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 MARCH 31, 2010.
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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
(State or Other Jurisdiction of
Incorporation or Organization)
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36-4159663
(I.R.S. Employer
Identification No.) |
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3280 Peachtree Road, NW Suite 2300, Atlanta, GA
(Address of Principal Executive Offices)
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30305
(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
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Non-accelerated filer o
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Smaller reporting company þ |
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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 April 27, 2010, the registrant had 42,011,608 outstanding shares of common stock consisting
of (i) 35,557,546 shares of Class A Common Stock; (ii) 5,809,191 shares of Class B Common Stock;
and (iii) 644,871 shares of Class C Common Stock.
CUMULUS MEDIA INC.
INDEX
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3 |
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3 |
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3 |
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4 |
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5 |
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6 |
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19 |
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26 |
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27 |
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27 |
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27 |
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27 |
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28 |
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28 |
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Item 4. Submission of Matters to a Vote of Security Holders |
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28 |
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28 |
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29 |
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30 |
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EX-31.1 |
EX-31.2 |
EX-32.1 |
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CUMULUS MEDIA INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except for share data)
(Unaudited)
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March 31, |
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December 31, |
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2010 |
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2009 |
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Assets |
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Current assets: |
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Cash and cash equivalents |
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$ |
14,950 |
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$ |
16,224 |
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Restricted cash |
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629 |
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789 |
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Accounts receivable, less allowance for doubtful accounts
of $1,097 and $1,166, in 2010 and 2009, respectively |
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31,538 |
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37,504 |
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Trade receivable |
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4,970 |
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5,488 |
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Prepaid expenses and other current assets |
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5,100 |
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4,709 |
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Total current assets |
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57,187 |
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64,714 |
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Property and equipment, net |
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44,655 |
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46,981 |
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Intangible assets, net |
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161,723 |
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161,380 |
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Goodwill |
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56,121 |
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56,121 |
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Other assets |
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3,397 |
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4,868 |
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Total assets |
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$ |
323,083 |
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$ |
334,064 |
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Liabilities and Stockholders Deficit |
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Current liabilities: |
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Accounts payable and accrued expenses |
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$ |
16,722 |
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$ |
13,635 |
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Trade payable |
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4,952 |
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5,534 |
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Derivative instrument |
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13,726 |
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Current portion of long-term debt |
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54,196 |
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49,026 |
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Total current liabilities |
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89,596 |
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68,195 |
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Long-term debt |
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566,725 |
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584,482 |
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Other liabilities |
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17,804 |
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32,598 |
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Deferred income taxes |
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21,287 |
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21,301 |
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Total liabilities |
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695,412 |
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706,576 |
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Stockholders Deficit: |
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Preferred stock, 20,262,000 shares authorized, par value $0.01 per share, including:
250,000 shares designated as 13 3/4% Series A Cumulative
Exchangeable Redeemable
Preferred Stock due 2009, shares designated at stated value
$1,000 per share; 0 shares
issued and outstanding in both 2010 and 2009 and 12,000 12%
Series B Cumulative
Preferred Stock, stated value $10,000 per share; 0 shares
issued and outstanding in
both 2010 and 2009 |
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Class A common stock, par value $0.01 per share; 200,000,000 shares authorized;
59,572,592 shares issued, 35,557,546 and 35,162,511 shares
outstanding in 2010 and
2009, 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 $.01 per share; 30,000,000 shares authorized;
644,871 shares issued and outstanding in both 2009 and 2008 |
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6 |
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6 |
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Treasury stock, at cost, 24,015,046 and 24,410,081 shares in 2009 and 2008,
respectively |
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(256,639 |
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(261,382 |
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Additional paid-in-capital |
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962,529 |
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966,945 |
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Accumulated deficit |
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(1,078,879 |
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(1,078,735 |
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Total stockholders deficit |
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(372,329 |
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(372,512 |
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Total liabilities and stockholders deficit |
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$ |
323,083 |
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$ |
334,064 |
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See accompanying notes to unaudited 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 March 31, |
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2010 |
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2009 |
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Broadcast revenues |
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$ |
55,358 |
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$ |
54,353 |
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Management fee from affiliate |
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1,000 |
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1,000 |
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Net revenues |
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56,358 |
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55,353 |
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Operating expenses: |
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Station operating expenses (excluding depreciation, amortization, and LMA fees) |
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39,926 |
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42,298 |
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Depreciation and amortization |
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2,517 |
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2,898 |
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LMA fees |
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529 |
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469 |
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Corporate general and administrative (including non-cash stock compensation
of $(101) and $592, in 2010 and 2009, respectively) |
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4,066 |
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6,108 |
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Realized loss on derivative instrument |
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584 |
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Total operating expenses |
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47,622 |
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51,773 |
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Operating income |
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8,736 |
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3,580 |
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Non-operating income (expense): |
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Interest expense |
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(8,831 |
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(7,783 |
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Interest income |
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2 |
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46 |
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Other (expense) income, net |
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(53 |
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3 |
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Total non-operating expense, net |
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(8,882 |
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(7,734 |
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Loss before income taxes |
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(146 |
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(4,154 |
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Income tax benefit |
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2 |
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858 |
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Net loss |
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$ |
(144 |
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$ |
(3,296 |
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Basic and diluted loss per common share: |
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Basic loss
per common share (See Note 8, Earnings Per Share) |
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$ |
(0.01 |
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$ |
(0.08 |
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Diluted loss
per common share (See Note 8, Earnings Per Share) |
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$ |
(0.01 |
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$ |
(0.08 |
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Weighted
average basic common shares outstanding (See Note 8, Earnings Per Share) |
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40,455,933 |
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40,420,814 |
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Weighted
average diluted common shares outstanding (See Note 8, Earnings Per Share) |
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40,455,933 |
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40,420,814 |
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See accompanying notes to unaudited condensed consolidated financial statements.
4
CUMULUS MEDIA INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
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Three Months Ended March 31, |
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2010 |
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2009 |
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Cash flows from operating activities: |
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Net loss |
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$ |
(144 |
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$ |
(3,296 |
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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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2,517 |
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2,898 |
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Amortization of debt issuance costs/discounts |
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305 |
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109 |
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Amortization of derivative gain |
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(828 |
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Provision for doubtful accounts |
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364 |
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657 |
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Loss (gain) on sale of assets or stations |
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53 |
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(3 |
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Fair value adjustment of derivative instruments |
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(1,329 |
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1,001 |
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Deferred income taxes |
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(14 |
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(852 |
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Non-cash stock compensation |
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(101 |
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592 |
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Changes in assets and liabilities: |
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Restricted cash |
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160 |
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(189 |
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Accounts receivable |
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8,192 |
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13,805 |
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Trade receivable |
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(2,072 |
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(3,916 |
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Prepaid expenses and other current assets |
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(391 |
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(406 |
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Accounts payable and accrued expenses |
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498 |
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(6,043 |
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Trade payable |
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2,008 |
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3,458 |
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Other assets |
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1,246 |
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(307 |
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Other liabilities |
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803 |
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(48 |
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Net cash provided by operating activities |
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12,095 |
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6,632 |
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Cash flows from investing activities: |
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Proceeds from sale of assets or radio stations |
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196 |
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6 |
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Purchase of intangible assets |
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(216 |
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(38 |
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Capital expenditures |
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(431 |
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(777 |
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Net cash used in investing activities |
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(451 |
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(809 |
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Cash flows from financing activities: |
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Repayments of borrowings from bank credit facility |
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(12,804 |
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(13,756 |
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Tax withholding paid on behalf of employees |
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(114 |
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Payments for repurchase of common stock |
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(193 |
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Net cash used in financing activities |
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(12,918 |
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(13,949 |
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Decrease in cash and cash equivalents |
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(1,274 |
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(8,126 |
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Cash and cash equivalents at beginning of period |
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16,224 |
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53,003 |
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Cash and cash equivalents at end of period |
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$ |
14,950 |
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$ |
44,877 |
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Supplemental disclosures of cash flow information: |
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Interest paid |
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$ |
6,767 |
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$ |
6,958 |
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Income taxes paid |
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213 |
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Trade revenue |
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3,813 |
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2,306 |
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Trade expense |
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3,741 |
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2,302 |
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See accompanying notes to unaudited 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. (Company) and the
notes thereto included in the Companys Annual Report on Form 10-K for the year ended December 31,
2009. These financial statements have been prepared in accordance with accounting principles
generally accepted in the United States of America (GAAP) for interim financial information and
with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not
include all of the information and notes required by GAAP for complete financial statements. In the
opinion of management, all adjustments necessary for a fair statement of results of the interim
periods have been made and such adjustments were of a normal and recurring nature. The results of
operations and cash flows for the three months ended March 31, 2010 are not necessarily indicative
of the results that can be expected for the entire fiscal year ending December 31, 2010.
The preparation of financial statements in conformity with GAAP requires management to make
estimates and judgments that affect the reported amounts of assets, liabilities, revenues and
expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, the
Company evaluates its estimates, including those related to bad debts, intangible assets,
derivative financial instruments, income taxes, stock-based compensation 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 economic crisis in 2009 has reduced demand for advertising in general, including
advertising on our radio stations. In consideration of current and projected market conditions, we
expect that overall advertising revenues will have modest growth in certain categories throughout
the remainder of 2010. Therefore, in conjunction with the development of the Companys 2010
business plan, management gave consideration to and incorporated the impact of recent market
developments in a variety of areas, including the Companys forecasted advertising revenues and
liquidity.
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 maintained the preexisting term loan facility of $750.0
million, which, as of March 31, 2010, had an outstanding balance of approximately $624.1 million,
and reduced the preexisting revolving credit facility from $100.0 million to $20.0 million.
Additional facilities are no longer permitted under the Credit Agreement. See Note 6, Long-Term
Debt for further discussion of the Credit Agreement.
