CUMULUS MEDIA INC - Quarter Report: 2010 September (Form 10-Q)
Table of Contents
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2010.
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. |
For or the transition period from to
Commission file number 000-24525
CUMULUS MEDIA INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware (State or Other Jurisdiction of Incorporation or Organization) |
36-4159663 (I.R.S. Employer Identification No.) |
|
3280 Peachtree Road, NW Suite 2300, Atlanta, GA (Address of Principal Executive Offices) |
30305 (ZIP Code) |
(404) 949-0700
(Registrants telephone number, including area code)
(Registrants 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 þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Website, if any, every Interactive Date File required to be submitted and posted pursuant
to Rule 405 of Regulation S-T 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 o | Smaller reporting company þ | |||
(Do not check if a smaller reporting company) |
Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ
As of October 26, 2010, the registrant had 42,030,355 outstanding shares of common stock consisting of
(i) 35,576,293 shares of Class A Common Stock; (ii) 5,809,191 shares of Class B Common Stock; and (iii) 644,871 shares of Class C Common Stock.
CUMULUS MEDIA INC.
INDEX
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CUMULUS MEDIA INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except for share data)
(Unaudited)
(Dollars in thousands, except for share data)
(Unaudited)
September 30, | December 31, | |||||||
2010 | 2009 | |||||||
Assets |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 12,565 | $ | 16,224 | ||||
Restricted cash |
604 | 789 | ||||||
Accounts receivable, less allowance for doubtful accounts
of $1,132 and $1,166, in 2010 and 2009, respectively |
38,065 | 37,504 | ||||||
Trade receivable |
4,012 | 5,488 | ||||||
Prepaid expenses and other current assets |
5,612 | 4,709 | ||||||
Total current assets |
60,858 | 64,714 | ||||||
Property and equipment, net |
41,730 | 46,981 | ||||||
Intangible assets, net |
161,623 | 161,380 | ||||||
Goodwill |
56,121 | 56,121 | ||||||
Other assets |
3,735 | 4,868 | ||||||
Total assets |
$ | 324,067 | $ | 334,064 | ||||
Liabilities and Stockholders Deficit |
||||||||
Current liabilities: |
||||||||
Accounts payable and accrued expenses |
$ | 16,696 | $ | 13,635 | ||||
Trade payable |
3,971 | 5,534 | ||||||
Current portion of derivative instrument |
7,294 | | ||||||
Current portion of long-term debt |
35,404 | 49,026 | ||||||
Total current liabilities |
63,365 | 68,195 | ||||||
Long-term debt |
568,153 | 584,482 | ||||||
Other liabilities |
18,011 | 32,598 | ||||||
Deferred income taxes |
23,789 | 21,301 | ||||||
Total liabilities |
673,318 | 706,576 | ||||||
Stockholders Deficit: |
||||||||
Preferred stock, 20,262,000 shares authorized, par value $0.01 per share, including: |
||||||||
250,000 shares designated as 13 3/4% Series A Cumulative
Exchangeable Redeemable
Preferred Stock due 2009, shares designated at stated value
$1,000 per share; 0 shares
issued and outstanding in both 2010 and 2009 and 12,000 12%
Series B Cumulative
Preferred Stock, stated value $10,000 per share; 0 shares
issued and outstanding in
both 2010 and 2009 |
| | ||||||
Class A common stock, par value $0.01 per share; 200,000,000 shares authorized;
59,572,592 shares issued, 35,576,293 and 35,162,511 shares
outstanding in 2010 and
2009, respectively |
596 | 596 | ||||||
Class B common stock, par value $0.01 per share; 20,000,000 shares authorized;
5,809,191 shares issued and outstanding in both 2010 and 2009 |
58 | 58 | ||||||
Class C common stock, par value $0.01 per share; 30,000,000 shares authorized;
644,871 shares issued and outstanding in both 2010 and 2009 |
6 | 6 | ||||||
Treasury stock, at cost, 24,027,620 and 24,410,081 shares in 2010 and 2009, respectively |
(256,632 | ) | (261,382 | ) | ||||
Additional paid-in-capital |
963,565 | 966,945 | ||||||
Accumulated deficit |
(1,056,844 | ) | (1,078,735 | ) | ||||
Total stockholders deficit |
(349,251 | ) | (372,512 | ) | ||||
Total liabilities and stockholders deficit |
$ | 324,067 | $ | 334,064 | ||||
See accompanying notes to unaudited condensed consolidated financial statements.
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CUMULUS MEDIA INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except for share and per share data)
(Unaudited)
(Dollars in thousands, except for share and per share data)
(Unaudited)
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Broadcast revenues |
$ | 66,434 | $ | 64,127 | $ | 190,531 | $ | 183,443 | ||||||||
Management fee from affiliate |
1,021 | 1,000 | 3,021 | 3,000 | ||||||||||||
Net revenues |
67,455 | 65,127 | 193,552 | 186,443 | ||||||||||||
Operating expenses: |
||||||||||||||||
Station operating expenses (excluding depreciation, amortization
and LMA fees) |
40,486 | 40,159 | 120,829 | 121,690 | ||||||||||||
Depreciation and amortization |
2,222 | 2,650 | 7,130 | 8,365 | ||||||||||||
LMA fees |
607 | 595 | 1,500 | 1,792 | ||||||||||||
Corporate general and administrative (including non-cash stock
compensation of $556, $850, $1,015, and $2,053 respectively) |
4,680 | 5,676 | 13,824 | 15,741 | ||||||||||||
Gain on exchange of assets or stations |
| | | (7,204 | ) | |||||||||||
Realized loss on derivative instrument |
746 | 3,016 | 1,810 | 3,016 | ||||||||||||
Impairment of goodwill and intangible assets |
| 173,085 | | 173,085 | ||||||||||||
Total operating expenses |
48,741 | 225,181 | 145,093 | 316,485 | ||||||||||||
Operating income (loss) |
18,714 | (160,054 | ) | 48,459 | (130,042 | ) | ||||||||||
Non-operating income (loss): |
||||||||||||||||
Interest expense |
(7,588 | ) | (11,052 | ) | (23,734 | ) | (25,048 | ) | ||||||||
Interest income |
2 | 3 | 6 | 58 | ||||||||||||
Other expense, net |
(6 | ) | (121 | ) | (87 | ) | (156 | ) | ||||||||
Total non-operating expense, net |
(7,592 | ) | (11,170 | ) | (23,815 | ) | (25,146 | ) | ||||||||
Income (loss) before income taxes |
11,122 | (171,224 | ) | 24,644 | (155,188 | ) | ||||||||||
Income tax (expense) benefit |
(1,391 | ) | 27,233 | (2,753 | ) | 21,976 | ||||||||||
Net income (loss) |
$ | 9,731 | $ | (143,991 | ) | $ | 21,891 | $ | (133,212 | ) | ||||||
Basic and diluted income per common share: |
||||||||||||||||
Basic income (loss) per common share (See Note 8, Earnings Per Share) |
$ | 0.23 | $ | (3.56 | ) | $ | 0.52 | $ | (3.29 | ) | ||||||
Diluted income (loss) per common share (See Note 8, Earnings Per Share) |
$ | 0.23 | $ | (3.56 | ) | $ | 0.51 | $ | (3.29 | ) | ||||||
Weighted average basic common shares outstanding
(See Note 8, Earnings Per Share) |
40,371,659 | 40,405,969 | 40,322,079 | 40,431,849 | ||||||||||||
Weighted average diluted common shares outstanding
(See Note 8, Earnings Per Share) |
41,466,480 | 40,405,969 | 41,241,895 | 40,431,849 | ||||||||||||
See accompanying notes to unaudited condensed consolidated financial statements.
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CUMULUS MEDIA INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
(Dollars in thousands)
(Unaudited)
Nine Months Ended September | ||||||||
2010 | 2009 | |||||||
Cash flows from operating activities: |
||||||||
Net income (loss) |
$ | 21,891 | $ | (133,212 | ) | |||
Adjustments to reconcile net (loss) income to net cash provided by operating activities: |
||||||||
Depreciation and amortization |
7,130 | 8,365 | ||||||
Amortization of debt issuance costs/discounts |
919 | 775 | ||||||
Amortization of derivative gain |
| (828 | ) | |||||
Provision for doubtful accounts |
922 | 1,856 | ||||||
Loss on sale of assets or stations |
82 | (29 | ) | |||||
Gain on exchange of assets or stations |
| (7,204 | ) | |||||
Fair value adjustment of derivative instruments |
(6,536 | ) | 2,151 | |||||
Impairment of goodwill and intangible assets |
| 173,085 | ||||||
Deferred income taxes |
2,488 | (22,351 | ) | |||||
Non-cash stock compensation |
1,016 | 2,053 | ||||||
Changes in assets and liabilities: |
||||||||
Restricted cash |
185 | (789 | ) | |||||
Accounts receivable |
(1,449 | ) | 2,650 | |||||
Trade receivable |
1,442 | 187 | ||||||
Prepaid expenses and other current assets |
(903 | ) | (3,038 | ) | ||||
Accounts payable and accrued expenses |
3,023 | (1,595 | ) | |||||
Trade payable |
(1,528 | ) | (8 | ) | ||||
Other assets |
818 | 84 | ||||||
Other liabilities |
(216 | ) | (938 | ) | ||||
Net cash provided by operating activities |
29,284 | 21,214 | ||||||
Cash flows from investing activities: |
||||||||
Proceeds from sale of assets or radio stations |
196 | 91 | ||||||
Purchase of intangible assets |
(230 | ) | | |||||
Capital expenditures |
(2,127 | ) | (1,872 | ) | ||||
Net cash used in investing activities |
(2,161 | ) | (1,781 | ) | ||||
Cash flows from financing activities: |
||||||||
Repayments of borrowings from bank credit facility |
(30,353 | ) | (49,956 | ) | ||||
Tax withholding paid on behalf of employees |
(184 | ) | (95 | ) | ||||
Payments made to creditors pursuant to debt amendment |
(245 | ) | (3,000 | ) | ||||
Payments for repurchase of common stock |
| (193 | ) | |||||
Net cash used in financing activities |
(30,782 | ) | (53,244 | ) | ||||
Decrease in cash and cash equivalents |
(3,659 | ) | (33,811 | ) | ||||
Cash and cash equivalents at beginning of period |
16,224 | 53,003 | ||||||
Cash and cash equivalents at end of period |
$ | 12,565 | $ | 19,192 | ||||
Supplemental disclosures of cash flow information: |
||||||||
Interest paid |
$ | 20,420 | $ | 17,577 | ||||
Income taxes paid |
259 | 340 | ||||||
Trade revenue |
12,435 | 8,676 | ||||||
Trade expense |
12,259 | 8,627 |
See accompanying notes to unaudited condensed consolidated financial statements.
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CUMULUS MEDIA INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Unaudited)
1. Interim Financial Data and Basis of Presentation
Interim Financial Data
The accompanying unaudited condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements of Cumulus Media Inc. (Company) and the
notes thereto included in the Companys Annual Report on Form 10-K for the year ended December 31,
2009. These financial statements have been prepared in accordance with accounting principles
generally accepted in the United States of America (GAAP) for interim financial information and
with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not
include all of the information and notes required by GAAP for complete financial statements. In the
opinion of management, all adjustments necessary for a fair statement of results of the interim
periods have been made and such adjustments were of a normal and recurring nature. The results of
operations and cash flows for the nine months ended September 30, 2010 are not necessarily
indicative of the results that can be expected for the entire fiscal year ending December 31, 2010.
The preparation of financial statements in conformity with GAAP requires management to make
estimates and judgments that affect the reported amounts of assets, liabilities, revenues and
expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, the
Company evaluates its estimates, including those related to bad debts, intangible assets,
derivative financial instruments, income taxes, stock-based compensation, contingencies and
litigation. The Company bases its estimates on historical experience and on various assumptions
that are believed to be reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are not readily apparent
from other sources. Actual results may differ materially from these estimates under different
assumptions or conditions.
Recent Accounting Pronouncements
ASU 2009-17. In December 2009, the Financial Accounting Standards Board (FASB) issued ASU
No. 2009-17, Consolidations (Topic 810) Improvements to Financial Reporting by Enterprises
Involved with Variable Interest Entities (ASU No. 2009-17) which amends the FASB ASC for the
issuance of FASB Statement No. 167, Amendments to FASB Interpretation No. 46(R), issued by the FASB
in June 2009. The amendments in this ASU replace the quantitative-based risks and rewards
calculation for determining which reporting entity, if any, has a controlling financial interest in
a variable interest entity (VIE) with an approach primarily focused on identifying which
reporting entity has the power to direct the activities of a VIE that most significantly impact the
entitys economic performance and (1) the obligation to absorb the losses of the entity or (2) the
right to receive the benefits from the entity. ASU No. 2009-17 also requires additional disclosure
about a reporting entitys involvement in a VIE, as well as any significant changes in risk
exposure due to that involvement. ASU No. 2009-17 is effective for annual and interim periods
beginning after November 15, 2009. The adoption of ASU No. 2009-07 required the Company to make
additional disclosures but did not have a material impact on the Companys financial position,
results of operations and cash flows. See Note 11, Variable Interest Entities, for further
discussion.
ASU 2010-06. The FASB issued ASU No. 2010-06 which provides improvements to disclosure
requirements related to fair value measurements. New disclosures are required for significant
transfers in and out of Level 1 and Level 2 fair value measurements, disaggregation regarding
classes of assets and liabilities, valuation techniques and inputs used to measure fair value for
both recurring and nonrecurring fair value measurements for Level 2 or Level 3. These disclosures
are effective for the interim and annual reporting periods beginning after December 15, 2009.
Additional new disclosures regarding the purchases, sales, issuances and settlements in the roll
forward of activity in Level 3 fair value measurements are effective for fiscal years beginning
after December 15, 2010 beginning with the first interim period. The Company adopted the portions
of this update which became effective January 1, 2010, for its financial statements as of that
date. See Note 4, Fair Value Measurements.
2. Acquisitions and Dispositions
2010 Acquisitions
The Company did not complete any material acquisitions or dispositions during the nine months
ended September 30, 2010.
