10-K 1 a09-35761_110k.htm 10-K

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

FORM 10-K

 

(Mark One)

 

x

 

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

 

 

 

For the fiscal year ended December 31, 2009

 

 

 

or

 

 

 

o

 

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

 

For the transition period from            to           

 

Commission File Number:  001-14461

 

GRAPHIC

 

Entercom Communications Corp.

(Exact name of registrant as specified in its charter)

 

Pennsylvania

 

23-1701044

(State or other jurisdiction of incorporation or organization)

 

(I.R.S. Employer Identification No.)

 

401 City Avenue, Suite 809

Bala Cynwyd, Pennsylvania 19004

(Address of principal executive offices and zip code)

 

(610) 660-5610

(Registrant’s telephone number, including area code)

 

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

 

Title of each class

 

Name of exchange on which registered

Class A Common Stock, par value $.01 per share

 

New York Stock Exchange

 

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

NONE

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o  No x

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes o  No x

 

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

 

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

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.

 

Large accelerated filer o

Accelerated filer o

 

 

Non-accelerated filer x

Smaller reporting company o

 

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

 

As of February 28, 2010, the aggregate market value of the Class A common stock held by non-affiliates of the registrant was $36,873,196 based on the June 30, 2009 closing price of $1.53 on the New York Stock Exchange on such date.

 

Class A common stock, $0.01 par value 29,675,448 Shares Outstanding as of February 28, 2010 (Class A Shares Outstanding includes 1,575,891 unvested and vested but deferred restricted stock units).

 

Class B common stock, $0.01 par value 7,457,532 Shares Outstanding as of February 28, 2010.

 

 

 



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DOCUMENTS INCORPORATED BY REFERENCE

 

Certain information in the registrant’s Definitive Proxy Statement for its 2010 Annual Meeting of Shareholders, pursuant to Regulation 14A, is incorporated by reference in Part III of this report, which will be filed with the Securities and Exchange Commission no later than April 30, 2010.

 

TABLE OF CONTENTS

 

 

 

Page

 

 

 

PART I

 

 

 

 

 

Item 1.

Business

1

Item 1A.

Risk Factors

7

Item 1B.

Unresolved Staff Comments

12

Item 2.

Properties

12

Item 3.

Legal Proceedings

13

Item 4.

[Reserved]

13

 

 

 

PART II

 

 

 

 

 

Item 5.

Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities

13

Item 6.

Selected Financial Data

18

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

21

Item 7A.

Quantitative and Qualitative Disclosures about Market Risk

43

Item 8.

Financial Statements and Supplementary Data

44

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

44

Item 9A.

Controls and Procedures

44

Item 9B.

Other Information

46

 

 

 

PART III

 

 

 

 

 

Item 10.

Directors, Executive Officers and Corporate Governance

46

Item 11.

Executive Compensation

46

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters

46

Item 13.

Certain Relationships and Related Transactions and Director Independence

46

Item 14.

Principal Accounting Fees and Services

46

 

 

 

PART IV

 

 

 

 

 

Item 15.

Exhibits, Financial Statement Schedules

47

 

 

 

Signatures

 

117

 

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CERTAIN DEFINITIONS

 

Unless the context requires otherwise, all references in this report to “Entercom,” “we,” “us,” “our” and similar terms refer to Entercom Communications Corp. and its consolidated subsidiaries, which would include any variable interest entities that are required to be consolidated under accounting guidance.

 

NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

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

 

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

 

You can identify forward-looking statements by our use of words such as “anticipates,” “believes,” “continues,” “expects,” “intends,” “likely,” “may,” “opportunity,” “plans,” “potential,” “project,” “will” and similar expressions which identify forward-looking statements, whether in the negative or the affirmative.  We cannot guarantee that we actually will achieve these plans, intentions or expectations.  These forward-looking statements are subject to risks, uncertainties and other factors, some of which are beyond our control, which could cause actual results to differ materially from those forecasted or anticipated in such forward-looking statements.  These risks, uncertainties and factors include, but are not limited to, the factors described in Part I, Item 1A, “Risk Factors.”

 

The pro forma information reflects adjustments and is presented for comparative purposes only and does not purport to be indicative of what has occurred or indicative of future operating results or financial position.

 

You should not place undue reliance on these forward-looking statements, which reflect our view only as of the date of this report.  We undertake no obligation to update these statements or publicly release the result of any revision(s) to these statements to reflect events or circumstances after the date of this report or to reflect the occurrence of unanticipated events.

 

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PART I

 

ITEM 1.                 BUSINESS

 

We are one of the five largest radio broadcasting companies in the United States with a nationwide portfolio in excess of 100 stations in 23 markets, including San Francisco, Boston, Seattle, Denver, Portland, Sacramento and Kansas City. We were organized in 1968 as a Pennsylvania corporation.

 

Our Strategy

 

Our strategy focuses on providing compelling content in the communities we serve to enable us to offer our advertisers an effective marketing platform to reach a large targeted local audience.  The principal components of our strategy are to: (i) build strongly-branded radio stations; (ii) develop market leading station clusters; (iii) focus on creating effective integrated marketing solutions for our customers that incorporate our audio, digital and experiential assets; and (iv) recruit, develop, motivate and retain superior employees.

 

Source Of Revenue

 

The primary source of revenues for our radio stations is the sale of advertising time to local, regional and national spot advertisers and national network advertisers.  A station’s local sales staff generates the majority of its local and regional advertising sales through direct solicitations of local advertising agencies and businesses. We retain a national representation firm to sell national spot commercial airtime on our stations to advertisers outside of our local markets. National spot radio advertising typically accounts for approximately 20% of a radio station’s revenues. A growing source of revenues is from station websites and streaming audio which allow for enhanced audience interaction and participation as well as integrated advertising.

 

We believe that radio is an efficient and effective means of reaching specifically identified demographic groups.  Our stations are typically classified by their format, such as news, talk, classic rock, adult contemporary, alternative, country and jazz, among others.  A station’s format enables it to target specific segments of listeners sharing certain demographics. Advertisers and stations use data published by audience measuring services to estimate how many people within particular geographical markets and demographics listen to specific stations. Our geographically and demographically diverse portfolio of radio stations allows us to deliver targeted messages to specific audiences for advertisers on a local, regional and national basis.

 

Competition

 

The radio broadcasting industry is highly competitive.  Our stations compete for listeners and advertising revenue with other radio stations within their respective markets. In addition, our stations compete for audiences and advertising revenues with other media such as: broadcast and cable television, newspapers and magazines, outdoor advertising, direct mail, yellow pages, Internet, satellite radio, wireless media alternatives, cellular phones and other forms of advertisement.

 

The following are some of the factors that are important to a radio station’s competitive position: (i) audience ratings; (ii) program content; (iii) management talent and expertise; (iv) sales talent and expertise; (v) audience characteristics; (vi) signal strength; and (vii) the number and characteristics of other radio stations and other advertising media in the market area.  We work to improve our competitive position through promotional campaigns aimed at the demographic groups targeted by our stations and sales efforts designed to attract advertisers. Radio station operators are subject to the possibility of another station changing programming formats to compete directly for listeners and advertisers.

 

We believe owning multiple radio stations in a market allows us to provide our listeners with a more diverse programming selection and a more efficient means for our advertisers to reach those listeners. By owning multiple stations in a market, we are also able to operate our stations with more highly skilled local management teams and eliminate duplicative operating and overhead expenses.

 

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Our Radio Stations

 

We operate with a nationwide portfolio of 23 markets, including San Francisco, Boston, Seattle, Denver, Portland, Sacramento, Kansas City, Indianapolis, Milwaukee, Austin, Norfolk, Buffalo, New Orleans, Memphis, Providence, Greensboro, Greenville/Spartanburg, Rochester, Madison, Wichita, Wilkes-Barre/Scranton, Springfield (MA) and Gainesville/Ocala.

 

Federal Regulation Of Radio Broadcasting

 

Overview.  The radio broadcasting industry is subject to extensive and changing regulation of, among other things, ownership limitations, program content, advertising content, technical operations and business and employment practices. The ownership, operation and sale of radio stations are subject to the jurisdiction of the Federal Communications Commission (“FCC”) pursuant to the Communications Act of 1934, as amended (the “Communications Act”). Among other things, the FCC: (i) assigns frequency bands for broadcasting; (ii) determines the particular frequencies, locations, operating power, and other technical parameters of stations; (iii) issues, renews, revokes and modifies station licenses; (iv) determines whether to approve changes in ownership or control of station licenses; (v) regulates equipment used by radio stations; (vi) adopts and implements regulations and policies which directly affect the ownership, operation and business and employment practices of stations; and (vii) regulates certain aspects of other electronic media which compete with the broadcast industry.

 

The following is a brief summary of certain provisions of the Communications Act and of certain specific FCC regulations and policies. This summary is not a comprehensive listing of all of the regulations and policies affecting radio stations.  For further information concerning the nature and extent of federal regulation of radio stations, you should refer to the Communications Act, FCC rules and FCC public notices and rulings.

 

FCC Licenses.  The operation of a radio broadcast station requires a license from the FCC.  Certain of our subsidiaries hold the FCC licenses for our stations.  The number of radio stations that can operate in a given area or market is limited by the number of AM frequencies permitted to serve a given area and the number of FM frequencies allotted by the FCC to communities in an area or market, based upon considerations of interference to and from other operating or authorized stations. The FCC’s multiple ownership rules further limit the number of stations serving the same area that may be owned or controlled by a single individual or entity.

 

There is no national limit on the number of radio stations that a single entity may own. Radio station ownership is regulated by rules applicable to the number of stations that may be owned in common in an individual local radio market.  The FCC ownership rules define a “local radio market” as comprising all radio stations, both commercial and non-commercial, which are included within a designated Arbitron market or, for stations located outside of Arbitron markets, all stations which have certain overlapping signal contours.  Digital radio channels authorized for AM and FM stations do not count as separate “stations” for purposes of the ownership limitations. The radio ownership rules limit the number of radio stations that can be owned by a single individual or entity in a local radio market as follows:

 

·                  in markets with 45 or more commercial and non-commercial radio stations, ownership is limited to eight commercial stations, no more than five of which can be in the same service (that is, AM or FM);

 

·                  in markets with 30 to 44 commercial and non-commercial radio stations, ownership is limited to seven commercial stations, no more than four of which can be in the same service;

 

·                  in markets with 15 to 29 commercial and non-commercial radio stations, ownership is limited to six commercial stations, no more than four of which can be in the same service; and

 

·                  in markets with 14 or fewer commercial and non-commercial radio stations, ownership is limited to the fewer of five commercial stations or not more than 50% of stations in the market, and no more than three of the stations can be in the same service.

 

Since the number of stations in a local market may fluctuate from time to time, the number of stations that can be owned by a single individual or entity in a given market can vary over time.  Once the FCC approves the ownership of a cluster of stations in a market, that owner may continue to hold those stations under the

 

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“grandfathering” policies, despite a decrease in the number of stations in the market.  Market clusters, such as our stations in Greenville, Kansas City and Wilkes-Barre/Scranton, which had been licensed under the former ownership rules but may exceed the ownership limits when applying the Arbitron-based market standard of the present rule, are considered to be “grandfathered.” If, at the time of a proposed future transaction, a cluster does not comply with the multiple ownership limitations based upon the number of stations then present in the market, the entire cluster cannot be transferred intact to a single party unless the purchaser qualifies as an “eligible entity” under specified small business standards and meets certain control tests, or the purchaser promises to file within 12 months following consummation an application to assign the “excess” stations in the market to an eligible entity or to an irrevocable divestiture trust for ultimate assignment of such stations to an eligible entity.

 

Classifications.  AM stations are classified as Class A, B, C or D depending on the type of channel and size and nature of the area they are designed to serve. Class A stations operate on an unlimited time basis and are designed to render primary and secondary service over an extended area. Class B stations operate on an unlimited time basis and are designed to render service only over a primary service area. Class C stations operate on a local channel and are designed to render service only over a primary service area that may be reduced as a consequence of interference. Class D stations operate either during daytime hours only, during limited times only or on an unlimited time basis with low nighttime power.

 

The class of an FM station determines the minimum and maximum facilities requirements. Some FM class designations depend upon the geographic zone in which the transmitter site of the FM station is located. In general, commercial FM stations are classified in order of increasing maximum power and antenna height, as follows: Class A, B1, C3, B, C2, C1, C0 and C.  Under certain circumstances, Class C FM stations that do not meet the minimum antenna height requirements are subject to an involuntary downgrade to Class C0 to correspond to the existing operating characteristics of the station.

 

Multiple Ownership Rules.  The Communications Act imposes specific limits on the number of commercial radio stations an individual or entity can own in a single market.  FCC rules and regulations implement these limitations.  On June 2, 2003, the FCC adopted new ownership rules following a comprehensive review of its ownership regulations. The ownership rules adopted in 2003 included: (i) new cross-media limits that in certain markets eliminated the newspaper-broadcast cross-ownership ban and altered the television-radio cross-ownership limitations; and (ii) regulations that revised the manner in which the radio numeric ownership limitations were to be applied, substituting where available geographic markets as determined by Arbitron in place of the former standard and, in areas outside of Arbitron markets, the relevant radio market for purposes of the rules remained determined by overlap of specified signal contours. The former standard was based on certain overlapping signal contours.

 

The 2003 ownership rules were appealed to the U.S. Court of Appeals for the Third Circuit, which imposed a stay of the rules with the exception that the court allowed: (a) the use of Arbitron markets to define local radio markets where available; (b) the inclusion of non-commercial radio stations in determining the number of stations in a radio market; (c) the attribution of joint sales agreements with in-market stations; and (d) the limitations on the transfers of non-compliant ownership clusters.  On December 18, 2007, the FCC adopted an order that modified only the newspaper/broadcast cross-ownership rule to adopt a rebuttable presumption permitting the cross-ownership of one newspaper and one television or radio station in the top 20 television markets under certain circumstances, and establishing a waiver procedure applicable to such combinations in smaller markets.  The FCC declined to make changes to any other broadcast ownership rules, and retained the rules as then in effect.  This decision was also appealed to the Third Circuit Court of Appeals. The FCC has advised the Court that the December 2007 decision may not represent the majority view of the current Commission, and asked the Court to defer further proceedings contemplated before the FCC. The Court has recently requested that the FCC show cause why the stay of the newspaper/broadcast cross-ownership rule, as adopted in December 2007, should not be lifted and the appeals heard. At this time, the FCC’s decision remains subject to both administrative and judicial appeals.

 

As presently applied, the FCC’s newspaper-broadcast cross-ownership rules impose limitations on the circumstances under which the same party may own a broadcast station and a daily newspaper in the same geographic market, as described above.  The FCC’s radio-television cross-ownership rules limit the number of radio stations that a local owner of television stations may hold.  We own no television stations or daily newspapers, but, to the extent these limitations continue to be enforced, these cross-media rules may limit the prospective buyers in the market of any stations we may wish to sell.

 

Ownership Attribution. In the application of the ownership limitations, the FCC generally only considers “attributable” ownership interests.  Attributable interests generally include: (i) equity and debt interests which when combined exceed 33% of a licensee’s or other media’s total asset value, if the interest holder supplies

 

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more than 15% of a station’s total weekly programming or has an attributable interest in any same-market media (television, radio, cable or newspaper), with a higher threshold in the case of investments in certain “eligible entities” acquiring broadcast stations; (ii) a 5% or greater direct or indirect voting stock interest, including certain interests held in trust, unless the holder is a qualified passive investor, in which case the threshold is a 20% or greater voting stock interest; (iii) any equity interest in a limited liability company or a partnership, including a limited partnership, unless properly “insulated” from management activities; and (iv) any position as an officer or director of a licensee or of its direct or indirect parent.

 

The FCC also considers the provision by the owner of one radio station of more than 15% of hours of weekly programming or the sale of more than 15% of the weekly advertising of another radio station serving substantially the same area under agreements commonly referred to as time brokerage or joint sales agreements, or otherwise, to represent an attributable interest of the party providing the programming or selling the advertising even though the ownership of the station broadcasting the programming or the advertising is distinct from that of the provider.  In instances, as in our case, where there is a “single majority voting shareholder,” voting stock interests held by other owners in excess of the five percent standard described above are considered to be non-attributable.  This exemption remains in effect, but has been under review by the FCC for a number of years.