Management believes that the Company will continue to be in compliance with all of its debt
covenants through at least March 31, 2011, 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 in 2009 and 2010 (see Note 6, Long-Term Debt), (ii) employee reductions of 16.5%
in 2009, (iii) the sales initiative implemented during the first quarter of 2009, which management
believes has contributed to increased advertising revenues by virtue of 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 do not meet or exceed expected growth 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 efficiencies, additional cost reductions, renegotiation of
major vendor contracts, deferral of capital expenditures, and sales of non-strategic assets.
Pursuant to the amended Credit Agreement, the Companys 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 Companys loan covenants require the Company to: (1) maintain a minimum
trailing twelve month consolidated EBITDA (as defined in the Credit Agreement) of $60.0 million for
fiscal quarters through March 31, 2010, increasing incrementally to $66.0 million for fiscal
quarter ended December 31, 2010, subject to certain adjustments; and (2)
6
maintain minimum cash on hand (defined as unencumbered consolidated cash and cash equivalents)
of at least $7.5 million. For the fiscal quarter ending March 31, 2011 (the first quarter after the
Covenant Suspension Period), the total leverage ratio covenant will be 6.50:1 and the fixed charge
coverage ratio covenant will be 1.20:1. At March 31, 2010, the Companys total leverage ratio was
8.00:1 and the fixed charge coverage ratio was 1.63:1. In order to comply with the leverage ratio
covenant at March 31, 2011, the Company estimates that it will be required to reduce a significant
amount of debt by March 31, 2011. See Note 6, Long-Term Debt for further discussion. The Company
plans to fund these debt payments from cash flows generated from operations.
If the Company is unable to comply with its debt covenants, the Company would need to obtain a
waiver or amendment to the Credit Agreement and no assurances can be given that the Company will be
able to do so. If the Company were unable to obtain a waiver or an amendment to the Credit
Agreement in the event of a debt covenant violation, the Company would be in default under the
Credit Agreement, which could have a material adverse impact on the Companys financial position.
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 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
In December 2009, the Financial Accounting Standards Board (FASB) issued ASU No. 2009-17,
Consolidations (Topic 810) Improvements to Financial Reporting by Enterprises Involved with
Variable Interest Entities (ASU No. 2009-17) which amends the FASB ASC for the issuance of FASB
Statement No. 167, Amendments to FASB Interpretation No. 46(R), issued by the FASB in June 2009.
The amendments in this ASU replace the quantitative-based risks and rewards calculation for
determining which reporting entity, if any, has a controlling financial interest in a variable
interest entity (VIE) with an approach primarily focused on identifying which reporting entity
has the power to direct the activities of a VIE that most significantly impact the entitys
economic performance and (1) the obligation to absorb the losses of the entity or (2) the right to
receive the benefits from the entity. ASU No. 2009-17 also requires additional disclosure about a
reporting entitys involvement in a VIE, as well as any significant changes in risk exposure due to
that involvement. ASU No. 2009-17 is effective for annual and interim periods beginning after
November 15, 2009. The adoption of ASU No. 2009-07 required the Company to make additional
disclosures but did not have a material impact on the Companys financial position, results of
operations and cash flows. See Note 11, Variable Interest Entities, for further discussion.
ASU 2010-06. The FASB issued ASU No. 2010-06 which provides improvements to disclosure
requirements related to fair value measurements. New disclosures are required for significant
transfers in and out of Level 1 and Level 2 fair value measurements, disaggregation regarding
classes of assets and liabilities, valuation techniques and inputs used to measure fair value for
both recurring and nonrecurring fair value measurements for Level 2 or Level 3. These disclosures
are effective for the interim and annual reporting periods beginning after December 15, 2009.
Additional new disclosures regarding the purchases, sales, issuances and settlements in the roll
forward of activity in Level 3 fair value measurements are effective for fiscal years beginning
after December 15, 2010 beginning with the first interim period. The Company adopted the portions
of this update which became effective January 1, 2010, for our financial statements as of that
date. See Note 4, Fair Value Measurements.
ASU 2010-09. The FASB issued ASU No. 2010-09 which provides amendments to certain recognition
and disclosure requirements. Previous guidance required that an entity that is an SEC filer be
required to disclose the date through which subsequent events have been evaluated. This update
amends the requirement of the date disclosure to alleviate potential conflicts between ASC 855-10
and the SECs requirements.
2. Acquisitions and Dispositions
The Company did not complete any material acquisitions or dispositions during the quarter
ended March 31, 2010.
During the 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 ASC 805. This transaction was not material to the
results of the Company.
7
3. Derivative Financial Instruments
The Company recognizes all derivatives on the balance sheet at fair value. Changes in fair
value are recorded in income for any contracts not classified as qualifying hedging instruments.
For derivatives qualifying as cash flow hedge instruments, the effective portion of the change in
fair value must be recorded through other comprehensive income, a component of stockholders equity
(deficit).
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 $400.0 million of the
Companys long-term bank borrowings to fixed-rate cash flows. Under the May 2005 Swap the Company
received LIBOR-based variable interest rate payments and made fixed interest rate payments, thereby
creating fixed-rate long-term debt. The May 2005 Swap was previously accounted for as a qualifying
cash flow hedge of the future variable rate interest payments. Starting in June 2006, the May 2005
Swap no longer qualified as a cash flow hedging instrument. Accordingly, the changes in its fair
value have since been reflected in the statement of operations instead of accumulated other
comprehensive income (AOCI). Interest expense for the three months ended March 31, 2010 and 2009
includes income of $0.0 million and $3.0 million, respectively.
The fair value of the May 2005 Swap was determined using observable market based inputs (a
Level 2 measurement). The fair value represents an estimate of the net amount that the Company
would pay if the agreement was transferred to another party or cancelled as of the date of the
valuation. The May 2005 Swap matured in March of 2009.
May 2005 Option
In May 2005, the Company also entered into an interest rate option agreement (the May 2005
Option), that provided Bank of America, N.A. the right to enter into an underlying swap agreement
with the Company, on terms substantially identical to the May 2005 Swap, for two years, from March
13, 2009 (the end of the term of the May 2005 Swap) through March 13, 2011.
The May 2005 Option was exercised on March 11, 2009. This instrument has not been highly
effective in mitigating the risks in the Companys cash flows, and therefore the Company has deemed
it speculative, and has accounted for changes in the May 2005 Options value as a current element
of interest expense. The balance sheets as of March 31, 2010 and December 31, 2009 reflect other
short-term liabilities of $13.7 million and other long-term liabilities $15.6 million,
respectively, to include the fair value of the May 2005 Option. The Company reported interest
income of $1.9 million and interest expense of $4.0 million, inclusive of the fair value adjustment
during the three months ended March 31, 2010 and 2009, respectively.
In the event of a default under the Credit Agreement, or a default under any derivative
contract, the derivative counterparties would have the right, although not the obligation, to
require immediate settlement of some or all open derivative contracts at their then-current fair
value. The Company does not utilize financial instruments for trading or other speculative
purposes.
The Companys financial instrument counterparties are high-quality investments or commercial
banks with significant experience with such instruments. The Company manages exposure to
counterparty credit risk by requiring specific minimum credit standards and diversification of
counterparties. The Company has procedures to monitor the credit exposure amounts. The maximum
credit exposure at March 31, 2010 was not significant to the Company.
Green Bay Option
On April 10, 2009, Clear Channel and the Company entered into a local marketing agreement
(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,
8
2013 (or earlier if the LMA is terminated before this date) for $17.6 million (the fair value
of the radio stations as of April 10, 2009). Clear Channel is the nations largest radio
broadcaster and as of December 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 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 sheet as of March 31, 2010 includes other long-term liabilities
of $6.7 million to reflect the fair value of the Green Bay Option. The fair value of the Green Bay
Option at March 31, 2010 and December 31, 2009, was $6.7 million and $6.1 million, respectively.
Accordingly, the Company recorded $0.6 million of expense in realized loss on derivative
instruments associated with marking to market the Green Bay Option to reflect the fair value of the
option during the three months ended March 31, 2010.