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2009 Acquisitions
Green Bay and Cincinnati Asset Exchange
On April 10, 2009, the Company completed an asset exchange with Clear Channel Communications,
Inc. (Clear Channel). As part of the asset exchange, the Company acquired two of Clear Channels
radio stations located in Cincinnati, Ohio in exchange for five of the Companys radio stations in
the Green Bay, Wisconsin market. The exchange transaction provided the Company with direct entry
into the Cincinnati market (notwithstanding the Companys current presence through its investment
in CMP (see Note 5, Investment in Affiliate)), which was ranked #28 at that time by Arbitron. The
transaction was accounted for as a business combination in accordance with guidance for business
combinations. The fair value of the assets acquired in the exchange was $17.6 million (refer to the
table below for the purchase price allocation). The Company incurred approximately $0.2 million of
acquisition costs related to this transaction and expensed them as incurred through earnings within
corporate general and administrative expense. The $0.9 million of goodwill identified in the
purchase price allocation below is deductible for tax purposes. During the fourth quarter of 2009
the Company adjusted the purchase price allocation to record an intangible asset of approximately
$0.9 million related to certain tower leases which will be amortized over the next four years in
accordance with the terms of the leases. The results of operations for the Cincinnati stations
acquired have been included in the statements of operations since the acquisition date. The results
of the Cincinnati stations were not material. Prior to the asset exchange, the Company and Clear
Channel did not have any preexisting relationship with regard to the Green Bay market.
In conjunction with the exchange on April 10, 2009, Clear Channel and the Company entered into
an LMA whereby the Company is responsible for operating (i.e. programming, advertising, etc.) the
five Green Bay radio stations that were sold to Clear Channel and must pay Clear Channel a monthly
fee of approximately $0.2 million over a five year term (expiring December 31, 2013), in exchange
for the Company retaining the operating profits for managing the radio stations. In conjunction
with the LMA, the Company included the net revenues and station operating expenses associated with
operating the Green Bay stations in the Companys consolidated financial statements from the
effective date of the LMA (April 10, 2009) through December 31, 2009. Additionally, Clear Channel
negotiated a written put option that allows them to require the Company to repurchase the five
Green Bay radio stations at any time during the two-month period commencing July 1, 2013 (or
earlier if the LMA is terminated prior to that date) for $17.6 million (the fair value of the radio
stations as of April 10, 2009). The Company accounted for the put option as a derivative contract
and accordingly, the fair value of the put was recorded as a liability at the acquisition date and
offset against the gain associated with the asset exchange. Subsequent changes to the fair value of
the derivative are recorded through earnings. See Note 3, Derivative Financial Instruments.
In conjunction with the transactions, the Company recorded a net gain of $7.2 million, which
is included in the gain on exchange of assets in the statements of operations. This amount
represents a gain of approximately $9.6 million recorded on the Green Bay stations sold, net of a
loss of approximately $2.4 million representing the fair value of the put option at acquisition
date.
The table below summarizes the final purchase price allocation (dollars in thousands):
Allocation | Amount | |||
Fixed assets |
$ | 458 | ||
Broadcast licenses |
15,353 | |||
Goodwill |
874 | |||
Other intangibles |
951 | |||
Total purchase price |
$ | 17,636 | ||
Less: Carrying value of Green Bay stations |
(7,999 | ) | ||
Gain on asset exchange |
$ | 9,637 | ||
Less: Fair value of Green Bay Option April 10, 2009 |
(2,433 | ) | ||
Net gain |
$ | 7,204 | ||
3. Derivative Financial Instruments
The Company recognizes all derivatives on the balance sheet at fair value. Changes in fair
value are recorded in income for any contracts not classified as qualifying hedging instruments.
For derivatives qualifying as cash flow hedge instruments, the effective portion of the change in
fair value must be recorded through other comprehensive income, a component of stockholders equity
(deficit).
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May 2005 Swap
In May 2005, the Company entered into a forward-starting LIBOR-based interest rate swap
arrangement (the May 2005 Swap) to manage fluctuations in cash flows resulting from interest rate
risk attributable to changes in the benchmark interest rate of LIBOR. The May 2005 Swap became
effective as of March 13, 2006, the end of the term of the Companys prior swap. The May 2005 Swap
expired on March 13, 2009, in accordance with the terms of the original agreement. Accordingly, for
the three and nine months ended September 30, 2010 and the three months ended September 30, 2009,
the Company did not record any interest expense related to the May 2005 Swap. For the nine months
ended September 30, 2009 the Company reported $3.0 million income in interest expense related to
the change in fair value.
The May 2005 Swap changed the variable-rate cash flow exposure on $400.0 million of the
Companys long-term bank borrowings to fixed-rate cash flows. Under the May 2005 Swap the Company
received LIBOR-based variable interest rate payments and made fixed interest rate payments, thereby
creating fixed-rate long-term debt. The May 2005 Swap was previously accounted for as a qualifying
cash flow hedge of the future variable rate interest payments. Starting in June 2006, the May 2005
Swap no longer qualified as a cash flow hedging instrument. Accordingly, the changes in its fair
value have since been reflected in the statement of operations instead of accumulated other
comprehensive income.
The fair value of the May 2005 Swap was determined using observable market based inputs (a
Level 2 measurement). The fair value represents an estimate of the net amount that the Company
would pay if the agreement was transferred to another party or cancelled as of the date of the
valuation.
May 2005 Option
In May 2005, the Company also entered into an interest rate option agreement (the May 2005
Option), that provided Bank of America, N.A. the right to enter into an underlying swap agreement
with the Company, on terms substantially identical to the May 2005 Swap, for two years, from March
13, 2009 (the end of the term of the May 2005 Swap) through March 13, 2011.
The May 2005 Option was exercised on March 11, 2009. This instrument has not been highly
effective in mitigating the risks in the Companys cash flows, and therefore the Company has deemed
it speculative, and has accounted for changes in the May 2005 Options value as a current element
of interest expense. The balance sheets as of September 30, 2010 and December 31, 2009 reflect
current liabilities of $7.3 million and other long-term liabilities of $15.6 million, respectively,
to include the fair value of the May 2005 Option. The Company reported $3.0 million and $8.3
million in interest expense during the three and nine months ended September 30, 2010,
respectively. Additionally, for the three and nine months ended September 30, 2009 the Company
reported $0.03 million in interest income and $2.2 million in interest expense, respectively.
In the event of a default under the Credit Agreement, or a default under any derivative
contract, the derivative counterparties would have the right, although not the obligation, to
require immediate settlement of some or all open derivative contracts at their then-current fair
value. The Company does not utilize financial instruments for trading or other speculative
purposes.
The Companys financial instrument counterparties are high-quality investments or commercial
banks with significant experience with such instruments. The Company manages exposure to
counterparty credit risk by requiring specific minimum credit standards and diversification of
counterparties. The Company has procedures to monitor the credit exposure amounts. The maximum
credit exposure at September 30, 2010 was not significant to the Company.
Green Bay Option
On April 10, 2009, Clear Channel and the Company entered into an LMA whereby the Company is
responsible for operating (i.e., programming, advertising, etc.) five Green Bay radio stations and
must pay Clear Channel a monthly fee of approximately $0.2 million over a five year term (expiring
December 31, 2013), in exchange for the Company retaining the operating profits for managing the
radio stations. Clear Channel also has a put option (the Green Bay Option) that allows it to
require the Company to repurchase the five Green Bay radio stations at any time during the
two-month period commencing July 1, 2013 (or earlier if the LMA is terminated before this date) for
$17.6 million (the fair value of the radio stations as of April 10, 2009). The Company accounted
for the Green Bay Option as a derivative contract. Accordingly, the fair value of the put was
recorded as a liability offsetting the gain at the acquisition date with subsequent changes in the
fair value recorded through earnings. The fair value of the Green Bay Option was
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determined using inputs that are supported by little or no market activity (a Level 3
measurement). The fair value represents an estimate of the net amount that the Company would pay if
the option was transferred to another party as of the date of the valuation.
The following table sets forth the location and fair value amounts of derivatives in the
consolidated balance sheets:
Information on the Location and Amounts of Derivatives Fair Values in the
Unaudited Consolidated Balance Sheets (dollars in thousands)
Unaudited Consolidated Balance Sheets (dollars in thousands)
Balance Sheet | Fair Value | |||||||||
Location | September 30, 2010 | December 31, 2009 | ||||||||
Derivative not designated as hedging instruments: | ||||||||||
Green Bay Option |
Other long-term liabilities | $ | 7,883 | $ | 6,073 | |||||
Interest rate swap option |
Other current liabilities | 7,294 | | |||||||
Interest rate swap option |
Other long-term liabilities | | 15,639 | |||||||
Total | $ | 15,177 | $ | 21,712 | ||||||
The location and fair value amounts of derivatives in the condensed consolidated statements of
operations are shown in the following table:
Amount of Income (Expense) | ||||||||||
Recognized on Derivatives | ||||||||||
Derivative | Statement of Operations | For the Three Months | For the Nine Months | |||||||
Instruments | Location | Ended September 30, 2010 | Ended September 30, 2010 | |||||||
Green Bay Option |
Realized loss on derivative instrument | $ | (746 | ) | $ | (1,810 | ) | |||
Interest rate swap option |
Interest income | 2,979 | 8,346 | |||||||
Total | $ | 2,233 | $ | 6,536 | ||||||
4. | Fair Value Measurements | |
The three levels of the fair value hierarchy to be applied to financial instruments when determining fair value are described below: | ||
Level 1 Valuations based on quoted prices in active markets for identical assets or liabilities that the entity has the ability to access; | ||
Level 2 Valuations based on quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable data for substantially the full term of the assets or liabilities; and | ||
Level 3 Valuations based on inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. |
A financial instruments level within the fair value hierarchy is based on the lowest level of
any input that is significant to the fair value measurement. The Companys financial assets and
liabilities are measured at fair value on a recurring basis.
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Financial assets and liabilities measured at fair value on a recurring basis as of September
30, 2010 were as follows (dollars in thousands):
Fair Value Measurements at Reporting Date Using | ||||||||||||||||
Quoted | Significant | |||||||||||||||
Prices in | Other | Significant | ||||||||||||||
Active | Observable | Unobservable | ||||||||||||||
Total Fair | Markets | Inputs | Inputs | |||||||||||||
Value | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
Financial Liabilities: |
||||||||||||||||
Other current liabilities |
||||||||||||||||
Interest rate swap (1) |
$ | 7,294 | $ | | $ | 7,294 | $ | | ||||||||
Other long-term liabilities |
||||||||||||||||
Green Bay option (2) |
7,883 | | | 7,883 | ||||||||||||
Total liabilities |
$ | 15,177 | $ | | $ | 7,294 | $ | 7,883 | ||||||||
(1) | The Companys derivative financial instruments consist solely of an interest rate swap in which the Company pays a fixed rate and receives a variable interest rate. The fair value of the Companys interest rate swap is determined based on the present value of future cash flows using observable inputs, including interest rates and yield curves. Derivative valuations incorporate adjustments that are necessary to reflect the Companys own credit risk. | |
(2) | The fair value of the Green Bay Option was determined using inputs that are supported by little or no market activity (a Level 3 measurement). The fair value represents an estimate of the net amount that the Company would pay if the option was transferred to another party as of the date of the valuation. The option valuation incorporates a credit risk adjustment to reflect the probability of default by the Company. |
To estimate the fair value of the interest rate swap, the Company used an industry standard
cash valuation model, which utilizes a discounted cash flow approach. The significant inputs for
the valuation model include the following:
Fixed | Floating | |||||||
| discount cash flow range of 0.99% - 1.00%; | | discount cash flow range of 0.99% - 1.00%; | |||||
| interest rate of 3.93%; and | | interest rate range of 0.26% - 0.32%; and | |||||
| credit spread of 4.85%. | | credit spread of 4.85%. |
The Company reported $0.7 million and $1.8 million for the three and nine months ended
September 30, 2010, respectively, in realized loss on derivative instruments within the income
statement related to the fair value adjustment, representing the change in the fair value of the
Green Bay Option.
The reconciliation below contains the components of the change in fair value associated with
the Green Bay Option as of September 30, 2010 (dollars in thousands):
Description | Green Bay Option | |||
Fair value balance at December 31, 2009 |
$ | 6,073 | ||
Add: Mark to market fair value adjustment |
1,810 | |||
Fair value balance at September 30, 2010 |
$ | 7,883 | ||
To estimate the fair value of the Green Bay Option, the Company used a Black-Scholes valuation
model. The significant inputs for the valuation model include the following:
| total term of 2.92 years; | ||
| volatility rate of 32.0%; | ||
| dividend annual rate of 0.0%; |
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| discount rate of 0.65%; and | ||
| market value of Green Bay of $8.5 million. |
The carrying values of receivables, payables, and accrued expenses approximate fair value due
to the short maturity of these instruments.
The following table shows the gross amount and fair value of the Companys term loan:
September 30, 2010 | December 31, 2009 | |||||||
Carrying value of term loan |
$ | 606,537 | $ | 636,890 | ||||
Fair value of term loan |
$ | 548,420 | $ | 538,604 |
To estimate the fair value of the term loan, the Company used an industry standard cash
valuation model, which utilizes a discounted cash flow approach. The significant inputs for the
valuation model include the following:
| discount cash flow rate of 7.76%; | ||
| interest rate of 0.26%; and | ||
| credit spread of 4.85%. |
5. Investment in Affiliate
In connection with the formation of CMP, the Company contributed four radio stations
(including related licenses and assets) in the Houston, Texas and Kansas City, Missouri markets
with a book value of approximately $71.6 million and approximately $6.2 million in cash in exchange
for its membership interests. The Company recognized a gain of $2.5 million from the transfer of
assets to CMP. In addition, upon consummation of the acquisition, the Company received a payment of
approximately $3.5 million as consideration for advisory services provided in connection with the
acquisition. The Company recorded the payment as a reduction in its investment in CMP. The table
below presents summarized financial statement data related to CMP (dollars in thousands):
Nine Months Ended September 30, | ||||||||
2010 | 2009 | |||||||
Income Statement Data: |
||||||||
Revenues |
$ | 140,028 | $ | 129,223 | ||||
Operating expenses |
91,994 | 296,665 | ||||||
Net income (loss) |
20,442 | (83,693 | ) | |||||
Balance Sheet Data: |
||||||||
Assets |
469,916 | 487,047 | ||||||
Liabilities |
885,800 | 958,026 | ||||||
Shareholders deficit |
(415,884 | ) | (470,979 | ) |
The Companys investment in CMP is accounted for under the equity method of accounting. At
September 30, 2010, the Companys proportionate share of its affiliate losses exceeded its
investment in CMP. In addition, the Company has no contractual obligation to fund the losses of
CMP. As a result, the Company has no exposure to loss as a result of its involvement in CMP.
