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Entercom Communications 10-Q 2005

Documents found in this filing:

  1. 10-Q
  2. Ex-31.01
  3. Ex-31.02
  4. Ex-32.01
  5. Ex-32.02
  6. Ex-32.02

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

FORM 10-Q

 

(Mark One)

 

ý

 

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

 

 

 

For the quarterly period ended June 30, 2005

 

 

 

or

 

 

 

o

 

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

 

For the transition period from                    to                       

 

Commission File Number:                 001-14461

 

Entercom Communications Corp.

(Exact name of registrant as specified in its charter)

 

Pennsylvania

 

23-1701044

(State or other jurisdiction of incorporation of organization)

 

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

 

401 City Avenue, Suite 809

Bala Cynwyd, Pennsylvania 19004

(Address of principal executive offices and Zip Code)

 

(610) 660-5610

(Registrant’s telephone number, including area code)

 

 

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

 

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

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes ý     No o

 

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

 

Class A Common Stock,  $.01 par value – 37,656,138 Shares Outstanding as of August 2, 2005

Class B Common Stock,  $.01 par value – 8,271,805 Shares Outstanding as of August 2, 2005

 

 



 

ENTERCOM COMMUNICATIONS CORP.

 

INDEX

 

Part I    Financial Information

 

 

 

 

Item 1.

Financial Statements

1

Item 2.

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

31

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

45

Item 4.

Controls and Procedures

46

 

 

 

Part II    Other Information

 

 

 

 

Item 1.

Legal Proceedings

47

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

47

Item 3.

Defaults Upon Senior Securities

47

Item 4.

Submission of Matters to a Vote of Security Holders

48

Item 5.

Other Information

48

Item 6.

Exhibits

49

 

 

 

Signatures

50

 

 

 

Exhibit Index

51

 

Private Securities Litigation Reform Act Safe Harbor Statement

 

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

 

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

 

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

 

Key risks to our company are described in our annual report on Form 10-K filed with the Securities and Exchange Commission on March 2, 2005.

 

i



 

PART I

 

FINANCIAL INFORMATION

 

ITEM 1.     Financial Information

 

ENTERCOM COMMUNICATIONS CORP.

CONDENSED CONSOLIDATED BALANCE SHEETS

JUNE 30, 2005 AND DECEMBER 31, 2004

(amounts in thousands)

(unaudited)

 

ASSETS

 

 

 

JUNE 30,

 

DECEMBER 31,

 

 

 

2005

 

2004

 

CURRENT ASSETS:

 

 

 

 

 

Cash and cash equivalents

 

$

11,108

 

$

11,844

 

Accounts receivable, net of allowance for doubtful accounts

 

87,381

 

78,341

 

Prepaid expenses and deposits

 

9,137

 

4,664

 

Prepaid and refundable income taxes

 

4,894

 

5,470

 

Deferred tax assets

 

3,060

 

2,881

 

Investment in deconsolidated subsidiaries

 

 

2,260

 

Total current assets

 

115,580

 

105,460

 

 

 

 

 

 

 

INVESTMENTS

 

9,393

 

12,291

 

 

 

 

 

 

 

PROPERTY AND EQUIPMENT:

 

 

 

 

 

Land, land easements and land improvements

 

14,814

 

14,794

 

Building

 

14,315

 

14,306

 

Equipment

 

102,847

 

102,429

 

Furniture and fixtures

 

14,490

 

14,552

 

Leasehold improvements

 

16,911

 

16,953

 

 

 

163,377

 

163,034

 

Accumulated depreciation

 

(75,597

)

(69,277

)

 

 

87,780

 

93,757

 

Capital improvements in progress

 

4,437

 

1,248

 

Net property and equipment

 

92,217

 

95,005

 

 

 

 

 

 

 

RADIO BROADCASTING LICENSES - Net

 

1,288,962

 

1,289,040

 

 

 

 

 

 

 

GOODWILL - Net

 

150,982

 

150,982

 

 

 

 

 

 

 

DEFERRED CHARGES AND OTHER ASSETS - Net

 

17,639

 

15,183

 

 

 

 

 

 

 

TOTAL

 

$

1,674,773

 

$

1,667,961

 

 

See notes to condensed consolidated financial statements.

 

1



 

ENTERCOM COMMUNICATIONS CORP.

CONDENSED CONSOLIDATED BALANCE SHEETS

JUNE 30, 2005 AND DECEMBER 31, 2004

(amounts in thousands)

(unaudited)

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

JUNE 30,

 

DECEMBER 31,

 

 

 

2005

 

2004

 

CURRENT LIABILITIES:

 

 

 

 

 

Accounts payable

 

$

2,072

 

$

1,569

 

Accrued expenses

 

11,617

 

10,587

 

Accrued liabilities:

 

 

 

 

 

Salaries

 

7,880

 

7,327

 

Interest

 

4,201

 

4,221

 

Advertiser obligations and commissions

 

1,734

 

1,457

 

Other

 

446

 

440

 

Non-controlling interest - variable interest entity

 

 

165

 

Current portion of long-term debt

 

18

 

17

 

Total current liabilities

 

27,968

 

25,783

 

 

 

 

 

 

 

LONG-TERM LIABILITIES:

 

 

 

 

 

Senior debt

 

373,750

 

333,259

 

7.625% senior subordinated notes

 

150,000

 

150,000

 

Deferred tax liabilities

 

173,227

 

155,918

 

Other long-term liabilities

 

7,665

 

6,928

 

Total long-term liabilities

 

704,642

 

646,105

 

Total liabilities

 

732,610

 

671,888

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SHAREHOLDERS’ EQUITY:

 

 

 

 

 

Preferred stock

 

 

 

Class A, B and C common stock

 

459

 

486

 

Additional paid-in capital

 

832,395

 

925,883

 

Retained earnings

 

110,292

 

69,780

 

Unearned compensation for unvested shares of restricted stock

 

(2,682

)

(2,853

)

Accumulated other comprehensive income

 

1,699

 

2,777

 

Total shareholders’ equity

 

942,163

 

996,073

 

 

 

 

 

 

 

TOTAL

 

$

1,674,773

 

$

1,667,961

 

 

See notes to condensed consolidated financial statements.

 

2



 

ENTERCOM COMMUNICATIONS CORP.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

SIX MONTHS ENDED JUNE 30, 2005 AND 2004

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

(unaudited)

 

 

 

SIX MONTHS ENDED

 

 

 

JUNE 30,

 

 

 

2005

 

2004

 

 

 

 

 

 

 

NET REVENUES

 

$

213,796

 

$

200,715

 

 

 

 

 

 

 

OPERATING EXPENSES:

 

 

 

 

 

Station operating expenses

 

124,001

 

116,879

 

Depreciation and amortization

 

7,983

 

7,780

 

Corporate general and administrative expenses

 

9,598

 

7,651

 

Time brokerage agreement (income) fees

 

(24

)

181

 

Net (gain) loss on sale or disposal of assets

 

(5,492

)

749

 

Total operating expenses

 

136,066

 

133,240

 

OPERATING INCOME

 

77,730

 

67,475

 

 

 

 

 

 

 

OTHER EXPENSE (INCOME):

 

 

 

 

 

Interest expense, including amortization of deferred financing costs of $658 in 2005 and $488 in 2004

 

14,002

 

9,618

 

Interest income

 

(134

)

(109

)

Net gain on derivative instruments

 

(544

)

(1,031

)

(Gain) loss on investments

 

(1,069

)

176

 

TOTAL OTHER EXPENSE

 

12,255

 

8,654

 

 

 

 

 

 

 

INCOME BEFORE INCOME TAXES

 

65,475

 

58,821

 

 

 

 

 

 

 

INCOME TAXES

 

24,963

 

22,825

 

 

 

 

 

 

 

NET INCOME

 

$

40,512

 

$

35,996

 

 

 

 

 

 

 

NET INCOME PER SHARE - BASIC

 

$

0.87

 

$

0.70

 

NET INCOME PER SHARE - DILUTED

 

$

0.86

 

$

0.70

 

 

 

 

 

 

 

WEIGHTED AVERAGE SHARES:

 

 

 

 

 

Basic

 

46,739,220

 

51,269,969

 

Diluted

 

47,021,613

 

51,715,582

 

 

See notes to condensed consolidated financial statements.

