10-Q 1 a10-12636_110q.htm 10-Q

Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

FORM 10-Q

 

(Mark One)

 

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

 

For the quarterly period ended June 30, 2010

 

or

 

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

 

For the transition period from                     to                     

 

Commission File Number: 001-14461

 

Entercom Communications Corp.

(Exact name of registrant as specified in its charter)

 

Pennsylvania

 

23-1701044

(State or other jurisdiction of incorporation or organization)

 

(I.R.S. employer identification no.)

 

401 City Avenue, Suite 809

Bala Cynwyd, Pennsylvania 19004

(Address of principal executive offices and zip code)

 

(610) 660-5610

(Registrant’s telephone number, including area code)

 

 

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

 

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

 

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

 

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

 

Large accelerated filer o

 

Accelerated filer o

 

 

 

Non-accelerated filer x

 

Smaller reporting company o

 

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

 

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

 

Class A common stock, $0.01 par value — 29,652,356 Shares Outstanding as of July 23, 2010

(Class A Shares Outstanding include 1,389,329 unvested and vested but deferred restricted stock units)

Class B common stock, $0.01 par value — 7,457,532 Shares Outstanding as of July 23, 2010

 

 

 



Table of Contents

 

ENTERCOM COMMUNICATIONS CORP.

 

INDEX

 

Part I

Financial Information

 

 

 

 

Item 1.

Financial Statements

1

Item 2.

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

27

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

41

Item 4.

Controls and Procedures

42

 

 

 

Part II

Other Information

 

 

 

 

Item 1.

Legal Proceedings

43

Item 1A.

Risk Factors

43

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

43

Item 3.

Defaults Upon Senior Securities

43

Item 4.

Reserved

43

Item 5.

Other Information

43

Item 6.

Exhibits

44

 

 

 

Signatures

45

 

 

Exhibit Index

46

 

Private Securities Litigation Reform Act Safe Harbor Statement

 

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

 

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

 

You can identify forward-looking statements by our use of words such as “anticipates,” “believes,” “continues,” “expects,” “intends,” “likely,” “may,” “opportunity,” “plans,” “potential,” “project,” “will,” and similar expressions which identify forward-looking statements, whether in the negative or the affirmative.  We cannot guarantee that we actually will achieve these plans, intentions or expectations.  These forward-looking statements are subject to risks, uncertainties and other factors, some of which are beyond our control, which could cause actual results to differ materially from those forecasted or anticipated in such forward-looking statements.  You should not place undue reliance on these forward-looking statements, which reflect our view only as of the date of this report.  We undertake no obligation to update these statements or publicly release the result of any revision(s) to these statements to reflect events or circumstances after the date of this report or to reflect the occurrence of unanticipated events.

 

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

 

ii


 


Table of Contents

 

PART I

 

FINANCIAL INFORMATION

 

ITEM 1.     Financial Statements

 

ENTERCOM COMMUNICATIONS CORP.

CONDENSED CONSOLIDATED BALANCE SHEETS

(amounts in thousands)

(unaudited)

 

 

 

JUNE 30,

 

DECEMBER 31,

 

 

 

2010

 

2009

 

ASSETS:

 

 

 

 

 

Cash and cash equivalents

 

$

4,371

 

$

10,751

 

Accounts receivable, net of allowance for doubtful accounts

 

76,612

 

68,319

 

Prepaid expenses and deposits, other

 

5,800

 

4,701

 

Prepaid and refundable federal and state income taxes

 

643

 

7,628

 

Insurance claim receivable

 

 

16,500

 

Total current assets

 

87,426

 

107,899

 

Investments

 

391

 

391

 

Net property and equipment

 

67,063

 

71,740

 

Radio broadcasting licenses

 

707,852

 

707,852

 

Goodwill

 

38,168

 

38,168

 

Deferred charges and other assets, net of accumulated amortization

 

11,859

 

8,486

 

 

 

 

 

 

 

TOTAL ASSETS

 

$

912,759

 

$

934,536

 

 

 

 

 

 

 

LIABILITIES:

 

 

 

 

 

Accounts payable

 

$

3,330

 

$

477

 

Accrued expenses

 

12,198

 

13,152

 

Accrued compensation and other current liabilities

 

15,374

 

12,678

 

Insurance claim payable

 

 

16,500

 

Long-term debt, current portion

 

96,025

 

80,024

 

Total current liabilities

 

126,927

 

122,831

 

Long-term debt, net of current portion

 

605,136

 

655,728

 

Financing method lease obligations

 

12,610

 

12,610

 

Deferred tax liabilities

 

9,139

 

 

Other long-term liabilities

 

23,116

 

29,415

 

Total long-term liabilities

 

650,001

 

697,753

 

Total liabilities

 

776,928

 

820,584

 

 

 

 

 

 

 

CONTINGENCIES AND COMMITMENTS

 

 

 

 

 

 

 

 

 

 

 

SHAREHOLDERS’ EQUITY:

 

 

 

 

 

Preferred stock

 

 

 

Class A, B and C common stock

 

372

 

372

 

Additional paid-in capital

 

590,216

 

588,622

 

Accumulated deficit

 

(443,060

)

(461,610

)

Accumulated other comprehensive loss

 

(11,697

)

(13,432

)

Total shareholders’ equity

 

135,831

 

113,952

 

 

 

 

 

 

 

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

 

$

912,759

 

$

934,536

 

 

See notes to condensed consolidated financial statements.

 

1



Table of Contents

 

ENTERCOM COMMUNICATIONS CORP.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

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

(unaudited)

 

 

 

SIX MONTHS ENDED

 

 

 

JUNE 30,

 

 

 

2010

 

2009

 

 

 

 

 

 

 

NET REVENUES

 

$

186,622

 

$

176,671

 

 

 

 

 

 

 

OPERATING (INCOME) EXPENSE:

 

 

 

 

 

Station operating expenses, including non-cash compensation expense of $568 in 2010 and $762 in 2009

 

127,877

 

125,733

 

Depreciation and amortization expense

 

6,647

 

8,540

 

Corporate general and administrative expenses, including non-cash compensation expense of $2,534 in 2010 and $2,937 in 2009

 

11,102

 

11,584

 

Impairment loss

 

 

67,676

 

Net time brokerage agreement income

 

 

(2

)

Net gain on sale or disposal of assets

 

(9

)

 

Total operating expense

 

145,617

 

213,531

 

OPERATING INCOME (LOSS)

 

41,005

 

(36,860

)

 

 

 

 

 

 

OTHER (INCOME) EXPENSE:

 

 

 

 

 

Interest expense, including amortization of deferred financing expense of $1,490 in 2010 and $776 in 2009

 

14,150

 

15,972

 

Interest and dividend income

 

(11

)

(17

)

Net (gain) loss on extinguishment of debt

 

62

 

(16,128

)

Other income

 

(22

)

(380

)

TOTAL OTHER (INCOME) EXPENSE

 

14,179

 

(553

)

 

 

 

 

 

 

INCOME (LOSS) BEFORE INCOME TAXES

 

26,826

 

(36,307

)

INCOME TAXES

 

8,364

 

270

 

NET INCOME (LOSS)

 

$

18,462

 

$

(36,577

)

 

 

 

 

 

 

NET INCOME (LOSS) PER SHARE - BASIC

 

$

0.52

 

$

(1.03

)

 

 

 

 

 

 

NET INCOME (LOSS) PER SHARE - DILUTED

 

$

0.49

 

$

(1.03

)

 

 

 

 

 

 

WEIGHTED AVERAGE SHARES:

 

 

 

 

 

Basic

 

35,686,383

 

35,342,509

 

Diluted

 

37,678,189

 

35,342,509

 

 

See notes to condensed consolidated financial statements.

