11.4 million for the year ended September 30, 1997. The
increase in interest expense was primarily attributable to indebtedness that we
incurred in connection with acquisitions.
We determined the adjustment to reflect indexing of the convertible
subordinated note as of the end of each relevant period by subtracting the sum
of principal and accrued interest on the note from the fair value of the shares
of our common stock into which the note was convertible using multiples of
broadcast cash flow of comparable publicly held radio broadcast companies. The
adjustment to reflect indexing of the note was $8.8 million and $29.1 million
for the years ended September 30, 1998 and 1997, respectively. The decrease in
the adjustment from 1997 to 1998 is due to a reduced broadcast cash flow growth
rate from 91.5% to 36.3% in 1998 (primarily due to the timing of acquisitions)
and a lower multiple in 1998 due to the overall market condition for publicly
held radio broadcast companies at September 30, 1998 relative to September 30,
1997.
YEAR ENDED SEPTEMBER 30,
------------------------
1997 1998
(DOLLAR AMOUNTS IN THOUSANDS)
INCOME BEFORE INCOME TAXES AND EXTRAORDINARY ITEM $ 177,259 $ 9,892
Decrease of $ (167,367) or (94.4)%
--------------------------------------------------------------------------
Percentage of Net Revenues 188.9% 7.4%
Income before income taxes and extraordinary item decreased to $9.9
million for the year ended September 30, 1998 from $177.3 million for the year
ended September 30, 1997, including $197.1 million from the gains on sale of
assets, for the year ended September 30, 1997. The gain on the assets in 1997 is
primarily attributable to our disposition of stations in the Houston, San
Francisco and Pittsburgh radio markets. We do not expect such significant gains
on the sale of assets to continue in the future.
EXTRAORDINARY ITEM, NET OF TAXES
The extraordinary item for the year ended September 30, 1998 resulted
from the write-off of $2.4 million ($1.5 million, net of taxes) of unamortized
finance charges due to the early extinguishment of debt. The early
extinguishment of debt resulted from the refinancing of our previous credit
facility. There was no extraordinary item in 1997.
YEAR ENDED SEPTEMBER 30,
------------------------
1997 1998
OTHER DATA (DOLLAR AMOUNTS IN THOUSANDS)
PRO FORMA NET INCOME $ 98,854 $ 1,285
Decrease of $ (97,569)
----------------------------------------------------------------------------
As a result of the factors described above, pro forma net income
decreased to $1.3 million for the year ended September 30, 1998 which included
the impact of the recognition of $8.8 million for the adjustment to reflect
indexing of the convertible subordinated note, offset by a gain of $5.4 million,
net of taxes, on the sale of assets. This compares to pro forma net income of
$98.9 million for the year ended September 30, 1997, which included the impact
of the recognition of $29.1 million for the adjustment to reflect indexing of
the convertible subordinated note, offset by a gain of $122.2 million, net of
taxes, on the sale of assets. The decrease is primarily attributable to our
disposition of stations in the Houston, San Francisco and Pittsburgh radio
markets during the year ended September 30, 1997. We used the proceeds from
these dispositions to acquire stations in markets where we believed there was
greater potential for establishing market leading station clusters.
26
30
YEAR ENDED SEPTEMBER 30,
------------------------
1997 1998
(DOLLAR AMOUNTS IN THOUSANDS)
BROADCAST CASH FLOW $ 32,582 $ 44,399
Increase of $ 11,817 or 36.3%
-------------------------------------------------------------------------
As a result of factors described above broadcast cash flow increased
36.3% to $44.4 million for the year ended September 30, 1998 from $32.6 million
for the year ended September 30, 1997. On a same station basis, broadcast cash
flow increase 27.7% to $43.8 million from $34.3 million.
YEAR ENDED SEPTEMBER 30,
------------------------
1997 1998
(DOLLAR AMOUNTS IN THOUSANDS)
BROADCAST CASH FLOW MARGIN Decrease of 34.7% 33.4%
-----------------------------------------------------------------------
Our broadcast cash flow margin declined to 33.4% for the year ended
September 30, 1998 from 34.7% for the year ended September 30, 1997. The
decrease is primarily attributable to our exchange in 1997 of relatively mature
stations in San Francisco and Houston, which operated at higher broadcast flow
margins but were located in markets where management believed there were limited
growth and clustering opportunities, for less developed properties in Seattle,
Kansas City and Sacramento. The less developed properties collectively operated
with lower broadcast cash flow margins but offered stronger growth and
clustering opportunities. On a same station basis, broadcast cash flow margin
increased to 34.1% from 31.1%.
YEAR ENDED SEPTEMBER 30,
------------------------
1997 1998
(DOLLAR AMOUNTS IN THOUSANDS)
PRO FORMA AFTER TAX CASH FLOW $ 16,590 $ 21,028
Increase of $ 4,438 or 26.8%
-------------------------------------------------------------------------
Pro forma after-tax cash flow increased 26.8% to $21.0 million for the
year ended September 30, 1998 from $16.6 million for the year ended September
30, 1997. The increase is attributable to improved operations of existing
stations and the net effect of newly acquired properties, taking into
consideration pro forma income taxes as though we had reported as a C
corporation.
LIQUIDITY AND CAPITAL RESOURCES
We use a significant portion of our capital resources to consummate
acquisitions. These acquisitions are funded from one or a combination of the
following sources: (1) our bank facility, which is described below; (2) the
swapping of our radio stations in transactions which qualify as "like-kind"
exchanges under Section 1031 of the Internal Revenue Code; and (3)
internally-generated cash flow.
Net cash flows from operating activities were $40.7 million and $26.8
million for the year ended December 31, 1999 and for the twelve months ended
December 31, 1998, respectively. Changes in our net cash flows from operating
activities are primarily a result of changes in advertising revenues and station
operating expenses, which are affected by the acquisition and disposition of
stations during those periods.
Net cash flows used in investing activities were $712.3 million and
$223.1 million for the year ended December 31, 1999 and for the twelve months
ended December 31, 1998, respectively. Net cash flows provided by financing
activities were $676.4 million and $199.2 million for the year ended December
31, 1999 and for the twelve months ended December 31, 1998, respectively. The
cash flows for the year ended December 31, 1999 reflect: (1) acquisitions
consummated along with the related borrowings; (2) proceeds from our initial
public offering, our October 1999 Class A Common Stock and TIDES offerings and
the related payment of long-term debt; and (3) the distribution to our S
Corporation shareholders of $88.1 million. The cash flows for the twelve months
ended December 31,1998 reflect: (1) refinancing as a result of our bank
facility; (2) acquisitions along with the related borrowings; and (3)
divestitures.
On February 3, 1999, upon the consummation of our initial public
offering, we received net proceeds of $236.2 million, after deducting expenses,
underwriting discounts and commissions. We used these proceeds to reduce
outstanding indebtedness under our former credit facility and to pay other
corporate obligations. Shortly after reducing indebtedness under our former
credit facility, in February 1999 we borrowed approximately $58.0 million to
purchase three Boston radio stations from CBS.
On October 6, 1999, we completed our Class A Common Stock and TIDES
offerings and received $276.1 million and $120.5 million in proceeds,
respectively, after deduction of discounts, commissions, fees and expenses. The
proceeds were used to reduce outstanding debt. As of December 31, 1999, we had
approximately $465.5 million of borrowings outstanding under our bank facility
in addition to outstanding letters of credit in the amounts of $7.5 million and
$5.0 million.
We used the net proceeds from our October 1999 Class A Common Stock
offering and the TIDES offering, together with cash on hand and proceeds from
our bank facility, to finance the $700.4 million in cash to consummate the
purchase of 41 stations from Sinclair on
27
31
December 16, 1999. In connection with the Sinclair acquisition we have also
agreed to purchase $5.0 million of advertising time on television stations owned
and/or programmed by Sinclair and its affiliates at prevailing rates over the
next five years.
In addition to debt service and quarterly distributions under the
TIDES, our principal liquidity requirements will be for working capital and
general corporate purposes, including capital expenditures, and, if appropriate
opportunities arise, acquisitions of additional radio stations. For fiscal year
2000, we estimate that capital expenditures will be between $10.0 million and
$13.0 million. We believe that cash flow from operating activities, together
with available revolving and term credit borrowings under our bank facility,
should be sufficient to permit us to meet our financial obligations and fund our
operations. However, we may require additional financing for future
acquisitions, if any, and there can be no assurance that we would be able to
obtain such financing on terms considered to be favorable to us.
Further, if Sinclair rightfully terminates the asset purchase agreement
for the four Kansas City stations, Sinclair may be entitled to receive
liquidated damages from us in the maximum amount of approximately $7.0 million.
In addition, on February 22, 2000 (150 days after public notice that the
applications for consent to assignment of the Kansas City station licenses had
been accepted for filing by the FCC), the purchase price for the Kansas City
stations increased 0.75% (approximately $0.9 million) and will continue to
increase 0.75% at the end of each 30 day period thereafter for so long as the
Kansas City market has not closed due to the failure to receive any required
regulatory consent as a result of facts relating to us or our affiliates.
Upon closing the Sinclair acquisition on December 16, 1999, our
effective tax rate increased from 38% to 40% as a result of adding facilities in
additional states which on average have higher income tax rates than in those
states in which we currently operate. We also recorded a non-cash deferred
income tax expense of approximately $3.9 million to reflect the increase in the
effective tax rate and its effect on previously reported temporary differences
between the tax and financial reporting bases of our assets and liabilities.
We entered into our bank facility, dated as of December 16, 1999, with
a syndicate of banks for senior secured credit in the amount of $650.0 million.
The bank facility consists of: (1) a $325.0 million reducing revolving credit
facility; and (2) a $325.0 million multi-draw term loan. The bank facility was
established to: (1) fund corporate acquisitions; (2) refinance our existing
indebtedness; and (3) provide working capital. At our election, interest on any
outstanding principal accrues at a rate based on either LIBOR plus a spread
which ranges from 0.75% to 2.375% or on KeyBank N.A.'s base rate plus a spread
of up to 1.125%, depending on our leverage ratio. Although we may borrow, repay
and re-borrow under the revolving credit facility, the aggregate maximum amount
that we can have outstanding at any one time is reduced on a quarterly basis
beginning on September 30, 2002. The multi-draw term loan must be fully drawn by
September 29, 2000 and principal is reduced on a quarterly basis beginning on
September 30, 2002. The final maturity date for the bank facility is September
30, 2007. Under the bank facility, at any time prior to December 31, 2001, we
may solicit incremental loans up to $350.0 million, and will be governed under
the same terms as the multi-draw term loan. However, there can be no guarantee
that, upon request, we will receive commitments for any of the incremental
loans. The bank facility requires us to comply with certain financial covenants
and leverage ratios. We believe we are in compliance with these covenants and
ratios.
As of December 31, 1999, we had approximately $465.5 million of
borrowings outstanding under the bank facility along with outstanding letters of
credit in the amounts of $7.5 million and $5.0 million. We expect to use the
credit available under the revolving credit facility and multi-draw term loan to
fund: (1) the purchase of the remaining assets under the Sinclair acquisition,
including the four Kansas City stations and (2) pending and future acquisitions.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("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, which are
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. We have not completed a
full evaluation of the applicability of SFAS No. 133.
INFLATION
Inflation has affected our performance in terms of higher costs for
radio station operating expenses, including wages, and equipment. Although the
exact impact is indeterminable, we believe we have offset these higher costs by
increasing the effective advertising rates of most of our broadcasting stations.
28
32
IMPACT OF YEAR 2000 ISSUES
We rely, directly and indirectly, on information technology systems to
operate our radio stations, provide our radio stations with up-to-date news and
perform a variety of administrative services including accounting, financial
reporting, advertiser spot scheduling, payroll and invoicing. We also use
non-information technology systems, such as microchips for dating and other
automated functions. All of these technology systems could have been affected by
Year 2000 Issues. Based upon our experience to date, we estimate that the impact
of the Year 2000 was minimal and has had no material effect on our operations
and any remaining costs to respond to the Year 2000 issues will not be material.
29
33
RISK FACTORS
Many statements contained in this report are forward-looking in nature.
These statements are based on current expectations and actual results could
differ significantly. Among the factors that could cause actual results to
differ are the following:
INTEGRATING ACQUISITIONS IS DIFFICULT.
We have acquired or agreed to acquire 90 radio stations since October
1, 1996, and we expect to make acquisitions of other stations and station groups
in the future. The integration of acquisitions involves numerous risks,
including:
- difficulties in the integration of operations and systems and the
management of a large and geographically diverse group of
stations;
- the diversion of management's attention from other business
concerns; and
- the potential loss of key employees of acquired stations.
We cannot assure you that we will be able to integrate successfully any
operations, systems or management that might be acquired in the future,
including the operations, systems or management that we acquired in the Sinclair
acquisition. Our consummation of the Sinclair acquisition requires us to manage
a significantly larger radio station portfolio than historically has been the
case. Our failure to integrate and manage newly acquired stations successfully
could have a material adverse effect on our business and operating results. In
addition, in the event that the operations of a new business do not meet
expectations, we may restructure or write-off the value of some or all of the
assets of the new business.
WE MAY NOT BE SUCCESSFUL IN IDENTIFYING AND CONSUMMATING FUTURE ACQUISITIONS,
WHICH IS AN IMPORTANT ELEMENT OF OUR BUSINESS STRATEGY.
We pursue growth, in part, through the acquisition of individual radio
stations and groups of radio stations. Our consummation of all future
acquisitions, including the acquisition of the Sinclair stations in the Kansas
City market, will be subject to various conditions, including FCC and other
regulatory approvals. The FCC must approve any transfer of control or assignment
of broadcast licenses. In addition, acquisitions may encounter intense scrutiny
under federal and state antitrust laws. Our acquisition of the Sinclair stations
in Kansas City is, and many of our future acquisitions may be, subject to
notification under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 and
to a waiting period and possible review by the Department of Justice and the
Federal Trade Commission. On September 24, 1999, we received a "second request"
from the Department of Justice with respect to the Sinclair Kansas City
acquisition. Although we believe that the concerns of the Department of Justice
will be resolved by our disposition of three stations in the Kansas City market
that we are required to make in order to comply with FCC rules, we cannot assure
you that this will be the case.
Any delays, injunctions, conditions or modifications by any of these
federal agencies could have a negative effect on us and result in the
abandonment of all or part of the acquisition of the Sinclair stations in the
Kansas City market or other attractive acquisition opportunities. We cannot
predict whether we will be successful in identifying future acquisition
opportunities or consummating these acquisitions or what the consequences of any
acquisitions will be.
Depending on the nature, size and timing of future acquisitions, we may
require additional financing. We cannot assure you that additional financing
will be available to us on acceptable terms. Radio broadcasting is a rapidly
consolidating industry, with many companies seeking to consummate acquisitions
and increase their market share. In this environment, we compete and will
continue to compete with many other buyers for the acquisition of radio
stations. Some of those competitors may be able to outbid us for acquisitions
because they have greater financial resources. As a result of these and other
factors, our ability to identify and consummate future acquisitions is
uncertain.
WE MUST RESPOND TO THE RAPID CHANGES IN TECHNOLOGY, SERVICES AND STANDARDS THAT
CHARACTERIZE OUR INDUSTRY IN ORDER TO REMAIN COMPETITIVE.
The radio broadcasting industry is subject to rapid technological
change, evolving industry standards and the emergence of new media technologies
and services. We cannot assure you that we will have the resources to acquire
new technologies or to introduce new services that could compete with these new
technologies. Several new media technologies and services are being developed or
introduced, including the following:
- satellite delivered audio radio service, which could result in
the introduction of new satellite radio services with sound
quality equivalent to that of compact discs;
30
34
- audio programming by cable systems, direct broadcast satellite
systems, personal communications systems, Internet content
providers and other digital audio broadcast formats;
- in-band on-channel digital radio, which could provide
multi-channel, multi-format digital radio services in the same
bandwidth currently occupied by traditional AM and FM radio
services; and
- microbroadcasting stations (low powered, limited coverage radio
stations), about which the FCC is accepting proposals.
We cannot predict the effect, if any, that competition arising from new
technologies or regulatory change may have on the radio broadcasting industry or
on our company.
WE HAVE SUBSTANTIAL INDEBTEDNESS THAT COULD HAVE IMPORTANT CONSEQUENCES TO YOU.
We have indebtedness that is substantial in relation to our
shareholders' equity. At December 31, 1999, we had long-term indebtedness of
$465.8 million and shareholders' equity of $686.6 million. In addition to our
obligations on our long-term indebtedness, we have quarterly interest
obligations on the debentures held by the trust that fund distributions on the
TIDES. These obligations are substantial in amount and could have a substantial
impact on you. For example, these obligations could:
- require us to dedicate a substantial portion of our cash flow
from operations to debt service, thereby reducing the
availability of cash flow for other purposes, including funding
future expansion and ongoing capital expenditures;
- impair our ability to obtain additional financing for working
capital, capital expenditures, acquisitions and general corporate
or other purposes;
- limit our ability to compete, expand and make capital
improvements;
- increase our vulnerability to economic downturns, limit our
ability to withstand competitive pressures and reduce our
flexibility in responding to changing business and economic
conditions; and
- limit or prohibit our ability to pay dividends and make other
distributions.