 

3



 

ENTERCOM COMMUNICATIONS CORP.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

THREE MONTHS ENDED JUNE 30, 2005 AND 2004

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

(unaudited)

 

 

 

THREE MONTHS ENDED

 

 

 

JUNE 30,

 

 

 

2005

 

2004

 

 

 

 

 

 

 

NET REVENUES

 

$

119,489

 

$

113,677

 

 

 

 

 

 

 

OPERATING EXPENSES:

 

 

 

 

 

Station operating expenses

 

65,493

 

62,356

 

Depreciation and amortization

 

3,947

 

3,778

 

Corporate general and administrative expenses

 

4,618

 

3,943

 

Time brokerage agreement fees

 

 

181

 

Net loss on sale or disposal of assets

 

41

 

718

 

Total operating expenses

 

74,099

 

70,976

 

OPERATING INCOME

 

45,390

 

42,701

 

 

 

 

 

 

 

OTHER EXPENSE (INCOME):

 

 

 

 

 

Interest expense, including amortization of deferred financing costs of $329 in 2005 and $244 in 2004

 

7,384

 

4,800

 

Interest income

 

(78

)

(43

)

Net loss (gain) on derivative instruments

 

166

 

(1,361

)

(Gain) loss on investments

 

(1,028

)

176

 

TOTAL OTHER EXPENSE

 

6,444

 

3,572

 

 

 

 

 

 

 

INCOME BEFORE INCOME TAXES

 

38,946

 

39,129

 

 

 

 

 

 

 

INCOME TAXES

 

14,671

 

15,097

 

 

 

 

 

 

 

NET INCOME

 

$

24,275

 

$

24,032

 

 

 

 

 

 

 

NET INCOME PER SHARE - BASIC AND DILUTED

 

$

0.53

 

$

0.47

 

 

 

 

 

 

 

WEIGHTED AVERAGE SHARES:

 

 

 

 

 

Basic

 

45,855,140

 

51,051,206

 

Diluted

 

46,135,783

 

51,412,878

 

 

See notes to condensed consolidated financial statements.

 

4



 

ENTERCOM COMMUNICATIONS CORP.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

SIX MONTHS ENDED JUNE 30, 2005 AND 2004

(amounts in thousands)

(unaudited)

 

 

 

SIX MONTHS ENDED

 

 

 

JUNE 30,

 

 

 

2005

 

2004

 

 

 

 

 

 

 

NET INCOME

 

$

40,512

 

$

35,996

 

 

 

 

 

 

 

OTHER COMPREHENSIVE LOSS, NET OF TAX BENEFIT:

 

 

 

 

 

Unrealized loss on investments, net of a tax benefit of $680 in 2005 and $436 in 2004

 

(1,078

)

(690

)

 

 

 

 

 

 

COMPREHENSIVE INCOME

 

$

39,434

 

$

35,306

 

 

See notes to condensed consolidated financial statements.

 

5



 

ENTERCOM COMMUNICATIONS CORP.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

THREE MONTHS ENDED JUNE 30, 2005 AND 2004

(amounts in thousands)

(unaudited)

 

 

 

THREE MONTHS ENDED

 

 

 

JUNE 30,

 

 

 

2005

 

2004

 

 

 

 

 

 

 

NET INCOME

 

$

24,275

 

$

24,032

 

 

 

 

 

 

 

OTHER COMPREHENSIVE LOSS, NET OF TAX BENEFIT:

 

 

 

 

 

Unrealized loss on investments, net of a tax benefit of $798 in 2005 and $721 in 2004

 

(1,265

)

(1,142

)

 

 

 

 

 

 

COMPREHENSIVE INCOME

 

$

23,010

 

$

22,890

 

 

See notes to condensed consolidated financial statements.

 

6



 

ENTERCOM COMMUNICATIONS CORP.

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

SIX MONTHS ENDED JUNE 30, 2005 AND YEAR ENDED DECEMBER 31, 2004

(amounts in thousands, except share data)

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Compre-

 

 

 

 

 

Common Stock

 

Additional

 

Retained

 

Unearned

 

hensive

 

 

 

 

 

Class A

 

Class B

 

Paid-in

 

Earnings

 

Compen-

 

Income

 

 

 

 

 

Shares

 

Amount

 

Shares

 

Amount

 

Capital

 

(Deficit)

 

sation

 

(Loss)

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2003

 

43,019,311

 

$

430

 

8,441,905

 

$

84

 

$

1,035,151

 

$

(5,854

)

$

(689

)

$

2,488

 

$

1,031,610

 

Net income

 

 

 

 

 

 

75,634

 

 

 

75,634

 

Conversion of Class B common stock to Class A common stock

 

170,100

 

2

 

(170,100

)

(2

)

 

 

 

 

 

Compensation expense related to granting of stock options

 

 

 

 

 

2

 

 

 

 

2

 

Compensation expense related to granting of restricted stock

 

70,624

 

1

 

 

 

2,818

 

 

(2,164

)

 

655

 

Issuance of Class A common stock related to an incentive plan

 

18,134

 

 

 

 

576

 

 

 

 

576

 

Exercise of stock options

 

93,816

 

1

 

 

 

3,229

 

 

 

 

3,230

 

Class A common stock repurchase

 

(3,007,900

)

(30

)

 

 

(115,893

)

 

 

 

(115,923

)

Net unrealized gain on investments

 

 

 

 

 

 

 

 

289

 

289

 

Balance, December 31, 2004

 

40,364,085

 

404

 

8,271,805

 

82

 

925,883

 

69,780

 

(2,853

)

2,777

 

996,073

 

Net income

 

 

 

 

 

 

40,512

 

 

 

40,512

 

Compensation expense valuation adjustment for restricted stock

 

 

 

 

 

(155

)

 

155

 

 

 

Compensation expense related to granting of restricted stock

 

13,550

 

 

 

 

681

 

 

16

 

 

697

 

Issuance of Class A common stock related to an incentive plan

 

9,566

 

 

 

 

278

 

 

 

 

278

 

Exercise of stock options

 

4,750

 

 

 

 

143

 

 

 

 

143

 

Tax benefit adjustment related to option exercises

 

 

 

 

 

(391

)

 

 

 

(391

)

Class A common stock repurchase

 

(2,736,000

)

(27

)

 

 

(94,044

)

 

 

 

(94,071

)

Net unrealized loss on investments

 

 

 

 

 

 

 

 

(1,078

)

(1,078

)

Balance, June 30, 2005

 

37,655,951

 

$

377

 

8,271,805

 

$

82

 

$

832,395

 

$

110,292

 

$

(2,682

)

$

1,699

 

$

942,163

 

 

See notes to condensed consolidated financial statements.