 

2



Table of Contents

 

ENTERCOM COMMUNICATIONS CORP.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

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

(unaudited)

 

 

 

THREE MONTHS ENDED

 

 

 

JUNE 30,

 

 

 

2010

 

2009

 

 

 

 

 

 

 

NET REVENUES

 

$

105,788

 

$

101,300

 

 

 

 

 

 

 

OPERATING (INCOME) EXPENSE:

 

 

 

 

 

Station operating expenses, including non-cash compensation expense of $390 in 2010 and $672 in 2009

 

68,489

 

67,164

 

Depreciation and amortization expense

 

3,266

 

4,224

 

Corporate general and administrative expenses, including non-cash compensation expense of $962 in 2010 and $1,235 in 2009

 

5,227

 

5,897

 

Impairment loss

 

 

67,676

 

Net gain on sale or disposal of assets

 

(38

)

(7

)

Total operating expense

 

76,944

 

144,954

 

OPERATING INCOME (LOSS)

 

28,844

 

(43,654

)

 

 

 

 

 

 

OTHER (INCOME) EXPENSE:

 

 

 

 

 

Interest expense, including amortization of deferred financing expense of $941 in 2010 and $382 in 2009

 

7,170

 

7,859

 

Interest and dividend income

 

(4

)

(9

)

Net gain on extinguishment of debt

 

 

(8,373

)

TOTAL OTHER (INCOME) EXPENSE

 

7,166

 

(523

)

 

 

 

 

 

 

INCOME (LOSS) BEFORE INCOME TAXES (BENEFIT)

 

21,678

 

(43,131

)

INCOME TAXES (BENEFIT)

 

7,416

 

(1,218

)

NET INCOME (LOSS)

 

$

14,262

 

$

(41,913

)

 

 

 

 

 

 

NET INCOME (LOSS) PER SHARE - BASIC

 

$

0.40

 

$

(1.19

)

 

 

 

 

 

 

NET INCOME (LOSS) PER SHARE - DILUTED

 

$

0.38

 

$

(1.19

)

 

 

 

 

 

 

WEIGHTED AVERAGE SHARES:

 

 

 

 

 

Basic

 

35,714,159

 

35,289,531

 

Diluted

 

37,581,924

 

35,289,531

 

 

See notes to condensed consolidated financial statements.

 

3



Table of Contents

 

ENTERCOM COMMUNICATIONS CORP.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(amounts in thousands)

(unaudited)

 

 

 

SIX MONTHS ENDED

 

 

 

JUNE 30,

 

 

 

2010

 

2009

 

 

 

 

 

 

 

NET INCOME (LOSS)

 

$

18,462

 

$

(36,577

)

 

 

 

 

 

 

OTHER COMPREHENSIVE INCOME, NET OF TAXES:

 

 

 

 

 

 

 

 

 

 

 

Net unrealized gain on derivatives, net of taxes of $0 in 2010 and $0 in 2009

 

1,735

 

1,359

 

 

 

 

 

 

 

COMPREHENSIVE INCOME (LOSS)

 

$

20,197

 

$

(35,218

)

 

See notes to condensed consolidated financial statements.

 

4



Table of Contents

 

ENTERCOM COMMUNICATIONS CORP.

CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS)

(amounts in thousands)

(unaudited)

 

 

 

THREE MONTHS ENDED

 

 

 

JUNE 30,

 

 

 

2010

 

2009

 

 

 

 

 

 

 

NET INCOME (LOSS)

 

$

14,262

 

$

(41,913

)

 

 

 

 

 

 

OTHER COMPREHENSIVE INCOME, NET OF TAXES:

 

 

 

 

 

 

 

 

 

 

 

Net unrealized gain on derivatives, net of taxes of $0 in 2010 and $0 in 2009

 

1,712

 

2,344

 

 

 

 

 

 

 

COMPREHENSIVE INCOME (LOSS)

 

$

15,974

 

$

(39,569

)

 

See notes to condensed consolidated financial statements.

 

5


 


Table of Contents

 

ENTERCOM COMMUNICATIONS CORP.

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

SIX MONTHS ENDED JUNE 30, 2010 AND YEAR ENDED DECEMBER 31, 2009

(amounts in thousands, except share data)

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

Common Stock

 

Additional

 

 

 

Other

 

 

 

 

 

Class A

 

Class B

 

Paid-in

 

Retained

 

Comprehensive

 

 

 

 

 

Shares

 

Amount

 

Shares

 

Amount

 

Capital

 

Earnings

 

Income (Loss)

 

Total

 

Balance, December 31, 2008

 

29,479,188

 

$

295

 

7,607,532

 

$

76

 

$

582,325

 

$

(467,177

)

$

(15,262

)

$

100,257

 

Net income

 

 

 

 

 

 

5,398

 

 

5,398

 

Conversion of Class B common stock to Class A common stock

 

150,000

 

1

 

(150,000

)

(1

)

 

 

 

 

Compensation expense related to granting of stock options

 

 

 

 

 

485

 

 

 

485

 

Compensation expense related to granting of restricted stock units

 

796,824

 

8

 

 

 

6,380

 

 

 

6,388

 

Issuance of common stock related to an incentive plan

 

74,369

 

 

 

 

97

 

 

 

97

 

Common stock repurchase

 

(662,664

)

(7

)

 

 

(882

)

 

 

(889

)

Purchase of vested employee restricted stock units

 

(82,556

)

 

 

 

(104

)

 

 

(104

)

Net dividend equivalents on restricted stock units (net of forfeitures and payments)

 

 

 

 

 

 

169

 

 

169

 

Realization of tax benefit for dividend equivalent payments

 

 

 

 

 

321

 

 

 

321

 

Net unrealized gain on derivatives

 

 

 

 

 

 

 

1,830

 

1,830

 

Balance, December 31, 2009

 

29,755,161

 

297

 

7,457,532

 

75

 

588,622

 

(461,610

)

(13,432

)

113,952

 

Net income

 

 

 

 

 

 

18,462

 

 

18,462

 

Compensation expense related to granting of stock options

 

 

 

 

 

255

 

 

 

255

 

Compensation expense related to granting of restricted stock units

 

(4,226

)

 

 

 

2,847

 

 

 

2,847

 

Exercise of stock options

 

81,975

 

 

 

 

109

 

 

 

109

 

Purchase of vested employee restricted stock units

 

(180,396

)

 

 

 

(1,617

)

 

 

(1,617

)

Net dividend equivalents on restricted stock units (net of forfeitures and payments)

 

 

 

 

 

 

88

 

 

88

 

Net unrealized gain on derivatives

 

 

 

 

 

 

 

1,735

 

1,735

 

Balance, June 30, 2010

 

29,652,514

 

$

297

 

7,457,532

 

$

75

 

$

590,216

 

$

(443,060

)

$

(11,697

)

$

135,831

 

 

See notes to condensed consolidated financial statements.

