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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 2002
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from ________ to ________
Commission file number 000-28395
---------
INTEREP NATIONAL RADIO SALES, INC.
(Exact Name of Registrant as Specified in Its Charter)
New York 13-1865151
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
100 Park Avenue, New York, New York 10017
(Address of Principal Executive Offices) (Zip Code)
(212) 916-0700
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
The number of shares of the registrant's Common Stock outstanding as of the
close of business on August 12, 2002, was 5,246,296 shares of Class A Common
Stock, and 3,979,996 shares of Class B Common Stock.
PART I
FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
INTEREP NATIONAL RADIO SALES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share information)
June 30, December 31,
2002 2001
------------ ----------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents ....................................................... $ 12,006 $ 11,502
Receivables, less allowance for doubtful accounts of $1,815 and
$1,747, respectively .......................................................... 24,491 26,656
Representation contract buyouts receivable ...................................... 2,000 12,504
Current portion of deferred representation contract costs ....................... 30,428 40,368
Prepaid expenses and other current assets ....................................... 1,161 927
---------- ----------
Total current assets ........................................................ 70,086 91,957
---------- ----------
Fixed assets, net .................................................................... 3,566 3,909
Deferred representation contract costs ............................................... 64,873 64,521
Investments and other assets ......................................................... 19,152 19,342
---------- ----------
Total assets ................................................................ $ 157,677 $ 179,729
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses ........................................... $ 9,049 $ 8,606
Accrued interest ................................................................ 4,950 4,950
Representation contract buyouts payable ......................................... 13,792 33,161
Accrued employee-related liabilities ............................................ 2,547 3,741
---------- ----------
Total current liabilities ................................................... 30,338 50,458
---------- ----------
Long-term debt ....................................................................... 99,000 99,000
---------- ----------
Representation contract buyouts payable .............................................. 12,576 21,267
---------- ----------
Other noncurrent liabilities ......................................................... 4,029 4,714
---------- ----------
Shareholders' equity:
4% Series A cumulative convertible preferred stock, $0.01 par
value - 400,000 shares authorized, 110,000 shares issued and
outstanding at June 30, 2002 (none issued at December 31,
2001)(aggregate liquidation preference - $11,000) ........................... 1 -
Class A common stock, $0.01 par value - 20,000,000 shares
authorized, 5,060,237 and 4,907,996 shares issued and
outstanding at June 30, 2002 and December 31, 2001,
respectively ................................................................ 51 49
Class B common stock, $0.01 par value - 10,000,000 shares
authorized, 4,488,126 and 4,314,463 shares issued and
outstanding at June 30, 2002 and December 31, 2001,
respectively ................................................................ 45 43
Additional paid-in-capital ........................................................... 52,516 39,456
Accumulated deficit .................................................................. (40,879) (35,258)
----------- -----------
Total shareholders' equity .................................................. 11,734 4,290
---------- ----------
Total liabilities and shareholders' equity .................................. $ 157,677 $ 179,729
========== ==========
The accompanying Notes to Unaudited Interim Consolidated Financial Statements are an integral part of these
balance sheets.
2
INTEREP NATIONAL RADIO SALES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
For the Three Months Ended For the Six Months
June 30, Ended June 30,
------------------------------ ---------------------------
2002 2001 2002 2001
------------- ------------- ----------- ------------
Commission revenues .................................................... $ 23,704 $ 22,650 $ 41,232 $ 39,258
Contract termination revenue ........................................... 3,979 20,240 6,366 20,309
--------- --------- --------- ---------
Total revenues ......................................................... 27,683 42,890 47,598 59,567
--------- --------- --------- ---------
Operating expenses:
Selling expenses ....................................................... 15,503 17,121 28,367 32,085
General and administrative expenses .................................... 3,098 3,242 6,294 6,422
Depreciation and amortization expense .................................. 5,980 13,815 11,900 20,322
--------- --------- --------- ---------
Total operating expenses ............................................... 24,581 34,178 46,561 58,829
--------- --------- --------- ---------
Operating income ....................................................... 3,102 8,712 1,037 738
Interest expense, net .................................................. 2,507 2,268 5,019 4,525
Other expense, net ..................................................... -- 586 -- 899
--------- --------- --------- ---------
Income (loss) before provision (benefit) for income taxes .............. 595 5,858 (3,982) (4,686)
Provision (benefit) for income taxes ................................... 284 4,622 (502) 383
--------- --------- ---------- ---------
Net income (loss) applicable to common shareholders .................... $ 311 $ 1,236 $ (3,480) $ (5,069)
========= ========= ========== =========
Basic earnings (loss) per share applicable to common
shareholders ........................................................... $ 0.03 $ 0.15 $ (0.37) $ (0.60)
Diluted earnings (loss) per share applicable to common
shareholders ........................................................... $ 0.02 $ 0.12 $ (0.37) $ (0.60)
The accompanying Notes to Unaudited Interim Consolidated Financial Statements are an integral part of these statements.