 

7



 

ENTERCOM COMMUNICATIONS CORP.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

SIX MONTHS ENDED JUNE 30, 2005 AND 2004

(amounts in thousands)

(unaudited)

 

 

 

SIX MONTHS ENDED

 

 

 

JUNE 30,

 

 

 

2005

 

2004

 

 

 

 

 

 

 

OPERATING ACTIVITIES:

 

 

 

 

 

Net income

 

$

40,512

 

$

35,996

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

Depreciation and amortization (includes amortization of station operating expenses of $5 in 2005)

 

7,988

 

7,780

 

Amortization of deferred financing costs

 

658

 

488

 

Deferred taxes

 

17,369

 

19,067

 

Tax benefit on exercise of options

 

11

 

378

 

Provision for bad debts

 

1,701

 

1,851

 

(Gain) loss on dispositions and exchanges of assets

 

(5,492

)

749

 

Non-cash stock-based compensation expense

 

446

 

317

 

(Gain) loss on investments

 

(1,069

)

176

 

Net gain on derivative instruments

 

(544

)

(1,031

)

Deferred rent

 

725

 

234

 

Unearned revenue -long-term

 

361

 

 

Deferred compensation

 

371

 

44

 

Changes in assets and liabilities (net of effects of acquisitions and dispositions):

 

 

 

 

 

Accounts receivable

 

(10,745

)

(6,860

)

Prepaid expenses and deposits

 

(4,452

)

(2,600

)

Prepaid and refundable income taxes

 

575

 

(2,619

)

Accounts payable and accrued liabilities

 

2,476

 

2,355

 

Net cash provided by operating activities

 

50,891

 

56,325

 

 

 

 

 

 

 

INVESTING ACTIVITIES:

 

 

 

 

 

Additions to property and equipment

 

(4,822

)

(3,365

)

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

 

7,823

 

787

 

Purchases of radio station assets

 

 

(25,229

)

Deferred charges and other assets

 

(78

)

(217

)

Cash of variable interest entity

 

 

241

 

Purchases of investments

 

(52

)

(24

)

Proceeds from investments

 

2,261

 

127

 

Station acquisition deposits and costs

 

(3,591

)

(5,024

)

Net cash provided by (used in) investing activities

 

1,541

 

(32,704

)

 

 

 

 

 

 

FINANCING ACTIVITIES:

 

 

 

 

 

Proceeds from issuance of long-term debt

 

98,000

 

65,000

 

Payments of long-term debt

 

(57,509

)

(44,508

)

Proceeds from issuance of stock under the employee stock plan

 

278

 

305

 

Purchase of the Company’s Class A common stock

 

(94,071

)

(50,055

)

Proceeds from the exercise of stock options

 

132

 

1,927

 

Net cash used in financing activities

 

(53,170

)

(27,331

)

 

 

 

 

 

 

NET DECREASE IN CASH AND CASH EQUIVALENTS

 

(738

)

(3,710

)

CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR

 

11,844

 

15,894

 

CASH ADJUSTMENT FOR REVERSAL OF DECONSOLIDATED SUBSIDIARIES

 

2

 

 

CASH AND CASH EQUIVALENTS, END OF PERIOD

 

$

11,108

 

$

12,184

 

 

 

 

 

 

 

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

Interest

 

$

13,356

 

$

9,193

 

Income taxes paid

 

$

6,874

 

$

6,535

 

 

SUPPLEMENTAL DISCLOSURES ON NON-CASH INVESTING AND FINANCING ACTIVITIES -

 

For the six months ended June 30, 2005, the Company increased its additional paid-in-capital by $0.5 million in connection with the issuance of certain awards of Restricted Stock for 13,550 shares of Class A common stock and a valuation adjustment from previous awards of Restricted Stock.

 

For the six months ended June 30, 2005, the Company decreased its additional paid-in-capital by $0.4 million in connection with tax benefits associated with the exercise of stock options.

 

For the six months ended June 30, 2004, the Company increased its additional paid-in-capital by $1.2 million in connection with the issuance of certain awards of Restricted Stock for 25,174 shares of Class A common stock.

 

See notes to consolidated financial statements.

 

8



 

ENTERCOM COMMUNICATIONS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SIX MONTHS ENDED JUNE 30, 2005 AND 2004

 

1.             BASIS OF PRESENTATION

 

The condensed consolidated interim unaudited financial statements included herein have been prepared by Entercom Communications Corp. and its subsidiaries (collectively, the “Company”) in accordance with (1) generally accepted accounting principles for interim financial information and (2) the instructions of the Securities and Exchange Commission (the “SEC”) for Form 10-Q and Article 10 of Regulation S-X.  Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.  In the opinion of management, the financial statements reflect all adjustments considered necessary for a fair statement of the results of operations and financial position for the interim periods presented.  All such adjustments are of a normal, recurring nature. The Company’s results are subject to seasonal fluctuations and, therefore, the results shown on an interim basis are not necessarily indicative of results for a full year.

 

This Form 10-Q should be read in conjunction with the financial statements and notes thereto included in the Company’s audited financial statements as of and for the year ended December 31, 2004 and filed with the SEC on March  2, 2005, as part of the Company’s Form 10-K.

 

Principles of Consolidation

 

The accompanying condensed consolidated financial statements include the accounts of the Company and its subsidiaries, all of which are wholly-owned. All inter-company transactions and balances have been eliminated in consolidation.  The Company also considers the applicability of Financial Accounting Standards Board (“FASB”) Financial Interpretation No. (“FIN”) 46R (as revised), “Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51,” which would include any variable interest entities that are required to be consolidated by the primary beneficiary.

 

Reportable Segment

 

The Company operates under one reportable business segment, radio broadcasting, for which segment disclosure is consistent with the management decision-making process that determines the allocation of resources and the measuring of performance.

 

Use of Estimates

 

The Company makes estimates and assumptions that affect the amounts reported in the financial statements and the disclosures made in the accompanying notes.  For example, the Company uses estimates for reserves to determine the collectibility of accounts receivable and to determine the value of deferred tax assets and liabilities and contingencies and litigation.  The Company uses estimates to determine the remaining economic lives and carrying values of property and equipment and other definite-lived intangible assets.  The Company estimates the fair value of the Company’s radio broadcasting licenses and goodwill for purposes of testing for impairment.  The Company also uses assumptions when employing the Black-Scholes valuation model to estimate the fair value of stock options granted for pro forma disclosures (see Note 2). Despite the Company’s intention to establish accurate estimates and assumptions, actual results may differ from the Company’s estimates.

 

Recent Accounting Pronouncements

 

EITF Issue No. 05-6

 

At a June 2005 meeting, the FASB Emerging Issues Task Force (“EITF”) reached a consensus on Issue No. 05-6, “Determining the Amortization Period for Leasehold Improvements.” The amortization period for leasehold improvements acquired in a business combination or acquired subsequent to lease inception should be based on the lesser of the useful life of the leasehold improvements or the period of the lease including all renewal periods that are reasonably assured of exercise at the time of the acquisition.  The consensus is to be applied prospectively to leasehold improvements acquired subsequent to the EITF ratification date of June 29, 2005. The Company does not expect that the adoption of Issue No. 05-6 will have a material effect on the Company’s financial position, results of operations or cash flows.

 

9



 

SFAS No. 154

 

On June 1, 2005, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 154, “Accounting Changes and Error Corrections,” which will require entities that voluntarily make a change in accounting principle to apply that change retrospectively to prior periods’ financial statements, unless this would be impracticable. SFAS No. 154 supersedes Accounting Principles Board (“APB”) Opinion No. 20, “Accounting Changes,” which previously required that most voluntary changes in accounting principle be recognized by including in the current period’s net income the cumulative effect of changing to the new accounting principle. SFAS No. 154 makes a distinction between “retrospective application” of an accounting principle and the “restatement” of financial statements to reflect the correction of an error.  In addition, another significant change in practice under SFAS No. 154 will be that if an entity changes its method of depreciation, amortization, or depletion for long-lived, non-financial assets, the change must be accounted for as a change in accounting estimate.  Under APB Opinion No. 20, such a change would have been reported as a change in accounting principle.  SFAS No. 154 applies to accounting changes and error corrections that are made by the Company beginning January 1, 2006.  The Company does not expect that the adoption of SFAS No. 154 will have a material effect on the Company’s financial position, results of operations or cash flows.

 

FIN 47

 

On March 30, 2005, the FASB issued FIN 47,  “Accounting for Conditional Asset Retirement Obligations,” that clarifies when an entity must record a liability for a conditional asset retirement obligation if the fair value of the obligation can be reasonably estimated.  The types of asset retirement obligations that are covered by this Interpretation are those for which an entity has a legal obligation to perform an asset retirement activity; however, the timing and/or method of settling the obligation are conditional on a future event that may or may not be within the control of the entity.  FIN 47, which also clarifies when an entity would have sufficient information to reasonably estimate the fair value of an asset retirement obligation, will be effective for the year ended December 31, 2005. The Company will reflect the cumulative effect of initially applying FIN 47 as a change in accounting principle. The Company does not expect that the adoption of FIN 47 will have a material effect on the Company’s financial position, results of operations or cash flows.

