CUMULUS MEDIA INC.
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, 2007.
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934. |
For or the transition period from to
Commission file number 000-24525
CUMULUS MEDIA INC.
(Exact Name of Registrant as Specified in Its Charter)
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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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14 Piedmont Center Suite 1400, 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 is a large accelerated filer, an accelerated filer,
or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in
Rule 12b-2 of the Exchange Act.
(Check one):
Large accelerated filer o Accelerated filer þ Non-accelerated filer o
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 30, 2007, the registrant had outstanding 43,154,996 shares of common stock
consisting of (i) 36,700,934 shares of Class A Common Stock; (ii) 5,809,191 shares of Class B
Common Stock; and (iii) 644,871 shares of Class C Common Stock.
CUMULUS MEDIA INC.
INDEX
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CUMULUS MEDIA INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except for share and per share data)
(Unaudited)
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March 31, |
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December 31, |
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2007 |
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2006 |
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Assets |
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Current assets: |
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Cash and cash equivalents |
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$ |
4,997 |
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$ |
2,392 |
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Accounts receivable, less allowance for doubtful accounts of $2,111
and $1,942, in 2007 and 2006, respectively |
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46,233 |
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55,013 |
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Prepaid expenses and other current assets |
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8,136 |
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5,477 |
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Total current assets |
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59,366 |
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62,882 |
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Property and equipment, net |
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68,700 |
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71,474 |
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Intangible assets, net |
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934,138 |
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934,140 |
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Goodwill |
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176,791 |
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176,791 |
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Investment in affiliates |
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70,865 |
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71,684 |
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Other assets |
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13,919 |
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16,176 |
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Total assets |
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$ |
1,323,779 |
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$ |
1,333,147 |
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Liabilities and Stockholders Equity |
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Current liabilities: |
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Accounts payable and accrued expenses |
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$ |
28,407 |
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$ |
30,826 |
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Current portion of long-term debt |
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7,500 |
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7,500 |
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Total current liabilities |
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35,907 |
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38,326 |
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Long-term debt |
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738,750 |
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743,750 |
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Other liabilities |
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17,597 |
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17,020 |
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Deferred income taxes |
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193,457 |
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197,044 |
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Total liabilities |
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985,711 |
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996,140 |
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Stockholders equity: |
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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 Stock due 2009, stated value $1,000 per share,
and 12,000 shares designated as 12% Series B Cumulative Preferred
Stock,
stated value $10,000 per share; 0 shares issued and outstanding |
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Class A common stock, par value $.01 per share; 100,000,000 shares
authorized; 60,215,054 and 58,850,286 shares
issued, 36,683,402 and
35,318,634 shares outstanding, in 2007 and 2006, respectively. |
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602 |
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588 |
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Class B common stock, par value $.01 per share; 20,000,000 shares
authorized; 5,809,191 and 6,630,759 shares issued and outstanding, in
2007
and 2006, respectively |
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58 |
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66 |
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Class C common stock, par value $.01 per share; 30,000,000 shares
authorized; 644,871 shares issued and outstanding |
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6 |
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6 |
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Class A Treasury stock, at cost, 23,531,652 shares |
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(282,195 |
) |
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(282,194 |
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Accumulated other comprehensive income |
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7,027 |
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7,028 |
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Additional paid-in-capital |
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981,350 |
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978,480 |
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Accumulated deficit |
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(368,780 |
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(366,967 |
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Total stockholders equity |
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338,068 |
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337,007 |
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Total liabilities and stockholders equity |
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$ |
1,323,779 |
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$ |
1,333,147 |
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See
accompanying notes to condensed consolidated financial statements.
3
CUMULUS MEDIA INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except for share and per share data)
(Unaudited)
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Three Months |
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Three Months |
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Ended March 31, |
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Ended March 31, |
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2007 |
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2006 |
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Broadcast revenues |
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$ |
71,401 |
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$ |
75,269 |
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Management fee from affiliate |
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1,000 |
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Net revenues |
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72,401 |
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75,269 |
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Operating expenses: |
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Station operating expenses, excluding depreciation,
amortization
and LMA fees (including provision for
doubtful accounts of $645 and $909 in 2007 and 2006, respectively) |
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51,646 |
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53,567 |
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Depreciation and amortization |
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3,871 |
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4,813 |
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LMA fees |
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165 |
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205 |
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Corporate general and administrative (including
non-cash stock
compensation of $2,341 and $3,503, in
2007 and 2006,
respectively) |
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6,728 |
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7,689 |
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Total operating expenses |
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62,410 |
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66,274 |
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Operating income |
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9,991 |
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8,995 |
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Nonoperating income (expense): |
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Interest expense |
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(14,627 |
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(6,670 |
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Interest income |
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84 |
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144 |
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Other (expense), net |
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(29 |
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(362 |
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Total nonoperating expenses, net |
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(14,572 |
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(6,888 |
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Income (loss) before income taxes |
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(4,581 |
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2,107 |
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Income tax expense (benefit) |
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(3,587 |
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1,250 |
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Equity loss in affiliate |
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(819 |
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Net income (loss) |
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$ |
(1,813 |
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$ |
857 |
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Basic and diluted income per common share: |
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Basic income per common share |
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$ |
(0.04 |
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$ |
0.01 |
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Diluted income per common share |
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$ |
(0.04 |
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$ |
0.01 |
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Weighted average common shares outstanding |
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43,206,683 |
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60,074,811 |
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Weighted average diluted common shares
outstanding |
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43,206,683 |
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61,531,604 |
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See accompanying notes to condensed consolidated financial statements.
4
CUMULUS MEDIA INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
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Three months ended |
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Three Months Ended |
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March 31, 2007 |
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March 31, 2006 |
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Cash flows from operating activities: |
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Net income (loss) |
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$ |
(1,813 |
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$ |
857 |
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Adjustments to reconcile net income (loss) to net cash
provided by operating activities: |
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Depreciation |
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3,862 |
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4,658 |
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Amortization of intangible assets and other |
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9 |
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155 |
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Amortization of debt issuance costs |
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111 |
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223 |
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Provision for doubtful accounts |
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645 |
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909 |
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Change in the fair value of derivative instruments |
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1,994 |
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(850 |
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Deferred income taxes |
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(3,587 |
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1,250 |
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Non-cash stock compensation |
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2,341 |
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3,503 |
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Net gain on disposition of fixed assets |
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16 |
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16 |
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Equity loss in affiliate |
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819 |
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Changes in assets and liabilities, net of effects of
acquisitions: |
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Accounts receivable |
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8,132 |
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3,387 |
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Prepaid expenses and other current assets |
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(2,657 |
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(790 |
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Accounts payable and accrued expenses |
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(1,458 |
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4,541 |
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Other assets |
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131 |
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1,355 |
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Other liabilities |
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147 |
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(98 |
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Net cash provided by operating activities |
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8,692 |
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19,116 |
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Cash flows from investing activities: |
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Dispositions |
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33 |
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Purchase of intangible assets |
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(306 |
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Escrow deposits on pending acquisitions |
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306 |
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Capital expenditures |
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(1,104 |
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(3,722 |
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Other |
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(13 |
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(36 |
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Net cash used in investing activities |
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(1,117 |
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(3,725 |
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Cash flows from financing activities: |
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Proceeds from bank credit facility |
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21,000 |
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Repayments of borrowings from bank credit facility |
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(5,000 |
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(14,000 |
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Proceeds from issuance of common stock |
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30 |
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287 |
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Payments for repurchases of common stock |
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(25,714 |
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Net cash provided by (used in) financing activities |
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(4,970 |
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(18,427 |
) |
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Increase (Decrease) in cash and cash equivalents |
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2,605 |
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(3,036 |
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Cash and cash equivalents at beginning of period |
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2,392 |
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5,121 |
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Cash and cash equivalents at end of period |
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$ |
4,997 |
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$ |
2,085 |
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Non-cash operating, investing and financing activities: |
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Trade revenue |
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$ |
3,629 |
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$ |
3,717 |
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Trade expense |
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3,642 |
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3,719 |
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Interest paid |
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$ |
13,302 |
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$ |
6,604 |
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See accompanying notes to condensed consolidated financial statements.