3
INTEREP NATIONAL RADIO SALES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
For the Six Months Ended
June 30,
----------------------------------
2002 2001
------------- --------------
Cash flows from operating activities:
Net loss ..................................................................... $ (3,480) $ (5,069)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization ................................................ 11,900 20,322
Noncash compensation expense ................................................. (529) 1,377
Equity loss on investment .................................................... -- 971
Changes in assets and liabilities:
Receivables .................................................................. 2,165 3,860
Representation contract buyouts receivable ................................... (2,000) (378)
Prepaid expenses and other current assets .................................... (234) (374)
Other noncurrent assets ...................................................... (584) (968)
Accounts payable and accrued expenses ........................................ 443 (7,605)
Accrued employee-related liabilities ......................................... (1,194) (5,098)
Other noncurrent liabilities ................................................. (685) (121)
------------- -------------
Net cash provided by operating activities .................................... 5,802 6,917
------------- -------------
Cash flows from investing activities:
Additions to fixed assets .................................................... (345) (322)
Redemption of marketable securities .......................................... -- 7,562
------------ ------------
Net cash (used in) provided by investing activities .......................... (345) 7,240
------------- ------------
Cash flows from financing activities:
Station representation contract payments ..................................... (16,406) (25,574)
Issuance of Class B common stock ............................................. 1,147 1,500
Issuance of Series A convertible preferred stock, net of
issuance costs ............................................................... 10,306 --
------------ ------------
Net cash used in financing activities ........................................ (4,953) (24,074)
------------- -------------
Net increase (decrease) in cash and cash equivalents ......................... 504 (9,917)
Cash and cash equivalents, beginning of period ............................... 11,502 23,681
------------ ------------
Cash and cash equivalents, end of period ..................................... $ 12,006 $ 13,764
============ ============
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest ................................................................ $ 4,950 $ 4,950
Income taxes ............................................................ $ 141 $ 373
Non-cash investing and financing activities:
Beneficial conversion option on preferred stock ......................... $ 2,142 $ --
Settlement of station representation contracts .......................... $ 12,504 $ --
Station representation contracts acquired ............................... $ 850 $ 5,528
The accompanying Notes to Unaudited Interim Consolidated Financial Statements
are an integral part of these statements.
4
INTEREP NATIONAL RADIO SALES, INC.
NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share information)
1. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of Interep
National Radio Sales, Inc. ("Interep"), together with its subsidiaries
(collectively, the "Company"), and have been prepared in accordance with the
rules and regulations of the Securities and Exchange Commission. Accordingly,
certain information and footnote disclosures normally included in financial
statements prepared in accordance with accounting principles generally accepted
in the United States have been condensed or omitted. All significant
intercompany transactions and balances have been eliminated.
The consolidated financial statements as of June 30, 2002 are unaudited;
however, in the opinion of management, such statements include all adjustments
(consisting of normal recurring accruals) necessary for a fair presentation of
the results for the periods presented. The interim financial statements should
be read in conjunction with the audited financial statements and notes thereto
included in the Company's Consolidated Financial Statements for the year ended
December 31, 2001, which are available upon request of the Company. Due to the
seasonal nature of the Company's business, the results of operations for the
interim periods are not necessarily indicative of the results that might be
expected for future interim periods or for the full year ending December 31,
2002.
Comprehensive Income (Loss)
For the three and six months ended June 30, 2002 and 2001, the Company's
comprehensive income (losses) were equal to the respective net income (losses)
for each of the periods presented.
Revenue Recognition
The Company is a national representation ("rep") firm serving radio
broadcast clients and certain internet service providers throughout the United
States. Commission revenues are derived from sales of advertising time for radio
stations under representation contracts. Commissions and fees are recognized in
the month the advertisement is broadcast. In connection with its unwired network
business, the Company collects fees for unwired network radio advertising and,
after deducting its commissions, remits the fees to the respective radio
stations. In instances when the Company is not legally obligated to pay a
station or service provider until the corresponding receivable is paid, fees
payable to stations have been offset against the related receivable from
advertising agencies in the accompanying consolidated balance sheets. The
Company records all commission revenues on a net basis. Commissions are
recognized based on the standard broadcast calendar that ends on the last Sunday
in each reporting period. The broadcast calendars for the six months ended June
30, 2002 and 2001 had 26 and 25 weeks, respectively.
Representation Contract Termination Revenue and Contract Acquisition Costs
The Company's station representation contracts usually renew automatically
from year to year after their stated initial terms unless either party provides
written notice of termination at least twelve months prior to the next automatic
renewal date. In accordance with industry practice, in lieu of termination, an
arrangement is normally made for the purchase of such contracts by a successor
5
representative firm. The purchase price paid by the successor representation
firm is generally based upon the historic commission income projected over the
remaining contract period, plus two months.
Costs of obtaining station representation contracts are deferred and
amortized over the life of the new contract. Such amortization is included in
the accompanying consolidated statements of operations as a component of
depreciation and amortization expense. Amounts which are to be amortized during
the next year are included as current assets in the accompanying consolidated
balance sheets. Income earned from the loss of station representation contracts
(contract termination revenue) is recognized on the effective date of the buyout
agreement.
Earnings (Loss) Per Share
Basic earnings (loss) per share applicable to common shareholders for each
of the respective periods has been computed by dividing the net income (loss) by
the weighted average number of common shares outstanding during the period ,
amounting to 9,390,497 and 8,516,027 for the three months ended June 30, 2002
and 2001, respectively, and 9,307,935 and 8,517,325 for the six months ended
June 30, 2002 and 2001, respectively. Diluted earnings per share applicable to
common shareholders reflects the potential dilution that could occur if the
outstanding options to purchase common stock were exercised, utilizing the
treasury stock method, and also assumes conversion of outstanding convertible
preferred stock into shares of common stock at the stated rate of conversion
(Note 5). For the six months ended June 30, 2002 and 2001, the exercise of
outstanding options would have an anti-dilutive effect and therefore have been
excluded from the calculation. For the purposes of determining diluted earnings
per share applicable to common shareholders for the three months ended June 30,
2002 and 2001, 3,115,422 and 1,766,987 shares have been assumed to be converted,
respectively.
