AUDACY, INC. - Quarter Report: 2010 March (Form 10-Q)

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

FORM 10-Q

 

(Mark One)

 

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2010

 

or

 

o	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 or organization)	(I.R.S. employer identification no.)

 

401 City Avenue, Suite 809

Bala Cynwyd, Pennsylvania 19004

(Address of principal executive offices and zip code)

 

(610) 660-5610

(Registrant’s telephone number, including area code)

 

 

(Former name, former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x  No o

 

Indicate by checkmark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files.)  Yes o No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer o	Accelerated filer o
Non-accelerated filer x	Smaller reporting company o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o  No x

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

Class A common stock, $0.01 par value 29,699,875 Shares Outstanding as of April 30, 2010

(Class A Shares Outstanding include 1,483,873 unvested and vested but deferred restricted stock units)

Class B common stock, $0.01 par value — 7,457,532 Shares Outstanding as of April 30, 2010

 

 

Table of Contents

 

ENTERCOM COMMUNICATIONS CORP.

 

INDEX

 

Part I	Financial Information
Item 1.	Financial Statements	1
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	22
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	29
Item 4.	Controls and Procedures	30
Part II	Other Information
Item 1.	Legal Proceedings	30
Item 1A.	Risk Factors	31
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	31
Item 3.	Defaults Upon Senior Securities	31
Item 4.	Reserved	31
Item 5.	Other Information	31
Item 6.	Exhibits	32
Signatures		33
Exhibit Index		34

 

Private Securities Litigation Reform Act Safe Harbor Statement

 

In addition to historical information, this report contains statements by us with regard to our expectations as to financial results and other aspects of our business that involve risks and uncertainties and may constitute forward- looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.

 

Forward-looking statements are presented for illustrative purposes only and reflect our current expectations concerning future results and events.  All statements other than statements of historical fact are “forward-looking statements” for purposes of federal and state securities laws, including, without limitation, any projections of earnings, revenues or other financial items; any statements of the plans, strategies and objectives of management for future operations; any statements concerning proposed new services or developments; any statements regarding future economic conditions or performance; any statements of belief; and any statements of assumptions underlying any of the foregoing.

 

You can identify forward-looking statements by our use of words such as “anticipates,” “believes,” “continues,” “expects,” “intends,” “likely,” “may,” “opportunity,” “plans,” “potential,” “project,” “will,” and similar expressions which identify forward-looking statements, whether in the negative or the affirmative.  We cannot guarantee that we actually will achieve these plans, intentions or expectations.  These forward-looking statements are subject to risks, uncertainties and other factors, some of which are beyond our control, which could cause actual results to differ materially from those forecasted or anticipated in such forward-looking statements.  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 revision(s) to these statements to reflect events or circumstances after the date of this report or to reflect the occurrence of unanticipated events.

 

Key risks to our company are described in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 15, 2010 and as may be supplemented by the risks described under Part II, Item 1A, of our quarterly reports on Form 10-Q and in our Current Reports on Form 8-K.

 

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PART I

 

FINANCIAL INFORMATION

 

ITEM 1.  Financial Statements

 

ENTERCOM COMMUNICATIONS CORP.

CONDENSED CONSOLIDATED BALANCE SHEETS

(amounts in thousands)

(unaudited)

 

 

		MARCH 31,			DECEMBER 31,
		2010			2009
ASSETS:
Cash and cash equivalents		$	2,583		$	10,751
Accounts receivable, net of allowance for doubtful accounts		58,413			68,319
Prepaid expenses and deposits, other		7,371			4,701
Prepaid and refundable federal and state income taxes		7,539			7,628
Insurance claim receivable		—			16,500
Total current assets		75,906			107,899
Investments		391			391
Net property and equipment		69,369			71,740
Radio broadcasting licenses		707,852			707,852
Goodwill		38,168			38,168
Deferred charges and other assets, net of accumulated amortization		12,434			8,486
TOTAL ASSETS		$	904,120		$	934,536
LIABILITIES:
Accounts payable		$	2,094		$	477
Accrued expenses		12,664			13,152
Accrued compensation and other current liabilities		16,293			12,678
Insurance claim payable		—			16,500
Long-term debt, current portion		90,025			80,024
Total current liabilities		121,076			122,831
Long-term debt, net of current portion		626,142			655,728
Financing method lease obligations		12,610			12,610
Deferred tax liabilities		1,643			—
Other long-term liabilities		24,016			29,415
Total long-term liabilities		664,411			697,753
Total liabilities		785,487			820,584
CONTINGENCIES AND COMMITMENTS
SHAREHOLDERS’ EQUITY:
Preferred stock		—			—
Class A, B and C common stock		372			372
Additional paid-in capital		589,068			588,622
Accumulated deficit		(457,398		)	(461,610		)
Accumulated other comprehensive loss		(13,409		)	(13,432		)
Total shareholders’ equity		118,633			113,952
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY		$	904,120		$	934,536