5
CUMULUS MEDIA INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Interim Financial Data and Basis of Presentation
Interim Financial Data
The accompanying unaudited condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements of Cumulus Media Inc. (Cumulus, we or
the Company) and the notes thereto included in the Companys Annual Report on Form 10-K for the
year ended December 31, 2006. These financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America 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 accounting principles generally
accepted in the United States of America for complete financial statements. In the opinion of
management, all adjustments necessary for a fair presentation 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, 2007 are not necessarily indicative
of the results that can be expected for the entire fiscal year ending December 31, 2007.
The preparation of financial statements in conformity with accounting principles generally
accepted in the United States of America 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, restructuring 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.
Recent Accounting Pronouncement
FIN 48. In July 2006, the FASB issued SFAS Interpretation No. 48, Accounting for Uncertainty
in Income Taxes an interpretation of SFAS Statement No. 109. FIN 48 applies to all tax
positions accounted for under SFAS 109. FIN 48 refers to tax positions as positions taken in a
previously filed tax return or positions expected to be taken in a future tax return that are
reflected in measuring current or deferred income tax assets and liabilities reported in the
financial statements. FIN 48 further clarifies a tax position to include the following:
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a decision not to file a tax return in a particular jurisdiction for which a return might be required, |
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an allocation or a shift of income between taxing jurisdictions, |
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the characterization of income or a decision to exclude reporting taxable income in a tax return, or |
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a decision to classify a transaction, entity, or other position in a tax return as tax exempt. |
FIN 48 clarifies that a tax benefit may be reflected in the financial statements only if
it is more likely than not that a company will be able to sustain the tax return position, based
on its technical merits. If a tax benefit meets this criterion, it should be measured and
recognized based on the largest amount of benefit that is cumulatively greater than 50% likely to
be realized. This is a change from prior practice, whereby companies was able to recognize a tax
benefit only if it is probable a tax position will be sustained.
The Company adopted the provisions of FIN 48 on January 1, 2007. The Company classifies interest and penalties relating to uncertain tax positions in income taxes. The Company files numerous income tax returns at the United States federal jurisdiction and for various state jurisdictions.
One of our subsidiaries is subject to filing in a foreign
jurisdiction. For U.S. federal purposes, due to the net operating
losses available, we are no longer subject to examination for years
prior to 1997. With few exceptions we are no longer subject to state
and local or non-U.S. income tax examinations for the years before
2003.
The Company has identified one uncertain tax position related to state income tax matters. Prior to the adoption of FIN 48, management identified this issue and recorded a contingent liability for estimated income tax, interest and penalties. The Company reorganized its corporate
structure and eliminated this type of transaction. The audit for the state with the largest potential liability was settled in late 2006 and subsequently paid. The Company determined that the income tax positions taken with these other states are not more likely than not to be sustained, and thus retained the contingencies previously
recorded for these other states and will reverse them as the open years are no longer subject to examination, principally in the third and fourth quarters of 2007. On January 1, 2007, the contingency recorded for these remaining states was approximately $5.7 million, including penalties and interest of approximately $2.4 million. This entire amount, if recognized, would affect the effective tax rate.
6
2. Share-Based Compensation
On March 1, 2007, the Compensation Committee of the Board of Directors granted 110,000
restricted shares of its Class A Common Stock to certain officers, other than the Chief Executive Officer. The restricted shares were
granted pursuant to the Cumulus Media Inc. 2004 Equity Incentive Plan, and are subject to the
continued employment of the recipient for a specified period of time. Consistent with the terms of
the awards, one-half of the shares granted will vest after two years of continuous employment. An
additional one-eighth of the remaining restricted shares will vest each quarter during the third
and fourth years following the date of grant. The fair value at the date of grant of these shares
was $1.1 million. Stock compensation expense for these fixed
awards will be accounted for as liability classified
awards which will require revaluation at the end of each accounting period.
On March 1, 2007, the Compensation Committee of the Board of Directors granted 320,000
restricted shares of its Class A Common Stock to Mr. L. Dickey, the Company's Chief Executive Officer. The restricted shares were granted
pursuant to Mr. L. Dickeys Third Amended and Restated Employment Agreement and are comprised of
160,000 shares of time-vested restricted Class A common stock which were previously accounted for
in December 2006, as a result of the shares being effectively awarded at that time. Vesting of
performance restricted shares is dependent upon achievement of compensation committee-approved
criteria for the three-year period beginning on January 1 of the fiscal year of the date of grant.
3. Derivative Financial Instruments
The Company accounts for derivative financial instruments in accordance with SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. This standard requires the Company to
recognize all derivatives on the balance sheet at fair value. Derivative value changes 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 derivative fair value
change must be recorded through other comprehensive income, a component of stockholders equity.
In May 2005, Cumulus 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, which
became effective as of March 13, 2006, the end of the term of the Companys prior swap (see further
discussion below) and will expire March 13, 2009, unless extended pursuant to its terms, changes
the variable-rate cash flow exposure on $400 million of the Companys long-term bank borrowings to
fixed-rate cash flows by entering into a receive-variable, pay-fixed interest rate swap. Under the
May 2005 Swap, Cumulus receives LIBOR-based variable interest rate payments and makes fixed
interest rate payments, thereby creating fixed-rate long-term debt. The May 2005 Swap was
previously accounted for as a qualifying cash flow hedge of the future variable rate interest
payments in accordance with SFAS No. 133, whereby changes in the fair market value are reflected as
adjustments to the fair value of the derivative instrument as reflected on the accompanying balance
sheets.
7
For the three months ended March 31, 2007 the May 2005 Swap did not qualify as a cash flow
hedging instrument and accordingly, this swap was, and will be
henceforth, accounted for by mark-to-market accounting.