The location and fair value amounts of derivatives in the consolidated balance sheets are
shown in the following table:
Information on the Location and Amounts of Derivatives Fair Values in the
Unaudited Consolidated Balance Sheets (dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
Liability Derivatives |
|
|
Balance Sheet |
|
Fair Value |
|
|
Location |
|
March 31, 2010 |
|
December 31, 2009 |
|
Derivative not designated
as hedging instruments: |
|
|
|
|
|
|
|
|
|
|
Green Bay Option |
|
Other long-term liabilities |
|
$ |
6,657 |
|
|
$ |
6,073 |
|
Interest rate swap option |
|
Other short-term liabilities |
|
|
13,726 |
|
|
|
|
|
Interest rate swap option |
|
Other long-term liabilities |
|
|
|
|
|
|
15,639 |
|
|
|
|
|
|
Total |
|
$ |
20,383 |
|
|
$ |
21,712 |
|
|
|
|
The location and fair value amounts of derivatives in the Unaudited Condensed
Consolidated Statement of Operations are shown in the following table:
|
|
|
|
|
|
|
|
|
|
|
Liability Derivatives |
|
|
|
|
Amount of Income (Expense) |
|
|
|
|
Recognized in Income on Derivatives |
Derivative |
|
Financial Statement |
|
for the Three Months Ended |
Instruments |
|
Location |
|
March 31, 2010 |
|
March 31, 2009 |
|
Green Bay Option |
|
Realized loss on derivative instrument |
|
$ |
(584 |
) |
|
$ |
|
|
Interest rate swap option |
|
Interest income/(expense) |
|
|
1,913 |
|
|
|
(4,045 |
) |
Interest rate swap |
|
Interest income/(expense) |
|
|
|
|
|
|
3,043 |
|
|
|
|
|
|
Total |
|
$ |
1,329 |
|
|
$ |
(1,002 |
) |
|
|
|
4. Fair Value Measurements
The three levels of the fair value hierarchy to be applied to financial instruments when
determining fair value are described below:
|
|
Level 1 Valuations based on quoted prices in active markets for identical assets or liabilities
that the entity has the ability to access; |
|
|
|
Level 2 Valuations based on quoted prices for similar assets or liabilities, quoted prices in
markets that are not active, or other inputs that are observable or can be corroborated by
observable data for substantially the full term of the assets or liabilities; and |
|
|
|
Level 3 Valuations based on inputs that are supported by little or no market activity and that
are significant to the fair value of the assets or liabilities. |
9
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 March 31,
2010 were as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at Reporting Date Using |
|
|
|
|
|
|
Quoted |
|
Significant |
|
|
|
|
|
|
|
|
Prices in |
|
Other |
|
Significant |
|
|
|
|
|
|
Active |
|
Observable |
|
Unobservable |
|
|
Total Fair |
|
Markets |
|
Inputs |
|
Inputs |
|
|
Value |
|
(Level 1) |
|
(Level 2) |
|
(Level 3) |
|
|
|
Financial assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds (1) |
|
$ |
4,382 |
|
|
$ |
4,382 |
|
|
$ |
|
|
|
$ |
|
|
|
|
|
Total assets |
|
$ |
4,382 |
|
|
$ |
4,382 |
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other short-term liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap (2) |
|
$ |
(13,726 |
) |
|
$ |
|
|
|
$ |
(13,726 |
) |
|
$ |
|
|
Other long-term liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Green Bay option (3) |
|
|
(6,657 |
) |
|
|
|
|
|
|
|
|
|
|
(6,657 |
) |
|
|
|
Total liabilities |
|
$ |
(20,383 |
) |
|
$ |
|
|
|
$ |
(13,726 |
) |
|
$ |
(6,657 |
) |
|
|
|
|
|
|
(1) |
|
This balance is invested in an institutional money market fund. The Companys Level 1 cash
equivalents are valued using quoted prices in active markets for identical investments. |
|
(2) |
|
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. The fair
value of the Companys interest rate swap is determined based on the present value of future
cash flows using observable inputs, including interest rates and yield curves. Derivative
valuations incorporate adjustments that are necessary to reflect the Companys own credit
risk. |
|
(3) |
|
The fair value of the Green Bay Option was determined using inputs that are supported by
little or no market activity (a Level 3 measurement). The fair value represents an estimate of
the net amount that the Company would pay if the option was transferred to another party as of
the date of the valuation. The option valuation incorporates a credit risk adjustment to
reflect the probability of default by the Company. |
To estimate the fair value of the Interest rate swap, the Company used an industry standard
cash valuation model, which utilizes a discounted cash flow approach. The significant inputs for
the valuation model include the following:
|
|
|
|
|
|
|
|
|
Fixed |
|
|
|
Floating |
|
|
discount cash flow range of 0.995% 0.999%;
|
|
|
|
discount cash flow range of 0.995% 0.999%; |
|
|
|
interest rate of 3.930%; and
|
|
|
|
interest rate range of 0.23% 0.85%; and |
|
|
|
credit spread of 4.28%.
|
|
|
|
credit spread of 4.28%. |
The Company reported $0.6 million in realized loss on derivative instruments within the income
statement related to the fair value adjustment, representing the change in the fair value of the
Green Bay Option.
The reconciliation below contains the components of the change in fair value associated with
the Green Bay Option as of March 31, 2010 (dollars in thousands):
10
|
|
|
|
|
Description |
|
Green Bay Option |
|
Fair value balance at December 31, 2009 |
|
$ |
6,073 |
|
|
|
|
|
|
Add: Mark to market fair value adjustment |
|
|
584 |
|
|
|
|
|
|
|
Fair value balance at March 31, 2010 |
|
$ |
6,657 |
|
|
To estimate the fair value of the Green Bay Option, the Company used a Black-Scholes
valuation model. The significant inputs for the valuation model include the following:
|
|
|
total term of 3.5 years; |
|
|
|
|
volatility rate of 37.1%; |
|
|
|
|
dividend annual rate of 0.0%; |
|
|
|
|
discount rate of 1.6%; and |
|
|
|
|
market value of Green Bay of $10.1 million. |
The following table represents the fair value of the Companys nonfinancial assets measured at
fair value on a nonrecurring basis as of March 31, 2010 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at Reporting Date Using |
|
|
|
|
|
|
Quoted |
|
Significant |
|
|
|
|
|
|
|
|
Prices in |
|
Other |
|
Significant |
|
|
|
|
|
|
Active |
|
Observable |
|
Unobservable |
|
|
Total Fair |
|
Markets |
|
Inputs |
|
Inputs |
|
|
Value |
|
(Level 1) |
|
(Level 2) |
|
(Level 3) |
|
|
|
Non-financial assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill |
|
$ |
56,121 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
56,121 |
|
Other intangible assets |
|
|
161,031 |
|
|
|
|
|
|
|
|
|
|
|
161,031 |
|
|
|
|
Total |
|
$ |
217,152 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
217,152 |
|
|
|
|
There have been no significant changes to our fair value methodologies related to goodwill and
other intangible assets, as described in Note 4, Intangible Assets and Goodwill, to our
consolidated financial statements and related notes of our Annual Report on Form 10-K for the year
ended December 31, 2009.
The carrying values of receivables, payables, and accrued expenses approximate fair value due
to the short maturity of these instruments.
The following table shows the gross amount and fair value of the Companys term loan:
|
|
|
|
|
|
|
|
|
|
|
March 31, 2010 |
|
December 31, 2009 |
|
|
|
Carrying value of term loan |
|
$ |
624,087 |
|
|
$ |
636,890 |
|
Fair value of term loan |
|
$ |
570,340 |
|
|
$ |
538,604 |
|
To estimate the fair value of the term loan, the Company used an industry standard cash
valuation model, which utilizes a discounted cash flow approach. The significant inputs for the
valuation model include the following:
|
|
|
discount cash flow rate of 6.25%; |
|
|
|
|
interest rate of 0. 25%; and |
11
|
|
|
credit spread of 4.28%. |
5. Investment in Affiliate
On October 31, 2005, the Company announced that together with Bain Capital Partners, The
Blackstone Group (Blackstone) and Thomas H. Lee Partners, the Company had formed a new private
partnership, Cumulus Media Partners, LLC (CMP). CMP was created by the Company and the equity
partners to acquire the radio broadcasting business of Susquehanna Pfaltzgraff Co. The Company and
the other three equity partners each hold a 25% economic interest in CMP.
On May 5, 2006, the Company announced the consummation of the acquisition of the radio
broadcasting business of Susquehanna Pfaltzgraff Co. by CMP for a purchase price of approximately
$1.2 billion. Susquehannas radio broadcasting business consisted of 33 radio stations in 8
markets: San Francisco, Dallas, Houston, Atlanta, Cincinnati, Kansas City, Indianapolis and York,
Pennsylvania.
In connection with the formation of CMP, the Company contributed four radio stations
(including related licenses and assets) in the Houston, Texas and Kansas City, Missouri markets
with a book value of approximately $71.6 million and approximately $6.2 million in cash in exchange
for its membership interests. The Company recognized a gain of $2.5 million from the transfer of
assets to CMP. In addition, upon consummation of the acquisition, the Company received a payment of
approximately $3.5 million as consideration for advisory services provided in connection with the
acquisition. The Company recorded the payment as a reduction in its investment in CMP. The table
below presents summarized financial statement data related to CMP (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
2010 |
|
2009 |
|
|
|
Income Statement Data: |
|
|
|
|
|
|
|
|
Revenues |
|
$ |
37,917 |
|
|
$ |
35,837 |
|
Operating expenses |
|
|
27,304 |
|
|
|
26,308 |
|
Net income |
|
|
1,413 |
|
|
|
50,402 |
|
Balance Sheet Data: |
|
|
|
|
|
|
|
|
Assets |
|
|
489,625 |
|
|
|
717,183 |
|
Liabilities |
|
|
924,538 |
|
|
|
1,050,504 |
|
Shareholders deficit |
|
|
(434,913 |
) |
|
|
(333,321 |
) |
The Companys investment in CMP is accounted for under the equity method of accounting. For
the three months ended March 31, 2010 and 2009, the Company recorded $0.0 million, as equity losses
in affiliate, respectively.
Concurrent with the consummation of the acquisition, the Company entered into a management
agreement with a subsidiary of CMP, pursuant to which the Companys personnel will manage the
operations of CMPs subsidiaries. The agreement provides for the Company to receive, on a quarterly
basis, a management fee that is expected to be approximately 1.0% of the CMP subsidiaries annual
EBITDA or $4.0 million, whichever is greater. The Company recorded as net revenues approximately
$1.0 million in management fees from CMP for the three months ended March 31, 2010 and 2009.
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
claims to CMPs assets (on a consolidated basis) as an equity holder has been diluted as a result
of the exchange.
12
6. Long-Term Debt
The Companys long-term debt consisted of the following at March 31, 2010 and December 31,
2009 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
December 31, |
|
|
2010 |
|
2009 |
|
|
|
Term loan, net of debt discount |
|
$ |
620,921 |
|
|
$ |
633,508 |
|
Less: Current portion of long-term debt |
|
|
(54,196 |
) |
|
|
(49,026 |
) |
|
|
|
|
|
$ |
566,725 |
|
|
$ |
584,482 |
|
|
|
|
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 preexisting term loan facility of $750.0 million, which had
an outstanding balance of approximately $647.9 million immediately after closing the amendment, and
reduced the preexisting revolving credit facility from $100.0 million to $20.0 million. Incremental
facilities are no longer permitted as of June 30, 2009 under the Credit Agreement.
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 4.0% or the Alternate Base Rate (defined as the
higher of the Bank of America, N.A. Prime Rate and the Federal Funds rate plus 0.50%) plus 3.0%.
