e10vq
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2009.
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. |
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For or the transition period from to |
Commission file number 000-24525
CUMULUS MEDIA INC.
(Exact Name of Registrant as Specified in Its Charter)
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Delaware
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36-4159663 |
(State or Other Jurisdiction of
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(I.R.S. Employer |
Incorporation or Organization)
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Identification No.) |
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3280 Peachtree Road, NW Suite 2300, Atlanta, GA
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30305 |
(Address of Principal Executive Offices)
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(ZIP Code) |
(404) 949-0700
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Website, if any, every Interactive Date File required to be submitted and posted pursuant
to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
(Check one):
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Large accelerated filer o
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Accelerated filer þ
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Non-accelerated filer o
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Smaller reporting company o |
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(Do not check if a smaller reporting company) |
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Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No þ
As of
July 31, 2009, the registrant had 41,635,872 outstanding shares of common stock consisting of
(i) 35,181,810 shares of Class A Common Stock; (ii)
5,809,191 shares of Class B Common Stock; and (iii) 644,871 shares of
Class C Common Stock.
CUMULUS MEDIA INC.
INDEX
2
PART I. FINANCIAL INFORMATION
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Item 1. |
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Financial Statements |
CUMULUS MEDIA INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except for share and per share data)
(Unaudited)
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June 30, |
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December 31, |
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2009 |
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2008 |
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Assets |
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Current assets: |
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Cash and cash equivalents |
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$ |
12,382 |
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$ |
53,003 |
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Restricted cash |
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789 |
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Accounts receivable, less allowance for doubtful accounts of $1,316 and $1,771, in
2009 and 2008, respectively |
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40,218 |
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44,199 |
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Prepaid expenses and other current assets |
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3,520 |
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3,287 |
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Total current assets |
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56,909 |
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100,489 |
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Property and equipment, net |
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50,353 |
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55,124 |
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Intangible assets, net |
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334,332 |
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325,134 |
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Goodwill |
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59,584 |
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58,891 |
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Other assets |
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3,281 |
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3,881 |
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Total assets |
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$ |
504,459 |
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$ |
543,519 |
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Liabilities and Stockholders Equity |
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Current liabilities: |
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Accounts payable and accrued expenses |
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$ |
15,644 |
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$ |
20,644 |
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Current portion of long-term debt |
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46,456 |
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7,400 |
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Total current liabilities |
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62,100 |
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28,044 |
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Long-term debt |
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597,625 |
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688,600 |
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Other liabilities |
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31,507 |
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30,543 |
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Deferred income taxes |
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49,545 |
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44,479 |
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Total liabilities |
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740,777 |
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791,666 |
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Stockholders equity: |
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Preferred stock, 20,262,000 shares authorized, par value $.01 per share,
including:250,000
shares designated as 13 3/4% Series A Cumulative Exchangeable Redeemable
Preferred Stock due 2009, stated value $1,000 per share, 0 shares issued and
outstanding in both 2009 and 2008 and 12,000 shares ` |
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Class A common stock, par value $.01 per share; 200,000,000 shares authorized;
59,572,592 and 59,572,592 shares issued, 35,260,978 and 34,945,290 shares
outstanding, in 2009 and 2008, respectively |
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596 |
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596 |
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Class B common stock, par value $.01 per share; 20,000,000 shares authorized;
5,809,191 shares issued and outstanding in both 2009 and 2008 |
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58 |
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58 |
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Class C common stock, par value $.01 per share; 30,000,000 shares authorized;
644,871 shares issued and outstanding in both 2009 and 2008 |
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6 |
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6 |
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Class A Treasury stock, at cost, 24,311,614 and 24,627,302 shares in 2009 and 2008,
respectively |
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(260,407 |
) |
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(265,278 |
) |
Accumulated other comprehensive income |
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828 |
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Additional paid-in-capital |
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964,683 |
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967,676 |
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Accumulated deficit |
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(941,254 |
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(952,033 |
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Total stockholders deficit |
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(236,318 |
) |
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(248,147 |
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Total liabilities and stockholders deficit |
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$ |
504,459 |
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$ |
543,519 |
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See accompanying notes to condensed consolidated financial statements.
3
CUMULUS MEDIA INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except for share and per share data)
(Unaudited)
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Three Months Ended |
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Six Months Ended |
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June 30, |
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June 30, |
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2009 |
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2008 |
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2009 |
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2008 |
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Broadcast revenues |
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$ |
64,962 |
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$ |
82,628 |
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$ |
119,316 |
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$ |
154,527 |
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Management fee from affiliate |
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1,000 |
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1,000 |
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2,000 |
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2,000 |
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Net revenues |
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65,962 |
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83,628 |
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121,316 |
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156,527 |
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Operating expenses: |
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Station operating expenses (excluding depreciation,
amortization and LMA fees) |
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39,232 |
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52,975 |
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81,530 |
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104,124 |
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Depreciation and amortization |
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2,817 |
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3,311 |
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5,715 |
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6,421 |
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LMA fees |
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728 |
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320 |
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1,196 |
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500 |
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Corporate general and administrative (including
non-cash stock compensation
of $611, $845, $1,203, and $2,867, respectively) |
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3,958 |
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4,094 |
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10,067 |
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9,555 |
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(Gain) on exchange of stations |
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(7,204 |
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(7,204 |
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Cost associated with terminated transaction |
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1,753 |
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1,893 |
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Total operating expenses |
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39,531 |
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62,453 |
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91,304 |
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122,493 |
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Operating income |
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26,431 |
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21,175 |
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30,012 |
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34,034 |
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Non-operating income (expense): |
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Interest expense |
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(6,213 |
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298 |
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(13,996 |
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(20,562 |
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Interest income |
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9 |
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283 |
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55 |
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611 |
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Terminated transaction fee |
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15,000 |
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15,000 |
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Other income (expense), net |
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(38 |
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(25 |
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(35 |
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(7 |
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Total non-operating (income) expense, net |
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(6,242 |
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15,556 |
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(13,976 |
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(4,958 |
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Income before income taxes and equity in net losses of affiliate |
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20,189 |
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36,731 |
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16,036 |
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29,076 |
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Income tax expense |
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(6,115 |
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(8,094 |
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(5,257 |
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(4,431 |
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Equity in net income of affiliate |
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1,652 |
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1,404 |
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Net income |
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$ |
14,074 |
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$ |
30,289 |
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$ |
10,779 |
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$ |
26,049 |
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Basic and diluted earnings per common share: |
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Basic
earnings per common share (See Note 8) |
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$ |
0.34 |
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$ |
0.69 |
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$ |
0.26 |
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$ |
0.59 |
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Diluted
earnings per common share (See Note 8) |
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$ |
0.34 |
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$ |
0.69 |
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$ |
0.26 |
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$ |
0.59 |
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Weighted
average basic common shares outstanding (See Note 8) |
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40,469,485 |
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43,076,642 |
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40,445,003 |
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43,061,682 |
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Weighted
average diluted common shares outstanding (See Note 8) |
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40,469,485 |
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43,095,223 |
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40,447,273 |
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43,083,770 |
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See accompanying notes to condensed consolidated financial statements.
4
CUMULUS MEDIA INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
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Six Months Ended |
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June 30, |
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2009 |
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2008 |
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Cash flows from operating activities: |
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Net income |
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$ |
10,779 |
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$ |
26,049 |
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Adjustments to reconcile net loss to net cash provided by
operating activities: |
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Depreciation and amortization |
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5,715 |
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6,421 |
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Amortization of debt issuance costs/discount |
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478 |
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209 |
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Amortization of derivative gain |
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(828 |
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(1,986 |
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Provision for doubtful accounts |
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1,159 |
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1,801 |
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Loss (gain) on sale of assets or stations |
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35 |
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(5 |
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(Gain) on
exchange of stations |
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(7,204 |
) |
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Adjustment of the fair value of derivative instruments |
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(835 |
) |
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2,388 |
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Deferred income taxes |
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5,066 |
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4,367 |
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Non-cash stock compensation |
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1,203 |
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2,867 |
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Equity in
net income of affiliate |
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(1,404 |
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Changes in assets and liabilities: |
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Restricted cash |
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(789 |
) |
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Accounts receivable |
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2,821 |
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(2,878 |
) |
Prepaid expenses and other current assets |
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(233 |
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604 |
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Accounts payable and accrued expenses |
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(5,001 |
) |
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(1,000 |
) |
Other assets |
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82 |
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(494 |
) |
Other liabilities |
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(488 |
) |
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(748 |
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Net cash provided by operating activities |
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11,960 |
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36,191 |
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Cash flows from investing activities: |
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Proceeds from the sale of assets |
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14 |
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Purchase of intangible assets |
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(975 |
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Capital expenditures |
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(1,206 |
) |
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(3,971 |
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Other |
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12 |
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Net cash used in investing activities |
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(1,192 |
) |
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(4,934 |
) |
Cash flows from financing activities: |
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Repayments of borrowings from bank credit facility |
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(48,106 |
) |
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(7,940 |
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Tax withholding paid on behalf of employees |
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(90 |
) |
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(2,241 |
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Proceeds from issuance of common stock |
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52 |
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Payments
made to creditors pursuant to debt amendment |
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(3,000 |
) |
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Payments related to the repurchase of common stock |
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(193 |
) |
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(1,219 |
) |
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Net cash used in financing activities |
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(51,389 |
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(11,348 |
) |
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Decrease in cash and cash equivalents |
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(40,621 |
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19,909 |
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Cash and cash equivalents at beginning of period |
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53,003 |
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32,286 |
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Cash and cash equivalents at end of period |
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$ |
12,382 |
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$ |
52,195 |
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See accompanying notes to condensed consolidated financial statements.
5
Cumulus Media Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. Interim Financial Data and Basis of Presentation
Interim Financial Data
The accompanying unaudited condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements of Cumulus Media Inc. (the Company) and
the notes thereto included in the Companys Annual Report on Form 10-K for the year ended December
31, 2008. These financial statements have been prepared in accordance with accounting principles
generally accepted in the United States of America (GAAP) for interim financial information and
with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not
include all of the information and notes required by GAAP for
complete financial statements. In the opinion of management, all adjustments necessary for a fair
statement of results of the interim periods have been made and such adjustments were of a normal
and recurring nature. The results of operations and cash flows for the six months ended June 30,
2009 are not necessarily indicative of the results that can be expected for the entire fiscal year
ending December 31, 2009.
The preparation of financial statements in conformity with GAAP requires management to make
estimates and judgments that affect the reported amounts of assets, liabilities, revenues and
expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, the
Company evaluates its estimates, including those related to bad debts, intangible assets,
derivative financial instruments, income taxes, stock-based compensation and contingencies and
litigation. The Company bases its estimates on historical experience and on various assumptions
that are believed to be reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are not readily apparent
from other sources. Actual results may differ materially from these estimates under different
assumptions or conditions.
Liquidity Considerations
The current economic crisis has reduced demand for advertising in general, including advertising on
the Companys radio stations. In consideration of current and projected market conditions, overall
advertising is expected to continue to decline at least through the remainder of 2009. Therefore,
in conjunction with the development of the 2009 business plan, management assessed the impact of
recent market developments in a variety of areas, including the Companys forecasted advertising
revenues and liquidity. In response to these conditions, management refined the 2009 business plan
to incorporate a reduction in forecasted 2009 revenues and cost reductions implemented in the
fourth quarter 2008 and during the first six months of 2009 to mitigate the impact of the Companys
anticipated decline in 2009 revenue.
On June 29, 2009, the Company entered into an amendment to the credit agreement governing its
senior secured credit facility. The credit agreement, as amended, is referred to herein as the
Credit Agreement. The Credit Agreement maintains the pre-existing term loan facility of $750
million, which, as of June 30, 2009, had an outstanding balance of approximately $647.9 million,
and reduces the pre-existing revolving credit facility from $100 million to $20 million.
Additional facilities are no longer permitted under the Credit Agreement. See Note 4 for further
discussion of the amendment to the Credit Agreement.
Management believes that the Company will continue to be in compliance with all of its debt
covenants through December 31, 2010, based upon actions the Company has already taken, which include:
(i) the amendment to the Credit Agreement, the purpose of which was to provide certain
covenant relief through 2010 (see Note 4), (ii) employee reductions coupled with a mandatory
one-week furlough during the second quarter of 2009, (iii) a new sales initiative implemented
during the first quarter of 2009, the goal of which is to increase advertising revenues by
re-engineering the Companys sales techniques through enhanced training of its sales force, and
(iv) continued scrutiny of all operating expenses. However, the Company will continue to monitor
its revenues and cost structure closely and if revenues decline greater than the forecasted decline
from 2008 or if the Company exceeds planned spending, the Company may take further actions as
needed in an attempt to maintain compliance with its debt covenants
under the Credit Agreement. The actions may include the
implementation of additional operational synergies, renegotiation of
major vendor contracts, deferral of capital expenditures, and sale
of non-strategic assets.
Although the Company was able to obtain the amendment to the Credit Agreement that provided relief
with regard to certain restrictive covenants, including the fixed charge coverage ratio and total
leverage ratio, there can be no assurance that the Company will be able to obtain an additional
waiver or amendment to, or refinancing of, the Credit Agreement should additional waivers,
amendments or refinancings become necessary to remain in compliance with its covenants in the
future. In the event the Company does not maintain compliance with the applicable covenants under
the Credit Agreement, the lenders could declare an event of default, subject to applicable notice
and cure provisions. Failure to comply with the financial covenants or other terms of the Credit
Agreement and failure to negotiate relief from the Companys lenders could result in the
acceleration of the maturity of all outstanding debt. Under these circumstances, the acceleration
of the Companys debt could have a material adverse effect on its business.
6
If the Company were unable to repay its debts when due, the lenders under the credit facilities
could proceed against the collateral granted to them to secure that indebtedness. The Company has
pledged substantially all of its assets as collateral under the Credit Agreement. If the lenders
accelerate the maturity of outstanding debt, the Company may be forced to liquidate certain assets
to repay all or part of the senior secured credit facilities, and the Company cannot be assured
that sufficient assets will remain after it has paid all of the its debt. The ability to liquidate
assets is affected by the regulatory restrictions associated with radio stations, including FCC
licensing, which may make the market for these assets less liquid and increase the chances that
these assets will be liquidated at a significant loss.
Recent Accounting Pronouncements
SFAS No. 141(R). Statement of Financial Accounting Standards No. 141(R), Business Combinations
(SFAS 141(R)), was issued in December 2007. SFAS 141(R) requires that upon initially obtaining
control, an acquirer should recognize 100% of the fair values of acquired assets, including
goodwill and assumed liabilities, with only limited exceptions, even if the acquirer has not
acquired 100%
of its target. Additionally, contingent consideration arrangements will be fair valued at the
acquisition date and included on that basis in the purchase price consideration and transaction
costs will be expensed as incurred. SFAS 141(R) also modifies the recognition for pre-acquisition
contingencies, such as environmental or legal issues, restructuring plans and acquired research and
development value in purchase accounting. SFAS 141(R) amends SFAS No. 109, to require the acquirer
to recognize changes in the amount of its deferred tax benefits that are recognizable because of a
business combination either in income from continuing operations in the period of the combination
or directly in contributed capital, depending on the circumstances. SFAS 141(R) is effective for
fiscal years beginning after December 15, 2008. The Company adopted SFAS 141(R) on January 1, 2009
and accounted for the acquisitions completed during the first two quarters of 2009 in accordance
with the provisions of SFAS 141(R).
FSP FAS 141 R -1 In February 2009, the FASB issued FAS
No. 141R-1, Accounting for Assets
Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies, which
allows an exception to the recognition and fair value measurement principles of FAS 141R. This
exception requires that acquired contingencies be recognized at fair value on the acquisition date
if fair value can be reasonably estimated during the allocation period. FAS No. 141R was effective
for the Company as of January 1, 2009 for all business combinations that close on or after January
1, 2009 and it did not have an impact on the Companys consolidated results of operations, cash
flows or financial condition.
SFAS 160. In December 2007, the Financial Accounting Standards Board (the FASB) issued SFAS 160,
Noncontrolling Interests in Consolidated Financial Statements an amendment of ARB No. 51, which
is effective for fiscal years beginning after December 15, 2008. Early adoption is prohibited. SFAS
160 will require companies to present minority interest separately within the equity section of the
balance sheet. The Company adopted SFAS 160 as of January 1, 2009 and it did not have an impact on
the Companys consolidated results of operations, cash flows or financial condition.
SFAS 161. In March 2008, the FASB issued FASB Statement No. 161, Disclosures about Derivative
Instruments and Hedging Activities (SFAS No. 161). The Statement changes the disclosure
requirements for derivative instruments and hedging activities. SFAS No. 161 will require entities
to provide enhanced disclosures about (a) how and why an entity uses derivative instruments, (b)
how derivative instruments and related hedged items are accounted for under SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities (SFAS No. 133), and its related
interpretations, and (c) how derivative instruments and related hedged items affect an entitys
financial position, financial performance, and cash flows. SFAS No. 161 became effective for
financial statements issued for fiscal years and interim periods beginning after November 15, 2008,
with early application encouraged. The Company adopted SFAS No. 161 as of January 1, 2009; see Note
3, Derivative Financial Instruments.
SFAS 165. In May 2009, the FASB issued FASB Statement No. 165, Subsequent Events (SFAS No. 165).
The statement establishes general standards of accounting for and disclosure of events that occur
after the balance sheet date but prior to the issuance of financial statements. The standard is
based on the same principles as those that currently exist in the auditing standards. FAS No. 165
is effective for interim or annual reporting periods after June 15, 2009. The statement requires
additional disclosure regarding the date through which subsequent events have been evaluated by the
entity as well as, whether that date is the date the financial statements were issued. This
statement became effective for the Companys financial statements as of June 30, 2009; see Note 13
Subsequent Events. We have evaluated our subsequent events through
August 5, 2009, which is the date
of the Companys quarterly report on Form 10-Q, of which these
financial statements are a part.
SFAS 167. In June 2009, the FASB issued FASB Statement No. 167, Amendments to FASB Interpretation
No. 46 (R) (SFAS No. 167), amending the consolidation guidance for variable-interest entities
under FIN 46 (R). The amendments include: (1) the elimination of the exemption for qualifying
special purpose entities, (2) a new approach for determining who should consolidate a
variable-interest entity, and (3) changes to when it is necessary to reassess who should
consolidate a variable-interest entity. This Statement is effective for financial statements issued
for fiscal years periods beginning after November 15, 2009, for interim periods within that first
annual reporting period and for interim and annual reporting periods thereafter. Earlier
application is prohibited. The Company will adopt SFAS No. 167 on January 1, 2010 and is still
assessing the impact the pronouncement will have on the Companys financial statements.