Interest expense for the three months ended March 31, 2007 includes a charge of $2.0 million for
the mark-to-market adjustment.
The fair value of the May 2005 Swap is determined periodically by obtaining quotations from
Bank of America, the financial institution that is the counterparty to the Companys swap
arrangement. The fair value represents an estimate of the net amount that Cumulus would receive if
the agreement was transferred to another party or cancelled as of the date of the valuation. The
balance sheet as of March 31, 2007 and December 31, 2006 reflects other long-term assets of $7.4
million and $9.4 million, respectively, to reflect the fair value of the May 2005 Swap. During the
three-month period ended March 31, 2007 and 2006,
$1.3 million and $1.5 million, respectively, were reported as
a reduction of interest expense, which represents yield adjustments on the hedged obligation.
In May 2005, Cumulus also entered into an interest rate option agreement (the May 2005
Option), which provides for Bank of America to unilaterally extend the period of the swap for two
additional years, from March 13, 2009 through March 13, 2011. This option may only be exercised in
March of 2009. This instrument is not highly effective in mitigating the risks in cash flows, and
therefore is deemed speculative and its changes in value are accounted for as a current element of
non-operating results. Interest expense for the three months ended March 31, 2006 included $1.0
million of net gains related to the 2005 swap. The balance sheets as of March 31, 2007 and
December 31, 2006 reflect other long-term liabilities of $1.2 million and $1.2 million,
respectively, to reflect the fair value of the May 2005 Option.
Cumulus had previously entered into a LIBOR-based interest rate swap arrangement in March 2003
(the March 2003 Swap) to manage fluctuations in cash flows resulting from interest rate risk
attributable to changes in the benchmark interest rate of LIBOR. The March 2003 Swap, which expired
by its terms on March 13, 2006, changed the variable-rate cash flow exposure on $300.0 million of
the Companys long-term bank borrowings to fixed-rate cash flows by entering into a
receive-variable, pay-fixed interest rate swap. Under the March 2003 swap, Cumulus received
LIBOR-based variable interest rate payments and made fixed interest rate payments, thereby creating
fixed-rate long-term debt. The March 2003 Swap was accounted for as a qualifying cash flow hedge of
the future variable rate interest payments in accordance with SFAS No. 133, whereby changes in the
fair market value are reflected as adjustments to the fair value of the derivative instrument as
reflected on the accompanying balance sheets.
The fair value of the March 2003 Swap was determined periodically by obtaining quotations from
the financial institution that was the counterparty to the March 2003 Swap. The fair value
represented an estimate of the net amount that Cumulus would have received if the agreement was
transferred to another party or cancelled as of the date of the valuation. Changes in the fair
value of the March 2003 Swap have been reported in accumulated other comprehensive income, or AOCI,
which is an element of stockholders equity. These amounts subsequently have been reclassified into
interest expense as a yield adjustment in the same period in which the related interest on the
floating-rate debt obligations affects earnings. During the three months ended March 31, 2006, $1.5
million of income related to the March 2003 Swap was reported as a reduction of interest expense
and represents a yield adjustment of the hedged debt obligation. The March 2003 Swap arrangement
was closed out in March 2006 and the assets and liabilities on the balance sheet were adjusted
accordingly.
4. Acquisitions
Completed Acquisitions
The Company did not complete any station acquisitions during the three months ended March 31,
2007 and 2006.
At March 31, 2007 and 2006 the Company operated four and three stations, respectively, under
local marketing agreements (LMAs). The consolidated statements of operations for the three months
ended March 31, 2007 and 2006 include the revenue and broadcast
operating expenses related to four and
three radio stations and any related fees associated with the LMAs, respectively.
8
5. Investment in Affiliate
On October 31, 2005, the Company announced that, together with Bain Capital Partners, The
Blackstone Group and Thomas H. Lee Partners, it had formed a new private partnership, Cumulus Media
Partners, LLC (CMP). CMP is a private partnership created by the Company and the equity partners
to acquire the radio broadcasting business of Susquehanna Pfaltzgraff Co. Each of the Company and
the equity partners holds a 25% equity ownership in CMP. Under the terms of the partnership
arrangement, if certain performance targets are met, the Companys participation in the
distribution of assets from CMP may be increased to up to 40%, with the respective participations
in such distributions by each equity partner reduced to as low as 20%.
On May 5, 2006, the Company announced that the acquisition of the radio broadcasting business of
Susquehanna Pfaltzgraff Co. by CMP was completed at 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 and
approximately $6.2 million in cash in exchange for its membership interests in CMP. 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 payment was
recorded by the Company as a reduction in Cumuluss investment in CMP.
The Companys investment in CMP is accounted for under the equity method. For the three months
ended March 31, 2007, the Company recorded approximately $0.8 million, as equity in losses of
affiliate. This amount is presented as part of nonoperating income (loss) on the accompanying
condensed consolidated statement of operations. For the three months ended March 31, 2007, the
affiliate generated revenues of $48.8 million, operating expense of $28.9 million and a net loss of
$2.0 million.
Concurrently with the consummation of the acquisition, the Company entered into a management
agreement with a subsidiary of CMP, pursuant to which the Companys management will manage the
operations of CMPs subsidiaries. The agreement provides for the Company to receive, on a quarterly
basis, a management fee that is expected to be approximately 1% of the subsidiaries annual EBITDA
or $4.0 million, whichever is greater. For the three months ended March 31, 2007, the Company
recorded as net revenues approximately $1.0 million in management fees from CMP.
6. Long-Term Debt
The Companys long-term debt consisted of the following at March 31, 2007 and December 31,
2006 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
|
2007 |
|
|
2006 |
|
Term loan and revolving credit facilities at 7.4% and 7.6%, respectively |
|
$ |
746,250 |
|
|
$ |
751,250 |
|
|
|
|
|
|
|
|
Less: Current portion of long-term debt |
|
|
(7,500 |
) |
|
|
(7,500 |
) |
|
|
|
|
|
|
|
|
|
$ |
738,750 |
|
|
$ |
743,750 |
|
|
|
|
|
|
|
|
2006 Refinancing
On June 23, 2006, the Company announced the completion of a tender offer for 11.5 million
outstanding shares of our Class A Common Stock. In connection with the tender offer, we also agreed
to repurchase 5.0 million shares of our outstanding Class B Common Stock.
In connection with the tender offer and common stock repurchase, on June 7, 2006, the Company
entered into a new $850 million credit facility, which provides for a $100.0 million six-year
revolving credit facility and a seven-year $750.0 million term loan facility. The proceeds were
used by the Company to repay all amounts outstanding under its 2005 credit facility (approximately
$588.2 million) and to purchase the 11.5 million shares of the Companys Class A Common Stock and
5.0 million shares of the Companys Class B Common Stock, which
9
occurred on June 23, 2006 and June 29, 2006, respectively, and to pay fees and expenses
related to the foregoing. The remaining proceeds are being used to provide ongoing working capital
(which may, in the future, include the funding of future acquisitions of radio stations) and for
other general corporate purposes, including capital expenditures. As of March 31, 2007, the Company
had an outstanding balance of $30.5 million under the revolving credit facility.