Restructuring Charges
A strategic restructuring program was undertaken in 2001 in response to
difficult economic conditions and to further ensure the Company's competitive
position. In 2001, the Company recognized restructuring charges of $3,471, which
were primarily comprised of termination benefits. The restructuring program
resulted in the termination of approximately 53 employees. At December 31, 2001,
the remaining accrual was approximately $2,917. During the six months ended June
30, 2002, the Company paid approximately $1,373 of termination benefits. As of
June 30, 2002, the remaining accrual was $1,544, of which $1,149 is included in
accrued employee related liabilities and $395 is included in other noncurrent
liabilities.
New Accounting Pronouncements
Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and
Other Intangible Assets," was issued in June 2001. This Statement addresses
financial accounting and reporting for acquired goodwill and other intangible
assets and supersedes APB Opinion No. 17, "Intangible Assets". It addresses how
intangible assets that are acquired individually or with a group of other assets
(but not those acquired in a business combination) should be accounted for in
financial statements upon their acquisition. This Statement also addresses how
goodwill and other intangible assets should be accounted for after they have
been initially recognized in the financial statements. With the adoption of this
Statement, goodwill is no longer subject to amortization over its estimated
useful life. Rather, goodwill will be subject to at least an annual assessment
for impairment by applying a fair-value-based test. Similarly, goodwill
associated with equity method investments is no longer amortized. Equity method
goodwill is not, however, subject to the new impairment rules. The Company
currently does not have any goodwill on its books, therefore the adoption of
this statement did not have a significant impact on the Company's financial
position and results of operations.
6
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" which addresses financial
accounting and reporting for the impairment or disposal of long-lived assets and
supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed Of", and the accounting and reporting
provisions of APB Opinion No. 30, "Reporting the Results of Operations" for the
disposal of a segment of a business. SFAS No. 144 is effective for fiscal years
beginning after December 15, 2001, with earlier application encouraged. The
Company adopted SFAS No. 144 as of January 1, 2002. The adoption of the
Statement did not have a significant impact on the Company's financial position
and results of operations.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Reclassification
Certain reclassifications have been made to prior period financial
statements to conform to the current period's presentation.
2. Segment Reporting
The Company is managed as one segment and all revenues are derived from
representation operations and related activities. The Company's management
decisions are based on operating EBITDA, defined as operating income or loss
before interest, taxes, depreciation and amortization and excluding contract
termination revenue and a non-cash option re-pricing charge. Operating EBITDA is
not a measure of performance calculated in accordance with accounting principles
generally accepted in the United States, but the management believes it is
useful in evaluating the Company's performance, in addition to the data
presented herein.
3. Acquisitions and Investments
In December 2000, the Company invested $3,000 in Cybereps, Inc. and thus
increased its ownership percentage from 16% to 51%. In October 2001, the Company
assumed effective control of Cybereps' operations and consolidated its results
from that date. The operating loss included in the accompanying statement of
operations for the six months ended June 30, 2002 is approximately $660,
compared to $899 of equity loss included in other income for the six months
ended June 30, 2001.
The Company has investments in affiliates, which are accounted for using
the cost method of accounting as the Company does not have the ability to
exercise significant influence over operating and financial policies of these
affiliates. The total carrying value of these investments was $2,500 and $2,600
as of June 30, 2002 and December 31, 2001, respectively, representing a range of
ownership from 8% to 16% of the affiliated companies.
4. Stock Options
In April 2000, the Company granted options to purchase shares of Class A
common stock at an exercise price of $8.77. In December 2000, the Company
repriced these options to an exercise price
7
of $2.81 which represented the fair market value on the date of the repricing.
In accordance with accounting principles generally accepted in the United
States, the Company has adopted variable plan accounting for these options from
the date of the repricing. For the six months ended June 30, 2002 and 2001, the
Company has recorded $(529) and $1,377, respectively, to selling expenses as a
result of the repricing.
5. Shareholders' Equity
In May 2002, the Company amended its certificate of incorporation for the
purpose of establishing a series of preferred stock referred to as Series A
Convertible Preferred Stock (the "Series A Stock"), with the authorization to
issue up to 400,000 shares. The Series A Stock has a face value of $100 per
share and a liquidation preference in such amount in priority over the Company's
Class A and Class B common stock. Each share of the Series A Stock may be
converted at the option of the holder at any time into 25 shares of Class A
common stock at an initial conversion price of $4.00 per share (subject to
anti-dilution adjustments). If the market price of the Company's Class A common
stock is $8.00 or more for 30 consecutive trading days, the Series A Stock will
automatically be converted into share of Class A common stock at the then
applicable conversion price. The Series A Stock bears a 4% annual cumulative
dividend that may be paid in cash or in kind in additional shares of the Series
A Stock. Holders of shares of the Series A Stock vote on an "as converted"
basis, together with the holders of Class A and Class B common stock.