Once the Company reduces the term loan facility by $25.0 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 $50.0 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 is required to make quarterly mandatory
prepayments of 100% of Excess Cash Flow through December 31, 2010 (while maintaining a minimum
balance of $7.5 million of cash on hand), before reverting to annual prepayments of a percentage of
Excess Cash Flow, depending on the Companys leverage, beginning in 2011. The Company has included
approximately $47.8 million, a component of long term debt, as current, which represents the
estimated Excess Cash Flow payments over the next
12 months in accordance with the terms of the Credit Agreement. Certain other mandatory
prepayments of the term loan facility 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 $60.0 million for
fiscal quarters through March 31, 2010, increasing |
13
|
|
|
incrementally to $66.0 million for fiscal
quarter ended December 31, 2010, subject to certain adjustments; and (2) maintain minimum
cash on hand (defined as unencumbered consolidated cash and cash equivalents) of at least
$7.5 million; |
|
|
|
|
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
the Companys subsidiaries; (f) the loss, revocation or suspension of, or any material impairment
in the ability to use of or more of, any of the Companys material FCC licenses; (g) any
representation or warranty made, or report, certificate or financial statement delivered, to the
lenders subsequently proven to have been incorrect in any material respect; and (h) the occurrence
of a Change in Control (as defined in the Credit Agreement). Upon the occurrence of an event of
default, the lenders may terminate the loan commitments, accelerate all loans and exercise any of
their rights under the Credit Agreement and the ancillary loan documents as a secured property.
As discussed above, the Companys covenants for the fiscal quarter ended March 31, 2010 were
as follows:
|
|
|
a minimum trailing twelve month consolidated EBITDA of $60.0 million; |
|
|
|
|
a $7.5 million minimum cash on hand; and |
|
|
|
|
a limit on annual capital expenditures of $15.0 million annually. |
The trailing twelve month consolidated EBITDA and cash on hand at March 31, 2010 were
$78.1 million and $15.0 million, respectively.
If the Company had been unable to secure the June 2009 amendments to the Credit Agreement, so
that the total leverage ratio and the fixed charge coverage ratio covenants were still operative,
those covenants for the fiscal quarter ended March 31, 2010 would have been as follows:
|
|
|
a maximum total leverage ratio of 6.50:1; and |
|
|
|
|
a minimum fixed charge coverage ratio of 1.20:1. |
At March 31, 2010, the total leverage ratio was 8.00:1 and the fixed charge coverage ratio was
1.63:1. For the fiscal quarter ending March 31, 2011 (the first quarter after the Covenant
Suspension Period), the total leverage ratio covenant will be 6.50:1 and the fixed charge coverage
ratio covenant will be 1.20:1.
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 Companys underlying Class A
Common Stock at an exercise price of $1.17 per share and has an expiration date of June 29, 2019.
Accounting for the Modification of the Credit Agreement
The amendment to the Credit Agreement was accounted for as a loan modification and
accordingly, the Company did not record a gain or a loss on the transaction. For the revolving
credit facility, the Company wrote off approximately $0.2 million of unamortized
14
deferred financing
costs, based on the reduction of capacity. With respect to both debt instruments, the Company
recorded $3.0 million of fees paid directly to the creditors as a debt discount which are amortized
as an adjustment to interest expense over the remaining term of the debt.
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 is amortized as an adjustment to
interest expense over the remaining term of the debt using the effective interest method.
As of March 31, 2010, prior to the effect of the May 2005 Swap, the effective interest rate of
the outstanding borrowings pursuant to the senior secured credit facilities was approximately
4.25%. As of March 31, 2010, the effective interest rate inclusive of the May 2005 Swap was
approximately 6.65%.
7. Stock Based Compensation
During the three months ended March 31, 2010, the Company awarded Mr. L. Dickey 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 $1.0 million. In addition, during the three months
ended March 31, 2010 the Company awarded 120,000 time vested restricted shares with a fair value on
the date of grant of $0.4 million, or $3.15 per share, to certain officers (other than Mr. L.
Dickey) of the Company.
In March 2010, the Compensation Committee of the Board of Directors reviewed the three-year
performance criteria established in March 2007 for the 160,000 performance-based shares of
restricted stock awarded to Mr. L. Dickey on March 1, 2007. The vesting conditions for those
restricted shares required that the Company achieve specified financial performance targets for the
three-year period ending December 31, 2009. The specified threshold was not achieved, however, the
Compensation Committee determined that in light of the unprecedented adverse developments in the
economy in general, and the radio industry in particular, it would be appropriate to modify the
performance requirements and extend the vesting period so that Mr. L. Dickey would retain the
ability to achieve vesting on those shares of restricted stock if the revised performance criteria
is achieved. Effective as of March 1, 2010, the terms of Mr. L. Dickeys 2007 performance-based
restricted stock award of 160,000 shares were amended to provide that those shares would vest in
full on March 31, 2013 if the Company achieves specified financial performance targets for the
three year period ending December 31, 2012.
For the three months ended March 31, 2010, the Company recorded a credit to non-cash stock
compensation of approximately $0.1 million, of which $0.3 million of the credit is related to the
March 2010 modification of the vesting period associated with the performance based restricted
share award that was issued in March 2007 to the Companys Chief Executive Officer, Mr. L. Dickey.
In connection with evaluating the accounting treatment for the modification of the restricted
shares, the Company identified and recorded an additional $0.3 million credit to stock based
compensation expense in the first quarter of 2010 to correct errors occurring in 2008 and 2009. The
Company determined that this out-of-period adjustment is not material to the condensed consolidated
financial statements for the three month period ended March 31, 2010, forecasted annual results for
fiscal 2010 or any prior period financial statements.
8. Earnings per Share
For all periods presented, the Company has disclosed basic and diluted earnings per common
share utilizing the two-class method. Basic earnings per common share is calculated by dividing net
income available to common shareholders by the weighted average number of shares of common stock
outstanding during the period. The Company determined that it is appropriate to allocate
undistributed net income between Class A, Class B and Class C Common Stock on an equal basis as the
Companys charter provides that the holders of Class A, Class B and Class C Common Stock have equal
rights and privileges except with respect to voting on certain matters.
Non-vested restricted shares of Class A common stock awarded contain non-forfeitable dividend
rights and are therefore a participating security. The two-class method of computing earnings per
share is required for companies with participating securities. Under this method, net income is
allocated to common stock and participating securities to the extent that each security may share
in earnings, as if all of the earnings for the period had been distributed. The Company has
accounted for non-vested restricted stock as a participating security and used the two-class method
of computing earnings per share as of January 1, 2009, with retroactive application to all prior
periods presented. For the three months ended March 31, 2010 and 2009, the Company was in a net
loss position and therefore did not allocate any loss to participating securities. Because the
Company does not pay dividends, earnings
15
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 months ended March 31, 2010 and 2009 (in thousands, except per share data).
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
2010 |
|
2009 |
|
|
|
Basic Earning Per Share |
|
|
|
|
|
|
|
|
Numerator: |
|
|
|
|
|
|
|
|
Undistributed net loss |
|
$ |
(144 |
) |
|
$ |
(3,296 |
) |
Participation rights of unvested restricted stock in
undistributed earnings (1) |
|
|
|
|
|
|
|
|
|
|
|
Basic undistributed net loss attributable to common shares |
|
$ |
(144 |
) |
|
$ |
(3,296 |
) |
|
|
|
Denominator: |
|
|
|
|
|
|
|
|
Denominator for basic loss per common share: |
|
|
|
|
|
|
|
|
Basic weighted average common shares outstanding |
|
|
40,456 |
|
|
|
40,421 |
|
|
|
|
Basic EPS attributable to common shares |
|
$ |
(0.01 |
) |
|
$ |
(0.08 |
) |
|
|
|
Diluted Earnings Per Share: |
|
|
|
|
|
|
|
|
Numerator: |
|
|
|
|
|
|
|
|
Undistributed net loss |
|
$ |
(144 |
) |
|
$ |
(3,296 |
) |
Participation rights of unvested restricted stock in
undistributed earnings (1) |
|
|
|
|
|
|
|
|
|
|
|
Basic undistributed net loss attributable to common shares |
|
$ |
(144 |
) |
|
$ |
(3,296 |
) |
|
|
|
Denominator: |
|
|
|
|
|
|
|
|
Basic weighted average shares outstanding |
|
|
40,456 |
|
|
|
40,421 |
|
Effect of dilutive options (2) |
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted average shares outstanding |
|
|
40,456 |
|
|
|
40,421 |
|
|
|
|
Diluted EPS attributable to common shares |
|
$ |
(0.01 |
) |
|
$ |
(0.08 |
) |
|
|
|
|
|
|
(1) |
|
Unvested restricted stock has no contractual obligation to absorb losses of the Company.
Therefore, for the three months ended March 31, 2010 and 2009, 1,710,099 shares and 1,532,910
shares of restricted stock, respectively, were outstanding but excluded from the EPS
calculations. |
|
(2) |
|
For the three months ended March 31, 2010 and 2009, options to purchase 925,290 shares and
2,274,895 shares of common stock, respectively, were outstanding but excluded from the EPS
calculations because their effect would have been antidilutive. Additionally, the Company
excluded warrants from the EPS calculations because including the warrants would be
antidilutive. |
The Company has issued to key executives and employees shares of restricted stock and options
to purchase shares of common stock as part of the Companys stock incentive plans. At March 31,
2010, the following restricted stock and stock options to purchase the following classes of common
stock were issued and outstanding:
|
|
|
|
|
|
|
March 31, 2010 |
Restricted shares of Class A Common Stock |
|
|
1,710,099 |
|
Options to purchase Class A Common Stock |
|
|
925,290 |
|
9. 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 had a five-year agreement with Arbitron under which it received programming
rating materials in a majority of its markets. On November 7, 2008, however, the Company entered
into an agreement with Nielsen pursuant to which Nielsen would rate certain of the Companys radio
markets as coverages for such markets until the Arbitron agreement expired in April 2009. The
Company forfeited its obligation under the agreement with Arbitron as of December 31, 2008, and
Arbitron was paid in accordance with the agreement through April 2009. Nielsen began efforts to
roll out its rating service for 51 of the Companys radio markets in January 2009, and such rollout
was completed in 2009.