The credit facility also provides for additional, incremental revolving credit or term loan
facilities in an aggregate principal amount of up to an additional $200.0 million, subject to the
satisfaction of certain conditions and upon the Company providing notice prior to June 30, 2009.
These incremental credit facilities are permitted from time to time, and may be used to fund future
acquisitions of radio stations and for other general corporate purposes, including capital
expenditures. Any incremental credit facilities will be secured and guaranteed on the same basis as
the term loan and revolving credit facility.
The Companys obligations under the credit facility 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 domestic subsidiaries (except for Broadcast Software
International, Inc.) and 65% of the capital stock of certain first-tier foreign subsidiaries. In
addition, the Companys obligations under the credit facility are guaranteed by certain of its
subsidiaries.
The term loan facility will mature on June 7, 2013 and amortizes in equal quarterly
installments which commenced on September 30, 2006, with 0.25% of the initial aggregate advances
payable each quarter during the first six years of the term, and 23.5% due in each quarter during
the seventh year. The term loan facility also contains certain minimum excess cash flow payment
requirements. During the three months ended March 31, 2007, the company made such a payment for
$30.5 million by drawing down on the revolving credit facility. The revolving credit facility will
mature on June 7, 2012 and, except at our option, the commitment will remain unchanged up to that
date.
Borrowings under the term loan facility bear interest, at the Companys option, at a rate
equal to LIBOR plus 2.0% or the Alternate Base Rate (defined as the higher of the Bank of America
Prime Rate and the Federal Funds rate plus 0.50%) plus 1.0%. Borrowings under the revolving credit
facility will bear interest, at the Companys option, at a rate equal to LIBOR plus a margin
ranging between 0.675% and 2.0% or the Alternate Base Rate plus a margin ranging between 0.0% and
1.0% (in either case dependent upon the Companys leverage ratio).
As of March 31, 2007, prior to the effect of the May 2005 Swap, the effective interest rate of
the outstanding borrowings pursuant to the credit facility was approximately 7.7%.
Certain mandatory prepayments of the term loan facility would be required upon the occurrence
of specified events, including upon the incurrence of certain additional indebtedness (other than
under any incremental credit facilities) and upon the sale of certain assets. Under the terms of
the credit agreement governing the credit facility, the Company is subject to certain restrictive
financial and operating covenants including, but not limited to, maximum leverage covenants,
minimum interest coverage covenants, and limitations on capital expenditures, asset dispositions
and the payment of dividends. The failure to comply with the covenants would result in an event of
default, which in turn would permit acceleration of debt under the credit facility. At March 31,
2007, the Company was in compliance with such financial and operating covenants.
The terms of the credit agreement contain events of default after expiration of applicable
grace periods including, but not limited to, failure to make payments on the credit facility,
breach of covenants, breach of representations and warranties, invalidity of the credit agreement
and related documents, cross default under other agreements or conditions relating to the Companys
indebtedness or that of our restricted subsidiaries, certain events of liquidation, moratorium,
insolvency, bankruptcy or similar events, enforcement of security, certain litigation or other
proceedings, and certain events relating to changes in control. Upon the occurrence of an event of
default under the terms of the credit agreement, the majority of the lenders are able to declare
all amounts under the credit facility to be due and payable and take certain other actions,
including enforcement of rights in respect of the collateral. The majority of the banks extending
credit under each term loan facility and the majority of the banks under each
10
revolving credit facility may terminate such term loan facility and such revolving credit
facility, respectively, upon an event of default.
In connection with the retirement of the Companys pre-existing credit facilities, in June
2006 the Company recorded a loss on early extinguishment of debt of $2.3 million, which was
comprised of previously capitalized loan origination expenses. In connection with the new credit
facility, the Company capitalized approximately $1.6 million of debt issuance costs, which will be
amortized to interest expense over the life of the debt.
7. Share Repurchases
On September 28, 2004, the Company announced that its Board of Directors had authorized the
repurchase, from time to time, of up to $100.0 million of the Companys Class A Common Stock,
subject to the terms of the Companys then-existing credit agreement. Subsequently, on December 7,
2005, the Company announced that its Board had authorized the purchase of up to an additional
$100.0 million of the Companys Class A Common Stock. During the three months ended March 31, 2007,
the Company did not repurchase any shares of its Class A Common Stock in the open market. The
Company has authority to repurchase an additional $57.0 million of its Class A Common Stock. Due
to restrictions in our credit agreement, however, the actual maximum dollar value of shares that
may be purchased under our Board-approved repurchase plan as of March 31, 2007 is limited to $2.0
million.
8. Earnings Per Share
The following table sets forth the computation of basic and diluted income (loss) per share
for the three-month periods ended March 31, 2007 and 2006 (dollars in thousands, except per share
data).
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
2007 |
|
2006 |
|
|
|
Numerator: |
|
|
|
|
|
|
|
|
Net (loss) income |
|
$ |
(1,813 |
) |
|
$ |
857 |
|
Denominator: |
|
|
|
|
|
|
|
|
Denominator for basic income per common share: |
|
|
|
|
|
|
|
|
Weighted average common shares outstanding |
|
|
43,207 |
|
|
|
60,075 |
|
Effect of dilutive securities: |
|
|
|
|
|
|
|
|
Options |
|
|
|
|
|
|
1,271 |
|
Restricted Shares |
|
|
|
|
|
|
186 |
|
|
|
|
Shares applicable to diluted income per common share |
|
|
43,207 |
|
|
|
61,532 |
|
|
|
|
Basic income per common share |
|
$ |
(0.04 |
) |
|
$ |
0.01 |
|
|
|
|
Diluted income per common share |
|
$ |
(0.04 |
) |
|
$ |
0.01 |
|
|
|
|
The Company has issued restricted shares and options to key executives and employees to
purchase shares of common stock as part of the Companys stock option plans. At March 31, 2007,
there were restricted shares (excluding 1,260,000 restricted shares awarded to Mr. L. Dickey and
certain officers of the Company that are classified as liabilities) and options issued and outstanding
to purchase the following classes of common stock:
|
|
|
|
|
|
|
March 31, |
|
|
2007 |
|
|
|
|
|
Restricted shares of Class A Common Stock |
|
|
255,00 |
|
Options to purchase Class A Common Stock |
|
|
7,459,023 |
|
Options to purchase Class C Common Stock |
|
|
1,469,440 |
|
For the three months ended March 31, 2007, there were 7,001,165 options not included in the
calculation of weighted average diluted common shares outstanding because the exercise price of the
options exceeded the average share price for the period and their effect would be anti-dilutive.
For the three months ended March 31, 2006,
11
7,437,688 options were not included in the calculation of weighted average diluted common
shares outstanding because the exercise price of the options exceeded
the average share price for the same period and this effect would be
anti-dilutive.