During the quarter ended June 30, 2002, the Company completed a series of
private placements to issue 110,000 units for an aggregate purchase price of
$11,000. Each unit consists of one share of Series A Stock and 6.25 warrants to
acquire an equal number of shares of Class A common stock. The warrants are
exercisable at any time from the date of grant and expire five years from the
date of grant. The Company incurred approximately $697 in legal and other costs
directly related to the private placements.
In March 2002, the Company issued 164,117 shares of Class B common stock to
the Interep Stock Growth Plan for net cash proceeds of $558. Additionally, in
June 2002, the Company issued 159,620 shares of Class B common stock to the
Interep Stock Growth Plan for net cash proceeds of $589. During 2001, the
Company issued 680,330 shares of Class B common stock to the Interep Stock
Growth Plan for net cash proceeds of $2,800. The shares were issued at the
current fair market value on the date of issuance.
6. Commitments and Contingencies
The Company may be involved in various legal actions from time to time
arising in the normal course of business. In the opinion of management, there
are no matters outstanding that would have a material adverse effect on the
consolidated financial position or results of operations of the Company.
In 2000, certain clients of the Company were served summons and complaints
(on separate matters) for alleged breaches of various national sales
representation agreements. The Company had agreed to indemnify its clients from
and against any loss, liability, cost or expense incurred in the actions. In the
first quarter of 2002, the Company entered into a settlement agreement regarding
these contract acquisition claims. The settlement resulted in the offset of
approximately $12,500 in representation contract buyout receivables and payables
as well as additional contract termination revenue of $2,400. In addition, the
settlement agreement includes amended payment schedules for approximately
$10,000 in contract representation payables previously recorded.
8
In June 2002, the Company reached a settlement with Entravision
Communications Corporation in regard to the termination of its contract. As a
result the Company recorded approximately $2,000, or $0.16 per common share on a
diluted basis, in contract termination revenue during the quarter ended June 30,
2002.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our
Consolidated Financial Statements, including the notes thereto, included
elsewhere in this Report.
Throughout this Quarterly Report, when we refer to "Interep" or "the
Company," we refer collectively to Interep National Radio Sales, Inc. and all of
our subsidiaries unless the context indicates otherwise or as otherwise noted.
Important Note Regarding Forward Looking Statements
Some of the statements made in this Quarterly Report are "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. These statements are not statements of historical fact, but instead
represent our belief about future events. In some cases, you can identify
forward-looking statements by terminology such as "may," "will," "should,"
"expects," "plans," "anticipates," "believes," "estimates," "predicts,"
"potential," "continue," or the negative of these terms or other comparable
terminology. These statements are based on many assumptions and involve known
and unknown risks and uncertainties that are inherently uncertain and beyond our
control. These risks and uncertainties may cause our or our industry's actual
results, levels of activity, performance or achievements to be materially
different than any expressed or implied by these forward-looking statements.
Although we believe that the expectations in the forward-looking statements are
reasonable, we cannot guarantee future results, levels of activity, performance
or achievements. You should review the factors noted in Management's Discussion
and Analysis of Financial Condition and Results of Operation - Certain Factors
That May Affect Our Results of Operations for a discussion of some of the things
that could cause actual results to differ from those expressed in our
forward-looking statements.
Overview
We derive a substantial majority of our revenues from commissions on sales
by us of national spot radio advertising airtime for the radio stations we
represent. Generally, advertising agencies or media buying services retained by
advertisers purchase national spot advertising time. We receive commissions from
our client radio stations based on the national spot radio advertising billings
of the station, net of standard advertising agency and media buying services
commissions. We enter into written representation contracts with our clients,
which include negotiated commission rates. Because commissions are based on the
prices paid to radio stations for spots, our revenue base is automatically
adjusted for inflation.
Our operating results generally depend on:
o changes in advertising expenditures;
o increases and decreases in the size of the total national spot
radio advertising market;
o changes in our share of this market;
9
o acquisitions and terminations of representation contracts; and
o operating expense levels.
The effect of these factors on our financial condition and results of operations
varies from period to period.
A number of factors influence the performance of the national spot radio
advertising market, including, but not limited to, general economic conditions,
consumer attitudes and spending patterns, the amount spent on advertising
generally, the share of total advertising spent on radio and the share of total
radio advertising represented by national spot radio. In this regard, we, like
other media businesses, have been adversely affected by a sluggish economy
generally, and the events of September 11, 2001, in particular, which we believe
have contributed to a temporary decrease in the amount spent on advertising.
Our share of the national spot advertising market changes as a result of
increases and decreases in the amount of national spot advertising broadcast by
our clients. Moreover, our market share increases as we acquire representation
contracts with new client stations and decreases if current client
representation contracts are terminated. Thus, our ability to attract new
clients and to retain existing clients significantly affects our market share.
The value of representation contracts that have been acquired or terminated
during the last few years has tended to increase due to a number of factors,
including the consolidation of ownership in the radio broadcast industry
following the passage of the Telecommunications Act of 1996. In recent years, we
have increased our representation contract acquisition activity, and we have
devoted a significant amount of our resources to these acquisitions. At the same
time, we have received an increased amount of contract termination revenue. We
base our decisions to acquire a representation contract on the market share
opportunity presented and on an analysis of the costs and net benefits to be
derived. We continuously seek opportunities to acquire additional representation
contracts on attractive terms as a means of expanding our business and market
share, while maintaining our current clients. Our ability to acquire and
maintain representation contracts has had, and will continue to have, a
significant impact on our revenues and cash flows.