SFAS 168. In June 2009, the FASB issued FASB Statement No. 168 The FASB Accounting
Standards Codification and the Hierarchy of Generally Accepted Accounting Principlesa replacement
of FASB Statement No. 162 The will become the source of authoritative U.S. generally accepted
accounting principles (GAAP) recognized by the FASB to be applied by nongovernmental entities.
Rules and interpretive releases of the Securities and Exchange Commission (SEC) under authority of
federal securities laws are also sources of authoritative GAAP for SEC registrants. On the
effective date of this Statement, the Codification will supersede all
7
then-existing non-SEC
accounting and reporting standards. All other nongrandfathered non-SEC accounting literature not
included in the Codification will become non-authoritative. This Statement is effective for
financial statements issued for interim and annual periods ending after September 15, 2009. The
Company will adopt this statement during the third quarter of 2009. The implementation of this
standard will not have a material impact on our consolidated financial position and results of
operations.
FSP No. 142-3. In April 2008, the FASB issued FASB Staff Position (FSP) No. 142-3, Determination
of the Useful Lives of Intangible Assets, which amends the factors that should be considered in
developing renewal or extension assumptions used to determine the useful life of an intangible
asset. This interpretation is effective for financial statements issued for fiscal years beginning
after December 15, 2008 and interim periods within those years. The Company adopted this FSP on
January 1, 2009, and it did not have a material impact on the Companys consolidated results of
operations, cash flows or financial condition, and did not require additional disclosures related
to existing intangible assets.
FSP FAS 140-4 and FIN 46R-8. The FASB issued this FSP in December 2008 and it is effective for the
first reporting period ending after December 15, 2008. This FSP requires additional disclosures
related to variable interest entities in accordance with SFAS 140 and FIN 46R. These disclosures
include significant judgments and assumptions, restrictions on assets, risks and the affects on
financial position, financial performance and cash flows. The Company
adopted this FSP as of
January 1, 2009, and it did not have a material impact on the Companys consolidated results of
operations, cash flows or financial condition, and did not require additional disclosures.
FSP
157-2. On February 12, 2008, the FASB issued FSP FAS 157-2, Effective Date of FASB Statement
No. 157 (FSP 157-2), which delays the effective date of SFAS 157 for nonfinancial assets and
liabilities, except for items that are recognized or disclosed at fair value in the financial
statements on a recurring basis (at least annually), to fiscal years beginning after November 15,
2008. The Company adopted FSP 157-2 on January 1, 2009 and it did not have a material impact on the
Companys consolidated results of operations, cash flows or
financial condition, and did not require additional disclosures.
FSP
157-4, FSP FAS 115-2 and FAS 124-2, and FSP FAS 107-1 and APB
28-1. On April 2, 2009, the FASB issued three FSPs to address concerns about measuring the
fair value of financial instruments when the markets become inactive and quoted prices may reflect
distressed transactions, recording impairment charges on investments in debt instruments, and
requiring the disclosure of fair value of certain financial instruments in interim financial
statements. The first Staff Position, FSP FAS 157-4, Determining Whether a Market is Not Active
and a Transaction is Not Distressed, provides additional guidance to highlight and expand on the
factors that should be considered in estimating fair value when there has been a significant
decrease in market activity for a financial asset. FSP 157-4 became effective for the Companys
financial statements as of June 30, 2009 and it did not have a material impact on the Companys
consolidated results of operations, cash flows or financial condition, nor required additional
disclosures.
The second Staff Position, FSP FAS 115-2 and FAS 124-2, Recognition and Presentation of
Other-Than-Temporary Impairments (FSP 115-2 and FSP
124-2), changes the method for determining
whether an other-than-temporary impairment exists for debt securities and the amount of an
impairment charge to be recorded in earnings. The Company adopted this FSP during the second
quarter and it did not have a material impact on the Companys consolidated results of operations,
cash flows or financial condition, and did not require additional disclosures.
The third Staff Position, FSP FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of
Financial Instruments (FSP FAS 107-1 and APB 28-1) increases the frequency of fair value
disclosures from annual only to quarterly. All three FSPs are effective for interim periods ending
after June 15, 2009, with the option to early adopt for interim periods ending after March 15,
2009. FSP FAS 107-1 and APB 28-1 became effective for the Companys financial statements as of June
30, 2009, see Note 5, Fair Value Measurements.
FSP EITF 03-6-1. In June 2008, the FASB issued FSP EITF 03-6-1, Determining Whether Instruments
Granted in Share-Based Payment Transactions Are Participating Securities (FSP EITF 03-6-1). FSP
EITF 03-6-1 clarifies that unvested share-based payment awards that entitle holders to receive
nonforfeitable dividends or dividend equivalents (whether paid or unpaid) are considered
participating securities and should be included in the computation of EPS pursuant to the two-class
method. The two-class method of computing EPS is an earning allocation formula that determines EPS
for each class of common stock and participating security according to dividends declared (or
accumulated) and participation rights in undistributed earnings. FSP EITF 03-6-1 requires
retrospective application and is effective for fiscal years beginning after December 15, 2008, and
interim periods within those years. FSP EITF 03-6-1 was adopted by the Company on January 1, 2009.
The unvested restricted shares of Class A Common Stock awarded by the Company pursuant to its
equity incentive plans contain rights to receive nonforfeitable dividends, and thus are
participating securities requiring the two-class method of computing EPS; see Note 7, Earnings Per
Share for the Companys disclosure of EPS.
2. Stock Based Compensation
For the three and six months ended June 30, 2009, the Company recognized approximately $0.6 and
$1.2 million in non-cash stock-based compensation expense, respectively.
During the
first quarter of 2009, the Company awarded Lewis W. Dickey, Jr., its
Chairman, President and Chief Financial Officer, 160,000 restricted performance
based shares and 160,000 restricted time vested shares. The fair value on the date of grant for
both of these awards was $0.5 million. In addition, during the first
8
quarter of 2009 the Company
awarded 140,000 time vested restricted shares with a fair value on the date of grant of $0.2
million, or $1.71 per share to certain officers (other than Mr. L. Dickey) of the Company.
During the second quarter ended June 30, 2009, the Company issued 17,000 time vested restricted
shares of Class A Common Stock to each of the non-employee directors
of the Company and 6,000 shares of Class of Common Stock to one
returning director, from
Treasury.
3. Acquisitions and Dispositions
Green Bay and Cincinnati Swap
On April 10, 2009, the Company completed an asset exchange agreement with Clear Channel
Communications, Inc (Clear Channel). As part of the asset exchange, the Company acquired two of
Clear Channels radio stations located in Cincinnati, Ohio in consideration for five of the
Companys radio stations in Green Bay, Wisconsin. The exchange
transaction provided the Company with entry into the Cincinnati
market, which is currently ranked #28 by Arbitron. Large markets are generally
desirable for national advertisers, and have large and
diversified local business communities providing for a large base of potential
advertising clients. The transaction was accounted for as a business
combination in accordance with SFAS No. 141(R). The fair value of the assets acquired in the
exchange was $17.6 million (refer to the table below for the
fair value allocation). The Company
incurred approximately $0.2 million of acquisition costs related to this transaction and expensed
them as incurred through earnings within corporate general and
administrative expense. The
results of operations for the Cincinnati stations acquired are included in the Condensed Consolidated Statement of Operations
since the acquisition date. The results of the Cincinnati stations
were not material. Prior
to the asset exchange, the Company and Clear Channel did not have any preexisting relationship.
In conjunction with the exchange, Clear Channel and the Company entered into a local management
agreement (LMA) whereby the Company will provide the programming, sell the advertising, and retain
the operating profits for managing the five Green Bay radio stations. In consideration for these
rights, the Company will pay Clear Channel a monthly fee of approximately $0.2 million over the
term of the agreement. The term of the LMA is for five years,
expiring December 31, 2013. In conjunction with the LMA, the Company included the net revenues and station operating expenses
associated with operating the Green Bay stations in the Companys consolidated financial statements
from effective date of the LMA (April 10, 2009) through
June 30, 2009. Additionally, Clear Channel negotiated a written put
option that allows them to require the Company to repurchase the five Green Bay radio stations at
any time during the two-month period commencing July 1, 2013 (or earlier if the LMA agreement is
terminated prior to this date) for $17.6 million (the fair value of the radio stations as of April
10, 2009). The Company accounted for the put option as a derivative
contract and accordingly, the fair value of the put was recorded as a liability at
the acquisition date and offset against the gain associated with the asset exchange. Subsequent
changes to the fair value of the derivative will be recorded through earnings.
In conjunction with the transactions, the Company recorded a net gain of $7.2 million, which is
included in gain on exchange of assets in the statement of
operations. This amount represents a gain of approximately $9.6 million recorded on the Green Bay Stations sold, net of a loss of approximately $2.4 million representing the fair
value of the put option at acquisition date.
The table
below summarizes the Purchase Price allocation:
|
|
|
|
|
Allocation |
|
Amount |
|
Fixed assets |
|
$ |
458 |
|
Broadcast Licenses |
|
|
15,353 |
|
Goodwill |
|
|
1,600 |
|
Other Intangibles |
|
|
225 |
|
|
Total Purchase Price |
|
$ |
17,636 |
|
|
|
|
|
|
|
Less: Carrying value of Green Bay Stations |
|
|
(7,999 |
) |
|
Gain on asset exchange |
|
$ |
9,637 |
|
|
|
|
|
|
|
Less: Fair value of Green Bay Option April 10, 2009 |
|
|
(2,433 |
) |
|
Net gain |
|
$ |
7,204 |
|
|
The above estimated fair values of assets acquired and liabilities assumed are preliminary and are
based on the information that was available as of the acquisition date to estimate the fair value
of assets acquired and liabilities assumed. The Company believes that information provides a
reasonable basis for estimating the fair values of assets acquired and liabilities assumed but the
Company is waiting for additional information necessary to finalize the determination of fair
value, if any, of lease agreements. Thus, the preliminary measurements of fair value reflected are
subject to change. The Company expects to finalize the valuation and complete the purchase price
allocation as soon as practicable but no later than December 31, 2009.
WZBN-FM Swap
During the first quarter ended March 31, 2009, the Company completed a swap transaction pursuant to
which it exchanged WZBN-FM, Camilla, Georgia, for W250BC, a translator licensed for use in Atlanta,
Georgia, owned by Extreme Media Group. The fair value of the assets acquired in exchange for the
assets disposed, was accounted for under SFAS No. 141R. This transaction was not material to the
results of the Company.
4. Derivative Financial Instruments
The Company accounts for derivative financial instruments in accordance with SFAS No. 133. This
Statement requires the Company to recognize all derivatives on the balance sheet at fair value.
Changes in fair value are recorded in income for any contracts not classified as qualifying
hedging instruments. For derivatives qualifying as cash flow hedge instruments, the effective
portion of the change in fair value must be recorded through other comprehensive income, a
component of stockholders equity.
May 2005 Swap
In May 2005, the Company entered into a forward-starting LIBOR-based interest rate swap arrangement
(the May 2005 Swap) to manage fluctuations in cash flows resulting from interest rate risk
attributable to changes in the benchmark interest rate of LIBOR. The May 2005 Swap became effective
as of March 13, 2006, the end of the term of the Companys prior swap. The May 2005 Swap
expired on March 13, 2009, in accordance with the terms of the original agreement.
The May 2005 Swap changed the variable-rate cash flow exposure on $400 million of the Companys
long-term bank borrowings to fixed-rate cash flows. Under the May 2005 Swap, the Company received
LIBOR-based variable interest rate payments and made fixed interest rate payments, thereby creating
fixed-rate long-term debt. The May 2005 Swap was previously accounted for as a qualifying cash flow
hedge of the future variable rate interest payments in accordance with SFAS No. 133. Starting in
June 2006, the May 2005 Swap no longer qualified as a cash-flow hedging instrument. Accordingly,
the changes in its fair value have since been reflected in the statement of operations instead of
accumulated other comprehensive income (AOCI). Interest for the three months ended June 30, 2009
and 2008 includes income of 0.0 million and $3.3 million, respectively, related to the change in
fair value. Interest expense for the six-months ended June 30, 2009 and 2008 includes income of
$3.0 million and charges of $3.1 million, respectively, related to the change in fair value.
The fair value of the May 2005 Swap was determined under the provisions of SFAS 157 using
observable market based inputs (a Level 2 measurement). The fair value represents an estimate of
the net amount that the Company would pay if the agreement was transferred to another party or
cancelled as of the date of the valuation. The balance sheets as of June 30, 2009 and December 31,
2008 include other long-term liabilities of $0.0 million and $3.0 million, respectively, to reflect
the fair value of the May 2005 Swap.
May 2005 Option
In May 2005, the Company also entered into an interest rate option agreement (the May 2005
Option), which provides for Bank of America to unilaterally extend the period of the May 2005 Swap
for two additional years, from March 13, 2009 through March 13, 2011. This option was exercised on
March 11, 2009 by Bank of America. This instrument was not highly effective in mitigating the risks
in cash flows, and therefore it was deemed speculative and its changes in value were accounted for
as a current element of interest expense. The balance sheets as of June 30, 2009 and December 31,
2008 reflect other long-term liabilities of $17.7 million and $18.5 million, respectively, to
include the fair value of the May 2005 Option. The Company reported $1.8 million of interest income
and $2.2 million of interest expense inclusive of FAS 157 fair
value adjustment, during the three-
and six-month periods ending June 30, 2009 and $5.6 million and $0.7 million of interest income,
during the three- and six-month periods ended June 30, 2008, representing the change in fair value of
the May 2005 option.
In the event of a default under the Credit Agreement, or a default under any derivative contract,
the derivative counterparties would have the right, although not the obligation, to require
immediate settlement of some or all open derivative contracts at their then-current fair value. The
Company does not utilize financial instruments for trading or other speculative purposes.
The Companys financial instrument counterparties are high-quality investments or commercial banks
with significant experience with such instruments. The Company manages exposure to counterparty
credit risk by requiring specific minimum credit standards and diversification of counterparties.
The Company has procedures to monitor the credit exposure amounts. The maximum credit exposure at
June 30, 2009 was not significant to the Company.
Green Bay Option
On
April 10, 2009, Clear Channel and the Company entered into an
LMA whereby the Company is responsible for operating (i.e., programming, advertising, etc.) five Green Bay
radio stations and must pay Clear Channel a monthly fee of approximately $0.2 million over a five
year term (expiring December 31, 2013), in exchange for the
Company retaining the operating profits for
managing the radio stations. Clear Channel also has a put option (the Green Bay Option) that allows them to require the
Company to repurchase the five Green Bay radio stations at any time during
the two-month period commencing July 1, 2013 (or earlier if the LMA agreement is terminated before
this date) for $17.6 million (the fair value of the radio stations as of
9
April 10, 2009). Clear
Channel is the nations largest radio broadcaster and as of June 2009 Moodys gave its debt a CCC
credit rating. The Company accounted for the Green Bay Option as a
derivative contract. Accordingly, the fair value of the put was recorded as a
long term liability offsetting the gain at the acquisition date with subsequent changes in the fair
value recorded through earnings.
The fair value of the Green Bay Option was determined under the provisions of SFAS 157 using inputs
that are supported by little or no market activity (a Level 3 measurement). The fair value
represents an estimate of the net amount that the Company would pay if the option was transferred
to another party as of the date of the valuation. The balance sheets as of June 30, 2009 and
December 31, 2008 include other long-term liabilities of $2.4 million and $0.0 million,
respectively, to reflect the fair value of the Green Bay Option. The fair value of the Green Bay
Option at June 30, 2009 and the origination date, April 10, 2009, was $2.4 million.
Accordingly the Company did not record income or expense associated with marking to market the
Green Bay Option under SFAS 157 during the three and six months ended June 30, 2009.
The location and fair value amounts of derivatives in the Consolidated Statement of Financial
Position are shown in the following table:
Information on the Location and Amounts of Derivatives Fair Values in
the Condensed Consolidated Balance Sheet (in Thousands)
Liability
Derivatives
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet |
|
June 30, 2009 |
|
|
Location |
|
Fair Value |
|
Derivative not designated as
hedging instruments under
Statement 133 |
|
Other long-term liabilities |
|
$ |
(17,672 |
) |
Green Bay Option |
|
Other long-term liabilities |
|
|
(2,433 |
) |
|
|
|
|
|
Total |
|
$ |
(20,105 |
) |
|
|
|
The location and effect of derivatives in the Consolidated Statement of Operations are shown
in the following table:
Liability Derivatives (in Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Income (Expense) |
|
Amount of Income (Expense) |
|
|
|
|
|
|
Recognized in Income on |
|
Recognized in Income on |
Derivative |
|
Financial Statement |
|
Derivatives for the Three |
|
Derivatives for the Six Months |
Instruments |
|
Location |
|
Months Ended June 30, 2009 |
|
Ended June 30, 2009 |
|
Derivative not designated as
hedging instruments under
Statement 133 |
|
Interest expense |
|
$ |
(1,837 |
) |
|
$ |
2,208 |
|
Green Bay Option |
|
Corporate G&A |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
(1,837 |
) |
|
$ |
2,208 |
|
|
|
|
10
5. Long Term Debt
The Companys long-term debt consisted of the following at June 30, 2009 and December 31, 2008
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
December 31, |
|
|
2009 |
|
2008 |
|
|
|
Term loan,
net of discount |
|
$ |
644,081 |
|
|
$ |
696,000 |
|
Less: Current portion of long-term debt |
|
|
46,456 |
|
|
|
7,400 |
|
|
|
|
|
|
$ |
597,625 |
|
|
$ |
688,600 |
|
|
|
|
Senior Secured Credit Facilities
2009 Amendment
On June 29, 2009, the Company entered into an amendment to the Credit Agreement, with Bank of
America, N.A., as administrative agent, and the lenders party thereto.
The Credit Agreement maintains the pre-existing term loan facility of $750 million, which has an
outstanding balance of approximately $647.9 million, and reduces the pre-existing revolving credit
facility from $100 million to $20 million. Incremental
facilities are no longer permitted as of June 30, 2009 under the Credit Agreement.