 

Alien Ownership Rules.  The Communications Act prohibits the issuance to or holding of broadcast licenses by foreign governments or aliens, non-U.S. citizens, whether individuals or entities, including any interest in a corporation which holds a broadcast license if more than 20% of the capital stock is owned or voted by aliens. In addition, the FCC may prohibit any corporation from holding a broadcast license if the corporation is directly or indirectly controlled by any other corporation of which more than 25% of the capital stock is owned of record or voted by aliens if the FCC finds that the prohibition is in the public interest. Our articles of incorporation prohibit the ownership, voting and transfer of our capital stock in violation of the FCC restrictions, and prohibit the issuance of capital stock or the voting rights such capital stock represents to or for the account of aliens or corporations otherwise subject to control by aliens in excess of the FCC limits.

 

License RenewalThe licenses issued by the FCC for radio stations are renewable authorizations that are ordinarily granted for an eight year term, which is standardized for all stations in a particular state.  A station may continue to operate beyond the expiration date of its license if a timely filed license renewal application is pending. During the periods when a renewal application is pending, informal objections to and petitions to deny the renewal application can be filed by interested parties, including members of the public, on a variety of grounds. The FCC is required to renew a broadcast station license if the FCC finds that the station has served the public interest, convenience and necessity; there have been no serious violations by the licensee of the Communications Act or the FCC’s rules and regulations; and there have been no other violations by the licensee of the Communications Act or the FCC’s rules and regulations that, taken together, constitute a pattern of abuse.  In a pending rule-making proceeding, the FCC has sought comments on the adoption of processing guidelines for renewal applications regarding a station’s locally-oriented programming performance. The effect of whether and to what extent any such requirements are ultimately adopted and become effective cannot currently be determined.

 

If a challenge is filed against a renewal application, and, as a result of an evidentiary hearing, the FCC determines that the licensee has failed to meet certain fundamental requirements and that no mitigating factors justify the imposition of a lesser sanction, the FCC may deny a license renewal application. Historically, FCC licenses have generally been renewed.  A petition to deny the renewal applications of all of our Sacramento radio stations has been filed and is pending, and the renewal applications of certain other stations remain pending due to listener complaints.  Subject to the resolution of open FCC inquiries, we have no reason to believe that our licenses will not continue to be renewed in the ordinary course, although there can be no assurance to that effect. The non-renewal of one or more of our licenses could have a material adverse effect on our business.

 

Transfer Or Assignment Of Licenses.  The Communications Act prohibits the assignment of broadcast licenses or the transfer of control of a broadcast licensee without the prior approval of the FCC. In determining whether to grant such approval, the FCC considers a number of factors pertaining to the existing licensee and the proposed licensee, including:

 

·                  compliance with the various rules limiting common ownership of media properties in a given market;

 

·                  the “character” of the proposed licensee; and

 

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·                  compliance with the Communications Act’s limitations on alien ownership as well as compliance with other FCC regulations and policies.

 

To obtain FCC consent for the assignment or transfer of control of a broadcast license, appropriate applications must be filed with the FCC. Interested parties may file objections or petitions to deny such applications. When evaluating an assignment or transfer application, the FCC is prohibited from considering whether the public interest might be served by assignment or transfer of the broadcast license to any party other than the one specified in the application.  No assignment or transfer application will be granted for any station by the FCC while a renewal application is pending for the station. Once an assignment or transfer application is granted, interested parties have 30 days following public notice of the grant to seek reconsideration of that grant.  The FCC usually has an additional ten days within which to set aside the grant on its own motion.  The Communications Act permits certain court appeals of a contested grant as well.

 

Programming And Operation.  The Communications Act requires broadcasters to serve the “public interest.” A licensee is required to present programming that is responsive to issues in the station’s community of license and to maintain records demonstrating this responsiveness. The FCC regulates, among other things, political advertising; sponsorship identification; the advertisement of contests and lotteries; the conduct of station-run contests; obscene, indecent and profane broadcasts; certain employment practices; and certain technical operation requirements, including limits on human exposure to radio-frequency radiation.  The FCC considers complaints from listeners concerning a station’s public service programming, employment practices, or other operational issues when processing a renewal application filed by a station, but the FCC may consider complaints at any time and may impose fines or take other action for violations of the FCC’s rules separate from its action on a renewal application.

 

In recent years, the FCC has received an increasing number of complaints alleging that broadcast stations have carried indecent programming at times when children may be in the audience, in violation of federal criminal law and the FCC’s policies which prohibit programming that is deemed to be indecent or profane under FCC decisions and is broadcast during the period between 6:00 am and 10:00 pm; the period between 10:00 pm through 6:00 am is considered to be a “safe harbor” period and less stringent standards apply to programming carried then. FCC regulations prohibit the broadcast of obscene material at any time. The FCC has greatly intensified its enforcement activities with respect to programming which it considers indecent or profane, including: (i) adopting rules to implement the statutory increase in the maximum fine which may be assessed for the broadcast of indecent or profane programming to $325,000 for a single violation, up to a maximum of $3,000,000 for a continuing violation; (ii) imposing fines on a per utterance basis instead of the imposition of a single fine for an entire program; and (iii) repeatedly warning broadcasters that future “serious” violations may result in the commencement of license revocation proceedings.  There are a number of outstanding indecency proceedings in which we are defending our stations’ conduct, and there may be other complaints of this nature which have been submitted to the FCC of which we have not yet been notified.

 

In April 2009, the U.S. Supreme Court reversed a decision of the U.S. Court of Appeals for the Second Circuit involving certain aspects of the FCC’s indecency rules, upholding the FCC’s policies under standards of administrative law, but remanding the case to the Second Circuit for the development of a full record on the constitutional challenge to the rules. In a case involving a separate aspect of the FCC’s indecency rules, the U.S. Court of Appeals for the Third Circuit reversed the FCC’s finding of indecency and, after the FCC sought review, the U.S. Supreme Court summarily remanded that decision without opinion to the Third Circuit for reconsideration in light of the reversal and remand of the Second Circuit case. Both cases were argued in 2010.  For further discussion, please refer to Part I, Item 3, “Legal Proceedings,” and to the risk factors described in Part I, Item 1A, “Risk Factors.”

 

The Communications Act and the FCC rules require that, when it is not evident from the content that any money, goods, services or other valuable consideration has been paid or promised to a station or an employee for the broadcast of certain programming, appropriate sponsorship identification announcement(s) must be given.  Following inquiries initiated by the FCC into sponsorship identification practices at several media companies, including us, we and other media companies entered into consent decrees pursuant to which we have adopted certain policies and procedures regarding our relationships with record labels and artists concerning the broadcast of music on our stations. We admitted no violations of any FCC rules in connection with the investigation, and the FCC found none.  We have also entered into a consent judgment terminating a lawsuit brought by the New York Attorney General in which we agreed to adopt a number of business reforms and practices in the future and to make a payment to a non-profit organization to support music education and appreciation.  We admitted no liability in this action, and the court found none.  The FCC has under consideration rule-making proceedings concerning other sponsorship

 

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identification issues, such as product placement.  We cannot determine if any new regulations will ultimately be adopted, and if adopted, what effect such regulations may have on our operations.

 

The FCC rules prohibit employment discrimination by broadcast stations on the basis of race, religion, color, national origin and gender. These rules require broadcasters generally to: (i) refrain from discrimination in hiring and promotion; (ii) widely disseminate information about all full-time job openings to all segments of the community to ensure that all qualified applicants have sufficient opportunity to apply for the job; (iii) send job vacancy announcements to recruitment organizations and others in the community indicating an interest in all or some vacancies at the station; and (iv) implement a number of specific recruitment outreach efforts, such as job fairs, internship programs, and interaction with educational and community groups from among a menu of approaches itemized by the FCC.  The applicability of these policies to part-time employment opportunities is the subject of a pending further rule-making proceeding.  In addition, the FCC bars discrimination with regard to race or gender in station transactions and has other rules designed to enhance the diversification of station ownership.

 

The FCC has rules which concern the manner in which on-air contests conducted by a station are announced and conducted, requiring in general that the material rules and terms of the contest be broadcast periodically and that the contest be conducted substantially as announced.  The FCC has a pending investigation into a contest at one of our stations (see Item 3, “Legal Proceedings,” for further discussion). We are cooperating in this investigation. In addition, a civil lawsuit arising from this incident has been resolved.

 

The FCC has adopted procedures that in general require the auction of broadcast spectrum in circumstances when two or more parties have applications for new radio facilities or when applications propose major changes that are mutually exclusive. Such procedures may limit our efforts to build new stations, or to modify or expand the broadcast signals of our existing stations.

 

Enforcement Authority.  The FCC has the power to impose penalties for violations of its rules under the Communications Act, including the imposition of monetary fines, the issuance of short-term licenses, the imposition of a condition on the renewal of a license, the denial of authority to acquire new stations, and the revocation of operating authority.  The maximum fine for a single violation of the FCC’s rules (other than indecency rules) is currently $37,500.  The maximum fine for a violation of the FCC’s indecency rules is $325,000 for each violation or each day of a continuing violation, with a maximum fine of up to $3,000,000 for a continuing violation.

 

Proposed And Recent Changes. Congress, the FCC, and other federal agencies are considering or may in the future consider and adopt new laws, regulations and policies regarding a wide variety of matters that could: (1) affect, directly or indirectly, the operation, ownership and profitability of our radio stations; (2) result in the loss of audience share and advertising revenues for our radio stations; and (3) affect our ability to acquire additional radio stations or to finance those acquisitions.  We cannot predict what other matters may be proposed or considered by the FCC or Congress, and we are unable to determine what effect, if any, the adoption of any such restrictions or limitations may have on our operations.

 

Federal Antitrust Laws.  The federal agencies responsible for enforcing the federal antitrust laws, the Federal Trade Commission and the Department of Justice, may investigate certain acquisitions. For an acquisition meeting certain size thresholds, the Hart-Scott-Rodino Antitrust Improvements Act of 1976 requires the parties to file Notification and Report Forms with the Federal Trade Commission and the Department of Justice and to observe specified waiting-period requirements before consummating the acquisition.

 

HD Radio®

 

The Federal Communications Commission selected In-Band On-Channel™ (“IBOC”) as the exclusive technology for introduction of terrestrial digital operations by AM and FM radio stations. The technology, developed by iBiquity Digital Corporation, is also known as “HD Radio®.”  We have a minority equity interest in iBiquity. We currently utilize HD Radio® digital technology on most of our FM stations.  We are also a founding member of the HD Digital Radio Alliance Association, which was formed to promote and develop HD Radio® and its digital multicast operations.  The advantages of digital audio broadcasting over traditional analog broadcasting technology include improved sound quality, additional channels and the ability to offer a greater variety of auxiliary services.  HD Radio® technology permits a station to transmit radio programming in both analog and digital formats.

 

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Employees

 

As of March 1, 2010, we had a staff of approximately 1,560 full-time employees and 750 part-time employees.  With respect to certain of our stations in our Kansas City and San Francisco markets, we are a party to collective bargaining agreements with the American Federation of Television and Radio Artists.  Approximately 19 employees are represented by these collective bargaining agreements.  We believe that our relations with our employees are good.

 

Corporate Governance

 

Code Of Business Conduct And Ethics.  We have adopted a Code of Business Conduct and Ethics that applies to each of our employees including our principal executive officers and senior members of our finance department. Our Code of Business Conduct and Ethics can be found on the “Investors” tab / “Governance” sub-page of our website located at www.entercom.com.

 

Board Committee Charters.  Each of our Audit Committee, Compensation Committee and Nominating/Corporate Governance Committee has a committee charter as required by the rules of the New York Stock Exchange.  These committee charters can be found on the “Investors” tab / “Governance” sub-page of our website located at www.entercom.com.

 

Corporate Governance Guidelines.  New York Stock Exchange rules require our Board of Directors to establish certain Corporate Governance Guidelines.  These guidelines can be found on the “Investors” tab / “Governance” sub-page of our website located at www.entercom.com.

 

Environmental Compliance

 

As the owner, lessee or operator of various real properties and facilities, we are subject to various federal, state and local environmental laws and regulations. Historically, compliance with these laws and regulations has not had a material adverse effect on our business. There can be no assurance, however, that compliance with existing or new environmental laws and regulations will not require us to make significant expenditures of funds.

 

Seasonality

 

Seasonal revenue fluctuations are common in the radio broadcasting industry and are due primarily to fluctuations in advertising expenditures. Our revenues are typically lowest in the first calendar quarter.

 

Internet Address And Internet Access To Periodic And Current Reports

 

You can find more information about us at our Internet website located at www.entercom.com. Our Annual Report on Form 10-K, our Quarterly Reports on Form 10-Q, our Current Reports on Form 8-K and any amendments to those reports are available free of charge through our Internet website as soon as reasonably practicable after we electronically file such material with the Securities and Exchange Commission (the “SEC”).  We will also provide a copy of our annual report on Form 10-K upon any written request.

 

ITEM 1A.    RISK FACTORS

 

Many statements contained in this report are forward-looking in nature (see Note Regarding Forward-Looking Statements at the beginning of this Form 10-K). These statements are based on current plans, intentions or expectations, and actual results could differ materially as we cannot guarantee that we will achieve these plans, intentions or expectations.  Among the factors that could cause actual results to differ are the following:

 

The Global Economic Crisis Has Affected Our Business And We Cannot Predict Its Future Impact.

 

Recent economic conditions had a negative impact on our results of operations during 2009 due to reduced demand in the advertising sector. This negative trend appears to be reversing in the first quarter of 2010, primarily due to the strengthening of advertiser demand. As the economy and the advertising environment rebound, we would expect to compare favorably to prior periods. If economic conditions worsen, a number of negative effects on our business could result, including a decrease in our net revenues and profitability and further impairment of our assets.

 

The capital and credit markets experienced unprecedented volatility and disruption in 2008 and 2009. If the economic crisis were to relapse, there can be no assurance that we will not experience an adverse effect on our ability to access capital, which may be material to our business, financial condition and results of operations.  In addition,

 

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our ability to access the capital markets may be severely restricted at a time when we would like or need to do so, which could have an impact on our flexibility to react to changing economic and business conditions.

 

We Must Comply With The Covenants In Our Senior Secured Credit Facility, Which Restricts Our Operational Flexibility.

 

Our senior secured credit facility (the “Bank Facility”) as amended during March 2010 contains provisions that restrict and under certain circumstances limit our ability to borrow money, make acquisitions, investments or restricted payments including dividends, the repurchase of stock, swap or sell assets, or merge or consolidate with another company.  We have pledged substantially all of our assets, including the stock or equity interests of our subsidiaries to secure the debt under our Bank Facility.

 

Our Bank Facility requires us to maintain compliance with specific financial covenants. Our ability to meet these financial covenants can be affected by operating performance or other events beyond our control, and we cannot be assured that we will meet these covenants. The recent economic crisis reduced demand for advertising in general, including advertising on our radio stations. Our ability to maintain compliance with our covenants will be highly dependent on our results of operations as the economy recovers from the economic downturn. Specifically, our Bank Facility as amended, requires us to comply with certain financial covenants which are defined terms within the agreement, including: (1) a maximum Consolidated Leverage Ratio of Consolidated Funded Indebtedness to Consolidated Operating Cash Flow that cannot exceed seven times in 2010 and which decreases quarterly in increments in 2011 to a ratio of six times; and (2) a minimum ratio of Consolidated Operating Cash Flow to Consolidated Interest Charges of two times.

 

Failure to comply with our financial covenants or other terms of our Bank Facility and the failure to negotiate and obtain any required relief from our lenders could result in the acceleration of the maturity of our outstanding bank debt and our lenders could proceed against our assets, including the equity interests of our subsidiaries.  Under these circumstances, the acceleration of our debt could have a material adverse effect on our business.

 

We Have Substantial Indebtedness Which Could Have Important Consequences.

 

Historically, we have carried significant amounts of debt. We have outstanding indebtedness to our bank and bond holders of $737.2 million (including a $1.5 million letter of credit) as of December 31, 2009 that could have an impact on us. For example, these obligations:

 

·                  increase our vulnerability in an economic downturn, limit our ability to withstand competitive pressures and reduce our flexibility in responding to changing business and economic conditions;

 

·                  impair our ability to obtain additional financing for working capital, capital expenditures, acquisitions and general corporate or other purposes;

 

·                  require us to dedicate a substantial portion of our cash flow from operations to debt service, thereby reducing the availability of cash flow for other purposes; and

 

·                  limit or prohibit our ability to pay dividends and make other distributions.