 

6



Table of Contents

 

ENTERCOM COMMUNICATIONS CORP.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(amounts in thousands)

(unaudited)

 

 

 

SIX MONTHS ENDED

 

 

 

JUNE 30,

 

 

 

2010

 

2009

 

OPERATING ACTIVITIES:

 

 

 

 

 

Net income (loss)

 

$

18,462

 

$

(36,577

)

 

 

 

 

 

 

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

 

 

 

 

 

Depreciation and amortization

 

6,647

 

8,540

 

Amortization of deferred financing costs

 

1,490

 

776

 

Deferred tax benefit and other

 

9,139

 

270

 

Provision for bad debts

 

742

 

1,372

 

Net gain on sale or disposal of assets

 

(9

)

 

Non-cash stock-based compensation expense

 

3,102

 

3,699

 

Deferred rent

 

(5

)

18

 

Unearned revenue - long-term

 

 

(421

)

Net (gain) loss on extinguishment of debt

 

62

 

(16,128

)

Deferred compensation

 

237

 

744

 

Impairment loss

 

 

67,676

 

Other income

 

(22

)

(380

)

 

 

 

 

 

 

Changes in assets and liabilities:

 

 

 

 

 

Accounts receivable

 

(9,014

)

1,121

 

Prepaid expenses and deposits

 

15,398

 

(388

)

Prepaid and refundable income taxes

 

6,985

 

95

 

Accounts payable and accrued liabilities

 

(14,516

)

(513

)

Accrued interest expense

 

(185

)

(1,074

)

Accrued liabilities - long-term

 

(949

)

(577

)

Prepaid expenses - long-term

 

(431

)

(229

)

Net cash provided by operating activities

 

37,133

 

28,024

 

 

 

 

 

 

 

INVESTING ACTIVITIES:

 

 

 

 

 

Additions to property and equipment

 

(1,474

)

(1,240

)

Proceeds from sale of property, equipment, intangibles and other assets

 

108

 

19

 

Deferred charges and other assets

 

(46

)

(43

)

Proceeds from investments

 

22

 

6

 

Proceeds from termination of radio station contract

 

 

380

 

Net cash used in investing activities

 

(1,390

)

(878

)

 

7



Table of Contents

 

ENTERCOM COMMUNICATIONS CORP.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(amounts in thousands)

(unaudited)

 

 

 

SIX MONTHS ENDED

 

 

 

JUNE 30,

 

 

 

2010

 

2009

 

FINANCING ACTIVITIES:

 

 

 

 

 

Deferred expenses related to bank facility

 

(5,155

)

 

Proceeds from issuance of long-term debt

 

37,500

 

25,000

 

Payments of long-term debt

 

(65,512

)

(14,011

)

Retirement of senior subordinated notes

 

(6,579

)

(22,860

)

Purchase of the Company’s common stock

 

 

(889

)

Proceeds from issuance of employee stock plan

 

 

82

 

Proceeds from the exercise of stock options

 

109

 

 

Purchase of vested restricted stock units

 

(1,617

)

(90

)

Payment of dividend equivalents on vested restricted stock units

 

(869

)

(747

)

Net cash used in financing activities

 

(42,123

)

(13,515

)

 

 

 

 

 

 

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

 

(6,380

)

13,631

 

CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR

 

10,751

 

4,284

 

CASH AND CASH EQUIVALENTS, END OF PERIOD

 

$

4,371

 

$

17,915

 

 

 

 

 

 

 

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

Interest

 

$

12,883

 

$

16,307

 

Income taxes

 

$

82

 

$

192

 

 

SUPPLEMENTAL DISCLOSURES ON NON-CASH INVESTING AND FINANCING ACTIVITIES:

 

During the six months ended June 30, 2010, the Company issued 0.1 million restricted stock units (net of forfeitures) that will increase its paid-in capital by $0.2 million over the vesting period of the restricted stock units. For purposes of computing forfeitures noted above, 0.1 million market-based restricted stock units that did not vest as the vesting conditions were not met, were not included.

 

During the six months ended June 30, 2009, the Company issued 0.2 million restricted stock units, recorded modification expense of $1.4 million and had forfeitures of $2.1 million that will decrease on an aggregate basis its paid-in capital by $0.4 million over the vesting period of the restricted stock units.

 

See notes to condensed consolidated financial statements.

 

8


 


Table of Contents

 

ENTERCOM COMMUNICATIONS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SIX MONTHS ENDED JUNE 30, 2010 AND 2009

 

1.                                      BASIS OF PRESENTATION

 

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

 

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

 

Recent Accounting Pronouncements

 

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

 

2.                                      SHARE-BASED COMPENSATION

 

Restricted Stock Units (“RSUs”)

 

A summary of the Company’s outstanding RSUs as of June 30, 2010, and changes in RSUs during the six months ended June 30, 2010, is as follows:

 

 

 

 

 

 

 

 

 

Weighted

 

 

 

 

 

 

 

 

 

 

 

Average

 

Aggregate

 

 

 

 

 

 

 

Weighted

 

Remaining

 

Intrinsic

 

 

 

 

 

 

 

Average

 

Contractual

 

Value As Of

 

 

 

 

 

Number of

 

Purchase

 

Term

 

June 30,

 

 

 

Period Ended

 

RSUs

 

Price

 

In Years

 

2010

 

 

 

 

 

 

 

 

 

 

 

 

 

RSUs outstanding as of:

 

December 31, 2009

 

1,917,533

 

 

 

 

 

 

 

RSUs awarded

 

 

 

71,336

 

 

 

 

 

 

 

RSUs released

 

 

 

(523,603

)

 

 

 

 

 

 

RSUs forfeited

 

 

 

(75,937

)

 

 

 

 

 

 

RSUs outstanding as of:

 

June 30, 2010

 

1,389,329

 

$

 

1.4

 

$

12,253,882

 

 

 

 

 

 

 

 

 

 

 

 

 

RSUs vested and expected to vest

 

 

 

1,264,506

 

$

 

1.4

 

$

10,413,204

 

RSUs exercisable (vested and deferred)

 

 

 

83,871

 

$

 

 

 

$

739,742

 

Weighted average remaining recognition period in years

 

 

 

2.3

 

 

 

 

 

 

 

 

9



Table of Contents

 

As of June 30, 2010, there was $4.6 million of unamortized compensation expense, net of estimated forfeitures, related to unvested RSUs, which is expected to be recognized over a remaining weighted average recognition period of 2.3 years.

 

RSUs With Service And Market Conditions

 

During the six months ended June 30, 2010, 50% of the Company’s outstanding 0.1 million RSUs with service and market conditions vested while the other 50% were forfeited (as not all of the market conditions were satisfied).

 

During the first quarter of 2009, the Company modified 0.2 million RSUs with service and market conditions by eliminating the market conditions.  Due to the modification, additional expense of $0.2 million will be recognized over the new vesting period of two years from the modification date.

 

Options

 

The following table presents the option activity for the six months ended June 30, 2010:

 

 

 

 

 

 

 

 

 

Weighted

 

Aggregate

 

 

 

 

 

 

 

 

 

Average

 

Intrinsic

 

 

 

 

 

 

 

Weighted

 

Remaining

 

Value

 

 

 

 

 

 

 

Average

 

Contractual

 

As of

 

 

 

 

 

Number of

 

Exercise

 

Term

 

June 30,

 

 

 

Period Ended

 

Options

 

Price

 

In Years

 

2010

 

 

 

 

 

 

 

 

 

 

 

 

 

Options outstanding as of:

 

December 31, 2009

 

1,148,032

 

$

3.13

 

 

 

 

 

Options granted

 

 

 

2,500

 

$

12.08

 

 

 

 

 

Options exercised

 

 

 

(81,975

)

$

1.34

 

 

 

 

 

Options forfeited

 

 

 

(30,030

)

$

1.83

 

 

 

 

 

Options expired

 

 

 

(10,877

)

$

30.74

 

 

 

 

 

Outstanding as of:

 

June 30, 2010

 

1,027,650

 

$

3.04

 

8.4

 

$

7,109,082

 

 

 

 

 

 

 

 

 

 

 

 

 

Options vested and expected to vest as of:

 

June 30, 2010

 

939,900

 

$

3.17

 

8.4

 

$

6,474,527

 

Options vested and exercisable as of:

 

June 30, 2010

 

221,670

 

$

8.00

 

7.6

 

$

1,299,211

 

Weighted average remaining recognition period in years

 

 

 

2.6

 

 

 

 

 

 

 

 

As of June 30, 2010, $0.8 million of unrecognized compensation costs related to unvested stock options, net of estimated forfeitures, is expected to be recognized in future periods over a weighted average period of 2.6 years.