 

SAB No. 107

 

On March 29, 2005, the SEC issued Staff Accounting Bulletin (“SAB”) No. 107 to assist in the implementation challenges of SFAS No. 123R and to enhance the information provided to investors. SAB No. 107 creates a framework that is premised on two themes: (1) considerable judgment is required by the Company to successfully implement SFAS No. 123R; and (2) reasonable individuals, acting in good faith, may conclude differently on the fair value of employee stock options.  Accordingly, situations in which there is only one acceptable fair value estimate are expected to be rare.

 

SFAS No. 153

 

In December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets - An Amendment of APB Opinion No. 29.”  SFAS No. 153 amends APB Opinion No. 29, “Accounting for Nonmonetary Transactions.” The amendments made by SFAS No. 153 are based on the principle that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged.  Further, the amendments eliminate the narrow exception for nonmonetary exchanges of similar productive assets, which requires that the accounting for the exchange be based on the recorded amount of the asset relinquished, and replace it with a broader exception for exchanges of nonmonetary assets that do not have “commercial substance.” The provisions in SFAS No. 153 are effective for nonmonetary asset exchanges occurring in the interim reporting period beginning July 1, 2005.  The Company does not expect the adoption of SFAS No. 153 to have a material effect on the Company’s financial position, results of operations or cash flows.

 

SFAS No. 123R

 

In December 2004, the FASB issued SFAS No. 123R, as revised, “Share-Based Payment.”  SFAS No. 123R replaces SFAS No. 123, “Accounting for Stock-Based Compensation,” and supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees.”  The scope of SFAS No. 123R includes a wide range of share-based compensation arrangements including stock options, restricted share plans, performance-based awards, stock appreciation rights, and employee stock purchase plans.  SFAS No. 123R requires companies to recognize in their financial statements the compensation expense relating to share-based payment transactions that would include all stock options that have future vesting provisions, as modified, or as newly granted beginning on the grant date of such options.  Prior to the effective date of this revision, SFAS No. 123 permitted entities the option of applying the guidance

 

10



 

in APB Opinion No. 25, as long as the footnotes to the financial statements disclosed what net income (loss) would have been had the Company used the preferable fair-value-based method.

 

The adoption of SFAS No. 123R, which will be effective for the Company for the annual reporting period beginning January 1, 2006, will have a significant impact on the Company’s results of operations, although it will have no impact on the Company’s overall financial position. The Company is unable to quantify the impact of adoption of SFAS No. 123R at this time as the impact will be affected by the future grants of share-based payments. In addition, SFAS No. 123R requires that the benefits of tax deductions in excess of recognized compensation expense are reported as cash flow from financing activities. This requirement will increase cash flows from financing activities in periods after adoption. The Company cannot estimate these amounts as it depends on when employees exercise their outstanding stock options and the price of the Company’s stock at the time of exercise.

 

The Company has not yet determined the implementation strategy that will be used under the three alternatives: (1) modified prospective application without restatement of prior interim periods in the year of adoption; (2) modified prospective application with restatement of prior interim periods in the year of adoption; or (3) modified retrospective application. If the Company had adopted SFAS No. 123R in prior periods, the impact would have approximated the impact of SFAS No. 123 as described in Note 2 in the disclosure of pro forma net income and net income per share.  Accordingly, if SFAS No. 123R had been adopted for the six months ended June 30, 2005 and 2004, net income would have been negatively impacted by $5.0 million ($0.12 per basic share and $0.11 per fully diluted share) and $7.0 million ($0.13 per basic share and $0.14 per fully diluted share), respectively.  If SFAS No. 123R had been adopted for the three months ended June 30, 2005 and 2004, net income would have been negatively impacted by $2.5 million ($0.06 per basic and fully diluted share) and $3.5 million ($0.07 per basic and fully diluted share), respectively. See Note 2 for a discussion of the Company’s current treatment of stock-based compensation.

 

EITF Issue No. 03-13

 

In November 2004, the EITF reached a consensus on Issue No. 03-13, “Applying the Conditions in Paragraph 42 of FASB Statement No. 144 in Determining Whether to Report Discontinued Operations.”  Under the consensus, the approach for assessing whether cash flows of the component have been eliminated from the ongoing operations of the entity focuses on whether continuing cash flows are direct or indirect cash flows. Cash flows of the component would not be eliminated if the continuing cash flows to the entity are considered direct cash flows. EITF Issue No. 03-13 is applied to a component of an enterprise that is either disposed of or classified as held for sale and was effective for the Company as of January 1, 2005. The adoption of EITF 03-13 did not have an impact on the Company’s financial position, results of operations or cash flows.

 

EITF Topic D-108

 

At the September 2004 meeting of the EITF, the SEC staff announced guidance on the use of the residual method to value acquired intangible assets other than goodwill in a business combination (EITF Topic D-108). The SEC concluded that the residual method does not comply with the requirements of SFAS No. 141, “Business Combinations.”  Instead, a direct value method should be used to determine the fair value of all intangible assets required to be recognized under SFAS No. 141. Similarly, impairment testing of intangible assets should not rely on a residual method and, instead, should comply with the provisions of SFAS No. 142, “Goodwill and Other Intangible Assets.” The adoption of the guidance did not have a material effect on the Company’s financial position, results of operations or cash flows.  See Note 4, Indefinite-Lived Intangibles, for further discussion.

 

2.             INCENTIVE STOCK-BASED COMPENSATION

 

The Company accounts for its incentive stock-based compensation under the intrinsic value method in accordance with the provisions of APB No. 25, “Accounting for Stock Issued to Employees,” as interpreted by FIN 44, “Accounting for Certain Transactions Involving Stock Compensation, and Interpretation of APB Opinion No. 25.”  The Company presents the pro forma disclosures required by SFAS No. 123, “Accounting for Stock-Based Compensation,” as amended by SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure,” and related Interpretations.  SFAS No. 123 requires disclosure of the pro forma effects on net income and net income per share had the fair value recognition provisions of SFAS No. 123 been adopted.  SFAS No. 123 permits the use of either a fair value based method or the intrinsic value method to measure the expense associated with stock-based compensation arrangements.

 

To determine the pro forma impact, the Company has employed the Black-Scholes model to estimate the fair value of options granted.  This valuation model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. This model also requires the input of highly subjective

 

11



 

assumptions including the expected stock price volatility. The Company’s outstanding stock options have characteristics significantly different from those of traded options, and changes in the subjective input assumptions can materially affect this estimate (see Note 1, Use of Estimates).

 

The weighted average fair value of each option granted under the various stock option plans for the six months ended June 30, 2005 and 2004 was $9.38 and $13.25, respectively, and for the three months ended June 30, 2005 and 2004 was $9.31 and $12.18, respectively.  The fair value of each option grant was estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions:

 

 

 

Six Months and Three

 

 

 

Months Ended June 30,

 

 

 

2005

 

2004

 

 

 

 

 

 

 

Expected life (years)

 

5

 

5

 

Expected volatility factor (%)

 

22

 

24

 

Risk-free interest rate (%)

 

4.0

 

3.0

 

Expected dividend yield (%)

 

 

 

 

In accordance with the interim disclosure provisions of SFAS No. 148, the following table presents the pro forma effect on our net income had compensation expense under the Equity Compensation Plan (see Note 3) been recorded for the six months and three months ended June 30, 2005 and 2004, as determined under the fair value method:

 

 

 

Six Months Ended June 30,

 

 

 

2005

 

2004

 

 

 

(amount in thousands, except per

 

 

 

share data)

 

 

 

 

 

 

 

Net income - as reported

 

$

40,512

 

$

35,996

 

Add: Compensation expense included in net income, net of taxes of $173 in 2005 and $123 in 2004

 

273

 

194

 

Subtract: Stock-based employee compensation expense determined under fair value based method for all awards, net of taxes of $3,322 in 2005 and $4,525 in 2004