 

The undrawn amount of the Bank Facility’s revolving credit (“Revolver”) was $289.5 million as of December 31, 2009.  The amount of the Revolver available to us is a function of covenant compliance at the time of borrowing.  Based on our financial covenant analysis as of December 31, 2009, we would be limited to borrowings significantly less than the undrawn limit unless such borrowings were used to repay indebtedness or for transactions that increase cash flow for purposes of covenant calculation.

 

Under our Bank Facility, as amended, we have restrictions that under certain circumstances, limit our ability to borrow money, make acquisitions, investments or restricted payments including dividends, the repurchase of stock, swap or the sale of assets, or the merger or consolidation with another company. If our Consolidated Leverage Ratio exceeds six times, then we have further restrictions on the use of the Revolver, including but not limited to, the elimination of any funding for dividends and share repurchases. In addition to cash flow from operations, we plan to use the Revolver to fund the amortization of the term loan (“Term Loan”), which was $370.0 million outstanding as of December 31, 2009.

 

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Notwithstanding the foregoing, we may from time-to-time seek to amend our existing Bank Facility or obtain other funding or additional financing, which may result in higher interest rates.  Amending our Bank Facility or obtaining other funding or additional financing prior to the expiration of the current agreement will be essential as the Revolver will be due as a balloon payment upon the expiration of the Bank Facility on June 30, 2012.  Failure to refinance upon maturity could result in default and have a material adverse impact on our Company.

 

We Face Many Unpredictable Business Risks, Both General And Specific To The Radio Broadcasting Industry, Which Could Have A Material Adverse Effect On Our Future Operations.

 

Our future operations are subject to many business risks, including those risks that specifically influence the radio broadcasting industry, which could have a material adverse effect on our business including:

 

·                  economic conditions, both generally and relative to the radio broadcasting industry;

 

·                  shifts in population, demographics or audience tastes;

 

·                  the level of competition for advertising revenues with other radio stations and other advertising- supported media;

 

·                  technological changes and innovations;

 

·                  new laws and regulations;

 

·                  the imposition by law or regulation of new or increased fees on radio broadcasting and related activities; and

 

·                  changes in governmental regulations and policies, and actions of federal regulatory bodies, including the FCC, the Department of Justice and the Federal Trade Commission.

 

Given the inherent unpredictability of these variables, we cannot predict with any degree of certainty, what effect, if any, these variables will have on our future operations. Generally, advertising tends to decline during economic recession or downturn, as evidenced by the negative impact that the current economic downturn has had on radio advertising.  Our advertising revenue is likely to be adversely affected by a recession or downturn in the United States economy, the economy of an individual geographic market in which we own or operate radio stations, or other events or circumstances that adversely affect advertising activity.

 

Our Radio Stations May Be Adversely Affected By Competition For Advertising Revenues.

 

Our radio stations are in a highly competitive business. Our radio stations compete for audiences and advertising revenues within their respective markets directly with other radio stations, as well as with other media, such as newspapers and magazines, Internet, broadcast and cable television, outdoor advertising and direct mail. Audience ratings and market shares are subject to change, and any change in a particular market could have a material adverse effect on the revenue of our stations located in that market. While we already compete in some of our markets with other stations with similar programming formats, if another existing or new radio station in a market were to convert its programming format to a format similar to one of our stations or if an existing competitor were to strengthen its operations, our stations could suffer a reduction in ratings and/or advertising revenue and could incur increased promotional and other expenses. We cannot be assured that any of our stations will be able to maintain or increase their current audience ratings and advertising revenues.

 

We Must Respond To The Increased Competition For Audio Distribution And The Rapid Changes In Technology, Services And Standards That Characterize Our Industry In Order To Remain Competitive.

 

The radio broadcasting industry is subject to rapid technological change, evolving industry standards and the emergence of new media technologies and services. These technologies and services, some of which are commercial free, include the following:

 

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·                  personal digital audio devices (e.g., iPods®, mp3® players, audio via WiFi, mobile phones and WiMAX);

 

·                  Internet radio services such as Pandora;

 

·                  satellite-delivered digital audio radio services;

 

·                  HD Radio®, which provides multi-channel, multi-format digital radio services in the same bandwidth currently occupied by traditional AM and FM radio services; and

 

·                  low-power FM radio, which could result in additional FM radio broadcast outlets.

 

We cannot predict the effect, if any, that competition arising from new technologies or regulatory changes may have on the radio broadcasting industry or on our financial condition and results of operations.

 

We Are Dependent On Federally Issued Licenses To Operate Our Radio Stations And Are Subject To Extensive Federal Regulation.

 

The radio broadcasting industry is subject to extensive regulation by the FCC under the Communications Act of 1934 (see, for example, the discussion of FCC regulations contained in Part I, Item 1, “Business,” of this Form 10-K). We are required to obtain licenses from the FCC to operate our radio stations. Licenses are normally granted for a term of eight years and are renewable. Although the vast majority of FCC radio station licenses are routinely renewed, we cannot be assured that the FCC will approve our future renewal applications or that the renewals will not include conditions or qualifications. A number of our applications to renew our station licenses have been objected to by third parties and remain pending before the FCC. The non-renewal, or renewal with substantial conditions or modifications, of one or more of our licenses could have a material adverse effect on us.

 

We must comply with extensive FCC regulations and policies in the ownership and operation of our radio stations. FCC regulations limit the number of radio stations that a licensee can own in a market, which could restrict our ability to consummate future transactions and in certain circumstances could require us to divest some radio stations. The FCC’s rules governing our radio station operations impose costs on our operations, and changes in those rules could have an adverse effect on our business. The FCC also requires radio stations to comply with certain technical requirements to limit interference between two or more radio stations. If the FCC relaxes these technical requirements, it could impair the signals transmitted by our radio stations and could have a material adverse effect on us. Moreover, these FCC regulations and others may change over time, and we cannot be assured that changes would not have a material adverse effect on us. The FCC has a pending investigation into a contest at one of our stations where a contestant died after participating in the contest. We are currently the subject of several other investigations by the FCC.

 

The FCC Has Engaged In Vigorous Enforcement Of Its Indecency Rules Against The Broadcast Industry, Which Could Have A Material Adverse Effect On Our Business.

 

FCC regulations prohibit the broadcast of obscene material at any time and indecent or profane material between the hours of 6:00 a.m. and 10:00 p.m. In the last several years, the FCC has enhanced its enforcement efforts relating to the regulation of indecency and has threatened on more than one occasion to initiate license revocation proceedings against a broadcast licensee who commits a “serious” indecency violation. Congress has dramatically increased the penalties for broadcasting obscene, indecent or profane programming, and these penalties may potentially subject broadcasters to license revocation, renewal or qualification proceedings in the event that they broadcast such material. In addition, the FCC’s heightened focus on the indecency regulatory scheme, against the broadcast industry generally, may encourage third parties to oppose our license renewal applications or applications for consent to acquire broadcast stations. Several of our stations are currently subject to indecency-related inquiries and/or proposed fines at the FCC’s Enforcement Bureau as well as objections to our license renewals based on such inquiries and proposed fines, and we may in the future become subject to additional inquiries or proceedings related to our stations’ broadcast of obscene, indecent or profane material. To the extent that these inquiries or other proceedings result in the imposition of fines, a settlement with the FCC, revocation of any of our station licenses or denials of license renewal applications, our results of operation and business could be materially adversely affected.

 

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Because Of Our Holding Company Structure, We Depend On Our Subsidiaries For Cash Flow, And Our Access To This Cash Flow Is Restricted.

 

We operate as a holding company. All of our radio stations are currently owned and operated by our subsidiaries. Entercom Radio, LLC (“Radio”), our 100% owned finance subsidiary, is the borrower under our Bank Facility and was the issuer of our Senior Subordinated Notes (“Notes”) (the Notes were redeemed at par on March 8, 2010). All of our station-operating subsidiaries and FCC license subsidiaries are subsidiaries of Radio. Further, we guaranteed Radio’s obligations under the Bank Facility on a senior secured basis and under the Notes on an unsecured basis, junior to our Bank Facility. Radio’s subsidiaries are all full and unconditional guarantors jointly and severally under the Bank Facility.

 

As a holding company, our only source of cash to pay our obligations, including corporate overhead and other accounts payable, are distributions from our subsidiaries. We currently expect that the net earnings and cash flow of our subsidiaries will be retained and used by them in their operations, including servicing their debt obligations. Even if our subsidiaries elect to make distributions to us, we cannot be assured that applicable state law and contractual restrictions, including the dividend covenants contained in our Bank Facility, would permit such dividends or distributions.

 

We Have Incurred Losses Over The Past Several Years And We May Incur Future Losses.

 

We have reported net losses in our consolidated statement of operations over the past several years, primarily as a result of recording non-cash write-downs of our broadcasting licenses and goodwill. In 2009, 2008 and 2007, we recorded impairments to our broadcasting licenses and goodwill of $67.7 million, $835.7 million (excluding impairments recorded during the first quarter of 2008 to assets held for sale) and $84.0 million, respectively. As of December 31, 2009, our broadcasting licenses and goodwill comprise 79.8% of our total assets. If events occur or circumstances change that would reduce the fair value of the broadcasting licenses and goodwill below the amount reflected on the balance sheet, we may be required to recognize impairment charges, which may be material, in future periods.

 

Our Common Stock May Cease To Be Listed On Its Current Stock Exchange.

 

Our common stock is currently listed on the New York Stock Exchange (“NYSE”) under the symbol “ETM”. In the future, we may not be able to meet the continued listing requirements of the NYSE, which require, among other things, (i) a minimum closing price of our common stock; (ii) a minimum market capitalization; and (iii) a minimum stockholders’ equity and market capitalization. If we are unable to satisfy the NYSE criteria for continued listing, our common stock would be subject to delisting, which could negatively impact us by, among other things, reducing the liquidity and market price of our common stock.  (See “Management’s Discussion and Analysis” for a discussion of the NYSE continued listing requirements.)

 

Our Chairman Of The Board And Our President And Chief Executive Officer Effectively Control Our Company And Own A Substantial Equity Interest In Us. Their Interests May Conflict With Your Interest.

 

As of February 28, 2010, Joseph M. Field, our Chairman of the Board, beneficially owned 2,651,170 shares of our Class A common stock and 6,408,282 shares of our Class B common stock, representing approximately 64.7% of the total voting power of all of our outstanding common stock.  As of February 28, 2010, David J. Field, our President and Chief Executive Officer, one of our directors and the son of Joseph M. Field, beneficially owned 2,549,747 shares of our Class A common stock and 749,250 shares of our outstanding Class B common stock, representing approximately 10.2% of the total voting power of all of our outstanding common stock. Collectively, Joseph M. Field and David J. Field and other members of the Field family beneficially own all of our outstanding Class B common stock. Other members of the Field family and Trusts for their benefit also own shares of Class A common stock.

 

Shares of Class B common stock are transferable only to Joseph M. Field, David J. Field, certain of their family members or trusts for any of their benefit. Upon any other transfer, shares of our Class B common stock automatically convert into shares of our Class A common stock on a one-for-one basis. Shares of our Class B common stock are entitled to ten votes only when Joseph M. Field or David J. Field vote them, subject to certain exceptions when they are restricted to one vote. Joseph M. Field generally is able to control the vote on all matters submitted to a vote of shareholders and, therefore, is able to direct our management and policies, except with respect to those matters when the shares of our Class B common stock are only entitled to one vote and those matters

 

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requiring a class vote under the provisions of our articles of incorporation, bylaws or applicable law, including, without limitation, the election of the two Class A directors. Without the approval of Joseph M. Field, we will be unable to consummate transactions involving an actual or potential change of control, including transactions in which investors might otherwise receive a premium for their shares over then current market prices.

 

Future Sales By Joseph M. Field Could Adversely Affect The Price Of Our Class A Common Stock.

 

The price for our Class A common stock could fall substantially if Joseph M. Field sells in the public market or transfers large amounts of shares, including any shares of our Class B common stock (as described in the above paragraph) which are automatically converted to Class A common stock when sold.  These sales, or the possibility of such sales, could make it more difficult for us to raise capital by selling equity or equity-related securities in the future.

 

The Difficulties Associated With Any Attempt To Gain Control Of Our Company Could Adversely Affect The Price Of Our Class A Common Stock.

 

Joseph M. Field controls the decision as to whether a change in control will occur for our Company.  There are also provisions contained in our articles of incorporation, by-laws and Pennsylvania law that could make it more difficult for a third party to acquire control of our Company. In addition, FCC approval for transfers of control of FCC licenses and assignments of FCC licenses are required. These restrictions and limitations could adversely affect the trading price of our Class A common stock.

 

We Depend On Selected Market Clusters Of Radio Stations.

 

For the year ended December 31, 2009, we generated in excess of 50% of our net revenues in six of our 23 markets (Boston, San Francisco, Portland, Seattle, Denver and Kansas City). Accordingly, we may have greater exposure to adverse events or conditions that affect the economy in any of these markets, which could have a material adverse effect on our financial position and results of operations.

 

Our Stock Price And Trading Volume Could Be Volatile.

 

Our Class A common stock has been publicly traded since January 29, 1999. The market price of our Class A common stock and our trading volume has been subject to fluctuations since the date of our initial public offering. The stock market has from time to time experienced price and volume fluctuations that have affected the market prices of public equities. As a result, the market price of our Class A common stock could experience volatility, regardless of our operating performance.

 

The Loss Of Key Personnel Could Have A Material Adverse Effect On Our Business.

 

Our business depends upon the continued efforts, abilities and expertise of our executive officers and other key executives. We believe that the loss of one or more of these individuals could have a material adverse effect on our business.

 

ITEM 1B.                    UNRESOLVED STAFF COMMENTS

 

None.

 

ITEM 2.                 PROPERTIES

 

The types of properties required to support each of our radio stations include offices, studios and transmitter/antenna sites. We typically lease our studio and office space, although we do own some of our facilities. Most of our studio and office space leases contain lease terms with expiration dates of five to 15 years. A station’s studios are generally housed with its offices in downtown or business districts. We own many of our AM main transmitter/antenna sites and several of our FM main transmitter/antenna sites. For those sites that we lease, we have entered into leases with lease terms that generally range from five to 30 years.  In addition, we also entered into a transaction that covers multiple tower sites that were treated as finance method lease obligations (for further discussion, see Note 9, Finance Method Lease Obligations, in the accompanying notes to the financial statements).

 

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The transmitter/antenna site for each station is generally located so as to provide maximum market coverage. In general, we do not anticipate difficulties in renewing facility or transmitter/antenna site leases or in leasing additional space or sites if required. We have approximately $11.8 million in aggregate annual minimum rental commitments under real estate leases.  Many of these leases contain clauses such as defined contractual increases or cost of living adjustments.

 

Our principal executive offices are located at 401 City Avenue, Suite 809, Bala Cynwyd, Pennsylvania 19004, in 10,678 square feet of leased office space. The lease on these premises expires October 31, 2011.

 

We own substantially all of our other equipment, consisting principally of transmitting antennae, transmitters, studio equipment and general office equipment. The towers, antennae and other transmission equipment used by our stations are generally in good condition.  We generally consider our facilities to be suitable and of adequate size for our current and intended purposes.

 

ITEM 3.

LEGAL PROCEEDINGS

 

We currently and from time to time are involved in litigation incidental to the conduct of our business. In the opinion of management, any potential liability of ours that may arise out of or with respect to these matters will not materially adversely affect our financial position, results of operations or cash flows.

 

During January 2007, a suit seeking various damages was filed against us relating to an on-air contest. The claims, which were settled on October 29, 2009, were fully covered by our insurance policies.  In connection with the settled claim, as of December 31, 2009 we recorded an insurance claim receivable from our insurance company of $16.5 million along with a claim payable to the plaintiff of $16.5 million.  In January 2010, the plaintiff acknowledged full satisfaction of the judgment by our insurance carrier.