The Companys obligations under the Credit Agreement are collateralized by substantially all of its
assets in which a security interest may lawfully be granted (including FCC licenses held by its
subsidiaries), including, without limitation, intellectual property and all of the capital stock of
the Companys direct and indirect subsidiaries, including Broadcast Software International, Inc.,
which prior to the amendment, was an excluded subsidiary. The Companys obligations under the
Credit Agreement continue to be guaranteed by all of its subsidiaries.
The Credit Agreement contains terms and conditions customary for financing arrangements of this
nature. The term loan facility will mature on June 11, 2014. The revolving credit facility will
mature on June 7, 2012.
Borrowings under the term loan facility and revolving credit facility will bear interest, at the
Companys option, at a rate equal to LIBOR plus 4.00% or the Alternate Base Rate (defined as the
higher of the Bank of America Prime Rate and the Federal Funds rate plus 0.50%) plus 3.00%. Once
the Company reduces the term loan facility by $25 million through mandatory prepayments of Excess
Cash Flow (as defined in the Credit Agreement), as described below, the Company will bear interest,
at the Companys option, at a rate equal to LIBOR plus 3.75% or the Alternate Base Rate plus 2.75%.
Once the Company reduces the term loan facility by $50 million through mandatory prepayments of
Excess Cash Flow, as described below, the Company will bear interest, at the Companys option, at a
rate equal to LIBOR plus 3.25% or the Alternate Base Rate plus 2.25%.
In connection with the closing of the Credit Agreement, the Company made a voluntary prepayment in
the amount of $32.5 million. The Company also will be required to make quarterly mandatory
prepayments of 100% of Excess Cash Flow beginning with the fiscal quarter ending September 30, 2009
and continuing through December 31, 2010, before reverting to annual prepayments of a percentage of
Excess Cash Flow, depending on the Companys leverage, beginning in 2011. The Company reclassified
approximately $39.1 million of long term debt as an addition to
current portion of long term debt, which represents the estimated Excess Cash Flow payments over the next 12 months in accordance with
the terms of the Credit Agreement. Certain other mandatory prepayments of the term loan facility
will be required upon the occurrence of specified events, including upon the incurrence of certain
additional indebtedness and upon the sale of certain assets.
Covenants
The representations, covenants and events of default in the Credit Agreement are customary for
financing transactions of this nature and are substantially the same as those in existence prior to
the amendment, except as follows:
|
|
|
the total leverage ratio and fixed charge coverage ratio covenants for the fiscal
quarters ending June 30, 2009 through and including December 31, 2010 (the Covenant
Suspension Period) have been suspended; |
|
|
|
|
during the Covenant Suspension Period, the Company must: (1) maintain minimum trailing
twelve month consolidated EBITDA (as defined in the Credit Agreement) of $60 million for
fiscal quarters ended June 30, 2009 through March 31, 2010, increasing incrementally to $66
million for fiscal quarter ended December 31, 2010, subject to certain adjustments; and (2)
maintain minimum cash on hand (defined as unencumbered consolidated cash and cash
equivalents) of at least $7.5 million; |
11
|
|
|
the Company is restricted from incurring additional intercompany debt or making any
intercompany investments other than to the parties to the Credit Agreement; |
|
|
|
|
the Company may not incur additional indebtedness or liens, or make permitted
acquisitions or restricted payments, during the Covenant Suspension Period. (after the
Covenant Suspension Period, the Credit Agreement will permit indebtedness, liens, permitted
acquisitions and restricted payments, subject to certain leverage ratio and liquidity
measurements); and |
|
|
|
|
the Company must provide monthly unaudited financial statements to the lenders within 30
days after each calendar-month end. |
Events of default in the Credit Agreement include, among others, (a) the failure to pay when due
the obligations owing under the credit facilities; (b) the failure to perform (and not timely
remedy, if applicable) certain covenants; (c) cross default and cross acceleration; (d) the
occurrence of bankruptcy or insolvency events; (e) certain judgments against the Company or any of
its subsidiaries; (f) the loss, revocation or suspension of, or any material impairment in the
ability to use of or more of, any of the Companys material FCC licenses; (g) any representation or
warranty made, or report, certificate or financial statement delivered, to the lenders subsequently
proven to have been incorrect in any material respect; and (h) the occurrence of a Change in
Control (as defined in the Credit Agreement). Upon the occurrence of an event of default, the
lenders may terminate the loan commitments, accelerate all loans and exercise any of their rights
under the Credit Agreement and the ancillary loan documents as a secured party.
As discussed above, the Companys covenants for the period ended June 30, 2009 are as follows:
|
|
|
a minimum trailing twelve month consolidated EBITDA; |
|
|
|
|
a $7.5 million minimum cash on hand and; |
|
|
|
|
a limit on annual capital expenditures of $15.0 million
annually. |
The trailing twelve month consolidated EBITDA and cash on hand at June 30, 2009 were $78.4 million and
$12.4 million, respectively.
Management believes the Company will continue to be in compliance with all of its debt covenants
through at least June 30, 2010, based upon actions taken as discussed in Note 1. The current
economic crisis has reduced demand for advertising in general, including advertising on our radio
stations. While the Company has negotiated relief from the total
leverage ratio and fixed charge coverage ratio,
if the Companys revenues were to be significantly less than planned due to difficult market
conditions or for other reasons between the period of June 30, 2009 and December 31, 2009, the
Companys ability to maintain compliance with covenants in its Credit Agreement would become
increasingly difficult without remedial measures, such as the implementation of further cost
abatement initiatives. If the Companys remedial measures were not successful in maintaining
compliance, then the Company would expect to negotiate with its lenders for further relief, which
relief could result in higher interest expense. Failure to comply with the financial covenants or
other terms of the Credit Agreement and failure to negotiate relief from the Companys lenders
could result in the acceleration of the maturity of all outstanding debt. Under these
circumstances, the acceleration of the Companys debt could have a material adverse effect on its
business.
Warrants
Additionally, the Company issued warrants to the Lenders with the execution of the amended Credit
Agreement that allow them to acquire up to 1.25 million shares of the Companys Class A Common
Stock. Each warrant is immediately exercisable to purchase the underlying Class A common stock of
the Company at an exercise price of $1.17 per share and has an
expiration date of June 29, 2019.
Accounting for the Modification of the Credit Agreement
The
amendment to the term loan was accounted for as a
modification and accordingly, the Company did not record a gain or a loss on the transaction. For
the revolving credit facility, the Company wrote off approximately $0.2 million of unamortized deferred financing
costs, based on the reduction of capacity. With respect to both debt
instruments, the Company recorded $3.0 million of fees paid directly to the creditors as a debt
discount which will be amortized as an adjustment to interest expense over the remaining term of
the debt.
The Company classified the warrants as equity at $0.8 million at fair value at inception. The fair value of the warrants was
recorded as a debt discount and will be amortized as an adjustment to interest expense over the
remaining term of the debt using the effective interest method.
12
As of June 30, 2009, prior to the effect of the May 2005 Swap, the effective interest rate of the
outstanding borrowings pursuant to the senior secured credit
facilities was approximately 2.221%. As of June 30,
2009, the effective interest rate inclusive of the May 2005 Swap was approximately 4.326%.
6. Fair Value Measurements
The Company adopted the provisions of SFAS No. 157 on January 1, 2008 as they relate to certain
items, including those within the scope of SFAS No. 107, Disclosures about Fair Value of Financial
Instruments and financial and nonfinancial derivatives within the scope of SFAS No. 133. SFAS No.
157 requires, among other things, enhanced disclosures about investments that are measured and
reported at fair value and establishes a hierarchical disclosure framework that prioritizes and
ranks the level of market price observability used in measuring investments at fair value. The
three levels of the fair value hierarchy under SFAS No. 157 are described below:
Level 1 Valuations based on quoted prices in active markets for identical assets or liabilities
that the entity has the ability to access.
Level 2 Valuations based on quoted prices for similar assets or liabilities, quoted prices in
markets that are not active, or other inputs that are observable or can be corroborated by
observable data for substantially the full term of the assets or liabilities.
Level 3 Valuations based on inputs that are supported by little or no market activity and that
are significant to the fair value of the assets or liabilities.
A financial instruments level within the fair value hierarchy is based on the lowest level of any
input that is significant to the fair value measurement. The Companys financial assets and
liabilities are measured at fair value on a recurring basis. Financial assets and liabilities
measured at fair value on a recurring basis as of June 30, 2009 were as follows (dollars in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted |
|
|
|
|
|
|
|
|
|
|
Prices in |
|
Other |
|
|
|
|
|
|
|
|
Active |
|
Observable |
|
Unobservable |
|
|
Total Fair |
|
Markets |
|
Inputs |
|
Inputs |
|
|
Value |
|
(Level 1) |
|
(Level 2) |
|
(Level 3) |
|
|
|
Financial assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds |
|
$ |
4,381 |
|
|
$ |
4,381 |
|
|
$ |
|
|
|
$ |
|
|
|
|
|
Total assets |
|
$ |
4,381 |
|
|
$ |
4,381 |
|
|
$ |
|
|
|
$ |
|
|
|
|
|
Financial liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other long-term, liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Green Bay Option |
|
$ |
(2,433 |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
(2,433 |
) |
Interest rate swap |
|
|
(17,672 |
) |
|
|
|
|
|
|
(17,672 |
) |
|
|
|
|
|
|
|
Total liabilities |
|
$ |
(20,105 |
) |
|
$ |
|
|
|
$ |
(17,672 |
) |
|
$ |
(2,433 |
) |
|
|
|
13
Cash Equivalents. A majority of the Companys cash equivalents are invested in an
institutional money market fund. The Companys Level 1 cash equivalents are valued using quoted
prices in active markets for identical investments.
Green Bay Option. The fair value of the Green Bay Option was determined under the provisions of
SFAS 157 using inputs that are supported by little or no market activity (a Level 3 measurement).
The fair value represents an estimate of the net amount that the Company would pay if the option
was transferred to another party as of the date of the valuation. In
accordance with the requirements of FAS 157, the option valuation
incorporates a credit risk adjustment to reflect the probability of
default by the company. The Company reported $0.0 million
in corporate general and administrative expenses line item within the income statement related to
the SFAS 157 fair value adjustment, representing the change in the fair value of the Green Bay
option. The reconciliation below contains the components of the change in fair value associated
with the Greenbay Option for the three and six months ended June 30, 2009 (dollars in thousands):
|
|
|
|
|
Description |
|
$ Amount |
|
April 10, 2009 fair value origination date |
|
$ |
2,433 |
|
Less: |
|
|
|
|
SFAS 157 fair value expense |
|
|
|
|
|
|
|
|
|
|
Fair
value balance as of June 30, 2009 |
|
$ |
2,433 |
|
|
Interest Rate Swap. The Companys derivative financial instruments consist solely of an
interest rate cash flow hedge in which the Company pays a fixed rate and receives a variable
interest rate that is observable based upon a forward interest rate curve and is therefore
considered a Level 2 input.
The fair value of our interest rate swap is determined based on the present value of future cash
flows using observable inputs, including interest rates, yield curves. In accordance with the
requirements of FAS 157, derivative valuations incorporate credit risk adjustments that are
necessary to reflect the probability of default by the Company.
The carrying values of receivables, payables, and accrued expenses approximate fair value due to
the short maturity of these instruments. The following table shows the gross amounts and fair values of the Companys term
loan:
|
|
|
|
|
|
|
|
|
|
|
June 30, 2009 |
|
December 31, 2008 |
|
|
|
Gross carrying value of term loan |
|
$ |
647,894 |
|
|
$ |
688,600 |
|
Fair value of term loan |
|
$ |
447,143 |
|
|
$ |
515,700 |
|
The fair
value of the Companys term loan is estimated using a discounted
cash flow analysis, based on the Companys marginal borrowing
rates.
7. Share Repurchase
On May 21, 2008, the Companys board of directors authorized the purchase, from time to time, of up
to $75 million of its shares of Class A Common Stock. Purchases may be made in the open market or
through block trades, in compliance with the SEC guidelines, subject to market conditions,
applicable legal requirements and various other factors, including the requirements of the Credit
Agreement. The Company has no obligation to purchase shares under the purchase program, and the
timing, actual number and value of shares to be purchased depends on the performance of Companys
stock price, general market conditions, and various other factors within the discretion of
management.
During the three-months ended June 30, 2009, the Company did not purchase any shares of Class A
Common Stock. For the six months ended June 30, 2009 the Company purchased 99,737 shares of Class
A Common Stock for approximately $0.2 million in cash in open market transactions under the
board-approved purchase plan.
8. Earnings per Share
For all periods presented, basic and diluted earnings per common share is presented in accordance
with SFAS 128, Earnings per Share, as clarified by EITF Issue No. 03-6, Participating Securities
and the Two Class Method under FASB Statement No. 128, Earnings per Share (EITF 03-6) as
clarified by FSP EITF 03-6-1. Basic earnings per common share is calculated by dividing net income
available to common shareholders by the weighted average number of shares of common stock
outstanding during the period. The Company determined that it is appropriate to allocate
undistributed net income between Class A, Class B and
Class C common stock on an equal basis as the Companys charter provides that the holders of Class A,
Class B and Class C common stock have equal rights and privileges except with respect to voting on
certain matters.
Non-vested restricted stock carries non-forfeitable dividend rights and is therefore a
participating security, in accordance with FSP EITF 03-6-1 (See Note 1 Recent Accounting
Pronouncements). The two-class method of computing earnings per share is required for
14
companies
with participating securities. Under this method, net income is allocated to common stock and
participating securities to the extent that each security may share in earnings, as if all of the
earnings for the period had been distributed. The Company has accounted for non-vested restricted
stock as a participating security and used the two-class method of computing earnings per share as
of January 1, 2009, with retroactive application to all prior periods. Because the Company does not
pay dividends, earnings allocated to each participating security and
the common stock are equal. The
following table sets forth the computation of basic and diluted income per share for the three and
six months ended June 30, 2009 and 2008 (in thousands, except per share data).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
|
|
June 30, |
|
June 30, |
|
|
2009 |
|
2008 |
|
2009 |
|
2008 |
|
|
|
Basic Earnings Per Share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Undistributed net income |
|
$ |
14,074 |
|
|
$ |
30,289 |
|
|
$ |
10,779 |
|
|
$ |
26,049 |
|
Participation rights of unvested restricted stock in undistributed earnings |
|
|
512 |
|
|
|
619 |
|
|
|
369 |
|
|
|
491 |
|
Basic undistributed net income attributable to common shares |
|
|
13,562 |
|
|
|
29,670 |
|
|
|
10,410 |
|
|
|
25,558 |
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic income per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average common shares outstanding |
|
|
40,469 |
|
|
|
43,077 |
|
|
|
40,445 |
|
|
|
43,062 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic EPS attributable to common shares |
|
$ |
0.34 |
|
|
$ |
0.69 |
|
|
$ |
0.26 |
|
|
$ |
0.59 |
|
|
|
|
Diluted Earnings Per Share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Undistributed net income |
|
|
14,074 |
|
|
|
30,289 |
|
|
|
10,779 |
|
|
|
26,049 |
|
Participation rights of unvested restricted stock in
undistributed earnings |
|
|
512 |
|
|
|
619 |
|
|
|
369 |
|
|
|
491 |
|
|
|
|
Basic undistributed net income attributable to
common shares |
|
$ |
13,562 |
|
|
$ |
29,670 |
|
|
$ |
10,410 |
|
|
$ |
25,558 |
|
|
|
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average shares outstanding |
|
|
40,469 |
|
|
|
43,077 |
|
|
|
40,445 |
|
|
|
43,062 |
|
Effect of dilutive options and warrants |
|
|
|
|
|
|
18 |
|
|
|
2 |
|
|
|
22 |
|
|
|
|
Diluted weighted average shares outstanding |
|
|
40,469 |
|
|
|
43,095 |
|
|
|
40,447 |
|
|
|
43,084 |
|
|
|
|
Diluted EPS attributable to common shares |
|
$ |
0.34 |
|
|
$ |
0.69 |
|
|
$ |
0.26 |
|
|
$ |
0.59 |
|
|
|
|
For the three and six months ended June 30, 2009 and 2008,
options to purchase 1,955,024 shares and 8,512,050 shares
of common stock, respectively, were outstanding but
excluded from the EPS calculations because the exercise
price of the options exceeded the average share price for
the period. Options outstanding have decreased from June
30, 2008 due to the effect of the Companys option
exchange program, which concluded on December 30, 2008.
The Company has issued to key executives and employees shares of restricted stock and options to
purchase shares of common stock as part of the Companys stock incentive plans. At June 30, 2009,
the following restricted stock and stock options to purchase the following classes of common stock
were issued and outstanding:
15
|
|
|
|
|
|
|
June 30, |
|
|
2009 |
Restricted shares of Class A Common Stock |
|
|
1,519,586 |
|
Options to purchase Class A Common Stock |
|
|
1,455,024 |
|
Options to purchase Class C Common Stock |
|
|
500,000 |
|
9. Comprehensive Income
SFAS No. 130, Reporting Comprehensive Income, establishes standards for reporting comprehensive
income. Comprehensive income includes net income as currently reported under accounting principles
generally accepted in the United States of America, and also considers the effect of additional
economic events that are not required to be reported in determining net income, but rather are
reported as a separate component of stockholders equity. The components of comprehensive income
are as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
|
|
June 30, |
|
June 30, |
|
|
2009 |
|
2008 |
|
2009 |
|
2008 |
|
|
|
Net income |
|
$ |
14,074 |
|
|
$ |
30,289 |
|
|
$ |
10,779 |
|
|
$ |
26,049 |
|
Yield adjustment interest rate swap arrangement, net of tax |
|
|
|
|
|
|
(993 |
) |
|
|
|
|
|
|
(1,986 |
) |
|
|
|
Comprehensive income |
|
$ |
14,074 |
|
|
$ |
29,296 |
|
|
$ |
10,779 |
|
|
$ |
24,063 |
|
|
|
|
Yield adjustment represents straight line amortization of the remaining AOCI balance to the Companys income statement.
10. Commitments and Contingencies
There are two radio station rating services available to the radio broadcast industry.