We recognize revenues on a contract termination as of the effective date of
the termination. When a contract is terminated, we write off in full the
unamortized portion, if any, of the expense we originally incurred on our
acquisition of the contract. When we enter into a representation contract with a
new client, we amortize the contract acquisition cost in equal monthly
installments over the life of the new contract. As a result, our operating
income is affected, negatively or positively, by the acquisition or loss of
client stations. We are unable to forecast any trends in contract buyout
activity, or in the amount of revenues or expenses that will likely be
associated with buyouts during a particular period. Generally, the amount of
revenue resulting from the buyout of a representation contract depends on the
length of the remaining term of the contract and the revenue generated under the
contract during the 12-month "trailing period" preceding the date of
termination. The amount recognized by us as contract termination revenue in any
period is not, however, indicative of contract termination revenue that may be
realized in any future period. Historically, the level of buyout activity has
varied from period to period. Additionally, the length of the remaining terms,
and the commission revenue generation, of the contracts which are terminated in
any period vary to a considerable extent. Accordingly, while buyout activity and
the size of buyout payments has increased since 1996, their impact on our
revenues and income is uncertain, due to the variables of contract length and
commission generation.
10
During 1999, we added Internet advertising to our sales representation
business. Revenues and expenses from the Internet advertising portion of our
business will be affected by the level of advertising on the Internet generally
and the portion of that advertising that we can direct to our clients, the
traffic volume at our client's websites, the prices obtained for advertising on
the Internet and our ability to obtain additional contracts from high-traffic
Internet websites and Internet advertisers. In December 2000, we merged our
Interep Interactive business with Cybereps, Inc., an Internet advertising
representation and marketing firm in which we had a minority interest, thereby
increasing our ownership percentage from 16% to 51%. In October 2001, we assumed
effective control of Cybereps' operations and have consolidated its results from
that date. Accordingly, the operations of Cybereps are included in the revenue
and expense accounts for the six months ended June 30, 2002 and the three months
ended June 30, 2002, whereas our share of the operating results for the six
months ended June 30, 2001 and the three months ended June 30, 2001 are included
in Other expenses, net.
Our selling and corporate expense levels are dependent on management
decisions regarding operating and staffing levels and on inflation. Selling
expenses represent all costs associated with our marketing, sales and sales
support functions. Corporate expenses include items such as corporate
management, corporate communications, financial services, advertising and
promotion expenses and employee benefit plan contributions.
Our business generally follows the pattern of advertising expenditures in
general. It is seasonal to the extent that radio advertising spending increases
during the fourth calendar quarter in connection with the Christmas season and
tends to be weaker during the first calendar quarter. Radio advertising also
generally increases during the second and third quarters due to holiday-related
advertising, school vacations and back-to-school sales. Additionally, radio
tends to experience increases in the amount of advertising revenues as a result
of special events such as political election campaigns. Furthermore, the level
of advertising revenues of radio stations, and therefore our level of revenues,
is susceptible to prevailing general and local economic conditions and the
corresponding increases or decreases in the budgets of advertisers, as well as
market conditions and trends affecting advertising expenditures in specific
industries.
Results of Operations
Three Months Ended June 30, 2002 Compared to Three Months Ended June 30, 2001
Commission revenues. Commission revenues for the second quarter of 2002
increased to $23.7 million from $22.7 million for the second quarter of 2001, or
approximately 4.7%. This $1.0 million increase was primarily attributable to the
inclusion, in the current period, of the commission revenue earned by our
Internet advertising representation operations. In the prior year, our share of
the Internet loss was reported on the equity basis, under the caption "Other
expense, net".
Contract termination revenue. Contract termination revenue in the second
quarter of 2002 decreased by $16.2 million, or 80.3%, to $4.0 million from $20.2
million in the second quarter of 2001. This decrease is primarily attributable
to contract termination revenue in the second quarter of 2001 resulting from the
agreement reached in that period with Clear Channel Communications regarding
termination revenue on rep contracts with us that had previously terminated.
Selling expenses. Selling expenses for the second quarter of 2002 decreased
to $15.5 million from $17.1 million in the second quarter of 2001. This decrease
of $1.6 million, or approximately 9.5%, was primarily due to the continuing
benefits of the strategic restructuring program undertaken in the fourth quarter
of 2001, offset by the operating expenses incurred by our Internet advertising
representation operations. In the prior year our share of the Internet loss was
reported on the equity basis,
11
under the caption "Other expense, net". In addition, for the three months ended
June 30, 2002 and 2001, the Company has recorded $391 and $1,027, respectively,
to selling expenses as a result of the repricing of its stock options due to its
variable plan accounting.
General and administrative expenses. General and administrative expenses
for the second quarter of 2002 were virtually unchanged from the second quarter
of 2001.
Operating EBITDA. Operating EBITDA increased by $2.2 million, or 66.7%, for
the second quarter of 2002 to $5.5 million, from $3.3 million for the second
quarter of 2001, for the reasons discussed above. Operating EBITDA is operating
income or loss before interest, taxes, depreciation and amortization and
excludes contract termination revenue and a non-cash option re-pricing charge.