Moreover, we may borrow up to an additional $172.0 million under our
existing bank facility. In addition, at any time prior to December 31, 2001, we
may solicit incremental loans up to $350.0 million. Any additional borrowings
would further increase the amount of our indebtedness and the associated risks.
THE COVENANTS IN OUR CREDIT FACILITY RESTRICT OUR FINANCIAL AND OPERATIONAL
FLEXIBILITY.
Our credit facility contains covenants that restrict, among other
things, our ability to borrow money, make particular types of investments or
other restricted payments, swap or sell assets, or merge or consolidate. An
event of default under our bank facility could allow the lenders to declare all
amounts outstanding to be immediately due and payable. We have pledged
substantially all of our consolidated assets and the stock of our subsidiaries
to secure the debt under our credit facility. If the amounts outstanding under
the credit facility were accelerated, the lenders could proceed against our
consolidated assets and the stock of our subsidiaries. Any event of default,
therefore, could have a material adverse effect on our business. Our bank
facility also requires us to maintain specified financial ratios. Our ability to
meet these financial ratios can be affected by events beyond our control, and we
cannot assure you that we will meet those ratios. We also may incur future debt
obligations which might subject us to restrictive covenants that could affect
our financial and operational flexibility or subject us to other events of
default.
BECAUSE OF OUR HOLDING COMPANY STRUCTURE, WE DEPEND ON OUR SUBSIDIARIES FOR CASH
FLOW, AND OUR ACCESS TO THIS CASH FLOW IS RESTRICTED.
We operate as a holding company. All of our radio stations are
currently owned and operated by our subsidiaries. Entercom Radio, our wholly
owned subsidiary, is the borrower under our credit facility and all of our
station-operating subsidiaries are subsidiaries of Entercom Radio. Further, we
guaranteed Entercom Radio's obligations under the credit facility on a senior
secured basis. Our obligations on the TIDES, which were purchased by the trust
that sells the TIDES, are subordinated to our obligations on this guarantee.
As a holding company, our only source of cash to pay our obligations,
including corporate overhead and other trade payables, is distributions from our
subsidiaries of their net earnings and cash flow. We currently expect that the
net earnings and cash flow of our subsidiaries will be retained and used by them
in their operations, including servicing their debt obligations, before
distributions are made
31
35
to us. Even if our subsidiaries elect to make distributions to us, we cannot
assure you that applicable state law and contractual restrictions, including the
dividend covenants contained in our credit facility, would permit such dividends
or distributions.
WE FACE MANY UNPREDICTABLE BUSINESS RISKS, BOTH GENERAL AND SPECIFIC TO THE
RADIO BROADCASTING INDUSTRY, WHICH COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR
FUTURE OPERATIONS.
Our future operations are subject to many business risks, including
those risks that specifically influence the radio broadcasting industry, which
could have a material adverse effect on our business including:
- economic conditions, both generally and relative to the radio
broadcasting industry;
- shifts in population, demographics or audience tastes;
- the level of competition for advertising revenues with other
radio stations, television stations and other entertainment and
communications media;
- priorities of advertisers;
- fluctuations in operating costs;
- technological changes and innovations;
- changes in labor conditions;
- new laws, including proposals to eliminate the tax deductibility
of certain expenses incurred by advertisers; and
- changes in governmental regulations and policies and actions of
federal regulatory bodies, including the United States Department
of Justice, the Federal Trade Commission and the FCC.
Given the inherent unpredictability of these variables, we cannot with
any degree of certainty predict what effect, if any, these variables will have
on our future operations. Generally, advertising tends to decline during
economic recession or downturn. Consequently, our advertising revenue is likely
to be adversely affected by a recession or downturn in the United States
economy, the economy of an individual geographic market in which we own or
operate radio stations or other events or circumstances that adversely affect
advertising activity.
DEPENDENCE ON SEATTLE RADIO STATIONS.
The radio stations we own or operate in Seattle generated approximately
35.9% of our net revenues and approximately 41.5% of our broadcast cash flow for
the fiscal year ended December 31, 1999. On a pro forma basis as if the Sinclair
acquisition had occurred as of the beginning of the period, the radio stations
we own or operate in Seattle would have generated approximately 25.0% of our net
revenues and approximately 28.3% of our broadcast cash flow for the fiscal year
ended December 31, 1999. Accordingly we have greater exposure to any operating
difficulties that may arise at our Seattle stations or to adverse events or
conditions that affect the Seattle economy than if we were more geographically
diverse.
OUR CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER EFFECTIVELY CONTROLS OUR
COMPANY, AND MEMBERS OF HIS IMMEDIATE FAMILY ALSO OWN A SUBSTANTIAL EQUITY
INTEREST IN US. THEIR INTERESTS MAY CONFLICT WITH YOURS.
Joseph M. Field, our Chairman of the Board and Chief Executive Officer,
beneficially owns 2,004,405 shares of our Class A common stock and 9,782,555
shares of our Class B common stock, representing approximately 72.5% of the
total voting power of all of our outstanding common stock. David J. Field, our
President, Chief Operating Officer, one of our directors and the son of Joseph
M. Field, beneficially owns 2,292,094 shares of our Class A common stock and
749,250 shares of our outstanding Class B common stock, representing
approximately 7.2% of the total voting power of all of our outstanding common
stock. Collectively, Joseph M. Field and David J. Field beneficially own all of
our outstanding Class B common stock. Other members of the Field family also own
shares of Class A common stock.
Shares of Class B common stock are transferable only to Joseph M.
Field, David J. Field, certain of their family members or trusts for any of
their benefit. Upon any other transfer, shares of our Class B common stock
convert automatically into shares of our Class A common stock on a
share-for-share basis. Shares of our Class B common stock are entitled to ten
votes only when they are voted by
32
36
Joseph M. Field or David J. Field, subject to certain exceptions where they are
restricted to one vote. Joseph M. Field generally is able to control the vote on
all matters submitted to the vote of shareholders and, therefore, is able to
direct our management and policies, except with respect to those matters where
the shares of our Class B common stock are only entitled to one vote and those
matters requiring a class vote under the provisions of our articles of
incorporation, bylaws or applicable law, including, without limitation, the
election of the two Class A directors. Without the approval of Joseph M. Field,
we will be unable to consummate transactions involving an actual or potential
change of control, including transactions in which investors might otherwise
receive a premium for your shares over then current market prices.
WE ARE DEPENDENT ON FEDERALLY-ISSUED LICENSES TO OPERATE OUR RADIO STATIONS AND
ARE SUBJECT TO EXTENSIVE FEDERAL REGULATION.
The radio broadcasting industry is subject to extensive regulation by
the FCC under the Communications Act of 1934. We are required to obtain licenses
from the FCC to operate our radio stations. Licenses are normally granted for a
term of eight years and are renewable. Although the vast majority of FCC radio
station licenses are routinely renewed, we cannot assure you that the FCC will
approve our future renewal applications or that the renewals will not include
conditions or qualifications. The non-renewal, or renewal with substantial
conditions or modifications, of one or more of our licenses could have a
material adverse effect on us.
We must comply with extensive FCC regulations and policies in the
ownership and operation of our radio stations. FCC regulations limit the number
of radio stations that a licensee can own in a market, which could restrict our
ability to consummate future transactions and in certain circumstances could
require us to divest some radio stations. For example, in connection with the
Sinclair Kansas City acquisition we are required to dispose of three radio
stations in Kansas City, and the timing and terms of these dispositions are both
unknown. The FCC also requires radio stations to comply with certain technical
requirements to limit interference between two or more radio stations. If the
FCC relaxes these technical requirements, it could impair the signals
transmitted by our radio stations and could have a material adverse effect on
us. Moreover, these FCC regulations and others may change over time and we
cannot assure you that those changes would not have a material adverse effect on
us.
OUR RADIO STATIONS MAY NOT BE ABLE TO COMPETE EFFECTIVELY IN THEIR RESPECTIVE
MARKETS FOR ADVERTISING REVENUES.
Our radio broadcasting stations are in a highly competitive business.
Our radio stations compete for audiences and advertising revenues within their
respective markets directly with other radio stations, as well as with other
media, such as newspapers, magazines, network and cable television, outdoor
advertising and direct mail. Audience ratings and market shares are subject to
change, and any change in a particular market could have a material adverse
effect on the revenue of our stations located in that market. While we already
compete in some of our markets with other stations with similar programming
formats, if another radio station in a market were to convert its programming
format to a format similar to one of our stations, if a new station were to
adopt a comparable format or if an existing competitor were to strengthen its
operations, our stations could suffer a reduction in ratings and/or advertising
revenue and could incur increased promotional and other expenses. Other radio
broadcasting companies may enter into the markets in which we operate or may
operate in the future. These companies may be larger and have more financial
resources than we have. We cannot assure you that any of our stations will be
able to maintain or increase their current audience ratings and advertising
revenues.
THE LOSS OF KEY PERSONNEL COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS.
Our business depends upon the continued efforts, abilities and
expertise of our executive officers and other key executives, including Joseph
M. Field, our Chairman of the Board and Chief Executive Officer, David J. Field,
our President and Chief Operating Officer, John C. Donlevie, Esq., our Executive
Vice President, Secretary and General Counsel, and Stephen F. Fisher, our Senior
Vice President and Chief Financial Officer. We believe that the loss of one or
more of these individuals could have a material adverse effect on our business.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our bank facility requires us to protect ourselves from interest rate
fluctuations through the use of derivative rate hedging instruments. As a
result, we have entered into various interest rate transactions with various
banks, which we call the rate hedging transactions, designed to mitigate our
exposure to significantly higher floating interest rates. A rate cap agreement
establishes an upper limit or "cap" for the base LIBOR rate and a rate floor
agreement establishes a lower limit or "floor" for the base LIBOR rate.
Agreements covering a rate cap and a rate floor have been entered into
simultaneously with the same bank. An agreement for a cap, which was entered
into without a rate floor agreement, provides an upper limit for the base LIBOR
rate. Swap agreements require that we pay a fixed rate of interest on the
notional amount to a bank and the bank pay to us a variable rate equal to
three-month LIBOR. As of March 9, 2000 we have rate hedging transactions in
place for a total notional amount of $243.0 million.
All of the rate hedging transactions are tied to the three-month LIBOR
interest rate, which may fluctuate significantly on a daily basis. An increase
in the three-month LIBOR rate results in a more favorable valuation of each of
the rate hedging transactions.
33
37
Correspondingly, a decrease in the three-month LIBOR rate results in a less
favorable valuation of each of the rate hedging transactions. The three-month
LIBOR rate at December 31, 1999 was higher than the rate at December 31, 1998.
This increase resulted in unrecognized gains by us from the rate hedging
transactions. We also terminated several rate hedge agreements during the year
ended December 31, 1999, which resulted in a gain of approximately $1.4 million.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our consolidated financial statements, together with related notes and
the report of Deloitte & Touche LLP, our independent accountants, are set forth
on the pages indicated in Item 14.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information with respect to directors and executive officers
required by this Item 10 is incorporated in this report by reference to the
information set forth under the caption "Directors and Executive Officers " in
our proxy statement for the 2000 Annual Meeting of Stockholders to be held May
2, 2000, which is expected to be filed with the Commission within 120 days after
the close of our fiscal year.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item 11 is incorporated in this report
by reference to the information set forth under the caption "Executive
Compensation" in the 2000 proxy statement. The sections entitled "Compensation
Committee Report on Executive Compensation" and "Performance Graph" in the 2000
proxy statement are not incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item 12 is incorporated in this report
by reference to the information set forth under the caption "Security Ownership
of Certain Beneficial Owners and Management" in the 2000 proxy statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item 13 is incorporated in this report
by reference to the information set forth under the caption "Certain
Relationships and Related Transactions" in the 2000 proxy statement.
34
38
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Report:
1. Consolidated Financial Statements
Page
----
Independent Auditor's Report. 37
Consolidated Financial Statements:
Balance Sheets as of December 31, 1998 and December 31, 1999. 38
Statements of Operations for the Years Ended September 30, 1997 and 1998,
for the Three Months Ended December 31, 1997 (unaudited) and 1998, for
the Twelve Months Ended December 31, 1998 (unaudited) and for the Year
Ended December 31, 1999 40
Statements of Comprehensive Income for the Years Ended September 30, 1997
and 1998, for the Three Months Ended December 31, 1997 (unaudited) and
1998, for the Twelve Months Ended December 31, 1998 (unaudited) and for
the Year Ended December 31, 1999 42
Statements of Shareholders' Equity for the Years Ended September 30, 1997
and 1998, for the Three Months Ended December 31, 1998 and for the Year
Ended December 31, 1999 43
Statements of Cash Flows for the Years Ended September 30, 1997 and 1998,
for the Three Months Ended December 31, 1997 (unaudited) and 1998, for
the Twelve Months Ended December 31, 1998 (unaudited) and for the Year
Ended December 31, 1999 44
Notes to Consolidated Financial Statements 45
2. Consolidated Financial Statement Schedule
Schedule II - Valuation and Qualifying Accounts 66
3. Exhibits 69
INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION
- -------------- -----------
3.01 Amended and Restated Articles of Incorporation of the Registrant(2)
3.02 Form of Amended and Restated Bylaws of the Registrant(2)
4.01 Lock-up Release Agreement, dated as of May 6, 1999, between Chase Equity
Associates L.P. and Credit Suisse Boston Corporation(3)
4.02 Form of Indenture for the Convertible Subordinated Debentures due 2014
among Entercom Communications Corp., as issuer, and Wilmington Trust
Company, as indenture trustee(4)
10.01 Registration Rights Agreement, dated as of May 21, 1996,
between the Registrant and Chase Equity Associates, L.P.(2)
10.02 Employment Agreement, dated June 25, 1993, between the Registrant and
Joseph M. Field, as amended(2)
10.03 Employment Agreement, dated December 17, 1998, between the Registrant and
David J. Field, as amended(2)
10.04 Employment Agreement, dated December 17, 1998, between the Registrant and
John C. Donlevie, as amended(2)
10.05 Employment Agreement, dated November 13, 1998, between the Registrant
and Stephen F. Fisher(2)
10.06 Entercom 1998 Equity Compensation Plan(2)
10.07 Credit Agreement, dated as of December 16, 1999, by and among Entercom
Radio, LLC, as the Borrower, the Registrant, as a Guarantor, Banc of
America Securities LLC, as Sole Lead Arranger and Book Manager, Key
Corporate Capital Inc., as Administrative Agent and Co-Documentation
Agent, Bank of America, N.A., as Syndication Agent, and Co-Documentation
Agent and the Financial Institutions listed therein.(6)
10.08 Amended and Restated Asset Purchase Agreement, dated as of August 20, 1999,
35
39
EXHIBIT NUMBER DESCRIPTION PAGE
- -------------- ----------- ----
among the Registrant, Sinclair Communications, Inc., WCGV, Inc.,
Sinclair Radio of Milwaukee Licensee, LLC, Sinclair Radio of New Orleans
Licensee, LLC, Sinclair Radio of Memphis, Inc., Sinclair Radio of Memphis
Licensee, Inc., Sinclair Properties, LLC, Sinclair Radio of
Norfolk/Greensboro Licensee, L.P., Sinclair Radio of Buffalo, Inc.,
Sinclair Radio of Buffalo Licensee, LLC, WLFL, Inc., Sinclair Radio of
Greenville Licensee, Inc., Sinclair Radio of Wilkes-Barre, Inc. and
Sinclair Radio of Willkes-Barre Licensee, LLC. (See table of contents for
list of omitted schedules and exhibits, which the Registrant hereby
agrees to furnish supplementally to the Securities and Exchange
Commission upon request.)(5)
10.09 Asset Purchase Agreement, dated as of August 20, 1999, among the
Registrant, Sinclair Communications, Inc., Sinclair Media III, Inc. and
Sinclair Radio of Kansas City Licensee, LLC. (See table of contents for
list of omitted schedules and exhibits, which the Registrant hereby
agrees to furnish supplementally to the Securities and Exchange
Commission upon request.)(5)
10.10 Asset Purchase Agreement, dated as of August 13, 1998, among the
Registrant, CBS Radio, Inc. and CBS Radio License, Inc.(2)
10.11 Time Brokerage Agreement, dated as of August 13, 1998, among the
Registrant, CBS Radio, Inc. and CBS Radio License, Inc.(2)
10.12 Asset Purchase Agreement, dated as of August 13, 1998, among CBS Radio,
Inc., CBS Radio License, Inc., ARS Acquisition II, Inc. and the
Registrant(2)
10.13 Time Brokerage Agreement, dated as of August 13, 1998, among CBS Radio,
Inc., CBS Radio License, Inc., ARS Acquisition II, Inc. and the
Registrant(2)
11.01 Reconciliation of Earnings Per Common Share(1) 69
21.01 Information Regarding Subsidiaries of the Registrant(1) 70
23.01 Consent of Deloitte & Touche LLP, Philadelphia, PA(1)
(1) Filed herewith.