Concurrent with the consummation of the acquisition, the Company entered into a management
agreement with a subsidiary of CMP, pursuant to which the Companys personnel will manage the
operations of CMPs subsidiaries. The agreement provides for the Company to receive, on a quarterly
basis, a management fee that is expected to be approximately 1.0% of the CMP subsidiaries annual
EBITDA or $4.0 million, whichever is greater. For the three and nine months ended September 30,
2010 and 2009, the Company recorded as net revenues approximately $1.0 million and $3.0 million,
respectively, in management fees from CMP.
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6. Long-Term Debt
The Companys long-term debt consisted of the following at September 30, 2010 and December 31,
2009 (dollars in thousands):
September 30, | December 31, | |||||||
2010 | 2009 | |||||||
Term loan |
$ | 606,537 | $ | 637,321 | ||||
Less: Debt discount |
(2,980 | ) | (3,813 | ) | ||||
Less: Current portion of long-term debt |
(35,404 | ) | (49,026 | ) | ||||
$ | 568,153 | $ | 584,482 | |||||
Senior Secured Credit Facilities
June 2009 Amendment
On June 29, 2009, the Company entered into the third amendment to the credit agreement (the
June 2009 amendment), with Bank of America, N.A., as administrative agent, and the lenders party
thereto, governing the Companys senior secured credit facilities (as amended to date, the Credit
Agreement).
The Credit Agreement maintains the preexisting term loan facility of $750.0 million, which had
an outstanding balance of approximately $647.9 million immediately after closing the June 2009
amendment, and reduced the preexisting revolving credit facility from $100.0 million to $20.0
million. Incremental facilities are no longer permitted as of June 30, 2009 under the Credit
Agreement.
The Companys obligations under the Credit Agreement are collateralized by substantially all
of its assets in which a security interest may lawfully be granted (including FCC licenses held by
its subsidiaries), including, without limitation, intellectual property and all of the capital
stock of the Companys direct and indirect subsidiaries, including Broadcast Software
International, Inc., which
prior to the amendment, was an excluded subsidiary. The Companys obligations under the Credit
Agreement continue to be guaranteed by all of its subsidiaries.
The Credit Agreement contains terms and conditions customary for financing arrangements of
this nature. The term loan facility will mature on June 11, 2014. The revolving credit facility
will mature on June 7, 2012.
Borrowings under the term loan facility and revolving credit facility bore interest, at the
Companys option, at a rate equal to LIBOR plus 4.0% or the Alternate Base Rate (currently defined
as the higher of the Wall Street Journals Prime Rate and the Federal Funds rate plus 0.50%) plus
3.0%. In July 2010, the Companys aggregate principal payments made to date in accordance with the
Companys obligation to make mandatory prepayments of Excess Cash Flow (as defined in the Credit
Agreement), as described below, exceeded $25.0 million which triggered a reduction in the Companys
interest rate equal to LIBOR plus 3.75% or the Alternate Base Rate plus 2.75%. Once the Company
reduces the term loan facility by an aggregate of $50.0 million through further mandatory
prepayments of Excess Cash Flow, as described below, the revolving credit facility will bear
interest, at the Companys option, at a rate equal to LIBOR plus 3.25% or the Alternate Base Rate
plus 2.25%.
In connection with the June 2009 amendment, the Company made a voluntary prepayment in the
amount of $32.5 million. The Company is also required to make quarterly mandatory prepayments of
100% of Excess Cash Flow through December 31, 2010 (while maintaining a minimum balance of $7.5
million of cash on hand), before reverting to annual prepayments of a percentage of Excess Cash
Flow, depending on the Companys leverage, beginning in 2011. The Company has included
approximately $29.1 million of long term debt, as current, which represents the estimated Excess
Cash Flow payments over the next 12 months in accordance with the terms of the Credit Agreement.
Certain other mandatory prepayments of the term loan facility would be required upon the occurrence
of specified events, including upon the incurrence of certain additional indebtedness and upon the
sale of certain assets.
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Covenants
The representations, covenants and events of default in the Credit Agreement are customary for
financing transactions of this nature and are substantially the same as those in existence prior to
the June 2009 amendment, except as follows:
| the total leverage ratio and fixed charge coverage ratio covenants for the fiscal quarters ending June 30, 2009 through and including December 31, 2010 (the Covenant Suspension Period), were suspended; | ||
| during the Covenant Suspension Period, the Company must: (1) maintain minimum trailing twelve month consolidated EBITDA (as defined in the Credit Agreement) of $60.0 million for fiscal quarters through March 31, 2010, increasing incrementally to $66.0 million for the fiscal quarter ended December 31, 2010, subject to certain adjustments; and (2) maintain minimum cash on hand (defined as unencumbered consolidated cash and cash equivalents) of at least $7.5 million; | ||
| the Company is restricted from incurring additional intercompany debt or making any intercompany investments other than to the parties to the Credit Agreement; | ||
| the Company may not incur additional indebtedness or liens, or make permitted acquisitions or restricted payments (except under certain circumstances, pursuant to the July 2010 amendment to the Credit Agreement, as described below), during the Covenant Suspension Period (after the Covenant Suspension Period, the Credit Agreement will permit indebtedness, liens, permitted acquisitions and restricted payments, subject to certain leverage ratio and liquidity measurements); and | ||
| the Company must provide monthly unaudited financial statements to the lenders within 30 days after each calendar-month end. |
Events of default in the Credit Agreement include, among others, (a) the failure to pay when
due the obligations owing under the credit facilities; (b) the failure to perform (and not timely
remedy, if applicable) certain covenants; (c) cross default and cross acceleration; (d) the
occurrence of bankruptcy or insolvency events; (e) certain judgments against the Company or any of
the Companys subsidiaries; (f) the loss, revocation or suspension of, or any material impairment
in the ability to use of or more of, any of the Companys material FCC licenses; (g) any
representation or warranty made, or report, certificate or financial statement delivered, to the
lenders subsequently proven to have been incorrect in any material respect; and (h) the occurrence
of a Change in Control (as defined in the Credit Agreement). Upon the occurrence of an event of
default, the lenders may terminate the loan commitments,
accelerate all loans and exercise any of their rights under the Credit Agreement and the
ancillary loan documents as a secured property.
As discussed above, the Companys covenants for the fiscal quarter ended September 30, 2010
required the following:
| a minimum trailing twelve month consolidated EBITDA of $64.0 million; | ||
| a $7.5 million minimum cash on hand; and | ||
| a limit on annual capital expenditures of $15.0 million annually. |
The trailing twelve month consolidated EBITDA and cash on hand at September 30, 2010 were
$81.7 million and $12.6 million, respectively.
If the Company had been unable to secure the June 2009 amendment to the Credit Agreement, so
that the total leverage ratio and the fixed charge coverage ratio covenants were still operative,
those covenants for the fiscal quarter ended September 30, 2010 would have been as follows:
| a maximum total leverage ratio of 6.50:1; and | ||
| a minimum fixed charge coverage ratio of 1.20:1. |
At September 30, 2010, the total leverage ratio was 7.42 and the fixed charge coverage ratio
was 1.89. For the fiscal quarter ending March 31, 2011 (the first quarter after the Covenant
Suspension Period), the required total leverage ratio covenant will be 6.50:1 and the required
fixed charge coverage ratio covenant will be 1.20:1.
As of September 30, 2010, prior to the effect of the May 2005 Swap, the effective interest
rate of the outstanding borrowings pursuant to the senior secured credit facilities was
approximately 4.0%. As of September 30, 2010, the effective interest rate inclusive of the May 2005
Swap was approximately 6.8%.
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July 2010 Amendment
On July 23, 2010, the Company entered into an amendment to the Credit Agreement (the July
2010 amendment). In connection with the July 2010 amendment, Bank of America, N.A. resigned as
administrative agent and the lenders appointed General Electric Capital Corporation as successor
administrative agent under the Credit Agreement for all purposes.
In addition, the July 2010 amendment grants the Company additional flexibility under the
Credit Agreement to, among other things, (i) consummate an asset swap of the Companys radio
stations in Canton, Ohio for radio stations in the Ann Arbor, Michigan and Battle Creek, Michigan
markets owned by Capstar Radio (and currently operated by the Company pursuant to LMAs); (ii)
subject to certain conditions, acquire up to 100% of the equity interests of CMP or two of its
subsidiaries, CMP Susquehanna Holdings Corp. or CMP Susquehanna Radio Holdings Corp.; (iii) subject
to certain conditions and if necessary in order that certain of CMPs subsidiaries maintain
compliance with applicable debt covenants, make further equity investments in CMP, in an aggregate
amount not to exceed $1.0 million; and (iv) enter into sale-leaseback transactions with respect to
communications towers that have an aggregate fair market value of no more than $20.0 million, so
long as the net proceeds of such transaction are used to repay indebtedness under the Companys
term loan facility.
In conjunction with the July 2010 amendment the Company capitalized approximately $0.2 million
in fees paid directly to the lenders.
Warrants
The Company issued warrants to the lenders in connection with the execution of the June 2009
amendment to the Credit Agreement that allow the warrant holders to acquire up to 1.25 million
shares of the Companys Class A Common Stock. Each warrant is exercisable to purchase the Companys
underlying Class A Common Stock at an exercise price of $1.17 per share and has an expiration date
of June 29, 2019.
Accounting for the Modification of the Credit Agreement
The June 2009 amendment to the Credit Agreement was accounted for as a loan modification and
accordingly, the Company did not record a gain or a loss on the transaction. For the revolving
credit facility, the Company wrote off approximately $0.2 million of unamortized deferred financing
costs, based on the reduction of capacity. With respect to both debt instruments, the Company
recorded $3.0 million of fees paid directly to the creditors as a debt discount which are amortized
as an adjustment to interest expense over the remaining term of the debt.
At inception, the Company classified $0.8 million of warrants as equity at fair value. The
fair value of the warrants was recorded as a debt discount and is amortized as an adjustment to
interest expense over the remaining term of the debt using the effective interest method.
7. Stock Based Compensation
During the first quarter of 2010, the Company awarded Mr. L. Dickey 160,000 performance-based
restricted shares and 160,000 time-vested restricted shares. The fair value on the date of grant
for both of these awards was $1.0 million. In addition, during the first quarter of 2010 the
Company awarded 120,000 time-vested restricted shares with a fair value on the date of grant of
$0.4 million, or $3.15 per share, to certain officers (other than Mr. L. Dickey) of the Company.
During the second quarter of 2010 the Company issued 6,000 time-vested restricted shares of
Class A Common Stock to each of the non-employee directors to the Company from Treasury.
In March 2010, the Compensation Committee of the Board of Directors reviewed the three-year
performance criteria established in March 2007 for the 160,000 performance-based shares of
restricted stock awarded to Mr. L. Dickey on March 1, 2007. The vesting conditions for those
restricted shares required that the Company achieve specified financial performance targets for the
three-year period ending December 31, 2009. The specified threshold was not achieved, however, the
Compensation Committee determined that in light of the unprecedented adverse developments in the
economy in general, and the radio industry in particular, it would be appropriate to modify the
performance requirements and extend the vesting period so that Mr. L. Dickey would retain the
ability to achieve vesting on those shares of restricted stock if the revised performance criteria
is achieved. Effective as of March 1, 2010, the terms of Mr. L. Dickeys 2007 performance-based
restricted stock award of 160,000 shares were amended to provide that those shares
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would vest in
full on March 31, 2013 if the Company achieves specified financial performance targets for the
three year period ending December 31, 2012.
During the first quarter of 2010 the Company recorded a credit to non-cash stock compensation
of approximately $0.1 million, of which $0.3 million is related to the March 2010 modification of
the vesting period associated with the performance-based restricted share award issued in March
2007 to the Companys Chief Executive Officer, Mr. L. Dickey. In connection with evaluating the
accounting treatment for the modification of the restricted shares, the Company identified and
recorded an additional $0.3 million credit to stock based compensation expense in the first quarter
of 2010 to correct errors occurring in 2008 and 2009. The Company determined that this
out-of-period adjustment was not material to the condensed consolidated financial statements for
the nine months ended September 30, 2010, forecasted annual results for fiscal 2010 or any prior
period financial statements.
For the three and nine months ended September 30, 2010, the Company recognized approximately
$0.6 million and $1.0 million, respectively, in non-cash stock based compensation expense.
8. Earnings per Share (EPS)
For all periods presented, the Company has disclosed basic and diluted earnings per common
share utilizing the two-class method. Basic earnings per common share is calculated by dividing net
income available to common shareholders by the weighted average number of shares of common stock
outstanding during the period. The Company determined that it is appropriate to allocate
undistributed net income between Class A, Class B and Class C Common Stock on an equal basis as the
Companys charter provides that the holders of Class A, Class B and Class C Common Stock have equal
rights and privileges except with respect to voting on certain matters.
Non-vested restricted shares of Class A common stock awarded contain non-forfeitable dividend
rights and are therefore a participating security. The two-class method of computing earnings per
share is required for companies with participating securities. Under this method, net income is
allocated to common stock and participating securities to the extent that each security may share
in earnings, as if all of the earnings for the period had been distributed. The Company has
accounted for non-vested restricted stock as a participating security and used the two-class method
of computing earnings per share as of January 1, 2009, with retroactive application to all prior
periods presented. Because the Company does not pay dividends, earnings are allocated to each
participating security and common share equally. The following table sets forth the computation of
basic and diluted income (loss) per common share for the three and nine months ended September 30,
2010 and 2009 (in thousands, except per share data).