 

5,246

 

7,146

 

Net income - pro forma

 

$

35,539

 

$

29,044

 

Basic net income per share - as reported

 

$

0.87

 

$

0.70

 

Basic net income per share - pro forma

 

$

0.76

 

$

0.57

 

Diluted net income per share - as reported

 

$

0.86

 

$

0.70

 

Diluted net income per share - pro forma

 

$

0.76

 

$

0.56

 

 

 

 

Three Months Ended June 30,

 

 

 

2005

 

2004

 

 

 

(amount in thousands, except per

 

 

 

share data)

 

 

 

 

 

 

 

Net income - as reported

 

$

24,275

 

$

24,032

 

Add: Compensation expense included in net income, net of taxes of $84 in 2005 and $67 in 2004

 

133

 

105

 

Subtract: Stock-based employee compensation expense determined under fair value based method for all awards, net of taxes of $1,669 in 2005 and $2,280 in 2004

 

2,635

 

3,617

 

Net income - pro forma

 

$

21,773

 

$

20,520

 

Basic net income per share - as reported

 

$

0.53

 

$

0.47

 

Basic net income per share - pro forma

 

$

0.47

 

$

0.40

 

Diluted net income per share - as reported

 

$

0.53

 

$

0.47

 

Diluted net income per share - pro forma

 

$

0.47

 

$

0.40

 

 

12



 

See Note 1, Basis of Presentation - Recent Accounting Pronouncements, for a discussion of SFAS No. 123R, as revised, “Share-Based Payment,” for the change in the Company’s treatment of stock-based compensation effective with the annual reporting period beginning January 1, 2006.

 

3.             STOCK OPTIONS AND RESTRICTED STOCK

 

On February 22, 2005, the Company’s Board of Directors approved an amended and restated Entercom Equity Compensation Plan (“Plan”), which was approved by the shareholders on May 6, 2005. Under this Plan, the Board of Directors authorized for grant: (1) 8.5 million shares of Common Stock (representing 1.2 million additional shares than authorized under the prior plan); and (2) in each year beginning in 2006, an additional amount not to exceed 1.5 million shares. The Plan allows officers (including those also serving as directors) and other employees, non-employee directors and key advisors and consultants, selected by a Committee of the Board of Directors, to receive incentive stock options, nonqualified stock options, restricted stock and stock appreciation rights in the Common Stock of the Company.  The shares of restricted stock that have been issued vest over periods that vary up to four years.  The options that have been issued vest over a four-year period and expire ten years from the date of grant.  See Note 2, Table of Pro Rata Compensation Expense under the Equity Compensation Plan.

 

During the periods presented, the Company recognized non-cash compensation expense primarily for the granting of restricted stock.

 

Options

 

During the six months ended June 30, 2005 and 2004, the Company issued non-qualified options to purchase 0.1 million shares and 0.8 million shares, respectively, of its Class A Common Stock at prices per share ranging from $32.17 to $35.05 and $38.77 to $52.99, respectively.  In addition, during the six months ended June 30, 2005, the Company decreased its additional paid-in-capital by $0.4 million in connection with tax benefits associated with the exercise of stock options.  All of these options vest over a four-year period.

 

Restricted Stock

 

During the six months ended June 30, 2005, the Company issued 13,550 shares of restricted stock (net of forfeitures) and increased its additional paid-in-capital by $0.5 million (net of a valuation adjustment from previously issued shares of restricted stock). During the six months ended June 30, 2004, the Company issued 25,174 shares of restricted stock and increased its additional paid-in-capital by $1.2 million. The shares of restricted stock vest over periods that range from one to four years. In connection with awards of restricted stock, the Company recognized non-cash stock-based compensation expense in the amounts of $0.4 million and $0.3 million for the six months ended June 30, 2005 and 2004, respectively, and $0.2 million for each of the three months ended June 30, 2005 and 2004.

 

4.             INTANGIBLE ASSETS AND GOODWILL

 

(A) Indefinite-Lived Intangibles

 

Under the provisions of SFAS No. 142, “Goodwill and Other Intangible Assets,” goodwill and certain intangible assets are not amortized. Instead, these assets are reviewed at least annually for impairment and charged to results of operations only in the periods in which the recorded value of goodwill and certain intangibles is more than its fair value. The Company has determined that broadcasting licenses were deemed to have indefinite useful lives.

 

Other than goodwill, the Company uses a direct value method to determine the fair value of all intangible assets required: (1) to be recognized under SFAS No. 141; and (2) to be tested for impairment under the provisions of SFAS No. 142.  See Note 1, Basis of Presentation - Recent Accounting Pronouncements (EITF Topic D-108), for further discussion.

 

Broadcasting Licenses

 

SFAS No. 142 requires the Company to test broadcasting licenses on an annual basis and between annual tests if events occur or circumstances change that would, more likely than not, reduce the fair value of broadcasting licenses below the amount reflected in the balance sheet. The annual test, which is performed by the Company in the first quarter of each year, requires that the Company: (1) determine the reporting unit; and (2) compare the carrying amount of the broadcasting licenses reflected on the balance sheet in each reporting unit to the fair value of the reporting unit’s broadcasting licenses.

 

13



 

The Company determines the fair value of the broadcasting licenses by relying primarily on a discounted cash flow approach assuming a start-up scenario in which the only assets held by an investor are broadcasting licenses. The fair value contains assumptions incorporating variables that are based on past experiences and judgments about future performance using industry normalized information for an average station within a market. These variables would include but not be limited to: (1) the forecast growth rate of each radio market, including population, household income, retail sales and other expenditures that would influence advertising expenditures; (2) market share and profit margin of an average station within a market; (3) estimated capital start-up costs and losses incurred during the early years; (4) risk-adjusted discount rate; (5) the likely media competition within the market area; and (6) terminal values.

 

During each of the first quarters of 2005 and 2004, the Company completed the non-amortizing intangible asset impairment test for broadcasting licenses and determined that: (1) the reporting unit was a radio market; and (2) the fair value of the broadcasting licenses was equal to or greater than the amount reflected in the balance sheet for each of the Company’s markets. Based upon the results of each of the asset impairment tests, no impairment charges were recorded.  No events occurred or circumstances changed since these tests were conducted that would, more likely than not, change the fair value of broadcasting licenses below the amount reflected in the balance sheets and, accordingly, no impairment charges were recorded for the six months ended June 30, 2005 and 2004.

 

If actual market conditions are less favorable than those projected by the industry or the Company, or if events occur or circumstances change that would, more likely than not, reduce the fair value of the Company’s broadcasting licenses below the amount reflected in the balance sheet, the Company may be required to recognize impairment charges in future periods. The amount of unamortized broadcasting licenses reflected in the balance sheet as of June 30, 2005 was $1.3 billion.

 

Goodwill

 

SFAS No. 142 requires the Company to test goodwill on an annual basis and between annual tests if events occur or circumstances change that would, more likely than not, reduce the fair value of goodwill below the amount reflected in the balance sheet.  The Company performs its annual impairment test during the second quarter of each year by: (1) determining the reporting unit; and (2) comparing the fair value for each reporting unit with the amount reflected on the balance sheet. If the fair value for any reporting unit is less than the amount reflected in the balance sheet, an indication exists that the amount of goodwill attributed to a reporting unit may be impaired, and the Company is required to perform a second step of the impairment test. In the second step, the Company compares the implied fair value of the reporting unit’s goodwill, determined by allocating the reporting unit’s fair value to all of its assets and liabilities in a manner similar to a purchase price allocation in accordance with SFAS No. 141, to the amount reflected in the balance sheet.

 

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

 

The Company performed its annual impairment test during each of the second quarters of 2005 and 2004 by comparing the fair value for market with the amount reflected on the balance sheet. As a result of these tests, the Company did not record any impairment charges for the six months ended June 30, 2005 and 2004. If actual market conditions are less favorable than those projected by the industry or the Company, or if events occur or circumstances change that would, more likely than not, reduce the fair value of the Company’s goodwill below the amount reflected in the balance sheet, the Company may be required to recognize impairment charges in future periods. The amount of goodwill reflected in the balance sheet as of June 30, 2005 was $151.0 million.