Traditionally, the Company has utilized Arbitron as its primary source of ratings information for
its radio markets, and previously had a five-year agreement with
Arbitron under which it received programming
rating materials in a majority of its markets. On November 7, 2008, the Company entered
into an agreement with Nielsen pursuant to which Nielsen would rate certain of the Companys radio
markets as the coverage expires for such markets under the Arbitron agreement. Nielsen began
efforts to roll out its rating service for 50 of the Companys radio markets in January 2009. The
Company forfeited its obligation under the agreement with Arbitron at December 31, 2008, and
Arbitron was paid in accordance with the agreement through the balance of the agreement.
The national advertising agency contract with Katz contains termination provisions that, if
exercised by the Company during the term of the contract, would obligate the Company to pay a
termination fee to Katz, calculated based upon a formula set forth in the contract.
In December 2004, the Company purchased 240 perpetual licenses from iBiquity Digital Corporation,
which will enable it to convert to and utilize digital broadcasting technology on 240 of its
stations. Under the terms of the agreement, the Company committed to convert the 240 stations over
a seven year period. On March 5, 2009, the Company entered into an amendment to its agreement with
iBiquity to reduce the number of planned conversions, extend the build-out schedule, and increase
the license fees to be paid for each converted station. In the event the Company does not fulfill
the conversion requirements within the period set forth in the agreement or otherwise modify the
rollout schedule, once the conversions are completed the Company will be subject to license fees
higher than those currently provided for under the agreement. The conversion of original stations
to the digital technology will require an investment in certain capital equipment over the next
several years. Management estimates its investment will be approximately $0.1 million per station
converted.
In August
2005, the Company was subpoenaed by the Office of the Attorney General of the State of New York, as
were other radio broadcasting companies, in connection with the New York Attorney Generals
investigation of promotional practices related to record companies dealings with radio stations
broadcasting in New York. The Company is cooperating with the Attorney General in this
investigation.
In May 2007, the Company received a request for information and documents from the FCC related to
the Companys sponsorship of identification policies and sponsorship identification practices at
certain of its radio stations as requested by the FCC. The Company is cooperating with the FCC in
this investigation. The Company has not yet determined what effect the inquiry will have, if any,
on its financial position, results of operations or cash flows.
16
The Company is aware of two active purported class action lawsuits related to the proposed
acquisition of the Company that was announced in July 2007 but terminated in May 2008: Jeff
Michelson, on behalf of himself and all others similarly situated v. Cumulus Media Inc., et al.
(Case No. 2007CV137612, filed July 27, 2007) was filed in the Superior Court of Fulton County,
Georgia against the Company, Lew Dickey and the sponsor; and Paul Cowles v. Cumulus Media Inc., et
al. (Case No. 2007-CV-139323, filed August
31, 2007, which was filed in the Superior Court of Fulton County, Georgia against the Company, Lew
Dickey, the other directors and the sponsor.
The complaints in the two lawsuits made similar allegations initially, but on June 25, 2008 and
July 11, 2008, respectively, plaintiffs in the Georgia lawsuits filed amended complaints, alleging,
among other things, entirely new state law claims, including breach of fiduciary duty, aiding and
abetting a breach of fiduciary duty, abuse of control, gross mismanagement, corporate waste, unjust
enrichment, rescission and accounting. The amended complaints further allege, for the first time,
misrepresentations or omissions in connection with the purchase or sale of securities by the
Company. The amended complaints seek, among other relief, damages on behalf of the putative class.
The Company believes that it has committed no disclosure violations or any other breaches or
violations whatsoever, including in connection with the terminated acquisition transaction. In
addition, the Company has been advised that the other defendants named in the complaints similarly
believe the allegations of wrongdoing in the complaints to be without merit, and deny any breach of
duty to or other wrongdoing with respect to the purported plaintiff classes.
With respect to the two lawsuits, defendants removed them to the U.S. District Court for the
Northern District of Georgia on July 17, 2008 and filed motions to dismiss both cases on July 24,
2008. In August 2008, plaintiffs moved to remand the cases back to state court. On February 6,
2009, the U.S. District Court remanded both class action lawsuits, as well as the pending motion to
dismiss, to the Supreme Court of Fulton County, Georgia.
On
April 15, 2009, the Superior Court consolidated the two lawsuits
into a single action styled, In re Cumulus Media Inc. Shareholder and
Derivative Litigation, Civil Action No., 2007-CV 137612. On
May 13, 2009, the Superior Court issued an Order granting with
prejudice defendants motion to dismiss plaintiffs derivative claims. See Note 13 for information on
developments regarding these two cases occurring after June 30,
2009.
In April,
the Company was named in a patent infringement suit bought against the
Company as well as twelve other radio companies, including Clear
Channel Communications, Citadel Broadcasting, CBS Radio, Entercom
Communications, Saga Communications, Cox Radio, Univision
Communications, Regent Communications, Gap Broadcasting, and Radio One.
The case, captioned Aldav, LLC v. Clear Channel Communications, Inc.,
et al, Civil Action No. 6:09-cv-170, U.S. District Court for the
Eastern District of Texas, Tyler Division (filed April 16,
2009), alleges that the defendants have infringed and continue to
infringe plaintiffs patented content replacement technology in
the in the context of radio station steaming over the Internet, and
seeks a permanent injunction and unspecified damages. The Company
believes the claims are without merit and is vigorously defending
this lawsuit.
The Company is also a defendant from time to time in various other lawsuits, which are generally
incidental to its business. The Company is vigorously contesting all such matters and believes that
their ultimate resolution will not have a material adverse effect on its consolidated financial
position, results of operations or cash flows. The Company is not a party to any lawsuit or
proceeding which, in managements opinion, is likely to have a material adverse effect.
17
11. Restricted Cash
As of January 1, 2009, the Company changed its health insurance coverage to a self insured policy
requiring the Company to deposit funds with its third party administrator (TPA) to fund the cost
associated with current claims. Disbursements for the incurred and approved claims are paid out of
the restricted cash account administered by the Companys TPA. As of June 30, 2009, the Companys
balance sheet included approximately $0.8 million in restricted cash.
12. Investment in affiliate
The Companys investment in Cumulus Media Partners, LLC (CMP) is accounted for under the equity
method. For the three and six months ended June 30, 2009 and 2008, the Company recorded
approximately $0.0 million, $0.0 million and $1.7 million and $1.4 million as equity losses in
affiliate, respectively. For each of the three month periods ended June 30, 2009 and 2008, the
affiliate generated revenues of $46.6 and $58.9 million, operating expense of $26.6 and $35.3
million and income of approximately $8.1 million and $6.6 million, respectively. For each of the
six month periods ended June 30, 2009 and 2008, the affiliate generated revenues of $82.4 and
$105.8 million, operating expense of $49.4 and $63.5 million and income of approximately $58.5
million and $5.6 million, respectively. As of June 30,
2009, the Companys share of CMPs accumulated deficit exceeded
its investment in CMP.
Concurrent with the consummation of the acquisition of CMP, the Company entered into a management
agreement with a subsidiary of CMP, pursuant to which the Companys personnel will manage the
operations of CMPs subsidiaries. The agreement provides for the Company to receive, on a quarterly
basis, a management fee that is expected to be approximately 1% of the CMP subsidiaries annual
EBITDA or $4.0 million, whichever is greater. For the three and six months ended June 30, 2009 and
2008, the Company recorded as net revenues approximately $1.0 million and $2.0 million,
respectively, in management fees from CMP.
Two indirect subsidiaries
of CMP, CMP Susquehanna Radio Holdings Corp. (Radio
Holdings) and CMP Susquehanna
Corporation (CMPSC), commenced an exchange offer (the 2009
Exchange Offer) on March 9, 2009, pursuant to which they offered to exchange all of CMPSCs 9 7/8%
senior subordinated notes due 2014 (the Existing Notes) (1) for up to $15 million aggregate
principal amount of Variable Rate Senior Subordinated Secured Second Lien Notes due 2014 of CMPSC
(the New Notes), (2) up to $35 million in shares of Series A preferred stock of Radio Holdings
(the New Preferred Stock), and (3) warrants exercisable for shares of Radio Holdings common
stock representing, in the aggregate, up to 40% of the outstanding common stock on a fully diluted
basis (the New Warrants). On March 26, 2009, Radio Holdings and CMPSC
completed the exchange of $175,464,000 aggregate
principal amount of Existing Notes, which represented 93.5% of the total principal amount
outstanding prior to the commencement of the 2009 Exchange Offer, for $14,031,000 aggregate
principal amount of New Notes, 3,273,633 shares of New Preferred Stock and New Warrants exercisable
for 3,740,893 shares of Radio Holdings common stock. Although
neither the Company nor its equity partners equity stakes in
CMP were directly affected by the exchange, each of their pro rata
claim to CMPs assets (on a consolidated basis) as an equity
holder has been diluted as a result of the exchange.
18
13. Intangible Assets and Goodwill
The following tables present the changes in
goodwill and intangible assets for the six months ended June 30,
2009 (dollars in thousands).
Intangible Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Indefinite Lived |
|
|
Definite Lived |
|
|
Total |
|
Balance as of December 31, 2008 |
|
$ |
325,132 |
|
|
$ |
2 |
|
|
$ |
325,134 |
|
Acquisition Cincinnati Stations |
|
|
15,353 |
|
|
|
225 |
|
|
|
15,578 |
|
Disposition Green Bay Stations |
|
|
(6,272 |
) |
|
|
|
|
|
|
(6,272 |
) |
Amortization |
|
|
|
|
|
|
(108 |
) |
|
|
(108 |
) |
|
|
|
Balance as of June, 30, 2009 |
|
$ |
334,213 |
|
|
$ |
119 |
|
|
$ |
334,332 |
|
|
|
|
|
|
|
|
|
|
|
Amount |
Goodwill: |
|
|
|
|
Balance as
of December 31, 2008 |
|
$ |
58,891 |
|
Acquisition
Cincinnati Stations |
|
|
1,600 |
|
Disposition
Green Bay Stations |
|
|
(907 |
) |
|
|
|
Balance as
of June 30, 2009 |
|
$ |
59,584 |
|
|
|
|
The Company has significant intangible assets recorded and these intangible assets are comprised
primarily of broadcast licenses and goodwill acquired through the acquisition of radio stations.
SFAS No. 142, Goodwill and other Intangible Assets, requires that the carrying value of the
Companys goodwill and certain intangible assets be reviewed at least annually for impairment and
charged to results of operations in the periods in which the recorded value of those assets is more
than their fair market value.
Goodwill
The Company performs its annual impairment testing of goodwill during the fourth quarter. The
calculation of the fair value of each reporting unit is prepared using an income approach and
discounted cash flow methodology. As part of its overall planning associated with the testing of
goodwill, the Company determined that its markets are the appropriate unit of accounting.
During the second quarter of 2009 the Company reviewed the events or circumstances detailed in
paragraph 28 of FASB No. 142 to determine if an interim test of impairment of goodwill might be
necessary. In conjunction with that review the Company determined there were no indicators of
impairment present as of June 30, 2009 as such no impairment charge was taken during the quarter.
Indefinite
Lived Intangibles (FCC Licenses)
Consistent with EITF 02-07, the Company has combined all of its broadcast licenses within a single
market cluster into a single unit of accounting for impairment testing purposes. As part of our
overall planning associated with the indefinite lived intangibles test, we determined that our
markets are the appropriate unit of accounting for our broadcast license impairment testing.
During the second quarter of 2009 the Company reviewed the impairment indicators detailed in
paragraph 8 of FASB No. 144 Accounting for the Impairment or Disposal of Long-Lived Assets for
potential issues or circumstances which might require the Company to test its indefinite lived
intangible assets for impairment on an interim basis. In conjunction with that review the Company
determined there were no indicators of impairment present as of June 30, 2009 and as such no
impairment charge was taken during the quarter.
14. Subsequent Events
The
Company evaluated subsequent events through August 5, 2009, the
date on which the Form 10-Q that includes these unaudited interim
financial statements was filed with the Securities and Exchange
Commission.
With regard to the two purported class action lawsuits related to the proposed acquisition of
the Company terminated in May 2008 (see Note 9), on July 1, 2009, defendants filed a motion for
judgment on the pleadings, seeking dismissal and judgment as to the remainder of plaintiffs
complaint, arguing that plaintiffs class claims, while framed as direct claims brought on behalf
of a putative class of the Companys stockholders, were in fact derivative in nature, and should
therefore be dismissed for failure to make pre-suit demand or to otherwise demonstrate demand
futility, consistent with the Superior Courts May 13, 2009 order. On July 23, 2009, in lieu of
filing a response to defendants motion for judgment on the pleadings, plaintiffs filed, with
defendants consent, a motion seeking to voluntarily dismiss without prejudice the remainder of
their complaint, namely the purported direct claims asserted on behalf of a putative class of the
Companys stockholders. On July 28, 2009, the Court granted plaintiffs motion, thereby dismissing
without prejudice all remaining claims in plaintiffs complaint. The Court also deemed the May 13,
2009 Order to be a final order under O.C.G.A. Sec. 9-11-54(a), thereby terminating the litigation.
No payments or other compensation was made to plaintiffs or their counsel in exchange for their
agreement to discontinue without prejudice the remaining claims against defendants.
On August
3 2009, the U.S. District Bankruptcy Court for the Eastern District of
Virginia issued an Order and Memorandum Opinion in the case In re:
Barry D. Wood v. Cumulus Broadcasting, LLC, Case No. 00-14460-RGM
(Chapter 11), Adv. Proc. 06-1085, dismissing with prejudice the
complaint and all claims brought by the plaintiff against Cumulus
Broadcasting, LLC, a wholly owned subsidiary of the Company. In light
of the Bankruptcy courts order, the Company reversed an accrual of
approximately $0.8 million during the second quarter of 2009
that had previously been established.
19
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
General
The following discussion of our financial condition and results of operations should be read in
conjunction with our condensed consolidated financial statements and related notes thereto included
elsewhere in this quarterly report. This discussion, as well as various other sections of this
quarterly report, contains statements that constitute forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. Such statements relate to the
intent, belief or current expectations of our officers primarily with respect to our future
operating performance. Any such forward-looking statements are not guarantees of future performance
and may involve risks and uncertainties. Actual results may differ from those in the
forward-looking statements as a result of various factors, including but not limited to, risks and
uncertainties relating to the need for additional funds, FCC and government approval of pending
acquisitions, our inability to renew one or more of our broadcast licenses, changes in interest
rates, consummation of our pending acquisitions, integration of acquisitions, our ability to
eliminate certain costs, the management of rapid growth, the popularity of radio as a broadcasting
and advertising medium, changing consumer tastes, the impact of general economic conditions in the
United States or in specific markets in which we currently do business, industry conditions,
including existing competition and future competitive technologies and cancellation, disruptions or
postponements of advertising schedules in response to national or world events. Many of these risks
and uncertainties are beyond our control. This discussion identifies important factors that could
cause such differences. The unexpected occurrence of any such factors would significantly alter the
results set forth in these statements.
Overview
The following discussion of our financial condition and results of operations includes the results
of acquisitions and local marketing, management and consulting agreements. As of June 30, 2009, we
owned and operated 314 stations in 59 U.S. markets, provided sales and marketing services under
local marketing, management and consulting agreements (pending FCC
approval of acquisition) to 12 stations in 4 U.S. markets and, as a result of our investment in CMP, managed an additional 33
stations in 9 markets, making us the second largest radio broadcasting company in the United States
based on number of stations. We believe that, including the stations we manage through CMP, we are
the fourth largest radio broadcasting company based on net revenues.
Our historical focus has been on mid-sized markets throughout the United States. Among the reasons
we have historically focused on such markets is our belief that these markets are characterized by
a lower susceptibility to economic downturns. Our belief stems from historical experience that
indicates that during recessionary times these markets have tended to be more resilient to economic
declines. In addition, these markets, as compared to large markets, are characterized by a higher
ratio of local advertisers to national advertisers and a larger number of smaller-dollar customers,
both of which lead to lower volatility in the face of changing macroeconomic conditions.
Our management team remains focused on our strategy of pursuing growth through acquisition.
However, acquisitions are closely evaluated to ensure that they will generate incremental value to
our existing portfolio of radio stations, and as such, our management is committed to completing
only those acquisitions that they believe will increase our Station Operating Income. The
compression of publicly traded radio broadcast company multiples since 2005, which has been
exacerbated by the current economic crisis, combined with a market for privately held radio
stations that did not see corresponding multiples compression, translated to minimal acquisition
activity for us in 2008 and through the first six months of 2009. In addition, the capital markets
crisis has led to a general decline in funds available for
acquisitions. As a result, we have been
consummating more swap transactions, whereby one station or a group
of stations in our portfolio is exchanged for
another equally valued station or group of stations with another
company, due to the
fact funding is not required to complete such transactions.
Liquidity Considerations
Given the current capital and credit market crisis, and in conjunction with the development of our
2009 business plan, we continue to assess the impact of recent market developments on a variety of
areas, including our forecasted advertising revenues and liquidity. In response to these
conditions, we refined our 2009 business plan to incorporate a further reduction in our forecasted
2009 revenues and additional cost reductions to mitigate the impact of our anticipated decline in
2009 revenues. Based upon actions we have already taken, described under Liquidity and Capital
Resources Sources of Liquidity and Note 1 to our consolidated financial statements, management
believes we will continue to be in compliance with all of our applicable debt covenants through
June 30, 2010.
As of June 30, 2009, the effective interest rate on the borrowings pursuant to our credit
facilities was approximately 2.221%. As of June 30, 2009, our average cost of debt, including the
effects of our derivative position, was 4.326%.
Advertising Revenue and Station Operating Income
Our primary source of revenue is the sale of advertising time on our radio stations. Our sales of
advertising time are primarily affected by the demand for advertising time from local, regional and
national advertisers and the advertising rates charged by our radio
stations. Advertising demand and rates are based primarily on a stations ability to attract
audiences in the demographic groups targeted by its advertisers, as measured principally by
Arbitron and Nielsen on a periodic basis, generally two to four times per year. Because
20
audience ratings in local markets are crucial to a stations financial success, we endeavor to
develop strong listener loyalty. We believe that the diversification of formats on our stations
helps to insulate them from the effects of changes in the musical tastes of the public with respect
to any particular format.
The current economic crisis has reduced demand for advertising in general, including advertising on
our radio stations. In addition, the recent capital and credit market crisis is adversely affecting
the U.S. and global economies. This has and could continue to have adverse effects on the markets
in which we operate. Continued slow economic growth could lead to increasingly lower demand for
advertising. The recent economic downturn and resulting decline in the demand for advertising could
continue to have future adverse effects on our ability to grow revenues. Furthermore, considering
the impact of the current economic crisis on the capital markets as well as the global economy and
the resulting negative effects it has had on our operations, our historical results cannot be
relied upon to be indicative of future performance.