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Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Basic Earnings Per Share |
||||||||||||||||
Numerator: |
||||||||||||||||
Undistributed net income (loss) |
$ | 9,731 | $ | (143,991 | ) | $ | 21,891 | $ | (133,212 | ) | ||||||
Participation rights of unvested restricted stock in
undistributed earnings |
385 | | 822 | | ||||||||||||
Basic undistributed net income (loss)
attributable to
common shares |
$ | 9,346 | $ | (143,991 | ) | $ | 21,069 | $ | (133,212 | ) | ||||||
Denominator: |
||||||||||||||||
Denominator for basic income (loss) per common
share: |
||||||||||||||||
Basic weighted average common shares outstanding |
40,372 | 40,406 | 40,322 | 40,432 | ||||||||||||
Basic EPS attributable to common shares |
$ | 0.23 | $ | (3.56 | ) | $ | 0.52 | $ | (3.29 | ) | ||||||
Diluted Earnings Per Share: |
||||||||||||||||
Numerator: |
||||||||||||||||
Undistributed net income (loss) |
$ | 9,731 | $ | (143,991 | ) | $ | 21,891 | $ | (133,212 | ) | ||||||
Participation rights of unvested restricted stock in
undistributed earnings |
378 | | 806 | | ||||||||||||
Basic undistributed net income (loss)
attributable to
common shares |
$ | 9,353 | $ | (143,991 | ) | $ | 21,085 | $ | (133,212 | ) | ||||||
Denominator: |
||||||||||||||||
Basic weighted average shares outstanding |
40,372 | 40,406 | 40,322 | 40,432 | ||||||||||||
Effect of dilutive options and warrants (1) |
658 | | 824 | | ||||||||||||
Diluted weighted average shares outstanding |
41,030 | 40,406 | 41,146 | 40,432 | ||||||||||||
Diluted EPS attributable to common shares |
$ | 0.23 | $ | (3.56 | ) | $ | 0.51 | $ | (3.29 | ) | ||||||
(1) | For the three and nine months ended September 30, 2009, options to purchase 925,504 shares of common stock were outstanding but excluded from the EPS calculation because their effect would have been antidilutive. Additionally, for the three and nine months ended September 30, 2009, the Company excluded warrants from the EPS calculations because including the warrants would be antidilutive. |
The Company has issued to key executives and employees shares of restricted stock and options
to purchase shares of common stock as part of the Companys stock incentive plans. At September 30,
2010, the following restricted stock and stock options to purchase the following classes of common
stock were issued and outstanding:
September 30, 2010 | ||||
Restricted shares of Class A Common Stock |
1,650,833 | |||
Options to purchase Class A Common Stock |
860,152 |
9. Commitments and Contingencies
There are two major radio station rating services available to the radio broadcast industry.
Prior to November 2008, the Company utilized Arbitron as its primary source of ratings information
for its radio markets, and had a five-year agreement with Arbitron under which it received
programming rating materials in a majority of its markets. On November 7, 2008, however, the
Company entered into an agreement with Nielsen pursuant to which Nielsen would rate certain of the
Companys radio markets as coverages for such markets until the Arbitron agreement expired in April
2009. The Company forfeited its rights under the agreement with Arbitron as of December 31, 2008,
and Arbitron was paid in accordance with the agreement through April 2009. Nielsen began efforts
to implement its rating service for 51 of the Companys radio markets in January 2009, and such
implementation was completed in 2009.
The Company engages Katz Media Group, Inc. (Katz) as its national advertising sales agent.
The national advertising agency contract with Katz contains termination provisions that, if
exercised by the Company during the term of the contract, would obligate the Company to pay a
termination fee to Katz, calculated based upon a formula set forth in the contract.
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In December 2004, the Company purchased 240 perpetual licenses from iBiquity Digital
Corporation, which enable it to convert to and utilize digital broadcasting technology on 240 of
its stations. Under the terms of the agreement, the Company committed to convert the 240 stations
over a seven year period. The Company negotiated an amendment to the Companys agreement with
iBiquity to reduce the number of planned conversions commissions, extend the build-out schedule,
and increase the license fees for each converted station. The conversion of original stations to
the digital technology will require an investment in certain capital equipment over the next six
years. Management estimates its investment will be between $0.1 million and $0.2 million per
station converted.
In August 2005, the Company was subpoenaed by the Office of the Attorney General of the State
of New York, as were other radio broadcasting companies, in connection with the New York Attorney
Generals investigation of promotional practices related to record companies dealings with radio
stations broadcasting in New York. The Company is cooperating with the Attorney General in this
investigation.
In May 2007, the Company received a request for information and documents from the FCC related
to the Companys sponsorship of identification policies and sponsorship identification practices at
certain of its radio stations as requested by the FCC. The Company cooperated with the FCC in this
investigation, producing documents and other information requested by the FCC. On July 12, 2010,
the FCC notified the Company that it has closed the investigation and is not planning to take any
further action regarding the matter at this time.
On December 11, 2008, Qantum Communications (Qantum) filed a counterclaim in a foreclosure
action the Company initiated in the Okaloosa County, Florida Circuit Court. The Companys action
was designed to collect a debt owed to the Company by Star Broadcasting, Inc. (Star), which then
owned radio station WTKE-FM in Holt, Florida. In its counterclaim, Qantum alleged that the Company
tortiously interfered with Qantums contract to acquire radio station WTKE from Star by entering
into an agreement to buy WTKE after Star had represented to the Company that its contract with
Qantum had been terminated (and that Star was therefore free to enter into the new agreement with
the Company). The counterclaim did not specify the damages Qantum was seeking. The Company did not
and does not believe that the counterclaim has merit, and, because there was no specification of
damages, the Company did not believe at the time that the counterclaim would have a material
adverse effect on the Companys overall financial condition or results of operations even if the
court were to determine that the claim did have merit. In June 2009, the court authorized Qantum to
seek punitive damages because it had satisfied the minimal threshold for asserting such a claim. In
August 2009, Qantum provided the Company with an experts report that estimated that Qantum had
allegedly incurred approximately $8.7 million in compensatory damages. The Companys liability
would be increased if Qantum is able to secure punitive damages as well.
The Company continues to believe that Qantums counterclaim against the Company has no merit;
the Company has denied the allegations and is vigorously defending against the counterclaim.
However, if the court were to find that the Company did tortiously interfere with Qantums contract
and that Qantum is entitled to the compensatory damages estimated by its expert as well as punitive
damages, the result could have a material adverse effect on the Companys overall financial
condition or results of operations.
In April 2009, the Company was named in a patent infringement suit brought against the Company
as well as twelve other radio companies, including Clear Channel, Citadel Broadcasting, CBS Radio,
Entercom Communications, Saga Communications, Cox Radio, Univision Communications, Regent
Communications, Gap Broadcasting, and Radio One. The case, captioned Aldav, LLC v. Clear Channel
Communications, Inc., et al, Civil Action No. 6:09-cv-170, U.S. District Court for the Eastern
District of Texas, Tyler Division (filed April 16, 2009), alleged that the defendants have
infringed and continue to infringe plaintiffs patented content replacement technology in the
context of radio station streaming over the Internet, and sought a permanent injunction and
unspecified damages. The Company settled this suit in March 2010.
On January 21, 2010, Brian Mas, a former employee of Susquehanna Radio Corp., filed a
purported class action lawsuit against the Company claiming (i) unlawful failure to pay required
overtime wages, (ii) late pay and waiting time penalties, (iii) failure to provide accurate
itemized wage statements, (iv) failure to indemnity for necessary expenses and losses, and (v)
unfair trade practices under Californias Unfair Competition Act. The plaintiff is requesting
restitution, penalties and injunctive relief, and seeks to represent other California employees
fulfilling the same job during the immediately preceding four year period. The Company is
vigorously defending this lawsuit and has not yet determined what effect the lawsuit will have, if
any, on its financial position, results of operations or cash flows.
The Company is also a defendant from time to time in various other lawsuits, which are
generally incidental to its business. The Company is vigorously contesting such lawsuits and
believes that their ultimate resolution will not have a material adverse effect on its consolidated
financial position, results of operations or cash flows.
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10. Restricted Cash
During 2009, the Company was required to secure the maximum exposure generated by automated
clearing house transactions in its operating bank accounts as dictated by the Companys banks
internal policies with cash. This action was triggered by an adverse rating as determined by the
Companys banks rating system. These funds were moved to a segregated bank account that does not
zero balance daily. As of September 30, 2010, the Companys balance sheet included approximately
$0.6 million in restricted cash related to the automated clearing house transactions.
11. Variable Interest Entities
The Company has an investment in CMP, which the Company accounts for using the equity method
and which the Company has determined to be a VIE that is not subject to consolidation because the
Company is not deemed to be the primary beneficiary. The Company cannot make unilateral management
decisions affecting the long-term operational results of CMP, as all such decisions require
approval by the CMP board of director. Additionally, one of the other equity holders has the
unilateral right to remove the Company as manager of CMP with 30 days notice. The Company
concluded that this ability to unilaterally terminate CMPs management agreement with the Company
resulted in a substantive kick out right, thereby precluding the Company from being designated as
the primary beneficiary with respect to its variable interest in CMP.
As of September 30, 2010, the Companys proportionate share of its affiliate losses exceeded
its investment in CMP. In addition, the Company has no contractual obligation to fund the losses of
CMP. As a result, the Company had no exposure to loss as a result of its investment in CMP. The
Company has not provided and does not intend to provide any financial support, guarantees or
commitments for or on behalf of CMP. Additionally, the Companys balance sheet at September 30,
2010 does not include any assets or liabilities related to its variable interest in CMP. See Note
5, Investment in Affiliate for further discussion.
12. Intangible Assets and Goodwill
The following tables present the changes in goodwill and intangible assets as of September 30,
2010 and December 31, 2009 (in thousands):
Indefinite Lived | Definite Lived | Total | ||||||||||
Intangible Assets: |
||||||||||||
Balance as of December 31, 2008 |
$ | 325,131 | $ | 3 | $ | 325,134 | ||||||
Acquisition |
15,353 | 841 | 16,194 | |||||||||
Disposition |
(7,471 | ) | | (7,471 | ) | |||||||
Amortization |
| (265 | ) | (265 | ) | |||||||
Impairment |
(172,212 | ) | | (172,212 | ) | |||||||
Balance as of December 31, 2009 |
$ | 160,801 | $ | 579 | $ | 161,380 | ||||||
Acquisition |
230 | | 230 | |||||||||
Amortization |
| (124 | ) | (124 | ) | |||||||
Reclassifications |
137 | | 137 | |||||||||
Balance as of September 30, 2010 |
$ | 161,168 | $ | 455 | $ | 161,623 | ||||||
2010 | 2009 | |||||||
Balance as of January 1: |
||||||||
Goodwill |
$ | 285,820 | $ | 287,609 | ||||
Accumulated impairment losses |
(229,699 | ) | (228,719 | ) | ||||
Subtotal |
56,121 | 58,890 | ||||||
Goodwill acquired during the year |
| 1,600 | ||||||
Goodwill related to sale of business unit |
| (906 | ) | |||||
Impairment losses |
| (1,757 | ) | |||||
Balance as of September 30: |
||||||||
Goodwill |
285,820 | 288,303 | ||||||
Accumulated impairment losses |
(229,699 | ) | (230,476 | ) | ||||
Total |
$ | 56,121 | $ | 57,827 | ||||
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The Company has significant intangible assets recorded and these intangible assets are
comprised primarily of broadcast licenses and goodwill acquired through the acquisition of radio
stations. Certain guidance related to goodwill and other intangible assets requires that the
carrying value of the Companys goodwill and certain intangible assets be reviewed at least
annually for impairment and charged to results of operations in the periods in which the recorded
value of those assets is more than their fair market value.
Goodwill
2009 Impairment Testing
The Company performs its annual impairment testing of goodwill during the fourth quarter and
more frequently if events or circumstances indicate that goodwill may be impaired. The calculation
of the fair value of each reporting unit is prepared using an income approach and discounted cash
flow methodology. As part of its overall planning associated with the testing of goodwill, the
Company determined that its geographic markets are the appropriate reporting unit.
During the third quarter of 2009, the Company reviewed the events and circumstances detailed
in ASC 350-20 to determine if an interim test of impairment of goodwill might be necessary. In
July 2009, the Company revised its revenue forecast downward for the last two quarters of 2009 due
to the sustained decline in revenues attributable to the current economic conditions. As a result
of these conditions, the Company determined it was appropriate and reasonable to conduct an interim
impairment analysis.
The assumptions used in estimating the fair values of reporting units were based on currently
available data and managements best estimates and, accordingly, a change in market conditions or
other factors could have a material effect on the estimated values.
Step 1 Goodwill Test
In performing the Companys interim impairment testing of goodwill, the fair value of each
market was calculated using a discounted cash flow analysis, an income approach. The discounted
cash flow approach requires the projection of future cash flows and the restatement of these cash
flows into their present value equivalent via a discount rate. An approximate eight-year projection
period was used to derive operating cash flow projections from a market participant level.
Assumptions regarding future audience shares and revenue shares were made in reference to actual
historical performance. Future operating expenses were then projected and operating profits
derived, which were combined with working capital additions and capital expenditures to determine
operating cash flows.
The Company then performed the Step 1 test and compared the fair value of each market to its
book net assets as of August 31, 2009. For markets where a Step 1 indicator of impairment exists,
the Company then performed Step 2 test in order to determine if goodwill was impaired on any of its
markets.
The Company then determined that, based on its Step 1 goodwill test, the fair value of 1 of
its 16 markets containing goodwill balances was below its carrying value. For the remaining
markets, since no impairment indicators existed, the Company determined that goodwill was
appropriately stated as of August 31, 2009.