 

Our agreements with Broadcast Music, Inc. (“BMI”) and American Society of Composers, Authors and Publishers (“ASCAP”) each expired as of December 31, 2009.  In January 2010, The Radio Music License Committee, of which we are a participant, filed motions in the New York courts against ASCAP and BMI on behalf of the radio industry, seeking interim fees and a determination of fair and reasonable industry-wide license fees.

 

We could face increased costs in the form of fines and a greater risk that we could lose any one or more of our broadcasting licenses if the FCC concludes that programming broadcast by our stations was obscene, indecent or profane and such conduct warrants license revocation. The FCC’s authority to impose a fine for the broadcast of such material is $325,000 for a single incident, with a maximum fine of up to $3.0 million for a continuing violation. In the past, the FCC has issued Notices of Apparent Liability and a Forfeiture Order with respect to several of our stations proposing fines for certain programming which the FCC deemed to have been indecent. These cases are the subject of pending administrative appeals. The FCC has also investigated other complaints from the public that some of our stations broadcast indecent programming.  These investigations remain pending.  For a further discussion, please refer to the risk factors described in Part I, Item 1A, “Risk Factors.”

 

ITEM 4.

[RESERVED]

 

PART II

 

ITEM 5.

MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

Market Information For Our Common Stock

 

Our Class A common stock, $0.01 par value, is listed on the New York Stock Exchange under the symbol “ETM.” The table below shows, for the quarters indicated, the reported high and low trading prices of our Class A common stock on The New York Stock Exchange.

 

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Price Range

 

 

 

High

 

Low

 

Calendar Year 2009

 

 

 

 

 

First Quarter

 

$

1.67

 

$

0.83

 

Second Quarter

 

$

3.14

 

$

1.09

 

Third Quarter

 

$

5.58

 

$

1.36

 

Fourth Quarter

 

$

9.85

 

$

5.02

 

 

 

 

 

 

 

Calendar Year 2008

 

 

 

 

 

First Quarter

 

$

13.75

 

$

9.46

 

Second Quarter

 

$

11.50

 

$

6.96

 

Third Quarter

 

$

8.10

 

$

4.89

 

Fourth Quarter

 

$

5.42

 

$

0.52

 

 

There is no established trading market for our Class B common stock, $0.01 par value.

 

Holders

 

As of March 1, 2010, there were approximately 312 shareholders of record of our Class A common stock.  This number does not include the number of shareholders whose shares are held of record by a broker or clearing agency but does include each such brokerage house or clearing agency as one record holder.  Based upon available information, we believe we have approximately 3,693 beneficial owners of our Class A common stock.  There are four shareholders of record of our Class B common stock, $0.01 par value, and no shareholders of record of our Class C common stock, $0.01 par value.

 

Dividends

 

Previously, we used a portion of our capital resources to pay dividends on a quarterly basis effective with the first quarter of 2006 and continuing through the third quarter of 2008.  Our Board of Directors has not declared any dividends since that time. Any future dividends will be at the discretion of the Board of Directors based upon the relevant factors at the time of such consideration.  For a description of the restrictions on our ability to declare and pay dividends pursuant to our Bank Facility, as amended, see Liquidity under Item 7, Management’s Discussion And Analysis Of Financial Condition And Results Of Operation and Note 8 in the notes to the accompanying financial statements.

 

Share Repurchases

 

Our most recent share repurchase program expired on June 30, 2009.

 

Prior to the expiration of the repurchase authorization, in 2009 we repurchased 0.7 million shares for an aggregate amount of $0.9 million at an average price of $1.34 per share and during 2008, we repurchased 2.1 million shares for an aggregate amount of $13.9 million at an average price of $6.72 per share.

 

The following table provides information on our repurchases during the quarter ended December 31, 2009:

 

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(d)

 

 

 

 

 

 

 

(c)

 

Maximum

 

 

 

 

 

 

 

Total

 

Approximate

 

 

 

 

 

 

 

Number

 

Dollar

 

 

 

 

 

 

 

Of Shares

 

Value Of

 

 

 

(a)

 

 

 

Purchased

 

Shares That

 

 

 

Total

 

(b)

 

As Part Of

 

May Yet Be

 

 

 

Number

 

Average

 

Publicly

 

Purchased

 

 

 

Of

 

Price

 

Announced

 

Under The

 

 

 

Shares

 

Paid Per

 

Plans Or

 

Plans Or

 

Period

 

Purchased

 

Share

 

Programs

 

Programs

 

October 1, 2009 - October 31, 2009 (1)

 

659

 

$

7.78

 

659

 

$

 

November 1, 2009 - November 30, 2009 (1)

 

 

$

 

 

$

 

December 1, 2009 - December 31, 2009 (1)

 

462

 

$

6.62

 

462

 

$

 

Total

 

1,121

 

 

 

1,121

 

 

 

 


(1) In connection with employee tax obligations related to the vesting of restricted stock during the three months ended December 31, 2009 and in accordance with elections by certain employees, we are deemed to have purchased the shares withheld to satisfy employees’ tax obligations of 659 shares at an average price of $7.78 per share in October 2009 and 462 shares at an average price of $6.62 per share in December 2009.  These shares are included in the table above.

 

Equity Compensation Plan Information

 

The following table sets forth, as of December 31, 2009, the number of securities outstanding under our equity compensation plans, the weighted average exercise price of such securities and the number of securities available for grant under these plans:

 

Equity Compensation Plan Information as of December 31, 2009

 

 

 

(a)

 

(b)

 

(c)

 

 

 

Number Of

 

Weighted

 

Number Of

 

 

 

Shares To Be

 

Average

 

Securities

 

 

 

Issued Upon

 

Exercise

 

Remaining Available

 

 

 

Exercise of

 

Price of

 

for Future Issuance

 

 

 

Outstanding

 

Outstanding

 

Under Equity

 

 

 

Options,

 

Options,

 

Compensation Plans

 

 

 

Warrants

 

Warrants

 

(Excluding

 

Plan Category

 

and Rights

 

and Rights

 

Column (a))

 

 

 

 

 

 

 

 

Equity Compensation Plans Approved by Shareholders:

 

 

 

 

 

 

 

Entercom Equity Compensation Plan (1)

 

1,103,032

 

$

3.20

 

969,627

 

Employee Stock Purchase Plan (2)

 

 

 

 

 

 

 

 

 

 

 

Equity Compensation Plans Not Approved by Shareholders:

 

 

 

 

 

 

 

None

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

1,103,032

 

 

 

969,627

 

 


(1)   Under the Entercom Equity Compensation Plan (the “Plan”), the Company is authorized to issue up to 11.5 million shares of Class A common stock, which amount included an increase on January 1, 2009 of 1.5 million shares.  The shares authorized are increased by 1.5 million shares on January 1 of each year, or a lesser number as may be determined by the Company’s Board of Directors. On January 1, 2010, the shares authorized under the Plan were automatically increased by 1.5 million shares to 13.0 million shares. As of December 31, 2009, 1.0 million shares were available for future grant.

 

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(2)          Our Employee Stock Purchase Plan expired March 31, 2009.

 

For a description of our equity compensation plans, please refer to Note 15 in the accompanying notes to the consolidated financial statements.

 

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Performance Graph

 

The following Comparative Stock Performance Graph shall not be deemed incorporated by reference by any general statement incorporating by reference this Form 10-K into any filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, except to the extent that we specifically incorporate this information by reference.  This Comparative Stock Performance Graph is being furnished with this Form 10-K and shall not otherwise be deemed filed under such acts.

 

The following line graph compares the cumulative 5-year total return provided to shareholders on our Class A common stock relative to the cumulative total returns of: (i) the S & P 500 index; and (ii) a peer group index consisting of Citadel Broadcasting Corp., Cumulus Media Inc. and Emmis Communications Corp.  Last year Cox Radio, Inc. was included in our peer group. In 2009, however, Cox Radio, Inc. ceased to be a public company. An investment of $100 (with reinvestment of all dividends) is assumed to have been made in our Class A common stock and in each of the indices on December 31, 2004 and its relative performance is tracked through December 31, 2009.

 

Cumulative Five-Year Return Index Of A $100 Investment

 

 

 

 

12/31/04

 

12/31/05

 

12/31/06

 

12/31/07

 

12/31/08

 

12/31/09

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Entercom Communications Corp.

 

$

100.00

 

$

82.67

 

$

83.11

 

$

43.31

 

$

4.16

 

$

23.90

 

S&P 500

 

$

100.00

 

$

104.91

 

$

121.48

 

$

128.16

 

$

80.74

 

$

102.11

 

Peer Group

 

$

100.00

 

$

88.70

 

$

66.92

 

$

28.11

 

$

4.24

 

$

3.63

 

 

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Table of Contents

 

ITEM 6.   SELECTED FINANCIAL DATA

 

The selected financial data below as of and for the years ended December 31, 2005 through 2009 were derived from our audited consolidated financial statements. The selected financial data for the years ended December 31, 2009, 2008 and 2007 and balance sheets as of December 31, 2009 and 2008 are qualified by reference to, and should be read in conjunction with, the corresponding audited consolidated financial statements, and the notes thereto, and Management’s Discussion and Analysis of Financial Condition and Results of Operations included elsewhere in this annual report. The selected financial data for the years ended December 31, 2006 and 2005 and the balance sheets as of December 31, 2007, 2006 and 2005 are derived from financial statements not included herein. Our financial results are not comparable from year to year due to our acquisitions and dispositions of radio stations. We acquired several radio stations in 2008, 2007 and 2005 (none in 2009 and one in 2006).  Also, in years 2009, 2008 and 2007, we incurred impairment losses of $67.7 million, $835.7 million and $84.0 million, respectively, in connection with our review of goodwill and broadcasting licenses under accounting guidance (please refer to Note 3 in the accompanying notes to the financial statements for further discussion of the contributing factors to the impairment loss).

 

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Table of Contents

 

SELECTED FINANCIAL DATA

(amounts in thousands, except per share data)

 

 

 

Years Ended December 31,

 

 

 

2009

 

2008

 

2007

 

2006

 

2005

 

 

 

 

 

 

 

 

 

 

 

 

Operating Data:

 

 

 

 

 

 

 

 

 

 

 

Net revenues

 

$

372,432

 

$

438,822

 

$

468,351

 

$

439,629

 

$

431,799

 

Operating (income) expenses:

 

 

 

 

 

 

 

 

 

 

 

Station operating expenses, including non-cash compensation expense

 

254,042

 

276,187

 

283,541

 

259,630

 

247,647

 

Depreciation and amortization

 

16,600

 

20,442

 

16,631

 

15,812

 

16,660

 

Corporate G & A expenses, including non-cash compensation expense

 

22,875

 

26,917

 

28,888

 

33,794

 

18,868

 

Impairment loss

 

67,676

 

835,716

 

84,037

 

 

 

Net time brokerage agreement fees (income)

 

(2

)

(233

)

14,001

 

2,766

 

(13

)

Net (gain) loss on sale of assets

 

420

 

(9,899

)

(647

)

1,280

 

(5,873

)

Expenses related to a natural disaster

 

 

 

 

 

1,697

 

Total operating expenses

 

361,611

 

1,149,130

 

426,451

 

313,282

 

278,986

 

Operating income (loss)

 

10,821

 

(710,308

)

41,900

 

126,347

 

152,813

 

Other (income) expense:

 

 

 

 

 

 

 

 

 

 

 

Interest expense, including amortization of deferred financing costs

 

31,229

 

45,040

 

51,183

 

44,173

 

29,925

 

Interest income and dividend income from investments

 

(58

)

(323

)

(740

)

(823

)

(396

)

Other income

 

(380

)

(3,339

)

(895

)

 

 

(Gain) loss on early extinguishment of debt

 

(20,805

)

(6,949

)

458

 

 

 

Net (gain) loss on investments

 

966

 

469

 

(245

)

 

(2,819

)

Net gain on derivative instruments

 

 

(34

)

(162

)

(446

)

(1,327

)

Total other expense

 

10,952

 

34,864

 

49,599

 

42,904

 

25,383

 

Income (loss) from continuing operations before income taxes (benefit)

 

(131

)

(745,172

)

(7,699

)

83,443

 

127,430

 

Income taxes (benefit)

 

(5,529

)

(232,600

)

695

 

35,596

 

49,164

 

Income (loss) from continuing operations

 

5,398

 

(512,572

)

(8,394

)

47,847

 

78,266

 

Income (loss) from discontinued operations, net of taxes (benefit)

 

 

(4,079

)

37

 

134

 

95

 

Net income (loss)

 

$

5,398

 

$

(516,651

)

$

(8,357

)

$

47,981

 

$

78,361

 

 

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SELECTED FINANCIAL DATA

(amounts in thousands, except per share data)

 

 

 

Years Ended December 31,

 

 

 

2009

 

2008

 

2007

 

2006

 

2005

 

Operating Data (continued):

 

 

 

 

 

 

 

 

 

 

 

Net Income (Loss) Per Common Share - Basic:

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations

 

$

0.15

 

$

(13.94

)

$

(0.22

)

$

1.20

 

$

1.70

 

Income (loss) from discontinued operations, net of taxes (benefit)

 

 

(0.11

)

 

 

 

Net income (loss) per common share - basic

 

$

0.15

 

$

(14.05

)

$

(0.22

)

$

1.20

 

$

1.70

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Income (Loss) Per Common Share - Diluted:

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations

 

$

0.15

 

$

(13.94

)

$

(0.22

)

$

1.19

 

$

1.70

 

Income (loss) from discontinued operations, net of taxes (benefit)

 

 

(0.11

)

 

 

 

Net income (loss) per common share - diluted

 

$

0.15

 

$

(14.05

)

$

(0.22

)

$

1.19

 

$

1.70

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares - basic

 

35,321

 

36,782

 

38,230

 

39,973

 

46,045

 

Weighted average shares - diluted

 

36,403

 

36,782

 

38,230

 

40,205

 

46,221

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash Flows Data:

 

 

 

 

 

 

 

 

 

 

 

Cash flows related to:

 

 

 

 

 

 

 

 

 

 

 

Operating activities

 

$

73,902

 

$

130,617

 

$

93,492

 

$

101,583

 

$

136,552

 

Investing activities

 

(2,062

)

31,944

 

(273,876

)

(45,146

)

(38,618

)

Financing activities

 

(65,373

)

(169,222

)

180,534

 

(61,713

)

(93,709

)

 

 

 

 

 

 

 

 

 

 

 

 

Other Data:

 

 

 

 

 

 

 

 

 

 

 

Dividends declared and paid per Class A and Class B common share

 

$

 

$

0.58

 

$

1.52

 

$

1.52

 

$

 

 

 

 

2009

 

2008

 

2007

 

2006

 

2005

 

Balance Sheet Data:

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

10,751

 

$

4,284

 

$

10,945

 

$

10,795

 

$

16,071

 

Intangibles and other assets

 

754,806

 

825,404

 

1,452,598

 

1,524,018

 

1,491,812

 

Investment in deconsolidated subsidiaries and assets held for sale

 

 

 

250,936

 

 

 

Total assets

 

934,536

 

996,734

 

1,919,352

 

1,733,258

 

1,697,758

 

Senior debt, including current portion

 

729,173

 

750,197

 

823,718

 

526,239

 

427,259

 

Senior subordinated notes and other

 

19,189

 

83,500

 

150,000

 

150,000

 

150,000

 

Deferred tax liabilities and other long-term liabilities

 

28,897

 

30,489

 

249,499

 

237,621

 

199,846

 

Total shareholders’ equity

 

113,952

 

100,257

 

660,767

 

777,092

 

885,715

 

 

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Table of Contents

 

ITEM 7.              MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Overview

 

We are one of the five largest radio broadcasting companies in the United States, with a nationwide portfolio in excess of 100 stations in 23 markets, including San Francisco, Boston, Seattle, Denver, Portland, Sacramento and Kansas City.

 

A radio broadcasting company derives its revenues primarily from the sale of broadcasting time to local and national advertisers. Net revenues are gross revenues less advertising agency commissions. The revenues are determined by the advertising rates charged and the number of advertisements broadcast. We maximize our revenues by managing the inventory of advertising spots available for broadcast, which can vary throughout the day, but is consistent over time. Advertising rates are primarily based on four factors:

 

·      a station’s audience share in the demographic groups targeted by advertisers as measured principally by periodic reports issued by The Arbitron Ratings Company;

 

·      the number of radio stations in the market competing for the same demographic groups;

 

·      the supply of, and demand for, radio advertising time, both nationally and in the regions in which the station operates; and

 

·      the market’s size based upon available radio advertising revenue.