The number of advertisements that can be broadcast without jeopardizing listening levels and the
resulting ratings is limited in part by the format of a particular station. Our stations strive to
maximize revenue by managing their on-air inventory of advertising time and adjusting prices based
upon local market conditions. In the broadcasting industry, radio stations sometimes utilize trade
or barter agreements that exchange advertising time for goods or services such as travel or
lodging, instead of for cash.
Our advertising contracts are generally short-term. We generate most of our revenue from local
advertising, which is sold primarily by a stations sales staff. During the six months ended June
30, 2009 and 2008, approximately 88.7% and 88.1% of our revenues were from local advertising,
respectively. We generate national advertising revenue with the assistance of an outside national
representation firm. We engaged Katz Media Group, Inc. (Katz) to represent us as our national
advertising sales agent.
Our revenues vary throughout the year. As is typical in the radio broadcasting industry, we expect
our first calendar quarter will produce the lowest revenues for the year, and the second and fourth
calendar quarters will generally produce the highest revenues for the year, with the exception of
certain of our stations such as those in Myrtle Beach, South Carolina, where the stations generally
earn higher revenues in the second and third quarters of the year because of the higher seasonal
population in those communities. Our operating results in any period may be affected by the
incurrence of advertising and promotion expenses that typically do not have an effect on revenue
generation until future periods, if at all.
Our most significant station operating expenses are employee salaries and commissions, programming
expenses, advertising and promotional expenditures, technical expenses, and general and
administrative expenses. We strive to control these expenses by working closely with local station
management. The performance of radio station groups, such as ours, is customarily measured by the
ability to generate Station Operating Income. See the quantitative reconciliation of Station
Operating Income the most directly comparable financial measure calculated and presented in
accordance with GAAP, that follows this section.
Results of Operations
Analysis of Condensed Consolidated Statements of Operations. The following analysis of selected
data from our condensed consolidated statements of operations and other supplementary data should
be referred to while reading the results of operations discussion that follows (dollars in
thousands):
21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months |
|
|
|
|
|
|
Ended June 30, |
|
Dollar Change |
|
Percent Change |
|
|
2009 |
|
2008 |
|
2009 vs. 2008 |
|
2009 vs. 2008 |
|
|
|
STATEMENT OF OPERATIONS DATA: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues |
|
$ |
65,962 |
|
|
$ |
83,628 |
|
|
$ |
(17,666 |
) |
|
|
-21.1 |
% |
Station operating expenses (excluding
depreciation, amortization and LMA fees) |
|
|
39,232 |
|
|
|
52,975 |
|
|
|
(13,743 |
) |
|
|
-25.9 |
% |
Depreciation and amortization |
|
|
2,817 |
|
|
|
3,311 |
|
|
|
(494 |
) |
|
|
-14.9 |
% |
LMA fees |
|
|
728 |
|
|
|
320 |
|
|
|
408 |
|
|
|
127.5 |
% |
Corporate general and administrative (including
non-cash stock compensation expense) |
|
|
3,958 |
|
|
|
4,094 |
|
|
|
(136 |
) |
|
|
-3.3 |
% |
(Gain) on exchange of assets or stations |
|
|
(7,204 |
) |
|
|
|
|
|
|
(7,204 |
) |
|
|
-100.0 |
% |
Costs associated with terminated transaction |
|
|
|
|
|
|
1,753 |
|
|
|
(1,753 |
) |
|
|
-100.0 |
% |
|
|
|
Operating income |
|
|
26,431 |
|
|
|
21,175 |
|
|
|
5,256 |
|
|
|
24.8 |
% |
Interest (expense) income, net |
|
|
(6,204 |
) |
|
|
581 |
|
|
|
(6,785 |
) |
|
|
-1167.8 |
% |
Terminated transaction fee |
|
|
|
|
|
|
15,000 |
|
|
|
(15,000 |
) |
|
|
-100.0 |
% |
Other income (expense), net |
|
|
(38 |
) |
|
|
(25 |
) |
|
|
(13 |
) |
|
|
52.0 |
% |
Income tax (expense) |
|
|
(6,115 |
) |
|
|
(8,094 |
) |
|
|
1,979 |
|
|
|
-24.5 |
% |
Equity in net income of affiliate |
|
|
|
|
|
|
1,652 |
|
|
|
(1,652 |
) |
|
|
-100.0 |
% |
|
|
|
Net income |
|
$ |
14,074 |
|
|
$ |
30,289 |
|
|
$ |
(16,215 |
) |
|
|
-53.5 |
% |
|
|
|
OTHER DATA: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Station Operating Income (1) |
|
$ |
26,730 |
|
|
$ |
30,653 |
|
|
$ |
(3,923 |
) |
|
|
-12.8 |
% |
Station Operating Income Margin (2) |
|
|
40.5 |
% |
|
|
36.7 |
% |
|
|
* |
* |
|
|
* |
* |
22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six Months |
|
|
|
|
|
|
Ended June 30, |
|
Dollar Change |
|
Percent Change |
|
|
2009 |
|
2008 |
|
2009 vs. 2008 |
|
2009 vs. 2008 |
|
|
|
STATEMENT OF OPERATIONS DATA: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues |
|
$ |
121,316 |
|
|
$ |
156,527 |
|
|
$ |
(35,211 |
) |
|
|
-22.5 |
% |
Station operating expenses (excluding
depreciation, amortization and LMA fees) |
|
|
81,530 |
|
|
|
104,124 |
|
|
|
(22,594 |
) |
|
|
-21.7 |
% |
Depreciation and amortization |
|
|
5,715 |
|
|
|
6,421 |
|
|
|
(706 |
) |
|
|
-11.0 |
% |
LMA fees |
|
|
1,196 |
|
|
|
500 |
|
|
|
696 |
|
|
|
139.2 |
% |
Corporate general and administrative (including
non-cash stock compensation expense) |
|
|
10,067 |
|
|
|
9,555 |
|
|
|
512 |
|
|
|
5.4 |
% |
(Gain) on exchange of assets or stations |
|
|
(7,204 |
) |
|
|
|
|
|
|
(7,204 |
) |
|
|
-100.0 |
% |
Costs associated with terminated transaction |
|
|
|
|
|
|
1,893 |
|
|
|
(1,893 |
) |
|
|
-100.0 |
% |
|
|
|
Operating income |
|
|
30,012 |
|
|
|
34,034 |
|
|
|
(4,022 |
) |
|
|
-11.8 |
% |
Interest expense, net |
|
|
(13,941 |
) |
|
|
(19,951 |
) |
|
|
6,010 |
|
|
|
-30.1 |
% |
Terminated transaction fee |
|
|
|
|
|
|
15,000 |
|
|
|
(15,000 |
) |
|
|
-100.0 |
% |
Other income (expense), net |
|
|
(35 |
) |
|
|
(7 |
) |
|
|
(28 |
) |
|
|
400.0 |
% |
Income tax expense |
|
|
(5,257 |
) |
|
|
(4,431 |
) |
|
|
(826 |
) |
|
|
18.6 |
% |
Equity in net income of affiliate |
|
|
|
|
|
|
1,404 |
|
|
|
(1,404 |
) |
|
|
-100.0 |
% |
|
|
|
Net income |
|
$ |
10,779 |
|
|
$ |
26,049 |
|
|
$ |
(15,270 |
) |
|
|
-58.6 |
% |
|
|
|
OTHER DATA: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Station operating income (1) |
|
$ |
39,786 |
|
|
$ |
52,403 |
|
|
$ |
(12,617 |
) |
|
|
-24.1 |
% |
Station operating income margin (2) |
|
|
32.8 |
% |
|
|
33.5 |
% |
|
|
* |
* |
|
|
* |
* |
Cash flows related to: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities |
|
|
11,960 |
|
|
|
36,191 |
|
|
|
(24,231 |
) |
|
|
-67.0 |
% |
Investing activities |
|
|
(1,192 |
) |
|
|
(4,934 |
) |
|
|
3,742 |
|
|
|
-75.8 |
% |
Financing activities |
|
|
(51,389 |
) |
|
|
(11,348 |
) |
|
|
(40,041 |
) |
|
|
352.8 |
% |
Capital
expenditures |
|
|
(1,206 |
) |
|
|
(3,971 |
) |
|
|
2,765 |
|
|
|
-69.6 |
% |
|
|
|
** |
|
Not a meaningful calculation to present. |
|
(1) |
|
Station Operating Income consists of operating income before depreciation and
amortization, LMA fees, corporate general and administrative expenses, non-cash stock compensation,
impairment of goodwill and intangible assets, gain on exchange of assets or stations sold and costs
associated with the terminated transaction. Station Operating Income is not a measure of
performance calculated in accordance with GAAP. Station Operating Income should not be considered
in isolation or as a substitute for net income, operating income (loss), cash flows from operating
activities or any other measure for determining our operating performance or liquidity that is
calculated in accordance with GAAP. See managements explanation of this measure and the reasons
for its use and presentation, along with a quantitative reconciliation of Station Operating Income
to its most directly comparable financial measure calculated and presented in accordance with GAAP,
below under Station Operating Income. |
|
(2) |
|
Station Operating Income margin is defined as Station Operating Income as a percentage of net
revenues. |
Three Months Ended June 30, 2009 versus the Three Months Ended June 30, 2008.
Net Revenues. Net revenues decreased $17.6 million or 21.1% to $66.0 million for the three months
ended June 30, 2009 compared to $83.6 million for the three months ended June 30, 2008, primarily
due to the impact the current economic recession has had across our entire station platform. We
believe that while this negative trend will continue through the fourth quarter of 2009, the rate
of decline should begin to become less severe sometime during the fourth quarter. However, a more
specific projection is extremely difficult at this time as one of the new trends we have noticed is
a significant decrease in the lead time with respect to writing sales
orders for the sale of advertising time. Prior
to the current economic crisis, the majority of radio station
adverting inventory was being sold three to six months prior to being
run on the air. Recently, we have noted that a much larger portion of our inventory is being sold in the quarter it is being
aired. At this time it is unknown if this trend will be permanent or represent a short term
change. We believe this new trend represents, for some of our clients, their increased scrutiny
over their advertising budgets and cash management in response to the current economic crisis.
23
Station Operating Expenses Excluding Depreciation, Amortization and LMA Fees. Station operating
expenses excluding depreciation, amortization and LMA fees decreased $13.8 million, or 25.9%, to
$39.2 million for the three months ended June 30, 2009 from $53.0 million for the three months
ended June 30, 2008, primarily due to our continued efforts to contain operating costs, such as
employee reductions, a mandatory one-week furlough, and continued scrutiny of all operating
expenses. We will continue to monitor all our operating costs as well as implement additional cost
saving measures as necessary in an attempt to remain in compliance with current and future debt covenant
requirements.
Depreciation and Amortization. Depreciation and amortization decreased $0.5 million, or 14.9%, to
$2.8 million for the three months ended June 30, 2009, compared to $3.3 million for the three
months ended June 30, 2008 resulting in a decrease in our asset base due to assets becoming fully
depreciated.
LMA Fees. LMA fees totaled $0.7 million and $0.3 million for the three months ended June 30, 2009
and 2008, respectively. LMA fees in the current year were comprised primarily of fees associated
with stations operated under LMAs in Cedar Rapids, Iowa, Ann Arbor, Michigan, Green Bay, WI, and
Battle Creek, Michigan.
Corporate, General and Administrative Expenses Including Non-cash Stock Compensation. Corporate,
general and administrative expenses decreased $0.1 million, or
3.3%, to $4.0 million for the three
months ended June 30, 2009, compared to $4.1 million for the three months ended June 30, 2008,
primarily due to an increase in professional fees associated with our defense of certain lawsuits
plus timing differences associated with the payment of various corporate expenses, offset by a $0.6
million decrease in non cash stock compensation, due to the absence of amortization expense
associated with certain option awards becoming fully amortized in 2008.
Gain on Stations Swap. During the second quarter of 2009 we completed a swap transaction with Clear
Channel Communications, Inc (Clear Channel) to exchange five of our radio stations in Green Bay,
Wisconsin for two of Clear Channels radio stations located in Cincinnati, Ohio. In connection
with the exchange, the Company recorded a gain of approximately $7.2 million during the second
quarter. We did not complete any similar transactions during the second quarter in the prior year.
Costs
Associated With Terminated Transaction. We did not incur any
costs associated with a terminated transaction for the three months ended June 30, 2009 as compared to $1.8 million in
2008. These costs were attributable to a going-private transaction
that was terminated in May 2008.
Non-operating (Income) Expense. Interest expense, net of interest income increased by $6.8 million
to $6.2 million expense for the three months ended June 30, 2009 as compared with $0.6 million
income in the three months ended June 30, 2008. Interest expense associated with outstanding debt,
decreased by $4.3 million to $3.8 million as compared to $8.1 million in the three months ended
June 30, 2008. This decrease is primarily due to lower average levels of bank debt, as well as, a
decrease in the interest rates associated with our debt. The following summary details the
components of our interest expense, net of interest income (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months |
|
|
|
|
|
|
Ended June 30, |
|
Dollar Change |
|
Percent Change |
|
|
2009 |
|
2008 |
|
2009 vs. 2008 |
|
2009 vs. 2008 |
|
|
|
Bank Borrowings term loan and revolving credit
facilities |
|
$ |
3,805 |
|
|
$ |
8,069 |
|
|
$ |
(4,264 |
) |
|
|
-52.8 |
% |
Bank Borrowings yield adjustment interest rate
swap arrangement |
|
|
3,629 |
|
|
|
326 |
|
|
|
3,303 |
|
|
|
1013.2 |
% |
Change in fair value of interest rate swap agreement |
|
|
|
|
|
|
(3,308 |
) |
|
|
3,308 |
|
|
|
-100.0 |
% |
Change in fair value of interest rate option agreement |
|
|
(1,837 |
) |
|
|
(5,589 |
) |
|
|
3,752 |
|
|
|
-67.1 |
% |
Other interest expense |
|
|
616 |
|
|
|
204 |
|
|
|
412 |
|
|
|
202.0 |
% |
Interest income |
|
|
(9 |
) |
|
|
(283 |
) |
|
|
274 |
|
|
|
-96.8 |
% |
|
|
|
Interest income (expense), net |
|
$ |
6,204 |
|
|
$ |
(581 |
) |
|
$ |
6,785 |
|
|
|
-1167.8 |
% |
|
|
|
Income
Taxes. We recorded income tax expense of $6.1 million for the three months ended June 30,
2009, compared to an income tax expense of $8.1 million for the three months ended June 30, 2008.
The change in the effective tax rate during 2009 as compared to 2008 is primarily due to the impact
of the deferred taxes recorded in conjunction with the gain on the asset exchange completed during
the second quarter.
Station Operating Income. As a result of the factors described above, Station Operating Income
decreased $3.9 million, or 12.8%, to $26.7 million for the three months ended June 30, 2009, compared to $30.6 million for the three
months ended June 30, 2008.
Station Operating Income consists of operating income before depreciation and amortization, LMA
fees, corporate general and administrative expenses, including non-cash stock compensation,
impairment of goodwill and intangible assets, gain on exchange of
24
assets or stations, and cost associated with the terminated transaction. Station Operating Income
should not be considered in isolation or as a substitute for net income, operating income (loss),
cash flows from operating activities or any other measure for determining our operating performance
or liquidity that is calculated in accordance with GAAP. We exclude depreciation and amortization
due to the insignificant investment in tangible assets required to operate our stations and the
relatively insignificant amount of intangible assets subject to amortization. We exclude LMA fees
from this measure, even though it requires a cash commitment, due to the insignificance and
temporary nature of such fees. Corporate expenses, despite representing an additional significant
cash commitment, are excluded in an effort to present the operating performance of our stations
exclusive of the corporate resources employed. We exclude gain on assets or stations and terminated
transaction costs due to the temporary nature of such gains. We believe this is important to our
investors because it highlights the gross margin generated by our station portfolio. Finally, we
exclude non-cash stock compensation and impairment of goodwill and intangible assets from the
measure as they do not represent cash payments for activities related to the operation of the
stations.
We believe that Station Operating Income is the most frequently used financial measure in
determining the market value of a radio station or group of stations. We have observed that Station
Operating Income is commonly employed by firms that provide appraisal services to the broadcasting
industry in valuing radio stations. Further, in each of the more than 140 radio station
acquisitions we have completed since our inception, we have used Station Operating Income as our
primary metric to evaluate and negotiate the purchase price to be paid. Given its relevance to the
estimated value of a radio station, we believe, and our experience indicates, that investors
consider the measure to be useful in order to determine the value of our portfolio of stations. We
believe that Station Operating Income is the most commonly used financial measure employed by the
investment community to compare the performance of radio station operators. Finally, Station
Operating Income is one of the measures that our management uses to evaluate the performance and
results of our stations. Our management uses the measure to assess the performance of our station
managers and our Board of Directors uses it as part of its assessment of the relative performance
of our executive management. As a result, in disclosing Station Operating Income, we are providing
our investors with an analysis of our performance that is consistent with that which is utilized by
our management and our Board.
Station Operating Income is not a recognized term under GAAP and does not purport to be an
alternative to operating income from continuing operations as a measure of operating performance or
to cash flows from operating activities as a measure of liquidity. Additionally, Station Operating
Income is not intended to be a measure of free cash flow available for dividends, reinvestment in
our business or other Company discretionary use, as it does not consider certain cash requirements
such as interest payments, tax payments and debt service requirements. Station Operating Income
should be viewed as a supplement to, and not a substitute for, results of operations presented on
the basis of GAAP. We compensate for the limitations of using Station Operating Income by using it
only to supplement our GAAP results to provide a more complete understanding of the factors and
trends affecting our business than GAAP results alone. Station Operating Income has its limitations
as an analytical tool, and you should not consider it in isolation or as a substitute for analysis
of our results as reported under GAAP. Moreover, because not all companies use identical
calculations, these presentations of Station Operating Income may not be comparable to other
similarly titled measures of other companies.