(2) Incorporated by reference to our Registration Statement on Form S-1. (File
No. 333-61381)
(3) Incorporated by reference to our Quarterly Report on Form 10-Q. (File No.
001-14461)
(4) Incorporated by reference to our Registration Statement on Form S-1. (File
No. 333-86843)
(5) Incorporated by reference to our Registration Statement on Form S-1. (File
No. 333-86397).
(6) Incorporated by reference to our Current Report on Form 8-K. (File No.
001-14461).
(b) Reports on Form 8-K
We filed a report on Form 8-K on December 16, 1999 to report the completion of
our previously announced acquisition of 41 of 46 radio stations from Sinclair
Broadcast Group, Inc. for $700.4 million.
36
40
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
Entercom Communications Corp.:
We have audited the accompanying consolidated balance sheets of
Entercom Communications Corp. and subsidiaries as of December 31, 1998 and 1999,
and the related consolidated statements of operations, comprehensive income,
shareholders' equity and cash flows for the years ended September 30, 1997 and
1998, for the three month period ended December 31, 1998 and for the year ended
December 31, 1999. Our audits also included the financial statement schedule
listed in the Index at Item 14(a)2. These financial statements and the financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly,
in all material respects, the financial position of Entercom Communications
Corp. and subsidiaries at December 31, 1998 and 1999, and the results of their
operations and their cash flows for the years ended September 30, 1997 and 1998,
for the three month period ended December 31, 1998 and for the year ended
December 31, 1999, in conformity with accounting principles generally accepted
in the United States of America. Also, in our opinion, such financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, present fairly in all material respects the
information set forth therein.
DELOITTE & TOUCHE LLP
Philadelphia, Pennsylvania
February 23, 2000
(March 10, 2000, as to Note 16)
37
41
CONSOLIDATED FINANCIAL STATEMENTS OF ENTERCOM COMMUNICATIONS CORP.
ENTERCOM COMMUNICATIONS CORP.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1999
(AMOUNTS IN THOUSANDS)
ASSETS
DECEMBER 31, DECEMBER 31,
------------ ------------
1998 1999
------------ ------------
CURRENT ASSETS:
Cash and cash equivalents (Note 2) ......................................... $ 6,469 $ 11,262
Accounts receivable (net of allowance for doubtful accounts of $0.6 million
in 1998 and $1.4 million in 1999) ........................................ 38,511 51,926
Prepaid expenses and deposits .............................................. 6,259 4,247
Proceeds held in escrow from sale of Tampa stations ........................ 75,000
Deferred tax assets ........................................................ 1,773
Station acquisition deposits ............................................... 327 1,212
----------- -----------
Total current assets ..................................................... 126,566 70,420
----------- -----------
INVESTMENTS, AT FAIR VALUE (NOTE 2) .......................................... 1,000 9,870
----------- -----------
PROPERTY AND EQUIPMENT - AT COST (NOTE 2):
Land, land easements and land improvements ................................. 6,927 9,833
Building ................................................................... 4,596 9,375
Equipment .................................................................. 35,804 66,780
Furniture and fixtures ..................................................... 7,662 11,338
Leasehold improvements ..................................................... 3,899 6,565
----------- -----------
58,888 103,891
Accumulated depreciation ................................................... (10,874) (16,837)
----------- -----------
48,014 87,054
Capital improvements in progress ........................................... 629 3,369
----------- -----------
Net property and equipment ............................................... 48,643 90,423
----------- -----------
RADIO BROADCASTING LICENSES AND OTHER INTANGIBLES - NET
Net of accumulated amortization of $25.8 million in 1998 and $33.0 million
in 1999 (Notes 2,3, and 4)
.............................................................................. 500,545 1,214,969
----------- -----------
DEFERRED CHARGES AND OTHER ASSETS - NET (NOTES 2, 3 AND 5) ................... 4,280 10,366
----------- -----------
TOTAL .................................................................... $ 681,034 $ 1,396,048
=========== ===========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
38
42
ENTERCOM COMMUNICATIONS CORP.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1999
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
LIABILITIES AND SHAREHOLDERS' EQUITY
DECEMBER 31, DECEMBER 31,
------------ ------------
1998 1999
------------ ------------
CURRENT LIABILITIES:
Accounts payable .............................................................................. $ 18,224 $ 18,380
Accrued liabilities
Salaries .................................................................................... 4,322 6,188
Interest .................................................................................... 1,492 1,208
Other ....................................................................................... 618 798
Income taxes payable .......................................................................... 476 946
Long-term debt due within one year ............................................................ 10 10
----------- -----------
Total current liabilities ............................................................... 25,142 27,530
----------- -----------
SENIOR DEBT - (NOTE 7A) ....................................................................... 330,271 465,760
----------- -----------
CONVERTIBLE SUBORDINATED NOTE (NOTE 7D)
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 ........................................................................ 91,147
MINORITY INTEREST IN EQUITY OF PARTNERSHIP (NOTES 2 AND 8) .................................... 2,882
----------- -----------
Total liabilities ....................................................................... 455,567 584,437
----------- -----------
ENTERCOM-OBLIGATED MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED
SECURITIES OF ENTERCOM COMMUNICATIONS CAPITAL TRUST (NOTE 3) ................................ 125,000
COMMITMENTS AND CONTINGENCIES (NOTE 10)
SHAREHOLDERS' EQUITY (NOTE 11):
Preferred Stock $.01 par value; authorized 25,000,000 shares; none issued
Class A common stock $.01 par value; voting; authorized 200,000,000
shares; issued and outstanding 11,002,194 in 1998 and 33,251,321 in 1999................... 110 333
Class B common stock $.01 par value; voting; authorized 75,000,000
shares; issued and outstanding 10,531,805 in 1998 and 1999 ................................ 105 105
Class C common stock $.01 par value; nonvoting; authorized 25,000,000
shares; issued and outstanding 0 in 1998 and 1,396,836 in 1999 ............................ 14
Additional paid-in capital .................................................................. 744,933
Retained earnings (accumulated deficit) ..................................................... 225,252 (59,104)
Unearned compensation ....................................................................... (192)
Accumulated other comprehensive income ...................................................... 522
----------- -----------
Total shareholders' equity .............................................................. 225,467 686,611
----------- -----------
TOTAL ......................................................................................... $ 681,034 $ 1,396,048
=========== ===========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
39
43
ENTERCOM COMMUNICATIONS CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED SEPTEMBER 30, 1997 AND 1998,
THREE MONTHS ENDED DECEMBER 31, 1997 (UNAUDITED),
THREE MONTHS ENDED DECEMBER 31, 1998,
TWELVE MONTHS ENDED DECEMBER 31, 1998 (UNAUDITED)
AND YEAR ENDED DECEMBER 31, 1999
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
THREE MONTHS
YEAR ENDED YEAR ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31,
------------- ------------- ------------
1997 1998 1997
------------- ------------- ------------
(UNAUDITED)
NET REVENUES ................................... $ 93,862 $ 132,998 $ 28,399
OPERATING EXPENSES (INCOME):
Station operating expenses ................... 61,280 88,599 18,868
Depreciation and amortization ................ 7,685 13,066 2,880
Corporate general and administrative expenses 3,249 4,527 849
Net expense (income) from time brokerage
agreement fees................................ (476) 2,399
Gains on sale of assets ...................... (197,097) (8,661) (43)
--------- --------- ---------
Total operating expenses (income) ............ (125,359) 99,930 22,554
--------- --------- ---------
OPERATING INCOME ............................... 219,221 33,068 5,845
OTHER EXPENSE (INCOME):
Interest expense (Note 7) .................... 11,388 14,663 2,996
Financing cost of Entercom-obligated
mandatorily redeemable convertible preferred
securities of Entercom Communications
Capital Trust...............................
Adjustment to reflect indexing of the
Convertible Subordinated Note (Note 7D) .... 29,070 8,841 14,903
Interest income .............................. (482) (410) (127)
Other non-operating expenses ................. 1,986 82 25
--------- --------- ---------
Total other expense .......................... 41,962 23,176 17,797
--------- --------- ---------
INCOME (LOSS) BEFORE INCOME TAXES AND
EXTRAORDINARY ITEM ........................... 177,259 9,892 (11,952)
INCOME TAXES
Income Taxes - C Corporation .................
Income Taxes - S Corporation ................. 489 453 81
Deferred income taxes for conversion from an S
to a C Corporation .........................
--------- --------- ---------
Total income taxes ........................... 489 453 81
--------- --------- ---------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM ........ 176,770 9,439 (12,033)
EXTRAORDINARY ITEM:
Debt extinguishment (net of taxes of $25, $25
and $612, respectively, for the periods
presented).................................. 2,376
--------- --------- ---------
NET INCOME (LOSS) .............................. $ 176,770 $ 7,063 $ (12,033)
========= ========= =========
NET LOSS PER SHARE:
Basic and Diluted:
Loss before extraordinary item................
Extraordinary item, net of taxes..............
NET LOSS PER SHARE - BASIC AND DILUTED..........
THREE MONTHS TWELVE MONTHS
ENDED ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
------------ ------------ ------------
1998 1998 1999
------------ ------------ ------------
(UNAUDITED)
NET REVENUES ................................... $ 47,363 $ 151,962 $ 215,001
OPERATING EXPENSES (INCOME):
Station operating expenses ................... 29,990 99,721 135,943
Depreciation and amortization ................ 4,358 14,544 21,564
Corporate general and administrative expenses 1,850 5,528 8,100
Net expense (income) from time brokerage
agreement fees................................ 1,236 3,365 652
Gains on sale of assets ...................... (69,648) (78,266) (1,986)
--------- --------- ---------
Total operating expenses (income) ............ (32,214) 45,162 164,273
--------- --------- ---------
OPERATING INCOME ............................... 79,577 106,800 50,728
OTHER EXPENSE (INCOME):
Interest expense (Note 7) .................... 5,732 17,399 11,182
Financing cost of Entercom-obligated
mandatorily redeemable convertible preferred
securities of Entercom Communications
Capital Trust............................... 1,845
Adjustment to reflect indexing of the
Convertible Subordinated Note (Note 7D) .... 29,503 23,441
Interest income .............................. (146) (429) (3,253)
Other non-operating expenses ................. 723 780
--------- --------- ---------
Total other expense .......................... 35,812 41,191 9,774
--------- --------- ---------
INCOME (LOSS) BEFORE INCOME TAXES AND
EXTRAORDINARY ITEM ........................... 43,765 65,609 40,954
INCOME TAXES
Income Taxes - C Corporation ................. 20,942
Income Taxes - S Corporation ................. 310 682 125
Deferred income taxes for conversion from an S
to a C Corporation ......................... 79,845
--------- --------- ---------
Total income taxes ........................... 310 682 100,913
--------- --------- ---------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM ........ 43,455 64,927 (59,959)
EXTRAORDINARY ITEM:
Debt extinguishment (net of taxes of $25, $25
and $612, respectively, for the periods
presented).................................. 2,376 918
--------- --------- ---------
NET INCOME (LOSS) .............................. $ 43,455 $ 62,551 $ (60,877)
========= ========= =========
NET LOSS PER SHARE:
Basic and Diluted:
Loss before extraordinary item................ ($ 1.58)
Extraordinary item, net of taxes.............. $ 0.03
---------
NET LOSS PER SHARE - BASIC AND DILUTED.......... ($ 1.61)
=========
(Continued)
40
44
ENTERCOM COMMUNICATIONS CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED SEPTEMBER 30, 1997 AND 1998,
THREE MONTHS ENDED DECEMBER 31, 1997 (UNAUDITED),
THREE MONTHS ENDED DECEMBER 31, 1998,
TWELVE MONTHS ENDED DECEMBER 31, 1998 (UNAUDITED)
AND YEAR ENDED DECEMBER 31, 1999
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(CONTINUED)
THREE MONTHS THREE MONTHS TWELVE MONTHS
YEAR ENDED YEAR ENDED ENDED ENDED ENDED YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
------------- ------------ ------------ ------------ ------------ ------------
1997 1998 1997 1998 1998 1999
------------- ------------ ------------ ------------ ------------ ------------
(UNAUDITED) (UNAUDITED)
PRO FORMA DATA (UNAUDITED):
PRO FORMA NET INCOME (LOSS) DATA:
Income (loss) before income
taxes and extraordinary item ... $ 177,259 $ 9,892 $ (11,952) $ 43,765 $ 65,609 $ 40,954
Pro forma income taxes ......... 78,405 7,119 1,121 27,842 33,840 20,278
------------- ------------ ------------ ------------ ------------ ------------
Pro forma income (loss) before
extraordinary item ............. 98,854 2,773 (13,073) 15,923 31,769 20,676
Extraordinary item, net of
pro forma taxes ................ 1,488 1,488 918
------------- ------------ ------------ ------------ ------------ ------------
PRO FORMA NET INCOME (LOSS) ...... $ 98,854 $ 1,285 $ (13,073) $ 15,923 $ 30,281 $ 19,758
============= ============ ============ ============ ============ ============
PRO FORMA EARNINGS (LOSS) PER
SHARE:
Basic:
Pro forma earnings (loss)
before extraordinary item .... $ 4.59 $ 0.12 $ (0.61) $ 0.64 $ 1.32 $ 0.55
Extraordinary item, net of
pro forma taxes .............. 0.06 0.06 0.03
------------- ------------ ------------ ------------ ------------ ------------
Pro forma earnings (loss)
per share - basic ............ $ 4.59 $ 0.06 $ (0.61) $ 0.64 $ 1.26 $ 0.52
============= ============ ============ ============ ============ ============
Diluted:
Pro forma earnings (loss)
before extraordinary item .... $ 4.59 $ 0.12 $ (0.61) $ 0.64 $ 1.32 $ 0.54
Extraordinary item, net of
pro forma taxes .............. 0.06 0.06 0.03
------------- ------------ ------------ ------------ ------------ ------------
Pro forma earnings (loss)
per share - diluted........... $ 4.59 $ 0.06 $ (0.61) $ 0.64 $ 1.26 $ 0.51
============= ============ ============ ============ ============ ============
WEIGHTED AVERAGE SHARES:
Basic .......................... 21,534,000 22,238,843 21,534,000 24,742,443 24,104,000 37,921,623
Diluted ........................ 21,534,000 22,238,843 21,534,000 24,104,000 24,104,000 38,237,723
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
41
45
ENTERCOM COMMUNICATIONS CORP.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
YEARS ENDED SEPTEMBER 30, 1997 AND 1998,
THREE MONTHS ENDED DECEMBER 31, 1997 (UNAUDITED),
THREE MONTHS ENDED DECEMBER 31, 1998,
TWELVE MONTHS ENDED DECEMBER 31, 1998 (UNAUDITED)
AND YEAR ENDED DECEMBER 31, 1999
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
THREE MONTHS
YEAR ENDED YEAR ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31,
------------- ------------- ------------
1997 1998 1997
------------- ------------- ------------
(UNAUDITED)
NET INCOME (LOSS) ............................... $176,770 $ 7,063 ($12,033)
OTHER COMPREHENSIVE INCOME, (NET OF TAX):
Unrealized gains on investments -- $870 in 1999
-------- -------- --------
COMPREHENSIVE INCOME (LOSS) ..................... $176,770 $ 7,063 $(12,033)
======== ======== ========
THREE MONTHS TWELVE MONTHS
ENDED ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
------------ ------------ ------------
1998 1998 1999
------------ ------------ ------------
(UNAUDITED)
NET INCOME (LOSS) ............................... $ 43,455 $ 62,551 ($60,877)
OTHER COMPREHENSIVE INCOME, (NET OF TAX):
Unrealized gains on investments -- $870 in 1999 522
-------- -------- --------
COMPREHENSIVE INCOME (LOSS) ..................... $ 43,455 $ 62,551 $(60,355)
======== ======== ========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
42
46
ENTERCOM COMMUNICATIONS CORP.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
YEARS ENDED SEPTEMBER 30, 1997 AND 1998,
THREE MONTHS ENDED DECEMBER 31, 1998
AND YEAR ENDED DECEMBER 31, 1999
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
COMMON STOCK
----------------------------------------------------------------------
CLASS A CLASS B CLASS C ADDITIONAL
----------------------- --------------------- ------------------- PAID-IN
SHARE AMOUNT SHARE AMOUNT SHARE AMOUNT CAPITAL
----- ------ ----- ------ ----- ------ -------
Balance, September 30, 1996 ...... 12,935,594 $129 10,531,805 $ 105 $ 482
Retirement of treasury stock ..... (1,933,400) (19) (482)
Net income for the year ..........