 

In 2009, we generated 78% of our net revenues from local advertising, which is sold primarily by each individual local radio station’s sales staff, and 20% from national advertising, which is sold by an independent advertising sales representative. Local and national revenues include advertising on our stations, websites, the sale of advertising during audio streaming of our radio stations over the Internet, promotional activities and e-commerce. We generated the balance of our 2009 revenues principally from network compensation and rental income from owned tower sites.

 

Our most significant station operating expenses are employee compensation, programming and promotional expenses. Other significant expenses that impact our profitability are interest and depreciation and amortization expense.

 

Our performance is based upon the aggregate performance of our radio stations.  The following are some of the factors that impact a radio station’s performance at any given time: (i) audience ratings; (ii) program content; (iii) management talent and expertise; (iv) sales talent and expertise; (v) audience characteristics; (vi) signal strength; and (vii) the number and characteristics of other radio stations and other advertising media in the market area.

 

In the radio broadcasting industry, seasonal revenue fluctuations are common and are due primarily to variations in advertising expenditures by local and national advertisers. Typically, revenues are lowest in the first calendar quarter of the year.

 

As opportunities arise, we may, on a selective basis, change or modify a station’s format due to changes in listeners’ tastes or changes in a competitor’s format. This could have an immediate negative impact on a station’s ratings and/or revenues, and there are no guarantees that the modification or change will be beneficial at some future time. Our management is continually focused on these opportunities as well as the associated risks and uncertainties. We strive to develop compelling content and strong brand images to maximize audience ratings that are crucial to our stations’ financial success.

 

You should read the following discussion and analysis of our financial condition and results in conjunction with our consolidated financial statements and related notes included elsewhere in this report. The following results of operations include a discussion of the year ended December 31, 2009 as compared to the year ended December 31, 2008 and a discussion of the year ended December 31, 2008 as compared to the year ended December 31, 2007.  Our results of operations for the relevant periods represent the operations of the radio stations: (1) owned and operated by us; or (2) operated by us pursuant to time brokerage agreements (“TBA”); and exclude those owned by us but operated by others pursuant to TBAs.

 

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Under the heading “Same Station Considerations,” we evaluate net revenues, station operating expenses and operating income by comparing the performance of stations owned or operated by us throughout a relevant year to the performance of those same stations in the prior year whether or not owned or operated by us. In addition, another party commenced operation of certain tower sites as part of our plan to exit the operation of non-strategic tower sites, which also impacted same station considerations when comparing the years 2009 with 2008. We use these comparisons to assess the effect of acquisitions and dispositions on our operations throughout the periods measured.

 

Results Of Operations

 

Year ended December 31, 2009 compared to the year ended December 31, 2008

 

The following significant factors affected our results of operations for the year ended December 31, 2009 as compared to the prior year:

 

Acquisition

 

·      On March 14, 2008, we acquired through an exchange agreement three radio stations in San Francisco, California, that in 2008 increased our depreciation and amortization expense as we acquired certain intangible assets with lives of a short duration.

 

Dispositions

 

·      During 2009, another party commenced operation of certain tower sites as part of our plan to exit the operation of non-strategic tower sites, which decreased net revenues (tower rental income) and station operating expenses for same station considerations, but had marginal impact to our reported results of operations.

 

·      On July 14, 2008, we sold three of our eight Rochester, New York, radio stations for net cash proceeds of $12.2 million, which the buyer began operating on May 1, 2008 under a TBA with us. The results for these stations were reflected in discontinued operations.

 

·      On March 14, 2008, we sold, through an exchange agreement, three of our seven Seattle, Washington, radio stations that in 2008 resulted in a $10.0 million gain on sale of assets.

 

·      On January 15, 2008, we sold an Austin, Texas, radio station for $20.0 million in cash.

 

Financing

 

·      During the years ended December 31, 2009 and 2008, we repurchased $76.9 million and $66.5 million, respectively, of Notes and recognized a net gain on extinguishment of debt of $20.8 million and $6.9 million, respectively.

 

·      Our interest expense decreased due to: (i) a decrease in interest rates; (ii) a decrease in our outstanding debt; and (iii) the redemption of a portion of our Notes that had a higher interest rate than the average rate under our senior debt.

 

·      During the fourth quarter of 2009, another party commenced operating certain of our tower facilities and we received $12.6 million in cash that was reflected as finance method lease obligations due to our ability to participate in future profits from these towers.

 

Other

 

·      The income tax benefit in 2009 was favorably impacted by the passage of federal tax legislation during the fourth quarter of 2009 that allowed us to carryback our 2008 net operating loss for five years rather than for two years. As a result, we reversed the federal portion of our valuation allowance for deferred tax assets associated with a net operating loss carry forward as we now expect to recover $7.0 million of previously paid taxes.

 

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·      During the years ended 2009, 2008 and 2007, we recorded an impairment loss of $67.7 million, $835.7 million and $84.0 million, respectively, in connection with our review of goodwill and broadcasting licenses. Please refer to Note 3 in the accompanying notes to the financial statements for further discussion of the contributing factors to the impairment loss.

 

·      In 2008, our income tax benefit on loss from continuing operations was negatively impacted by an increase to our valuation allowance of $59.4 million to fully reserve our net deferred tax assets. Our deferred tax assets were also fully reserved in 2009. The increase in the valuation allowance was primarily due to the cumulative losses incurred by us since 2006, which caused uncertainty as to the realization of the deferred tax assets in future years.

 

·      During 2008, we recovered $3.6 million from our insurance company for damages resulting from Hurricane Katrina.

 

·      During the first quarter of 2008, we reviewed our carrying amount for the Rochester assets then held for sale and determined that an impairment loss of $6.7 million was necessary as a result of the status of our then ongoing divestiture process.

 

Net Revenues

 

 

 

Years Ended

 

 

 

December 31, 2009

 

December 31, 2008

 

 

 

(dollars in millions)

 

Net Revenues

 

$

372.4

 

$

438.8

 

Amount of Change

 

$

(66.4

)

 

 

Percentage Change

 

(15.1

)%

 

 

 

The recent economic downturn reduced demand for advertising in general, including advertising on our radio stations during 2009.  Net revenues declined in most of the markets where we operate stations.  Those markets that were impacted the most by the decline in radio station net revenue dollars were the Boston, Seattle, Sacramento, San Francisco and Portland markets.

 

Economic conditions sequentially improved throughout 2009 and, based upon early indications for 2010, this negative trend appears to be reversing, primarily due to the strengthening of advertiser demand.  As the economy and the advertising environment rebound, we would expect to compare favorably to prior periods.

 

Same Station Considerations:

 

·              Net revenues (tower rental income) in 2009 would have been lower by $1.0 million if we had adjusted net revenues for the transfer of tower operations to a third party as of the beginning of the period.

 

·              Net revenues (tower rental income) in 2008 would have been lower by $0.9 million if we had adjusted net revenues for the transfer of tower operations to a third party as of the beginning of the period.

 

Station Operating Expenses

 

 

 

Years Ended

 

 

 

December 31, 2009

 

December 31, 2008

 

 

 

(dollars in millions)

 

Station Operating Expenses

 

$

254.0

 

$

276.2

 

Amount of Change

 

$

(22.2

)

 

 

Percentage Change

 

(8.0

)%

 

 

 

The decrease in station operating expenses was primarily due to: (1) a decrease in net revenues as described under Net Revenues as certain variable expenses decrease with a corresponding decrease in net revenues; and (2) 

 

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cost reduction initiatives that commenced during the fourth quarter of 2008, including but not limited to reductions in workforce, the elimination of the 401(k) employer matching contribution and other cost reduction actions.

 

Management anticipates that station operating expenses will increase in 2010 as net revenues increase and as most cost-cutting measures were fully realized in early 2009.

 

Same Station Considerations:

 

·              Station operating expenses in 2009 would have been lower by $0.2 million if we had adjusted station operating expenses for the transfer of tower operations to a third party as of the beginning of the period.

 

·              Station operating expenses in 2008 would have been lower by $0.2 million if we had adjusted station operating expenses for the transfer of tower operations to a third party as of the beginning of the period.

 

Depreciation And Amortization Expense

 

 

 

Years Ended

 

 

 

December 31, 2009

 

December 31, 2008

 

 

 

(dollars in millions)

 

Depreciation And Amortization Expense

 

$

16.6

 

$

20.4

 

Amount of Change

 

$

(3.8

)

 

 

Percentage Change

 

(18.6

)%

 

 

 

Depreciation and amortization expense decreased in 2009 as the expense in 2008 was higher due to acquisitions during the first quarter of 2008 and fourth quarter of 2007, which included certain amortizable assets with lives of a short duration.

 

Corporate General And Administrative Expenses

 

 

 

Years Ended

 

 

 

December 31, 2009

 

December 31, 2008

 

 

 

(dollars in millions)

 

Corporate General And Administrative Expenses

 

$

22.9

 

$

26.9

 

Amount of Change

 

$

(4.0

)

 

 

Percentage Change

 

(14.9

)%

 

 

 

Corporate general and administrative expenses decreased primarily due to: (1) a decrease in non-cash compensation expense of $2.5 million as a result of a decrease in the fair value of equity awards issued; and (2) a decrease in legal expense of $1.3 million associated with certain legal proceedings during 2008 which did not recur in 2009. The decrease in corporate general and administrative expense was offset by an increase in deferred compensation expense of $1.6 million as our deferred compensation liability generally tracks movements in the stock market.

 

Operating Income (Loss)

 

 

 

Years Ended

 

 

 

December 31, 2009

 

December 31, 2008

 

 

 

(dollars in millions)

 

Operating Income (Loss)

 

$

10.8

 

$

(710.3

)

Amount of Change

 

$

721.1

 

 

 

Percentage Change

 

101.5

%

 

 

 

The increase in operating income was primarily due to a decrease in impairment loss of $768.0 million in connection with our review of broadcasting licenses and goodwill in 2009 as compared to 2008. The decrease was partially offset by: (1) a decrease in net revenues for the reasons described above under Net Revenues, net of a

 

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decrease in station operating expenses for the reasons described under Station Operating Expenses; and (2) a decrease in net gain on sale or disposal of assets of $10.0 million as a result of the sale in 2008 of three of our Seattle stations.

 

Same Station Considerations:

 

·              Operating income in 2009 would have been lower by $0.8 million if we had adjusted operating income for the transfer of tower operations to a third party as of the beginning of the period.

 

·              Operating loss in 2008 would have been higher by $0.7 million if we had adjusted operating loss for the transfer of tower operations to a third party as of the beginning of the period.

 

Interest Expense

 

 

 

Years Ended

 

 

 

December 31, 2009

 

December 31, 2008

 

 

 

(dollars in millions)

 

Interest Expense

 

$

31.2

 

$

45.0

 

Amount of Change

 

$

(13.8

)

 

 

Percentage Change

 

(30.6

)%

 

 

 

The decrease in interest expense was primarily due to: (1) a decrease in interest rates on outstanding debt in 2009 as compared to 2008; (2) a decline in outstanding debt upon which interest is computed; and (3) the repurchase of our Notes, which have a higher interest rate than the interest rate on the borrowings under our Bank Facility used to repurchase our Notes.

 

We anticipate a reduction in interest expense associated with an expected reduction in outstanding debt in 2010 and a reduction in January 2010 of $75.0 million in notional value of an existing 3.03% fixed interest rate swap agreement. This reduction could be offset by the impact of an increase in interest rates and fees associated with the Amendment to our Bank Facility in the first quarter of 2010.

 

Loss From Continuing Operations Before Income Tax Benefit

 

 

 

Years Ended

 

 

 

December 31, 2009

 

December 31, 2008

 

 

 

(dollars in millions)

 

Loss From Continuing Operations Before Income Tax Benefit

 

$

(0.1

)

$

(745.2

)

Amount of Change

 

$

745.1

 

 

 

Percentage Change

 

100.0

%

 

 

 

The net change was primarily attributable to: (1) an increase in operating income for the reasons as described above under Operating Income (Loss); (2) a $13.9 million increase in gain on the retirement of our Notes; and (3) a decrease in our interest expense of $13.8 million for the reasons described above under Interest Expense.

 

Income Tax Benefit

 

 

 

Years Ended

 

 

 

December 31, 2009

 

December 31, 2008

 

 

 

(dollars in millions)

 

Income Tax Benefit

 

$

(5.5

)

$

(232.6

)

Amount of Change

 

$

227.1

 

 

 

Percentage Change

 

97.6

%

 

 

 

The income tax benefit in 2009 was favorably impacted by the passage of tax legislation during the fourth quarter of 2009 that allows us to carryback our 2008 net operating loss for five years rather than for two years. As a

 

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result, we reversed the federal portion of our valuation allowance for deferred tax assets as we now expect to recover $7.0 million of previously paid taxes.

 

The income tax benefit in 2008 primarily resulted from the elimination of deferred tax liabilities associated with intangible assets due to the recording of an impairment loss in 2008 of $835.7 million. The income tax benefit was offset by an increase to our valuation allowance to fully reserve our net deferred tax assets, as the cumulative losses incurred by us over the past several years caused uncertainty about our ability to realize our deferred tax assets.

 

The Company’s income tax rate for the year ended December 31, 2009 was not numerically relevant. For the year ended December 31, 2008, our income tax rate was 31.2%. The tax rates for the years ended December 31, 2009 and 2008 were impacted by a decrease to the valuation allowance of $6.7 million and an increase to the valuation allowance of $59.4 million, respectively.

 

We estimate that our annual tax rate for 2010, which may fluctuate from quarter to quarter, will be in the low 40% range (before any necessary adjustment to the valuation allowance). We estimate that our rate in 2010 will be affected primarily by: (1) changes in the level of income in any of our taxing jurisdictions; (2) adding facilities in states that on average have different income tax rates than states in which we currently operate and the resulting effect on previously reported temporary differences between the tax and financial reporting bases of our assets and liabilities; (3) the effect of recording changes in our liabilities for uncertain tax positions; (4) taxes in certain states that are dependent on factors other than taxable income; and (5) the limitations on the deduction of cash and certain non-cash compensation expense for certain key employees.  Our annual effective tax rate may also be materially impacted by: (i) regulatory changes in certain states in which we operate; (ii) changes in the expected outcome of tax audits; (iii) changes in the estimate of expenses that are not deductible for tax purposes; and (iv) changes in the deferred tax valuation allowance.

 

Deferred tax liabilities primarily relate to differences between book and tax bases of certain of our indefinite-lived intangibles (broadcasting licenses and goodwill). Under accounting guidance, we do not amortize our indefinite-lived intangibles for financial statement purposes, but instead test them annually for impairment. The amortization of our indefinite-lived assets for tax purposes but not for book purposes creates deferred tax liabilities.  A reversal of deferred tax liabilities may occur when indefinite-lived intangibles: (1) become impaired; or (2) are sold for cash, which would typically only occur in connection with the sale of the assets of a station or groups of stations or the entire company in a taxable transaction.  Due to the amortization for tax purposes of our indefinite-lived intangible assets, we expect to generate deferred tax liabilities in future periods (without consideration for any impairment loss in future periods).

 

Income (Loss) From Continuing Operations

 

 

 

Years Ended

 

 

 

December 31, 2009

 

December 31, 2008

 

 

 

(dollars in millions)

 

Income (Loss) From Continuing Operations

 

$

5.4

 

$

(512.6

)

Amount of Change

 

$

518.0

 

 

 

Percentage Change

 

101.1

%

 

 

 

The change is primarily due to the reasons described above under Loss From Continuing Operations Before Income Tax Benefit, net of income tax benefit.

 

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Loss From Discontinued Operations, Net Of Tax Benefit

 

 

 

 

Years Ended

 

 

 

December 31, 2009

 

December 31, 2008

 

 

 

(dollars in millions)

 

Loss From Discontinued Operations, Net Of Tax Benefit

 

$

 

$

(4.1

)

Amount of Change

 

$

4.1

 

 

 

Percentage Change

 

100.0

%

 

 

 

The net change was primarily due to a non-cash impairment loss of $6.7 million (before income tax benefit) in the first quarter of 2008 for the Rochester assets that were held for sale and that were subsequently disposed of during the third quarter of 2008.