Step 2 Goodwill Test
As required by the Step 2 test, the Company prepared an allocation of the fair value of the
market as if the market was acquired in a business combination. The presumed purchase price
utilized in the calculation is the fair value of the market determined in the Step 1 test. The
results of the Step 2 test and the calculated impairment charge follows (dollars in thousands):
Reporting Unit | Implied Goodwill | August 31, 2009 | ||||||||||||||
Market ID | Fair Value | Value | Carrying Value | Impairment | ||||||||||||
Market 37 |
$ | 15,006 | $ | 9,754 | $ | 11,511 | $ | 1,757 |
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To validate the Companys conclusions and determine the reasonableness of the impairment
charge related to goodwill, the Company:
| conducted an overall reasonableness check of the Companys fair value calculations by comparing the aggregate, calculated fair value of the Companys markets to its market capitalization as of August 31, 2009; | ||
| prepared a market fair value calculation using a multiple of Adjusted EBITDA as a comparative data point to validate the fair values calculated using the discounted cash-flow approach; | ||
| reviewed the historical operating performance of each market with impairment; | ||
| reviewed the facts surrounding the acquisition of the impaired market, including original, implied acquisition Station Operating Income multiple; and | ||
| performed a sensitivity analysis on the overall fair value and impairment evaluation. |
The discount rate employed in the market fair value calculation ranged between 12.4% and
12.7%. It is believed that the 12.4% to 12.7% discount rate range was appropriate and reasonable
for goodwill purposes due to the resulting implied 7.9 times exit multiple (i.e. equivalent to the
terminal value).
Post 2009, the Company projected a median annual revenue growth of 2.2% and median annual
operating expense to increase at a growth rate of 1.7%. The Company derived projected expense
growth based primarily on the stations historical financial performance and expected future
revenue growth. Based on current market and economic conditions and the Companys historical
knowledge of the markets, the Company was comfortable with the eight-year forecast of Station
Operating Income by market.
As compared with the market capitalization value of $536.8 million as of August 31, 2009, the
aggregate fair value of all markets of approximately $604.0 million was approximately $67.2
million, or 12.5%, higher than the market capitalization value.
Key data points included in the market capitalization calculation were as follows:
| shares outstanding as of August 31, 2009: 41.6 million; | ||
| average closing price of the Companys Class A Common Stock over 30 days: $1.40 per share; and | ||
| debt discounted by 26% (gross $647.9 million, net $479.4 million). |
Based on these calculations, the Company concluded that the markets are receiving a control
premium over the calculated enterprise value.
Utilizing the above analysis and data points, the Company concluded the fair values of its
markets, as calculated, are appropriate and reasonable.
Indefinite Lived Intangibles (FCC Licenses)
2009 Impairment Testing
The Company performs its annual impairment testing of indefinite lived intangibles (its FCC
licenses) during the fourth quarter and more frequently if events or circumstances indicate that
the asset may be impaired. Consistent with the guidance set forth in ASC 350-30, the Company has
combined all of its broadcast licenses within a single geographic market cluster into a single unit
of accounting for impairment testing purposes. As part of the overall planning associated with the
indefinite lived intangibles test, the Company determined that its geographic markets are the
appropriate unit of accounting for the broadcast license impairment testing.
In August 2009, the Company reviewed the impairment indicators detailed in ASC 350-20 for
potential issues or circumstances which might require the Company to test its FCC licenses assets
for impairment on an interim basis. In July 2009, the Company revised its revenue forecast downward
from December 31, 2008 due to the sustained decline in revenues for 2009 attributable to the
current economic conditions. As a result of these conditions, the Company determined it was
appropriate and reasonable to conduct an interim impairment analysis.
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For the nine months ended September 30, 2009, the Company determined that the carrying value
of certain reporting units FCC licenses exceeded their fair values. Accordingly, the Company
recorded an impairment charge of $171.3 million, as reflected in the Unaudited Condensed
Consolidated Statements of Operations, to reduce the carrying value of these assets.
The Company notes that the following considerations, as cited by the EITF task force, continue
to apply to the FCC licenses:
| In each market, the broadcast licenses were purchased to be used as one combined asset. | ||
| The combined group of licenses in a market represents the highest and best use of the assets. | ||
| Each markets strategy provides evidence that the licenses are complementary. |
For the interim impairment test the Company utilized the three most widely accepted approaches
in conducting its appraisals: (1) the cost approach, (2) the market approach, and (3) the income
approach. In conducting the appraisals, the Company conducted a thorough review of all aspects of
the assets being valued.
The cost approach measures value by determining the current cost of an asset and deducting for
all elements of depreciation (i.e., physical deterioration as well as functional and economic
obsolescence). In its simplest form, the cost approach is calculated by subtracting all
depreciation from current replacement cost. The market approach measures value based on recent
sales and offering prices of similar properties and analyzes the data to arrive at an indication of
the most probable sales price of the subject property. The income approach measures value based on
income generated by the subject property, which is then analyzed and projected over a specified
time and capitalized at an appropriate market rate to arrive at the estimated value.
The Company relied on both the income and market approaches for the valuation of the FCC
licenses, with the exception of certain AM and FM stations that have been valued using the cost
approach. The Company estimated this replacement value based on estimated legal, consulting,
engineering, and internal charges to be $25,000 for each FM station. For each AM station the
replacement cost was estimated at $25,000 for a station licensed to operate with a one-tower array
and an additional charge of $10,000 for each additional tower in the stations tower array.
The estimated fair values of the FCC licenses represent the amount at which an asset (or
liability) could be bought (or incurred) or sold (or settled) in a current transaction between
willing parties (i.e. other than in a forced or liquidation sale).
A basic assumption in the Companys valuation of these FCC licenses was that these radio
stations were new radio stations, signing on-the-air as of the date of the valuation. The Company
assumed the competitive situation that existed in those markets as of that date, except that these
stations were just beginning operations. In doing so, the Company bifurcated the value of going
concern and any other assets acquired, and strictly valued the FCC licenses.
The Company estimated the values of the AM and FM licenses, combined, through a discounted
cash flow analysis, which is an income valuation approach. In addition to the income approach, the
Company also reviewed recent similar radio station sales in similarly sized markets.
In estimating the value of the AM and FM licenses using a discounted cash flow analysis, in
order to make the net free cash flow (to invested capital) projections, the Company began with
market revenue projections. The Company made assumptions about the stations future audience shares
and revenue shares in order to project the stations future revenues. The Company then projected
future operating expenses and operating profits derived. By combining these operating profits with
depreciation, taxes, additions to working capital, and capital expenditures, the Company projected
net free cash flows.
The Company discounted the net free cash flows using an appropriate after-tax average weighted
cost of capital ranging between approximately 12.7% and 13.0% and then calculated the total
discounted net free cash flows. For net free cash flows beyond the projection period, the Company
estimated a perpetuity value, and then discounted to present values, as of the valuation date.
The Company performed one discounted cash flow analysis for each market. For each market
valued, the Company analyzed the competing stations, including revenue and listening shares for the
past several years. In addition, for each market the Company analyzed the discounted cash flow
valuations of its assets within the market. Finally, the Company considered sales of comparable
stations.
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The first discounted cash flow analysis examined historical and projected gross radio revenues
for each market.
In order to estimate what listening audience share and revenue share would be expected for
each station by market, the Company analyzed the Arbitron audience estimates over the past two
years to determine the average local commercial share garnered by similar AM and FM stations
competing in those radio markets. Often the Company made adjustments to the listening share and
revenue share based on its stations signal coverage of the market and the surrounding areas
population as compared to the other stations in the market. Based on managements knowledge of the
industry and familiarity with similar markets, the Company determined that approximately three
years would be required for the stations to reach maturity. The Company also incorporated the
following additional assumptions into the discounted cash flow valuation model:
| the stations gross revenues through 2017; | ||
| the projected operating expenses and profits over the same period of time (the Company considered operating expenses, except for sales expenses, to be fixed, and assumed sales expenses to be a fixed percentage of revenues); | ||
| calculations of yearly net free cash flows to invested capital; | ||
| depreciation on start-up construction costs and capital expenditures (the Company calculated depreciation using accelerated double declining balance guidelines over five years for the value of the tangible assets necessary for a radio station to go on-the-air); and | ||
| amortization of the intangible assetthe FCC License (the Company calculated amortization on a straight line basis over 15 years). |
Impact of Economic Environment on the 2009 Impairment Analysis
The economic crisis of 2009 reduced demand for advertising in general, including advertising
on the Companys radio stations. As such, revenue projections for the industry were down, which
impacted the Companys calculation by virtue of reducing the Companys future cash flows, resulting
in a proportionate reduction in the Companys discounted cash-flow valuation. Likewise, the
combination of a decline in current revenues and future projected revenues coupled with frozen
capital markets contributed significantly to a decline in deals to acquire or sell companies within
the industry, the result of which was a compression in the multiples on the radio station
transactions that were completed in the prior year. In the aggregate, the economic developments
resulted in significant downward pressures on valuations across the radio industry as a whole.
Therefore, as a company that has experienced significant synthetic growth at historically greater
multiples than those currently utilized in the Companys valuation model, the Company experienced
relatively large write-downs in 2009 associated with its impairment calculation.
13. Related Party
During the third quarter of 2010, the Company entered into a management agreement with DM
Luxury, LLC, the countrys largest city magazine publisher which publishes 26 titles in twelve
major U.S. markets. The Company will provide back office shared services, such as finance,
accounting, treasury, internal audit, use of corporate headquarters, legal, human resources, risk
management and information technology for an annual management fee of $0.5 million. The Company
determined that DM Luxury, LLC was a related party as a result of the Companys Chairman and Chief
Executive Officers ownership interest in Dickey Publishing, Inc. and Dickey Media Investments,
LLC, which together own 50.0% of DM Luxury, LLC, with Macquarie Capital (USA), Inc. owning the
remaining 50.0% of DM Luxury, LLC. The Company does not have an equity interest in DM Luxury, LLC
and recorded $0.0 million of revenues during the three and nine months ended September 30, 2010.
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Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations |
General
The following discussion of our financial condition and results of operations should be read
in conjunction with our condensed consolidated financial statements and related notes thereto
included elsewhere in this quarterly report. This discussion, as well as various other sections of
this quarterly report, contains statements that constitute forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. Such statements relate to the
intent, belief or current expectations of our officers primarily with respect to our future
operating performance. Any such forward-looking statements are not guarantees of future performance
and may involve risks and uncertainties. Actual results may differ from those in the
forward-looking statements as a result of various factors, including but not limited to, risks and
uncertainties relating to the need for additional funds, FCC and government approval of pending
acquisitions, our inability to renew one or more of our broadcast licenses, changes in interest
rates, consummation of our pending acquisitions, integration of acquisitions, our ability to
eliminate certain costs, the management of rapid growth, the popularity of radio as a broadcasting
and advertising medium, changing consumer tastes, the impact of general economic conditions in the
United States or in specific markets in which we currently do business, industry conditions,
including existing competition and future competitive technologies and cancellation, disruptions or
postponements of advertising schedules in response to national or world events. Many of these risks
and uncertainties are beyond our control. This discussion identifies important factors that could
cause such differences. The unexpected occurrence of any such factors would significantly alter the
results set forth in these statements.
Overview
We engage in the acquisition, operation, and development of commercial radio stations in
mid-size radio markets in the United States. In addition, we, along with three private equity
firms, formed CMP, which acquired the radio broadcasting business of Susquehanna in May 2006. As a
result of our investment in CMP and the acquisition of Susquehannas radio operations, we are the
second largest radio broadcasting company in the United States based on number of stations and
believe we are the fourth largest radio broadcasting company based on net revenues. As of September
30, 2010, directly and through our investment in CMP, we owned or operated 343 stations in 68
United States markets and provided sales and marketing services under local marketing, management
and consulting agreements to twelve additional stations. The following discussion of our financial
condition and results of operations includes the results of acquisitions and local marketing,
management, and consulting agreements.
Liquidity Considerations
While preparing our 2010 business plan, we assessed future covenant compliance under the
Credit Agreement, including consideration of market uncertainties, as well as the incremental cost
that would be required to potentially amend the terms of the Credit Agreement. We believe we will
continue to be in compliance with all of our debt covenants through at least September 30, 2011,
based upon actions we have already taken, which included the June 2009 amendment to the Credit
Agreement, the purpose of which was to provide certain covenant relief in 2009 and 2010, and
continued scrutiny of all operating expenses associated with our cost containment initiative. We
will continue to monitor our revenues and cost structure closely and if revenues do not meet or
exceed forecasted growth or if we exceed our planned spending, we may take further actions as
needed in an attempt to maintain compliance with our debt covenants under the Credit Agreement. The
actions may include the implementation of additional operational efficiencies, further
renegotiation of major vendor contracts, deferral of capital expenditures, and sales of
non-strategic assets.
As of September 30, 2010, the effective interest rate on the borrowings under our senior
secured credit facilities was approximately 4.0%. As of September 30, 2010, our average cost of
debt, including the effects of our derivative positions, was 6.8%. We remain committed to
maintaining manageable debt levels, which will continue to improve our ability to generate cash
flow from operations.
Advertising Revenue and Station Operating Income
Our primary source of revenues is the sale of advertising time on our radio stations. Our
sales of advertising time are primarily affected by the demand for advertising time from local,
regional and national advertisers and the advertising rates charged by our radio stations.
Advertising demand and rates are based primarily on a stations ability to attract audiences in the
demographic groups targeted by its advertisers, as measured principally by various ratings agencies
on a periodic basis, generally two or four times per year. Because audience ratings in local
markets are crucial to a stations financial success, we endeavor to develop strong listener
loyalty. We believe that the diversification of formats on our stations helps to insulate them from
the effects of changes in the musical tastes of the public with respect to any particular format.
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The number of advertisements that can be broadcast without jeopardizing listening levels and
the resulting ratings is limited in part by the format of a particular station. Our stations strive
to maximize revenue by managing their on-air inventory of advertising time and adjusting prices
based upon local market conditions. In the broadcasting industry, radio stations sometimes utilize
trade or barter agreements that exchange advertising time for goods or services such as travel or
lodging, instead of for cash. Our advertising contracts are generally short-term. We generate most
of our revenue from local and regional advertising, which is sold primarily by a stations sales
staff. Local advertising represented approximately 83.0% and 87.9% of our total revenues during the
nine months ended September 30, 2010 and 2009, respectively.
Our revenues vary throughout the year. As is typical in the radio broadcasting industry, our
first calendar quarter produced the lowest revenues during the last twelve month period as
advertising generally declines following the winter holidays. The second and fourth calendar
quarters will likely produce the highest revenues for the year. Our operating results in any period
may be affected by the incurrence of advertising and promotion expenses that typically do not have
an effect on revenue generation until future periods, if at all.