9. Comprehensive Income
SFAS No. 130, Reporting Comprehensive Income, establishes standards for reporting
comprehensive income. Comprehensive income includes net income (loss) as currently reported under
accounting principles generally accepted in the United States of America, and also considers the
effect of additional economic events that are not required to be reported in determining net
income, but rather are reported as a separate component of stockholders equity. The Company
reports changes in the fair value of derivatives qualifying as cash flow hedges as components of
comprehensive income. The components of comprehensive income are as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
2007 |
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income |
|
$ |
(1,813 |
) |
|
$ |
857 |
|
Change in the fair value of derivative instrument |
|
|
|
|
|
|
2,938 |
|
|
|
|
Comprehensive income |
|
$ |
(1,813 |
) |
|
$ |
3,795 |
|
|
|
|
10. Commitments and Contingencies
The contract with Katz as described in Note 1 contains termination provisions which, 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.
The radio broadcast industrys principal ratings service is Arbitron, which publishes periodic
ratings surveys for domestic radio markets. The Company has a five-year agreement with Arbitron
under which the Company receives programming ratings materials in a majority of its markets. The
Companys remaining obligation under the agreement with Arbitron totals approximately $16.2 million
as of March 31, 2007 and will be paid in accordance with the agreement through July 2009.
In December 2004, the Company purchased 240 perpetual licenses from iBiquity Digital
Corporation, which will enable the Company to convert to and utilize HD Radio technology on 240 of
the Companys stations. Under the terms of the agreement, the Company has committed to convert the
240 stations over a seven year period beginning in the second half of 2005. The conversion of
stations to the HD Radio technology will require an investment in certain capital equipment over
the next five years. Management estimates its investment will be approximately $0.1 million per
station converted.
The Company has been subpoenaed by the Office of the Attorney General of the State of New
York, as were some of the other radio broadcasting companies operating in the state of New York, in
connection with the New York Attorney Generals investigation of promotional practices related to
record companies dealings with radio stations. We are cooperating with the Attorney General in
this investigation.
The Company is also a defendant from time to time in various other lawsuits, which are
generally incidental to its business. The Company is vigorously contesting all such matters and
believes that their ultimate resolution will not have a material adverse effect on its consolidated
financial position, results of operations or cash flows.
12
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
The following discussion of our consolidated financial condition and results of operations
should be read in conjunction with our unaudited 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. Risks and uncertainties that may
effect forward-looking statements in this document include, without limitation, risks and
uncertainties relating to leverage, the need for additional funds, FCC and government approval of
pending acquisitions, our inability to renew one or more of our broadcast licenses, changes in
interest rates, consummation of our pending acquisitions, integration of acquisitions, our ability
to eliminate certain costs, the management of rapid growth, the popularity of radio as a
broadcasting and advertising medium, changing consumer tastes, the impact of general economic
conditions in the United States or in specific markets in which we currently do business, industry
conditions, including existing competition and future competitive technologies and cancellation,
disruptions or postponements of advertising schedules in response to national or world events. Many
of these risks and uncertainties are beyond our control. This discussion identifies important
factors that could cause such differences. The unexpected occurrence of any such factors would
significantly alter the results set forth in these statements.
Overview
The following discussion of our financial condition and results of operations includes the
results of acquisitions and local marketing, management and consulting agreements. As of March 31,
2007, we owned and operated 306 stations in 59 U.S. markets and provided sales and marketing
services under local marketing, management and consulting agreements (pending FCC approval of
acquisition) to four stations in two U.S. markets. In addition, we, along with three private equity
firms, formed Cumulus Media Partners, LLC (CMP), which acquired the radio broadcasting business
of Susquehanna Pfaltzgraff Co. (Susquehanna) in May 2006. The acquisition included 33 radio
stations in 8 markets.
As a result of our investment in CMP and the acquisition of Susquehannas radio operations, we
continue to be the second largest radio broadcasting company in the United States based on number
of stations and believe that, based upon the stations we own or manage through CMP, we are the
third largest radio broadcasting company based on net revenues. Upon completion of all the
Companys pending acquisitions, we, directly and through our investment in CMP, will own or operate
a total of 344 radio stations in 67 U.S. markets.
Advertising Revenue and Station Operating Income
Our primary source of revenue is the sale of advertising time on our radio stations. Our sales
of advertising time are primarily affected by the demand for advertising time from local, regional
and national advertisers and the advertising rates charged by our radio stations. Advertising
demand and rates are based primarily on a stations ability to attract audiences in the demographic
groups targeted by its advertisers, as measured principally by Arbitron on a periodic
basis-generally one, 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.
Our advertising contracts are generally short-term. We generate most of our revenue from local
advertising, which is sold primarily by a stations sales staff. During the three months ended
March 31, 2007 and 2006,
13
approximately 88.3% and 85.0% of our revenues were from local advertising,
respectively. We generate national advertising revenue with the assistance of an outside national
representation firm. We engaged Katz Media Group, Inc. (Katz) to represent the Company as our
national advertising sales agent.
Our revenues vary throughout the year. As is typical in the radio broadcasting industry, we
expect our first calendar quarter will produce the lowest revenues for the year, and the fourth
calendar quarter will generally produce the highest revenues for the year, with the exception of
certain of our stations such as those in Myrtle Beach, South Carolina, where the stations generally
earn higher revenues in the second and third quarters of the year because of the higher seasonal
population in those communities.
Our operating results in any period may be affected by the incurrence of advertising and
promotion expenses that typically do not have an effect on revenue generation until future periods,
if at all. Our most significant station operating expenses are employee salaries and commissions,
programming expenses, advertising and promotional expenditures, technical expenses, and general and
administrative expenses. We strive to control these expenses by working closely with local station
management. The performance of radio station groups, such as ours, is customarily measured by the
ability to generate station operating income. See the definition of this non-GAAP measure,
including a description of the reasons for its presentation, as well as a quantitative
reconciliation to its most directly comparable financial measure calculated and presented in
accordance with GAAP, below.