 

Net Income (Loss)

 

 

 

Years Ended

 

 

 

December 31, 2009

 

December 31, 2008

 

 

 

(dollars in millions)

 

Net Income (Loss)

 

$

5.4

 

$

(516.7

)

Amount of Change

 

$

522.1

 

 

 

Percentage Change

 

101.1

%

 

 

 

The net change was primarily attributable to the reasons described above under Loss From Continuing Operations Before Income Tax Benefit and under Income Tax Benefit.

 

Results Of Operations

 

Year ended December 31, 2008 compared to the year ended December 31, 2007

 

The following significant factors affected our results of operations for the year ended December 31, 2008 as compared to the prior year:

 

Acquisitions

 

·                  On March 14, 2008, we acquired through an exchange agreement three radio stations in San Francisco, California. We began operating these stations on February 26, 2007 under a TBA that in 2008 increased our net revenues, station operating expenses and depreciation and amortization expense.

 

·                  On December 10, 2007, we acquired WVEI-FM (formerly WBEC-FM), a station in Springfield, Massachusetts, for $5.8 million in cash. We began operating this station on February 10, 2006 under a TBA by simulcasting the format of WEEI-AM (a radio station owned and operated by us in the Boston, Massachusetts, market). The impact to 2008 was an increase in our depreciation and amortization expense and interest expense.

 

·                  On November 30, 2007, we acquired four radio stations in Austin, Texas, and three radio stations in Memphis, Tennessee, for $101.0 million in cash. We began operating these stations on November 1, 2006 under a TBA. The impact to 2008 was an increase in our depreciation and amortization expense and interest expense and a decrease in our TBA expense.

 

·                  On November 30, 2007, we acquired four radio stations in Cincinnati, Ohio, for $119.0 million in cash. From November 1, 2006 through February 25, 2007, we operated three of these stations under a TBA. On February 26, 2007, a buyer began operating the same three stations under a TBA with us. The impact to 2008 was a decrease in our net revenues, station operating expenses and TBA fees and an increase to our interest expense.

 

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·                  On November 30, 2007, we acquired four stations in Rochester, New York, for $42.0 million in cash. Of the four stations acquired, two stations were reflected in continuing operations and two stations were reflected in discontinued operations. For the two stations reflected in continuing operations, the impact to 2008 was an increase to our net revenues, station operating expenses, depreciation and amortization expense and interest expense.

 

Dispositions

 

·                  On July 14, 2008, we sold three of our eight Rochester, New York, radio stations for net cash proceeds of $12.2 million, which the buyer began operating on May 1, 2008 under a TBA with us. The results for these stations were reflected in discontinued operations.

 

·                  On March 14, 2008, we sold, through an exchange agreement, three of our seven Seattle, Washington, radio stations which a buyer began operating on February 26, 2007 under a TBA with us.  The impact to 2008, due to the cessation of operation by us of these stations on February 26, 2007, was a decrease in our net revenues, station operating expenses and depreciation and amortization expense.

 

·                  On March 14, 2008, we sold, through an exchange agreement, four Cincinnati, Ohio, radio stations we acquired during the fourth quarter of 2007 under two separate transactions. Pursuant to two TBA agreements, we operated these stations from November 1, 2006 through February 25, 2007.  On February 26, 2007, a buyer began operating these stations under a TBA with us.  The impact to 2008, due to the cessation of operation by us of these stations on February 26, 2007, was a decrease in our net revenues and station operating expenses.

 

·                  On January 15, 2008, we sold a station in Austin, Texas, for $20.0 million in cash.  The buyer began operating this station under a TBA on February 26, 2007 (a station we began operating on November 1, 2006 under a TBA agreement with another party). The impact to 2008, due to the cessation of operation of this station by us on February 26, 2007 and the sale on January 15, 2008, was a decrease in our net revenues, station operating expenses and interest expense.

 

Financing

 

·                  Our interest expense decreased due to: (i) a decrease in interest rates; and (ii) the redemption of a portion of our Notes that had a higher interest rate than the rate under our senior debt. This decrease was offset by: (1) increased borrowings used to finance: (a) acquisitions during the fourth quarter of 2007 in the amount of $268.3 million; (b) the payment of cash dividends to our shareholders of $21.6 million in 2008 and $58.0 million in 2007; and (c) stock repurchases during 2008 of $13.9 million and during 2007 of $55.0 million; and (2) interest expense of $0.9 million related to the resolution of certain litigation.

 

·                  During the year ended December 31, 2008, we repurchased $66.5 million of our Notes and recognized a net gain on extinguishment of debt of $6.9 million.

 

·                  On June 18, 2007, we entered into a new credit facility that resulted in the recognition of a $0.5 million loss on the early extinguishment of debt related to the write-off of deferred financing costs during the second quarter of 2007.

 

Other

 

·                  During the years ended 2008 and 2007, we recorded an impairment loss of $835.7 million and $84.0 million, respectively, in connection with our review of goodwill and broadcasting licenses. Please refer to Note 3 in the accompanying notes to the financial statements for further discussion of the contributing factors to the impairment loss.

 

·                  In 2008, our income tax benefit on loss from continuing operations was negatively impacted by an increase to our valuation allowance of $59.4 million to fully reserve our net deferred tax assets. The increase was primarily due to the cumulative losses incurred by us since 2006, which caused uncertainty as to the realization of the deferred tax assets in future years.

 

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·                  During 2008, we recovered $3.6 million from our insurance company for damages resulting from Hurricane Katrina.

 

·                  During the first quarter of 2008, we reviewed our carrying amount for the Rochester assets then held for sale and determined that an impairment loss of $6.7 million was necessary as a result of the status of our then ongoing divestiture process.

 

·                  During the first quarter of 2007, we recorded a discrete income tax expense adjustment of $2.9 million as we commenced operations in 2007 in states which on average have higher income tax rates than in states in which we had previously operated.

 

Net Revenues

 

 

 

Years Ended

 

 

 

December 31, 2008

 

December 31, 2007

 

 

 

(dollars in millions)

 

Net Revenues

 

$

438.8

 

$

468.4

 

Amount of Change

 

$

(29.6

)

 

 

Percentage Change

 

(6.3

)%

 

 

 

Our decrease in net revenues was primarily due to: (1) weak demand for advertising in general that contributed to an overall decline in total market revenues in most of the markets where we operate stations; and (2) the commencement of operations by other parties under TBAs on: (a) February 26, 2007 for three of our seven Seattle radio stations; (b) February 26, 2007 for four radio stations in the Cincinnati market; and (c) February 26, 2007 for one radio station in the Austin market. Our decrease in net revenues was offset by: (i) the acquisition on November 30, 2007 of four radio stations in the Rochester market of which two radio stations were reflected in continuing operations; (ii) the commencement by us of operations under a TBA on February 26, 2007 of three radio stations in the San Francisco market; and (iii) increases in net revenues for our radio stations in markets such as Buffalo, Madison and Milwaukee.

 

Same Station Considerations:

 

·                                          Net revenues in 2008 were not impacted by any acquisitions or dispositions of radio stations as of the beginning of the period.

 

·                                          Net revenues in 2007 would have been higher by $3.3 million if we had adjusted net revenues to give effect to acquisitions or dispositions of radio stations as of the beginning of the period.

 

Station Operating Expenses

 

 

 

Years Ended

 

 

 

December 31, 2008

 

December 31, 2007

 

 

 

(dollars in millions)

 

Station Operating Expenses

 

$

276.2

 

$

283.5

 

Amount of Change

 

$

(7.3

)

 

 

Percentage Change

 

(2.6

)%

 

 

 

The decrease in station operating expenses was primarily due to the factors leading to the decrease in net revenues as described above as certain variable expenses decrease with a corresponding decrease in net revenues, offset by the effects of inflation.

 

In the fourth quarter of 2008, we initiated several cost reduction initiatives, including certain station operating expense and personnel reductions and the cessation of our Company’s voluntary employee benefits matching programs. While the impact of these initiatives was not material in this quarter, future periods will have benefited from these actions and any other cost reduction actions.

 

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Same Station Considerations:

 

·                                          Station operating expenses in 2008 were not impacted by any acquisitions or dispositions of radio stations as of the beginning of the period.

 

·                                          Station operating expenses in 2007 would have been higher by $1.9 million if we had adjusted station operating expenses to give effect to acquisitions or dispositions of radio stations as of the beginning of the period.

 

Depreciation And Amortization Expense

 

 

 

Years Ended

 

 

 

December 31, 2008

 

December 31, 2007

 

 

 

(dollars in millions)

 

Depreciation And Amortization Expense

 

$

20.4

 

$

16.6

 

Amount of Change

 

$

3.8

 

 

 

Percentage Change

 

22.9

%

 

 

 

Depreciation and amortization expense increased due to the acquisitions of radio station assets in the first quarter of 2008 and in the fourth quarter of 2007 (other than those assets in Rochester, New York, that were acquired and held for sale or those assets in Cincinnati, Ohio, which were acquired and reflected as an investment in deconsolidated subsidiaries), which included certain amortizable assets with lives of a short duration.

 

Corporate General And Administrative Expenses

 

 

 

Years Ended

 

 

 

December 31, 2008

 

December 31, 2007

 

 

 

(dollars in millions)

 

Corporate General And Administrative Expenses

 

$

26.9

 

$

28.9

 

Amount of Change

 

$

(2.0

)

 

 

Percentage Change

 

(6.9

)%

 

 

 

Corporate general and administrative expenses decreased primarily due to: (1) a decrease in legal expenses of $1.4 million primarily associated with certain legal proceedings in the year ended December 31, 2007 which did not recur in 2008; and (2) a deferred compensation expense reduction of $1.0 million as a result of a decrease in the value of the unfunded obligation as the deferred compensation liability generally tracks the movements in the stock market.

 

The decrease in corporate general and administrative expense was offset by an increase in non-cash compensation expense of $1.5 million due to: (a) the cumulative effect of equity awards issued over multiple years, including 2008, with the awards vesting over periods of up to four years; and (b) the acceleration of vesting of equity awards for a key officer.

 

Operating Income (Loss)

 

 

 

Years Ended

 

 

 

December 31, 2008

 

December 31, 2007

 

 

 

(dollars in millions)

 

Operating Income (Loss)

 

$

(710.3

)

$

41.9

 

Amount of Change

 

$

(752.2

)

 

 

Percentage Change

 

NM

 

 

 

 

The decrease in operating income to an operating loss was primarily due to an increase in an impairment loss of $751.7 million in connection with our review of broadcasting licenses and goodwill during the fourth quarter of 2008 and our review of goodwill during the second quarter of 2008 (see Note 3 in the accompanying notes to the financial statements), which loss was primarily due to: (1) an increase in the discount rate used; (2) a decrease in

 

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station transaction multiples; and (3) a decrease in advertising revenue growth projections for the broadcasting industry. This decrease in operating income was offset by: (i) a decrease in time brokerage agreement fees of $14.2 million, primarily due to the cessation of a TBA on November 30, 2007; and (ii) an increase in net gain on sale or disposal of assets of $9.3 million primarily related to our sale of three radio stations in Seattle, Washington, in connection with an exchange agreement that was completed during the first quarter of 2008.

 

Same Station Considerations:

 

·                                          Operating loss in 2008 was not impacted by any acquisitions or dispositions of radio stations as of the beginning of the period.

 

·                                          Operating income in 2007 would have been higher by $1.4 million if we had adjusted operating income to give effect to acquisitions or dispositions of radio stations as of the beginning of the period.

 

Interest Expense

 

 

 

Years Ended

 

 

 

December 31, 2008

 

December 31, 2007

 

 

 

(dollars in millions)

 

Interest Expense

 

$

45.0

 

$

51.2

 

Amount of Change

 

$

(6.2

)

 

 

Percentage Change

 

(12.1

)%

 

 

 

The decrease in interest expense was primarily due to: (i) a decline in interest rates during the year ended December 31, 2008 as compared to the year ended December 31, 2007; and (ii) the repurchase during 2008 of $66.5 million of our Notes which have a higher interest rate than the replacement debt. This decrease was offset by: (1) higher average outstanding debt under our senior credit agreement used to finance: (a) the acquisition of radio station assets in several markets in the amount of $268.3 million during the fourth quarter of 2007; (b) dividend payments of $21.6 million in 2008 and $58.0 million in 2007; and (c) the repurchase of our common stock in the amount of $13.9 million during 2008; and (2) higher interest expense of $0.9 million related to the resolution of certain litigation.

 

Loss From Continuing Operations Before Income Taxes (Benefit)

 

 

 

Years Ended

 

 

 

December 31, 2008

 

December 31, 2007

 

 

 

(dollars in millions)

 

Loss From Continuing Operations Before Income Taxes (Benefit)

 

$

(745.2

)

$

(7.7

)

Amount of Change

 

$

(737.5

)

 

 

Percentage Change

 

NM

 

 

 

 

The net change was primarily attributable to an increase in impairment loss of $751.7 million due to the reasons as described above under Operating Income (Loss). The increase in loss from continuing operations before income tax provision (benefit) was offset by: (1) a $6.9 million gain on the retirement of our Notes; (2) a decrease in our interest expense of $6.1 million for the reasons described above under Interest Expense; and (3) a $2.4 million increase in other income related to an insurance recovery.

 

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Income Taxes (Benefit)

 

 

 

Years Ended

 

 

 

December 31, 2008

 

December 31, 2007

 

 

 

(dollars in millions)

 

Income Taxes (Benefit)

 

$

(232.6

)

$

0.7

 

Amount of Change

 

$

(233.3

)

 

 

Percentage Change

 

NM

 

 

 

 

The net change in income tax provision (benefit) was primarily the result of the net change as described above under Loss From Continuing Operations Before Income Tax Provision (Benefit).  In addition, we recorded discrete items of tax of: (1) $59.4 million for the year ended December 31, 2008 primarily due to an increase to our valuation allowance to fully reserve our net deferred tax assets; and (2) $2.9 million for the year ended December 31, 2007 resulting from the commencement of operations in 2007 in states which on average have higher income tax rates than in states in which we previously operated and the resulting effect on previously reported temporary differences between the tax and financial reporting bases of our assets and liabilities.

 

For the years ended December 31, 2008 and 2007, our income tax rate was 31.2% and 9.0%, respectively. Included in the tax rate for the years ended December 31, 2008 and 2007 were discrete items of tax (as described above) in the amount of $59.4 million and $2.9 million, respectively.

 

For the year ended December 31, 2008, the income tax benefit was $232.6 million, which resulted from a reduction in deferred tax liabilities primarily due to the recording of an impairment loss of $835.7 million.  For the year ended December 31, 2007, the income tax expense of $0.7 million was comprised of a current tax credit of $8.9 million and a deferred tax expense of $9.6 million.

 

Our net non-current deferred tax liabilities were eliminated as of December 31, 2008 primarily due to the deferred tax benefit associated with the $835.7 million impairment loss to our indefinite-lived intangible assets. Our net non-current deferred tax liabilities as of December 31, 2007 were $235.6 million. The deferred tax liabilities primarily relate to differences between book and tax bases of certain of our indefinite-lived intangibles (broadcasting licenses and goodwill). We do not amortize our indefinite-lived intangibles for financial statement purposes, but instead test them annually for impairment. The amortization of our indefinite-lived assets for tax purposes but not for book purposes creates deferred tax liabilities.  A reversal of deferred tax liabilities may occur when: (1) indefinite-lived intangibles become impaired; or (2) indefinite-lived intangibles are sold for cash, which would typically only occur in connection with the sale of the assets of a station or groups of stations or the entire company in a taxable transaction.

 

Loss From Continuing Operations

 

 

 

Years Ended

 

 

 

December 31, 2008

 

December 31, 2007

 

 

 

(dollars in millions)

 

Loss From Continuing Operations

 

$

(512.6

)

$

(8.4

)

Amount of Change

 

$

(504.2

)

 

 

Percentage Change

 

NM

 

 

 

 

The increase in loss from continuing operations is primarily due to the reasons described above under Loss From Continuing Operations Before Income Tax Provision (Benefit), net of income taxes (benefit).