 

See notes to condensed consolidated financial statements.

 

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ENTERCOM COMMUNICATIONS CORP.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(amounts in thousands, except share and per share data)

(unaudited)

 

		THREE MONTHS ENDED
		MARCH 31,
		2010			2009
NET REVENUES		$	80,834		$	75,371
OPERATING (INCOME) EXPENSE:
Station operating expenses, including non-cash compensation expense of $178 in 2010 and $90 in 2009		59,388			58,569
Depreciation and amortization expense		3,381			4,316
Corporate general and administrative expenses, including non-cash compensation expense of $1,572 in 2010 and $1,702 in 2009		5,875			5,687
Net time brokerage agreement income		—			(2		)
Net loss on sale or disposal of assets		29			7
Total operating expense		68,673			68,577
OPERATING INCOME		12,161			6,794
OTHER (INCOME) EXPENSE:
Interest expense, including amortization of deferred financing expense of $549 in 2010 and $394 in 2009		6,980			8,113
Interest and dividend income		(7		)	(8		)
Net (gain) loss on extinguishment of debt		62			(7,755		)
Other income		(22		)	(380		)
TOTAL OTHER (INCOME) EXPENSE		7,013			(30		)
INCOME BEFORE INCOME TAXES		5,148			6,824
INCOME TAXES		948			1,488
NET INCOME		$	4,200		$	5,336
NET INCOME PER SHARE - BASIC		$	0.12		$	0.15
NET INCOME PER SHARE - DILUTED		$	0.11		$	0.15
WEIGHTED AVERAGE SHARES:
Basic		35,622,615			35,393,660
Diluted		37,571,384			35,482,330

 

See notes to condensed consolidated financial statements.

 

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ENTERCOM COMMUNICATIONS CORP.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(amounts in thousands)

(unaudited)

 

		THREE MONTHS ENDED
		MARCH 31,
		2010			2009
NET INCOME		$	4,200		$	5,336
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAXES (BENEFIT):
Net unrealized gain (loss) on derivatives, net of taxes (benefit) of $0 in 2010 and $0 in 2009		23			(985		)
COMPREHENSIVE INCOME		$	4,223		$	4,351

 

See notes to condensed consolidated financial statements.

 

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CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

THREE MONTHS ENDED MARCH 31, 2010 AND YEAR ENDED DECEMBER 31, 2009

(amounts in thousands, except share data)

(unaudited)

 

		Common Stock										Additional						Other
		Class A					Class B					Paid-in			Retained			Comprehensive
		Shares		Amount			Shares		Amount			Capital			Earnings			Income (Loss)			Total
Balance, December 31, 2008		29,479,188		$	295		7,607,532		$	76		$	582,325		$	(467,177	)	$	(15,262	)	$	100,257
Net income		—		—			—		—			—			5,398			—			5,398
Conversion of Class B common stock to Class A common stock		150,000		1			(150,000	)	(1		)	—			—			—			—
Compensation expense related to granting of stock options		—		—			—		—			485			—			—			485
Compensation expense related to granting of restricted stock units		796,824		8			—		—			6,380			—			—			6,388
Issuance of common stock related to an incentive plan		74,369		—			—		—			97			—			—			97
Common stock repurchase		(662,664	)	(7		)	—		—			(882		)	—			—			(889		)
Purchase of vested employee restricted stock units		(82,556	)	—			—		—			(104		)	—			—			(104		)
Net dividend equivalents on restricted stock units (net of forfeitures and payments)		—		—			—		—			—			169			—			169
Realization of tax benefit for dividend equivalent payments		—		—			—		—			321			—			—			321
Net unrealized gain on derivatives		—		—			—		—			—			—			1,830			1,830
Balance, December 31, 2009		29,755,161		297			7,457,532		75			588,622			(461,610		)	(13,432		)	113,952
Net income		—		—			—		—			—			4,200			—			4,200
Compensation expense related to granting of stock options		—		—			—		—			132			—			—			132
Compensation expense related to granting of restricted stock units		29,781		—			—		—			1,618			—			—			1,618
Exercise of stock options		69,725		—			—		—			92			—			—			92
Purchase of vested employee restricted stock units		(157,181	)	—			—		—			(1,396		)	—			—			(1,396		)
Net dividend equivalents on restricted stock units (net of forfeitures and payments)		—		—			—		—			—			12			—			12
Net unrealized gain on derivatives		—		—			—		—			—			—			23			23
Balance, March 31, 2010		29,697,486		$	297		7,457,532		$	75		$	589,068		$	(457,398	)	$	(13,409	)	$	118,633