The Company engages Katz Media Group, Inc. (Katz) as its national advertising sales agent.
The national advertising agency contract with Katz contains termination provisions that, if
exercised by the Company during the term of the contract, would obligate the Company to pay a
termination fee to Katz, calculated based upon a formula set forth in the contract.
16
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. The Company negotiated an amendment to the Companys agreement
with iBiquity to reduce the number of planned conversions commissions, extend the build-out
schedule, and increase the license fees for each converted station. The conversion of original
stations to the digital technology will require an investment in certain capital equipment over the
next six years. Management estimates its investment will be between $0.08 million and $0.15 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 and is in the process of producing documents and other information requested by
the FCC. The Company has not yet determined what effect the inquiry will have, if any, on its
financial position, results of operations or cash flows.
On December 11, 2008, Qantum Communications (Qantum) filed a counterclaim in a foreclosure
action the Company initiated in the Okaloosa County, Florida Circuit Court. The Companys action
was designed to collect a debt owed to the Company by Star Broadcasting, Inc. (Star), which then
owned radio station WTKE-FM in Holt, Florida. In its counterclaim, Qantum alleged that the Company
tortiously interfered with Qantums contract to acquire radio station WTKE from Star by entering
into an agreement to buy WTKE after Star had represented to the Company that its contract with
Qantum had been terminated (and that Star was therefore free to enter into the new agreement with
the Company). The counterclaim did not specify the damages Qantum was seeking. The Company did not
and does not believe that the counterclaim has merit, and, because there was no specification of
damages, the Company did not believe at the time that the counterclaim would have a material
adverse effect on the Companys overall financial condition or results of operations even if the
court were to determine that the claim did have merit. In June 2009, the court authorized Qantum to
seek punitive damages because it had satisfied the minimal threshold for asserting such a claim. In
August 2009, Qantum provided the Company with an experts report that estimated that Qantum had
allegedly incurred approximately $8.7 million in compensatory damages. The Companys liability
would be increased if Qantum is able to secure punitive damages as well.
The Company continues to believe that Quantums counterclaim against the Company has no merit;
the Company has denied the allegations and is vigorously defending against the counterclaim.
However, if the court were to find that the Company did tortiously interfere with Qantums contract
and that Quantum is entitled to the compensatory damages estimated by its expert as well as
punitive damages, the result could have a material adverse effect on the Companys overall
financial condition or results of operations.
In April 2009, the Company was named in a patent infringement suit brought against the Company
as well as twelve other radio companies, including Clear Channel, Citadel Broadcasting, CBS Radio,
Entercom Communications, Saga Communications, Cox Radio, Univision Communications, Regent
Communications, Gap Broadcasting, and Radio One. The case, captioned Aldav, LLC v. Clear Channel
Communications, Inc., et al, Civil Action No. 6:09-cv-170, U.S. District Court for the Eastern
District of Texas, Tyler Division (filed April 16, 2009), alleged that the defendants have
infringed and continue to infringe plaintiffs patented content replacement technology in the
context of radio station streaming over the Internet, and sought a permanent injunction and
unspecified damages. The Company settled this suit in March 2010.
On January 21, 2010, Brian Mas, a former employee of Susquehanna Radio Corp., filed a
purported class action lawsuit against the Company claiming (i) unlawful failure to pay required
overtime wages, (ii) late pay and waiting time penalties, (iii) failure to provide accurate
itemized wage statements, (iv) failure to indemnity for necessary expenses and losses, and (v)
unfair trade practices under Californias Unfair Competition Act. The plaintiff is requesting
restitution, penalties and injunctive relief, and seeks to represent other California employees
fulfilling the same job during the immediately preceding four year period. The Company is
vigorously defending this lawsuit.
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
17
its consolidated financial position, results of operations or cash flows. The Company is not a
party to any lawsuit or proceeding that, in managements opinion, is likely to have a material
adverse effect.
10. Restricted Cash
During 2009, the Company was required to secure the maximum exposure generated by automated
clearing house transactions in its operating bank accounts as dictated by the Companys banks
internal policies with cash. This action was triggered by an adverse rating as determined by the
Companys banks rating system. These funds were moved to a segregated bank account that does not
zero balance daily. As of March 31, 2010, the Companys balance sheet included approximately $0.6
million in restricted cash related to the automated clearing house transactions.
11. Variable Interest Entities
The Company has an investment in CMP which it accounts for using the equity method and which
the Company has determined to be a VIE that is not subject to consolidation because the Company is
not deemed to be the primary beneficiary. The Company cannot make unilateral management decisions
affecting the long-term operational results of CMP, as all such decisions require approval by the
CMP board of directors. Additionally, one of the other equity holders has the unilateral right to
remove the Company as manager of CMP with 30 days notice. As such, the Company concluded that this
ability to unilaterally terminate CMPs management agreement with the Company resulted in a
substantive kick out right, thereby precluding the Company from being designated as the primary
beneficiary with respect to its variable interest in CMP.
As of March 31, 2010, the Companys proportionate share of its affiliate losses exceeded its
investment in CMP, therefore the Company has no exposure to loss as a result of its involvement
with CMP as its investment has been written down to zero, nor is it under any contractual
obligation to fund losses of CMP. The Company has not provided and does not intend to provide any
financial support, guarantees or commitments for or on behalf of CMP. Additionally, the Companys
balance sheet at March 31, 2010 does not include any assets or liabilities related to its variable
interest in CMP. See Note 5, Investment in Affiliate for further discussion.
12. Subsequent Event
On April 7, 2010, the Company and Crestview Partners, a $4.0 billion private equity firm with
a strong media focus, announced the formation of a strategic investment partnership that will seek
to invest in radio broadcasting companies that present attractive opportunities for significant
long-term capital appreciation.
Under the terms of the partnership, Crestview will lead an investor group that would invest up
to $500.0 million in equity in the partnership, to be called Cumulus Radio Investors, L.P. (CRI).
Together with debt financing expected to be available through the capital markets, CRI could target
acquisitions totaling in excess of $1 billion. The Company would provide all management, financial,
operational and corporate services to the partnership and its operations pursuant to a management
services agreement. The Company will be compensated through management fees as well as incentive
compensation based on investment returns. This had no impact to the quarter ended March 31, 2010.
18
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
General
The following discussion of our financial condition and results of operations should be read
in conjunction with our condensed consolidated financial statements and related notes thereto
included elsewhere in this quarterly report. This discussion, as well as various other sections of
this quarterly report, contains statements that constitute forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. Such statements relate to the
intent, belief or current expectations of our officers primarily with respect to our future
operating performance. Any such forward-looking statements are not guarantees of future performance
and may involve risks and uncertainties. Actual results may differ from those in the
forward-looking statements as a result of various factors, including but not limited to, risks and
uncertainties relating to the need for additional funds, FCC and government approval of pending
acquisitions, our inability to renew one or more of our broadcast licenses, changes in interest
rates, consummation of our pending acquisitions, integration of acquisitions, our ability to
eliminate certain costs, the management of rapid growth, the popularity of radio as a broadcasting
and advertising medium, changing consumer tastes, the impact of general economic conditions in the
United States or in specific markets in which we currently do business, industry conditions,
including existing competition and future competitive technologies and cancellation, disruptions or
postponements of advertising schedules in response to national or world events. Many of these risks and uncertainties are beyond our control.
This discussion identifies important factors that could cause such differences. The unexpected
occurrence of any such factors would significantly alter the results set forth in these statements.
Overview
We engage in the acquisition, operation, and development of commercial radio stations in
mid-size radio markets in the United States. In addition, we, along with three private equity
firms, formed CMP, which acquired the radio broadcasting business of Susquehanna in May 2006. As a
result of our investment in CMP and the acquisition of Susquehannas radio operations, we are the
second largest radio broadcasting company in the United States based on number of stations and
believe we are the fourth largest radio broadcasting company based on net revenues. As of March 31,
2010, directly and through our investment in CMP, we owned or operated 345 stations in 67 United
States markets and provided sales and marketing services under local marketing, management and
consulting agreements to twelve additional stations. The following discussion of our financial
condition and results of operations includes the results of acquisitions and local marketing,
management, and consulting agreements.
Liquidity Considerations
We believe that we will continue to be in compliance with all of our debt covenants through at
least March 31, 2011, based upon actions we have already taken, which included: (i) the amendment
to the Credit Agreement, the purpose of which was to provide certain covenant relief in 2009 and
2010, (ii) employee reductions of 16.5% in 2009, (iii) the sales initiative implemented during the
first quarter of 2009, which we believe has contributed to increased advertising revenues by virtue
of re-engineering our sales techniques through enhanced training of our sales force, and (iv)
continued scrutiny of all operating expenses. We will continue to monitor our revenues and cost
structure closely and if revenues do not exceed forecasted growth or if we exceed our planned
spending, we may take further actions as needed in an attempt to maintain compliance with our debt
covenants under the Credit Agreement. The actions may include the implementation of additional
operational efficiencies, further renegotiation of major vendor contracts, deferral of capital
expenditures, and sales of non-strategic assets.
As of March 31, 2010, the effective interest rate on the borrowings pursuant to the credit
facility was approximately 4.25%. As of March 31, 2010, our average cost of debt, including the
effects of our derivative positions, was 6.65%. We remain committed to maintaining manageable debt
levels, which will continue to improve our ability to generate cash flow from operations.
Advertising Revenue and Station Operating Income
Our primary source of revenues is the sale of advertising time on our radio stations. Our
sales of advertising time are primarily affected by the demand for advertising time from local,
regional and national advertisers and the advertising rates charged by our radio stations.
Advertising demand and rates are based primarily on a stations ability to attract audiences in the
demographic groups targeted by its advertisers, as measured principally by various ratings agencies
on a periodic basis, generally two or four times per year. Because audience ratings in local
markets are crucial to a stations financial success, we endeavor to develop strong listener
loyalty. We believe that the diversification of formats on our stations helps to insulate them from
the effects of changes in the musical tastes of the public with respect to any particular format.