 

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

 

 

 

Six Months Ended

 

 

 

June 30,

 

 

 

2010

 

2009

 

Expected life (years)

 

6.3

 

6.3

 

Expected volatility factor (%)

 

69.2%

 

54.9% to 61.4%

 

Risk-free interest rate (%)

 

3.0%

 

2.2% to 2.4%

 

Expected dividend yield (%)

 

0.0%

 

0.0%

 

 

The following table summarizes significant ranges of outstanding and exercisable options as of June 30, 2010:

 

10



Table of Contents

 

 

 

 

 

Options Outstanding

 

Options Exercisable

 

 

 

 

 

 

 

Weighted

 

 

 

 

 

 

 

 

 

 

 

Number Of

 

Average

 

 

 

Number Of

 

 

 

 

 

 

 

Options

 

Remaining

 

Weighted

 

Options

 

Weighted

 

 

 

 

 

Outstanding

 

Contractual

 

Average

 

Exercisable

 

Average

 

 

 

 

 

June 30,

 

Term

 

Exercise

 

June 30,

 

Exercise

 

Exercise Prices

 

2010

 

In Years

 

Price

 

2010

 

Price

 

$

1.34

 

$

1.34

 

934,525

 

8.6

 

$

1.34

 

173,464

 

$

1.34

 

$

1.57

 

$

12.08

 

60,375

 

8.4

 

$

8.37

 

15,456

 

$

11.41

 

$

27.75

 

$

47.77

 

17,250

 

2.3

 

$

35.97

 

17,250

 

$

35.97

 

$

47.82

 

$

48.21

 

15,500

 

1.7

 

$

48.00

 

15,500

 

$

48.00

 

 

 

 

 

1,027,650

 

8.4

 

$

3.04

 

221,670

 

$

8.00

 

 

Recognized Non-Cash Compensation Expense

 

The following table summarizes stock-based compensation expense related to awards of RSUs, employee stock options and purchases under the employee stock purchase plan for the six months ended June 30, 2010 and 2009:

 

 

 

Six Months Ended

 

Three Months Ended

 

 

 

June 30,

 

 

 

2010

 

2009

 

2010

 

2009

 

 

 

(amounts in thousands)

 

Station operating expenses

 

$

568

 

$

762

 

$

390

 

$

672

 

Corporate general and administrative expenses

 

2,534

 

2,937

 

962

 

1,235

 

Stock-based compensation expense included in operating expenses

 

3,102

 

3,699

 

1,352

 

1,907

 

Income tax benefit (net of a fully reserved valuation allowance)

 

 

 

 

 

Total

 

$

3,102

 

$

3,699

 

$

1,352

 

$

1,907

 

 

2009 Option Exchange Program

 

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

 

Option

 

Exchange Ratio

Strike Price

 

(Options For RSUs)

At least $11.80, but less than $30.00

 

2.25 for 1

$30.00 or more

 

4.5 for 1

 

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

 

The Company applied modification accounting for the 2009 OEP and will recognize share-based compensation expense of $1.2 million on a straight-line basis over the four-year vesting period of the RSUs. Under modification accounting, the fair value of the new shares immediately prior to the exchange was greater by $1.2 million than the fair value of the surrendered options. In addition, under the bifurcated method, share-based compensation expense of $0.9 million associated with any unvested options exchanged and cancelled as of the

 

11



Table of Contents

 

modification date will be recognized over the remaining original option term, and the expense will only be reversed if the original service period is not met.

 

3.                                      INTANGIBLE ASSETS AND GOODWILL

 

(A) Indefinite-Lived Intangibles

 

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

 

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

 

Broadcasting Licenses

 

The Company performs its broadcasting license impairment test by evaluating its broadcasting licenses for impairment at the market level using the direct method.  For purposes of testing impairment, indefinite-lived intangible assets are combined into a single unit of accounting. Since the broadcasting licenses in each market are operated as a single asset, each market’s broadcasting licenses are a single unit of accounting. The Company determines the fair value of the broadcasting licenses in each of its markets by relying on a discounted cash flow approach (a 10-year income model) assuming a start-up scenario in which the only assets held by an investor are broadcasting licenses. The Company’s fair value analysis contains assumptions incorporating variables that are based on past experiences and judgments about future performance using industry normalized information for an average station within a certain market. These variables include, but are not limited to: (1) the 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.

 

Broadcasting License Impairment Testing During The Second Quarter Of 2010

 

The Company completed the impairment test for broadcasting licenses and determined that the fair value of the broadcasting licenses was more than the amount reflected in the balance sheet for each of the Company’s markets and accordingly, no impairment was recorded.

 

The methodology used by the Company in determining its key estimates and assumptions was applied consistently to each market. As a result, the analysis for each market is the same. Of the seven variables identified above, the Company believes that the first three (in clauses (1) through (3) above) are the most important to the determination of fair value. The following table reflects these estimates and assumptions used in 2010 as compared to the second quarter of 2009, the date of the most recent prior impairment test.  In general, when comparing the second quarter of 2010 to the second quarter of 2009: (1) the discount rate decreased primarily due to a decrease in the estimated required returns on debt and equity of publically traded radio companies; (2) the market specific operating profit margin range remained relatively flat; and (3) the market long-term revenue growth rates were marginally higher as the outlook for the industry improved.

 

 

 

Second

 

Second

 

 

 

Quarter

 

Quarter

 

 

 

2010

 

2009

 

Discount rates

 

10.0%

 

10.6%

 

Operating profit margin ranges of the Company’s markets

 

21.0% to 42.5%

 

21.0% to 44.0%

 

Long-term revenue growth rate ranges of the Company’s markets

 

1.5% to 2.0%

 

1.0% to 2.5%

 

 

The following table presents the changes in the carrying value of the Company’s broadcasting licenses for the six months ended June 30, 2010 and 2009:

 

12



Table of Contents

 

 

 

Broadcasting Licenses

 

 

 

Carrying Amount

 

 

 

2010

 

2009

 

 

 

(amounts in thousands)

 

 

 

 

 

 

 

Balance as of beginning of year

 

$

707,852

 

$

768,646

 

Impairment loss

 

 

(60,794

)

Balance as of June 30,

 

$

707,852

 

$

707,852

 

 

The amount of unamortized broadcasting licenses reflected in the balance sheet as of June 30, 2010 and December 31, 2009 was $707.9 million.

 

Broadcasting License Impairment Testing During The Second Quarter Of 2009:

 

During the second quarter of 2009, the Company completed the impairment test for broadcasting licenses and determined that the fair value of its broadcasting licenses was less than the amount reflected in the balance sheet for each of the Company’s 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 reduction in the projected growth levels for the industry was the primary reason for further impairment to the Company’s broadcasting licenses in the second quarter, which was in addition to the impairment recorded in 2008. 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.

 

Goodwill

 

The Company performs its annual impairment test on its goodwill during the second quarter of each year by comparing the fair value for each reporting unit with the amount reflected on the balance sheet. The Company has determined that a radio market is a reporting unit and, in total, the Company assesses goodwill at 19 separate reporting units (three of the Company’s 22 reporting units have no goodwill recorded as of June 30, 2010). If the fair value of any reporting unit is less than the amount reflected in the balance sheet, an indication exists that the amount of goodwill attributed to a reporting unit may be impaired, and the Company is required to perform a second step of the impairment test. In the second step, the Company compares the amount reflected in the balance sheet to the implied fair value of the reporting unit’s goodwill, determined by allocating the reporting unit’s fair value to all of its assets and liabilities in a manner similar to a purchase price allocation.