Dividends paid to S Corporation
Shareholders....................
---------- ------- ---------- ------ --------- ---- --------
Balance, September 30, 1997 ...... 11,002,194 110 10,531,805 105
Net income for the year ..........
Dividends paid to S Corporation
Shareholders....................
---------- ------- ---------- ------ --------- ---- --------
Balance, September 30, 1998 ...... 11,002,194 110 10,531,805 105
Net income for the period ........
Dividends paid to S Corporation
Shareholders....................
---------- ------- ---------- ------ --------- ---- --------
Balance, December 31, 1998 ....... 11,002,194 110 10,531,805 105
Net loss for the year ............
Dividends paid to S Corporation
Shareholders....................
Transfer of S Corporation retained
earnings to paid-in capital .... 135,366
Sale of Common Stock A ........... 11,300,000 113 236,044
Conversion of Convertible
Subordinated Note to Common
Stock A and C .................. 2,327,500 23 1,995,669 20 96,387
Conversion of Common Stock C
to Common Stock A .............. 598,833 6 (598,833) (6)
Compensation expense related
to granting of stock options ... 402
Issuance of Common Stock A
related to an incentive plan ... 11,682 1 464
Sale of Common Stock A ........... 8,000,000 80 276,020
Compensation related to granting
of Restricted stock ............ 11,112 250
Net unrealized gain on
investments ....................
---------- ------- ---------- ------ --------- ---- --------
Balance, December 31, 1999 33,251,321 $ 333 10,531,805 $ 105 1,396,836 $ 14 $744,933
========== ======= ========== ====== ========= ==== ========
ACCUMULATED TREASURY STOCK AT COST
OTHER ----------------------------------
RETAINED UNEARNED COMPREHENSIVE CLASS A
EARNINGS COMPENSATION INCOME SHARES AMOUNT TOTAL
-------- ------------ ------ ------ ------ -----
Balance, September 30, 1996 ...... $ 5,407 1,931,400 $(1,044) $ 5,079
Retirement of treasury stock ..... (543) (1,931,400) 1,044 0
Net income for the year .......... 176,770 176,770
Dividends paid to S Corporation
Shareholders.................... (2,830) (2,830)
---------- ------ ------ ----------- ------- --------
Balance, September 30, 1997 ...... 178,804 179,019
Net income for the year .......... 7,063 7,063
Dividends paid to S Corporation
Shareholders.................... (3,112) (3,112)
---------- ------ ------ ----------- ------- --------
Balance, September 30, 1998 ...... 182,755 182,970
Net income for the period ........ 43,455 43,455
Dividends paid to S Corporation
Shareholders.................... (958) (958)
---------- ------ ------ ----------- ------- --------
Balance, December 31, 1998 ....... 225,252 225,467
Net loss for the year ............ (60,877) (60,877)
Dividends paid to S Corporation
Shareholders.................... (88,113) (88,113)
Transfer of S Corporation retained
earnings to paid-in capital .... (135,366) --
Sale of Common Stock A ........... 236,157
Conversion of Convertible ........
Subordinated Note to Common
Stock A and C .................. 96,430
Conversion of Common Stock C
to Common Stock A .............. --
Compensation expense related
to granting of stock options ... 402
Issuance of Common Stock A
related to an incentive plan ... 465
Sale of Common Stock A ........... 276,100
Compensation related to granting
of Restricted stock ............ $ (192) 58
Net unrealized gain on
investments .................... $ 522 522
---------- ------ ------ ----------- ------- --------
Balance, December 31, 1999 ....... $ (59,104) $ (192) $ 522 $686,611
========== ====== ====== =========== ======= ========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
43
47
ENTERCOM COMMUNICATIONS CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 1997 AND 1998,
THREE MONTHS ENDED DECEMBER 31, 1997 (UNAUDITED),
THREE MONTHS ENDED DECEMBER 31, 1998,
TWELVE MONTHS ENDED DECEMBER 31, 1998 (UNAUDITED)
AND YEAR ENDED DECEMBER 31, 1999
(AMOUNTS IN THOUSANDS)
THREE MONTHS THREE MONTHS TWELVE MONTHS
YEAR ENDED YEAR ENDED ENDED ENDED ENDED YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1998 1997 1998 1998 1999
---- ---- ---- ---- ---- ----
OPERATING ACTIVITIES:
Net income (loss) ............................. $ 176,770 $ 7,063 $(12,033) $ 43,455 $ 62,551 $ (60,877)
Adjustments to reconcile net income (loss)
and other comprehensive income to net
cash provided by operating activities:
Depreciation and amortization ............... 7,685 13,066 2,880 4,358 14,544 21,564
Extraordinary items ......................... 2,401 2,401 1,530
Deferred tax provision............ .......... 89,374
Gain on dispositions and exchanges of
assets .................................... (197,097) (8,661) (43) (69,648) (78,266) (1,986)
Non-cash stock-based compensation expense 461
Interest accrued ............................ 1,785 1,925 477 506 1,954
Adjustment to reflect indexing of the
Convertible Subordinated Note ............. 29,070 8,841 14,903 29,503 23,441
Changes in assets and liabilities which
provided (used) cash:
Accounts receivable ....................... (11,798) (7,728) 135 (5,987) (13,850) (12,458)
Prepaid expenses .......................... (929) (589) 981 (115) (1,685) 1,054
Accounts payable, accrued liabilities
and income taxes payable ................ 1,463 6,695 16 8,381 15,060 2,038
Minority interest ......................... 1,910 6 25 705 686
--------- ---------- -------- -------- --------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 8,859 23,019 7,341 11,158 26,836 40,700
--------- ---------- -------- -------- --------- ---------
INVESTING ACTIVITIES:
Additions to property and equipment ........... (4,373) (11,183) (5,012) (2,400) (8,571) (14,357)
Acquisition of limited partnership interest ... (3,138)
Proceeds from sale of property, equipment,
intangibles and other assets ................ 3,750 9,724 68 75,016 84,672 2,781
Proceeds from exchanges of radio stations ..... 72,200 3,132 3,132
Payments for exchanges of radio stations ...... (5,304) (306) (306)
Purchases of radio station assets (Note 3) .... (74,498) (152,791) (15,987) (82,903) (219,707) (763,068)
Proceeds held in escrow from sale of Tampa
stations .................................... (75,000) (75,000) 75,000
Deferred charges and other assets ............. (644) (3,329) (50) (622) (3,901) (656)
Purchase of investment ........................ (1,000) (1,000) (8,000)
Station acquisition deposits .................. (4,826) 1,102 3,511 15 (2,394) (885)
--------- ---------- -------- -------- --------- ---------
NET CASH USED BY INVESTING ACTIVITIES ....... (13,695) (153,651) (17,470) (86,894) (223,075) (712,323)
--------- ---------- -------- -------- --------- ---------
FINANCING ACTIVITIES:
Net proceeds from initial public offering ..... 236,157
Net proceeds from stock offering .............. 276,100
Proceeds from issuance of Entercom-
obligated mandatorily redeemable convertible
preferred securities of Entercom
Communications Capital Trust ("TIDES") ...... 125,000
Deferred financing expenses related to TIDES
and long-term debt .......................... (8,683)
Proceeds from issuance of long-term debt ...... 20,000 277,286 13,000 79,500 343,786 551,000
Payments of long-term debt .................... (14,000) (140,502) (3,000) (3,003) (140,505) (415,509)
Proceeds from issuance of common stock related
to an incentive plan ........................ 464
Dividends paid to S Corporation shareholders .. (2,830) (3,112) (958) (4,070) (88,113)
--------- ---------- ---------- -------- --------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES ... 3,170 133,672 10,000 75,539 199,211 676,416
--------- ---------- ---------- -------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS.................................. (1,666) 3,040 (129) (197) 2,972 4,793
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD .. 5,292 3,626 3,626 6,666 3,497 6,469
--------- ---------- ---------- -------- --------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD ........ $ 3,626 $ 6,666 $ 3,497 $ 6,469 $ 6,469 $ 11,262
========= ========== ========== ======== ========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION--
Cash paid during the period for:
Interest .................................... $ 10,203 $ 11,541 $ 2,980 $ 5,698 $ 14,259 $ 11,187
========= ========== ========== ======== ========= =========
Interest on TIDES ........................... $ 1,845
=========
Income taxes ................................ $ 211 $ 293 $ 31 $ 60 $ 322 $ 10,851
========= ========== ========== ======== ========= =========
SUPPLEMENTAL DISCLOSURES ON NON-CASH INVESTMENTS AND FINANCING ACTIVITIES
In connection with the radio station exchange transactions completed by the
Company, the noncash portion of assets recorded was $127,000 for the year
ended September 30, 1997 and $22,500 for the year ended September 30, 1998.
In connection with the Company's initial public offering completed by the
Company during the year ended December 31, 1999, the Convertible
Subordinated Note, net of deferred finance charges, was converted into
equity in the amount of $96,400.
During 1999 the Company issued 1.4 million stock options.
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
44
48
ENTERCOM COMMUNICATIONS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION AND ORGANIZATION
Audited Financial Statements - The financial statements and
accompanying notes have been audited for the periods presented except for the
three-month period ended December 31, 1997 and the twelve-month period ended
December 31, 1998 which are unaudited.
Nature of Business - Entercom Communications Corp. (the "Company) is a
radio broadcasting company operating one reportable business segment, whose
business is devoted to acquiring, developing and operating radio broadcast
properties throughout the United States. The Company owns or operates three or
more radio stations in the following markets: Boston, Seattle, Portland,
Sacramento, Kansas City, Milwaukee, Norfolk, New Orleans, Greensboro, Buffalo,
Memphis, Rochester, Greenville/Spartanburg, Wilkes-Barre/Scranton,
Longview/Kelso and owns two stations in Gainesville/Ocala. The Company also has
an asset purchase agreement for two stations and has purchased five stations on
February 23, 2000 in the Wichita market (see Note 16).
Effective January 28, 1999 (the "Revocation Date"), in connection with
the initial public offering (the "IPO"), the Company revoked its S Corporation
election 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 has been 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.
Upon the acquisition of the 41 radio properties from Sinclair Broadcast Group
("Sinclair") on December 16, 1999, the Company's combined effective tax rate
increased to 40% as a result of adding facilities in additional states which on
average have higher income tax rates than the states in which the Company
currently operates.
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 were
approximately $236.2 million.
On September 30, 1999, the Company and certain shareholders of the
Company entered into an underwriting agreement to sell 8,750,000 shares of Class
A Common Stock of which 8,000,000 shares were sold by the Company and 750,000
shares were sold by selling shareholders. The Company completed this offering on
October 6, 1999 and sold 8,000,000 shares of Class A Common Stock at a price per
share of $36.00. The net proceeds to the Company, after deducting underwriting
discounts and other offering expenses, were approximately $276.1 million.
On September 30, 1999, the Company entered into an agreement to sell
2,500,000 6.25% Convertible Preferred Securities, Term Income Deferrable Equity
Securities ("TIDES"), including underwriters' over-allotments at an offering
price of $50.00 per TIDES. The Company completed this offering on October 6,
1999 and sold 2,500,000 securities, at an offering price of $50.00 per TIDES.
The net proceeds to the Company, after deducting underwriting discounts and
other offering expenses, were approximately $120.5 million.
Concurrent with and as a result of the revocation of its S Corporation
election 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. Upon the closing on the
acquisition of the radio properties from Sinclair on December 16, 1999, the
Company recorded a non-cash deferred income tax expense of approximately $3.9
million. This amount reflects an increase in the Company's effective tax rate
from 38% to 40% and its effect on previously reported temporary differences
between the tax and financial reporting bases of the Company's assets and
liabilities.
Unaudited Pro Forma Adjustments - 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 the adjustment to reflect indexing of the Convertible Subordinated
Note (as such adjustment is not tax deductible) of $29.1 million and $ 8.8
million for the years ended September 30, 1997 and 1998, $14.9 million and $29.5
million for the three-month periods ended December 31, 1997 and 1998 and $23.4
million for the twelve-month period ended December 31, 1998.
45
49
2. SIGNIFICANT ACCOUNTING POLICIES
Income Taxes - For periods prior to January 28, 1999, the Company was
taxed as an S Corporation for federal and certain state income taxes. As an S
Corporation, the Company's shareholders were obligated for payment of the income
taxes on their proportionate share of the Company's taxable income. Effective on
January 28, 1999, in connection with the Company's IPO, the shareholders'
revoked their S Corporation election. As a result, all of the Company's taxable
income subsequent to January 27, 1999, is taxed to the Company rather than to
the shareholders.
Deferred income taxes are recognized for all temporary differences
between the tax and financial reporting bases of the Company's assets and
liabilities based on enacted tax laws and statutory tax rates applicable to the
periods in which the differences are expected to affect taxable income.
Principles of Consolidation - The accompanying consolidated financial
statements include the accounts of the Company, its former general partnership
interest, its former limited partnership interest (acquired on January 22,
1999), and its subsidiaries, all of which are directly or indirectly
wholly-owned. All inter-company transactions and balances have been eliminated
in consolidation.
Management's Use of Estimates - The preparation of consolidated
financial statements, in accordance with generally accepted accounting
principles, requires the Company to make estimates and assumptions that affect
the reported amounts of assets and liabilities, and the disclosure of contingent
assets and liabilities, as of the date of the consolidated financial statements,
and the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Depreciation - Depreciation is determined on a straight-line basis. The
estimated useful lives for depreciation are as follows:
Land Improvements................................................... 10 years
Building............................................................ 20 years
Equipment........................................................... 5-20 years
Furniture and fixtures.............................................. 5-10 years
Leasehold improvements.............................................. Various
Revenue Recognition - Revenue from the sale of commercial broadcast
time to advertisers is recognized when the commercials are broadcast.
Promotional fees are recognized as services are rendered.
Concentration of Credit Risk - The Company's revenues and accounts
receivable relate primarily to the sale of advertising within the radio
stations' broadcast areas. Credit is extended based on an evaluation of the
customers' financial condition, and generally, collateral is not required.
Credit losses are provided for in the financial statements and consistently have
been within management's expectations. The Company also maintains deposit
accounts with financial institutions. At times, such deposits may exceed FDIC
insurance limits.
Radio Broadcasting Licenses and Other Intangibles - Broadcasting
licenses and other intangibles are being amortized on a straight-line basis over
40 years.
Impairment of Long-Lived Assets - In accordance with Statement of
Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed Of", the Company
evaluates the recoverability of its long-lived assets which include broadcasting
licenses, other intangibles, deferred charges, and other assets whenever events
or changes in circumstance indicate that the carrying amount may not be
recoverable. If indications are that the carrying amount of the asset is not
recoverable, the Company will estimate the future cash flows expected to result
from use of the asset and its eventual disposition. If the sum of the expected
future cash flows (non-discounted and without interest charges) is less than the
carrying amount of the asset, the Company recognizes an impairment loss. The
impairment loss recognized is measured as the amount by which the carrying
amount of the asset exceeds its fair value.
Deferred Charges - The costs related to the issuance of debt are
capitalized and accounted for as amortization expense over the lives of the
related debt. During the years ended September 30, 1997 and 1998, the
three-month periods ended December 31, 1997 and 1998, the twelve-month period
ended December 31, 1998 and the year ended December 31, 1999, the Company
recognized amortization of debt issuance costs, exclusive of extraordinary
expense for the extinguishment of debt, of $0.6 million, $0.5 million, $0.2
million, $0.1 million, $0.4 million and $0.3 million, respectively, which
amounts are included in amortization expense in the accompanying consolidated
statements of operations.
Earnings (Loss) and Pro Forma Earnings (Loss) Per Common Share - Net
earnings (loss) and pro forma earnings (loss) per share are calculated in
accordance with SFAS No. 128, "Earnings Per Share" which requires presentation
of basic
46
50
earnings (loss) per share and diluted earnings (loss) per share. Basic
earnings (loss) per share excludes dilution and is computed by dividing earnings
(loss) available to common shareholders by the weighted average number of common
shares outstanding for the period. Diluted earnings (loss) per share is computed
in the same manner as basic earnings after assuming issuance of common stock for
all potentially dilutive equivalent shares, which includes (1) stock options
(using the treasury stock method), (2) the Convertible Subordinated Note after
eliminating from net income the interest expense, net of taxes, on the
Convertible Subordinated Note and (3) the TIDES after eliminating from net
income the interest expense, net of taxes, on the TIDES. Antidilutive
instruments are not considered in this calculation. For the years ended
September 30, 1997 and 1998, the three-month periods ended December 31, 1997 and
1998 and the twelve-month period ended December 31, 1998, the effect of the
conversion of the Convertible Subordinated Note on the calculation of the pro
forma earnings (loss) per share was anti-dilutive. For the year ended December
31, 1999, the effect of the TIDES on the calculation of the loss per share and
pro forma earnings per share was anti-dilutive.