 

See notes to condensed consolidated financial statements.

 

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ENTERCOM COMMUNICATIONS CORP.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(amounts in thousands)

(unaudited)

 

		THREE MONTHS ENDED
		MARCH 31,
		2010			2009
OPERATING ACTIVITIES:
Net income		$	4,200		$	5,336
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization		3,381			4,316
Amortization of deferred financing costs		549			394
Deferred tax benefit and other		1,643			1,488
Provision for bad debts		65			691
Net loss on sale or disposal of assets		29			7
Non-cash stock-based compensation expense		1,750			1,792
Deferred rent		10			20
Unearned revenue - long-term		—			(210		)
Net (gain) loss on extinguishment of debt		62			(7,755		)
Deferred compensation		579			41
Other income		(22		)	(380		)
Changes in assets and liabilities:
Accounts receivable		9,851			17,188
Prepaid expenses and deposits		13,822			(2,237		)
Prepaid and refundable income taxes		90			77
Accounts payable and accrued liabilities		(15,960		)	(2,696		)
Accrued interest expense		(192		)	(1,798		)
Accrued liabilities - long-term		(763		)	(577		)
Prepaid expenses - long-term		250			200
Net cash provided by operating activities		19,344			15,897
INVESTING ACTIVITIES:
Additions to property and equipment		(793		)	(823		)
Proceeds from sale of property, equipment, intangibles and other assets		106			16
Deferred charges and other assets		(11		)	(33		)
Proceeds from investments		22			7
Proceeds from insurance recovery		—			380
Net cash used in investing activities		(676		)	(453		)

 

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ENTERCOM COMMUNICATIONS CORP.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(amounts in thousands)

(unaudited)

 

		THREE MONTHS ENDED
		MARCH 31,
		2010			2009
FINANCING ACTIVITIES:
Deferred expenses related to bank facility		(5,155		)	—
Proceeds from issuance of long-term debt		21,000			18,000
Payments of long-term debt		(34,006		)	(14,006		)
Retirement of senior subordinated notes		(6,579		)	(13,030		)
Purchase of the Company’s common stock		—			(888		)
Proceeds from issuance of employee stock plan		—			82
Proceeds from the exercise of stock options		92			—
Purchase of vested restricted stock units		(1,396		)	(87		)
Payment of dividend equivalents on vested restricted stock units		(792		)	(736		)
Net cash used in financing activities		(26,836		)	(10,665		)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		(8,168		)	4,779
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR		10,751			4,284
CASH AND CASH EQUIVALENTS, END OF PERIOD		$	2,583		$	9,063
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest		$	6,617		$	9,499
Income taxes		$	1		$	73

 

SUPPLEMENTAL DISCLOSURES ON NON-CASH INVESTING AND FINANCING ACTIVITIES:

 

During the three months ended March 31, 2010, the Company issued less than 0.1 million restricted stock units (net of forfeitures) that will decrease its paid-in capital by less than $0.1 million over the vesting period of the restricted stock units, as the fair value of the restricted stock units forfeited exceeded the fair value of the restricted stock units granted.

 

During the three months ended March 31, 2009, the Company issued 0.1 million restricted stock units (net of forfeitures) and will increase its paid-in capital by $0.3 million over the vesting period of the restricted stock units.