Our most significant station operating expenses are employee salaries and commissions,
programming expenses, advertising and promotional expenditures, technical expenses, and general and
administrative expenses. We strive to control these expenses by working closely with local market
management. The performance of radio station groups, such as ours, is customarily measured by the
ability to generate Station Operating Income. See the quantitative reconciliation of Station
Operating Income to the most directly comparable financial measure calculated and presented in
accordance with GAAP, which follows in this section.
Cumulus Radio Investors, L.P. (CRI)
On April 7, 2010, the Company and Crestview Partners, a $4.0 billion private equity firm with
a strong media focus, announced the formation of a strategic investment partnership that intends to
invest in radio broadcasting companies that present attractive opportunities for significant
long-term capital appreciation.
Under the partnership arrangement, Crestview will lead an investor group that would invest up
to $500.0 million in equity in the partnership, to be called Cumulus Radio Investors, L.P. (CRI).
Together with debt financing expected to be available through the capital markets, CRI could target
acquisitions totaling in excess of $1.0 billion. The Company would provide all management,
financial, operational and corporate services to the partnership and its operations pursuant to a
management services agreement. The Company would be compensated through management fees as well as
incentive compensation based on investment returns. This had no impact on the three or nine months
ended September 30, 2010.
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Table of Contents
Results of Operations
Analysis of the Condensed Consolidated Statements of Operations. The following analysis of
selected data from our unaudited condensed consolidated statements of operations and other
supplementary data should be referred to while reading the results of operations discussion that
follows (dollars in thousands):
For the Three Months | ||||||||||||||||
Ended September 30, | 2010 vs 2009 | |||||||||||||||
2010 | 2009 | $ Change | % Change | |||||||||||||
STATEMENT OF OPERATIONS DATA: |
||||||||||||||||
Net revenues |
$ | 67,455 | $ | 65,127 | $ | 2,328 | 3.6 | % | ||||||||
Station operating expenses (excluding depreciation,
amortization and LMA fees) |
40,486 | 40,159 | 327 | 0.8 | % | |||||||||||
Depreciation and amortization |
2,222 | 2,650 | (428 | ) | -16.2 | % | ||||||||||
LMA fees |
607 | 595 | 12 | 2.0 | % | |||||||||||
Corporate general and administrative (including
non-cash stock compensation expense) |
4,680 | 5,676 | (996 | ) | -17.5 | % | ||||||||||
Realized loss on derivative instrument |
746 | 3,016 | (2,270 | ) | -75.3 | % | ||||||||||
Impairment of goodwill and intangible assets |
| 173,085 | (173,085 | ) | -100.0 | % | ||||||||||
Operating income (loss) |
18,714 | (160,054 | ) | 178,768 | -111.7 | % | ||||||||||
Interest expense, net |
(7,586 | ) | (11,049 | ) | 3,463 | -31.3 | % | |||||||||
Other expense, net |
(6 | ) | (121 | ) | 115 | -95.0 | % | |||||||||
Income tax (expense) benefit |
(1,391 | ) | 27,233 | (28,624 | ) | -105.1 | % | |||||||||
Net income (loss) |
$ | 9,731 | $ | (143,991 | ) | $ | 153,722 | -106.8 | % | |||||||
OTHER DATA: |
||||||||||||||||
Station operating income (1) |
$ | 26,969 | $ | 24,968 | $ | 2,001 | 8.0 | % | ||||||||
Station operating income margin (2) |
40.0 | % | 38.3 | % | * | * | * | * |
For the Nine Months | ||||||||||||||||
Ended September 30, | 2010 vs 2009 | |||||||||||||||
2010 | 2009 | $ Change | % Change | |||||||||||||
STATEMENT OF OPERATIONS DATA: |
||||||||||||||||
Net revenues |
$ | 193,552 | $ | 186,443 | $ | 7,109 | 3.8 | % | ||||||||
Station operating expenses (excluding depreciation,
amortization and LMA fees) |
120,829 | 121,690 | (861 | ) | -0.7 | % | ||||||||||
Depreciation and amortization |
7,130 | 8,365 | (1,235 | ) | -14.8 | % | ||||||||||
LMA fees |
1,500 | 1,792 | (292 | ) | -16.3 | % | ||||||||||
Corporate general and administrative (including
non-cash stock compensation expense) |
13,824 | 15,741 | (1,917 | ) | -12.2 | % | ||||||||||
Gain on exchange of assets or stations |
| (7,204 | ) | 7,204 | -100.0 | % | ||||||||||
Realized loss on derivative instrument |
1,810 | 3,016 | (1,206 | ) | -40.0 | % | ||||||||||
Impairment of goodwill and intangible assets |
| 173,085 | (173,085 | ) | -100.0 | % | ||||||||||
Operating income (loss) |
48,459 | (130,042 | ) | 178,501 | -137.3 | % | ||||||||||
Interest expense, net |
(23,728 | ) | (24,990 | ) | 1,262 | -5.1 | % | |||||||||
Other expense, net |
(87 | ) | (156 | ) | 69 | -44.2 | % | |||||||||
Income tax (expense) benefit |
(2,753 | ) | 21,976 | (24,729 | ) | -112.5 | % | |||||||||
Net income (loss) |
$ | 21,891 | $ | (133,212 | ) | $ | 155,103 | -116.4 | % | |||||||
OTHER DATA: |
||||||||||||||||
Station operating income (1) |
$ | 72,723 | $ | 64,753 | $ | 7,970 | 12.3 | % | ||||||||
Station operating income margin (2) |
37.6 | % | 34.7 | % | * | * | * | * | ||||||||
Cash flows related to: |
||||||||||||||||
Operating activities |
$ | 29,284 | $ | 21,214 | $ | 8,070 | 38.0 | % | ||||||||
Investing activities |
(2,161 | ) | (1,781 | ) | (380 | ) | 21.3 | % | ||||||||
Financing activities |
(30,782 | ) | (53,244 | ) | 22,462 | -42.2 | % | |||||||||
Capital expenditures |
(2,127 | ) | (1,872 | ) | (255 | ) | 13.6 | % |
** | Calculation is not meaningful. |
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(1) | Station Operating Income consists of operating income before depreciation and amortization, LMA fees, non-cash stock compensation corporate general and administrative expenses, gain on exchange of assets or stations, realized loss on derivative instruments and impairment of goodwill and intangible assets. Station Operating Income is not a measure of performance calculated in accordance with GAAP. Station Operating Income should not be considered in isolation or as a substitute for net income, operating income, cash flows from operating activities or any other measure for determining our operating performance or liquidity that is calculated in accordance with GAAP. See managements explanation of this measure and the reasons for its use and presentation, along with a quantitative reconciliation of Station Operating Income to its most directly comparable financial measure calculated and presented in accordance with GAAP, below under Station Operating Income. | |
(2) | Station Operating Income margin is defined as Station Operating Income as a percentage of net revenues. |
Three Months Ended September 30, 2010 versus the Three Months Ended September 30, 2009
Net Revenues. Net revenues for the three months ended September 30, 2010 increased $2.3
million, or 3.6%, to $67.4 million compared to $65.1 million for the three months ended September
30, 2009, primarily due to an increase in revenue from national accounts, political revenue
generated by mid-term elections, and increases in internet related revenues. We believe that
continued incremental growth in advertising revenue throughout the fourth quarter of 2010 will be
driven primarily by increases in national revenue and cyclical political spending.
Station Operating Expenses, Excluding Depreciation, Amortization and LMA Fees. Station
operating expenses for the three months ended September 30, 2010 remained relatively flat
increasing only $0.3 million, or 0.8%, to $40.5 million, compared to $40.2 million for the three
months ended September 30, 2009.
Depreciation and Amortization. Depreciation and amortization for the three months ended
September 30, 2010 decreased $0.4 million, or 16.2%, to $2.2 million, compared to $2.6 million for
the three months ended September 30, 2009, resulting from a decrease in our asset base due to
assets becoming fully depreciated.
LMA Fees. LMA fees totaled $0.6 million for the three months ended September 30, 2010 and
2009, respectively. LMA fees in the current year were comprised primarily of fees associated with
stations operated under LMAs in Cedar Rapids, Iowa, Ann Arbor, Michigan, Green Bay, Wisconsin, and
Battle Creek, Michigan.
Corporate, General and Administrative Expenses Including Non-cash Stock Compensation.
Corporate expenses, including non-cash stock compensation expense for the third quarter of 2010
decreased $1.0 million, or 17.5%, to $4.7 million compared to $5.7 million in 2009. This change is
primarily attributable to a $0.7 million decrease in legal and professional fees and a $0.3 million
decrease in non cash stock compensation expense.
Realized Loss on Derivative Instrument. During the three months ended September 30, 2010 and
2009, we recorded a charge of $0.7 million and $3.0 million, respectively, related to our recording
of the fair market value of the Green Bay Option. The Green Bay Option liability increased
primarily due to the continued decline in associated market operating results.
Impairment of Goodwill and Intangible Assets. We did not have any impairment during the three
months ended September 30, 2010. During the three months ended September 30, 2009 we recorded
approximately $173.1 million of charges related to the impairment of goodwill and intangible
assets. The impairment loss in connection with our review of broadcasting licenses and goodwill
during the third quarter of 2009 was primarily due to a decrease in advertising revenue growth
projections for the broadcasting industry.
Interest Expense, net. Interest expense, net of interest income, for the three months ended
September 30, 2010 decreased $3.5 million, or 31.3%, to $7.6 million compared to $11.1 million for
the three months ended September 30, 2009. Interest expense associated with outstanding debt
decreased by $0.7 million to $6.4 million as compared to $7.1 million in the prior years period,
primarily due to an increase in interest rates, partially offset by a decrease in the borrowing
base due to the repayment of approximately $39.5 million of debt compared to the same period in the
prior year. The remaining decrease is primarily attributable to a $2.9 million change in fair value
of our interest rate option agreement. The following summary details the components of our interest
expense, net of interest income (dollars in thousands):
For the Three Months | ||||||||||||||||
Ended September 30, | 2010 vs 2009 | |||||||||||||||
2010 | 2009 | $ Change | % Change | |||||||||||||
Bank Borrowings term loan and revolving credit facilities |
$ | 6,433 | $ | 7,088 | $ | (655 | ) | -9.2 | % | |||||||
Bank Borrowings yield adjustment interest rate swap |
3,647 | 3,675 | (28 | ) | -0.8 | % | ||||||||||
Change in fair value of interest rate option agreement |
(2,979 | ) | (30 | ) | (2,949 | ) | 9830.0 | % | ||||||||
Other interest expense |
487 | 319 | 168 | 52.7 | % | |||||||||||
Interest income |
(2 | ) | (3 | ) | 1 | -33.3 | % | |||||||||
Interest expense, net |
$ | 7,586 | $ | 11,049 | $ | (3,463 | ) | -31.3 | % | |||||||
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Income Taxes. We recorded income tax expense of $1.4 million for the three months ended
September 30, 2010, compared to an income tax benefit of $27.2 million for the three months ended
September 30, 2009. The change is primarily due to the impairments of intangibles recorded during
the third quarter of 2009 which decreased our deferred tax liabilities resulting in a corresponding
decrease in our quarterly tax provision. There was no impairment during the three months ended
September 30, 2010.
Station Operating Income. As a result of the factors described above, Station Operating
Income for the three months ended September 30, 2010 increased $2.0 million, or 8.0%, to $27.0
million compared to $25.0 million for the three months ended September 30, 2009.
Station Operating Income consists of operating income before depreciation and amortization,
LMA fees, non-cash stock compensation, corporate general and administrative expenses, the realized
loss on derivative instrument, and impairment of intangible assets and goodwill. Station Operating
Income should not be considered in isolation or as a substitute for net income, operating income
(loss), cash flows from operating activities or any other measure for determining our operating
performance or liquidity that is calculated in accordance with GAAP. We exclude depreciation and
amortization due to the insignificant investment in tangible assets required to operate our
stations and the relatively insignificant amount of intangible assets subject to amortization. We
exclude LMA fees from this measure, even though it requires a cash commitment, due to the
insignificance and temporary nature of such fees. Corporate expenses, despite representing an
additional significant cash commitment, are excluded in an effort to present the operating
performance of our stations exclusive of the corporate resources employed. We believe this is
important to our investors because it highlights the gross margin generated by our station
portfolio. Finally, we exclude non-cash stock compensation, the gain on exchange of assets or
stations and the realized loss on derivative instrument, and impairment of goodwill and intangible
assets from the measure as they do not represent cash payments for activities related to the
operation of the stations.
We believe that Station Operating Income is the most frequently used financial measure in
determining the market value of a radio station or group of stations. We have observed that Station
Operating Income is commonly employed by firms that provide appraisal services to the broadcasting
industry in valuing radio stations. Further, in each of the more than 140 radio station
acquisitions we have completed since our inception, we have used Station Operating Income as our
primary metric to evaluate and negotiate the purchase price to be paid. Given its relevance to the
estimated value of a radio station, we believe, and our experience indicates, that investors
consider the measure to be useful in order to determine the value of our portfolio of stations. We
believe that Station Operating Income is the most commonly used financial measure employed by the
investment community to compare the performance of radio station operators. Finally, Station
Operating Income is one of the measures that our management uses to evaluate the performance and
results of our stations. Our management uses the measure to assess the performance of our station
managers and our Board of Directors uses it as part of its assessment of the relative performance
of our executive management. As a result, in disclosing Station Operating Income, we are providing
our investors with an analysis of our performance that is consistent with that which is utilized by
our management and our Board.
Station Operating Income is not a recognized term under GAAP and does not purport to be an
alternative to operating income from continuing operations as a measure of operating performance or
to cash flows from operating activities as a measure of liquidity. Additionally, Station Operating
Income is not intended to be a measure of free cash flow available for dividends, reinvestment in
our business or other Company discretionary use, as it does not consider certain cash requirements
such as interest payments, tax payments and debt service requirements. Station Operating Income
should be viewed as a supplement to, and not a substitute for, results of operations presented on
the basis of GAAP. We compensate for the limitations of using Station Operating Income by using
it only to supplement our GAAP results to provide a more complete understanding of the factors
and trends affecting our business than GAAP results alone. Station Operating Income has its
limitations as an analytical tool, and you should not consider it in isolation or as a substitute
for analysis of our results as reported under GAAP. Moreover, because not all companies use
identical calculations, these presentations of Station Operating Income may not be comparable to
other similarly titled measures of other companies.