 

There was no change in the carrying amount of goodwill for the six months ended June 30, 2005.

 

(B) Definite-Lived Intangibles

 

The Company has definite-lived intangible assets that consist of advertiser lists and customer relationships,  acquired advertising contracts and income leases that are amortized in accordance with SFAS No. 142. These assets are amortized over the period for which the assets are expected to contribute to the Company’s future cash flows and are reviewed for impairment in accordance with SFAS No. 144 whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The amounts of the amortization expense for definite-lived intangible assets were $0.3 million for each of the six months ended June 30, 2005 and 2004 and $0.1 million for each of the three months ended June 30, 2005 and 2004.  As of June 30, 2005, the Company reflected $0.7 million in unamortized definite-lived assets, which amounts are included in deferred charges and other assets on the balance sheet.

 

14



 

The following is an estimate of the amortization expense for definite-lived assets, in thousands, for each of the succeeding years ending December 31:

 

 

 

Definitive-

 

 

 

Lived

 

 

 

Assets

 

Years ending December 31,

 

 

 

2005 (excludes the six months ended June 30, 2005)

 

$

152

 

2006

 

228

 

2007

 

144

 

2008

 

84

 

2009

 

44

 

Thereafter

 

34

 

Total

 

$

686

 

 

5.             ACQUISITIONS, DISPOSITIONS, OTHER EVENTS AND UNAUDITED PRO FORMA SUMMARY

 

Acquisitions for the Six Months Ended June 30, 2005

 

There were no acquisitions during the six months ended June 30, 2005.

 

Dispositions for the Six Months Ended June 30, 2005

 

Longview, Washington

 

On March 31, 2005, the Company completed the transaction to sell the radio station assets of KBAM-AM, KEDO-AM, KLYK-FM and KRQT-FM, Longview, Washington, for $2.2 million in cash. The Company recorded a gain on the sale of assets of less than $0.1 million during the first quarter of 2005.

 

Seattle, Washington

 

On January 21, 2005, the Company completed the transaction to sell the radio station assets of KDDS-AM (the call letters were changed from KNWX-AM in December 2004), Seattle, Washington, for $6.0 million in cash. The Company recorded a gain on sale of assets of $5.5 million during the first quarter of 2005. The Company believes that the elimination of this station will not alter the competitive position of the seven stations the Company continues to operate in this market.

 

Other Events

 

Portland, Oregon

 

In connection with the purchase in December 2003 of radio station assets from Fisher Communications, Inc. (“Fisher”), the Company purchased land that was contaminated with low levels of pesticide residue in the soil and trace amounts of pesticide residue in the shallow ground water. During January 2005, the Company received confirmation of the state’s notice to Fisher that remediation was not required at this site. As a result of the state’s notice to Fisher, the Company shortly thereafter: (1) authorized the release of $1.0 million in escrow that was recorded on the Company’s balance sheet as station deposits under deferred charges and other assets; and (2) reduced, by $1.0 million, accrued expenses recorded under current liabilities in the balance sheet for the remaining amount due to Fisher.

 

Unaudited Pro Forma Summary Of Financial Information

 

The following unaudited pro forma summary of financial information presents the consolidated results of operations as if any acquisitions which occurred during the period of January 1, 2004 through June 30, 2005 had all occurred as of the beginning of the respective periods. The summary also includes certain adjustments, including depreciation and amortization of assets and interest expense on any debt incurred to fund acquisitions which would have been incurred had such acquisitions occurred as of the beginning of the respective periods.  For the six months and three months ended June 30, 2005, actual financial information is presented as there were no acquisitions during the six months ended June 30, 2005. For a discussion of the acquisitions, please refer to the Company’s Form 10-K filed with the Securities and Exchange Commission on March 2, 2005, which should be read in conjunction with the Company’s

 

15



 

condensed consolidated financial statements, the related notes and all other information included elsewhere in this Form 10-Q. These unaudited pro forma results, which do not reflect: (1) dispositions of radio stations; and (2) acquisitions and dispositions of certain contracts or joint sales agreements, have been prepared for comparative purposes only and do not purport to be indicative of what would have occurred had the acquisitions been made as of that date or results which may occur in the future.

 

 

 

Six Months Ended June 30,

 

 

 

2005

 

2004

 

 

 

(amounts in thousands, except per
share data)

 

 

 

Actual

 

Pro Forma

 

 

 

 

 

 

 

Net revenues

 

$

213,796

 

$

204,689

 

Net income

 

$

40,512

 

$

34,149

 

Net income per share - basic

 

$

0.87

 

$

0.67

 

Net income per share - diluted

 

$

0.86

 

$

0.66

 

 

 

 

Three Months Ended June 30,

 

 

 

2005

 

2004

 

 

 

(amounts in thousands, except per
share data)

 

 

 

Actual

 

Pro Forma

 

 

 

 

 

 

 

Net revenues

 

$

119,489

 

$

115,289

 

Net income

 

$

24,275

 

$

23,457

 

Net income per share - basic & diluted

 

$

0.53

 

$

0.46

 

Net income per share - diluted

 

$

0.53

 

$

0.46

 

 

6.             SENIOR DEBT

 

Bank Revolver

 

On August 12, 2004, the Company entered into a bank credit agreement  (the “Bank Revolver”) with a syndicate of banks for a five-year senior secured revolving credit facility of $800.0 million. The Company used the proceeds of $271.0 million from the Bank Revolver to pay all of the outstanding debt under the Company’s former credit facility. The Company expects to use the Bank Revolver to: (1) provide for working capital; and (2) provide for general corporate purposes, including capital expenditures and any or all of the following: repurchases of Class A Common Stock, dividends and acquisitions. The Bank Revolver is secured by a pledge of 100% of the capital stock and other equity interest in all of the Company’s wholly owned subsidiaries. The Bank Revolver requires the Company to comply with certain financial covenants and leverage ratios which are defined terms within the agreement, including: (1) Total Debt to Operating Cash Flow; (2) Operating Cash Flow to Interest Expense; and (3) Operating Cash Flow to Fixed Charges. Upon the occurrence of certain events, the Company’s borrowing costs can increase to a maximum of Eurodollar plus 1.375% or prime plus 0.875%. The interest payable on the Eurodollar rate is payable at the end of the selected duration. The Company also pays a commitment fee that varies, depending on certain financial covenants and the amount of the unused commitment, to a maximum of 0.375% per annum, on the average unused balance of the Bank Revolver. As of June 30, 2005, the Company had $373.5 million outstanding, as well as a $0.4 million Letter of Credit, under the Bank Revolver. Subject to covenant compliance at the time of each borrowing, the amount available under the Bank Revolver as of June 30, 2005 was $426.1 million.  Management believes that as of June 30, 2005, the Company was in compliance with all financial covenants and leverage ratios and all other terms of the Bank Revolver.

 

Interest Rate Transactions

 

The Company enters into interest rate transactions with different banks to diversify its risk associated with interest rate fluctuations against the variable rate debt under the Bank Revolver and to comply with certain covenants under the Bank Revolver. Under these transactions, the Company agrees with other parties to exchange, at specified intervals, the difference between fixed rate and floating rate interest amounts calculated by reference to an agreed notional principal amount against the variable debt.  As of June 30, 2005, the Company had an interest rate transaction outstanding that was entered into in February 1998 with a notional amount of $30.0 million and an initial term of 10

 

16



 

years, that effectively fixes the interest at a rate of 5.8% on borrowings equal to the total notional amount (see Note 8, Derivative and Hedging Activities).

 

7.             SENIOR SUBORDINATED NOTES

 

On March 5, 2002, the Company issued $150.0 million of 7.625% Senior Subordinated Notes (“Notes”) due March 1, 2014 and received net proceeds of $145.7 million.  There were approximately $4.3 million in deferred offering costs recorded in connection with this issuance, which are amortized to interest expense over the life of the Notes using the effective interest rate method.