Corporate General and Administrative Expense - Corporate general and
administrative expense consists of corporate overhead costs not specifically
allocable to any of the Company's individual business properties.
Net Expense (Income ) from Time Brokerage Agreement ("TBA") Fees - Net
expense (income) from TBA fees consists of fees paid by or earned by the Company
under agreements which permit an acquirer to program and market stations prior
to acquisition. The Company sometimes enters into such agreements prior to the
consummation of station acquisitions and dispositions. Under the TBAs relating
to the Company's acquisitions, the expense from TBA fees was approximately $2.2
million, $2.5 million, $1.6 million, $4.1 million and $0.7 million for the years
ended September 30, 1997 and 1998, the three-month period ended December
31,1998, the twelve-month period ended December 31, 1998 and the year ended
December 31, 1999, respectively. Under the TBAs relating to the Company's
dispositions, the income from TBA fees was approximately $2.7 million, $0.1
million, $0.4 million, and $0.5 million for the years ended September 30, 1997
and 1998, the three-month period ended December 31,1998 and the twelve-month
period ended December 31, 1998, respectively. Amounts reflected in net revenues
and station expenses from operations under TBAs, excluding expense (income) from
TBA fees, were approximately $12.3 million and $9.0 million, $7.8 million and
$5.0 million, $8.3 million and $5.6 million, $16.1 million and $10.6 million and
$1.7 million and $1.2 million for the years ended September 30, 1997 and 1998,
the three-month period ended December 31,1998, the twelve-month period ended
December 31, 1998 and the year ended December 31, 1999, respectively.
Barter Transactions - The Company provides advertising broadcast time
in exchange for certain products, supplies, and services. The terms of the
exchanges generally permit the Company to preempt such broadcast time in favor
of advertisers who purchase time on regular terms. The Company includes the
value of such exchanges in both broadcasting revenues and operating costs and
expenses. Barter valuation is based upon management's estimate of fair value of
the products, supplies and services received. For the years ended September 30,
1997 and 1998, the three-month periods ended December 31,1997 and 1998, the
twelve-month period ended December 31, 1998 and the year ended December 31,
1999, barter transactions amounted to approximately $0.8 million, $1.0 million,
$0.2 million, $0.5 million, $1.2 million and $1.8 million, respectively. The
Company accrues as a liability the amount by which the value of broadcasting
time to be provided exceeds the value of products, supplies and services to be
received. At December 31,1998, and December 31, 1999, such amounts were
approximately $24,000 and $19,000, respectively.
Cash and Cash Equivalents - Cash and cash equivalents consist primarily
of amounts held on deposit with financial institutions, including investments
held in financial institutions, in immediately available money market accounts.
Incentive Compensation Plans - The Company accounts for stock
compensation in accordance with the requirements of Accounting Principles board
Opinion No. 25, "Accounting for Stock Issued to Employees" and related
Interpretations SFAS No. 123, "Accounting for Stock-Based Compensation",
requires disclosure of the pro forma effects on net income and earnings per
share had the fair value recognition provisions of SFAS No. 123 been adopted
(Note 13).
Investments - Investments are composed of equity securities of $1.0
million and $9.0 million at December 31, 1998 and December 31, 1999,
respectively, and are carried at fair value based upon quoted market prices or
historical cost when quoted market prices are unavailable. The Company's
investment strategy is to seek long-term strategic investments to enhance its
core business. The Company is currently limited to an initial aggregate
investment, at cost, of $50.0 million under our existing Bank Facility. The net
unrealized gains or losses on these investments, net of tax, are reported in the
statement of comprehensive income (loss) and as a separate component of
shareholders' equity. For the years ended September 30, 1997 and 1998, the
three-month periods ended December 31,1997 and 1998 and the twelve-month period
ended December 31, 1998, there were no unrealized gains or losses. For the year
ended December 31, 1999 the amount of unrealized gains on these investments was
a gain of $0.5 million, net of income taxes of $0.4 million.
Derivative Financial Instruments - Periodically, the Company enters
into derivative financial instruments, including interest rate exchange
agreements ("Swaps") and interest rate cap agreements ("Caps") to manage its
exposure to fluctuations in interest rates. A rate cap agreement establishes an
upper limit for the base LIBOR rate and a rate floor agreement establishes a
47
51
lower limit or "floor" for the base LIBOR rate. In January 2000, agreements
covering a rate cap and a rate floor have been entered into simultaneously with
the same banks. The Company's derivative activities, all of which are for
purposes other than trading, are initiated within the guidelines of corporate
risk-management policies. As derivative contracts are initiated, the Company
designates the instruments individually as hedges of underlying financial
instruments or anticipated transactions. Management reviews the correlation and
effectiveness of its derivatives on a periodic basis. Interest expense on debt
is adjusted to include the payments made or received under the derivative
agreements. Any fees associated with these instruments are amortized over their
term.
Recent Accounting Pronouncements - In June 1998, the Financial
Accounting Standards Board 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 for companies with calendar years to
January 1, 2001 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.
Reclassifications - Certain reclassifications have been made to the
prior years' financial statements to conform to the current year presentation.
3. ACQUISITIONS, DIVESTITURES AND OTHER SIGNIFICANT EVENTS
During each of the periods presented, the Company consummated
acquisitions of radio stations. All of these acquisitions were accounted for
under the purchase method of accounting (unless otherwise noted below), and the
purchase price, including transaction costs, was allocated to the assets based
upon their respective fair values as determined by independent appraisal as of
the purchase dates. Gains on exchange transactions are determined based on the
excess of the fair value of the station assets acquired, as determined by an
independent appraisal, plus any cash received, over the Company's carrying basis
in the station assets exchanged, plus cash paid by the Company, all less
transaction costs.
FOR THE YEAR ENDED SEPTEMBER 30, 1997
On March 27, 1997, the Company acquired the assets of KMBZ-AM, KYYS-FM,
KCMO-AM and KCMO-FM, serving the Kansas City/Missouri radio market, from
Bonneville International Corporation and Bonneville Holding Corporation
(collectively referred to hereafter as "Bonneville") for a purchase price of
$35.0 million. The Company also acquired the assets of KIRO-AM, KQBZ-FM and
KNWX-AM, serving the Seattle, Washington radio market, from KIRO, Inc., a wholly
owned subsidiary of Bonneville International Corporation ("KIRO") for a purchase
price of $60.0 million. As consideration for the assets received, the Company
transferred the assets of KLDE-FM serving the Houston, Texas radio market, plus
$5.0 million, to Bonneville and KIRO resulting in a gain of $88.7 million. The
Company incurred transaction costs of $0.2 million related to these
acquisitions. Broadcasting licenses and other intangibles in the amount of $85.8
million were recorded in connection with these transactions.
On April 28, 1997, the Company acquired the assets of KEDO-AM and
KLYK-FM, serving the Longview/Kelso, Washington radio market, for $1.8 million
from Longview Broadcasting Company and Premier Development Company. Broadcasting
licenses and other intangibles in the amount of $0.7 million were recorded in
connection with this transaction.
On May 30, 1997, the Company completed an Asset Exchange Agreement with
Nationwide Communications, Inc. ("Nationwide") and Secret Communications, LP
("Secret"). In this three party agreement, in exchange for the transfer to
Secret of the Company's two FM radio stations in Pittsburgh, WDSY and WNRQ, the
Company received Nationwide's radio station in Seattle, KISW-FM, plus $32.5
million, resulting in a gain of $43.9 million. Broadcasting licenses and other
intangibles in the amount of $12.1 million were recorded in connection with this
transaction. The total purchase price of this transaction was $47.0 million.
On May 30, 1997, the Company acquired the assets of KLOU-FM, serving
the St. Louis, Missouri radio market, from Group W Broadcasting, Inc., plus
$39.7 million, in exchange for the assets of KITS-FM, resulting in a gain of
$61.2 million. The Company incurred transaction costs of $0.1 million related to
this acquisition. Broadcasting licenses and other intangibles in the amount of
$21.6 million were recorded in connection with this transaction. The total
purchase price of this transaction was $62.2 million.
48
52
On June 3, 1997, the Company acquired the assets of KDND-FM, serving
the Sacramento, California radio market, from American Radio Systems Corporation
for $27.2 million. The Company incurred transaction costs of $0.2 million
related to this acquisition. Broadcasting licenses and other intangibles in the
amount of $26.9 million were recorded in connection with this transaction.
On June 4, 1997, the Company acquired the assets of KRXQ-FM and
KSEG-FM, serving the Sacramento, California radio market, from Citicasters Co.
for $45.0 million. The Company incurred transaction costs of $0.3 million
related to these acquisitions. Broadcasting licenses and other intangibles in
the amount of $40.7 million were recorded in connection with this transaction.
FOR THE YEAR ENDED SEPTEMBER 30, 1998
On November 26, 1997, the Company acquired the assets of KSSJ-FM,
serving the Sacramento, California radio market, from Susquehanna Radio Corp.,
KTHX License Investment Co. and KTHX Radio Inc. for $15.9 million in cash. The
Company incurred transaction costs of approximately $0.1 million related to this
acquisition. Broadcasting licenses and other intangibles in the amount of $15.8
million were recorded in connection with this transaction.
On January 1, 1998, the Company acquired the assets of KCTC-AM, serving
the Sacramento, California radio market, from ARS for $4.0 million. Broadcasting
licenses and other intangibles in the amount of $2.7 million were recorded in
connection with this transaction.
On January 1, 1998, the Company acquired the assets of KUDL-FM and
WDAF-AM, serving the Kansas City, Kansas/Missouri radio market from ARS. As
consideration for the asset received, which included the receipt of $7.1 million
in cash from ARS, the Company transferred the assets of KLOU-FM, serving the St.
Louis radio market, to ARS resulting in a gain of $0.3 million. The Company
incurred transaction costs of approximately $0.3 million related to this
acquisition. Broadcasting licenses and other intangibles in the amount of $12.8
million were recorded in connection with this transaction. The total purchase
price of this transaction was $15.4 million.
On May 7, 1998, the Company acquired the assets of WSKY-FM, serving the
Gainesville/Ocala, Florida radio market, from Gator Broadcasting Co. for $2.0
million in cash plus an additional payment of up to $1.0 million payable once
the authorized upgrade of the station from a Class A license to a Class C-2
license becomes final. The Company incurred transaction costs of approximately
$0.1 million related to this acquisition. Broadcasting licenses and other
intangibles in the amount of $1.7 million were recorded in connection with this
transaction.
On May 15, 1998, the Company acquired the assets of KBAM-AM and
KRQT-FM, serving the Longview, Washington radio market, from Armak Broadcasters
Inc. for $1.0 million in cash. Broadcasting licenses and other intangibles in
the amount of $0.4 million were recorded in connection with this transaction.
On June 19, 1998, the Company acquired from Sinclair Broadcast Group
the assets of KFXX-AM KRSK-FM and KKSN-FM, all serving the Portland, Oregon
radio market, and WBEE-FM, WBBF-FM, WQRV-FM and WEZO-AM all serving the
Rochester, New York radio market. The purchase price for the stations was $126.5
million in cash. The Company began operating these stations on March 1, 1998
under a TBA. The Company incurred transaction costs of approximately $0.5
million related to this acquisition. Broadcasting licenses and other intangibles
in the amount of $121.3 million were recorded in connection with this
transaction.
On August 13, 1998 the Company acquired from Capital Broadcasting, Inc.
the assets and rental leases used in connection with the operation of a tower
facility serving the Kansas City, Kansas/Missouri radio market for a purchase
price of $2.0 million in cash.
FOR THE THREE MONTHS ENDED DECEMBER 31, 1998
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 in cash (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 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 Radio, Inc
(the "Willamette Transaction") for $0.6 million in cash. Broadcasting licenses
and other intangibles in the amount of $0.5 million were recorded in connection
with this transaction.
49
53
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 in cash
(the "Tampa Transaction"), resulting in a gain of approximately $69.6 million.
FOR THE YEAR ENDED DECEMBER 31, 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. ("Partnership") for $3.4 million in cash. ECI License
Company, L.P. was a limited partnership in which the Company was the general
partner, owning a 99% general partnership interest. The Partnership owned
certain of the Company's FCC licenses. The acquisition effectively gave the
Company a 100% interest in its FCC licenses. On December 31, 1999, the
Partnership was merged into the Company and the Partnership along with the
entity holding the 1% limited partnership interest were dissolved.
On February 22, 1999, the Company acquired the assets of WAAF-FM and
WQSX-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 acquisition. 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.
On April 22, 1999, the Company sold a building located in Seattle,
Washington for cash of $1.3 million, resulting in a gain of approximately $0.5
million.
On June 11, 1999, the Company acquired the assets of KKGM-AM, serving
the Kansas City, Kansas/Missouri radio market from Mortenson Broadcasting
Company of Canton, LLC for the sum of $2.8 million in cash. Broadcasting
licenses and other intangibles in the amount of $2.5 million were recorded in
connection with this transaction.
On August 20, 1999, the Company entered into an agreement with Sinclair
Broadcast Group ("Sinclair") which consists of two separate asset purchase
agreements for the purchase of: (1) Sinclair's 42 stations in eight markets and
other assets for which the purchase price is $702.5 million ("First Sinclair
Transaction") and (2) Sinclair's four Kansas City stations in the amount of
$122.0 million ("Sinclair Kansas City"). On December 16, 1999, under the First
Sinclair Transaction, the Company acquired 41 of Sinclair's radio properties for
a purchase price of $700.4 million in cash. This transaction included 26 FM and
15 AM radio stations in eight markets including Milwaukee, New Orleans, Memphis,
Buffalo, Norfolk, Greensboro/Winston-Salem/High Point, Greenville/Spartanburg
and Wilkes-Barre/Scranton. The Company also began operations at WKRF-FM in the
Wilkes-Barre/Scranton market on December 16, 1999 under a TBA. As part of the
agreement with Sinclair, the Company has agreed to spend $5.0 million in
television advertising time for the promotion of the Company's radio stations,
on Sinclair's TV stations over a five year period, and will be responsible for
certain capital expenditures of approximately $2.5 million. In connection with
the First Sinclair Transaction, the Company incurred transaction costs of
approximately $1.7 million. The Company also recorded broadcasting licenses and
other intangibles in the amount of $668.8 million. The final allocation of the
purchase price is contingent upon the receipt of final appraisals of the
acquired assets and the revision of other estimates. The Company does not expect
final allocations to differ materially from the preliminary allocation. The
Company anticipates completing the Sinclair Kansas City acquisition and the
purchase of WKRF-FM currently under a TBA agreement, in the second quarter of
the year 2000. Pursuant to the Sinclair Kansas City agreement, on February 22,
2000, the purchase price for the Sinclair Kansas City stations increased by
approximately $0.9 million and will increase by an additional $0.9 million for
each 30 day period thereafter until the later of the closing or the termination
of the agreement.
OTHER SIGNIFICANT EVENTS
Effective July 1, 1997, the Company entered into a Joint Sales
Agreement ("JSA") with Classic Radio, Inc. ("Classic"), whereby the Company
serves as the exclusive sales agent for the Classic-owned KING-FM radio station
located in Seattle Washington. This agreement is a continuation of a
relationship under a prior JSA which expired on June 30, 1997. Under the new
JSA, which continues through June 30, 2002, the Company will be entitled to all
revenues from the sale of advertising time broadcast on KING-FM, but will be
required to pay a monthly fee to Classic based upon calculations as defined in
the agreement. Under the terms of the JSA, the Company will be responsible for
all costs incurred in selling the advertising time. Classic will be responsible
for all costs incurred in operating the station. Net revenues and expenses
incurred by the Company under this contract during the years ended September 30,
1997 and 1998, the three-month periods ended December 31,1997 and 1998, the
twelve-month period ended December 31, 1998 and the year ended December 31,
1999, were $2.2 million and $1.3 million, $3.6 million and $ 2.3 million, $1.0
million and $06 million, $1.1 million and $0.6 million, $3.7 million and $2.3
million and $3.9 million and $2.3 million, respectively.
On October 7, 1997, the Company, in a transaction with Kanza Inc.,
exchanged the broadcasting frequency and the transmitter related assets of
KCMO-AM, Kansas City, Missouri for the broadcasting frequency and transmitter
related assets of WHB-AM, Kansas City, Missouri. The Company incurred
transaction costs of $0.2 million. The transaction was accounted for as
50
54
a non-monetary exchange of similar productive assets and no gain or loss was
recognized. The assets received were recorded at the historical cost of the
assets surrendered.