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Reconciliation of Non-GAAP Financial Measure. The following table reconciles Station
Operating Income to operating income as presented in the accompanying condensed consolidated
statements of operations (the most directly comparable financial measure calculated and presented
in accordance with GAAP, dollars in thousands):
For the Three Months | ||||||||||||||||
Ended September 30, 2010 | 2010 vs 2009 | |||||||||||||||
2010 | 2009 | $ Change | % Change | |||||||||||||
Operating income (loss) |
$ | 18,714 | $ | (160,054 | ) | $ | 178,768 | -111.7 | % | |||||||
Depreciation and amortization |
2,222 | 2,650 | (428 | ) | -16.2 | % | ||||||||||
LMA fees |
607 | 595 | 12 | 2.0 | % | |||||||||||
Non-cash stock compensation |
556 | 611 | (55 | ) | -9.0 | % | ||||||||||
Corporate general and
administrative |
4,124 | 5,065 | (941 | ) | -18.6 | % | ||||||||||
Realized loss on derivative
instrument |
746 | 3,016 | (2,270 | ) | -75.3 | % | ||||||||||
Impairment of goodwill and
intangible assets |
| 173,085 | (173,085 | ) | -100.0 | % | ||||||||||
Station Operating Income |
$ | 26,969 | $ | 24,968 | $ | 2,001 | 8.0 | % | ||||||||
Nine Months Ended September 30, 2010 versus the Nine Months Ended September 30, 2009
Net Revenues. Net revenues for the nine months ended September 30, 2010 increased $7.2
million, or 3.8%, to $193.6 million compared to $186.4 million for the nine months ended September
30, 2009, primarily due to an increase in revenue from national accounts, political revenue
generated by mid-term elections, and increases in internet related revenues. We believe that
continued incremental growth in advertising revenue throughout the fourth quarter of 2010 will be
driven primarily by increases in national revenue and cyclical political spending.
Station Operating Expenses, Excluding Depreciation, Amortization and LMA Fees. Station
operating expenses for the nine months ended September 30, 2010 decreased $0.9 million, or 0.7%, to
$120.8 million, compared to $121.7 million for the nine months ended September 30, 2009 as the
result of a $1.7 million decrease in salary related expenses as well as a $2.8 million decrease in
other general expenses resulting from our ongoing efforts to contain operating costs. These cost
savings were partially offset by a $3.6 million increase in trade expenses. We will continue to
monitor all our operating costs and to the extent we are able to identify any additional cost
saving measures, we will implement them in an attempt to remain in compliance with current and
future debt covenant requirements.
Depreciation and Amortization. Depreciation and amortization for the nine months ended
September 30, 2010 decreased $1.3 million, or 14.8%, to $7.1 million, compared to $8.4 million for
the nine months ended September 30, 2009, resulting from a decrease in our asset base due to assets
becoming fully depreciated.
LMA Fees. LMA fees totaled $1.5 million and $1.8 million for the nine months ended September
30, 2010 and 2009, respectively. LMA fees in the current year were comprised primarily of fees
associated with stations operated under LMAs in Cedar Rapids, Iowa, Ann Arbor, Michigan, Green Bay,
Wisconsin, and Battle Creek, Michigan.
Corporate, General and Administrative Expenses Including Non-cash Stock Compensation.
Corporate expenses, including non-cash stock compensation expense for the nine months ended
September 30, 2010 decreased $1.9 million, or 12.2%, to $13.8 million compared to $15.7 million in
2009. This decrease is primarily due to a $0.6 million decrease in corporate expenses associated
with our cost containment initiatives, including a $0.8 million decrease in professional fees and a
$0.5 million reduction in salary expense attributable to the severance we paid to our former Chief
Financial Officer.
Gain on Exchange of Assets or Stations. During the second quarter of 2009 we completed an
asset exchange with Clear Channel Communications to exchange five of our radio stations in the
Green Bay, Wisconsin market for two of Clear Channels radio stations located in Cincinnati, Ohio.
In connection with the exchange, we recorded a gain of approximately $7.2 million during the second
quarter of 2009. We did not complete any similar transactions during the first nine months of the
current year.
Realized Loss on Derivative Instrument. During the nine months ended September 30, 2010 and
2009 we recorded a charge of $1.8 million and $3.0 million, respectively, related to marking the
Green Bay Option (Green Bay Option or the Option) to market.
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We entered into the Option in
conjunction with the asset exchange in the second quarter of 2009. The Option declined in value
primarily due to the continued decline in the markets operating results.
Impairment of Goodwill and Intangible Assets. We did not have any impairment during the nine
months ended September 30, 2010. During the nine months ended September 30, 2009 we recorded
approximately $173.1 million of charges related to the impairment of goodwill and intangible
assets. The impairment loss in connection with our review of broadcasting licenses and goodwill
during the third quarter of 2009 was primarily due to an increase in the discount rate used, a
decrease in station transaction multiples, and a decrease in advertising revenue growth projections
for the broadcasting industry. There was no impairment during the nine months ended September 30,
2010.
Interest Expense, net. Interest expense, net of interest income, for the nine months ended
September 30, 2010 decreased $1.3 million, or 5.1%, to $23.7 million compared to $25.0 million for
the nine months ended September 30, 2009. While overall interest expense decreased, the interest
expense associated with outstanding debt increased by $4.9 million to $19.9 million as compared to
$15.0 million in the prior years period. This increase was primarily due to an increase in
interest rates, partially offset by a decrease in the borrowing base due to the pay-down of
approximately $39.5 million of debt compared to the same period in the prior year. Additionally,
interest expense increased by $1.4 million related to the yield adjustment on the interest rate
swap. These increases were offset by a $7.5 million decrease in the fair value of the interest rate
swap/option agreement. The following summary details the components of our interest expense, net of
interest income (dollars in thousands):
For the Nine Months | ||||||||||||||||
Ended September 30, | 2010 vs 2009 | |||||||||||||||
2010 | 2009 | $ Change | % Change | |||||||||||||
Bank Borrowings term loan and revolving credit facilities |
$ | 19,866 | $ | 15,008 | $ | 4,858 | 32.4 | % | ||||||||
Bank Borrowings yield adjustment interest rate swap |
11,081 | 9,667 | 1,414 | 14.6 | % | |||||||||||
Change in fair value of interest rate swap agreement |
| (3,043 | ) | 3,043 | -100.0 | % | ||||||||||
Change in fair value of interest rate option agreement |
(8,346 | ) | 2,178 | (10,524 | ) | -483.2 | % | |||||||||
Other interest expense |
1,133 | 1,238 | (105 | ) | -8.5 | % | ||||||||||
Interest income |
(6 | ) | (58 | ) | 52 | -89.7 | % | |||||||||
Interest expense, net |
$ | 23,728 | $ | 24,990 | $ | (1,262 | ) | -5.1 | % | |||||||
Income Taxes. We recorded income tax expense of $2.8 million for the nine months ended
September 30, 2010, compared to a benefit of $22.0 million for the nine months ended September 30,
2009. The change in the effective tax rate during 2010 as compared to 2009 is primarily due to the
impact of prior year impairments of intangibles on deferred tax assets and liabilities, the impact
of the Green Bay Option and the forecasted net income for the current year versus the prior year.
Station Operating Income. As a result of the factors described above, Station Operating
Income for the nine months ended September 30, 2010 increased $7.9 million, or 12.3%, to $72.7
million compared to $64.8 million for the nine months ended September 30, 2009.
Reconciliation of Non-GAAP Financial Measure. The following table reconciles Station
Operating Income to operating income as presented in the accompanying condensed consolidated
statements of operations (the most directly comparable financial measure calculated and presented
in accordance with GAAP, dollars in thousands):
For the Nine Months | ||||||||||||||||
Ended September 30, | 2010 vs 2009 | |||||||||||||||
2010 | 2009 | $ Change | % Change | |||||||||||||
Operating income (loss) |
$ | 48,459 | $ | (130,042 | ) | 178,501 | -137.3 | % | ||||||||
Depreciation and amortization |
7,130 | 8,365 | (1,235 | ) | -14.8 | % | ||||||||||
LMA fees |
1,500 | 1,792 | (292 | ) | -16.3 | % | ||||||||||
Non-cash stock compensation |
1,015 | 2,053 | (1,038 | ) | -50.6 | % | ||||||||||
Corporate general and
administrative |
12,809 | 13,688 | (879 | ) | -6.4 | % | ||||||||||
Gain on exchange of assets
or stations |
| (7,204 | ) | 7,204 | -100.0 | % | ||||||||||
Realized loss on derivative
instrument |
1,810 | 3,016 | (1,206 | ) | -40.0 | % | ||||||||||
Impairment of goodwill and
intangible assets |
| 173,085 | (173,085 | ) | -100.0 | % | ||||||||||
Station Operating Income |
$ | 72,723 | $ | 64,753 | $ | 7,970 | 12.3 | % | ||||||||
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Liquidity and Capital Resources
Liquidity Considerations
While preparing our 2010 business plan, we assessed future covenant compliance under the
Credit Agreement, including consideration of market uncertainties, as well as the incremental cost
that would be required to potentially amend the terms of the Credit Agreement. We believe we will
continue to be in compliance with all of our debt covenants through at least September 30, 2011
based upon actions we have already taken, as well as through additional paydowns of debt we will be
required to make during 2010 and in the first quarter of 2011 from existing cash balances and cash
flow generated from operations. Further discussion of our debt covenant compliance considerations
is included below.
If our revenues were to be significantly less than planned due to difficult market conditions
or for other reasons, our ability to maintain compliance with the financial covenants in the Credit
Agreement would become increasingly difficult without remedial measures, such as the implementation
of further cost abatement initiatives. If our remedial measures were not successful in maintaining
covenant compliance, then we would need to negotiate with our lenders for relief, which relief
could result in higher interest expense or other fees or costs. Failure to comply with our
financial covenants or other terms of our credit agreements and failure to negotiate relief from
our lenders could result in the acceleration of the maturity of all outstanding debt. Under these
circumstances, the acceleration of our debt could have a material adverse effect on our business.
Historically, our principal need for funds has been to fund the acquisition of radio stations,
expenses associated with our station and corporate operations, capital expenditures, repurchases of
our Class A Common Stock, and interest and debt service payments. Funding needs on a long-term
basis will include capital expenditures associated with maintaining our station and corporate
operations, implementing HD Radiotm technology and potential future
acquisitions. In December 2004, we purchased 240 perpetual licenses from
iBiquity, which enable us to convert to and utilize iBiquitys HD Radiotm
technology on up to 240 of our stations. Under the terms of our original agreement with iBiquity,
we agreed to convert certain of our stations over a seven-year period. On March 5, 2009, we entered
into an amendment to our agreement with iBiquity to reduce the number of planned conversions,
extend the build-out schedule, and increase the license fees to be paid for each converted station.
We anticipate that the average cost to convert each station will be between $0.1 million and $0.2
million.
Our principal sources of funds for these requirements have been cash flow from operations and
borrowings under our senior secured credit facilities. Our cash flow from operations is subject to
such factors as shifts in population, station listenership, demographics, or audience tastes, and
fluctuations in preferred advertising media. In addition, customers may not be able to pay, or may
delay payment of accounts receivable that are owed to us. Management has taken steps to mitigate
this risk through heightened collection efforts and enhancements to our credit approval process. As
discussed further below, borrowings under our senior secured credit facilities are subject to
financial covenants that can restrict our financial flexibility. Further, our ability to obtain
additional equity or debt financing is also subject to market conditions and operating performance.
In addition, pursuant to the June 2009 amendment to the Credit Agreement, we are required to repay
100% of Excess Cash Flow (as defined in the Credit Agreement) on a quarterly basis beginning
September 30, 2009 through December 31, 2010, while maintaining a minimum balance of $7.5 million
of cash on hand. We have assessed the implications of these factors on our current business and
determined, based on our financial condition as of September 30, 2010, that cash on hand and cash
expected to be generated from operating activities and, if necessary, further financing activities,
will be sufficient to satisfy our anticipated financing needs for working capital, capital
expenditures,
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interest and debt service payments and potential acquisitions and repurchases of securities
and other debt obligations through September 30, 2011. However, given the uncertainty of our
markets cash flows, pending litigation and the impact of the current economic environment, there
can be no assurance that cash generated from operations will be sufficient or financing will be
available at terms, and on the timetable, that may be necessary to meet our future capital needs.
Cash Flows provided by Operating Activities
For the nine months ended September 30, 2010, net cash provided by operating activities
increased $8.1 million to $29.3 million from net cash provided by operating activities of $21.2
million for the nine months ended September 30, 2009. The increase is primarily attributable to a
$4.6 million increase in accounts payable and accrued expenses related to the timing of certain
payments. For the nine months ended September 30, 2010 and 2009, our working capital was $(12.5)
million and $8.4 million, respectively. We have assessed the implications of the working capital
deficiency on our current business and determined, based on our financial condition as of September
30, 2010, that cash on hand and cash expected to be generated from operating activities and, if
necessary, further financing activities, will be sufficient to satisfy our anticipated working
capital needs including short-term debt service payments.
Cash Flows used in Investing Activities
For the nine months ended September 30, 2010, net cash used in investing activities increased
$0.4 million to $2.2 million from net cash used in investing activities of $1.8 million for the
nine months ended September 30, 2009. This increase was primarily attributable to a $0.2 million
increase in the purchase of intangible assets and a $0.3 million increase in capital expenditures,
offset by $0.1 million received in proceeds from the sale of assets.
Cash Flows used in Financing Activities
For the nine months ended September 30, 2010, net cash used in financing activities decreased
$22.4 million to $30.8 million compared to net cash used in financing activities of $53.2 million
during the nine months ended September 30, 2009. The decrease is primarily due to repayments of
borrowings outstanding under our credit facilities.
Credit Agreement and the June 2009 Amendment
We experienced revenue declines in late 2008 and throughout 2009 in line with macro industry
trends and consistent with our radio peer group, particularly when compared to groups with similar
market sizes and portfolio composition. In anticipation of significant revenue declines and in an
attempt to mitigate the effect of these declines on profitability, in early 2009 we engaged in an
aggressive cost cutting campaign across all of our stations and at corporate headquarters, as well.