 

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Table of Contents

 

Income (Loss) From Discontinued Operations, Net Of Taxes (Benefit)

 

 

 

Years Ended

 

 

 

December 31, 2008

 

December 31, 2007

 

 

 

(dollars in millions)

 

Income (Loss) From Discontinued Operations, Net Of Taxes (Benefit)

 

$

(4.1

)

$

 

Amount of Change

 

$

(4.1

)

 

 

Percentage Change

 

NM

 

 

 

 

The net change was primarily due to a non-cash impairment loss of $4.6 million (net of an income tax benefit of $2.1 million) in the first quarter of 2008 for the Rochester assets which were then held for sale and were subsequently disposed of during the third quarter of 2008.

 

Net Loss

 

 

 

Years Ended

 

 

 

December 31, 2008

 

December 31, 2007

 

 

 

(dollars in millions)

 

Net Loss

 

$

(516.7

)

$

(8.4

)

Amount of Change

 

$

(508.3

)

 

 

Percentage Change

 

NM

 

 

 

 

The net change was primarily attributable to the reasons described above under Loss From Continuing Operations Before Income Tax Provision (Benefit) and under Income Tax Provision (Benefit).

 

Future Impairments

 

We may determine that it will be necessary to take impairment charges in future periods for various reasons, including if the economic downturn worsens and/or continues for an extended period of time.  Although the annual impairment test of our broadcasting licenses and goodwill was performed in the second quarter of 2009, we may be required to retest prior to our next annual evaluation.  Any such impairment could be material.  As of December 31, 2009, no interim impairment test was required during 2009 for our broadcasting licenses and goodwill.

 

Liquidity And Capital Resources

 

Liquidity

 

We have used a significant portion of our capital resources to repurchase most of our Notes, acquire radio station assets, repurchase shares of our Class A common stock and pay dividends to our shareholders. Generally, our cash requirements are funded from one or a combination of the following sources: (1) internally generated cash flow; (2) borrowings under our credit agreement; and (3) the sales of assets.

 

Historically, we have carried significant amounts of debt. As of December 31, 2009, we had outstanding $749.8 million, including: (1) $729.2 million under our Bank Facility; (2) $12.6 million in finance method lease obligations; (3) $6.6 million in Notes; and (4) $1.5 million in a letter of credit. As of December 31, 2009, we had $10.8 million in cash and cash equivalents. During the year ended December 31, 2009, we decreased our outstanding debt by $85.3 million (which included a discount of $21.6 million on the repurchase of our Notes). During the year ended December 31, 2008, we decreased our outstanding debt by $140.0 million (which included a $7.9 million discount on the repurchase of our Notes) due in part to the cash available from the sale of a station in Austin, Texas, for $20.0 million, $12.2 million net cash proceeds made available from the sale of three radio stations in our Rochester, New York, market as well as the receipt of $14.6 million in income tax refunds.

 

Our Credit Agreement, As Amended

 

During March 2010, we amended (the “Amendment”) our Bank Facility with certain key terms, as defined within the Bank Facility, revised as follows:

 

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

·                  During periods when the Consolidated Leverage Ratio exceeds six times, we are restricted in our ability to take certain actions, including but not limited to, the payment of dividends and the repurchase of our stock;

·                  Certain restrictions and limitations on acquisitions and investments; and

·                  A maximum Consolidated Leverage Ratio that cannot exceed seven times in 2010 and which ratio decreases quarterly in 2011 to a ratio of six times.

 

As of December 31, 2009, we have $3.3 million of unamortized deferred financing expenses outstanding related to the Bank Facility and we expect to incur estimated additional costs of approximately $5.2 million in connection with the Amendment.

 

Our Bank Facility with a syndicate of 33 lenders as of December 31, 2009, is comprised of: (i) a Revolver of $650 million, of which $359.0 million is outstanding as of December 31, 2009; and (ii) a Term Loan of $400 million, of which $370.0 million is outstanding as of December 31, 2009.  The Term Loan reduces (from and after September 30, 2009) in quarterly amounts starting at $15 million and ultimately increasing to $60 million. The Revolver provides us with funds for working capital and general corporate purposes including capital expenditures, and, except as limited under the Amendment, any one or more of the following: repurchases of Class A common stock, investments, dividends and acquisitions. The Bank Facility is secured by a pledge of 100% of the capital stock and other equity interest in all of our wholly owned subsidiaries. In addition, the Bank Facility, as amended, is secured by a lien on all of our assets, other than our real property.

 

As of December 31, 2009, the undrawn amount of the Revolver was $289.5 million. The amount available under the Revolver is a function of covenant compliance at the time of borrowing. Based on our financial covenant analysis as of December 31, 2009, we would be limited to borrowings significantly less than the undrawn limit unless such borrowings were used to repay indebtedness or for transactions that increase cash flow for purposes of covenant calculation. We plan to use the Revolver and cash flow from operations to fund the amortization of the Term Loan.

 

The Bank Facility, as amended, requires us to comply with certain financial covenants which are defined terms within the agreement, including: (1) a maximum Consolidated Leverage Ratio that cannot exceed seven times in 2010 and which decreases quarterly in 2011 to a ratio that will not exceed six times (prior to the Amendment, the Consolidated Leverage Ratio could not exceed six times); and (2) a minimum ratio of Consolidated Operating Cash Flow to Consolidated Interest Charges of two times.  Management believes we are in compliance with all financial covenants and leverage ratios and all other terms of the Bank Facility as of December 31, 2009.

 

We believe that over the next 12 months we will continue to maintain our compliance with these covenants. We believe that cash on hand and cash from operating activities, together with available borrowings under the Revolver will be sufficient to permit us to meet our liquidity requirements over the next 12 months, including our debt repayments. While our operating cash flow has been reduced from prior periods during the recent economic downturn, it has remained positive and adequate to fund our operating needs. As a result, we have not been required to rely upon, and we do not anticipate having to rely upon, our Revolver to fund our operations

 

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

 

Failure to comply with our financial covenants or other terms of our Bank Facility and the failure to negotiate and obtain any required 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.  Notwithstanding the foregoing, we may from time-to-time seek to amend our existing Bank Facility or obtain other funding or additional financing, which may result in higher interest rates.  Amending our Bank Facility or obtaining other funding or additional financing prior to the expiration of the current agreement will be essential as the Revolver will be due as a balloon payment upon the expiration of the Bank Facility on June 30, 2012.

 

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Table of Contents

 

The recent economic downturn reduced demand for advertising in general, including advertising on our radio stations during 2009.  Economic conditions sequentially improved throughout 2009 and, based upon early indications for 2010, this negative trend appears to be reversing, primarily due to the strengthening of advertiser demand.  We anticipate that revenue trends will be positive in 2010 as the economy and the advertising environment rebound and we compare favorably to prior periods.

 

Operating Activities

 

Net cash flows provided by operating activities were $73.9 million and $130.6 million for the years ended December 31, 2009 and 2008, respectively. The decrease was mainly attributable to: (1) a decrease in 2009 of $44.2 million in net revenues, net of station operating expenses; and (2) a decrease in 2009 of $21.4 million in prepaid and refundable taxes as we received $14.6 million of state and federal tax refunds in 2008 and we expect to receive $7.0 million in federal tax refunds in 2010.

 

Net cash flows provided by operating activities were $130.6 million and $93.5 million for the years ended December 31, 2008 and 2007, respectively. The increase in 2008 was mainly attributable to a net decrease in working capital requirements of $42.0 million, primarily due to: (1) a $22.2 million reduction in prepaid and refundable income taxes as we received income tax refunds in 2008 of $14.6 million; (2) a $13.8 million reduction in outstanding accounts receivable; and (3) an increase in accounts payable and accrued liabilities of $6.7 million primarily due to $8.3 million that was accrued as of December 31, 2006, paid in 2007, and that related to a settlement with the New York Attorney General and an investigation by the FCC.

 

Investing Activities

 

For the year ended December 31, 2009, net cash flows used in investing activities of $2.1 million primarily reflect additions to property and equipment of $2.5 million.

 

For the year ended December 31, 2008, net cash flows provided by investing activities of $31.9 million primarily reflect $20.0 million in net cash proceeds from the sale of a station in Austin, Texas, and $12.2 million in net cash proceeds from the sale of three stations in Rochester, New York, offset by cash used in investing activities for additions to property and equipment of $8.6 million.

 

For the year ended December 31, 2007, net cash flows used in investing activities of $273.9 million primarily reflect: (1) the purchase of radio station assets of $268.3 million; and (2) additions to property and equipment of $9.3 million, offset by: (i) $2.9 million from the sale of investments; (ii) $1.8 million from insurance recovery proceeds; and (iii) $1.4 million from the reduction of station acquisition deposits and costs.

 

Financing Activities

 

Net cash flows (used in) provided by financing activities were $(65.4) million, $(169.2) million and $180.5 million for the years ended December 31, 2009, 2008 and 2007, respectively. For the year ended December 31, 2009, the cash flows used in financing activities primarily reflects the net repurchase of our Notes (after a discount of $21.6 million).

 

For the year ended December 31, 2008, the cash flows used in financing activities primarily reflect the net repayment of debt (including the repurchase of our Notes) of $132.2 million, the payment of dividends of $21.6 million and the repurchase of our common stock of $13.9 million.

 

For the year ended December 31, 2007, net cash flows provided by financing activities primarily reflect a net increase in outstanding indebtedness of $297.5 million, offset by: (1) the payment of $58.0 million in dividends; (2) the repurchase of $55.0 million of our Class A common stock; and (3) deferred financing expense of $4.7 million related to our new credit facility.

 

Our Former Credit Agreement

 

Our former credit agreement (“Former Facility”) consisted of a five-year $900 million (as amended) senior secured revolving credit agreement with a syndicate of banks that was to mature on August 11, 2009.  The Former Facility was secured by a pledge of 100% of the capital stock and other equity interest in all of our 100% owned

 

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subsidiaries and required us to comply with certain financial covenants and leverage ratios, which were defined terms within the agreement.

 

Income Taxes

 

During the years ended December 31, 2009, 2008 and 2007, we paid a nominal amount in income taxes as we have benefited from the tax deductions available on acquired assets, which are primarily intangible assets such as broadcasting licenses and goodwill. We anticipate that it will not be necessary to make any additional quarterly estimated federal, and most state, income tax payments for 2010, based upon projected quarterly taxable income and our ability to utilize federal net operating loss carryforwards beginning with 2009 and certain state net operating loss carryforwards beginning with 2006.

 

Income Tax Refunds

 

As a result of tax legislation during the fourth quarter of 2009 that allowed us to carryback our 2008 net operating loss for five years rather than for two years, we recorded $7.0 million under prepaid and refundable income taxes as we expect to recover this amount in the first quarter of 2010 for income taxes we previously paid.

 

In 2008, we received $14.6 million in income tax refunds that was primarily comprised of: (1) $8.4 million in previously paid federal income taxes as a result of a 2007 net operating loss carryback; and (2) $6.2 million in refunds related to federal and state estimated tax prepayments.

 

Dividends

 

Previously, we have used a portion of our capital resources to pay dividends on a quarterly basis effective beginning with the first quarter of 2006 and ending with and including the third quarter of 2008. Our Board of Directors has not declared any dividends since that time.

 

Pursuant to our Bank Facility as amended during March 2010, during periods when our Consolidated Leverage Ratio exceeds six times, we will be prohibited from paying dividends.

 

Any future dividends will be at the discretion of the Board of Directors based upon the relevant factors at the time of such consideration.

 

Share Repurchase Programs

 

Our most recent share repurchase program, which had $25.4 million remaining in authorization for repurchases, expired on June 30, 2009. Depending on market conditions and other factors, new share repurchase programs could be commenced or suspended at any time or from time to time without prior notice.

 

Over the past several years, our Board of Directors authorized several programs to repurchase our Class A common stock. Under these repurchase programs, we repurchased and immediately retired: (1) in 2009, 0.7 million shares for an aggregate of $0.9 million at an average price of $1.34 per share; (2) in 2008, 2.1 million shares for an aggregate of $13.9 million at an average price of $6.72 per share; and (3) in 2007, 2.2 million shares for an aggregate of $55.0 million at an average price of $25.28 per share.

 

2009 Option Exchange Program

 

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

 

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Option

 

Exchange Ratio

 

Strike Price

 

(Options For RSUs)

 

At least $11.80, but less than $30.00

 

2.25 for 1

 

$30.00 or more

 

4.5 for 1

 

 

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

 

Senior Subordinated Note Repurchases

 

On March 5, 2002, we issued $150.0 million of Notes due March 1, 2014. As of December 31, 2009 and 2008, we had outstanding $6.6 million and $83.5 million, respectively, as we repurchased and retired, during the years 2009 and 2008, $76.9 million and $66.5 million of the Notes, respectively.

 

On March 8, 2010, we redeemed at par all of the remaining $6.6 million Notes outstanding.

 

Interest on the Notes, which were in denominations of $1,000 each, accrued at the rate of 7.625% per annum and were payable semi-annually in arrears on March 1 and September 1.  Effective March 1, 2010, the Notes were callable at a redemption price of 100.0% of their principal amount plus accrued interest. The Notes were unsecured and ranked junior to our senior indebtedness. Our Notes also required us to comply with certain covenants that limited, among other things, our ability to incur indebtedness and to make certain payments.

 

Capital Expenditures

 

Capital expenditures for the years ended December 31, 2009, 2008 and 2007 were $2.5 million, $8.6 million and $9.3 million, respectively. We anticipate that capital expenditures in 2010 will be between $4.0 million and $5.0 million.

 

Credit Rating Agencies

 

Effective for 2009, we elected to discontinue our subscription to such ratings services. On a continuing basis, credit rating agencies such as Moody’s Investor Services and Standard and Poor’s may evaluate our debt in order to assign a credit rating. Any future significant downgrade in our credit rating could adversely impact our future liquidity by limiting or eliminating our ability to obtain debt financing.

 

Contractual Obligations

 

The following table reflects a summary of our contractual obligations as of December 31, 2009:

 

 

 

Payments Due By Period

 

 

 

 

 

Less Than

 

1 To 3

 

3 To 5

 

More Than 5

 

Contractual Obligations:

 

Total

 

1 Year

 

Years

 

Years

 

Years

 

 

 

(amounts in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-term debt obligations (1)

 

$

779,554

 

$

103,085

 

$

669,193

 

$

7,233

 

$

43

 

Operating lease obligations

 

67,274

 

11,837

 

20,985

 

14,699

 

19,753

 

Finance method lease obligations (2)

 

31,588

 

706

 

1,477

 

14,177

 

15,228

 

Purchase obligations (3)

 

235,133

 

63,330

 

90,316

 

46,487

 

35,000

 

Other long-term liabilities (4)

 

29,415

 

1,362

 

13,665

 

1,129

 

13,259

 

Total

 

$

1,142,964

 

$

180,320

 

$

795,636

 

$

83,725

 

$

83,283

 

 


(1)                      (a)          Our Bank Facility had outstanding debt in the amount of $729.0 million as of December 31, 2009. The maturity under our Bank Facility could be accelerated if we do not maintain compliance with certain covenants.

 

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(b)         Under our Notes, the maturity could be accelerated if we do not maintain compliance with certain covenants or could be repaid in cash by us at our option prior to the due date of the Notes.  On March 8, 2009, we redeemed at par all of the remaining $6.6 million Notes outstanding.

 

(c)          The above table includes projected interest expense under the remaining term of our Bank Facility and our Notes.

 

(2)                            Finance lease obligations outstanding include principal and interest expense.  When our continuing involvement in this transaction ceases over a remaining period of 42 months in the year 2013, we expect we will discontinue finance accounting and instead treat our obligations under the accounting guidance for capital and operating leases.

 

Also, we will recognize additional obligations included in the above table that cover lease payments for the period subsequent to the 42 month period of continuing involvement. The minimum term for each of the leases is 20 years, which covers the period of continuing involvement and the period subsequent to continuing involvement. For further discussion, see Note 9, Financing Method Lease Obligations in the accompanying notes to the financial statements.

 

(3)                    (a) We have purchase obligations of $233.6 million including contracts primarily for on-air personalities, sports programming rights, ratings services, music licensing fees, equipment maintenance and certain other operating contracts.