Results of Operations
Analysis of Consolidated Statements of Operations. The following analysis of selected data
from the Companys consolidated statements of operations and other supplementary data should be
referred to while reading the results of operations discussion that follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
Three Months |
|
|
|
|
|
Percent |
|
|
Ended March 31, |
|
Ended March 31, |
|
Dollar Change |
|
Change 2007 |
|
|
2007 |
|
2006 |
|
2007 vs. 2006 |
|
vs. 2006 |
|
|
|
STATEMENT OF OPERATIONS DATA: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues |
|
$ |
72,401 |
|
|
$ |
75,269 |
|
|
$ |
(2,868 |
) |
|
|
-3.8 |
% |
Station operating expenses excluding
depreciation, amortization and LMA fees |
|
|
51,646 |
|
|
|
53,567 |
|
|
|
(1,921 |
) |
|
|
-3.6 |
% |
Depreciation and amortization |
|
|
3,871 |
|
|
|
4,813 |
|
|
|
(942 |
) |
|
|
-19.6 |
% |
LMA fees |
|
|
165 |
|
|
|
205 |
|
|
|
(40 |
) |
|
|
-19.5 |
% |
Corporate general and administrative
(including non-cash stock compensation
expense) |
|
|
6,728 |
|
|
|
7,689 |
|
|
|
(961 |
) |
|
|
-12.5 |
% |
|
|
|
Operating income |
|
|
9,991 |
|
|
|
8,995 |
|
|
|
996 |
|
|
|
11.1 |
% |
Interest expense, net |
|
|
14,543 |
|
|
|
6,526 |
|
|
|
8,017 |
|
|
|
122.8 |
% |
Other expense (income), net |
|
|
848 |
|
|
|
362 |
|
|
|
486 |
|
|
|
134.3 |
% |
Income tax expense (benefit) |
|
|
(3,587 |
) |
|
|
1,250 |
|
|
|
(4,837 |
) |
|
|
-387.0 |
% |
|
|
|
Net income (loss) |
|
$ |
(1,813 |
) |
|
$ |
857 |
| |
$ |
(2,670 |
) |
|
|
-311.6 |
% |
|
|
|
OTHER DATA: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Station operating income (1) |
|
$ |
20,755 |
|
|
$ |
21,702 |
|
|
$ |
(947 |
) |
|
|
-4.4 |
% |
Station operating income margin (2) |
|
|
28.7 |
% |
|
|
28.8 |
% |
|
|
|
|
|
|
-0.1 |
% |
Cash flows related to: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities |
|
|
8,692 |
|
|
|
19,116 |
|
|
|
(10,424 |
) |
|
|
-54.5 |
% |
Investing activities |
|
|
(1,117 |
) |
|
|
(3,725 |
) |
|
|
2,608 |
|
|
|
70.0 |
% |
Financing activities |
|
|
(4,970 |
) |
|
|
(18,427 |
) |
|
|
13,457 |
|
|
|
73.0 |
% |
Capital expenditures |
|
$ |
(1,104 |
) |
|
$ |
(3,722 |
) |
|
$ |
2,618 |
|
|
|
70.3 |
% |
|
|
|
(1) |
|
Station operating income is defined as operating income before depreciation and amortization, LMA fees, corporate general and
administrative expenses, and non-cash stock |
14
|
|
|
|
|
compensation. Station operating income should not be considered in isolation or as a
substitute for net income, operating income, cash flows from operating activities or any other
measure for determining our operating performance or liquidity that is calculated in
accordance with GAAP. See managements explanation of this measure and the reasons for its use
and presentation, along with a quantitative reconciliation of station operating income to its
most directly comparable financial measure calculated and presented in accordance with GAAP,
below. |
|
(2) |
|
Station operating income margin is defined as station operating income as a percentage of net
revenues. |
Three Months Ended March 31, 2007 Versus the Three Months Ended March 31, 2006
Net Revenues. Net revenues decreased $2.9 million, or 3.8% to $72.4 million for the three
months ended March 31, 2007 from $75.3 million for the three months ended March 31, 2006. This
decrease was primarily attributable to the contribution of four stations to CMP in the second
quarter of 2006.
On a pro forma basis, which excludes the January through March 2006 results of the
stations contributed to CMP in May 2006, net revenues for the three months ended March 31, 2007 decreased $0.5
million to $72.4 million, a decrease of 0.6% from the same period in 2006.
Station Operating Expenses, Excluding Depreciation, Amortization and LMA Fees. Station
operating expenses excluding depreciation, amortization and LMA fees decreased $2.0 million, or
3.6%, to $51.6 million for the three months ended March 31, 2007 from $53.6 million for the three
months ended March 31, 2006. This decrease was primarily attributable to the contribution of four
radio stations to CMP in the second quarter of 2006. The provision for doubtful accounts was $0.6
million for the three months ended March 31, 2007 as compared to $0.9 million during the three
months ended March 31, 2006. As a percentage of net revenues, the provision for doubtful accounts
was 0.9% for the three months ended March 31, 2007 and was consistent with the prior year.
Depreciation and Amortization. Depreciation and amortization decreased $0.9 million, or 19.6%,
to $3.9 million for the three months ended March 31, 2007 compared to $4.8 million for the three
months ended March 31, 2006. This decrease was primarily attributable to the contribution of assets
to CMP in the second quarter of 2006.
LMA Fees. LMA fees totaled $0.2 million for the three months ended March 31, 2007 and were
comprised primarily of fees associated with stations operated under LMAs in Vinton, Iowa, and Ann
Arbor, Michigan.
Corporate, General and Administrative Expenses. Corporate, general and administrative expenses
decreased $1.0 million, or 12.5%, to $6.7 million for the three months ended March 31, 2007
compared to $7.7 million for the three months ended March 31, 2006. This is primarily attributable
to a $1.2 million decrease in non-cash stock compensation costs offset by a slight increase in
general and administrative expenses.
15
Non-operating (Income) Expense. Interest expense, net of interest income, increased by $8.0
million to $14.5 million for the three months ended March 31, 2007 compared to $6.5 million for the
three months ended March 31, 2006. This increase was primarily due to increased levels of bank
debt outstanding, a higher average cost of bank debt and a net $2.0 million non-cash charge versus
a net $0.8 million credit for the change in value and amortization of an interest rate swap
arrangement for the same period in 2006. (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
Three Months |
|
|
|
|
|
Percent |
|
|
Ended March 31, |
|
Ended March 31, |
|
Dollar Change |
|
Change 2007 |
|
|
2007 |
|
2006 |
|
2007 vs. 2006 |
|
vs. 2006 |
|
|
|
Bank Borrowings term loan and revolving
credit facilities |
|
$ |
13,712 |
|
|
$ |
8,462 |
|
|
$ |
5,250 |
|
|
|
62.0 |
% |
Bank Borrowings yield adjustment interest
rate swap arrangement net |
|
|
(1,340 |
) |
|
|
(1,515 |
) |
|
|
175 |
|
|
|
-11.5 |
% |
Change in
fair value of interest rate swap
agreement |
|
|
2,020 |
|
| |
|
|
| |
2,020 |
|
| |
N/A |
|
Change in fair value of interest rate option
agreement |
|
|
(26 |
) |
|
|
(850 |
) |
|
|
824 |
|
|
|
96.9 |
% |
Other interest expense |
|
|
261 |
|
|
|
573 |
|
|
|
(312 |
) |
|
|
-54.5 |
% |
Interest income |
|
|
(84 |
) |
|
|
(144 |
) |
|
|
60 |
|
|
|
41.7 |
% |
|
|
|
Interest expense, net |
|
$ |
14,543 |
|
|
$ |
6,526 |
|
|
$ |
8,017 |
|
|
|
122.8 |
% |
|
|
|
Income Taxes For the three months ended March 31, 2007, the Company recorded an income tax
benefit of $3.6 million, as compared to a $1.3 million charge during the first quarter of 2006.