 

Interest on the Notes, which are in denominations of $1,000 each, accrues at the rate of 7.625% per annum and is payable semi-annually in arrears on March 1 and September 1. The Company may redeem the Notes on and after March 1, 2007 at an initial redemption price of 103.813% of their principal amount plus accrued interest.  The Notes are unsecured and rank junior to the Company’s senior indebtedness.  In addition to the parent, Entercom Communications Corp., all of the Company’s subsidiaries (other than Entercom Radio, LLC, the issuer of the Notes) have fully and unconditionally guaranteed jointly and severally these Notes (“Subsidiary Guarantors”).  Under certain covenants, the Subsidiary Guarantors are restricted from paying dividends or distributions in excess of amounts defined under the Notes, and the Subsidiary Guarantors cannot incur additional indebtedness if the Leverage Ratio exceeds a specified level.

 

8.             DERIVATIVE AND HEDGING ACTIVITIES

 

In accordance with the provisions of SFAS No. 133, “Accounting for Derivative and Hedging Activities,” which was amended by SFAS No. 137, SFAS No. 138 and SFAS No. 149, the Company follows established accounting and reporting standards for: (1) derivative instruments, including certain derivative instruments embedded in other contracts, which are collectively referred to as derivatives; and (2) hedging activities. The accounting for changes in the fair value of a derivative depends on the intended use of the derivative and the resulting designation.  All derivatives, whether designated in hedging relationships or not, are required to be recorded on the balance sheet at fair value. If the derivative is designated as a fair value hedge, the changes in the fair value of the derivative and the hedged item are recognized in the statement of operations. If the derivative is designated as a cash flow hedge, changes in the fair value of the derivative are recorded in other comprehensive income (loss) and are recognized in the statement of operations when the hedged item affects net income (loss). SFAS No. 133 defined new requirements for designation and documentation of hedging relationships as well as ongoing effectiveness assessments in order to use hedge accounting under this standard.  A derivative that does not qualify as a hedge is marked to fair value through the statement of operations. The Company formally documents all relationships between hedging instruments and hedged items, as well as its risk-management objective and strategy for undertaking various hedge transactions. This process includes relating all derivatives that are designated as fair value or cash flow hedges to specific assets and liabilities on the balance sheet or to specific firm commitments or forecasted transactions. The Company also formally assesses, both at the inception of the hedge and on an ongoing basis, whether each derivative is highly effective in offsetting changes in fair values or cash flows of the hedged item.  If it is determined that a derivative is not highly effective as a hedge or if a derivative ceases to be a highly effective hedge, the Company will discontinue hedge accounting prospectively.  See Note 6, Senior Debt – Interest Rate Transactions.

 

Non-Hedge Accounting Treatment

 

During the six months ended June 30, 2005 and 2004 and as of June 30, 2005 and 2004, the Company had a derivative outstanding with a notional amount of $30.0 million that did not qualify for hedge accounting treatment. For the six months ended June 30, 2005 and 2004, the Company recorded to the statement of operations gains of $0.5 million and $1.0 million, respectively, under net gain on derivative instruments. For the three months ended June 30, 2005 and 2004, the Company recorded to the statement of operations a $0.2 million loss and a $1.4 million gain, respectively, under net loss (gain) on derivative instruments.

 

Hedge Accounting Treatment

 

During the six months ended June 30, 2005 and 2004, the Company had no derivatives that qualified for hedge accounting treatment.

 

17



 

9.             COMMITMENTS AND CONTINGENCIES

 

Pending Acquisition

 

Greenville, South Carolina

 

On March 18, 2005, the Company entered into an asset purchase agreement to acquire the assets of WROQ-FM, WTPT-FM and WGVC-FM, serving the Greenville, South Carolina radio market, for $45.0 million in cash, of which $4.5 million was paid by the Company as a deposit on March 21, 2005. This transaction is subject to approval by the Federal Communications Commission (the “FCC”). Under the Communications Act, the FCC imposes specific limits on the number of commercial radio stations an entity can own in a single market. The Company entered into an agreement to sell two of its FM radio stations, WOLI-FM and WOLT-FM (the formats of WOLI-FM and WOLT-FM are currently simulcasted), and an AM station, WSPA-AM (see Note 9 below).

 

Pending Disposition

 

Greenville, South Carolina

 

On June 13, 2005, the Company entered into an asset purchase agreement to sell WOLI-FM, WOLT-FM and WSPA-AM, serving the Greenville, South Carolina, radio market for $6.7 million in cash, of which $0.7 million was paid by the buyer as a deposit on June 14, 2005 (see Note 9 above).

 

Contingencies

 

The FCC has recently begun more vigorous enforcement, against the broadcasting industry as a whole, of its indecency rules concerning the broadcast of obscene, indecent, or profane material. Potential changes to enhance the FCC’s authority in this area include the ability to impose substantially higher monetary forfeiture penalties, consider violations to be serious offenses in the context of license renewal applications, and, under certain circumstances, designate a license for hearing to determine whether such license should be revoked. In the event that this or similar legislation is ultimately enacted into law, the Company could face increased costs in the form of fines and a greater risk that the Company could lose any one or more of the Company’s broadcasting licenses. The FCC has issued Notices of Apparent Liability or Forfeiture Orders with respect to several of the Company’s stations proposing fines for certain programming which the FCC deemed to have been “indecent.” These cases have been or are being appealed. The Company estimates that the effect of an unfavorable outcome for the proposed fines would not materially impact the Company’s financial position, results of operations or cash flows.

 

The Company has filed on a timely basis renewal applications for those radio stations where the radio broadcasting license is subject to renewal with the FCC. Certain licenses may not be renewed prior to the renewal date, which is not unusual. The Company will continue to operate these radio stations under their existing licenses until the licenses are renewed.

 

On May 19, 2003, the Company acquired the assets of radio station KWOD-FM, Sacramento, California, from Royce International Broadcasting Corporation (“Royce”) for a purchase price of $21.2 million in cash. This acquisition was accomplished following extensive litigation.  Although the Company successfully secured the assets of KWOD-FM through court-ordered specific performance of the agreement, Royce has continued to appeal its case through the California judicial system.  While the order granting specific performance of the transfer of the station is final, the court’s determination that the Company was entitled to $3.8 million in damages as an offset against the original $25.0 million purchase price is subject to final adjustment and is subject to appeal. The allocation of the purchase price and transaction costs was based upon information available at the time and, pending the outcome of this litigation, could be subject to change. The Company cannot determine the amount of time required for the appeal process to be completed. The Company estimates that the impact of an unfavorable outcome will not materially impact the Company’s financial position, results of operations or cash flows.

 

18



 

The Company uses a combination of insurance and self-insurance mechanisms to provide for the potential liabilities for workers’ compensation, general liability, property, director and officers’ liability, vehicle liability and employee health care benefits. Liabilities associated with the risks that are retained by the Company are estimated, in part, by considering claims experience, demographic factors, severity factors, outside expertise and other actuarial assumptions.

 

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

 

Guarantor Arrangements

 

Under the provisions of FIN 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, an Interpretation of FASB Statements No. 5, 57, and 107 and Rescission of FASB Interpretation No. 34,”  a guarantor recognizes, at the inception of a guarantee, a liability for the fair value of the obligation undertaken by issuing the guarantee. The accounting requirements for the initial recognition of guarantees were applicable on a prospective basis for guarantees issued or modified after December 31, 2002. The following is a summary of agreements that the Company has determined are within the scope of FIN 45.

 

Under the Company’s Bank Revolver, the Company is required to reimburse lenders for any increased costs that they may incur in an event of a change in law, rule or regulation resulting in their reduced returns from any change in capital requirements. The Company cannot estimate the potential amount of any future payment under this provision nor can the Company predict if such an event will occur.