 

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

 

Goodwill Impairment Test During Second Quarter Of 2010

 

In step one of the Company’s goodwill analysis, the Company considered the results of the market approach and the income approach in computing the fair value of the Company’s reporting units. In the market approach, the Company applied an estimated market multiple of between seven and a half times and eight times to each reporting unit’s operating performance to calculate the fair value. This multiple was higher than the six times multiple applied to all markets in the second quarter of 2009.  Management believes that these approaches are an appropriate measurement given the current market valuations of broadcast radio stations together with the historical market transactions, including those in recent months. Factors contributing to the determination of the reporting unit’s operating performance were historical performance and management’s estimates of future performance.

 

In the income approach, the Company utilized the discounted cash flow method to calculate the fair value of the reporting unit (the key estimates and assumptions are included in the table below). The results of step one indicated that it was not necessary to perform the second step analysis in any of the markets tested as the fair values for all of the Company’s markets were above book value. As a result of the step one test, no impairment loss was

 

13



Table of Contents

 

recorded during the second quarter of 2010. The Company performed a reasonableness test by comparing the fair value results for goodwill by using the implied multiple based on the Company’s cash flow performance and its current stock price and comparing the results to prevailing radio broadcast transaction multiples.

 

The following table reflects certain key estimates and assumptions used in 2010 and in the second quarter of 2009, the date of the most recent prior impairment test. The ranges for operating profit margin and revenue growth rates are for the Company’s markets.  In general, when comparing the second quarter of 2010 to the second quarter of 2009: (1) the discount rate decreased primarily due to a decrease in the estimated required returns in the debt and equity of publically traded radio companies; (2) the market specific operating profit margin range narrowed; and (3) the market long-term revenue growth rate range narrowed.

 

 

 

Second

 

Second

 

 

 

Quarter

 

Quarter

 

 

 

2010

 

2009

 

Discount rates

 

10.0%

 

10.6%

 

Operating profit margin ranges of the Company’s markets

 

26.0% to 39.0%

 

21.0% to 41.0%

 

Long-term revenue growth rate ranges of the Company’s markets

 

1.5% to 2.0%

 

1.0% to 2.5%

 

 

The following table presents the change in the carrying value of the Company’s goodwill for the six months ended June 30, 2010 and 2009:

 

 

 

Goodwill

 

 

 

Carrying Amount

 

 

 

June 30,

 

 

2010

 

2009

 

 

 

(amounts in thousands)

 

Goodwill before cumulative loss on impairment as of January 1,

 

$

163,783

 

$

163,783

 

Accumulated loss on impairment

 

(125,615

)

(118,733

)

Goodwill after cumulative loss on impairment

 

38,168

 

45,050

 

Loss on impairment during the year

 

 

(6,882

)

Ending balance as of June 30,

 

$

38,168

 

$

38,168

 

 

If actual market conditions are less favorable than those projected by the industry or the Company, or if events occur or circumstances change that would reduce the fair value of the Company’s goodwill below the amount reflected in the balance sheet, the Company may be required to recognize impairment charges, which could be material, in future periods.

 

Goodwill Impairment Test During Second Quarter Of 2009

 

In step one of the Company’s goodwill analysis, the Company considered the results of the market approach and the income approach in computing the fair value of the Company’s reporting units. In the market approach, the Company applied an estimated market multiple of six times to each reporting unit’s operating performance to calculate the fair value. The Company applied the same market multiple consistently across all reporting units. In the income approach, the Company utilized the discounted cash flow method to calculate the fair value of the reporting unit. The results of step one indicated that it was necessary to perform the second step analysis in seven of the 22 markets. The fair values for two of the seven markets were marginally above book value. Management believes that these approaches are commonly used methodologies for valuing broadcast radio stations and that a six times multiple was an appropriate measurement given the then recent fall in market valuations of broadcast radio stations together with a historically low level of market transactions in recent months. The marginal stations were included in the Company’s step two impairment testing due to the subjective nature of the step one analysis (unobservable inputs) and the sensitivities inherent in these calculations. Factors contributing to the determination of the reporting unit’s operating performance were historical performance and management’s estimates of future performance.

 

14


 


Table of Contents

 

Under the second step, the Company determined that the fair value of the Company’s goodwill was less than the amount reflected in the balance sheet for the seven markets tested, which were Austin, Greensboro, Greenville, Indianapolis, Kansas City, Memphis and Wichita, and recorded an impairment loss of $6.9 million during the second quarter of 2009. Contributing factors to the impairment were a decline in the advertising dollars in these markets and its effect on the Company’s operations, coupled with changes in the anticipated growth and profitability of these markets.

 

4.                                      SENIOR DEBT

 

Bank Facility

 

The Company has a credit agreement (“Bank Facility”) with a syndicate of lenders for a $1,050 million senior secured credit facility that matures on June 30, 2012. The Bank Facility was originally comprised of $650 million in revolving credit (the “Revolver”) and a $400 million term loan (“Term Loan”).

 

The Company is required to make payments on the Term Loan in quarterly amounts starting at $15 million (September 30, 2009) and ultimately increasing to $60 million. The Company plans to fund the amortization of the Term Loan with cash flow from operations and its available Revolver capacity.

 

As of June 30, 2010, the Company had: (1) $701.0 million outstanding under the Bank Facility, including: (i) $336.0 million in Term Loan; and (ii) $365.0 million in drawn Revolver; and (2) a $0.7 million letter of credit.  As of June 30, 2010, the Company had $4.4 million in cash and cash equivalents.

 

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

 

·                  The Consolidated Leverage Ratio cannot exceed seven times in 2010. Beginning in 2011, this covenant ratio decreases quarterly in increments to a ratio of six times as of December 31, 2011.

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

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

 

As of June 30, 2010, the Consolidated Leverage Ratio exceeded six times.  As a result, the Company is in a Restricted Period.

 

The Company’s ability to maintain compliance with its covenants will be highly dependent on the Company’s results of operations.  If the Company were to enter into an agreement with its lenders for covenant compliance relief, such relief could result in higher interest expense.

 

As of June 30, 2010, the undrawn amount of the Revolver was $284.3 million. The amount of the Revolver available to the Company, however, is a function of covenant compliance at the time of borrowing. Based on the Company’s financial covenant analysis as of June 30, 2010, the Company would be limited to borrowings significantly less than the undrawn limit unless such borrowings were used to repay indebtedness or for transactions that increase cash flow for purposes of covenant calculation.

 

Management believes that for the next 12 months the Company can continue to maintain its compliance with these covenants. Management also believes that cash on hand and cash from operating activities, together with available borrowings under the Revolver, will be sufficient to permit the Company to meet its liquidity requirements for the next 12 months, including the Company’s scheduled debt repayments.  The Company’s operating cash flow remains positive and Management believes that it is adequate to fund the Company’s operating needs.  As a result,

 

15



Table of Contents

 

the Company has not been required to rely upon, and the Company does not anticipate being required to rely upon, the Revolver to fund the Company’s operations.

 

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

 

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

 

The Amendment in March 2010 was treated as a modification to a debt instrument.  As a result, in the first quarter of 2010, the Company recorded deferred financing costs of $5.2 million related to the Amendment, which will be amortized over the remaining life of the Bank Facility on: (1) a straight-line basis for the Revolver; and (2) an effective interest rate method for the Term. In addition, unamortized deferred financing costs of $3.1 million as of the Amendment date will continue to be amortized over the remaining life of the Bank Facility.