 

(b)         In addition to the above, we have $1.5 million in liabilities primarily related to our obligation to provide a letter of credit.

 

(4)                      Included within total other long-term liabilities of $29.4 million are liabilities for unrecognized tax positions of $5.3 million, which have been reflected in the above table in the column labeled as “More Than 5 Years” as it is impractical to determine whether there will be a cash impact to an individual year.  Please see Note 7, Income Taxes, in the accompanying notes to the consolidated financial statements for a discussion of deferred tax liabilities, including liabilities for unrecognized tax positions.

 

Off-Balance Sheet Arrangements

 

We utilize letters of credit to back certain payment and performance obligations. Letters of credit are subject to limits based on amounts outstanding under our credit facility. We had an outstanding letter of credit of $1.5 million as of December 31, 2009.

 

We enter into interest rate contracts (collars and swaps) to hedge a portion of our variable rate debt. See Note 10 in the accompanying notes to the consolidated financial statements for a detailed discussion of our derivative instruments.

 

We do not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet financial arrangements or other contractually narrow or limited purposes at December 31, 2009. Accordingly, we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in such relationships.

 

As of December 31, 2009, we had no other off-balance sheet arrangements.

 

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Market Capitalization

 

As of December 31, 2009 and 2008, our total market capitalization was $263.1 million and $45.6 million, respectively, which was $149.1 million more and $54.6 million less, respectively, than our equity book value. As of December 31, 2009 and 2008, our stock price was $7.07 per share and $1.23 per share, respectively. The difference in market capitalization versus equity book value can be attributed to: (i) a partial recovery in our stock price as compared to recent historical averages; and (ii) a reduction in equity book value due to impairments to broadcasting licenses and goodwill during the past several years (please refer to Note 3, Intangible Assets And Goodwill in the accompanying notes to the financial statements for a discussion of impairment losses in 2009, 2008 and 2007).

 

Intangibles

 

As of December 31, 2009, approximately 79.8% of our total assets consisted of radio broadcast licenses and goodwill, the value of which depends significantly upon the operational results of our business. We could not operate our radio stations without the related FCC license for each station.  FCC licenses are subject to renewal every eight years; consequently, we continually monitor the activities of our stations to ensure they comply with all regulatory requirements. Subject to delays in processing by the FCC, historically, all of our licenses have been renewed at the end of their respective eight-year periods, and we expect that all licenses will continue to be renewed in the future. (See Part I, Item 1A, “Risk Factors,” for a discussion of the risks associated with the renewal of licenses.)

 

Inflation

 

In 2009, we were not significantly impacted by the effects of inflation on our radio station operating expenses, including wages and equipment, although the exact impact cannot be reasonably determined.

 

Recent Accounting Pronouncements Not Yet Adopted

 

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

 

For a discussion of recent accounting pronouncements which impacted 2009, please see Note 2 in the accompanying consolidated financial statements.

 

Critical Accounting Policies

 

Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the amount of reported revenues and expenses during the reporting period. We base our estimates on historical experience and various other assumptions that we believe 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 available from other sources. Actual results may differ from these estimates under different circumstances or by using different assumptions.

 

We consider the following policies to be important in understanding the judgments involved in preparing our financial statements and the uncertainties that could affect our financial position, results of operations or cash flows.

 

Revenue Recognition

 

We recognize revenue from the sale of commercial broadcast time to advertisers when the commercials are broadcast, subject to meeting certain conditions such as persuasive evidence that an arrangement exists, the price is fixed and determinable and collection is reasonably assured. These criteria are generally met at the time an

 

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advertisement is broadcast, and the revenue is recorded net of advertising agency commission. Based upon past experience, the use of these criteria has been a reliable method to recognize revenues.

 

Allowance For Doubtful Accounts

 

We record an allowance for doubtful accounts for estimated losses resulting from our customers’ failure to make payments to us. We specifically review historical write-off activity by market, large customer concentrations, customer creditworthiness, the economic conditions of the customer’s industry, and changes in our customer payment practices when evaluating the adequacy of the allowance for doubtful accounts. Our historical estimates have been a reliable method to estimate future allowances. Our historical reserves have generally ranged between 3% and 5% of our outstanding receivables. Due to the recent economic downturn and its effect on our business and our customer base, our accounts receivable reserve has been in the higher range with a reserve of 4.6% as of December 31, 2009 and higher than usual in the prior year with a reserve of 5.6% as of 2008.  If the financial condition of our customers or markets were to deteriorate, resulting in an impairment of their ability to make payments, then additional allowances could be required. Our net income would be negatively impacted by $0.02 per share (basic and diluted), assuming a 1% increase in our outstanding accounts receivable allowance of $0.7 million as of December 31, 2009 (assuming a full valuation allowance against any tax benefit).

 

Contingencies And Litigation

 

On an ongoing basis, we evaluate our exposure related to contingencies and litigation and record a liability when available information indicates that a liability is probable and estimable. We also disclose significant matters that are reasonably possible to result in a loss or are probable but not estimable.

 

Estimation Of Our Tax Rates

 

We must make certain estimates and judgments in determining income tax expense for financial statement purposes. These estimates and judgments must be used in the calculation of certain tax assets and liabilities because of differences in the timing of recognition of revenue and expense for tax and financial statement purposes.

 

We must assess the likelihood that we will be able to recover our deferred tax assets. In 2009 and 2008, we recorded full valuation allowances for our net deferred tax assets primarily due to our cumulative losses over the past three years.  As changes occur in our assessments regarding our ability to recover our deferred tax assets, our tax provision is decreased in any period in which we determine that the recovery is probable.

 

In addition, the calculation of our tax liabilities requires us to account for uncertainties in the application of complex tax regulations. We recognize liabilities for uncertain tax positions based on the two-step process prescribed within the interpretation of accounting for uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit based upon its technical merits, including resolution of related appeals or litigation processes, if any. The second step requires us to estimate and measure the tax benefit as the largest amount that has greater than a 50% likelihood of being realized upon ultimate settlement. It is inherently difficult and subjective to estimate such amounts, as this requires us to determine the probability of various possible outcomes. We reevaluate these uncertain tax positions, and review whether any new uncertain tax positions have arisen, on a quarterly basis. This evaluation is based on factors including, but not limited to, changes in facts or circumstances, changes in tax law, effectively settled issues under audit, historical experience with similar tax matters, guidance from our tax advisors, and new audit activity. A change in recognition or measurement would result in the recognition of a tax benefit or an additional charge to the tax provision in the period in which the change occurs.

 

We believe our estimates of the value of our tax contingencies and valuation allowances are critical accounting estimates, as they contain assumptions based on past experiences and judgments about potential actions by taxing jurisdictions. It is reasonably likely that the ultimate resolution of these matters may be greater or less than the amount that we have currently accrued.  Excluding discrete items of tax, changes in our valuation allowance and impairment losses, our tax rate over the past several years has varied between a range of high 30% to low 40%. The effect of a 1% increase in our estimated tax rate as of December 31, 2009, would be minimal as the 1% tax would be applied to a marginal loss for the year.

 

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Valuation Of Share-Based Compensation

 

We determine the fair value of our employee stock options at the date of grant using a Black-Scholes option-pricing model. The Black-Scholes option-pricing model was developed for use in estimating the value of exchange-traded options that have no vesting restrictions and are fully transferable. Our employee stock options have characteristics significantly different from these traded options. In addition, option-pricing models require the input of highly subjective assumptions, including the expected stock price volatility and expected term of the options granted.

 

We determine the fair value of restricted stock units with service and market conditions using a Monte Carlo simulation model. The fair value is based on the use of certain assumptions regarding a number of highly complex and subjective variables.  If other reasonable assumptions were used, the results could differ.

 

Radio Broadcasting Licenses And Goodwill

 

We have made acquisitions in the past for which a significant amount of the purchase price was allocated to broadcasting licenses and goodwill assets. As of December 31, 2009, we have recorded approximately $746.0 million in radio broadcasting licenses and goodwill, which represents 79.8% of our total assets at that date. We must conduct impairment testing at least annually, or more frequently if events or changes in circumstances indicate that the asset might be impaired, and charge to operations an impairment expense only in the periods in which the recorded value of these assets is more than their fair value. After an impairment expense is recognized, the recorded value of these assets will be reduced by the impairment recognized and this shall be the assets’ new accounting basis. In 2009 and 2008, we recorded impairment losses of $67.7 million and $835.7 million, respectively, for radio broadcasting licenses and goodwill.

 

We believe our estimate of the value of our radio broadcasting licenses and goodwill assets is a critical accounting estimate as the value is significant in relation to our total assets, and our estimate of the value uses assumptions that incorporate variables based on past experiences and judgments about future performance of our stations. These variables include but are not limited to: (1) the risk-adjusted discount rate used in the valuation of fair value; (2) market share and profit margin of an average station within a market based upon market size and station type; (3) the forecast growth rate of each radio market, including assumptions regarding each market’s population, household income, retail sales and other factors that would influence advertising expenditures; (4) estimated capital start-up costs and losses incurred during the early years; (5) the likely media competition within the market area; (6) an effective tax rate assumption; and (7) future terminal values.  Changes in our estimates of the fair value of these assets could result in material future period write-downs in the carrying value of our broadcasting licenses and goodwill assets.

 

During the second quarter of 2009, we completed the impairment test for broadcasting licenses and determined that the fair value of the broadcasting licenses was less than the amount reflected in the balance sheet for each of our markets, other than Seattle, and recorded an impairment loss of $60.8 million. The prolonged economic downturn negatively impacted the radio broadcasting industry as advertising revenues continued to decline and expectations for growth over the next year were reduced. The projected growth levels for the industry and for us were less than those originally forecasted for 2009, which was the primary reason for further impairment to broadcasting licenses in the second quarter.  As revenues decline, profitability levels are also negatively impacted as fixed costs represent a large component of a radio station’s operating expenses. As a result, the asset base is particularly sensitive to the impact of continued declining revenues.

 

The methodology we use in determining our key estimates and assumptions for broadcasting licenses was applied consistently to each market (each market’s broadcasting licenses are a single unit of accounting).  As a result, the analysis for each market is the same. Of the seven variables identified above, we believe that the first three (in clauses (1) through (3)) are the most important to the determination of value. The following table reflects these key estimates and assumptions since the most recent impairment test for broadcasting licenses in the fourth quarter of 2008.  The table also depicts the range of operating profit margin and market long-term revenue growth rates used for determining the fair value of our broadcasting licenses.  In general, when comparing between the second quarter of 2009 and the fourth quarter of 2008: (1) the market specific operating profit margin range declined; and (2) the market long-term revenue growth rates were consistent; however, current period revenues were less than previously projected for 2009.

 

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Second

 

Fourth

 

 

 

Quarter

 

Quarter

 

 

 

2009

 

2008

 

Discount rates

 

10.6%

 

10.6%

 

Operating profit margin ranges

 

21.0% to 44.0%

 

21.0% to 46.7%

 

Market long-term revenue growth rates

 

1.0% to 2.5%

 

1.0% to 2.0%

 

 

We believe all of our markets’ broadcasting licenses, except for one, are at risk for future impairment. The methodology used in determining our key estimates and assumptions was applied consistently to each market. While we believe we have made reasonable estimates and assumptions to calculate the fair value of our broadcasting licenses, these estimates and assumptions could be materially different. If actual results for the industry are not consistent with our estimates and assumptions, then we could incur additional impairments.

 

Operating profit margins are defined as profit before interest, depreciation and amortization, income tax and corporate allocation charges.  Operating profits are then divided by broadcast revenues, net of agency and national representative commissions, to compute the operating profit margins.  Operating profit margins are projected based upon industry operating profit norms, which reflect market size and station type.  This assumption is not specific to the performance of our stations in a market, but is predicated on the expectation that a new entrant into the market could reasonably be expected to perform at a level similar to a typical competitor.  If the outlook for the industry’s growth declines further, then operating profit margins would be negatively impacted, which would further impair the value of our broadcasting licenses.

 

The long-term market growth rates are estimated from information available from industry sources, using historical and expected performance, which could be different in each of our markets.  Each market’s revenues were determined based upon this data and market revenues were forecast over a ten-year projection period to reflect the expected long-term growth rates for the radio broadcast industry and for each of our markets. If the estimates used for the industry’s growth are less than forecasted, then our broadcasting licenses could be further impaired.

 

The discount rate to be used by a typical market participant reflects the risk inherent in future cash flows for the broadcast industry and the same discount rate was used for each of our markets. The discount rate is calculated by weighting the required returns on interest-bearing debt and common equity capital in proportion to their estimated percentages in an expected capital structure.  The capital structure was estimated based upon data available for publicly traded companies in the broadcast industry.  The discount rate could be negatively impacted by reductions in the industry’s forecasted growth rates that directly impact future cash flows.

 

If we were to assume a 100 basis point change in our three key assumptions (a reduction in the long-term revenue growth rate, a reduction in the operating performance cash flow and an increase in the weighted average cost of capital) used to determine the fair value of our broadcasting licenses and goodwill during the second quarter of 2009, the following would be the incremental impact:

 

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Sensitivity Analysis Of 100 Basis Point Change

 

 

 

Results Of

 

 

 

Results Of

 

 

 

Long-Term

 

Results Of

 

Weighted

 

 

 

Revenue

 

Operating

 

Average

 

 

 

Growth

 

Performance

 

Cost Of

 

 

 

Rate

 

Cash Flow

 

Capital

 

 

 

Decrease

 

Decrease

 

Increase

 

 

 

(amounts in millions)

 

Broadcasting Licenses

 

 

 

 

 

 

 

Impairment assumption sensitivity result

 

$

127.6 

 

$

84.0 

 

$

159.7

 

Impairment recorded during the second quarter of 2009

 

60.8 

 

60.8 

 

60.8

 

Incremental broadcasting licenses impairment

 

66.8 

 

23.2 

 

98.9

 

 

 

 

 

 

 

 

 

Goodwill

 

 

 

 

 

 

 

Impairment assumption sensitivity result

 

2.6 

 

6.6 

 

5.0

 

Impairment recorded during the second quarter of 2009

 

6.9 

 

6.9 

 

6.9

 

Incremental goodwill impairment (decrease)

 

(4.3

)

(0.3

)

(1.9

)

 

 

 

 

 

 

 

 

Total incremental impairment from sensitivity analysis

 

$

62.5 

 

$

22.9 

 

$

97.0

 

 

Please refer to Note 3, Intangible Assets And Goodwill, in the accompanying notes to the financial statements for a discussion of several key assumptions used in the fair value estimate of our broadcasting licenses and goodwill during the second quarter of 2009 as compared to the fourth quarter 2008 interim impairment test.

 

For a more comprehensive list of our accounting policies, please see Note 2, Significant Accounting Policies, accompanying the consolidated financial statements included in our latest annual report on Form 10-K for the year ended December 31, 2008.  Note 2 to the consolidated financial statements included with Form 10-K contains several other policies, including policies such as governing the timing of revenue recognition, that are important to the preparation of our consolidated financial statements, but do not meet the SEC’s definition of critical accounting policies because they do not involve subjective or complex judgments.  In addition, for further discussion of new accounting policies that were effective for us on January 1, 2009, please refer to the new accounting standards under Note 2 to the accompanying notes to the financial statements.

 

ITEM 7A.                    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

We are exposed to market risk from changes in interest rates on our variable rate Bank Facility. From time to time, we may seek to limit our exposure to interest rate volatility through the use of derivative rate hedging instruments. If the borrowing rates under our LIBOR loans were to increase 1% above the rates as of December 31, 2009, our interest expense under our Bank Facility would increase by approximately $2.5 million on an annual basis, including any interest benefit or interest expense associated with the use of outstanding derivative rate hedging instruments.

 

During the year ended December 31, 2009, the following derivative rate hedging transactions to fix interest on our variable rate debt were outstanding in the aggregate notional amount of $550.0 million. These rate hedging transactions are tied to the one-month LIBOR interest rate.

 

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Effective

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Date That

 

Notional

 

Type

 

 

 

 

 

 

 

Fixed

 

 

 

Notional

 

Amount

 

Of

 

Notional

 

Effective

 

 

 

LIBOR

 

Expiration

 

Amount

 

After

 

Hedge

 

Amount

 

Date

 

Collar

 

Rate

 

Date

 

Decreases

 

Decrease

 

 

 

(amounts