Reconciliation of Non-GAAP Financial Measure. The following table reconciles Station Operating
Income to operating income as presented in the accompanying condensed consolidated statements of
operations (the most directly comparable financial measure calculated and presented in accordance
with GAAP, dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months |
|
|
|
|
|
|
Ended June 30, |
|
Dollar Change |
|
Percent Change |
|
|
2009 |
|
2008 |
|
2009 vs. 2008 |
|
2009 vs. 2008 |
|
|
|
Operating income |
|
$ |
26,431 |
|
|
$ |
21,175 |
|
|
$ |
5,256 |
|
|
|
24.8 |
% |
Depreciation and amortization |
|
|
2,817 |
|
|
|
3,311 |
|
|
|
(494 |
) |
|
|
-14.9 |
% |
LMA fees |
|
|
728 |
|
|
|
320 |
|
|
|
408 |
|
|
|
127.5 |
% |
Corporate general and administrative (including
non-cash stock compensation) |
|
|
3,958 |
|
|
|
4,094 |
|
|
|
(136 |
) |
|
|
-3.3 |
% |
(Gain) on exchange of assets or stations |
|
|
(7,204 |
) |
|
|
|
|
|
|
(7,204 |
) |
|
|
-100.0 |
% |
Cost associated with terminated transaction |
|
|
|
|
|
|
1,753 |
|
|
|
(1,753 |
) |
|
|
-100.0 |
% |
|
|
|
Station operating income |
|
$ |
26,730 |
|
|
$ |
30,653 |
|
|
$ |
(3,923 |
) |
|
|
-12.8 |
% |
|
|
|
Six Months Ended June 30, 2009 Versus the Six Months Ended June 30, 2008
Net Revenues. Net revenues decreased $35.2 million or 22.5% to $121.3 million for the six months
ended June 30, 2009 compared to $156.5 million for the six months ended June 30, 2008, primarily
due to the impact the current economic recession has had across our
entire station platform. We believe that while this negative trend will continue through the fourth
quarter of 2009, the rate of decline
25
should begin to become less severe sometime during the fourth quarter. However, a more specific
projection is extremely difficult at this time as one of the new trends we have noticed is a
significant decrease in the lead time with respect to writing sales orders. Prior to the current
economic crisis, the majority of radio station adverting inventory
was being sold three to six months prior to being run on the air. Recently, we have noted that a much larger portion of our inventory is being sold in the quarter it is being aired. At this
time it is unknown if this trend will be permanent or represent a short term change. We believe
this new trend represents, for some of our clients, their increased scrutiny over their
advertising budgets and cash management in response to the current economic crisis.
Station Operating Expenses Excluding Depreciation, Amortization and LMA Fees. Station operating
expenses excluding depreciation, amortization and LMA fees decreased $22.6 million, or 21.7%, to
$81.5 million for the six months ended June 30, 2009 from $104.1 million for the six months ended
June 30, 2008, primarily due to our continued efforts to contain operating costs such as employee
reductions, a mandatory one week furlough, and continued scrutiny of all operating expenses. We
will continue to monitor all our operating costs as well as implement additional cost saving
measures as necessary, such as further employee reductions or
furloughs, in an attempt to remain in
compliance with current and future covenant requirements.
Depreciation and Amortization. Depreciation and amortization remained decreased $0.7 million, or
11.0%, to $5.7 million for the six months ended June 30, 2009, compared to $6.4 million for the six
months ended June 30, 2008 resulting from a decrease in our asset base due to assets becoming fully
depreciated.
LMA Fees. LMA fees totaled $1.2 million and $0.5 million for the six months ended June 30, 2009 and
2008, respectively. LMA fees in the current year were comprised primarily of fees associated with
stations operated under LMAs in Cedar Rapids, Iowa, Ann Arbor, Michigan, Green Bay, WI, and Battle
Creek, Michigan.
Corporate, General and Administrative Expenses Including Non-cash Stock Compensation. Corporate,
general and administrative expenses increased $0.5 million, or 5.4%, to $10.1 million for the six
months ended June 30, 2009, compared to $9.6 million for the six months ended June 30, 2008,
primarily due to an increase in professional fees associated with our defense of certain lawsuits
plus timing differences associated with the payment of various corporate expenses, offset by a $2.0
million decrease in non cash stock compensation, due to the absence of amortization expense
associated with certain option awards becoming fully amortized in 2008.
Gain on Stations Swap. During the second quarter of 2009 we completed a swap transaction with Clear
Channel Communications to exchange five of our radio stations in Green Bay,
Wisconsin for two of Clear Channels radio stations located in Cincinnati, Ohio. In connection
with the exchange, the Company recorded a gain of approximately $7.2 million during the second
quarter. We did not complete any similar transactions during the second quarter in the prior year.
Costs
Associated With Terminated Transaction. We did not incur any costs associated with a terminated transaction for the six months ended June 30, 2009 as compared to $1.9 million in 2008.
These costs were attributable to a going-private transaction that was
terminated in May 2008.
Non-operating (Income) Expense. Interest expense, net of interest income decreased by $6.0 million,
to $13.9 million expense for the six months ended June 30, 2009 as compared with $20.0 million
expense for the six months ended June 30, 2008. Interest expense associated with outstanding debt,
decreased by $10.4 million to $7.9 million as compared to $18.3 million in the prior years period,
primarily due to lower average levels of bank debt, as well as, a decrease in the interest rates
associated with our debt. The following summary details the components of our interest expense, net
of interest income (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six Months |
|
|
|
|
|
|
Ended June 30, |
|
Dollar Change |
|
Percent Change |
|
|
2009 |
|
2008 |
|
2009 vs. 2008 |
|
2009 vs. 2008 |
|
|
|
Bank Borrowings term loan and revolving credit
facilities |
|
$ |
7,920 |
|
|
$ |
18,326 |
|
|
$ |
(10,406 |
) |
|
|
-56.8 |
% |
Bank Borrowings yield adjustment interest rate
swap arrangement |
|
|
5,992 |
|
|
|
(560 |
) |
|
|
6,552 |
|
|
|
-1170.0 |
% |
Change in fair value of interest rate swap agreement |
|
|
(3,043 |
) |
|
|
3,081 |
|
|
|
(6,124 |
) |
|
|
-198.8 |
% |
Change in fair value of interest rate option agreement |
|
|
2,208 |
|
|
|
(693 |
) |
|
|
2,901 |
|
|
|
-418.6 |
% |
Other interest expense |
|
|
919 |
|
|
|
407 |
|
|
|
512 |
|
|
|
125.8 |
% |
Interest income |
|
|
(55 |
) |
|
|
(610 |
) |
|
|
555 |
|
|
|
-91.0 |
% |
|
|
|
Interest expense, net |
|
$ |
13,941 |
|
|
$ |
19,951 |
|
|
$ |
(6,010 |
) |
|
|
-30.1 |
% |
|
|
|
Income
Taxes. We recorded income tax expense of $5.3 million for the six months ended June 30,
2009, compared to an income tax
expense of $4.4 million for the six months ended June 30, 2008. The change in the effective tax
rate during 2009 as compared to 2008 is primarily due to the impact of the deferred taxes recorded
in conjunction with the gain on the asset exchange completed during the second quarter.
26
Station Operating Income. As a result of the factors described above, Station Operating Income
decreased $12.6 million, or 24.1%, to $39.8 million for the six months ended June 30, 2009,
compared to $52.4 million for the six months ended June 30, 2008.
Reconciliation of Non-GAAP Financial Measure. The following table reconciles Station Operating
Income to operating income as presented in the accompanying condensed consolidated statements of
operations (the most directly comparable financial measure calculated and presented in accordance
with GAAP, dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six Months |
|
|
|
|
|
|
Ended June 30, |
|
Dollar Change |
|
Percent Change |
|
|
2009 |
|
2008 |
|
2009 vs. 2008 |
|
2009 vs. 2008 |
|
|
|
Operating income |
|
$ |
30,012 |
|
|
$ |
34,034 |
|
|
$ |
(4,022 |
) |
|
|
-11.8 |
% |
Depreciation and amortization |
|
|
5,715 |
|
|
|
6,421 |
|
|
|
(706 |
) |
|
|
-11.0 |
% |
LMA fees |
|
|
1,196 |
|
|
|
500 |
|
|
|
696 |
|
|
|
139.2 |
% |
Corporate general and administrative (including
non-cash stock compensation) |
|
|
10,067 |
|
|
|
9,555 |
|
|
|
512 |
|
|
|
5.4 |
% |
(Gain) on exchange of assets or stations |
|
|
(7,204 |
) |
|
|
|
|
|
|
(7,204 |
) |
|
|
-100.0 |
% |
Cost associated with terminated transaction |
|
|
|
|
|
|
1,893 |
|
|
|
(1,893 |
) |
|
|
-100.0 |
% |
|
|
|
Station operating income |
|
$ |
39,786 |
|
|
$ |
52,403 |
|
|
$ |
(12,617 |
) |
|
|
-24.1 |
% |
|
|
|
27
Liquidity and Capital Resources
Historically, our principal need for funds has been to fund the acquisition of radio stations,
expenses associated with our station and corporate operations, capital expenditures, repurchases of
our Class A Common Stock, and interest and debt service payments. In the short term, we expect that
our principal future need for funds will include the funding of station operating expenses,
corporate general and administrative expenses and interest and debt service payments. In addition,
in the long term, we expect that our funding needs will include future acquisitions and capital
expenditures associated with maintaining our station and corporate operations and implementing HD
Radio TM technology.
Our principal sources of funds for these requirements have been cash flow from operating activities
and borrowings under our credit facilities. Our cash flow from operations is subject to such
factors as shifts in population, station listenership, demographics or, audience tastes, and
fluctuations in preferred advertising media. In addition, customers may not be able to pay, or may
delay payment
of, accounts receivable that are owed to us. Management has taken steps to mitigate this risk
through heightened collection efforts and enhancing our credit approval process. As discussed
further below, borrowings under our senior secured credit facilities are subject to financial covenants that can
restrict our financial flexibility. Further, our ability to obtain additional equity or debt
financing is also subject to market conditions and operating performance. In
addition, pursuant to the June 2009 amendment to the Credit
Agreement, we are required to repay 100% Excess Cash Flow (as defined in the Credit Agreement) on a
quarterly basis beginning September 30, 2009 through December 31, 2010, while maintaining a minimum
balance of $7.5 million of cash on hand. We have assessed the implications of these factors on our
current business and determined, based on our financial condition as of June 30, 2009, that cash on
hand and cash expected to be generated from operating activities and, if necessary, financing
activities, will be sufficient to satisfy our anticipated financing needs for working capital,
capital expenditures, interest and debt service payments and potential acquisitions and repurchases
of securities and other debt obligations through June 30, 2010. However, given the uncertainty of
the markets cash flows and the impact of the current recession on guarantors, there can be no
assurance that cash generated from operations will be sufficient, or financing will be available at
terms, and on the timetable, that may be necessary to meet our future capital needs.
For the six months ended June 30, 2009, net cash provided by operating activities decreased $24.2
million to $12.0 million from net cash provided by operating activities of $36.2 million for the
six months ended June 30, 2008. The decrease was primarily
attributable to a $16.2 million decrease
in income from operations, a $15.0 million terminated transaction fee received in 2008, with the
remaining change primarily attributable to the timing of certain payments.
For the six months ended June 30, 2009, net cash used in investing activities decreased $3.7
million to $1.2 million from net cash used in investing activities of $4.9 million for the six
months ended June 30, 2008. The decrease is primarily due to a $2.8 million decrease in capital
expenditures and a $1.0 million decrease in the purchase of intangible assets.
For the six months ended June 30, 2009, net cash used in financing activities increased $40.1
million to $51.4 million compared to net cash used in financing activities of $11.3 million during
the six months ended June 30, 2008. The increase is primarily due to repayments of borrowings
outstanding under our credit facilities and bank amendment fees paid in conjunction with the bank
amendment finalized late in the quarter.
Consideration of Recent Economic Developments
The current economic crisis has reduced demand for advertising in general, including advertising on
our radio stations. In November 2008, Moodys credit rating agency downgraded our debt rating from
B2 to Caa. In consideration of current and projected market conditions, overall advertising is
expected to continue to decline. Therefore, in conjunction with the development of the 2009
business plan, management continues to assess the impact of recent market developments on a variety
of areas, including our forecasted advertising revenues and liquidity. In response to these
conditions, management refined the 2009 business plan to incorporate a reduction in forecasted 2009
revenues and cost reductions implemented in the fourth quarter 2008 and during the first six months
of 2009 to mitigate the impact of our anticipated decline in 2009 revenue.
Management believes that we will continue to be in compliance with all of our applicable debt
covenants through June, 30, 2010, based upon actions we have already taken, which include: (i) the
June 29, 2009 amendment to our Credit Agreement, the purpose of which was to provide certain
covenant relief through 2010 (see Senior Secured Credit Facilities), (ii) employee reductions
coupled with a mandatory one-week furlough during the second quarter of 2009, (iii) a new sales
initiative implemented during the
28
first quarter of 2009, the goal of which is to increase advertising revenues by re-engineering our
sales techniques through enhanced training of our sales force, and (iv) continued scrutiny of all
operating expenses. While several of these actions have immediate, measurable impacts on our
financial condition, others, like the sales initiative, are newly implemented, so we cannot
determine at this time if their impact will effectively reverse or
mitigate the revenue decline. However, we will continue to monitor
our revenues and cost structure closely and if revenues decline
greater than the forecasted decline from 2008 or if we exceed planned
spending, we may take further actions as needed in order to maintain
compliance with our debt covenants under the Credit Agreement. These
actions may include the implementation of additional operational
synergies, renegotiation of major vendor contracts, deferral of
capital expenditures, and sale of non-strategic assets.
Senior Secured Credit Facilities
On
June 29, 2009, we entered into an amendment to the Credit
Agreement with Bank of America, N.A., as administrative agent,
and the lenders party thereto.
As
amended, the Credit Agreement maintains the pre-existing term loan facility of $750 million, which has an
outstanding balance of approximately $647.9 million, and reduces the pre-existing revolving credit
facility from $100 million to $20 million. Incremental facilities are no longer permitted as of
June 30, 2009 under the Credit Agreement.
Our obligations under the Credit Agreement are collateralized by substantially all of our assets in
which a security interest may lawfully be granted (including FCC licenses held by our
subsidiaries), including, without limitation, intellectual property and all of the capital stock of
our direct and indirect subsidiaries, including Broadcast Software International, Inc., which was
formerly an excluded subsidiary. Our obligations under the Credit Agreement continue to be
guaranteed by all of our subsidiaries.
The Credit Agreement contains terms and conditions customary for financing arrangements of this
nature. The term loan facility will mature on June 11, 2014. The revolving credit facility will
mature on June 7, 2012.
Borrowings under the term loan facility and revolving credit facility will bear interest, at our
option, at a rate equal to LIBOR plus 4.00% or the Alternate Base Rate (defined as the higher of
the Bank of America Prime Rate and the Federal Funds rate plus 0.50%) plus 3.00%. Once we reduce
the term loan facility by $25 million through mandatory prepayments of Excess Cash Flow (as defined
in the Credit Agreement), as described below, borrowings will bear interest, at the our option, at
a rate equal to LIBOR plus 3.75% or the Alternate Base Rate plus 2.75%. Once we reduce the term
loan facility by $50 million through mandatory prepayments of Excess Cash Flow, as described below,
borrowings will bear interest, at our option, at a rate equal to LIBOR plus 3.25% or the Alternate
Base Rate plus 2.25%.
In connection with the closing of the Credit Agreement, we made a voluntary prepayment in the
amount of $32.5 million. We also will be required to make quarterly mandatory prepayments of 100%
of Excess Cash Flow beginning with the fiscal quarter ending September 30, 2009 and continuing
through December 31, 2010, before reverting to annual prepayments of a percentage of Excess Cash
Flow, depending on our leverage, beginning in 2011. Certain other mandatory prepayments of the term
loan facility will be required upon the occurrence of specified events, including upon the
incurrence of certain additional indebtedness and upon the sale of certain assets.
The representations, covenants and events of default in the Credit Agreement are customary for
financing transactions of this nature and are substantially the same as those in existence prior to
the amendment, except as follows:
|
|
|
the total leverage ratio and fixed charge coverage ratio covenants for the fiscal
quarters ending June 30, 2009 through and including December 31, 2010 (the Covenant
Suspension Period) have been suspended; |
|
|
|
|
during the Covenant Suspension Period, we must: (1) maintain minimum trailing twelve
month consolidated EBITDA (as defined in the Credit Agreement) of $60 million for fiscal
quarters ended June 30, 2009 through March 31, 2010, increasing incrementally to $66
million for fiscal quarter ended December 31, 2010, subject to certain adjustments; and (2)
maintain minimum cash on hand (defined as unencumbered consolidated cash and cash
equivalents) of at least $7.5 million; |
|
|
|
|
We are restricted from incurring additional intercompany debt or making any intercompany
investments other than to the parties to the Credit Agreement; |
|
|
|
|
We may not incur additional indebtedness or liens, or make permitted acquisitions or
restricted payments, during the Covenant Suspension Period. (after the Covenant Suspension
Period, the Credit Agreement will permit indebtedness, liens, permitted acquisitions and
restricted payments, subject to certain leverage ratio and liquidity measurements); and |
|
|
|
|
We must provide monthly unaudited financial statements to the lenders within 30 days
after each calendar-month end. |
Events of default in the Credit Agreement include, among others, (a) the failure to pay when due
the obligations owing under the credit facilities; (b) the failure to perform (and not timely
remedy, if applicable) certain covenants; (c) cross default and cross acceleration; (d) the
occurrence of bankruptcy or insolvency events; (e) certain judgments against us or any of our
subsidiaries; (f) the loss, revocation or suspension of, or any material impairment in the ability
to use of or more of, any of our material FCC licenses; (g) any representation or warranty made, or
report, certificate or financial statement delivered, to the lenders subsequently proven to have
been incorrect in any material respect; and (h) the occurrence of a Change in Control (as defined
in the Credit Agreement). Upon
29
the occurrence of an event of default, the lenders may terminate the loan commitments, accelerate all
loans and exercise any of their rights under the Credit Agreement and the ancillary loan documents
as a secured party.
As discussed above, our covenants for period ended June 30, 2009 are as follows:
|
|
|
a minimum trailing twelve month consolidated EBITDA |
|
|
|
|
a $7.5 million minimum cash on hand and; |
|
|
|
|
a limit on annual capital expenditures |
The trailing twelve month consolidated EBITDA and cash on hand at June 30, 2009 were $78.4 million
and $12.4 million, respectively.