On May 7, 1998, the Company sold certain rights in a license for the
Vancouver, Washington radio market to Jacor Communications and Smith
Broadcasting, Inc. for $10.0 million in cash. The Company acquired an interest
in these rights at a cost of $1.3 million. The sale resulted in a gain of $8.5
million.
On June 25, 1998, the Company completed its transaction with McKenzie
River Broadcasting Company ("McKenzie") whereby McKenzie received FCC approval
to reclassify the broadcast license of its KMGE-FM station, serving Eugene,
Oregon radio market, from a class C to a Class C-1. Such a reclassification of
that station allowed the Company to seek approval from the FCC for construction
and operation of an enhanced transmission facility for its KNRK-FM station
serving the Portland, Oregon radio market. In consideration for its agreement,
McKenzie was paid approximately $1.2 million in cash and the Company recorded
this amount as broadcast licenses.
On September 16, 1998, the Company completed an agreement with American
Radio Systems, Inc. and American Radio Systems License Corp. (collectively
referred to as "ARS") to exchange certain assets used in the operation of radio
stations serving the Sacramento radio market. ARS provided KRAK-FM's license and
transmission facility to the Company in exchange for KRXQ-FM's license and
transmission facility and $4.5 million. Each of the stations retained its own
call letters, programming format and studio and office property and equipment,
and the parties provided each other with reciprocal covenants against
programming competition on the respective frequencies for a period of two years.
ARS also transferred the intellectual property comprising program format for use
by the Company on its recently acquired KSSJ-FM in that market. The transaction
was accounted for as a non-monetary exchange of similar productive assets and no
gain or loss was recognized. The assets received were recorded at the historical
cost of the assets surrendered plus the $3.8 million paid to ARS. In a related
transaction the Company sold the KRXQ-FM transmitter site, including broadcast
tower facilities to ARS for $0.8 million, resulting in a loss of approximately
$34,000.
Prior to the revocation of its S Corporation election, 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 was taxable to its S Corporation
shareholders as of the Revocation Date. The S Distribution of $88.1 million was
paid as of June 30, 1999.
Prior to the IPO, Chase Capital, which held a Convertible Subordinated
Promissory Note of the Company (the "Convertible Subordinated Note") in the
principal amount of $25.0 million, converted the Convertible Subordinated Note
into 2,327,500 shares of Class A Common Stock and 1,995,669 shares of Class C
Common Stock (the "Chase Conversion"). At the time of the Chase Conversion, the
market value of the shares into which the Convertible Subordinated Note was
convertible, was approximately $97.3 million (the principal amount of the
Convertible Subordinated Note plus accrued interest amounted to approximately
$29.9 million, and the cumulative adjustment to reflect indexing of the
Convertible Subordinated Note was approximately $67.4 million). The amount of
$96.5 million, net of the write off of unamortized deferred financing costs of
$.0.8 million, was recorded as an increase to shareholders' equity. The
Convertible Subordinated Note has been retired and there is no further
obligation due.
On September 30, 1999, the Company and certain shareholders of the
Company entered into an underwriting agreement to sell 8,750,000 shares of Class
A Common Stock of which 8,000,000 shares were sold by the Company and 750,000
shares were sold by selling shareholders. The Company completed this offering on
October 6, 1999 and sold 8,000,000 shares of Class A Common Stock at a price per
share of $36.00. The net proceeds to the Company after deducting underwriting
discounts and other offering expenses, was $276.1 million.
On September 30, 1999, the Company entered into an agreement to sell
2,500,000 Convertible Preferred Securities, Term Income Deferrable Equity
Securities ("TIDES"), including underwriters' over-allotments at an offering
price of $50.00 per security. Subject to certain deferral provisions, the trust
will pay quarterly calendar distributions. The first distribution was paid on
December 31, 1999. The TIDES represent undivided preferred beneficial ownership
interest in the assets of the trust. The trust used the proceeds to purchase
from the Company an equal amount of 6.25% Convertible Subordinated Debentures
due 2014. The Company owns all of the common securities issued by the trust. The
trust exists for the sole purpose of issuing the common securities and the
TIDES. The holders of the TIDES have a preference with respect to each
distribution and amounts payable upon liquidation, redemption or otherwise over
the holders of the common securities of the trust. Each TIDES is initially
convertible into shares of the Company's Class A Common Stock at the rate of
1.1364 shares of Class A Common Stock for each TIDES. The Company completed this
offering on October 6, 1999, and issued 2,500,000 TIDES at $50.00 per TIDES. The
net proceeds to the Company after deducting underwriting discounts and other
offering expenses, was $120.5 million.
51
55
The following unaudited pro forma summary presents the consolidated
results of operations as if the transactions which occurred during the period of
January 1, 1998 through December 31, 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 what would have occurred had the acquisition and other
transactions been made as of that date or results which may occur in the future.
(UNAUDITED)
TWELVE MONTHS YEAR ENDED
ENDED DECEMBER 31, 1998 DECEMBER 31, 1999
----------------------- -----------------
(AMOUNTS IN THOUSANDS,
EXCEPT PER SHARE DATA)
Net Revenues........................................................... $ 264,130 $ 307,513
=========== ==========
Income (loss) before extraordinary item and gains on sale of assets.... $ (11,726) $ 15,844
========== ==========
Income before extraordinary items...................................... $ 36,502 $ 15,844
========== ==========
Net income ........................................................... $ 35,030 $ 14,926
=========== ==========
Net Earnings Per Share - Basic......................................... $ 1.45 $ 0.39
========= ==========
Net Earnings Per Share - Diluted....................................... $ 1.45 $ 0.39
========= ==========
52
56
4. RADIO BROADCASTING LICENSES AND OTHER INTANGIBLES
Radio Broadcasting Licenses and other intangibles consist of the
following:
DECEMBER 31, 1998 DECEMBER 31, 1999
----------------- -----------------
(AMOUNTS IN THOUSANDS,
EXCEPT PER SHARE DATA)
FCC Licenses.......................................................... $ 516,755 $ 1,242,665
Other Intangibles.................................................... 1,190 4,322
------------ ------------
Subtotal............................................................ 517,945 1,246,987
Less accumulated amortization......................................... (17,400) (32,018)
------------ ------------
Total Radio broadcasting licenses and other intangibles............... $ 500,545 $ 1,214,969
============ ============
5. DEFERRED CHARGES AND OTHER ASSETS
Deferred charges and other assets consist of the following:
DECEMBER 31, 1998 DECEMBER 31, 1999
----------------- -----------------
(AMOUNTS IN THOUSANDS,
EXCEPT PER SHARE DATA)
Debt issuance costs less accumulated amortization of $677 and $73
in 1998 and 1999, respectively..................................... $ 2,586 $ 8,610
Leasehold premium less accumulated amortization of $239 and $413
in 1998 and 1999, respectively..................................... 1,451 1,277
Other deferred charges less accumulated amortization of $223 and
$292 in 1998 and 1999, respectively................................ 243 479
------- -------
$ 4,280 $10,366
======= =======
6. INCOME TAXES
Income tax expense, is summarized as follows:
YEAR ENDED
DECEMBER 31, 1999
----------------------
(AMOUNTS IN THOUSANDS)
Current:
Federal............................................................ $ 9,083
State.............................................................. 1,844
---------
Total current.................................................... 10,927
---------
Deferred:
Federal............................................................ 78,202
State.............................................................. 11,172
---------
Total deferred................................................... 89,374
---------
Total income taxes............................................... $ 100,301
==========
Approximately $0.6 million of benefit for income taxes was allocated to
an extraordinary item in connection with the early extinguishment of debt in the
accompanying consolidated statements of operations for the year ended December
31, 1999 (Actual and Pro Forma). For purposes of the foregoing components of
provision for income taxes, the allocation affects the current components of the
provision.
The Company revoked its S Corporation election on January 28, 1999. The
last day the Company was taxed as an S Corporation was January 27, 1999. As a
result of the revocation of its S Corporation election and 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 adjustment is reflected in results for the year ended December
31, 1999 (Actual).
53
57
Upon closing the acquisition of radio properties from Sinclair on
December 16, 1999, the Company recorded a non-cash deferred income tax expense
of approximately $3.9 million. This amount reflects an increase in the Company's
effective tax rate from 38% to 40% and its effect on previously reported
temporary differences between the tax and financial reporting bases of the
Company's assets and liabilities as a result of adding facilities in additional
states which on average have higher income tax rates than in states in which the
Company currently operates. The adjustment is reflected in results for the year
ended December 31, 1999 (Actual and Pro Forma).
Income tax expense computed using the United States federal statutory
rates is reconciled to the reported income tax provisions as follows:
YEAR ENDED
DECEMBER 31, 1999
----------------------
(AMOUNTS IN THOUSANDS)
Federal statutory income tax rate ........................................... 35%
Computed tax expense at federal statutory rates ............................. $ 14,344
State income taxes (net of federal tax benefit).............................. 1,834
S Corporation termination and conversion to a C Corporation.................. 79,845
Deferred state income tax rate adjustment.................................... 3,891
Nondeductible expenses and other............................................. 387
-------------
$ 100,301
=============
The tax effects of significant temporary differences which compromise
the net deferred tax assets and liabilities are as follows:
DECEMBER 31, 1999
----------------------
(AMOUNTS IN THOUSANDS)
Current deferred tax assets:
Employee benefits....................................................... $ 599
Other................................................................... 1,174
-----------
Total net current asset............................................... 1,773
-----------
Noncurrent deferred tax assets (liabilities):.............................
Property and equipment and intangibles.................................. (91,331)
Employee benefits....................................................... 184
-----------
Total net noncurrent liability........................................ (91,147)
-----------
Net deferred tax liability.......................................... $ (89,374)
===========
7. DEBT
(A) SENIOR DEBT
Senior debt consists of the following:
DECEMBER 31, 1998 DECEMBER 31, 1999
----------------- -----------------
(AMOUNTS IN THOUSANDS)
Notes payable, due February 13, 2006 (A)(1).......................... $ 330,000 $ --
Notes payable, due September 30, 2007 (A)(2)......................... -- 465,500
Other................................................................ 281 270
------------ -----------
Total.............................................................. 330,281 465,770
Amounts due within one year.......................................... 10 10
------------ -----------
$ 330,271 $ 465,760
=========== ===========
(1) The Company's term and revolving credit facilities were refinanced
on February 13, 1998, under a bank credit agreement (the "Credit Agreement")
with Key Corporate Capital Inc., as administrative agent. The Credit Agreement
provided for a $300.0 million Senior Secured Revolving Credit Facility. The
Credit Agreement was amended on October 8, 1998 to increase the maximum
borrowing capacity to $350.0 million.
54
58
The Credit Agreement was secured by (1) a pledge of the Company's 100%
interest in ECI License Company, LP ("ECI"), (2) a security interest in
substantially all of the assets of ECI, (3) a pledge of 100% of the capital
stock of the Company (4) a security interest in all major tangible and
intangible personal property assets of the Company and any future subsidiaries
as well as a negative pledge on all real property, and (5) an assignment of all
major leases and rights, as appropriate. The availability under the reducing
revolving credit agreement, which was to mature on February 13, 2006, reduced on
a quarterly basis beginning June 30, 2000 in amounts which vary from $4.35
million to $17.5 million. The Company had the option to elect to pay interest at
a rate equal to LIBOR (in increments with durations of 1, 2, 3 or 6 months) plus
0.50% or the prime rate. Upon the occurrence of certain events, the Company's
borrowing costs could have increased to a maximum of LIBOR plus 2.125% or prime
plus 0.875%. The interest payable on LIBOR rate was payable at the end of the
selected duration but not less frequently than every three months and on prime
rates was payable at the end of each calendar quarter. The weighted average
interest rate under the Credit Agreement at December 31, 1998 was 6.95%. The
Company also paid a commitment fee of 0.375% per annum on the average unused
balance of the Credit Agreement.
(2) The Company's Credit Agreement was refinanced on December 16, 1999,
under a new bank credit agreement (the "Bank Facility") with Banc of America
Securities LLC as the lead and syndication agent and Key Corporate Capital Inc.,
as administrative agent. The Bank Facility provides for senior secured credit of
$650.0 million consisting of: (1) a $325.0 million reducing revolving credit
facility ("Revolver") and (2) a $325.0 multi-draw term loan ("Term Loan"), to be
fully drawn no later than September 29, 2000 in a maximum of four draws of no
less than $50.0 million each. The Bank Facility is secured by (1) a pledge of
100% of the Company's capital stock and other equity interest in all
subsidiaries; (2) a security interest in all present and future assets and
properties; (3) a security interest in all major tangible and intangible
personal property assets of the Company and any future subsidiaries as well as a
negative pledge on all real property, and (4) an assignment of all major leases
and rights, as appropriate. Under the terms of the Bank Facility, the Company is
restricted from the distribution of any dividends. The Bank Facility requires
the Company to comply with certain financial covenants and leverage ratios that
are defined terms within the agreement and that include but are not limited to
the following: (1) Total Debt to Operating Cash Flow, (2) Operating Cash Flow to
Interest Expense, (3) Operating Cash Flow to Pro Forma Debt Service and (4)
Operating Cash Flow to Fixed Charges. Management believes the Company is in
compliance with all of the terms of the agreement. The Bank Facility also
provides that at any time prior to December 31, 2001, the Company may solicit
additional incremental loans up to $350.0 million, and will be governed under
the same terms as the Term Loan.
The availability under the Revolver and Term Loan, which mature on
September 30, 2007, reduces on a quarterly basis beginning September 30, 2002 in
quarterly amounts which vary from $12.2 million to $16.3 million for each Loan.
The Company has the option to elect to pay interest at a rate equal to LIBOR (in
increments with durations of 1, 2, 3 or 6 months) plus 0.75% or the prime rate.
Upon the occurrence of certain events, the Company's borrowing costs can
increase to a maximum of LIBOR plus 2.375% or prime plus 1.125%. The interest
payable on LIBOR rate is payable at the end of the selected duration but not
less frequently than every three months and on prime rates is payable at the end
of each calendar quarter. The weighted average interest rate under the Credit
Agreement at December 31, 1999 was 8.1%. The Company also pays a commitment fee
which varies depending on certain financial covenants and the amount of the
unused commitment, from 0.25% or 0.5% per annum, on the average unused balance
of the Bank Facility.
(B) INTEREST RATE TRANSACTIONS
The Company has entered into several interest rate transactions as
hedges against the variable debt discussed in 7(A) above:
(1) The Company has an interest rate swap agreement for a notional
amount of $20.0 million through May 16, 2000. Under this agreement, the Company
pays a fixed rate of 6.77% on the notional amount to a bank and the bank pays to
the Company a variable rate equal to three month LIBOR as determined from time
to time on a quarterly basis through May 16, 2000. The variable rate was 5.7%,
5.4% and 6.1% at September 30, 1998, December 31, 1998 and December 31, 1999,
respectively. The net amount the Company paid under this agreement was
approximately $235,000, $211,000, $49,000, $63,000, $224,000 and $298,000 for
the years ended September 30, 1997 and 1998, the three-month periods ended
December 31,1997 and 1998, the twelve-month period ended December 31, 1998 and
the year ended December 31, 1999, respectively. These amounts have been
accounted for as interest expense.
(2) The Company had a swap for a notional amount of $25.0 million in
which the Company paid a fixed rate of 5.89% on the notional amount to the bank
and the bank paid to the Company a variable rate equal to three-month LIBOR as
determined from time to time on a quarterly basis through July 29, 2003. On
December 14, 1999, the Company unwound this agreement and received $0.6 million
in cash, which resulted in a gain of $0.6 million and is included in the income
statement under gains on sale of assets. The variable rate was 5.27% at December
31,1998. The net amount the Company paid under this agreement was approximately
$0, $0, $0, $30,000, $30,000 and $164,000 for the years ended September 30, 1997
and 1998, the three-month periods ended December 31,1997 and 1998, the
twelve-month period ended December 31, 1998 and the year ended December 31,
1999, respectively. These amounts have been accounted for as interest expense.
55
59
(3) The Company simultaneously entered into a rate cap transaction and
a swap arrangement in the amount of $25.0 million to hedge a portion of its
variable rate debt. Under the rate cap transaction, which expires August 8,
2000, the Company will be compensated to the extent that the base LIBOR rate
exceeds 7.5% at the time of any quarterly reset date. Under the swap
arrangement, the bank may make an election prior to August 8, 2000 to enter into
a swap in which the Company pays a fixed rate of 6.05% on the notional amount to
a bank and the bank pays to the Company a variable rate equal to three-month
LIBOR. If the bank exercises its election, then the swap will terminate on
August 8, 2002. Any election by the bank will not terminate the rate cap
transaction described above. No amounts were paid related to these transactions
during the years ended September 30, 1997 and 1998, the three-month periods
ended December 31,1997 and 1998, the twelve-month period ended December 31, 1998
or the year ended December 31, 1999.