Operating EBITDA is not a measure of performance calculated in accordance with
accounting principles generally accepted in the United States, but we believe it
is useful in evaluating the performance of Interep, in addition to the GAAP data
presented.
Depreciation and amortization expense. Depreciation and amortization
expense decreased $7.8 million, or 56.7%, during the second quarter of 2002, to
$6.0 million from $13.8 million in the second quarter of 2001. This decrease was
primarily the result of the write-off, in the second quarter of 2001, of the
remaining deferred costs, amounting to $6.3 million, related to the terminated
contract with Clear Channel.
Operating income. Operating income decreased by $5.6 million, or 64.4%, for
the second quarter of 2002 to $3.1 million, as compared to $8.7 million for the
second quarter of 2001, for the reasons discussed above.
Interest expense, net. Interest expense, net, increased $0.2 million, or
10.5%, to $2.5 million for the second quarter of 2002, from $2.3 million for the
second quarter of 2001. This increase primarily resulted from a reduction in the
amount of cash invested and lower interest rates.
Other expense, net. Other expense, net, for 2001 primarily consisted of our
share of the equity loss incurred by Cybereps, Inc. See discussion of commission
revenues, selling expenses and general and administrative expenses, above. See
also Note 3 to the Notes to the Unaudited Interim Consolidated Financial
Statements included elsewhere in this Report.
Provision for income taxes. The provision for income taxes decreased by
$4.3 million, or 93.9%, to $0.3 million for the first quarter of 2002, from $4.6
million for the second quarter of 2001, as a result of the decreased operating
income.
Net income. Our net income after tax declined $0.9 million, or 74.8%, to
$0.3 million for the second quarter of 2002, from $1.2 million for the second
quarter of 2001. The decrease was attributable to the reasons discussed above.
Six Months Ended June 30, 2002 Compared to Six Months Ended June 30, 2001
Commission revenues. Commission revenues for the first half of 2002
increased to $41.2 million from $39.3 million for the first half of 2001, or
approximately 5.0%. This $1.9 million increase was primarily attributable to the
inclusion, in the current period, of the commission revenue earned by our
Internet advertising representation operations. In the prior year, our share of
the Internet loss was reported on the equity basis, under the caption "Other
expense, net". Additionally, our comparative revenue was affected by the fact
that the first quarter of 2002 had 13 broadcast weeks, as compared to 12
broadcast
12
weeks during the first quarter of 2001, and, accordingly, there were 26 weeks in
the first half of 2002 compared to 25 weeks in the first half of 2001.
Contract termination revenue. Contract termination revenue in the first
half of 2002 decreased by $13.9 million, or 68.7%, to $6.4 million from $20.3
million in the first half of 2001. This decrease is primarily attributable to
contract termination revenue in the second quarter of 2001 resulting from the
agreement reached in that period with Clear Channel Communications regarding
termination revenue on rep contracts with us that had previously terminated.
Selling expenses. Selling expenses for the first half of 2002 decreased to
$28.4 million from $32.1 million in the first half of 2001. This decrease of
$3.7 million, or approximately 11.6%, was primarily due to the continuing
benefits of the strategic restructuring program undertaken in the fourth quarter
of 2001, offset by the operating expenses incurred by our Internet advertising
representation operations. In the prior year our share of the Internet loss was
reported on the equity basis, under the caption "Other expense, net". In
addition, for the six months ended June 30, 2002 and 2001, the Company has
recorded $(529) and $1,377, respectively, to selling expenses as a result of the
repricing of its stock options due to its variable plan accounting.
General and administrative expenses. General and administrative expenses
for the first half of 2002 were virtually unchanged from the first half of 2001.
Operating EBITDA. Operating EBITDA increased by $3.9 million for the first
half of 2002 to $6.0 million, from $2.1 million for the first half of 2001, for
the reasons discussed above. Operating EBITDA is operating income or loss before
interest, taxes, depreciation and amortization and excludes contract termination
revenue and a non-cash option re-pricing charge. Operating EBITDA is not a
measure of performance calculated in accordance with accounting principles
generally accepted in the United States, but we believe it is useful in
evaluating the performance of Interep, in addition to the GAAP data presented.
Depreciation and amortization expense. Depreciation and amortization
expense decreased $8.4 million, or 41.4%, during the first half of 2002, to
$11.9 million from $20.3 million in the first half of 2001. This decrease was
primarily the result of the write-off, in the second quarter of 2001, of the
remaining deferred costs, amounting to $6.3 million, related to the terminated
contract with Clear Channel.
Operating income. Operating income increased by $0.3 million, or 40.5%, for
the first half of 2002 to $1.0 million, as compared to $0.7 million for the
first half of 2001, for the reasons discussed above.
Interest expense, net. Interest expense, net, increased $0.5 million, or
10.9%, to $5.0 million for the first half of 2002, from $4.5 million for the
first half of 2001. This increase primarily resulted from a reduction in the
amount of cash invested and lower interest rates.
Other expense, net. Other expense, net, for 2001 primarily consists of our
share of the equity loss incurred by Cybereps, Inc. See discussion of commission
revenues, selling expenses and general and administrative expenses, above. See
also Note 3 to the Notes to the Unaudited Interim Consolidated Financial
Statements included elsewhere in this Report.