 

5.                                      7.625% SENIOR SUBORDINATED NOTES

 

During the six months ended June 30, 2010, the Company repurchased the remaining $6.6 million of its 7.625% Senior Subordinated Notes (“Notes”) due March 1, 2014 at par and recorded in the statement of operations a loss on the extinguishment of debt of $0.1 million due to the write-off of deferred financing costs.

 

During the six and three months ended June 30, 2009, the Company repurchased $39.4 million and $18.4 million of its Notes, respectively. For the six and three months ended June 30, 2009, the Company recorded in the statement of operations a gain on the extinguishment of debt of $16.1 million and $8.4 million, respectively, net of the write-off of deferred financing costs of $0.5 million and $0.2 million, respectively.

 

6.                                      FINANCING METHOD LEASE OBLIGATIONS

 

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

 

The amount of depreciation and amortization expense attributable to assets held under the financing method was $0.1 million for the six months ended June 30, 2010 and the amount of interest expense for the cash consideration received of $12.6 million was $0.3 million for the six months ended June 30, 2010.

 

7.                                      DERIVATIVES AND HEDGING ACTIVITIES

 

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

 

During the six months ended June 30, 2010 and 2009, the Company had outstanding the aggregate notional amounts of $475.0 million and $550.0 million, respectively, of cash flow interest rate transactions that were hedged against the Company’s variable rate senior debt.  In accordance with the terms of a Swap agreement dated January 28, 2008, the notional amount decreased from $225.0 million to $150.0 million on January 28, 2010 thereby eliminating a notional amount of $75.0 million with a fixed Eurodollar London interbank offered rate (“LIBOR”) of 3.03%.

 

As of June 30, 2010, the Company had the following derivatives outstanding:

 

16



Table of Contents

 

Type

 

 

 

 

 

 

 

 

Fixed

 

 

 

 

Of

 

Notional

 

Effective

 

 

 

 

LIBOR

 

 

Expiration

 

Hedge

 

Amount

 

Date

 

 

Collar

 

Rate

 

 

Date

 

 

 

(amounts

 

 

 

 

 

 

 

 

 

 

 

 

 

(in millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Swap

 

$

150.0

 

January 28, 2008

 

 

n/a

 

3.03

%

 

January 28, 2011

 

Collar

 

100.0

 

February 28, 2008

 

[

Cap

 

4.00

%

 ]

February 28, 2011

 

Floor

2.14

%

Swap

 

125.0

 

March 28, 2008

 

 

n/a

 

2.91

%

 

September 28, 2011

 

Swap

 

100.0

 

May 28, 2008

 

 

n/a

 

3.62

%

 

May 28, 2012

 

Total

 

$

475.0

 

 

 

 

 

 

 

 

 

 

 

 

The following is a summary of the fair value of the derivatives outstanding as of June 30, 2010 and December 31, 2009:

 

 

 

 

 

Fair Value

 

 

 

 

 

June 30,

 

December 31,

 

 

 

Balance Sheet

 

2010

 

2009

 

 

 

Location

 

Asset (Liability)

 

 

 

 

 

(amounts in thousands)

 

Designated Derivatives

 

 

 

 

 

 

 

Interest rate hedge transactions

 

Current Liabilities

 

$

(3,279

)

$

 

Interest rate hedge transactions

 

Other Long-Term Liabilities

 

$

(8,418

)

$

(13,432

)

 

The Company does not expect to reclassify to the statement of operations within the next 12 months any portion of the amount outstanding as of June 30, 2010.

 

The following is a summary (amounts in thousands) of the gains (losses) related to the Company’s cash flow hedges for the six months and three months ended June 30, 2010 and 2009:

 

 

 

Six Months Ended

 

Three Months Ended

 

 

 

June 30,

 

June 30,

 

Description

 

2010

 

2009

 

2010

 

2009

 

 

 

 

 

 

 

 

 

 

 

Type Of Derivative Designated As A Cash Flow Hedge

 

Interest Rate

 

Interest Rate

 

Interest Rate

 

Interest Rate

 

Amount of Gain (Loss) Recognized In Other Comprehensive Income (“OCI”)

 

$

1,735

 

$

1,359

 

$

1,712

 

$

2,344

 

Location Of Gain (Loss) Reclassified From OCI To Statement Of Operations

 

Interest Expense

 

Interest Expense

 

Interest Expense

 

Interest Expense

 

Amount of Gain (Loss) Reclassified From OCI To Statement Of Operations

 

$

 

$

 

$

 

$

 

Location Of Gain (Loss) In Statement Of Operations

 

Interest Expense

 

Interest Expense

 

Interest Expense

 

Interest Expense

 

Amount Of Gain (Loss) In Statement Of Operations Due To Ineffectiveness

 

$

 

$

 

$

 

$

 

 

The following table presents the accumulated derivative gains (losses) recorded in the statements of other comprehensive income (loss) as of June 30, 2010 and December 31, 2009:

 

17



Table of Contents

 

 

 

June 30,

 

December 31,

 

 

 

2010

 

2009

 

 

 

Assets (Liabilities)

 

 

 

(amounts in thousands)

 

 

 

 

 

 

Accumulated derivative unrealized loss

 

$

(11,697

)

$

(13,432

)

 

8.                                      CONTINGENCIES AND GUARANTOR ARRANGEMENTS

 

Contingencies

 

The Company is subject to various outstanding claims which arise in the ordinary course of business and to other legal proceedings.  In the opinion of management, any potential liability of the Company which may arise out of, or with respect to, these matters will not materially affect the Company’s financial position, results of operations or cash flows.

 

The Company uses a combination of insurance and self-insurance mechanisms to provide for the potential liabilities for workers’ compensation, general liability, property, directors’ and officers’ liability, vehicle liability and employee health care benefits. Liabilities associated with the risks that are retained by the Company are estimated, in part, by considering claims experience, demographic factors, severity factors, outside expertise and other actuarial assumptions. Under one of these policies, the Company is required to maintain a letter of credit in the amount of $0.7 million.

 

In January 2010, a plaintiff acknowledged full satisfaction by the Company’s insurance carrier of a judgment against the Company. In connection with the satisfaction of this claim, as of December 31, 2009, the Company recorded an insurance claim receivable from its insurance company of $16.5 million along with a claim payable to the plaintiff of $16.5 million.

 

The Company could face increased costs in the form of fines and a greater risk that the Company could lose any one or more of its broadcasting licenses if the FCC concludes that programming broadcast by a Company station 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 the Company’s 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 the Company’s stations broadcast indecent programming.  These investigations remain pending.  The FCC initiated an investigation into the incident that was the subject of the lawsuit described above.

 

The Company has filed on a timely basis renewal applications for those radio stations with radio broadcasting licenses that are subject to renewal with the FCC. The Company’s costs to renew its licenses with the FCC are minimal and are expensed as incurred rather than capitalized.  Certain licenses were not renewed prior to the renewal date, which is not unusual. The Company continues to operate these radio stations under their existing licenses until the licenses are renewed.  The FCC may delay the renewal pending the resolution of open inquiries. The affected stations are, however, authorized to continue operations until the FCC acts upon the renewal applications.

 

The Company’s 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 Licensing Committee, of which the Company is a participant, filed motions in the New York courts against BMI and ASCAP on behalf of the radio industry, seeking interim fees and a determination of fair and reasonable industry-wide license fees. The courts recently approved reduced interim fees for ASCAP and BMI. The final fees, as determined by the courts, may be retroactive to the beginning of the period and may be different from these interim fees.

 

Guarantor Arrangements

 

The Company enters into indemnification agreements in the ordinary course of business and other

 

18



Table of Contents

 

agreements which include indemnification provisions.  The Company believes the estimated fair value of these agreements is minimal and has not recorded liabilities for these agreements as of June 30, 2010.