Station Operating Income. As a result of the factors described above, station operating income
decreased $0.9 million, or 4.4%, to $20.8 million for the three months ended March 31, 2007
compared to $21.7 million for the three months ended March 31, 2006. Station Operating Income
consists of operating income before depreciation and amortization, LMA fees, corporate general and
administrative expenses and non-cash stock compensation. Station operating income is not a measure
of performance calculated in accordance with accounting principles generally accepted in the United
States (GAAP). Station Operating Income isolates the amount of income generated solely by our
stations and assists management in evaluating the earnings potential of our station portfolio. In
deriving this measure, we exclude depreciation and amortization due to the insignificant investment
in tangible assets required to operate the stations and the relatively insignificant amount of
intangible assets subject to amortization. We exclude LMA fees from this measure, even though it
requires a cash commitment, due to the insignificance and temporary nature of such fees. Corporate
expenses, despite representing an additional significant cash commitment, are excluded in an effort
to present the operating performance of our stations exclusive of the corporate resources employed.
We believe this is important to our investors because it highlights the gross margin generated by
our station portfolio. Finally, we exclude non-cash stock compensation as it does not represent an
actual cash obligation.
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 the primary measure 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 to determine 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
16
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 consolidated statements of operations
(the most directly comparable financial measure calculated and presented in accordance with GAAP
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
|
|
2007 |
|
2006 |
|
|
|
Operating income |
|
$ |
9,991 |
|
|
$ |
8,995 |
|
LMA fees |
|
|
165 |
|
|
|
205 |
|
Depreciation and amortization |
|
|
3,871 |
|
|
|
4,813 |
|
Corporate general and administrative |
|
|
6,728 |
|
|
|
7,689 |
|
|
|
|
Station operating income |
|
$ |
20,755 |
|
|
$ |
21,702 |
|
|
|
|
Intangible Assets. Intangible assets, net of amortization, were $934.1 million and $934.1
million as of March 31, 2007 and December 31, 2006, respectively. These intangible asset balances
primarily consist of broadcast licenses and goodwill, although we possess certain other intangible
assets obtained in connection with our acquisitions, such as non-compete agreements. Specifically
identified intangible assets, including broadcasting licenses, acquired in a business combination
are recorded at their estimated fair value on the date of the related acquisition. Purchased
intangible assets are recorded at cost. Goodwill represents the excess of purchase price over the
fair value of tangible assets and specifically identified intangible assets.
Liquidity and Capital Resources
Our principal need for funds has been to fund the acquisition of radio stations and, to a
lesser extent, working capital needs, capital expenditures, and interest and debt service payments.
Our principal sources of funds for these requirements have been cash flows from financing
activities, such as the proceeds from borrowings under credit facilities and cash flows from
operations. Our principal needs for funds in the future are expected to include the need to fund
pending and future acquisitions, interest and debt service payments, working capital needs and
capital expenditures. We believe that our presently projected cash flow from operations and present
financing arrangements, including availability under our existing credit facilities, or borrowings
that would be available from future financing arrangements, will be sufficient to meet our
foreseeable capital needs for the next 12 months, including the funding of pending acquisitions,
operations and debt service. However, our cash flow from operations is subject to such factors as
shifts in population, station listenership, demographics, audience tastes and fluctuations in
preferred advertising media and borrowings under financing arrangements 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. As such,
there can be no assurance that we will be able to obtain such financing at terms, and on the
timetable, that may be necessary to meet our future capital needs.
For the three months ended March 31, 2007, net cash provided by operating activities decreased
$10.4 million to $8.7 million from $19.1 million for the three months ended March 31, 2006. The
decrease is primarily attributable to a $6.0 million decrease in accounts payable and a $4.8
million decrease in deferred income taxes, with favorable offsets related to the net change in the
remaining operating activities.
For the three months ended March 31, 2007, net cash used in investing activities decreased
$2.6 million to $1.1 million from $3.7 million for the three months ended March 31, 2007. This
decrease was primarily attributable a
17
decrease in capital expenditures for the period comprised of
$0.8 million of expenditures related to the consolidation of or the purchase of studio facilities
and tower structures and $0.3 million of maintenance capital expenditures..
For the three months ended March 31, 2007, net cash used in financing activities totaled $5.0
million compared to net cash used in financing activities of $18.4 million during the three
months ended March 31, 2006. Net cash used during the current period was primarily due to repayment
of the revolving credit facility.
Historical Acquisitions. We did not complete any station acquisitions during the three months
ended March 31, 2007 and 2006.
Pending Acquisitions. As of March 31, 2007 we were not a party to any pending acquisitions.
Acquisition Shelf Registration Statement. We have registered an aggregate of 20,000,000
shares of our Class A Common Stock, pursuant to registration statements on Form S-4, for issuance
from time to time in connection with our acquisition of other businesses, properties or securities
in business combination transactions utilizing a shelf registration process. As of March 31,
2007, we had issued 5,666,553 of the 20,000,000 shares registered in connection with various
completed acquisitions.
Sources of Liquidity. We have historically financed our acquisitions primarily through the
proceeds from debt and equity financings, the proceeds from asset divestitures and using cash
generated from operations. There were no acquisitions in first quarter 2007.
On June 23, 2006, we announced the completion of a tender offer for 11.5 million outstanding
shares of our Class A Common Stock. In connection with the tender offer, we also agreed to
repurchase 5.0 million shares of our outstanding Class B Common Stock.
In connection with the tender offer and common stock repurchase, on June 7, 2006, we entered
into a new $850 million credit facility, which provides for a $100.0 million six-year revolving
credit facility and a seven-year $750.0 million term loan facility. We used the proceeds to repay
all amounts outstanding under our 2005 credit facility (approximately $588.2 million) and to
purchase the 11.5 million shares of our Class A Common Stock pursuant to the tender offer and 5.0
million shares of our Class B Common Stock pursuant to the negotiated repurchase, which occurred on
June 23, 2006 and June 29, 2006, respectively, and to pay fees and expenses related to the
foregoing. The remaining proceeds are being used to provide ongoing working capital (which may, in
the future, include the funding of future acquisitions of radio stations) and for other general
corporate purposes, including capital expenditures. As of March 31, 2007, we had an outstanding
balance under the revolving credit facility of $30.5 million.
The credit facility also provides for additional, incremental revolving credit or term loan
facilities in an aggregate principal amount of up to an additional $200.0 million, subject to the
satisfaction of certain conditions and upon our providing notice prior to June 30, 2009. These
incremental credit facilities are permitted from time to time, and may be used to fund future
acquisitions of radio stations and for other general corporate purposes, including capital
expenditures. Any incremental credit facilities will be secured and guaranteed on the same basis as
the term loan and revolving credit facility.