13
Provision (benefit) for income taxes. The benefit for income taxes for the
first half of 2002 was $0.5 million, compared to a provision of $0.4 million for
the comparable 2001 period, reflecting change in the taxable profit for the
periods.
Net loss. Our net loss after tax declined $1.6 million, or 31.3%, to $3.5
million for the first half of 2002, from $5.1 million for the first half of
2001. The change was attributable to the reasons discussed above.
Liquidity and Capital Resources
Our cash requirements have been primarily funded by cash provided from
operations and financing transactions. In December 1999 we closed our initial
public offering, which resulted in net proceeds of $46.8 million. At June 30,
2002, we had cash and cash equivalents of $12.0 million and working capital of
$39.7 million.
In the second quarter of 2002, we issued $11.0 million of units in a
private placement. Each unit consists of one share of $100 face value, 4%
pay-in-kind, Series A Convertible Preferred Stock and 6.25 warrants to purchase
the same number of shares of our Class A common stock. Each share of Preferred
Stock is convertible into 25 shares of our Class A common stock. Each warrant is
exerciseable during the next five years at an exercise price of $4.00 per share.
Cash provided by operating activities during the first half of 2002 was
$5.8 million, as compared to $6.9 million during the first half of 2001. This
fluctuation was primarily attributable to representation contract buyouts, the
reduction in payables and accrued expenses and increased collections in trade
accounts receivable in 2002. The first half of the year is normally weaker than
the second half due to the seasonality of our business.
Net cash provided by (used in) investing activities is attributable to the
purchase and sale of marketable securities and capital expenditures. Net cash
used in investing activities during the first 6 months of 2002 was $0.3 million,
which consisted solely of capital expenditures. Net cash provided by investing
activities was $7.2 million during the first six months of 2001, reflecting $7.5
million from the redemption of marketable securities and $0.3 million of capital
expenditures.
Cash used for financing activities of $5.0 million during the first half of
2002 was used for representation contract acquisition payments of $16.4 million,
offset by $11.4 million from the issuance of units referred to above, net of
issuance costs, and the sale of additional stock to our Stock Growth Plan.
In general, as we acquire new representation contracts, we use more cash
and, as our contracts are terminated, we receive additional cash. For the
reasons noted above in "Overview", we are not able to predict the amount of cash
we will require for contract acquisitions, or the cash we will receive on
contract terminations, from period to period.
We do not have any written options on financial assets, nor do we have any
special purpose entities. We have not guaranteed any obligations of our
unconsolidated investments
In July 1998 we issued 10% Senior Subordinated Notes in the aggregate
principal amount of $100.0 million due July 1, 2008. Interest on the Senior
Subordinated Notes is payable in semi-annual payments of $5.0 million. The
Senior Subordinated Notes, while guaranteed by our subsidiaries, are unsecured
and junior to certain other indebtedness. We used a portion of the net proceeds
from the issuance of the Senior Subordinated Notes to repay the then outstanding
balance of our bank debt.
14
Additionally, we redeemed all of the outstanding shares of our then outstanding
Series A preferred stock and Series B preferred stock, together with all of the
associated shares of common stock then subject to redemption.
We issued the Senior Subordinated Notes under an indenture that limits our
ability to engage in various activities. Among other things, we are generally
not able to pay any dividends to our shareholders, other than dividends payable
in shares of common stock; we can only incur additional indebtedness under
limited circumstances, and certain types of mergers, asset sales and changes of
control either are not permitted or permit the note holders to demand immediate
redemption of their Senior Subordinated Notes.
The Senior Subordinated Notes may not be redeemed by us prior to July 1,
2003, except that we may redeem up to 30% of the Senior Subordinated Notes with
the proceeds of equity offerings. If certain events occurred which would be
deemed to involve a change of control under the indenture, we would be required
to offer to repurchase all of the Senior Subordinated Notes at a price equal to
101% of their aggregate principal, plus unpaid interest.
We believe that the liquidity resulting from our initial public offering
and the transactions described above, together with anticipated cash from
continuing operations, should be sufficient to fund our operations and
anticipated needs for required representation contract acquisition payments, and
to make the required 10% annual interest payments on our Senior Subordinated
Notes, for at least the next 12 months. We may not, however, generate sufficient
cash flow for these purposes or to repay the notes at maturity. In this regard,
we believe that the cost-saving restructuring we implemented in 2001 should
contribute to an improvement in cash flow. Moreover, the improvement in radio
advertising pacings experienced in the first half of 2002 may be indicative of
an improving revenue trend that should also have a positive effect on liquidity
and cash flow. At the same time, as noted above, we recently obtained $11.0
million of new equity financing, and we are continuing to seek additional debt
and equity financing to enhance our working capital position.
Our ability to fund our operations and required contract acquisition
payments and to make scheduled principal and interest payments will depend on
our future performance, which, to a certain extent, is subject to general
economic, financial, competitive, legislative, regulatory and other factors that
are beyond our control. We may also need to refinance all or a portion of our
Senior Subordinated Notes on or prior to maturity. There can be no assurance
that we will be able to effect any such refinancing on commercially reasonable
terms, if at all.