Management believes the Company will continue to be in compliance with all of its debt covenants
through at least June 30, 2010 based upon actions taken as
discussed in Consideration of
Recent Economic Developments. Although we were able to obtain the amendment to Credit Agreement
that provided relief with regard to certain restrictive covenants,
including the fixed charge coverage ratio and total leverage ratio, there can be no assurance that we will be able to obtain
an additional waiver or amendment to, or refinancing of, the Credit Agreement should additional
waivers, amendments or refinancings become necessary to remain in compliance with our covenants in
the future. In the event we do not maintain compliance with the applicable covenants under the
Credit Agreement, the lenders could declare an event of default, subject to applicable notice and
cure provisions. Failure to comply with the financial covenants or other terms of the Credit
Agreement and failure to negotiate relief from the 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.
If we were unable to repay our debt when due, the lenders under the credit facilities could proceed
against the collateral granted to them to secure that indebtedness. We have pledged substantially
all of our assets as collateral under the Credit Agreement. If the lenders accelerate the maturity
of outstanding debt, we may be forced to liquidate certain assets to repay all or part of such
debt, and we cannot be assured that sufficient assets will remain after we have paid all of our
debt. The ability to liquidate assets is affected by the regulatory restrictions associated with
radio stations, including FCC licensing, which may make the market for these assets less liquid and
increase the chances that these assets will be liquidated at a significant loss.
At June 30, 2009, our market capitalization had decreased approximately 19% as compared to our
market capitalization at December 31, 2008, to approximately 76% below our implied equity.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with accounting principles generally accepted
in the United States of America requires us to make estimates and judgments that affect the
reported amounts of assets, liabilities, revenues and expenses, and related disclosure of
contingent assets and liabilities. On an on-going basis, our management, in consultation with the
Audit Committee of our Board, evaluates these estimates, including those related to bad debts,
intangible assets, income taxes, and contingencies and litigation. We base our estimates on
historical experience and on various 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 apparent from other sources. Actual results may
differ from these estimates under different assumptions or conditions. We believe the following
critical accounting policies affect our more significant judgments and estimates used in the
preparation of our consolidated financial statements.
Revenue
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 and collection is reasonably assured. These criteria are generally met at the
time an advertisement is broadcast.
Allowance
for Doubtful Accounts
We maintain allowances for doubtful accounts for estimated losses resulting from the inability of
our customers to make required payments. We determine the allowance based on historical write-off
experience and trends. We review our allowance for doubtful accounts monthly. All past due balances
are reviewed for collectability, particularly those over 120 days. Account balances are charged off
against the allowance after all means of collection have been exhausted and the potential for
recovery is considered remote. Although our management believes that the allowance for doubtful
accounts is our best estimate of the amount of probable credit losses, if the financial condition
of our customers were to deteriorate, resulting in an impairment of their ability to make payments,
additional allowances may be required.
30
Intangible Assets
We have significant intangible assets recorded in our accounts. These intangible assets are
comprised primarily of broadcast licenses and goodwill acquired through the acquisition of radio
stations. SFAS No. 142, Goodwill and other Intangible Assets, requires that the carrying value of
our goodwill and certain intangible assets be reviewed at least annually for impairment and charged
to results of operations in the periods in which the recorded value of those assets is more than
their fair market value. For the six months ended June 30, 2009
and 2008, we recorded impairment
charges of $0.0 million, respectively, and for the year ended December 31, 2008, we recorded
impairment charges of approximately $498.9 million, in each case in order to reduce the carrying
value of certain broadcast licenses and goodwill to their respective fair market values. As of June
30, 2009, we had $393.5 million in intangible assets and goodwill, which represented approximately
78% of our total assets.
Generally, we perform our annual impairment tests for goodwill and indefinite-lived intangibles
under SFAS No. 142 as of December 31. The annual impairment tests require us to make certain
assumptions in determining fair value, including assumptions about the cash flow growth rates of
our businesses. Additionally, the fair values are significantly impacted by macro-economic factors,
including market multiples at the time the impairment tests are performed. In light of the overall
economic environment, we continue to monitor whether any impairment triggers are present and may be
required to record material impairment charges prior to the fourth quarter of 2009. More specifically, the following could adversely impact the current
carrying value of our broadcast licenses and goodwill: (a) sustained decline in the price of our
common stock, (b) the potential for a decline in our forecasted operating profit margins or
expected cash flow growth rates, (c) a decline in our industry forecasted operating profit margins,
(d) the potential for a continued decline in advertising market revenues within the markets we
operate stations, or (e) the sustained decline in the selling prices of radio stations.
Goodwill
In performing our annual impairment testing of goodwill, we first calculate the fair value of each
reporting unit using an income approach and discounted cash flow methodology. As part of our
overall planning associated with the testing of goodwill, we determined that our markets are the
appropriate unit of accounting for our broadcast license impairment
testing. We then perform the
Step 1 test as dictated by FAS 142 and compare the fair value of each market to its book net
assets as of December 31, 2008. For markets where a Step 1 indicator of impairment exists, we then
performed the Step 2 test in order to determine if goodwill is impaired on any of our markets.
Consistent with prior years, we employ a ten-year discounted cash-flow methodology to arrive at the
fair value for each of our markets. In calculating the fair value, we first derive the stand
alone projected ten-year cash flows for each market. This process starts with the projected cash
flows of each of our markets. These cash flows are then discounted or adjusted to account for
expenses or investments that are not accumulated in each markets results.
We then determined that, based on our Step 1 goodwill test, the fair value of 5 of our 17 markets
containing goodwill balances, exceeded their adjusted net assets value. Accordingly, as no
impairment indicator existed and as the implied fair value of goodwill did not appear to exceed its
carrying value in these markets, we determined that goodwill was appropriately stated, as of
December 31, 2008.
However, in 12 markets, our Step 1 comparison of the fair value of the market to its adjusted net
assets value yielded an excess of carrying amount to fair value and, thus, an indication of
impairment. For purposes of this Step 1 analysis, we also included markets that were we perceived
as being on the bubble. These markets had an excess fair value ranging from $129,000 to $1.8
million. We noted that due to the subjectivities and sensitivities inherent in the calculations and
subsequent analysis that these markets should be subjected to Step 2 impairment testing in order to
measure the potential impairment loss.
In accordance with FAS 142, for any market where an impairment indicator existed as a result of
conducting the Step 1 test, we performed the Step 2 test to measure the amount, if any, of
impairment loss related to goodwill.
As required by the Step 2 test, we prepared an allocation of the fair value of the market as if the
market was acquired in a business combination. The presumed purchase price utilized in the
calculation is the fair value of the market determined in the Step 1 test. The results of our Step
2 test and the calculated impairment charge follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reporting Unit |
|
|
Implied Goodwill |
|
|
12-31-08 Goodwill |
|
|
|
|
Market ID |
|
Fair Value |
|
|
Value |
|
|
Carrying Value |
|
|
Impairment |
|
|
Market 7 |
|
$ |
7,189 |
|
|
$ |
3,827 |
|
|
$ |
4,303 |
|
|
$ |
476 |
|
Market 8 |
|
|
11,293 |
|
|
|
3,726 |
|
|
|
5,295 |
|
|
|
1,569 |
|
Market 17 |
|
|
5,640 |
|
|
|
3,447 |
|
|
|
2,450 |
|
|
|
|
|
Market 18 |
|
|
3,050 |
|
|
|
1,672 |
|
|
|
2,080 |
|
|
|
408 |
|
Market 26 |
|
|
5,425 |
|
|
|
2,860 |
|
|
|
2,068 |
|
|
|
|
|
Market 35 |
|
|
10,912 |
|
|
|
1,150 |
|
|
|
1,715 |
|
|
|
565 |
|
Market 36 |
|
|
8,309 |
|
|
|
712 |
|
|
|
5,907 |
|
|
|
5,195 |
|
Market 37 |
|
|
21,277 |
|
|
|
11,742 |
|
|
|
11,512 |
|
|
|
|
|
Market 48 |
|
|
12,699 |
|
|
|
1,478 |
|
|
|
8,099 |
|
|
|
6,621 |
|
Market 51 |
|
|
12,508 |
|
|
|
4,284 |
|
|
|
5,255 |
|
|
|
971 |
|
Market 52 |
|
|
21,176 |
|
|
|
|
|
|
|
21,437 |
|
|
|
21,437 |
|
Market 55 |
|
|
11,066 |
|
|
|
|
|
|
|
2,168 |
|
|
|
2,168 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
39,410 |
|
The following table provides a breakdown of our goodwill balances as of December 31, 2008, by
market:
31
|
|
|
|
|
Market ID |
|
Goodwill Balance |
|
|
Market 7 |
|
$ |
3,827 |
|
Market 8 |
|
|
3,726 |
|
Market 17 |
|
|
2,450 |
|
Market 18 |
|
|
1,672 |
|
Market 26 |
|
|
2,068 |
|
Market 35 |
|
|
1,150 |
|
Market 36 |
|
|
712 |
|
Market 37 |
|
|
11,512 |
|
Market 48 |
|
|
1,478 |
|
Market 51 |
|
|
4,284 |
|
Market 52 |
|
|
|
|
Market 55 |
|
|
|
|
Market 11 |
|
|
13,847 |
|
Market 27 |
|
|
1,929 |
|
Market 30 |
|
|
5,684 |
|
Market 56 |
|
|
2,586 |
|
Market 57 |
|
|
1,966 |
|
|
|
|
|
|
|
$ |
58,891 |
|
To validate our conclusions and determine the reasonableness of our impairment charge related to
goodwill, we performed the following:
|
|
|
conducted an overall reasonableness check of our fair value calculations by
comparing the aggregate, calculated fair value of our markets to our market
capitalization as of December 31, 2008; |
|
|
|
|
prepared a market fair value calculation using a multiple of Adjusted EBITDA as a
comparative data point to validate the fair values calculated using our discounted
cash-flow approach; |
|
|
|
|
reviewed the historical operating performance of each market with impairment; |
|
|
|
|
reviewed the facts surrounding our acquisition of the impaired market, including
original, implied acquisition Station Operating Income multiple; and |
|
|
|
|
performed a sensitivity analysis on the overall fair value and impairment evaluation. |
The discount rate we employed in our market fair value calculation was 13.0%. We believe that the
13.0% is accurate for goodwill purposes due to the resulting 6.8 times exit multiple ( i.e.
equivalent to the terminal value).
Post 2009, we project revenue growth to be 2.6% and fixed operating expense to increase 1.5% with
variable expense increasing 2.6% (in line with the revenue increase). These variables result in
Station Operating Income increasing by approximately 40 basis points each year. Based on current
market and economic conditions and our historical knowledge of the markets, we are comfortable with
the ten year forecast of Station Operating Income by market.
We derived projected expense growth based primarily on our historical experience and expected
future revenue growth. We projected growth for each markets fixed expense base at approximately
1.5% annually. We calculated variable selling expenses based on revenues and at a rate consistent
with current experience for each market, which resulted in an approximate growth rate projection of
2.6% through 2018.
For purposes of our fair value model, we have uniformly applied one discount rate to all markets.
As compared with the market capitalization value of $594.3 million as of December 31, 2008, the
aggregate fair value of all markets of $598.4 million was approximately $4.0 million, or 0.69%,
higher than as calculated.
Key data points included in the market capitalization calculation were as follows:
|
|
|
Shares outstanding as of 12/31: 41.4 million; |
32
|
|
|
Average closing price of our Class A Common Stock over
32 days: $2.00 per share; and |
|
|
|
|
Debt discounted by 26% (gross $696.0 million, net
$515.0 million). |
Based on these calculations, we have concluded that the markets are receiving a slight control
premium over the calculated enterprise value.
Utilizing the above analysis and data points, we have concluded the fair values of our markets, as
calculated, are appropriate and reasonable.
Changes to the Assumptions and Methodologies
We have also discounted projected cash flows for each market for a projected working capital
adjustment. This adjustment was based on actual 2008 working capital requirements and allocated to
each market based on percentage of revenue. Thus, as revenue decreased, working capital
requirements decreased and as revenue increased, working capital requirements increased.
As previously noted, the basis used for markets did not change and there were no other changes to
methodologies in the current year other than the one described above.
Impact of Current Economic Environment on the Analysis
The current economic crisis has reduced demand for advertising in general, including advertising on
our radio stations. As such, revenue projections for the industry were down, which impacted our
calculation by virtue of reducing our future cash flows, resulting in a proportionate reduction in
our discounted cash-flow valuation. Likewise, the combination of a decline in current revenues and
future projected revenues coupled with frozen capital markets have contributed significantly to a
decline in deals to acquire or sell companies within the industry, the result of which has been a
compression in the multiples on the radio station transactions that have been completed in the past
year. In the aggregate, these recent economic developments have resulted in significant downward
pressures on valuations across the radio industry as a whole. Therefore, since we are a company
that has experienced significant synthetic growth at historically greater multiples than those
currently utilized in our valuation model, we are experiencing relatively large write-downs
associated with our impairment calculation.
FCC Licenses
Consistent with EITF 02-07, we have combined all of the broadcast licenses within a single market
cluster into a single unit of accounting for impairment testing purposes. As part of our overall
planning associated with the indefinite lived intangibles test, we determined that our markets are
the appropriate unit of accounting for our broadcast license
impairment testing. We note that the
following considerations, as cited by the EITF task force, continue to apply to our FCC licenses:
|
|
|
in each market, the broadcast licenses were purchased to be used as one combined asset; |
|
|
|
|
the combined group of licenses in a market represents the highest and best use of the assets;
and |
|
|
|
|
each markets strategy provides evidence that the licenses are complementary. |
For the annual impairment test of broadcast license, we engaged an independent valuation expert as
opposed to performing this analysis in-house as has been done in previous years. In connection with
engaging the valuation expert, we reviewed the valuation experts prior experience and capabilities
in order to verify that the valuation expert was adequately qualified to perform radio appraisals.
Likewise, we reviewed the methodologies employed by the valuation expert in conducting tangible
asset, broadcast license and radio market valuations for reasonableness.
The valuation expert employed the three most widely accepted approaches in conducting its
appraisals: (1) the cost approach, (2) the market approach, and (3) the income approach. In
conducting the appraisals, the valuation expert conducted a thorough review of all aspects of the
assets being valued.
The cost approach measures value by determining the current cost of an asset and deducting for all
elements of depreciation (i.e., physical deterioration as well as functional and economic
obsolescence). In its simplest form, the cost approach is calculated by subtracting all
depreciation from current replacement cost.
The market approach measures value based on recent sales and offering prices of similar properties
and analyzes the data to arrive at an indication of the most probable sales price of the subject
property.
The income approach measures value based on income generated by the subject property, which is then
analyzed and projected over a specified time and capitalized at an appropriate market rate to
arrive at the estimated value.
33
The valuation expert relied on both the income and market approaches for the valuation of the FCC
licenses, with the exception of certain AM and FM stations that have been valued using the cost
approach. The valuation expert estimated this replacement value based on estimated legal,
consulting, engineering, and in-house charges to be $25,000 for each FM station. For each AM
station the replacement cost was estimated at $25,000 for a station licensed to operate with a
one-tower array and an additional charge of $10,000 for each additional tower in the stations
tower array.
The estimated fair values of the FCC licenses represent the amount at which an asset (or liability)
could be bought (or incurred) or sold (or settled) in a current transaction between willing parties
( i.e. other than in a forced or liquidation sale).
A basic assumption in our valuation of these FCC licenses was that these radio stations were new
radio stations, signing on-the-air as of the date of the valuation, December 31, 2008. We assumed
the competitive situation that existed in those markets as of that date, except that these stations
were just beginning operations. In doing so, we extract the value of going concern and any other
assets acquired, and strictly valued the FCC licenses.
We estimated the values of the AM and FM licenses, combined, through a discounted cash flow
analysis, which is an income valuation approach. In addition to the income approach, the valuation
expert also reviewed recent similar radio station sales in similarly sized markets.
In estimating the value of the AM and FM licenses using a discounted cash flow analysis, in order
to make the net free cash flow (to invested capital) projections, we began with market revenue
projections. We made assumptions about the stations future audience shares and revenue shares in
order to project the stations future revenues. We then projected future operating expenses and
operating profits derived. By combining these operating profits with depreciation, taxes, additions
to working capital, and capital expenditures, we projected net free cash flows.
We discounted the net free cash flows using an appropriate after-tax average weighted cost of
capital of approximately 11.5% and then calculated the total discounted net free cash flows. For
net free cash flows beyond the projection period, we estimated a perpetuity value, and then
discounted to present values, as of the valuation date.
We performed one discounted cash flow analysis for each market. For each market valued we analyzed
the competing stations, including revenue and listening shares for the past several years. In
addition, for each market we analyzed the discounted cash flow valuations of our assets within the
market. Finally, we prepared a detailed analysis of sales of comparable stations.
The first discounted cash flow analysis examined historical and projected gross radio revenues for
each market.
In order to estimate what listening audience share and revenue share would be expected for each
station by market, we analyzed the Arbitron audience estimates over the past two years to determine
the average local commercial share garnered by similar AM and FM stations competing in those radio
markets. Often we made adjustments to the listening share and revenue share based on our stations
signal coverage of the market and the surrounding areas population as compared to the other
stations in the market. Based on our knowledge of the industry and familiarity with similar
markets, we determined that approximately three years would be required for the stations to reach
maturity.