However, even with these cost containment initiatives in place, our rapidly deteriorating revenue
outlook left uncertainty as to whether we would be able to maintain compliance with the covenants
in the then-existing Credit Agreement. As an additional measure, in June 2009 we obtained an
amendment to the Credit Agreement that, among other things, temporarily suspended certain financial
covenants, as further described below.
The Credit Agreement maintains the preexisting term loan facility of $750.0 million, which had
an outstanding balance of approximately $647.9 million immediately after closing the amendment, and
reduced the preexisting revolving credit facility from $100.0 million to $20.0 million. Incremental
facilities are no longer permitted as of June 30, 2009 under the Credit Agreement.
Our obligations under the Credit Agreement are collateralized by substantially all of our
assets in which a security interest may lawfully be granted (including FCC licenses held by its
subsidiaries), including, without limitation, intellectual property and all of the capital stock of
our direct and indirect subsidiaries, including Broadcast Software International, Inc., which prior
to the amendment, was an excluded subsidiary. Our obligations under the Credit Agreement continue
to be guaranteed by all of our subsidiaries.
The Credit Agreement contains terms and conditions customary for financing arrangements of
this nature. The term loan facility will mature on June 11, 2014. The revolving credit facility
will mature on June 7, 2012.
Borrowings under the term loan facility and revolving credit facility bore interest, at our
option, at a rate equal to LIBOR plus 4.0% or the Alternate Base Rate (currently defined as the
higher of the Wall Street Journals Prime Rate and the Federal Funds rate plus 0.50%) plus 3.0%. In
July 2010, our aggregate principal payments made to date in accordance with our obligation to make
mandatory prepayments of Excess Cash Flow (as defined in the Credit Agreement), as described below,
exceeded $25.0 million, which triggered a reduction in our interest rate equal to LIBOR plus 3.75%
or the Alternate Base Rate plus 2.75%. Once we reduce the term loan
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facility by an aggregate of $50.0 million through further mandatory prepayments of Excess Cash
Flow, as described below, the revolving credit facility will bear interest, at our option, at a
rate equal to LIBOR plus 3.25% or the Alternate Base Rate plus 2.25%.
In connection with the closing of the Credit Agreement, we made a voluntary prepayment in the
amount of $32.5 million. We also are required to make quarterly mandatory prepayments of 100% of
Excess Cash Flow through December 31, 2010, before reverting to annual prepayments of a percentage
of Excess Cash Flow, depending on our leverage, beginning in 2011. Certain other mandatory
prepayments of the term loan facility will be required upon the occurrence of specified events,
including upon the incurrence of certain additional indebtedness and upon the sale of certain
assets.
Covenants
The representations, covenants and events of default in the Credit Agreement are customary for
financing transactions of this nature and are substantially the same as those in existence prior to
the June 2009 amendment, except as follows:
| the total leverage ratio and fixed charge coverage ratio covenants for the fiscal quarters ending June 30, 2009 through and including December 31, 2010 (the Covenant Suspension Period) have been suspended; | ||
| during the Covenant Suspension Period, we must: (1) maintain minimum trailing twelve month consolidated EBITDA (as defined in the Credit Agreement) of $60.0 million for fiscal quarters through March 31, 2010, increasing incrementally to $66.0 million for fiscal quarter ended December 31, 2010, subject to certain adjustments; and (2) maintain minimum cash on hand (defined as unencumbered consolidated cash and cash equivalents) of at least $7.5 million; | ||
| we are restricted from incurring additional intercompany debt or making any intercompany investments other than to the parties to the Credit Agreement; | ||
| we may not incur additional indebtedness or liens, or make permitted acquisitions or restricted payments (except under certain circumstances, pursuant to the July 2010 amendment to the Credit Agreement, described under the caption July 2010 Amendment), during the Covenant Suspension Period (after the Covenant Suspension Period, the Credit Agreement will permit indebtedness, liens, permitted acquisitions and restricted payments, subject to certain leverage ratio and liquidity measurements); and | ||
| we must provide monthly unaudited financial statements to the lenders within 30 days after each calendar-month end. |
Events of default in the Credit Agreement include, among others, (a) the failure to pay when
due the obligations owing under the credit facilities; (b) the failure to perform (and not timely
remedy, if applicable) certain covenants; (c) cross default and cross acceleration; (d) the
occurrence of bankruptcy or insolvency events; (e) certain judgments against us or any of our
subsidiaries; (f) the loss, revocation or suspension of, or any material impairment in the ability
to use of or more of, any of our material FCC licenses; (g) any representation or warranty made, or
report, certificate or financial statement delivered, to the lenders subsequently proven to have
been incorrect in any material respect; and (h) the occurrence of a Change in Control (as defined
in the Credit Agreement). Upon the occurrence of an event of default, the lenders may terminate the
loan commitments, accelerate all loans and exercise any of their rights under the Credit Agreement
and the ancillary loan documents as a secured party.
As discussed above, our covenants for the fiscal quarter ended September 30, 2010, required
the following:
| a minimum trailing twelve month consolidated EBITDA of $64.0 million; | ||
| a $7.5 million minimum cash on hand; and | ||
| a limit on annual capital expenditures of $15.0 million annually. |
The trailing twelve month consolidated EBITDA and cash on hand for the fiscal quarter ended
September 30, 2010, were $81.7 million and $12.6 million, respectively.
If we had been unable to obtain the June 2009 amendments to the Credit Agreement, such that
the original total leverage ratio and the fixed charge coverage ratio covenants were still
operative, those covenants at September 30, 2010, would have been as follows:
| a maximum total leverage ratio of 6.5:1; and | ||
| a minimum fixed charge coverage ratio of 1.20:1. |
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At September 30, 2010, the total leverage ratio was 7.42 and the fixed charge coverage ratio
was 1.89. For the fiscal quarter ending March 31, 2011 (the first quarter after the Covenant
Suspension Period), the total leverage ratio covenant will be 6.50:1 and the fixed charge coverage
ratio covenant will be 1.20:1.
If we are unable to comply with our debt covenants, we would need to seek a waiver or
amendment to the Credit Agreement and no assurances can be given that we will be able to do so. If
we were unable to obtain a waiver or an amendment to the Credit Agreement in the event of a debt
covenant violation, we would be in default under the Credit Agreement, which could have a material
adverse impact on our financial position.
If we were unable to repay our debts when due, including upon an event of default, the lenders
under the credit facilities could proceed against the collateral granted to them to secure that
indebtedness. We have pledged substantially all of our assets as collateral under the Credit
Agreement. If the lenders accelerate the maturity of outstanding debt, we may be forced to
liquidate certain assets to repay all or part of the senior secured credit facilities, and we
cannot be assured that sufficient assets will remain after we have paid all of the debt. The
ability to liquidate assets is affected by the regulatory restrictions associated with radio
stations, including FCC licensing, which may make the market for these assets less liquid and
increase the chances that these assets will be liquidated at a significant loss.
As of September 30, 2010, prior to the effect of the forward-starting LIBOR based interest
rate swap arrangement entered into in May 2005 (May 2005 Option), the effective interest rate of
the outstanding borrowings pursuant to the senior secured credit facilities was approximately 4.0%.
As of September 30, 2010, the effective interest rate inclusive of the May 2005 Option was
approximately 6.8%.
July 2010 Amendment
On July 23, 2010, we entered into the July 2010 Amendment to the Credit Agreement. In
connection with the amendment, Bank of America, N.A. resigned as administrative agent and the
lenders appointed General Electric Capital Corporation as successor administrative agent under the
Credit Agreement for all purposes.
In addition, the July 2010 amendment grants us additional flexibility under the Credit
Agreement to, among other things, (i) consummate an asset swap of our radio stations in Canton,
Ohio for radio stations in the Ann Arbor, Michigan and Battle Creek, Michigan markets owned by
Capstar Radio (and currently operated by us pursuant to LMAs); (ii) subject to certain conditions,
acquire up to 100% of the equity interests of CMP or two of its subsidiaries, CMP Susquehanna
Holdings Corp. or CMP Susquehanna Radio Holdings Corp.; (iii) subject to certain conditions and if
necessary in order that certain of CMPs subsidiaries maintain compliance with applicable debt
covenants, make further equity investments in CMP, in an aggregate amount not to exceed $1.0
million; and (iv) enter into sale-leaseback transactions with respect to communications towers that
have an aggregate fair market value of no more than $20.0 million, so long as the net proceeds of
such transaction are used to repay indebtedness under our term loan facility.
In conjunction with the July 2010 amendment the Company capitalized approximately $0.2 million
in fees paid directly to the lenders.
Warrants
We issued warrants to the lenders in connection with the execution of the June 2009 amendment
to the Credit Agreement which allow the holders to acquire up to 1.25 million shares of our Class A
Common Stock. Each warrant is exercisable to purchase our underlying Class A Common Stock at an
exercise price of $1.17 per share and has an expiration date of June 29, 2019.
Accounting for the Modification of the Credit Agreement
The June 2009 amendment to the Credit Agreement was accounted for as a loan modification and
accordingly, we did not record a gain or a loss on the transaction. For the revolving credit
facility, we wrote off approximately $0.2 million of unamortized deferred financing costs, based on
the reduction of capacity. With respect to both debt instruments, we recorded $3.0 million of fees
paid directly to the lenders as a debt discount which are amortized as an adjustment to interest
expense over the remaining term of the debt.
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We classified the warrants as equity at $0.8 million at fair value at inception. The fair
value of the warrants was recorded as a debt discount and is amortized as an adjustment to interest
expense over the remaining term of the debt using the effective interest method.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
At September 30, 2010, 34.1% of our long-term debt bears interest at variable rates.
Accordingly, our earnings and after-tax cash flow are affected by changes in interest rates.
Assuming the current level of borrowings at variable rates and assuming a one percentage point
change in the average interest rate under these borrowings, it is estimated that our interest
expense and net income would have changed by $3.0 million for the nine months ended September 30,
2010. As part of our efforts to mitigate interest rate risk, in May 2005, we entered into a
forward-starting (effective March 2006) LIBOR-based interest rate swap agreement that effectively
fixed the interest rate, based on LIBOR, on $400.0 million of our current floating rate bank
borrowings for a three-year period. In May 2005, we also entered into an interest rate option
agreement (the May 2005 Option) that provided Bank of America, N.A. the right to enter into an
underlying swap agreement with us, on terms substantially identical to the May 2005 Swap, for two
years, from March 13, 2009 (the end of the term of the May 2005 Swap) through March 13, 2011. The
May 2005 Option was exercised on March 11, 2009. This instrument is intended to reduce our exposure
to interest rate fluctuations and was not entered into for speculative purposes. Segregating the
$206.5 million of borrowings outstanding at September 30, 2010 that are not subject to the interest
rate swap and assuming a one percentage point change in the average interest rate under these
borrowings, it is estimated that our interest expense and net income would have changed by
$1.0 million for the nine months ended September 30, 2010.
In the event of an adverse change in interest rates, our management would likely take actions,
in addition to the interest rate swap agreement discussed above, to mitigate our exposure. However,
due to the uncertainty of the actions that would be taken and their possible effects, additional
analysis is not possible at this time. Further, such analysis would not consider the effects of the
change in the level of overall economic activity that could exist in such an environment.
Item 4. Controls and Procedures
We maintain a set of disclosure controls and procedures (as defined in Rules 13a-15(e) and
15(d)-15(e) of the Securities Exchange Act of 1934, as amended, the Exchange Act) designed to
ensure that information we are required to disclose in reports that we file or submit under the
Exchange Act is recorded, processed, summarized and reported within the time periods specified in
Securities and Exchange Commission rules and forms. Such disclosure controls and procedures are
designed to ensure that information required to be disclosed in reports we file or submit under the
Exchange Act is accumulated and communicated to our management, including our Chairman, President
and Chief Executive Officer (CEO) and Senior Vice President and Chief Financial Officer (CFO),
as appropriate, to allow timely decisions regarding required disclosure. At the end of the period
covered by this report, an evaluation was carried out under the supervision and with the
participation of our management, including our CEO and CFO, of the effectiveness of the design and
operation of our disclosure controls and procedures. Based on that evaluation, the CEO and CFO have
concluded our disclosure controls and procedures were effective as of September 30, 2010.
There were no changes to our internal control over financial reporting during the fiscal
quarter ended September 30, 2010 that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
From time to time we are involved in various legal proceedings that are handled and defended
in the ordinary course of business. While we are unable to predict the outcome of these matters,
our management does not believe, based upon currently available facts, that the ultimate resolution
of any such proceedings would have a material adverse effect on our overall financial condition or
results of operations.
Item 1A. Risk Factors
Please refer to Part I, Item 1A, Risk Factors, in our annual report on Form 10-K for the
year ended December 31, 2009, for information regarding factors that could affect our results of
operations, financial condition and liquidity.
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
On May 21, 2008, our Board of Directors authorized the purchase, from time to time, of up to
$75.0 million of our Class A Common Stock, subject to the terms of the Credit Agreement and
compliance with other applicable legal requirements. During the three months ended September 30,
2010, we did not purchase any shares of our Class A Common Stock. As of September 30, 2010, we had
authority to repurchase an additional $68.3 million of our Class A Common Stock.
Item 3. Defaults upon Senior Securities
Not applicable.
Item 5. Other Information
Not applicable.
Item 6. Exhibits
10.1
|
| Amendment No. 4 to Credit Agreement, dated as of July 23, 2010, among the Company, Bank of America, N.A., as the existing administrative agent, General Electric Capital Corporation, as administrative agent, and the other Lenders signature thereto. | ||
31.1
|
| Certification of the Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | ||
31.2
|
| Certification of the Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | ||
32.1
|
| Officer Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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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.
CUMULUS MEDIA INC. |
||||
Date: November 1, 2010 | By: | /s/ Joseph P. Hannan | ||
Joseph P. Hannan | ||||
Senior Vice President, Treasurer and
Chief Financial Officer |
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EXHIBIT INDEX
10.1
|
| Amendment No. 4 to Credit Agreement, dated as of July 23, 2010, among the Company, Bank of America, N.A., as the existing administrative agent, General Electric Capital Corporation, as administrative agent, and the other Lenders signature thereto. | ||
31.1
|
| Certification of the Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | ||
31.2
|
| Certification of the Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | ||
32.1
|
| Officer Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
37