 

9.                                      SHAREHOLDERS’ EQUITY

 

Dividend Equivalents

 

The Company’s grants of RSUs include the right, upon vesting, to receive a cash payment equal to the aggregate amount of dividends, if any, that a holder would have received on the shares of common stock underlying their RSUs if such RSUs had been vested during the period. For the six months ended June 30, 2010 and 2009, the Company paid $0.9 million and $0.7 million, respectively, to the holders of RSUs that vested during these periods. The long-term dividend equivalent amount, accrued and unpaid on unvested RSUs, was $0.3 million and $0.8 million as of June 30, 2010 and December 31, 2009, respectively, and is included under other long-term liabilities in the balance sheet. The short-term dividend equivalent amount, accrued and unpaid on unvested RSUs, was $0.5 million and $1.0 million as of June 30, 2010 and December 31, 2009, respectively, and is included under other current liabilities in the balance sheet. The amount paid is considered a windfall tax benefit that will be recorded to paid-in capital when realized.

 

Purchases Of Vested RSUs

 

Upon vesting, unless an employee elects to pay the tax withholding obligation in cash, the Company withholds shares of stock in an amount sufficient to cover the employee’s tax withholding obligations.  As a result, during the six months ended June 30, 2010 and 2009, the Company was deemed to have repurchased 0.2 million and 0.1 million shares of stock, respectively.

 

Share Repurchase Programs

 

The Company’s share repurchase program expired on June 30, 2009.

 

During the six months ended June 30, 2009, the Company repurchased 0.7 million shares in the amount of $0.9 million at an average price of $1.34 per share.

 

10.                               DEFERRED COMPENSATION PLANS

 

The Company provides certain of its employees and the Board of Directors with an opportunity to defer a portion of their compensation on a tax-favored basis. The obligations by the Company to pay these benefits under these plans represent unsecured general obligations that rank equally with the Company’s other unsecured indebtedness. Deferred compensation expense is allocated to corporate general and administrative expenses and station operating expenses.

 

As of June 30, 2010 and December 31, 2009, $5.3 million and $5.2 million, respectively, were deferred under these plans and were included in other long-term liabilities.  For the six months and three months ended June 30, 2010, the Company recorded a decrease in deferred compensation expense of $0.5 million and $0.3 million, respectively. For the six months and three months ended June 30, 2009, the Company recorded an increase in deferred compensation expense of $0.3 million and $0.5 million, respectively.

 

11.                               NET INCOME PER SHARE

 

Six Months Ended June 30, 2010 and 2009

 

The effect of stock options and RSUs in the calculation of net income per share, using the treasury stock method, was dilutive for the six months ended June 30, 2010 and anti-dilutive for the six months ended June 30, 2009.

 

The following table sets forth the computations of basic and diluted net income per share for the six months ended June 30, 2010 and 2009:

 

19



Table of Contents

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended

 

 

 

June 30, 2010

 

June 30, 2009

 

 

 

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

 

 

 

 

 

 

Net Income

 

 

 

 

 

Net Loss

 

 

 

Net Income

 

Shares

 

Per Share

 

Net Loss

 

Shares

 

Per Share

 

Basic net income (loss) per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

18,462

 

35,686,383

 

$

0.52

 

$

(36,577

)

35,342,509

 

$

(1.03

)

Impact of equity awards

 

 

 

1,991,806

 

 

 

 

 

 

 

 

Diluted net income (loss) per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

18,462

 

37,678,189

 

$

0.49

 

$

(36,577

)

35,342,509

 

$

(1.03

)

 

In computing the incremental shares under the treasury stock method for the six months ended June 30, 2010, 0.1 million restricted stock units and options to purchase 0.1 million shares of common stock at a range of $11.01 to $48.21 were excluded from the computation as they were anti-dilutive.

 

For the six months ended June 30, 2009, 0.2 million incremental shares were not included in diluted net loss per share as the shares were anti-dilutive when reporting a net loss.

 

In computing the incremental shares under the treasury stock method for the six months ended June 30, 2009, 1.0 million restricted stock units (including less than 0.1 million restricted stock units with market and service conditions, as half of the restricted stock units with market conditions were not satisfied as of June 30, 2009) and options to purchase 1.8 million shares of common stock at a range of $1.48 to $48.21, were excluded from the computation as they were anti-dilutive.

 

Three Months Ended June 30, 2010 and 2009

 

The effect of stock options and RSUs in the calculation of net income per share, using the treasury stock method, was dilutive for the three months ended June 30, 2010 and anti-dilutive for the three months ended June 30, 2009.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

June 30, 2010

 

June 30, 2009

 

 

 

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

 

 

 

 

 

 

Net Income

 

 

 

 

 

Net Loss

 

 

 

Net Income

 

Shares

 

Per Share

 

Net Loss

 

Shares

 

Per Share

 

Basic net income (loss) per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

14,262

 

35,714,159

 

$

0.40

 

$

(41,913

)

35,289,531

 

$

(1.19

)

Impact of equity awards

 

 

 

1,867,765

 

 

 

 

 

 

 

 

Diluted net income (loss) per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

14,262

 

37,581,924

 

$

0.38

 

$

(41,913

)

35,289,531

 

$

(1.19

)

 

In computing the incremental shares under the treasury stock method for the three months ended June 30, 2010, 0.1 million RSUs and options to purchase under 0.1 million shares of common stock at a range of $12.50 to $48.21, were excluded from the computation as they were anti-dilutive.

 

For the three months ended June 30, 2009, 0.4 million incremental shares were not included in diluted net loss per share as the shares were anti-dilutive when reporting a net loss.

 

In computing the incremental shares under the treasury stock method for the three months ended June 30, 2009, 0.9 million restricted stock units (including less than 0.1 million restricted stock units with market and service conditions, as half of the restricted stock units with market and service conditions were not satisfied as of June 30,

 

20



Table of Contents

 

2009) and options to purchase 1.2 million shares of common stock at a range of $1.75 to $48.21, were excluded from the computation as they were anti-dilutive.

 

12.                               INCOME TAXES

 

Effective Tax Rate - Overview

 

The Company’s income tax rates for the six months and three months ended June 30, 2010 were based on the estimated annual effective tax rate for 2010 (excluding the impact of a valuation allowance for deferred tax assets as described below), and includes: (1) the effect of permanent differences between income subject to income tax for book and tax purposes; and (2) any discrete items of tax. The Company’s effective tax rate, which can fluctuate from quarter to quarter, can be higher than the federal statutory rate of 35% primarily as a result of the provision for state taxes (net of a federal tax deduction).

 

The Company’s effective income tax rate may be impacted by: (1) changes in the level of income in any of the Company’s taxing jurisdictions; (2) changes in the statutes and rules applicable to taxable income in the jurisdictions in which the Company operates; (3) changes in the expected outcome of income tax audits; (4) changes in the estimate of expenses that are not deductible for tax purposes; (5) income taxes in certain states where the states’ current taxable income is dependent on factors other than the Company’s consolidated net income; and (6) the effect of recording changes in the Company’s liabilities for uncertain tax positions.

 

An impairment loss will result in an income tax benefit during the period incurred (before any adjustment for a deferred tax asset valuation allowance) as the amortization of broadcasting licenses and goodwill is deductible for income tax purposes.

 

Tax Rates For The Six Months And Three Months Ended June 30, 2010

 

The effective income tax rates were 31.2% and 34.2% for the six months and three months ended June 30, 2010, respectively. For the six months and three months ended June 30, 2010, the effective income tax rates reflect: (1) an increase in net deferred tax liabilities associated with non-amortizable assets such as broadcasting licenses and goodwill; (2) an increase in the deferred tax asset valuation allowance for the reasons as described below under Valuation Allowance For Deferred Tax Assets; and (3) certain discrete items of tax.