Our obligations under the credit facility are collateralized by a pledge of substantially all
of our assets in which a security interest may lawfully be granted (including FCC licenses held by
our subsidiaries), including, without limitation, intellectual property and all of the capital
stock of our direct and indirect domestic subsidiaries (except for Broadcast Software
International, Inc.) and 65% of the capital stock of certain first-tier foreign subsidiaries. In
addition, our obligations under the credit facility are guaranteed by certain of our subsidiaries.
The term loan facility will mature on June 7, 2013 and amortizes in equal quarterly
installments which commenced on September 30, 2006, with 0.25% of the initial aggregate advances
payable each quarter during the first six years of the term, and 23.5% due in each quarter during
the seventh year. The term loan facility also contains certain minimum excess cash flow payment
requirements. During the three months ended March 31, 2007, we made such a payment for
$30.5 million by drawing down on the revolving credit facility. The
18
revolving credit facility will
mature on June 7, 2012 and, except at our option, the commitment will remain unchanged up to that
date.
Borrowings under the term loan facility bear interest, at our option, at a rate equal to LIBOR
plus 2.0% or the Alternate Base Rate (defined as the higher of the Bank of America Prime Rate and
the Federal Funds rate plus 0.50%) plus 1.0%. Borrowings under the revolving credit facility will
bear interest, at our option, at a rate equal to LIBOR plus a margin ranging between 0.675% and
2.0% or the Alternate Base Rate plus a margin ranging between 0.0% and 1.0% (in either case
dependent upon our leverage ratio).
As of March 31, 2007, prior to the effect of the May 2005 Swap, the effective interest rate of
the outstanding borrowings pursuant to the credit facility was approximately 7.7%.
Certain mandatory prepayments of the term loan facility would be required upon the occurrence
of specified events, including upon the incurrence of certain additional indebtedness (other than
under any incremental credit facilities) and upon the sale of certain assets. Under the terms of
the credit agreement governing the credit facility, we are subject to certain restrictive financial
and operating covenants including, but not limited to, maximum leverage covenants, minimum interest
coverage covenants, limitations on capital expenditures, asset dispositions and the payment of
dividends. The failure to comply with the covenants would result in an event of default, which in
turn would permit acceleration of debt under the credit facility. At March 31, 2007, we were in
compliance with such financial and operating covenants.
The terms of the credit agreement contain events of default after expiration of applicable
grace periods including, but not limited to, failure to make payments on the credit facility,
breach of covenants, breach of representations and warranties, invalidity of the credit agreement
and related documents, cross default under other agreements or conditions relating to our
indebtedness or that of our restricted subsidiaries, certain events of liquidation, moratorium,
insolvency, bankruptcy or similar events, enforcement of security, certain litigation or other
proceedings, and certain events relating to changes in control. Upon the occurrence of an event of
default under the terms of the credit agreement, the majority of the lenders are able to declare
all amounts under the credit facility to be due and payable and take certain other actions,
including enforcement of rights in respect of the collateral. The majority of the banks extending
credit under each term loan facility and the majority of the banks under each revolving credit
facility may terminate such term loan facility and such revolving credit facility, respectively,
upon an event of default.
In May 2005, we entered into a forward-starting interest rate swap agreement that became
effective in March 2006. This swap agreement effectively fixes the interest rate, based on LIBOR,
on $400.0 million of our floating rate bank borrowings through March 2009. As a result and
including the fixed component of the swap, at March 31, 2007, our effective cash interest rate on
loan amounts outstanding under our current interest rate swap agreement is 6.8%.
A
commitment fee calculated at a rate ranging from 0.25% to 0.38% per year (depending upon
our leverage levels) of the average daily amount available under the revolving credit facility is
payable quarterly in arrears, and fees in respect of letters of credit, issued in accordance with
the credit agreement governing our credit facility, equal to the interest rate margin then
applicable to Eurodollar Rate loans under the revolving credit facility are payable quarterly in
arrears. In addition, a fronting fee of 0.25% is payable quarterly to the issuing bank.
19
Item 3. Quantitative and Qualitative Disclosures About Market Risk
At March 31, 2007, 100% 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 $1.8 million for the three months ended March 31, 2007. As part of our
efforts to mitigate interest rate risk, in May 2005, we entered into a forward starting interest
rate swap agreement that effectively fixed the interest rate, based on LIBOR, on $400.0 million of
our current floating rate bank borrowings for a three-year period commencing March 2006. This
agreement is intended to reduce our exposure to interest rate fluctuations and was not entered into
for speculative purposes. Segregating the $346.3 million of borrowings outstanding at March 31,
2007 that are not subject to the interest rate swap and assuming a one percentage point change in
the average interest rate under these borrowings, it is estimated that our interest expense and net
income would have changed by $0.8 million for the three months ended March 31, 2007.
In the event of an adverse change in interest rates, management would likely take actions, in
addition to the interest rate swap agreement similar to that discussed above, to further mitigate
its exposure. However, due to the uncertainty of the actions that would be taken and their possible
effects, additional analysis is not possible at this time. Further, such analysis could not take
into account the effects of any change in the level of overall economic activity that could exist
in such an environment.
Item 4. Controls and Procedures
We maintain a set of disclosure controls and procedures designed to ensure that information
required to be disclosed by the Company in reports that it files or submits under the Securities
Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods
specified in Securities and Exchange Commission rules and forms. At the end of the period covered
by this report, an evaluation was carried out under the supervision and with the participation of
our management, including our Chairman, President and Chief Executive Officer (CEO) and our
Executive Vice President, Treasurer and Chief Financial Officer (CFO), of the effectiveness of
our disclosure controls and procedures. Based on that evaluation, the CEO and CFO have concluded
that, as a result of the previously disclosed material weakness in our internal control over
financial reporting described in our Annual Report on Form 10-K for the year ended December 31,
2006, our disclosure controls and procedures are not effective as of March 31, 2007, due to the
fact that the remediation steps being taken, described below, were not fully implemented by the end
of such period.
In response to the material weakness described in our annual report on Form 10-K for the year
ended December 31, 2006, we have engaged an outside tax consultant, who is unaffiliated with our
external auditor, to perform quarter-end reviews of our tax accounting, and we have hired
additional personnel to complement our existing corporate accounting staff. There have been no
other changes in our internal control over financial reporting during the period covered by this
report that have materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
From time to time, we are involved in various legal proceedings that are handled and defended
in the ordinary course of business. While we are unable to predict the outcome of these matters,
our management does not believe, based upon currently available facts, that the ultimate resolution
of any such proceedings would have a material adverse effect on our overall financial condition or
results of operations.
Item 1A. Risk Factors
Not applicable.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
20
Not applicable
Item 3. Defaults upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 5. Other Information
Not applicable.
Item 6. Exhibits
|
|
|
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. |
21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
|
|
|
CUMULUS MEDIA INC.
|
|
Date: May 10, 2007 |
By: |
/s/ Martin R. Gausvik
|
|
|
|
Executive Vice President, Treasurer and |
|
|
|
Chief Financial Officer |
|
22
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. |
23