 

See notes to condensed consolidated financial statements.

 

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ENTERCOM COMMUNICATIONS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE MONTHS ENDED MARCH 31, 2010 AND 2009

 

1.                                      BASIS OF PRESENTATION

 

The condensed consolidated interim unaudited financial statements included herein have been prepared by Entercom Communications Corp. and its subsidiaries (collectively, the “Company”) in accordance with: (i) generally accepted accounting principles (“U.S. GAAP”) for interim financial information; and (ii) the instructions of the Securities and Exchange Commission (the “SEC”) for Form 10-Q and Article 10 of Regulation S-X.  Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for annual financial statements.  In the opinion of management, the financial statements reflect all adjustments considered necessary for a fair statement of the results of operations and financial position for the interim periods presented.  All such adjustments are of a normal and recurring nature. The Company’s results are subject to seasonal fluctuations and, therefore, the results shown on an interim basis are not necessarily indicative of results for a full year.

 

This Form 10-Q should be read in conjunction with the financial statements and related notes included in the Company’s audited financial statements as of and for the year ended December 31, 2009 and filed with the SEC on March 15, 2010, as part of the Company’s Annual Report on Form 10-K.  Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations.

 

Recent Accounting Pronouncements

 

In June, 2009, the accounting standards were amended for determining whether to consolidate a variable interest entity. These amended standards eliminate a mandatory quantitative approach to determine whether a variable interest provides the entity with a controlling financial interest in a variable interest entity in favor of a qualitatively focused analysis, and require an ongoing reassessment of whether an entity is the primary beneficiary. These amended standards were effective January 1, 2010.  The adoption of the amended standards did not have any effect on our results of operations, cash flows or financial position.

 

2.                                      SHARE-BASED COMPENSATION

 

Restricted Stock Units (“RSUs”)

 

A summary of the Company’s outstanding RSUs as of March 31, 2010, and changes in RSUs during the three months ended March 31, 2010, is as follows:

 

									Weighted
									Average		Aggregate
						Weighted			Remaining		Intrinsic
						Average			Contractual		Value As Of
				Number of		Purchase			Term		March 31,
		Period Ended		RSUs		Price			In Years		2010
RSUs outstanding as of:		December 31, 2009		1,917,533
RSUs awarded				48,842
RSUs released				(464,705	)
RSUs forfeited				(19,436	)
RSUs outstanding as of:		March 31, 2010		1,482,234		$	—		1.5		$	17,623,762
RSUs vested and expected to vest				1,338,273		$	—		1.5		$	14,914,837
RSUs exercisable (vested and deferred)				83,871		$	—				$	997,226
Weighted average remaining recognition period in years				2.4

 

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As of March 31, 2010, there was $5.4 million of unamortized compensation expense, net of estimated forfeitures, related to unvested RSUs, which is expected to be recognized over a remaining weighted average recognition period of 2.4 years.

 

Options

 

The following table presents the option activity for the three months ended March 31, 2010:

 

									Weighted		Aggregate
									Average		Intrinsic
						Weighted			Remaining		Value
						Average			Contractual		As of
				Number of		Exercise			Term		March 31,
		Period Ended		Options		Price			In Years		2010
Options outstanding as of:		December 31, 2009		1,148,032		$	3.13
Options exercised				(69,725	)	$	1.34
Options forfeited				(29,280	)	$	1.84
Options expired				(6,782	)	$	41.58
Outstanding as of:		March 31, 2010		1,042,245		$	3.03		8.6		$	10,232,111
Options vested and expected to vest as of:		March 31, 2010		941,905		$	3.19		8.6		$	9,199,745
Options vested and exercisable as of:		March 31, 2010		237,265		$	7.74		7.8		$	1,986,267
Weighted average remaining recognition period in years				2.9

 

As of March 31, 2010, $0.9 million of unrecognized compensation costs related to unvested stock options, net of estimated forfeitures, is expected to be recognized in future periods over a weighted average period of 2.9 years.