 

Tax Rates For The Six Months And Three Months Ended June 30, 2009

 

The effective income tax rates (benefits) were 0.7% and (2.8%) for the six months and three months ended June 30, 2009, respectively. The effective income tax rates for the six months and three months ended June 30, 2009 were positively impacted primarily by a decrease in net deferred tax liabilities associated with non-amortizable assets such as broadcasting licenses and goodwill.

 

Deferred Tax Liabilities

 

As of June 30, 2010, deferred tax liabilities were $9.1 million, primarily from net deferred tax liabilities associated with non-amortizable assets such as broadcasting licenses and goodwill.  As of December 31, 2009, the deferred tax liabilities were fully offset by deferred tax assets. The income tax accounting process to determine the deferred tax liabilities involves estimating all temporary differences between the tax and financial reporting bases of the Company’s assets and liabilities, based on enacted tax laws and statutory tax rates applicable to the period in which the differences are expected to affect taxable income. The Company estimated the current exposure by assessing the temporary differences and computing the provision for income taxes by applying the estimated effective tax rate to income.

 

Valuation Allowance For Deferred Tax Assets

 

The Company increased its valuation allowance by $2.8 million to $53.7 million as of June 30, 2010 from $50.9 million as of December 31, 2009, primarily as a result of an increase in its deferred tax assets as of June 30, 2010 as compared to December 31, 2009. As a result of cumulative losses incurred by the Company since 2006, a deferred tax asset valuation allowance was established due to the uncertainty that the deferred tax assets would be realized in future years (after consideration for any net deferred tax liabilities associated with non-amortizable assets such as broadcasting licenses and goodwill). The valuation allowance as of June 30, 2010 and December 31, 2009

 

21



Table of Contents

 

includes $4.6 million and $5.3 million, respectively, for an income tax benefit recorded in other comprehensive income (loss).

 

The Company has also considered future taxable income and ongoing prudent and feasible tax-planning strategies in assessing the need for the valuation allowance.  On a quarterly basis, management assesses whether it remains more likely than not that the deferred tax assets will not be realized.  In the event the Company determines at a future time that it could realize its deferred tax assets in excess of the net amount recorded, the Company will reduce its deferred tax asset valuation allowance and decrease income tax expense in the period when the Company makes such determination.

 

Income Tax Payments And Refunds

 

The Company made income tax payments of $0.1 million and $0.2 million for the six months ended June 30, 2010 and 2009, respectively.

 

The Company received state income tax refunds of less than $0.1 million for each of the six months ended June 30, 2010 and 2009.

 

As a result of federal tax legislation during the fourth quarter of 2009 that allowed the Company to carryback its 2008 net operating loss for five years rather than for two years, the Company recorded $7.1 million under prepaid and refundable income taxes.  On April 2, 2010, the Company received $6.8 million in federal income tax refunds and expects to receive the balance of $0.3 million during the second half of 2010.

 

Liabilities For Uncertain Tax Positions

 

For the six months and three months ended June 30, 2010, the Company recorded decreases of $0.9 million and $0.2 million, respectively, to income tax expense, which amounts consisted primarily of the expiration of statutes of limitation for certain tax liabilities (including interest and principal), partially offset by income tax liabilities for the current year (including interest and principal).  For the six months and three months ended June 30, 2009, the Company recorded income tax expense of $0.1 million for each period, which amounts consisted primarily of interest and penalties. The Company’s liabilities for uncertain tax positions as of June 30, 2010 and December 31, 2009 were $4.4 million and $5.3 million, respectively, which were recorded in the balance sheets as long-term tax liabilities. The Company reviews its estimates on a quarterly basis, and any change in its liabilities for uncertain tax positions will result in an adjustment to its income tax expense in the statement of operations in each period measured.

 

Federal And State Income Tax Audits

 

The Company is subject to federal and state income tax audits from time to time that could result in proposed assessments. The Company cannot predict with certainty how these audits will be resolved and whether the Company will be required to make additional tax payments, which may or may not include penalties and interest. The Company is currently under audit by the Internal Revenue Service for the tax years of 2004 through 2008. For most states where the Company conducts business, the Company is subject to examination for the preceding three to six years. In certain states, the period could be longer.

 

13.                               ACCOUNTS RECEIVABLE AND RELATED ALLOWANCE FOR DOUBTFUL ACCOUNTS

 

Accounts receivable are primarily attributable to advertising that has aired on the Company’s radio stations, but for which payment has not been collected, net of agency commissions and an estimated allowance for doubtful accounts. Estimates of the allowance for doubtful accounts are recorded based on management’s judgment of the collectability of the accounts receivable based on historical information, relative improvements or deteriorations in the age of the accounts receivable and changes in current economic conditions.

 

The accounts receivable balances and reserve for doubtful accounts as of June 30, 2010 and December 31, 2009 are presented in the following table:

 

22


 


Table of Contents

 

 

 

June 30,

 

December 31,

 

 

 

2010

 

2009

 

 

 

(amounts in thousands)

 

 

 

 

 

 

 

Accounts receivable

 

$

79,935

 

$

71,618

 

Allowance for doubtful accounts

 

(3,323

)

(3,299

)

Accounts receivable, net of allowance for doubtful accounts

 

$

76,612

 

$

68,319

 

 

As of June 30, 2010 and December 31, 2009, the Company recorded accounts receivable credits in the amounts of $2.4 million and $1.8 million, respectively, which amounts are included in the balance sheets under other current liabilities.  Accounts receivable credits can result from advertiser prepayments or overpayments.

 

As of June 30, 2010 and December 31, 2009, the Company recorded current unearned revenues of $0.4 million and $0.8 million, respectively, which amounts are included in the balance sheets under other current liabilities.

 

14.                               FAIR VALUE MEASUREMENTS

 

The fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). The Company utilizes market data or assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated, or generally unobservable. The Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. The fair value hierarchy prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurement) and the lowest priority to unobservable inputs (level 3 measurement).

 

Recurring Fair Value Measurements

 

The following tables set forth, by level within the fair value hierarchy, the Company’s financial assets and liabilities that were accounted for at fair value on a recurring basis as of June 30, 2010 and December 31, 2009. The financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the valuation of fair value assets and liabilities and their placement within the fair value hierarchy levels.

 

 

 

As Of June 30, 2010

 

 

 

Value Measurements At Reporting Date Using

 

 

 

 

 

Quoted Prices

 

 

 

 

 

 

 

 

 

In Active

 

 

 

 

 

 

 

 

 

Markets For

 

Significant

 

 

 

 

 

 

 

Identical

 

Other

 

Significant

 

 

 

 

 

Assets Or

 

Observable

 

Unobservable

 

 

 

 

 

Liabilities

 

Inputs

 

Inputs

 

 

 

Total

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

Description

 

Assets (Liabilities)

 

 

 

(amounts in thousands)

 

 

 

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

 

Available For Sale Securities

 

$

391

 

$

 

$

 

$

391

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

Interest Rate Cash Flow Hedges

 

$

(11,697

)

$

 

 

$

(11,697

)

$

 

 

23



Table of Contents

 

 

 

As Of December 31, 2009

 

 

 

Value Measurements At Reporting Date Using

 

 

 

 

 

Quoted Prices

 

 

 

 

 

 

 

 

 

In Active

 

 

 

 

 

 

 

 

 

Markets For

 

Significant

 

 

 

 

 

 

 

Identical

 

Other

 

Significant

 

 

 

 

 

Assets Or</