(4) The Company had an interest rate swap agreement with a bank in the
amount of $15.0 million to hedge a portion of its variable rate debt. Under the
swap transaction the Company paid a fixed rate of 5.61% on the notional amount
to the bank and the bank paid to the Company a variable rate equal to three
month LIBOR as determined from time to time on a quarterly basis. On December
14, 1999, the Company unwound this agreement and received $0.3 million in cash,
which resulted in a gain of $0.3 million which is included in the income
statement under gains on sale of assets. The variable rate was 5.3 % at December
31, 1998. The net amount the Company paid under this agreement was approximately
9,000, $10,000, $1,000 and $40,000 for the year ended September 30, 1998, the
three-month period ended December 31, 1998, the twelve-month period ended
December 31, 1998 and the year ended December 31, 1999, respectively. These
amounts have been accounted for as interest expense.
(5) The Company had an interest rate swap agreement with a bank in the
amount of $14.0 million to hedge a portion of its variable rate debt. Under the
swap transaction, the Company paid a fixed rate of 5.86% on the notional amount
to the bank and the bank paid to the Company a variable rate equal to three
month LIBOR as determined from time to time on a quarterly basis. On December
14, 1999, the Company unwound this agreement and received $0.5 million in cash,
which resulted in a gain of $0.5 million which is included in the income
statement under gains on sale of assets. The variable rate was 5.3% at December
31, 1998. The net amount the Company paid under this agreement was approximately
$7,000, $18,000, $35,000 and $79,000 for the year ended September 30, 1998, the
three-month period ended December 31,1998, the twelve-month period ended
December 31,1998 and the year ended December 31, 1999, respectively. These
amounts have been accounted for as interest expense.
(6) The Company has an interest rate swap agreement with a bank in the
amount of $30.0 million to hedge a portion of its variable rate debt. Under the
swap transaction, which expires February 27, 2008, unless terminated by the bank
on February 28, 2005, the Company pays a fixed rate of 5.77% on the notional
amount to the bank and the bank pays to the Company a variable rate equal to
three month LIBOR as determined from time to time on a quarterly basis through
the end of the transaction period. The variable rate was 5.3% and 6.1% at
December 31, 1998 and December 31, 1999, respectively. The net amount the
Company paid under this agreement was approximately $16,000, $19,000, $35,000
and $149,000 for the year ended September 30, 1998, the three-month period ended
December 31,1998, the twelve-month period ended December 31,1998 and the year
ended December 31, 1999, respectively. These amounts have been accounted for as
interest expense.
(C) AGGREGATE PRINCIPAL MATURITIES
Aggregate principal maturities on Senior debt are as follows (amounts
in thousands):
Fiscal years ending December 31:
2000........................................................................ $ 10
2001........................................................................ 10
2002........................................................................ 4,385
2003........................................................................ 56,885
2004 ....................................................................... 65,010
Thereafter.................................................................. 339,470
--------
Total..................................................................... $465,770
========
The extraordinary charges for the years ended September 30, 1998 and
December 31, 1999, are the result of write-offs ($1.5 million and $0.9 million
respectively, net of pro forma tax benefits) of unamortized finance charges
resulting from the early extinguishment of long-term debt.
(D) CONVERTIBLE SUBORDINATED NOTE
On May 21, 1996, the Company entered into a convertible subordinated
note purchase agreement with an investment partnership in the principal amount
of $25.0 million (the "Convertible Subordinated Note"). Interest on the note
accrued at the rate of 7% per annum. Such interest compounded annually and was
deferred and payable with principal in one installment on
56
60
May 21, 2003. The payment due date could be deferred by one year under certain
circumstances. The obligations of the Company under the note were subordinate to
the obligations of the notes payable to the banks as noted in (A) above.
The Convertible Subordinated Note was convertible by the holder in
certain events and circumstances such as a public offering of the Company's
capital stock, a change of control of the Company, a sale of substantially all
of the Company's assets, a merger or consolidation into a publicly traded
company or the Company's ceasing to be an S Corporation. In the event of
conversion, the holders would receive shares of the common stock of the Company
representing an ownership interest of approximately 15% of the Company prior to
such event in lieu of principal and interest. In connection with the Company's
IPO, Chase Capital (the holder of the Note) elected to convert 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") and there was no further
obligation due by the Company.
The Company accounted for this instrument as indexed debt since under
certain circumstances, the holder of the Convertible Subordinate Note had the
option to put ("Put Option") the note to the Company and receive, at the option
of the Company, either cash or a new note ("Put Note") which would equal the
fair market value of the shares of common stock into which the Convertible
Subordinate Note would be convertible. Accordingly, the Company's balance sheet
as of December 31, 1998 and statements of income for the years ended September
30, 1997 and 1998, the three-month periods ended December 31, 1997 and 1998 and
the twelve-month period ended December 31, 1998 reflected an "adjustment to
reflect indexing of the Convertible Subordinated Note".
The adjustment to reflect indexing of the Convertible Subordinated Note
had been determined by reference to the difference between the estimated market
value of the shares of Common Stock into which the note was convertible pursuant
to the terms of the Put Option and the sum of the principal outstanding of $25.0
million plus interest accrued at 7% per annum. Such estimated market value was
calculated using comparable publicly held broadcast companies' multiples of
broadcast cash flow.
(E) OUTSTANDING LETTERS OF CREDIT
The Company is required to maintain a $5.0 million letter of credit in
connection with a sports contract assumed in the First Boston Transaction. The
contract expires on November 15, 2000. The Company is also required to maintain
a $7.5 million letter of credit in connection with the acquisition of the
remaining assets not yet acquired under the asset purchase agreement with
Sinclair (see Note 3). The Company expects to close on these assets in the
second quarter of the year 2000, after which the need for the $7.5 million
letter of credit will be eliminated.
8. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value of the Company's financial instruments, which
consist of cash and cash equivalents, accounts receivable, station acquisition
deposits, income tax deposit, accounts payable, accrued liabilities, debt and
interest rate instruments have been determined by the Company using available
market information and appropriate valuation methodologies. At December 31, 1998
and December 31, 1999 the fair value of cash and cash equivalents, accounts
receivable, station acquisition deposits, income tax deposit, accounts payable,
accrued liabilities and debt approximate their carrying value. At December 31,
1998 and 1999, unrealized gains and losses on interest rate transactions
described under Note 7(B) is a loss of $4.2 million and a gain of $1.2 million,
respectively.
9. MINORITY INTEREST
On December 2, 1992, in connection with a financing transaction, the
Company created a wholly owned subsidiary, ECI Investors Corporation
("Investors"), with a capital of $50,000. Upon creation, the Company immediately
distributed the stock of Investors to the Company's shareholders. On December
23, 1992, the Company formed a limited partnership, ECI License Company, LP
("Partnership") with Investors. The Company was the sole general partner of
Partnership. The Company contributed its Federal Communications Commission (FCC)
license and authorizations to Partnership in exchange for a 99% interest in
Partnership, and Investors acquired its 1% interest in Partnership for cash.
The book value of Partnership was approximately $124.5 million (net of
accumulated amortization of approximately $7.8 million) at December 31, 1998.
The Company's 99% interest in Partnership was pledged as collateral for the debt
described in Note 7A(1). The Company paid a licensing fee to Partnership in
exchange for the right to utilize Partnership's licenses and authorizations in
connection with the operation of the stations. As discussed in Note 2, the
financial impact of such transactions was substantially eliminated in
consolidation. The minority interest at December 31, 1998 included in the
accompanying consolidated balance sheet represented the 1% interest of Investors
in the Partnership, net of a note receivable by the Partnership from Investors.
The note was in the amount of approximately $0.3 million at December 31, 1998.
The note provided interest at
57
61
rates ranging from 6% to 8% per annum, and was issued to the Partnership by
Investors for Investor's share of the FCC licenses and authorizations acquired
by the Company during 1998.
On January 22, 1999, in a related party transaction, a wholly owned
subsidiary ("Sub") of the Company purchased the 1% limited partnership interest
in Partnership for an amount of $3.4 million. The acquisition effectively
provided the Company with a 100% interest in its FCC licenses. On December 31,
1999, Partnership was merged into the Company, after which Partnership and Sub
were dissolved.
10. COMMITMENTS AND CONTINGENCIES
ACQUISITIONS
The Company entered into a preliminary agreement on February 6, 1996
for the Company to acquire the assets of radio station KWOD-FM, Sacramento,
California, from Royce International Broadcasting Corporation ("Royce") subject
to approval by the FCC for a purchase price of $25.0 million. Notwithstanding
efforts by the Company to pursue this transaction, Royce has been
non-responsive. On July 28, 1999, the Company commenced a legal action seeking
to enforce this agreement, and subsequently Royce filed a cross-complaint
against the Company asking for treble damages, an injunction, attorney's fees
and costs and filed a separate action against the Company's President asking for
treble damages, an injunction, attorney's fees and costs. This separate action
against the Company's President was dismissed without leave to amend in February
2000. The Company intends to pursue legal action against Royce and seek
dismissal of the cross-complaint. Accordingly, the Company cannot determine if
and when the transaction might occur.
On December 16, 1999, the Company completed the Fist Sinclair
Transaction and expects to close on the remaining assets (Sinclair Kansas City
and WKRF-FM, see Note 3) in the second quarter of the year 2000. In connection
with the Sinclair Kansas City asset purchase agreement, FCC rules require the
Company to divest three of its stations in the Kansas City market where the
Company already owns 7 stations.
On November 29, 1999, the Company entered into an asset purchase
agreement with the Wichita Stations Trust, a trust formed for the benefit of
Capstar Broadcasting Corporation as required by federal regulations, to purchase
five stations serving the Wichita radio market ("Wichita Trust") for $8.0
million in cash. This transaction closed on February 23, 2000. Upon the
completion of the acquisition of the two radio stations described under Note 16,
the Company will own 7 radio stations serving the Wichita, Kansas radio market.
OTHER
The Company's employment agreement with its Chairman and Chief
Executive Officer renews automatically each calendar year unless terminated by
either party in accordance with the contract. Under the terms of the agreement,
compensation is calculated annually by utilizing the gross national product
implicit price deflator issued by the Bureau of Economic Analysis to determine
the equivalent of 1993 base compensation of $500,000. Total compensation for the
years ended September 30, 1997 and 1998, the three-month periods ended December
31,1997 and 1998, the twelve-month period ended December 31,1998 and the year
ended December 31, 1999, was approximately $542,000, $555,000, $136,000,
$140,000, $558,000 and $563,000, respectively. The current annual salary,
effective January 1, 2000, is $600,000.
The Company's employment agreements with its Executive Officers, David
J. Field, President, Chief Operating Officer and Director and John C. Donlevie,
Executive Vice President, Secretary, General Counsel and Director, provides that
the agreement may be terminated at will by either party (1) immediately if good
cause for termination exists, or (2) upon thirty days notice in the absence of
good cause. Pursuant to these employment agreements, the current annual
salaries, effective January 1, 2000, of Mr. Field and Mr. Donlevie are $450,000
and $265,000, respectively. The Company's employment agreement with Stephen F.
Fisher, Senior Vice President and Chief Financial Officer, provides that the
agreement may be terminated at will by either party (1) immediately if good
cause for termination exists or (2) upon at least 120 days notice prior to the
end of the current yearly term. Mr. Fisher's current annual salary, effective
January 1, 2000, is $300,000. Each of the above employment agreements provides
for yearly salary adjustments for inflation and an annual discretionary bonus.
Rental expense is incurred principally for office and broadcasting
facilities. Rental expense during the years ended September 30, 1997 and 1998,
the three-month periods ended December 31, 1997 and 1998, the twelve-month
period ended December 31, 1998 and the year ended December 31, 1999 was
approximately $2.2 million, $2.8 million, $0.6 million, $0.8 million, $3.1
million and $3.7 million, respectively.
58
62
The Company also has various contracts for sports programming and
on-air personalities with initial terms ranging from one to five years. The
aggregate minimum annual commitments as of December 31, 1999 for operating
leases, sports programming and on-air personalities are as follows:
OPERATING SPORTS ON-AIR
LEASES PROGRAMMING PERSONALITIES
---------- ----------- -------------
(AMOUNTS IN THOUSANDS)
Fiscal years ending December 31:
2000...................................................... $ 5,718 $ 20,177 9,215
2001...................................................... 5,346 10,969 4,017
2002...................................................... 5,026 8,884 1,742
2003...................................................... 4,456 -- 77
2004...................................................... 4,126 -- --
Thereafter................................................ 27,816 -- --
---------- ---------- ---------
$ 52,488 $ 40,030 $ 15,051
========== ========== ==========
In October 1999, The Radio Music License Committee ("RMLC"), of which
the Company is a participant, filed a motion in the New York courts against
Broadcast Music, Inc. ("BMI") commencing a rate-making proceeding, on behalf of
the radio industry, seeking a determination of fair and reasonable industry-wide
license fees. The Company is currently operating under interim license
agreements for the period commencing January 1, 1997 at the rates and terms
reflected in prior agreements. The Company's management estimates that the
impact of an unfavorable outcome of the motion will not materially impact the
financial results of the Company.
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 adversely affect the financial position,
results of operations or cash flows of the Company.
11. SHAREHOLDERS' EQUITY
For the years ended September 30, 1997 and 1998, the three-month
periods ended December 31, 1997 and 1998, the twelve-month period ended December
31, 1998 and the year ended December 31, 1999, the Company paid total dividends
of approximately $2.8 million, $3.1 million, $0 million, $1.0 million, $4.1
million and $88.1 million, respectively. These amounts include special dividends
paid to the Company's shareholders to compensate them for federal and state
income tax obligations attributable to pass-through taxable income generated by
the Company when it was taxed as a sub-chapter S Corporation prior to the
Revocation Date. No dividends were paid by the Company after the Revocation Date
relating to the Company's activities as a C Corporation.
On June 24, 1998, the Board of Directors and the shareholders of the
Company approved the Company's amended and restated Articles of Incorporation to
provide for, among other things, an increase in the aggregate number of shares
which the Company has authority to issue to 350,000,000 shares, par value $.01
per share, consisting of the following: (1) 200,000,000 shares of Class A Common
Stock; (2) 75,000,000 shares of Class B Common Stock; (3) 50,000,000 shares of
Class C Common Stock and (4) 25,000,000 shares of Preferred Stock. Such change
occurred just prior to the effective date of the Company's initial public
offering. The rights of each share of Common Stock are essentially identical
other than with respect to voting rights. The Class A Common Stock entitles the
holders thereof to one vote per share, the Class B Common Stock entitles the
holders thereof to ten votes per share, subject to certain exceptions and the
Class C Common Stock has no voting rights, except as otherwise required by law.
Subject to any necessary approval of the Federal Communications Commission, the
Class B Common Stock and the Class C Common Stock are convertible in whole or in
part at any time into Class A Common Stock on a share-for-share basis. There are
also no liquidation preferences for any class of stock.
On May 11, 1999 and November 15, 1999, Chase Capital converted 300,000
shares and 298,833 shares, respectively, from shares of Class C Common Stock to
shares of Class A Common Stock.
12. EMPLOYEE SAVINGS AND BENEFIT PLANS
The Company sponsors a 401(k) savings plan that includes a provision
under which the Company contributes 50% of the amount of any eligible employee's
contribution to the plan up to a maximum employer contribution of 3% of an
employee's compensation. The maximum eligible employee contribution under the
plan was $9,500, $10,000 and $10,000 for the plan years ended December 31, 1997,
1998 and 1999, respectively. The Company may at its discretion suspend future
matching
59
63
contributions. The Company contributed approximately $0.5 million, $0.6 million,
$0.1 million, $0.2 million, $0.6 million and $0.8 million under the 401(k) plan
for the years ended September 30, 1997 and 1998, the three-month periods ended
December 31, 1997 and 1998, the twelve-month period ended December 31, 1998 and
the year ended December 31, 1999, respectively.