Certain Factors That May Affect Our Results of Operations
The following factors are some, but not all, of the variables that may have
an impact on our results of operations:
o Changes in the ownership of our radio station clients, in the demand for
radio advertising, in our expenses, in the types of services offered by
our competitors, and in general economic factors may adversely affect
our ability to generate the same levels of revenue and operating
results.
o Advertising tends to be seasonal in nature as advertisers typically
spend less on radio advertising during the first calendar quarter.
o The terrorist attacks that occurred in New York City and Washington,
D.C. on September 11, 2001, and the subsequent military actions taken by
the United States
15
and its allies in response, have caused uncertainty. While the full
consequences of these events remain uncertain, they could continue to
have a material adverse effect on general economic conditions, consumer
confidence, advertising and the media industry.
o The termination of a representation contract will increase our results
of operations for the fiscal quarter in which the termination occurs due
to the termination payments that are usually required to be paid, but
will negatively affect our results in later quarters due to the loss of
commission revenues. Hence, our results of operations on a quarterly
basis are not predictable and are subject to significant fluctuations.
o We depend heavily on our key personnel, including our Chief Executive
Officer Ralph C. Guild and the President of our Marketing Division Marc
Guild, and our inability to retain them could adversely affect our
business.
o We rely on a limited number of clients for a significant portion of our
revenues.
o Our significant indebtedness from our Senior Subordinated Notes may
burden our operations, which could make us more vulnerable to general
adverse economic and industry conditions, make it more difficult to
obtain additional financing when needed, reduce our cash flow from
operations to make payments of principal and interest and make it more
difficult to react to changes in our business and industry.
o We may need additional financing for our future capital needs, which may
not be available on favorable terms, if at all.
o Competition could harm our business. Our only significant competitor is
Katz Media Group, Inc., which is a subsidiary of a major radio station
group that has significantly greater financial and other resources than
do we. In addition, radio must compete for a share of advertisers' total
advertising budgets with other advertising media such as television,
cable, print, outdoor advertising and the Internet.
o Acquisitions and strategic investments could adversely affect our
business.
o Our Internet business may suffer if the market for Internet advertising
fails to develop or continues to weaken.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risk from changes in interest rates that may
adversely affect our results of operations and financial condition. We seek to
minimize the risks from these interest rate fluctuations through our regular
operating and financing activities. Our policy is not to use financial
instruments for trading or other speculative purposes. We are not currently a
party to any financial instruments.
16
PART II
OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
None.
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
In May and June 2002, we sold an aggregate of 110,000 units consisting of
one share of Series A Convertible Preferred Stock ("Series A Preferred Stock")
and 6.25 warrants to acquire the same number of shares of our Class A common
stock ("Warrants") for an aggregate purchase price of $11 million. We will use
the proceeds for working capital. We also issued warrants to acquire 5,000
shares of our Class A common stock to a placement agent in connection with the
sale of 10,000 units. These securities were sold as a private placement in
reliance on Regulation D of the Securities Act of 1933, as amended.
The Series A Preferred Stock has a face amount of $100 per share and a
liquidation preference in such amount in priority over our Class A common stock
and Class B common stock. Each share of the Series A Preferred Stock may be
converted at the option of the holder at any time into 25 shares of our Class A
common stock at an initial conversion price of $4.00 per share (subject to
anti-dilution adjustment). If the market price of our Class A Common Stock is
$8.00 or more for 30 consecutive trading days, the Series A Preferred Stock will
automatically be converted into shares of our Class A Common Stock at the then
applicable conversion price. The Series A Preferred Stock bears a 4% annual
cumulative dividend that we can pay in cash or in kind in additional shares of
the Series A Preferred Stock. Holders of shares of the Series A Preferred Stock
vote, on an "as converted basis", together with the holders of our Class A and
Class B common stock on all matters and would vote alone as a class if changes
to the rights or status of the Series A Preferred Stock were proposed by us.
Each warrant is immediately exercisable for one share of our Class A common
Stock at a strike price of $4.00 per share (subject to anti-dilution
adjustment). The Warrants expire on the fifth anniversary of their date of
issuance.
Item 3. DEFAULTS UPON SENIOR SECURITIES
None.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
Item 5. OTHER INFORMATION
None.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
(A) Documents Filed as Part of this Report
Exhibit No. Description
----------- -------------------------------------------------------
3.1 Certificate of Amendment of the Restated Certificate of
17
Incorporation (1)
4.1 Form of Warrant (1)
10.1 Form of Stock Purchase Agreement (1)
10.2 Form of Registration Rights Agreement (1)
99.1 Statement required pursuant to 18 U.S.C.ss. 1350 (filed
herewith)
- -------------------------
(1) Incorporated by reference to our Quarterly Report on Form 10-Q for our
fiscal quarter ended March 31, 2002, filed with the Commission on May 15,
2002.
18
(B) Reports on Form 8-K
We have filed the following current reports on Form 8-K since the beginning
of our second fiscal quarter:
Financial
Date of Report Items Reported Statements Filed
- -------------- --------------------------------------------- ----------------
June 3, 2002 Private placement of Series A Preferred Stock No
and Warrants
June 12, 2002 Private placement of Series A Preferred Stock No
and Warrants
June 26, 2002 Change in certifying accountant No
July 3, 2002 Unaudited pro forma consolidated balance sheet Yes
as of May 31, 2002
19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized in the City of New York, State of New
York.
August 14, 2002
INTEREP NATIONAL RADIO SALES, INC.
By: /s/ WILLIAM J. MCENTEE, JR.
---------------------------
William J. McEntee, Jr.
Vice President and Chief Financial
Officer
20