We also incorporated the following additional assumptions into the DCF valuation model:
|
|
|
the stations gross revenues through 2016; |
|
|
|
|
the projected operating expenses and profits over the same period of
time (we considered operating expenses, except for sales expenses, to
be fixed, and assumed sales expenses to be a fixed percentage of
revenues); |
|
|
|
|
calculations of yearly net free cash flows to invested
capital; |
|
|
|
|
depreciation on start-up construction costs and capital expenditures
(we calculated depreciation using accelerated double declining balance
guidelines over five years for the value of the tangible assets
necessary for a radio station to go on-the-air); and |
|
|
|
|
amortization of the intangible assetthe FCC License (we calculated
amortization on a straight line basis over 15 years). |
In addition, we performed the following sensitivity analyses to determine the impact of a 1% change
in certain variables contained within the impairment model:
|
|
|
Assumption Change |
|
Result |
|
1% decline in revenue
|
|
Approximately $99.0 M increase in license impairment |
1% decline in SOI
|
|
Approximately $17.1 M increase in license impairment |
1% increase in discount rate
|
|
Approximately $48.9 M increase in license impairment |
The following sensitivity analysis highlights our markets that were not impaired at December 31,
2008 and applies a hypothetical 10%, 15%, or 20% decrease in the fair value of our broadcast licenses:
34
$ Change in Excess (Deficit) Based on % Decreases in Fair Value of Broadcast
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008 |
|
Licenses |
Market ID |
|
Carrying Value |
|
Market Value |
|
Excess/(Deficit) |
|
10% |
|
15% |
|
20% |
|
Market 1 |
|
|
1,473,333 |
|
|
|
2,139,827 |
|
|
|
666,494 |
|
|
|
452,511 |
|
|
|
345,520 |
|
|
|
238,528 |
|
Market 3 |
|
|
1,810,969 |
|
|
|
2,532,261 |
|
|
|
721,292 |
|
|
|
468,066 |
|
|
|
341,453 |
|
|
|
214,839 |
|
Market 27 |
|
|
7,268,649 |
|
|
|
7,460,786 |
|
|
|
192,137 |
|
|
|
(553,942 |
) |
|
|
(926,981 |
) |
|
|
(1,300,020 |
) |
Market 33 |
|
|
5,578,997 |
|
|
|
6,705,218 |
|
|
|
1,126,221 |
|
|
|
455,699 |
|
|
|
120,438 |
|
|
|
(214,823 |
) |
Market 38 |
|
|
3,016,628 |
|
|
|
3,811,405 |
|
|
|
794,777 |
|
|
|
413,637 |
|
|
|
223,067 |
|
|
|
32,496 |
|
Market 44 |
|
|
3,343,140 |
|
|
|
5,117,679 |
|
|
|
1,774,539 |
|
|
|
1,262,771 |
|
|
|
1,006,887 |
|
|
|
751,003 |
|
Market 48 |
|
|
7,897,423 |
|
|
|
9,126,587 |
|
|
|
1,229,164 |
|
|
|
316,506 |
|
|
|
(139,824 |
) |
|
|
(596,153 |
) |
Market 55 |
|
|
21,953,907 |
|
|
|
35,872,186 |
|
|
|
13,918,279 |
|
|
|
10,331,060 |
|
|
|
8,537,451 |
|
|
|
6,743,842 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Excess (Deficit) Impairment |
|
|
|
|
|
|
|
|
|
|
13,146,308 |
|
|
|
9,508,010 |
|
|
|
5,869,713 |
|
|
After federal and state taxes are subtracted, net free cash flows were reduced for working capital.
According to recent editions of Risk Management Associations Annual Statement Studies , over the
past five years, the typical radio station has an average ratio of sales to working capital of
7.56. In other words, approximately 13.2% of a typical radio stations sales go to working capital.
As a result, we have allowed for working capital in the amount of 13.2% of the stations
incremental net revenues for each year of the projection period. After subtracting federal and
state taxes and accounting for the additions to working capital, we determined net free cash flows.
In connection with the elimination of amortization of broadcast licenses upon the adoption of SFAS
No. 142, the reversal of our deferred tax liabilities relating to those intangible assets is no
longer assured within our net operating loss carry-forward period. We have a valuation allowance of
approximately $229.1 million as of June 30, 2009 based on our assessment of whether it is more
likely than not these deferred tax assets will be realized. Should we determine that we would be
able to realize all or part of our net deferred tax assets in the future, reduction of the
valuation allowance would be recorded in income in the period such determination was made.
Stock-based Compensation
Stock-based compensation expense recognized under SFAS No. 123(R), Share-Based Payment, for the
three and six months ended June 30, 2009 and 2008, was $0.6 million, $0.9 million, $1.2 million and,
$2.9 million, respectively, before income taxes. Upon adopting SFAS No. 123(R), for awards with
service conditions, a one-time election was made to recognize stock-based compensation expense on a
straight-line basis over the requisite service period for the entire award. For options with
service conditions only, we utilized the Black-Scholes option pricing model to estimate fair value
of options issued. For restricted stock awards with service conditions, we utilized the intrinsic
value method. For restricted stock awards with performance conditions, we have evaluated the
probability of vesting of the awards at each reporting period and have adjusted compensation cost
based on this assessment. 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.
35
Item 3. Quantitative and Qualitative Disclosures about Market Risk
At June 30, 2009 38.3% of our long-term debt bears interest at variable rates. Accordingly, our
earnings and after-tax cash flow are affected by changes in interest rates. Assuming the current
level of total borrowings and assuming a one percentage point change in the average interest rate
under these borrowings, it is estimated that our interest expense and net income would have changed
by $1.6 million and $3.2 million for the three and six months ended June 30, 2009. As part of our
efforts to mitigate interest rate risk, in May 2005, we entered into a forward starting interest
rate swap agreement that effectively fixed the interest rate, based on LIBOR, on $400.0 million of
our current floating rate bank borrowings for a three-year period commencing March 2006. This
agreement is intended to reduce our exposure to interest rate fluctuations and was not entered into
for speculative purposes. Segregating the $247.9 million from the effective interest rate schedule
of borrowings outstanding at June 30, 2009 that are not subject to the interest rate swap, and
assuming a one percentage point change in the average interest rate under the remaining borrowings,
it is estimated that our interest expense and net income would have changed by $.6 million and $1.2
million for the three and six months ended June 30, 2009,
respectively.
In the event of an adverse change in interest rates, management would likely take actions, in
addition to the interest rate swap agreement similar to that discussed above, to further mitigate
its exposure. However, due to the uncertainty of the actions that would be taken and their possible
effects, additional analysis is not possible at this time. Further, such analysis could not take
into account the effects of any change in the level of overall economic activity that could exist
in such an environment.
Item 4. Controls and Procedures
We maintain a set of disclosure controls and procedures designed to ensure that information we are
required to disclose in reports that we file or submit under the Securities Exchange Act of 1934 is
recorded, processed, summarized and reported within the time periods specified in Securities and
Exchange Commission rules and forms. At the end of the period covered by this report, an evaluation
was carried out under the supervision and with the participation of our management, including our
Chairman, President and Chief Executive Officer (CEO) and our Executive Vice President, Treasurer
and Chief Financial Officer (CFO), of the effectiveness of our disclosure controls and
procedures. Based on that evaluation, the CEO and CFO have concluded that, as a result of the
previously disclosed material weakness in our internal control over financial reporting described
in our annual report on Form 10-K for the year ended December 31, 2008 and further described below,
our disclosure controls and procedures were not effective as of June 30, 2009. Because we believe
that the maintenance of reliable financial reporting is a prerequisite to our ability to submit or
file complete disclosures in our Exchange Act reports on a timely basis, our management determined
that the material weakness caused our disclosure controls and procedures to not be effective.
In connection with the preparation and completion of our 2008 annual financial statements, we
identified the following material weakness in the Companys internal control over financial
reporting as of December 31, 2008:
We did not maintain a sufficient complement of personnel with the level of financial accounting
technical expertise necessary to facilitate an effective review of certain corporate accounting
transactions. As a result of this deficiency, we did not timely identify a computational error
related to the SFAS 157 mark-to-market adjustment on the Companys interest rate swap instrument.
This deficiency resulted in an adjustment identified by our independent registered public
accounting firm to the consolidated financial statements as of December 31, 2008 to correct an
overstatement of interest expense and accrued liabilities. Additionally, this control deficiency
could result in misstatements that would result in a material misstatement of the consolidated
financial statements that would not be prevented or detected. Accordingly, we determined that this
control deficiency constitutes a material weakness.
Changes in Internal Control over Financial Reporting
We have
begun efforts to remediate the material weakness described above. The
remediation measures we have begun include the improvement of the design of certain internal
controls related to the analysis and review of significant or non-routine transactions accounted for at
the corporate level and the engagement of an outside expert to assist us with the
accounting for complex or unusual corporate accounting transactions on an as needed basis. We have
begun to implement all of these remedial measures with the objective of fully remediating the
material weakness by December 31, 2009. Other than as described above, there were no changes in our internal control over financial reporting during the quarter ended
June 30, 2009 that have materially affected, or are reasonably likely to materially affect, our
internal control over financial reporting.
36
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
As previously reported, in our annual report on Form 10-K for the year ended December 31, 2008, we
are aware of two active purported class action lawsuits related to the proposed acquisition of us
that was announced in July 2007 but terminated in May 2008: Jeff Michelson, on behalf of himself and all
others similarly situated v. Cumulus Media Inc., et al. (Case No. 2007CV137612, filed July 27,
2007) was filed in the Superior Court of Fulton County, Georgia against us, Lew Dickey, the other
directors and the sponsor; and Paul Cowles v. Cumulus Media Inc., et al. (Case No. 2007-CV-139323,
filed August 31, 2007) was filed in the Superior Court of Fulton County, Georgia against us, Lew
Dickey, our directors and the sponsor.
The complaints in the two lawsuits made similar allegations initially, but on June 25, 2008
and July 11, 2008, respectively, plaintiffs in the Georgia lawsuits filed amended complaints,
alleging, among other things, entirely new state law claims, including breach of fiduciary duty,
aiding and abetting a breach of fiduciary duty, abuse of control, gross mismanagement, corporate
waste, unjust enrichment, rescission and accounting. The amended complaints further allege, for the
first time, misrepresentations or omissions in connection with our purchase or sale of securities.
The amended complaints seek, among other relief, damages on behalf of the putative class.
We believe that we have committed no disclosure violations or any other breaches or violations
whatsoever, including in connection with the terminated acquisition transaction. In addition, we
have been advised that the other defendants named in the complaints similarly believe the
allegations of wrongdoing in the complaints to be without merit, and deny any breach of duty to or
other wrongdoing with respect to the purported plaintiff classes.
With respect to the two lawsuits, defendants removed them to the U.S. District Court for the
Northern District of Georgia on July 17, 2008 and filed motions to dismiss both cases on July 24,
2008. In August 2008, plaintiffs moved to remand the cases back to state court. On February 6,
2009, the U.S. District Court remanded both class action lawsuits, as well as the pending motion to
dismiss, to the Supreme Court of Fulton County, Georgia.
On April 15, 2009, the Superior Court consolidated the two lawsuits into a single action
styled, In re Cumulus Media Inc. Shareholder and Derivative Litigation, Civil Action No.:
2007-CV-137612. On May 13, 2009, the Superior Court issued an Order granting with prejudice
defendants motion to dismiss plaintiffs derivative claims.
On July 1, 2009, defendants filed a motion for judgment on the pleadings, seeking dismissal
and judgment as to the remainder of plaintiffs complaint, arguing that plaintiffs class claims,
while framed as direct claims brought on behalf of a putative class of our stockholders, were in
fact derivative in nature, and should therefore be dismissed for failure to make pre-suit demand or
to otherwise demonstrate demand futility, consistent with the Superior Courts May 13, 2009 order.
On July 23, 2009, in lieu of filing a response to defendants motion for judgment on the pleadings,
plaintiffs filed, with defendants consent, a motion seeking to voluntarily dismiss without
prejudice the remainder of their complaint, namely the purported direct claims asserted on behalf
of a putative class of our stockholders. On July 28, 2009, the Court granted plaintiffs motion,
thereby dismissing without prejudice all remaining claims in plaintiffs complaint. The Court also
deemed the May 13, 2009 Order to be a final order under O.C.G.A. Sec. 9-11-54(a), thereby
terminating the litigation. No payments or other compensation was made to plaintiffs or their
counsel in exchange for their agreement to discontinue without prejudice the remaining claims
against defendants.
In April, we were named in a patent infringement suit brought against us as well as twelve
other radio companies, including Clear Channel Communications, Citadel Broadcasting, CBS Radio,
Entercom Communications, Saga Communications, Cox Radio, Univision Communications, Regent
Communications, Gap Broadcasting, and Radio One. The case, captioned Aldav, LLC v. Clear Channel Communications, Inc., et al, Civil Action No.
6:09-cv-170, U.S. District Court for the Eastern District of Texas, Tyler Division (filed April 16,
2009), alleges that the defendants have infringed and continue to infringe plaintiffs patented
content replacement technology in the context of radio station streaming over the Internet, and
seeks a permanent injunction and unspecified damages. We believe the claims are without merit and
are vigorously defending this lawsuit.
From time to time, we are involved in various other legal proceedings that are handled and defended
in the ordinary course of business. While we are unable to predict the outcome of these matters,
our management does not believe, based upon currently available facts, that the ultimate resolution
of any such proceedings would have a material adverse effect on our overall financial condition or
results of operations.
Item 1A. Risk Factors
In addition to the risk factors set forth below, please refer to Part I, Item 1A, Risk Factors,
in our annual report on Form 10-K for the year ended December 31, 2008, and Part II, Item 1A, Risk
Factors, in our quarterly report on Form 10-Q for the period ended March 31, 2009, for information regarding
factors that could affect our results of operations, financial condition and liquidity.
If we cannot continue to comply with the financial covenants in our debt instruments, or obtain
waivers or other relief from our lenders, we may default, which could result in loss of our sources
of liquidity and acceleration of our indebtedness.
We have a substantial amount of indebtedness, and the instruments governing such indebtedness
contain restrictive financial covenants. We may not be able to meet these restrictive financial
covenants and may not be able to maintain compliance with certain financial covenants required to
be complied with under our Credit Agreement. In that event, we would need to seek an amendment to,
or a refinancing of, the senior secured credit facilities. There can be no assurance that we can
obtain any amendment or waiver of, or refinance the senior secured credit facilities and, even if
so, it is likely that such relief would only last for a specified period, potentially necessitating
additional amendments, waivers or refinancings in the future. In the event that we do not maintain
compliance with the covenants under the Credit Agreement, the lenders could declare an event of
default, subject to applicable notice and cure provisions, resulting in a material adverse impact
on our financial position. Upon the occurrence of an event of default under the Credit Agreement,
the lenders could elect to declare all amounts outstanding under the senior secured credit
facilities to be immediately due and payable and terminate all commitments to extend further
credit. If we were unable to repay those amounts, the lenders under the credit facilities could
proceed against the collateral granted to them to secure that indebtedness. We have pledged
substantially all of our assets as collateral under the Credit Agreement. If the lenders accelerate
the repayment of borrowings, we may be forced to liquidate certain assets to repay all or part of
the senior secured credit facilities, and we cannot be assured that sufficient assets will remain
after it has paid all of the borrowings under the senior secured credit facilities. The ability to
liquidate assets is affected by the regulatory restrictions associated with radio stations,
including FCC licensing, which may make the market for these assets less liquid and increase the
chances that these assets will be liquidated at a significant loss.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
On May 21, 2008, our Board of Directors authorized the purchase, from time to time, of up to $75.0
million of our Class A Common Stock, subject to the terms of the Credit Agreement and compliance
with other applicable legal requirements. During the three months
ended June 30, 2009, we did not purchase any shares of our Class
A Common Stock.
37
In connection with the amendment to the Credit Agreement, on June 29, 2009 the lenders consenting
to the amendment (the Consenting Lenders) received warrants (the Warrants), exercisable within
ten years, to acquire an aggregate of up to approximately 1.24 million shares of our Class A common stock. The
Warrants were issued in a private transaction exempt from the registration requirements of the
Securities Act of 1933 (the Securities Act), pursuant to Section 4(2) thereof, and have not been
registered under the Securities Act or any state securities laws. Therefore, the Warrants (and the
common stock underlying the Warrants) may not be offered or sold in the United States absent
registration or an applicable exemption from the registration requirements of the Securities Act
and any applicable state securities laws.
In connection with the issuance of the Warrants, on June 29, 2009, we entered into a Warrant
Agreement, with Lewis W. Dickey, Jr., our Chairman, President and Chief Executive Officer, John W.
Dickey, our Executive Vice President and Co-Chief Operating Officer, Lewis W. Dickey, Sr., Michael
W. Dickey, David W. Dickey, the Lewis W. Dickey Revocable Trust and DBBC, LLC (collectively, the
Dickey Family), and the Consenting Lenders thereto (the Warrant Agreement). Pursuant to the
Warrant Agreement, each Warrant is immediately exercisable to purchase all or part of the number of
shares of the Companys Class A Common Stock underlying such Warrant, at an exercise price of $1.17
per share. The Warrants will expire on June 29, 2019. The Warrants will have appropriate
adjustments for stock splits, stock dividends and other recapitalization events.
Pursuant to the Warrant Agreement, holders of the Warrants are also entitled to (i) cashless
exercise of the Warrants; (ii) certain tag-along rights to participate pro-rata in any sale,
transfer or disposition to the Company or a third party (other than permitted transferees) of 50%
or more of the Class A common stock owned by the Dickey Family as of the date of the Warrant
Agreement; and (iii) certain registration rights if Rule 144 of the Securities Act (or such other
available rule or regulation) is not fully available to allow the Class A Common Stock underlying
the Warrants to be sold to the public without registration.
Item 3.
Defaults upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 5. Other Information
Not applicable.
38
Item 6. Exhibits
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4.1
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Form of Warrant Certificate (incorporated by reference to Exhibit 4.1 of the Companys
current report on Form 8-K, filed June 30, 2009). |
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10.1
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Amendment No. 3 to Credit Agreement, dated as of June 29, 2009, by and among, the Company,
Bank of America, N.A., as administrative agent, the Lenders party thereto, and the Subsidiary
Loan Parties thereto (incorporated by reference to Exhibit 10.1 of the Companys current
report on Form 8-K, filed June 30, 2009). |
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10.2
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Warrant Agreement, dated as of June 29, 2009, by and among, the Company, Lewis W. Dickey,
Jr., Lewis W. Dickey, Sr., John W. Dickey, Michael W. Dickey, David W. Dickey, Lewis W.
Dickey, Sr. Revocable Trust, DBBC, LLC and the Consenting Lenders party thereto (incorporated
by reference to Exhibit 10.2 of the Companys current report on Form 8-K, filed June 30,
2009). |
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31.1
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Certification of the Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
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31.2
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Certification of the Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
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32.1
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Officer Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
39
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
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CUMULUS MEDIA INC.
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Date: August 6, 2009 |
By: |
/s/ Joseph Patrick Hannan
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Joseph Patrick Hannan |
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Vice President and Interim Chief
Financial Officer |
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40
EXHIBIT INDEX
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31.1
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Certification of the Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
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31.2
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Certification of the Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
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32.1
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Officer Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
41