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. In the three months ended March 31, 2010 and 2009, trade revenue
totaled $3.8 million and $2.3 million, respectively. Our advertising contracts are generally
short-term. We generate most of our revenue from local and regional advertising, which is sold
primarily by a stations sales staff. Local advertising represented approximately 90.9% and 89.6%
of our total revenues during the three months ended March 31, 2010 and 2009.
The economic crisis in 2009 has reduced demand for advertising in general, including
advertising on our radio stations. In consideration of current and projected market conditions, we
expect that overall advertising revenues will have modest growth in certain categories throughout
the remainder of 2010.
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 as advertising
generally declines following the winter holidays, and the second and fourth
19
calendar quarters will generally produce the highest revenues for the year. Our operating
results in any period may be affected by the incurrence of advertising and promotion expenses that
typically do not have an effect on revenue generation until future periods, if at all.
Our most significant station operating expenses are employee salaries and commissions,
programming expenses, advertising and promotional expenditures, technical expenses, and general and
administrative expenses. We strive to control these expenses by working closely with local market
management. The performance of radio station groups, such as ours, is customarily measured by the
ability to generate Station Operating Income. See the quantitative reconciliation of Station
Operating Income to the most directly comparable financial measure calculated and presented in
accordance with GAAP, which follows in this section.
Results of Operations
Analysis of Unaudited Condensed Consolidated Statements of Operations. The following analysis
of selected data from our unaudited condensed consolidated statements of operations and other
supplementary data should be referred to while reading the results of operations discussion that
follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months |
|
|
|
|
Ended March 31, |
|
2010 vs 2009 |
|
|
2010 |
|
2009 |
|
$ Change |
|
% Change |
|
|
|
STATEMENT OF OPERATIONS DATA: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues |
|
$ |
56,358 |
|
|
$ |
55,353 |
|
|
$ |
1,005 |
|
|
|
1.8 |
% |
Station operating expenses (excluding depreciation,
amortization and LMA fees) |
|
|
39,926 |
|
|
|
42,298 |
|
|
|
(2,372 |
) |
|
|
-5.6 |
% |
Depreciation and amortization |
|
|
2,517 |
|
|
|
2,898 |
|
|
|
(381 |
) |
|
|
-13.1 |
% |
LMA fees |
|
|
529 |
|
|
|
469 |
|
|
|
60 |
|
|
|
12.8 |
% |
Corporate general and administrative (including non-cash
stock compensation expense) |
|
|
4,066 |
|
|
|
6,108 |
|
|
|
(2,042 |
) |
|
|
-33.4 |
% |
Realized loss on derivative instrument |
|
|
584 |
|
|
|
|
|
|
|
584 |
|
|
|
* |
* |
|
|
|
Operating income |
|
|
8,736 |
|
|
|
3,580 |
|
|
|
5,156 |
|
|
|
144.0 |
% |
Interest expense, net |
|
|
(8,829 |
) |
|
|
(7,737 |
) |
|
|
(1,092 |
) |
|
|
14.1 |
% |
Other (expense) income, net |
|
|
(53 |
) |
|
|
3 |
|
|
|
(56 |
) |
|
|
-1866.7 |
% |
Income tax benefit |
|
|
2 |
|
|
|
858 |
|
|
|
(856 |
) |
|
|
-99.8 |
% |
|
|
|
Net loss |
|
$ |
(144 |
) |
|
$ |
(3,296 |
) |
|
$ |
3,152 |
|
|
|
-95.6 |
% |
|
|
|
OTHER DATA: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Station Operating Income (1) |
|
$ |
16,432 |
|
|
$ |
13,055 |
|
|
$ |
3,377 |
|
|
|
25.9 |
% |
Station Operating Income margin (2) |
|
|
29.2 |
% |
|
|
23.6 |
% |
|
|
* |
* |
|
|
* |
* |
Cash flows related to: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities |
|
$ |
12,095 |
|
|
$ |
6,632 |
|
|
$ |
5,463 |
|
|
|
82.4 |
% |
Investing activities |
|
|
(451 |
) |
|
|
(809 |
) |
|
|
358 |
|
|
|
-44.3 |
% |
Financing activities |
|
|
(12,918 |
) |
|
|
(13,949 |
) |
|
|
1,031 |
|
|
|
-7.4 |
% |
Capital expenditures |
|
|
(431 |
) |
|
|
(777 |
) |
|
|
346 |
|
|
|
-44.5 |
% |
|
|
|
** |
|
Calculation is not meaningful. |
|
(1) |
|
Station Operating Income consists of operating income before depreciation and amortization,
LMA fees, corporate general and administrative expenses, the mark to market fair value
adjustment of the Green Bay Option, and non-cash stock compensation. 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. |
20
Three Months Ended March 31, 2010 versus the Three Months Ended March 31, 2009
Net Revenues. Net revenues for the three months ended March 31, 2010 increased $1.0 million,
or 1.8%, to $56.4 million compared to $55.4 million for the three months ended March 31, 2009,
primarily due to an increase in political revenue generated by mid-term congressional elections and
an increase in revenue from national accounts.
We believe that advertising revenue in our markets will have modest growth in certain
categories throughout the remainder of 2010. We believe two areas of potentially strong growth for
radio advertising in 2010 could be cyclical political advertising and automotive advertising fueled
by a general recovery in that sector.
Station Operating Expenses, Excluding Depreciation, Amortization and LMA Fees. Station
operating expenses for the three months ended March 31, 2010 decreased $2.4 million, or 5.6%, to
$39.9 million, compared to $42.3 million for the three months ended March 31, 2009, primarily due
to our continued efforts to contain operating costs and continued scrutiny of operating expenses.
We will continue to monitor all our operating costs and to the extent we are able to identify any
additional cost saving measures, we will implement them in an attempt to remain compliant with
current and future covenant requirements.
Depreciation and Amortization. Depreciation and amortization for the three months ended March
31, 2010 decreased $0.4 million, or 13.1%, to $2.5 million, compared to $2.9 million for the three
months ended March 31, 2009, resulting from a decrease in our asset base due to assets becoming
fully depreciated coupled with a decrease in capital expenditures.
LMA Fees. LMA fees totaled $0.5 million for both the three months ended March 31, 2010 and
2009. LMA fees in the current year were comprised primarily of fees associated with stations
operated under LMAs in Cedar Rapids, Iowa, Ann Arbor, Michigan, Green Bay, Wisconsin, and Battle
Creek, Michigan.
Corporate, General and Administrative Expenses Including Non-cash Stock Compensation.
Corporate expenses, including non-cash stock compensation expense for the first quarter of 2010
decreased $2.0 million, or 33.4%, to $4.1 million compared to $6.1 million in 2009, primarily due
to a decrease in corporate expenses associated with our cost containment initiatives including a
reduction in salary expense, as well as a decrease in professional fees associated with our defense
of certain lawsuits that were subsequently settled in 2009.
Realized Loss on Derivative Instrument. During the three months ended March 31, 2010, we
recorded a charge of $0.6 million related to our recording of the fair market value of the Green
Bay Option. We entered into the Green Bay Option in conjunction with an asset exchange in the
second quarter of 2009; therefore, there is no amount related to the Green Bay Option recorded in
the accompanying statements of operations for the three months ended March 31, 2009. The Green Bay
Option liability increased primarily due to the continued decline in associated market operating
results.
Interest Expense, net. Interest expense, net of interest income, for the three months ended
March 31, 2010 increased $1.1 million, or 14.1%, to $8.8 million compared to $7.7 million for the
three months ended March 31, 2009. Interest expense associated with outstanding debt increased by
$2.6 million to $6.7 million as compared to $4.1 million in the prior years period, primarily due
to an increase in interest rates, partially offset by a decrease in the borrowing base due to the
repayment of approximately $58.2 million of debt compared to the
same period in the prior year. The following summary details the components of
our interest expense, net of interest income (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended |
|
|
|
|
March 31, |
|
2010 vs 2009 |
|
|
2010 |
|
2009 |
|
$ Change |
|
% Change |
|
|
|
Bank Borrowings term loan and revolving credit facilities |
|
$ |
6,678 |
|
|
$ |
4,115 |
|
|
$ |
2,563 |
|
|
|
62.3 |
% |
Bank Borrowings yield adjustment interest rate swap |
|
|
3,739 |
|
|
|
2,363 |
|
|
|
1,376 |
|
|
|
58.2 |
% |
Change in fair value of interest rate swap agreement |
|
|
(1,913 |
) |
|
|
(3,043 |
) |
|
|
1,130 |
|
|
|
-37.1 |
% |
Change in fair value of interest rate option agreement |
|
|
|
|
|
|
4,045 |
|
|
|
(4,045 |
) |
|
|
-100.0 |
% |
Other interest expense |
|
|
327 |
|
|
|
303 |
|
|
|
24 |
|
|
|
7.9 |
% |
Interest income |
|
|
(2 |
) |
|
|
(46 |
) |
|
|
44 |
|
|
|
-95.7 |
% |
|
|
|
Interest expense, net |
|
$ |
8,829 |
|
|
$ |
7,737 |
|
|
$ |
1,092 |
|
|
|
14.1 |
% |
|
|
|
21
Income Tax Benefit. We recorded a tax benefit of $0.0 million for the three months ended
March 31, 2010, compared to $0.9 million for the three months ended March 31, 2009. The income tax
benefit in the current period is primarily due to the amortization of certain intangible assets for
tax purposes, which are not amortized for book purposes.
Station Operating Income. As a result of the factors described above, Station Operating
Income for the three months ended March 31, 2010 increased $3.3 million, or 25.9%, to $16.4 million
compared to $13.1 million for the three months ended March 31, 2009.