13. STOCK OPTIONS AND RESTRICTED STOCK
On June 24, 1998, the Company adopted an Equity Compensation Plan (the
"Compensation Plan"). The Compensation Plan will allow officers (including those
also serving as directors) and other employees, non-employee directors and key
advisors and consultants, selected by a Committee of Board of Directors, to
receive incentive stock options, nonqualified stock options, restricted stock
and stock appreciation rights in the Common Stock of the Company. The Company
has reserved 10% of the shares of Class A Common Stock for issuance under the
Compensation Plan. On January 28, 1999, the Company issued 11,112 shares of
restricted stock at the offering price of $22.50 per share and 795,611 in
options of which 520,049 options have an exercise price equal to the initial
public offering price per share and 275,562 have an exercise price of 80% of the
initial public offering price. All of the options and restricted stock vest over
a four-year period. For options granted during the year ended December 31, 1999
at prices below fair market value, the Company will recognize $1.8 million in
non-cash compensation expense ratably over the four-year period. For restricted
stock, the Company will recognize $250,000 in non-cash compensation expense
ratably over the four-year period. A summary of the status of the Company's
stock options granted and changes during the year is presented below:
DECEMBER 31, 1999
------------------------------------
WEIGHTED
AVERAGE
SHARES EXERCISE PRICE
------------ ---------------
Outstanding at beginning of year...................................... -- $ --
Granted ($18.00 - $57.56)............................................. 1,426,523 $ 31.69
Exercised............................................................. -- $ --
Cancelled............................................................. (22,004) $ 22.50
----------- -----------
Outstanding at end of year............................................ 1,404,519 $ 31.83
============ ===========
Options exercisable at year end....................................... --
Weighted-average fair value of options granted during the year........ $ 31.83
The following table summarizes information about stock options
outstanding at December 31, 1999:
OPTIONS
OUTSTANDING WEIGHTED
NUMBER OF OPTIONS WEIGHTED-AVERAGE AVERAGE NUMBER OF
OUTSTANDING AT REMAINING EXERCISE OPTIONS
EXERCISE PRICES DECEMBER 31, 1999 CONTRACTUAL LIFE PRICE EXERCISABLE
------------------------ ----------------- ---------------- -------------- -----------
$18.00 - $18.00 275,562 9.1 $ 18.00 --
$22.50 - $22.50 524,657 9.1 $ 22.50 --
$31.69 - $41.75 42,900 9.5 $ 34.43 --
$46.88 - $46.88 532,900 9.8 $ 46.88 --
$48.00 - $57.56 28,500 9.9 $ 52.16 --
---------- ------------ --------- -------
1,404,519 9.4 $ 31.83 --
========= ============ ========= =======
At December 31, 1999, common stock shares reserved for future issuance
under the Compensation Plan aggregate approximately 3.1 million shares.
The fair value of the options granted during 1999 is estimated on the
date of grant using the Black-Scholes option-pricing model with the following
assumptions: expected volatility of 34%, no dividend yield, risk-free interest
rate of 6% and expected life of six years after grant. Had compensation cost for
the Equity Compensation Plan been determined based on the fair value at the
grant dates for awards in 1999 consistent with the provisions of SFAS No. 123,
the Company's net income and net income per share would have been reduced to the
pro forma amounts indicated below:
60
64
YEAR ENDED DECEMBER 31 1999
---------------------------
(AMOUNTS IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS)
Net loss - As reported.......................................... $ (60,877)
Compensation expense, net of taxes of $0.9 million.............. 1,362
-----------
Net loss - Pro Forma ........................................... $ (62,239)
-----------
Basic and diluted net loss per share - As reported.............. $ (1.61)
-----------
Basic and diluted net loss per share - Pro Forma................ $ (1.64)
===========
On June 24, 1998, the Company adopted an Employee Stock Purchase Plan
(the "Purchase Plan"). The Purchase Plan will allow the participants to purchase
shares of the Company's Common Stock at a purchase price equal to 85% of the
Market Value of such shares on the Purchase Date. Under this plan, during which
there should be no expense recognized on the difference between the Market Value
and the purchase price, 11,682 shares were purchased during the year ended
December 31, 1999. The shares of Common Stock reserved for issuance under the
Purchase Plan was 1,850,000, leaving a balance of shares available for purchase
as of December 31, 1999 of 1,838,318.
14. NET LOSS AND PRO FORMA NET INCOME (LOSS) PER COMMON SHARE
Basic loss per common share and pro forma basic earnings (loss) per
common share is calculated by dividing net loss and pro forma net income (loss)
by the weighted average number of common shares outstanding during the reporting
period.
Diluted loss per common share and pro forma diluted loss per common
share is calculated using the same number of shares outstanding as basic as any
increase in the number of shares assumed would be anti-dilutive. Accordingly,
the following is not assumed for purposes of computing the potential dilutive
effect on diluted loss per share and pro forma diluted loss per share of: (1)
the exercise of 1.4 million options outstanding during the year ended December
31, 1999, as adjusted to 0.3 million shares on a weighted average basis, using
the treasury stock method, (2) the conversion of the Convertible Subordinated
Note, after eliminating interest expense, net of tax, on the Convertible
Subordinated Note, for the three-month period ended December 31, 1997 and (3)
the conversion of 2.5 million TIDES into 2.8 million shares, as adjusted to 0.7
million shares on a weighted average basis, after eliminating interest expense,
net of tax, on the TIDES, for the year ended December 31, 1999.
Pro forma diluted earnings per common share is calculated using the
same number of shares outstanding as basic and adjusted for the assumed exercise
of 1.4 million options outstanding during the year ended December 31, 1999, as
adjusted to 0.3 million shares on a weighted average basis, using the treasury
stock method. Accordingly, the following is not assumed for purposes of
computing the potential dilutive effect on diluted earnings per share and pro
forma diluted earnings per share of: (1) the conversion of the Convertible
Subordinated Note after eliminating interest expense, net of tax, on the
Convertible Subordinated Note for the years ended September 30, 1997 and 1998,
the three-month period ended December 31,1998 and the twelve-month period ended
December 31, 1998 and (2) the conversion of 2.5 million TIDES into 2.8 million
shares, as adjusted to 0.7 million shares on a weighted average basis as
adjusted to 0.7 million shares on a weighted average basis, after eliminating
interest expense, net of tax, on the TIDES, for the year ended December 31,
1999.
15. RELATED PARTY TRANSACTIONS
On January 22, 1999, a wholly owned subsidiary of the Company purchased
a 1% limited partnership interest in Partnership from Investors for an amount of
$3.4 million. At the time of the purchase, the shareholders of Investors held
stock in the Company on a percentage basis equal to the percentage of shares
held in Investors.
16. SUBSEQUENT EVENTS
A. In January 2000, the Company entered into four interest rate
transactions with different banks to hedge a portion of its variable rate debt
and also to comply with a covenant under the Bank Facility (see Note 7). Each
transaction is comprised of two transactions entered into simultaneously for a
rate cap and for a rate floor. Under these transactions, the Company's base
LIBOR can not exceed the cap nor can the Company's base LIBOR be less than the
floor at the time of any quarterly reset date. The total notional amount of the
four transactions is $168.0 million. The interest rates for the floor varies
from 6.25% to 6.34% and the interest rates for the cap varies from 7.5% to
8.25%, with each of the four transactions having a term which varies from 24
months to 30 months.
B. On February 17, 2000 and March 10, 2000, the Company entered into
separate asset purchase agreements with Gary and Viola Violet ("Violet") for a
total amount of $5.2 million to purchase KDGS-FM and KAYY-FM, serving the
Wichita, Kansas radio market. Upon the completion of these acquisitions, the
Company will own 7 radio stations serving the Wichita, Kansas radio market. The
Company expects to close on these transactions in the second quarter of the year
2000.
61
65
C. On February 17, 2000, the Company entered into an asset purchase
agreement with WHYZ Radio, L.P. in the amount of $1.5 million to purchase
WHYZ-AM, serving the Greenville, South Carolina radio market. The Company
currently owns seven stations serving this radio market. The Company expects to
close on this transaction in the second quarter of the year 2000.
D. On February 23, 2000, the Company completed the Wichita Trust asset
purchase agreement for five stations serving the Wichita radio market for $8.0
million in cash (see Note 10). The Company will record estimated broadcasting
licenses and other intangibles in the amount of $6.3 million in connection with
this transaction.
17. CHANGES IN CAPITALIZATION
In connection with the adoption of the Company's amended and restated
Articles of Incorporation (See Note 11), the Company declared a 185 for 1 stock
split payable to shareholders at the time the Amended and Restated Articles of
Incorporation became effective. The accompanying consolidated financial
statements give effect to these transactions as if they had occurred on
September 30, 1996.
62
66
18. QUARTERLY FINANCIAL DATA (UNAUDITED)
THREE MONTHS ENDED
--------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
-------------- --------- ------------- ------------
1998:
Net revenues............................ $ 24,978 $ 38,709 $ 40,912 $ 47,363
Operating income........................ $ 1,920 $ 8,473 $ 8,212 $ 9,929
Net income (loss)....................... $ (13,037) $ 17,961 $ 14,172 $ 43,455
1999:
Net revenues............................ $ 39,599 $ 55,946 $ 59,204 $ 60,252
Operating income........................ $ 3,376 $ 13,748 $ 15,801 $ 15,817
Net income (loss)....................... $ (80,427) $ 7,152 $ 8,053 $ 4,345
Basic earnings (loss) per share $ (2.48) $ 0.19 $ 0.22 $ 0.10
=========== ========= ======== ==========
Weighted basic average common
shares outstanding 32,478 37,168 37,172 44,742
=========== ========= ======== ==========
Diluted earnings (loss) per share $ (2.48) $ 0.19 $ 0.21 $ 0.10
============ ========= ======== ==========
Weighted diluted average common and
common equivalents shares outstanding 32,803 37,583 37,506 45,143
=========== ========= ======== ==========
Basic and diluted earnings (loss) per common share for the year ended December
31, 1999, differs from the sum of basic and diluted earnings (loss) per common
share for the quarters during the respective year due to the different periods
used to calculate net income (loss) and weighted average shares outstanding.
63
67
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
and Exchange Act of 1934, we have duly caused this report to be signed on our
behalf by the undersigned, thereunto duly authorized, in Bala Cynwyd,
Pennsylvania, on March __, 2000.
ENTERCOM COMMUNICATIONS CORP.
By: /s/ JOSEPH M. FIELD
----------------------------
Joseph M. Field
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities and Exchange Act of
1934, this report has been signed by the following persons in the capacities and
on the dates indicated.
SIGNATURE CAPACITY DATE
/s/ JOSEPH M. FIELD Chairman of the Board and Chief March __, 2000
- --------------------------------------------- Executive Officer (Principal
Joseph M. Field Executive Officer)
/s/ DAVID J. FIELD President, Chief Operating March __, 2000
- --------------------------------------------- Officer and a Director
David J. Field
/s/JOHN C. DONLEVIE Executive Vice President, March __, 2000
Secretary, General Counsel and
- --------------------------------------------- a Director
John C. Donlevie
/s/ STEPHEN F. FISHER Senior Vice President and Chief March __, 2000
- --------------------------------------------- Financial Officer (Principal
Stephen F. Fisher Financial and Accounting Officer
/s/ MARIE H. FIELD
- --------------------------------------------- Director March __, 2000
Marie H. Field
/s/ HERBERT KEAN, M.D.
- --------------------------------------------- Director March __, 2000
Herbert Kean, M.D.
/s/ LEE HAGUE
- --------------------------------------------- Director March __, 2000
Lee Hague
/s/ THOMAS H. GINLEY, JR., M.D.
- --------------------------------------------- Director March __, 2000
Thomas H. Ginley, Jr. M.D.
64
68
SIGNATURE CAPACITY DATE
/s/ S. GORDON ELKINS
- --------------------------------------------- Director March __, 2000
S. Gordon Elkins
/s/ MICHAEL R. HANNON
- --------------------------------------------- Director March __, 2000
Michael R. Hannon
/s/ DAVID J. BERKMAN
- --------------------------------------------- Director March __, 2000
David J. Berkman
65
69
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
ENTERCOM COMMUNICATIONS CORP.
YEARS ENDED SEPTEMBER 30, 1997 AND 1998,
THREE MONTHS ENDED DECEMBER 31, 1998 AND
YEAR ENDED DECEMBER 31, 1999
ADDITIONS
BALANCE AT CHARGED TO BALANCE AT
BEGINNING COSTS DEDUCTIONS END
ALLOWANCE FOR DOUBTFUL ACCOUNTS PERIOD AND EXPENSES FROM RESERVES OF PERIOD
- ------------------------------- ------- ------------ ------------- ----------
Year Ended September 30, 1997 $117,000 $549,000 ($374,000) $292,000
Year Ended September 30, 1998 $292,000 $920,000 ($845,000) $367,000
Three-month period ended December 31, 1998 $367,000 $327,000 ($101,000) $593,000
Year Ended December 31, 1999 $593,000 $2,000,000 ($1,164,000) $1,429,000
66
70
INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION PAGE
3.01 Amended and Restated Articles of Incorporation of the
Registrant(2)
3.02 Form of Amended and Restated Bylaws of the Registrant(2)
4.01 Lock-up Release Agreement, dated as of May 6, 1999, between
Chase Equity Associates L.P. and Credit Suisse Boston
Corporation(3)
4.02 Form of Indenture for the Convertible Subordinated Debentures
due 2014 among Entercom Communications Corp., as issuer, and
Wilmington Trust Company, as indenture trustee(4)
10.01 Registration Rights Agreement, dated as of May 21, 1996,
between the Registrant and Chase Equity Associates, L.P.(2)
10.02 Employment Agreement, dated June 25, 1993, between the
Registrant and Joseph M. Field, as amended(2)
10.03 Employment Agreement, dated December 17, 1998, between the
Registrant and David J. Field, as amended(2)
10.04 Employment Agreement, dated December 17, 1998, between the
Registrant and John C. Donlevie, as amended(2)
10.05 Employment Agreement, dated November 13, 1998, between the
Registrant and Stephen F. Fisher(2)
10.06 Entercom 1998 Equity Compensation Plan(2)
10.07 Credit Agreement, dated as of December 16, 1999, by and among
Entercom Radio, LLC, as the Borrower, the Registrant, as a
Guarantor, Banc of America Securities LLC, as Sole Lead
Arranger and Book Manager, Key Corporate Capital Inc., as
Administrative Agent and Co-Documentation Agent, Bank of
America, N.A., as Syndication Agent, and Co-Documentation
Agent and the Financial Institutions listed therein.(6)
10.08 Amended and Restated Asset Purchase Agreement, dated as of
August 20, 1999, among the Registrant, Sinclair
Communications, Inc., WCGV, Inc., Sinclair Radio of Milwaukee
Licensee, LLC, Sinclair Radio of New Orleans Licensee, LLC,
Sinclair Radio of Memphis, Inc., Sinclair Radio of Memphis
Licensee, Inc., Sinclair Properties, LLC, Sinclair Radio of
Norfolk/Greensboro Licensee, L.P., Sinclair Radio of Buffalo,
Inc., Sinclair Radio of Buffalo Licensee, LLC, WLFL, Inc.,
Sinclair Radio of Greenville Licensee, Inc., Sinclair Radio of
Wilkes-Barre, Inc. and Sinclair Radio of Willkes-Barre
Licensee, LLC. (See table of contents for list of omitted
schedules and exhibits, which the Registrant hereby agrees to
furnish supplementally to the Securities and Exchange
Commission upon request.)(5)
10.09 Asset Purchase Agreement, dated as of August 20, 1999, among
the Registrant, Sinclair Communications, Inc., Sinclair Media
III, Inc. and Sinclair Radio of Kansas City Licensee, LLC.
(See table of contents for list of omitted schedules and
exhibits, which the Registrant hereby agrees to furnish
supplementally to the Securities and Exchange Commission upon
request.)(5)
10.10 Asset Purchase Agreement, dated as of August 13, 1998, among
the Registrant, CBS Radio, Inc. and CBS Radio License, Inc.(2)
10.11 Time Brokerage Agreement, dated as of August 13, 1998, among
the Registrant, CBS Radio, Inc. and CBS Radio License, Inc.(2)
10.12 Asset Purchase Agreement, dated as of August 13, 1998, among
CBS Radio, Inc., CBS Radio License, Inc., ARS Acquisition II,
Inc. and the Registrant(2)
10.13 Time Brokerage Agreement, dated as of August 13, 1998, among
CBS Radio, Inc., CBS Radio License, Inc., ARS Acquisition II,
Inc. and the Registrant(2)
11.01 Reconciliation of Earnings Per Common Share(1) 69
21.01 Information Regarding Subsidiaries of the Registrant(1) 70
23.01 Consent of Deloitte & Touche LLP, Philadelphia, PA(1)
(1) Filed herewith.
(2) Incorporated by reference to our Registration Statement on Form S-1. (File
No. 333-61381)
(3) Incorporated by reference to our Quarterly Report on Form 10-Q. (File No.
001-14461)
(4) Incorporated by reference to our Registration Statement on Form S-1. (File
No. 333-86843)
(5) Incorporated by reference to our Registration Statement on Form S-1. (File
No. 333-86397).
(6) Incorporated by reference to our Current Report on Form 8-K. (File No.
001-14461).
67
71
(b) Reports on Form 8-K
We filed a report on Form 8-K on December 16, 1999 to report the completion of
our previously announced acquisition of 41 of 46 radio stations from Sinclair
Broadcast Group, Inc. for $700.4 million.