 

The fair value of each option grant was estimated on the date of grant using the following weighted average assumptions:

 

		Three Months
		Ended
		March 31,
		2009
Expected life (years)		6.3
Expected volatility factor (%)		54.9% to 57.3%
Risk-free interest rate (%)		2.2% to 2.4%
Expected dividend yield (%)		0.0%

 

The following table summarizes significant ranges of outstanding and exercisable options as of March 31, 2010:

 

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						Options Outstanding							Options Exercisable
								Weighted
						Number Of		Average					Number Of
						Options		Remaining		Weighted			Options		Weighted
						Outstanding		Contractual		Average			Exercisable		Average
						March 31,		Term		Exercise			March 31,		Exercise
Exercise Prices						2010		In Years		Price			2010		Price
$	1.34		$	1.34		948,025		8.9		$	1.34		186,214		$	1.34
$	1.57		$	11.69		52,220		8.4		$	7.49		13,051		$	10.26
$	11.78		$	11.78		8,000		7.9		$	11.78		4,000		$	11.78
$	27.75		$	40.00		17,000		2.3		$	34.78		17,000		$	34.78
$	45.03		$	48.21		17,000		2.1		$	47.90		17,000		$	47.90
$	1.34		$	48.21		1,042,245		8.6		$	3.03		237,265		$	7.74

 

Recognized Non-Cash Compensation Expense

 

The following table summarizes stock-based compensation expense related to awards of RSUs, employee stock options and purchases under the employee stock purchase plan for the three months ended March 31, 2010 and 2009:

 

		Three Months Ended
		March 31,
		2010			2009
		(amounts in thousands)
Station operating expenses		$	178		$	90
Corporate general and administrative expenses		1,572			1,702
Stock-based compensation expense included in operating expenses		1,750			1,792
Income tax benefit (net of a fully reserved valuation allowance)		—			—
Total		$	1,750		$	1,792

 

2009 Option Exchange Program

 

In February 2009, the Company’s Board of Directors approved an amendment to the Entercom Equity Compensation Plan (“Plan”) to permit a one-time 2009 Option Exchange Program (“2009 OEP”), which amendment was approved at the May 2009 shareholders’ meeting. On April 13, 2009, the Company commenced the 2009 OEP, which was subject to shareholder approval, by making an offer to exchange to the Company’s eligible employees and non-employee directors. The Company offered such persons the opportunity to make an election to exchange all of their outstanding stock options with exercise prices equal to or greater than $11.80 per share for a lesser number of RSUs. The exchange ratios were as follows:

 

Option		Exchange Ratio
Strike Price		(Options For RSUs)
At least $11.80, but less than $30.00		2.25 for 1
$30.00 or more		4.5 for 1

 

On May 15, 2009, following the May 14, 2009 expiration of the Company’s 2009 OEP, the Company granted 0.7 million RSUs in exchange for 2.1 million options. As a result of the 2009 OEP, the number of RSUs that can be issued under the Plan was effectively increased by 0.7 million as all RSUs granted did not count against the restricted stock sublimit in the Plan.  In addition, the number of awards that can be issued under the Plan was effectively reduced by 2.1 million as all options that were exchanged will not be available for re-grant under the Plan.

 

The Company applied modification accounting for the 2009 OEP and will recognize share-based compensation expense of $1.2 million on a straight-line basis over the four-year vesting period of the RSUs. Under modification accounting, the fair value of the new shares immediately prior to the exchange was greater by $1.2 million than the fair value of the surrendered options. In addition, under the bifurcated method, share-based

 

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compensation expense of $0.9 million associated with any unvested options exchanged and cancelled as of the modification date will be recognized over the remaining original option term, and the expense will only be reversed if the original service period is not met.

 

3.                                      INTANGIBLE ASSETS AND GOODWILL

 

(A) Indefinite-Lived Intangibles

 

Goodwill and certain intangible assets are not amortized.  The Company has concluded that its acquired broadcasting licenses are treated as an indefinite-lived intangible asset and, similar to goodwill, these assets are reviewed at least annually for impairment. At the time of each review, if the recorded value of goodwill and certain intangibles (such as broadcasting licenses) is more than their fair value, then a charge is recorded to the results of operations.

 

The Company may only write down the carrying value of its indefinite-lived intangibles, but is not permitted to increase the carrying value if the fair value of these assets subsequently increases.