Station Operating Income consists of operating income before depreciation and amortization,
LMA fees, corporate general and administrative expenses, including the Green Bay Option mark to
market, and non-cash stock compensation. Station Operating Income should not be considered in
isolation or as a substitute for net income, operating income (loss), cash flows from operating
activities or any other measure for determining our operating performance or liquidity that is
calculated in accordance with GAAP. We exclude depreciation and amortization due to the
insignificant investment in tangible assets required to operate our stations and the relatively
insignificant amount of intangible assets subject to amortization. We exclude LMA fees from this
measure, even though it requires a cash commitment, due to the insignificance and temporary nature
of such fees. Corporate expenses, despite representing an additional significant cash commitment,
are excluded in an effort to present the operating performance of our stations exclusive of the
corporate resources employed. We believe this is important to our investors because it highlights
the gross margin generated by our station portfolio. Finally, we exclude the Green Bay Option mark
to market and non-cash stock compensation 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):
22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months |
|
|
|
|
Ended March 31, |
|
2010 vs 2009 |
|
|
2010 |
|
2009 |
|
$ Change |
|
% Change |
|
|
|
Operating income |
|
$ |
8,736 |
|
|
$ |
3,580 |
|
|
$ |
5,156 |
|
|
|
144.0 |
% |
Depreciation and amortization |
|
|
2,517 |
|
|
|
2,898 |
|
|
|
(381 |
) |
|
|
-13.1 |
% |
LMA fees |
|
|
529 |
|
|
|
469 |
|
|
|
60 |
|
|
|
12.8 |
% |
Non-cash stock compensation |
|
|
(101 |
) |
|
|
592 |
|
|
|
(693 |
) |
|
|
-117.1 |
% |
Corporate general and administrative |
|
|
4,167 |
|
|
|
5,516 |
|
|
|
(1,349 |
) |
|
|
-24.5 |
% |
Realized loss on derivative instrument |
|
|
584 |
|
|
|
|
|
|
|
584 |
|
|
|
* |
* |
|
|
|
Station Operating Income |
|
$ |
16,432 |
|
|
$ |
13,055 |
|
|
$ |
3,377 |
|
|
|
25.9 |
% |
|
|
|
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.
Funding needs on a long-term basis will include capital expenditures associated with
maintaining our station and corporate operations, implementing HD Radiotm
technology and potential future acquisitions. In December 2004, we purchased 240 perpetual licenses
from iBiquity, which will enable us to convert to and utilize iBiquitys HD
Radiotm technology on up to 240 of our stations. Under the terms of our
original agreement with iBiquity, we agreed to convert certain of our stations over a seven-year
period. On March 5, 2009, we entered into an amendment to our agreement with iBiquity to reduce the
number of planned conversions, extend the build-out schedule, and increase the license fees to be
paid for each converted station. We anticipate that the average cost to convert each station will
be between $0.08 million and $0.15 million.
Our principal sources of funds for these requirements have been cash flow from operations and
borrowings under our senior secured credit facilities. Our cash flow from operations is subject to
such factors as shifts in population, station listenership, demographics or, audience tastes, and
fluctuations in preferred advertising media. In addition, customers may not be able to pay, or may
delay payment of accounts receivable that are owed to us. Management has taken steps to mitigate
this risk through heightened collection efforts and enhancements to our credit approval process. As
discussed further below, borrowings under our senior secured credit facilities are subject to
financial covenants that can restrict our financial flexibility. Further, our ability to obtain
additional equity or debt financing is also subject to market conditions and operating performance.
In addition, pursuant to the June 2009 amendment to the Credit Agreement, we are required to repay
100% of Excess Cash Flow (as defined in the Credit Agreement) on a quarterly basis beginning
September 30, 2009 through December 31, 2010, while maintaining a minimum balance of $7.5 million
of cash on hand. We have assessed the implications of these factors on our current business and
determined, based on our financial condition as of March 31, 2010, that cash on hand and cash
expected to be generated from operating activities and, if necessary, further financing activities,
will be sufficient to satisfy our anticipated financing needs for working capital, capital
expenditures, interest and debt service payments and potential acquisitions and repurchases of
securities and other debt obligations through March 31, 2011. However, given the uncertainty of our
markets cash flows, pending litigation and the impact of the current economic environment, there
can be no assurance that cash generated from operations will be sufficient or financing will be
available at terms, and on the timetable, that may be necessary to meet our future capital needs.
Consideration of Recent Economic Developments
The economic crisis in 2009 has reduced demand for advertising in general, including
advertising on our radio stations. In consideration of current and projected market conditions, we
expect that overall advertising revenues will have modest growth in certain categories throughout
the remainder of 2010. Therefore, in conjunction with the development of the 2010 business plan, we
assessed the impact of the current year market developments in a variety of areas, including our
forecasted advertising revenues and liquidity. In response to these conditions, we have forecasted
maintaining cost reductions achieved in 2009 with no significant increases in 2010.
While preparing our 2010 business plan, we assessed future covenant compliance under the
Credit Agreement, including consideration of market uncertainties, as well as the incremental cost
that would be required to potentially amend the terms of the
Credit Agreement. We believe we will continue to be in compliance with all of our debt
covenants through at least March 31, 2011 based upon actions we have already taken, as well as
through additional paydowns of debt we will be required to make during 2010
23
from existing cash
balances and cash flow generated from operations. Further discussion of our debt covenant
compliance considerations is included below.
If our revenues were to be significantly less than planned due to difficult market conditions
or for other reasons, our ability to maintain compliance with the financial covenants in our credit
agreements would become increasingly difficult without remedial measures, such as the
implementation of further cost abatement initiatives. If our remedial measures were not successful
in maintaining covenant compliance, then we would need to negotiate with our lenders for relief,
which relief could result in higher interest expense or other fees or costs. Failure to comply with
our financial covenants or other terms of our credit agreements and failure to negotiate relief
from our lenders could result in the acceleration of the maturity of all outstanding debt. Under
these circumstances, the acceleration of our debt could have a material adverse effect on our
business.
Cash Flows from Operating Activities
For the three months ended March 31, 2010, net cash provided by operating activities increased
$5.5 million to $12.1 million from net cash provided by operating activities of $6.6 million for
the three months ended March 31, 2009. The increase is primarily attributable to a $6.5 million
increase in accounts payable and accrued expenses related to the timing of certain payments. For
the three months ended March 31, 2010 and 2009, our working capital was $(32.4) million and $56.9
million, respectively. We have assessed the implications of the working capital deficiency on our
current business and determined, based on our financial condition as of March 31, 2010, that cash
on hand and cash expected to be generated from operating activities and, if necessary, further
financing activities, will be sufficient to satisfy our anticipated working capital needs including
short-term debt service payments.
Cash Flows used in Investing Activities
For the three months ended March 31, 2010, net cash used in investing activities decreased
$0.3 million to $0.5 million from net cash used in investing activities of $0.8 million for the
three months ended March 31, 2009. The decrease is primarily due to a $0.3 million decrease in
capital expenditures.
Cash Flows used in Financing Activities
For the three months ended March 31, 2010, net cash used in financing activities decreased
$1.0 million to $12.9 million compared to net cash used in financing activities of $13.9 million
during the three months ended March 31, 2009. The decrease is primarily due to repayments of
borrowings outstanding under our credit facilities.
Amended Credit Agreement
2009 Amendment
We experienced revenue declines in late 2008 and throughout 2009 in line with macro industry
trends and consistent with our radio peer group, particularly when compared to groups with similar
market sizes and portfolio composition. In anticipation of significant revenue declines and in an
attempt to mitigate the effect of these declines on profitability, in early 2009 we engaged in an
aggressive cost cutting campaign across all of our stations and at corporate headquarters as well.
However, even with these cost containment initiatives in place, our rapidly deteriorating revenue
outlook left uncertainty as to whether we would be able to maintain compliance with the covenants
in the then-existing Credit Agreement. As an additional measure, in June 2009 we obtained an
amendment to the Credit Agreement that, among other things, temporarily suspended certain financial
covenants, as further described below.
The Credit Agreement maintains the preexisting term loan facility of $750.0 million, which had
an outstanding balance of approximately $647.9 million immediately after closing the amendment, and
reduced the preexisting revolving credit facility from $100.0 million to $20.0 million. Incremental
facilities are no longer permitted as of June 30, 2009 under the Credit Agreement.
Our obligations under the Credit Agreement are collateralized by substantially all of our
assets in which a security interest may lawfully be granted (including FCC licenses held by its
subsidiaries), including, without limitation, intellectual property and all of the capital stock of
our direct and indirect subsidiaries, including Broadcast Software International, Inc., which prior
to the amendment, was an excluded subsidiary. Our obligations under the Credit Agreement continue
to be guaranteed by all of our subsidiaries.
The Credit Agreement contains terms and conditions customary for financing arrangements of
this nature. The term loan facility will mature on June 11, 2014. The revolving credit facility
will mature on June 7, 2012.
24
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, N.A. Prime Rate and the Federal Funds rate plus 0.50%) plus 3.00%. Once we
reduce the term loan facility by $25.0 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 $50.0 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 are required to make quarterly mandatory prepayments of 100% of
Excess Cash Flow through December 31, 2010, before reverting to annual prepayments of a percentage
of Excess Cash Flow, depending on our leverage, beginning in 2011. Certain other mandatory
prepayments of the term loan facility will be required upon the occurrence of specified events,
including upon the incurrence of certain additional indebtedness and upon the sale of certain
assets.
Covenants
The representations, covenants and events of default in the Credit Agreement are customary for
financing transactions of this nature and are substantially the same as those in existence prior to
the amendment, except as follows:
|
|
|
the total leverage ratio and fixed charge coverage ratio covenants for the fiscal
quarters ending June 30, 2009 through and including December 31, 2010 (the Covenant
Suspension Period) have been suspended; |
|
|
|
during the Covenant Suspension Period, we must: (1) maintain minimum trailing twelve
month consolidated EBITDA (as defined in the Credit Agreement) of $60.0 million for fiscal
quarters through March 31, 2010, increasing incrementally to $66.0 million for fiscal
quarter ended December 31, 2010, subject to certain adjustments; and (2) maintain minimum
cash on hand (defined as unencumbered consolidated cash and cash equivalents) of at least
$7.5 million; |
|
|
|
we are restricted from incurring additional intercompany debt or making any intercompany
investments other than to the parties to the Credit Agreement; |
|
|
|
we may not incur additional indebtedness or liens, or make permitted acquisitions or
restricted payments, during the Covenant Suspension Period (after the Covenant Suspension
Period, the Credit Agreement will permit indebtedness, liens, permitted acquisitions and
restricted payments, subject to certain leverage ratio and liquidity measurements); and |
|
|
|
we must provide monthly unaudited financial statements to the lenders within 30 days
after each calendar-month end. |
Events of default in the Credit Agreement include, among others, (a) the failure to pay when
due the obligations owing under the credit facilities; (b) the failure to perform (and not timely
remedy, if applicable) certain covenants; (c) cross default and cross acceleration; (d) the
occurrence of bankruptcy or insolvency events; (e) certain judgments against us or any of our
subsidiaries; (f) the loss, revocation or suspension of, or any material impairment in the ability
to use of or more of, any of our material FCC licenses; (g) any representation or warranty made, or
report, certificate or financial statement delivered, to the lenders subsequently proven to have
been incorrect in any material respect; and (h) the occurrence of a Change in Control (as defined
in the Credit Agreement). Upon the occurrence of an event of default, the lenders may terminate the
loan commitments, accelerate all loans and exercise any of their rights under the Credit Agreement
and the ancillary loan documents as a secured party.
As discussed above, our covenants for the fiscal quarter ended March 31, 2010, were as
follows:
|
|
|
a minimum trailing twelve month consolidated EBITDA of $60.0 million; |
|
|
|
a $7.5 million minimum cash on hand; and |
|
|
|
a limit on annual capital expenditures of $15.0 million annually. |
The trailing twelve month consolidated EBITDA and cash on hand for the fiscal quarter ended
March 31, 2010, were $78.1 million and $15.0 million, respectively.
25
If we had been unable to obtain the June 2009 amendments to the Credit Agreement, such that
the original total leverage ratio and the fixed charge coverage ratio covenants were still
operative, those covenants at March 31, 2010, would have been as follows:
|
|
|
a maximum total leverage ratio of 6.5:1; and |
|
|
|
a minimum fixed charge coverage ratio of 1.20:1. |
At March 31, 2010, the total leverage ratio was 8.00:1 and the fixed charge coverage ratio was
1.63:1. For the fiscal quarter ending March 31, 2011 (the first quarter after the Covenant
Suspension Period), the total leverage ratio covenant will be 6.50:1 and the fixed charge coverage
ratio covenant will be 1.20:1.
If we are unable to comply with our debt covenants, we would need to seek a waiver or
amendment to the Credit Agreement and no assurances can be given that we will be able to do so. If
we were unable to obtain a waiver or an amendment to the Credit Agreement in the event of a debt
covenant violation, we would be in default under the Credit Agreement, which could have a material
adverse impact on our financial position.
If we were unable to repay our debts when due, the lenders under the credit facilities could
proceed against the collateral granted to them to secure that indebtedness. We have pledged
substantially all of our assets as collateral under the Credit Agreement. If the lenders accelerate
the maturity of outstanding debt, we may be forced to liquidate certain assets to repay all or part
of the senior secured credit facilities, and we cannot be assured that sufficient assets will
remain after we have paid all of the debt. The ability to liquidate assets is affected by the
regulatory restrictions associated with radio stations, including FCC licensing, which may make the
market for these assets less liquid and increase the chances that these assets will be liquidated
at a significant loss.
Warrants
We issued warrants to the lenders in connection with the execution of the amendment to the
Credit Agreement which allow the holders to acquire up to 1.25 million shares of our Class A Common
Stock. Each warrant is immediately exercisable to purchase our underlying Class A Common Stock at
an exercise price of $1.17 per share and has an expiration date of June 29, 2019.
Accounting for the Modification of the Credit Agreement
The amendment to the Credit Agreement was accounted for as a loan modification and
accordingly, we did not record a gain or a loss on the transaction. For the revolving credit
facility, we wrote off approximately $0.2 million of unamortized deferred financing costs, based on
the reduction of capacity. With respect to both debt instruments, we recorded $3.0 million of fees
paid directly to the lenders as a debt discount which are amortized as an adjustment to interest
expense over the remaining term of the debt.
We classified the warrants as equity at $0.8 million at fair value at inception. The fair
value of the warrants was recorded as a debt discount and is amortized as an adjustment to interest
expense over the remaining term of the debt using the effective interest method.
As of March 31, 2010, prior to the effect of the forward-starting LIBOR based interest rate
swap arrangement entered into in May 2005 (May 2005 Swap), the effective interest rate of the
outstanding borrowings pursuant to the senior secured credit facilities was approximately 4.25%. As
of March 31, 2010, the effective interest rate inclusive of the May 2005 Swap was approximately
6.65%.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
At March 31, 2010, 35.9% of our long-term debt bears interest at variable rates. Accordingly,
our earnings and after-tax cash flow are affected by changes in interest rates. Assuming the
current level of borrowings at variable rates and assuming a one percentage point change in the
average interest rate under these borrowings, it is estimated that our interest expense and net
income would have changed by $1.6 million for the three months ended March 31, 2010. As part of our
efforts to mitigate interest rate risk, in May 2005, we entered into a forward-starting (effective
March 2006) LIBOR-based interest rate swap agreement that effectively fixed the interest rate,
based on LIBOR, on $400.0 million of our current floating rate bank borrowings for a three-year
period. In May 2005, we also entered into an interest rate option agreement (the May 2005 Option)
that provided Bank of America, N.A. the right to enter into an underlying swap agreement with us,
on terms substantially identical to the May 2005 Swap, for two years, from March 13, 2009 (the
end of the term of the May 2005 Swap) through March 13, 2011. The May 2005 Option was
exercised on March 11, 2009. This instrument is intended to reduce our exposure to interest rate
fluctuations and was not entered into for speculative purposes. Segregating the $224.1 million of
borrowings outstanding at March 31, 2010 that are not subject to the interest rate swap and
26
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 $0.6 million for the three
months ended March 31, 2010.
In the event of an adverse change in interest rates, our management would likely take actions,
in addition to the interest rate swap agreement discussed above, to mitigate our exposure. However,
due to the uncertainty of the actions that would be taken and their possible effects, additional
analysis is not possible at this time. Further, such analysis would not consider the effects of the
change in the level of overall economic activity that could exist in such an environment.
Item 4. Controls and Procedures
We maintain a set of disclosure controls and procedures (as defined in Rules 13a-15(e) and
15(d)-15(e) of the Securities Exchange Act of 1934, as amended, the Exchange Act) designed to
ensure that information we are required to disclose in reports that we file or submit under the
Exchange Act is recorded, processed, summarized and reported within the time periods specified in
Securities and Exchange Commission rules and forms. Such disclosure controls and procedures are
designed to ensure that information required to be disclosed in reports we file or submit under the
Exchange Act is accumulated and communicated to our management, including our Chairman, President
and Chief Executive Officer (CEO) and Senior Vice President and Chief Financial Officer (CFO),
as appropriate, to allow timely decisions regarding required disclosure. At the end of the period
covered by this report, an evaluation was carried out under the supervision and with the
participation of our management, including our CEO and CFO, of the effectiveness of the design and
operation of our disclosure controls and procedures. Based on that evaluation, the CEO and CFO have
concluded our disclosure controls and procedures were effective as of March 31, 2010.
There were no changes to our internal control over financial reporting during the fiscal
quarter ended March 31, 2010 that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
As previously disclosed, in August 2005, we were 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. We have cooperated with the Attorney General
in this investigation.
Also as previously disclosed, in May 2007, we received a request for information and documents
from the FCC related to our sponsorship of identification policies and sponsorship identification
practices at certain of our radio stations as requested by the FCC. We are cooperating with the FCC
in this investigation and are in the process of producing documents and other information requested
by the FCC.
In April 2009, the Company was named in a patent infringement suit brought against the Company
as well as twelve other radio companies, including Clear Channel, Citadel Broadcasting, CBS Radio,
Entercom Communications, Saga Communications, Cox Radio, Univision Communications, Regent
Communications, Gap Broadcasting, and Radio One. The case, captioned Aldav, LLC v. Clear Channel
Communications, Inc., et al, Civil Action No. 6:09-cv-170, U.S. District Court for the Eastern
District of Texas, Tyler Division (filed April 16, 2009), alleged that the defendants have
infringed and continue to infringe plaintiffs patented content replacement technology in the
context of radio station streaming over the Internet, and sought a permanent injunction and
unspecified damages. The parties settled this suit in March 2010.
In addition to the above proceedings and those previously disclosed in our annual report on
Form 10-K for the year ended December 31, 2009, 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
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Please refer to Part I, Item 1A, Risk Factors, in our annual report on Form 10-K for the
year ended December 31, 2009, for information regarding factors that could affect our results of
operations, financial condition and liquidity.
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 March 31, 2010,
we did not purchase any shares of our Class A Common Stock. As of March 31, 2010, we had authority
to repurchase an additional $68.3 million of our Class A Common Stock.
Item 3. Defaults upon Senior Securities
Not applicable.
Item 5. Other Information
Not applicable.
Item 6. Exhibits
31.1 |
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Certification of the Principal Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002. |
31.2 |
|
Certification of the Principal Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002. |
32.1 |
|
Officer Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
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CUMULUS MEDIA INC.
|
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Date: April 30, 2010 |
By: |
/s/ Joseph P. Hannan
|
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Joseph P. Hannan |
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|
Senior Vice President, Treasurer and Chief Financial Officer |
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EXHIBIT INDEX
31.1 |
|
Certification of the Principal Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002. |
31.2 |
|
Certification of the Principal Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002. |
32.1 |
|
Officer Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
30