 

Change In Annual Testing Period For Broadcasting Licenses

 

In 2009, the Company changed the period when it performs its annual impairment test for broadcasting licenses from the first quarter to the second quarter of each year, in line with its annual impairment test for goodwill.

 

Broadcasting Licenses

 

The Company performs its broadcasting license impairment test by evaluating its broadcasting licenses for impairment at the market level using the direct method.  Separately recorded indefinite-lived intangible assets are combined into a single unit of accounting for purposes of testing impairment if they are operated as a single asset.  The Company determines the fair value of the broadcasting licenses in each of its markets by relying on a discounted cash flow approach (a 10-year income model) assuming a start-up scenario in which the only assets held by an investor are broadcasting licenses. The Company’s fair value analysis contains assumptions incorporating variables that are based on past experiences and judgments about future performance using industry normalized information for an average station within a certain market. These variables include, but are not limited to: (1) the forecast growth rate of each radio market, including assumptions regarding each market’s population, household income, retail sales and other factors that would influence advertising expenditures; (2) market share and profit margin of an average station based upon market size and station type; (3) estimated capital start-up costs and losses incurred during the early years; (4) risk-adjusted discount rate; (5) the likely media competition within the market area; (6) an effective tax rate assumption; and (7) future terminal values.

 

The amount of broadcasting licenses reflected in the Company’s balance sheets was: (1) $707.9 million as of March 31, 2010 and as of December 31, 2009; and (2) $768.6 million as of March 31, 2009 and as of December 31, 2008. There were no events or circumstances during the first quarter of 2010 that indicated an interim review of broadcast licenses was required. If actual market conditions are less favorable than those projected by the industry or the Company, or if events occur or circumstances change that would reduce the fair value of the Company’s broadcasting licenses below the amount reflected in the balance sheet, the Company may be required to recognize impairment charges, which may be material, in future periods.

 

Goodwill

 

The Company performs its annual impairment test on its goodwill during the second quarter of each year by comparing the fair value for each reporting unit with the amount reflected on the balance sheet. The Company has determined that a radio market is a reporting unit and in total, the Company assesses goodwill at 19 separate reporting units (three of the Company’s 22 reporting units have no goodwill recorded as of March 31, 2010). If the fair value for any reporting unit is less than the amount reflected in the balance sheet, an indication exists that the amount of goodwill attributed to a reporting unit may be impaired, and the Company is required to perform a second step of the impairment test. In the second step, the Company compares the amount reflected in the balance sheet to the implied fair value of the reporting unit’s goodwill, determined by allocating the reporting unit’s fair value to all of its assets and liabilities in a manner similar to a purchase price allocation.

 

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To determine the fair value, the Company uses an income and market approach for each reporting unit. The market approach compares recent sales and offering prices of similar properties. The income approach uses the subject property’s income generated over a specified time and capitalized at an appropriate market rate to arrive at an indication of the most probable selling price.

 

The amount of goodwill reflected in the Company’s balance sheets was: (1) $38.2 million as of March 31, 2010 and as of December 31, 2009; and (2) $45.1 million as of March 31, 2009 and as of December 31, 2008. If actual market conditions are less favorable than those projected by the industry or the Company, or if events occur or circumstances change that would reduce the fair value of the Company’s goodwill below the amount reflected in the balance sheet, the Company may be required to recognize impairment charges, which may be material, in future periods.

 

(B) Definite-Lived Intangibles

 

The Company has definite-lived intangible assets that consist of advertiser lists and customer relationships, acquired advertising contracts and income leases. These assets are amortized over the period for which the assets are expected to contribute to the Company’s future cash flows and are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The amount of the amortization expense for definite-lived intangible assets was less than $0.1 million for each of the three months ended March 31, 2010 and 2009. As of March 31, 2010, the Company reflected $0.8 million in unamortized definite-lived assets, which is included in deferred charges and other assets on the balance sheet.

 

The following is an estimate of the amortization expense for definite-lived assets, in thousands, for each of the succeeding years ending December 31:

 

		Definite-
		Lived
		Assets
Year ending December 31,:
2010    (Excludes year-to-date ended March 31, 2010)		$	90
2011		84
2012		81
2013		53
2014		49
Thereafter		396
Total		$	753

 

4.                                      SENIOR DEBT

 

Bank Facility

 

The Company has a credit agreement (“Bank Facility”) with a syndicate of lenders for a $1,050 million senior secured credit facility that matures on June 30, 2012. The Bank Facility was originally comprised of $650 million in revolving credit (the “Revolver”) and a $400 million term loan (“Term Loan”). The Company is required to make payments of the Term Loan (from and after September 30, 2009) in quarterly amounts starting at $15 million and ultimately increasing to $60 million.

 

As of March 31, 2010, the Company had: (1) $716.0 million outstanding under the Bank Facility, including: (i) $355.0 million in Term Loan; and (ii) $361.0 million in drawn Revolver; and (2) a $0.7 million letter of credit.  As of March 31, 2010, the Company had $2.6 million in cash and cash equivalents.

 

On March 11, 2010, the Company amended its Bank Facility (the “Amendment”). The Bank Facility, as amended, requires the Company to comply with certain financial covenants such as a maximum Consolidated Leverage Ratio and a minimum Consolidated Interest Coverage Ratio (defined terms within the agreement). In connection with the Amendment, certain key terms, as defined within the Bank Facility, were revised as follows:

 

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·                  Depending on the Consolidated Leverage Ratio (Consolidated Funded Indebtedness to Consolidated Operating Cash Flow), the Company may elect an interest rate equal to: (1) the Eurodollar Rate plus fees that can range from 0.5% to 2.5%; or (2) the Base Rate plus fees that can range from 0.0% to 1.5%, where the Base Rate is the highest of: (a) the Federal Funds Rate plus 0.5%; (b) the Eurodollar Rate plus 1.0%; and (c) the Prime Rate;

·                  During periods when the Consolidated Leverage Ratio exceeds six times, the Company is: (a) restricted in its ability to take certain actions, including but not limited to, the payment of dividends, the repurchase of its stock; and (b) subject to additional limitations on acquisitions and investments.

 

Under the Amendment, the Consolidated Leverage Ratio cannot exceed seven times in 2010.This covenant ratio decreases quarterly in increments in 2011 to a ratio of six times as of December 31, 2011.

 

The Company’s ability to maintain compliance with its covenants will be highly dependent on the Company’s results of operations as the economy recovers from the recent economic downturn and, to the extent necessary, the Company’s ability to implement remedial measures such as further reductions in operating costs.  If the Company were to enter into an agreement with its lenders for covenant compliance relief, such relief could result in higher interest expense.

 

The Amendment was treated as a modification to a debt instrument.  As a result, in the first quarter of 2010 the Company recorded deferred financing costs of $5.2 million related to the Amendment that will be amortized under the effective interest rate method over the remaining life of the Bank Facility. In addition, unamortized deferred financing costs of $3.1 million as of the Amendment date will continue to be amortized over the remaining life of the Bank Facility.

 

As of March 31, 2010, the undrawn amount of the Revolver was $288.3 million. The amount of the Revolver available to the Company, however, is a function of covenant compliance at the time of borrowing. Based on the Company’s financial covenant analysis as of March 31, 2010, the Company would be limited to borrowings significantly less than the undrawn limit unless such borrowings were used to repay indebtedness or for transactions that increase cash flow for purposes of covenant calculation. The Company plans to fund the amortization of the Term Loan with its available Revolver capacity and cash flow from operations.

 

The Bank Facility is secured by a pledge of 100% of the capital stock and other equity interest in all of the Company’s wholly owned subsidiaries. In addition, the Bank Facility as amended, is secured by a lien on all of the Company’s assets, other than real property.

 

The interest rate, which is based upon the Consolidated Leverage Ratio, was revised under the Amendment.  Prior to the Amendment the interest rate was: (i) the Eurodollar rate plus a rate that ranges from 0.50% to 1.13%; or (ii) the greater of prime rate plus a rate that ranges from 0.0% to 0.13% or the federal funds rate plus a rate that ranges from 0.50% to 0.63%. The Company also pays a commitment fee that varies, depending on the Company’s Leverage Ratio and the amount of the unused commitment, to a maximum of 0.50% per year (prior to the Amendment, it was a maximum of 0.35% per year) on the average unused balance of the Revolver.

 

Management believes that over the next 12 months the Company can continue to maintain its compliance with these covenants. Management also believes that cash on hand and cash from operating activities, together with available borrowings under the Revolver, will be sufficient to permit the Company to meet its liquidity requirements over the next 12 months, including the Company’s scheduled debt repayments. While the Company’s operating cash flow has been reduced from prior periods during the recent economic downturn, it has remained positive and adequate to fund the Company’s operating needs. As a result, the Company has not been required to rely upon, and the Company does not anticipate having to rely upon, the Revolver to fund the Company’s operations.

 

Amending the Company’s Bank Facility or obtaining other funding or additional financing prior to the expiration of the current agreement will be essential as the Revolver balance outstanding will be due in full upon the expiration of the Bank Facility on June 30, 2012.

 

5.                                      7.625% SENIOR SUBORDINATED NOTES

 

On March 8, 2010, the Company redeemed at par all of its remaining outstanding senior subordinated notes (“Notes”) of $6.6 million that were due March 1, 2014 and recorded in the statement of operations a loss on the extinguishment of debt of $0.1 million due to the write-off of deferred financing costs.

 

During the three months ended 2009, the Company repurchased $21.0 million of its Notes and recorded in the statement of operations a gain on the extinguishment of debt of $7.8 million, net of the write-off of deferred financing costs of $0.2 million.

 

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6.                                      FINANCING METHOD LEASE OBLIGATIONS

 

During the fourth quarter of 2009, the Company completed the sale of certain tower facilities for $12.6 million in cash.  At the same time, the Company entered into leases for space on the towers at most of these sites for use by the Company’s radio stations. The Company classified this transaction under the finance method as the agreement provides for an earn-out whereby the Company can receive additional cash consideration of up to $2.0 million after 42 months, depending if the buyer meets certain revenue targets.

 

The amount of depreciation and amortization expense attributable to assets held under the financing method was $0.1 million for the three months ended March 31, 2010 and the amount of interest expense for the cash consideration received of $12.6 million was $0.2 million for the three months ended March 31, 2010.

 

7.                                      DERIVATIVES AND HEDGING ACTIVITIES

 

The Company from time to time enters into derivative financial instruments, including interest rate exchange agreements (“Swaps”) and interest rate collar agreements (“Collars”), to manage its exposure to fluctuations in interest rates. Under a fixed rate Swap, the Company pays a fixed rate on a notional amount to a bank, and the bank pays to the Company a variable rate on the notional amount equal to the Company’s Eurodollar borrowing rate. A Collar establishes two separate agreements: an upper limit or “Cap” and a lower limit or “Floor” for the Company’s Eurodollar borrowing rate.

 

During the three months ended March 31, 2010 and 2009, the Company had outstanding the aggregate notional amounts of $475.0 million and $550.0 million, respectively, of cash flow interest rate transactions that were hedged against the Company’s variable rate senior debt.  In accordance with the terms of a Swap agreement dated January 28, 2008, the notional amount decreased from $225.0 million to $150.0 million on January 28, 2010 thereby eliminating a notional amount of $75.0 million with a fixed Eurodollar London interbank offered rate (“LIBOR”) of 3.03%.

 

As of March 31, 2010, the Company had the following derivatives outstanding:

 

Type

Fixed

Of

Notional

Effective

LIBOR

Expiration

Hedge

Amount

Date

Collar

Rate

Date

(amounts

(in millions)

Swap

$

150.0

January 28, 2008

n/a

3.03

%

January 28, 2011

Collar

100.0

February 28, 2008

[

Cap

4.00

%

]

February 28, 2011

Floor

2.14

%

Swap

125.0

March 28, 2008

n/a

2.91

%

September 28, 2011

Swap

100.0

May 28, 2008

n/a

3.62

%

May 28, 2012

Total

$

475.0

 

The following is a summary of the fair value of the derivatives outstanding as of March 31, 2010 and December 31, 2009:

 

				Fair Value
				March 31,			December 31,
		Balance Sheet		2010			2009
		Location		Asset (Liability)
				(amounts in thousands)
Designated Derivatives
Interest rate hedge transactions		Current Liabilities		$	(4,729	)	$	—
Interest rate hedge transactions		Other Long-Term Liabilities		$	(8,680	)	$	(13,432	)

 

The Company does not expect to reclassify to the statement of operations within the next 12 months any

 

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