 

The Company enters into indemnification agreements in the ordinary course of business. Under these agreements, the Company indemnifies, holds harmless, and agrees to reimburse the indemnified party for losses suffered or incurred by the indemnified party. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is unlimited. The Company believes the estimated fair value of these agreements is minimal. Accordingly, there are no liabilities recorded for these agreements as of June 30, 2005.

 

In connection with many of the Company’s acquisitions, the Company enters into time brokerage agreements or local marketing agreements for specified periods of time, typically six months or less, whereby the Company indemnifies the owner and operator of the radio station, their employees, agents and contractors from liability, claims and damages arising from the activities of operating the radio station under such agreements. Although the Company has operated radio stations previously under these agreements, the maximum potential amount of any future payments the Company could be required to make for any such indemnification obligations is indeterminable at this time. The Company has not, however, previously incurred any significant costs to defend lawsuits or settle claims relating to any such indemnification obligation.

 

10.          SHAREHOLDERS’ EQUITY

 

Share Repurchase Programs

 

The Company’s Board of Directors has authorized in the past, and may authorize in the future, share repurchase programs over a defined period of time. Any purchases under these programs may be made in the open market, through block trades or otherwise. Depending on market conditions and other factors, these purchases may be commenced or suspended at any time or from time to time without prior notice.  All shares repurchased are immediately retired.

 

Under the repurchase programs identified below, 2.7 million shares in the amount of $94.1 million at an average price of $34.38 were repurchased for the six months ended June 30, 2005.

 

March 17, 2005 Program

 

On March 17, 2005, the Company’s Board of Directors authorized a one-year share repurchase program of up to $100.0 million. As of June 30, 2005, 0.3 million shares were purchased in the amount of $10.0 million at an average price of $34.26 per share and $90.0 million remained authorized as available for repurchase.

 

19



 

May 13, 2004 and November 1, 2004 Programs

 

On November 1, 2004 and May 13, 2004, the Company’s Board of Directors authorized one-year share repurchase programs of up to $100.0 million for each program. During the years 2005 and 2004, the Company repurchased an aggregate of 5.5 million shares in the amount of $200.0 million at an average price of $36.68 per share.

 

11.          DEFERRED COMPENSATION PLAN

 

In December 2003, the Company’s Board of Directors approved an unfunded deferred compensation plan that provides a select group of the Company’s management and highly compensated employees with an opportunity to defer a portion of their compensation on a tax-favored basis. The obligations by the Company to pay these benefits under the plan represent unsecured general obligations that rank equally with the Company’s other unsecured and unsubordinated indebtedness.  As of June 30, 2005, $0.9 million were deferred under this plan and were included in other long-term liabilities in the consolidated balance sheet. For the six months ended June 30, 2005, the Company recorded a minimal amount in unfunded compensation expense to Corporate General and Administrative Expense. The Company also recorded a deferred tax asset of $0.3 million in connection with this liability as the tax benefit of the deferred tax asset is not realized for tax purposes until the liability is paid.

 

12.          NET INCOME PER SHARE

 

The net income per share is calculated in accordance with SFAS No. 128, “Earnings Per Share,” which requires presentation of basic net income per share and diluted net income per share. Basic net income per share excludes dilution and is computed by dividing net income available to common shareholders by the weighted average number of common shares outstanding for the period.  Diluted net income per share is computed in the same manner as basic net income after assuming issuance of common stock for all potentially dilutive equivalent shares, which includes stock options (using the treasury stock method). Anti-dilutive instruments are not considered in this calculation. For the six months and three months ended June 30, 2005 and 2004, stock options were included in the calculation of net income per share as they were dilutive.

 

 

 

SIX MONTHS ENDED

 

 

 

JUNE 30, 2005

 

JUNE 30, 2004

 

 

 

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

 

 

 

Income

 

Shares

 

EPS

 

Income

 

Shares

 

EPS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

40,512

 

46,739,220

 

$

0.87

 

$

35,996

 

51,269,969

 

$

0.70

 

Impact of options

 

 

 

282,393

 

 

 

 

 

445,613

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

40,512

 

47,021,613

 

$

0.86

 

$

35,996

 

51,715,582

 

$

0.70

 

 

For the six months ended June 30, 2005 and 2004, outstanding options to purchase 5.6 million and 3.6 million shares, respectively, of Class A Common Stock at option exercise prices per share ranging from $33.30 to $57.63 and from $44.90 to $57.63, respectively, were excluded from the computation of diluted net income per share as the options’ exercise price was greater than the average market price of the stock.

 

 

 

THREE MONTHS ENDED

 

 

 

JUNE 30, 2005

 

JUNE 30, 2004

 

 

 

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

 

 

 

Income

 

Shares

 

EPS

 

Income

 

Shares

 

EPS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

24,275

 

45,855,140

 

$

0.53

 

$

24,032

 

51,051,206

 

$

0.47

 

Impact of options

 

 

 

280,643

 

 

 

 

 

361,672

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

24,275

 

46,135,783

 

$

0.53

 

$

24,032

 

51,412,878

 

$

0.47

 

 

For the three months ended June 30, 2005 and 2004, outstanding options to purchase 5.5 million and 4.0 million shares, respectively, of Class A Common Stock at option exercise prices per share ranging from $33.30 to $57.63 and from $45.28 to $57.63, respectively, were excluded from the computation of diluted net income per share as the options’ exercise price was greater than the average market price of the stock.

 

20



 

13.          GUARANTOR FINANCIAL INFORMATION

 

Entercom Radio, LLC (“Radio”), which is a wholly-owned subsidiary of Entercom Communications Corp., holds the ownership interest in various subsidiary companies that own the operating assets, including broadcasting licenses, permits and authorizations.  Radio is: (1) the borrower of the Company’s senior debt under the Bank Revolver described in Note 6; and (2) the issuer of the Company’s 7.625% Senior Subordinated Notes described in Note 7. Entercom Communications Corp. and each of its direct and indirect subsidiaries (other than Radio) is a guarantor of such debt.

 

Under the Bank Revolver, Radio is permitted to make distributions to Entercom Communications Corp. in amounts, as defined, that are required to pay Entercom Communications Corp.’s reasonable overhead costs, including income taxes and other costs associated with conducting the operations of Radio and its subsidiaries. Under the Company’s 7.625% Senior Subordinated Notes, Radio is permitted to make distributions to Entercom Communications Corp. in amounts, as defined, that are required to pay Entercom Communications Corp.’s overhead costs and other costs associated with conducting the operations of Radio and its subsidiaries.

 

The equity method of accounting has been used to report Entercom Communications Corp.’s investment in its subsidiaries. Separate financial statements of Radio’s subsidiaries, which are full and unconditional guarantors jointly and severally under the Bank Revolver and the Senior Subordinated Notes as described above, are not presented as the Company’s management has determined that they would not be material to investors.

 

The following tables set forth condensed consolidating financial information for:

 

                  Entercom Communications Corp. and Radio:

 

                  the balance sheets as of June 30, 2005 and December 31, 2004;

 

                  the statements of operations for the six months and three months ended June 30, 2005 and 2004; and

 

                  the statements of cash flows for the six months ended June 30, 2005 and 2004.

 

Condensed Balance Sheets as of June 30, 2005

(amounts in thousands)

 

 

 

Entercom

 

 

 

 

 

 

 

 

 

Communications

 

Entercom

 

 

 

 

 

 

 

Corp.

 

Radio, LLC

 

Eliminations

 

Total

 

 

 

 

 

 

 

 

 

 

 

ASSETS:

 

 

 

 

 

 

 

 

 

Current assets

 

$

2,308

 

$

113,272

 

$

 

$

115,580

 

Net property and equipment

 

1,071

 

91,146

 

 

92,217

 

Radio broadcasting licenses - Net

 

 

1,288,962

 

 

1,288,962

 

Goodwill - Net

 

 

150,982

 

 

150,982

 

Other long-term assets - Net

 

564

 

26,468

 

 

27,032

 

Investment in subsidiaries

 

939,021

 

 

$

(939,021

)

 

Total assets

 

$

942,964

 

$

1,670,830

 

$

(939,021

)

$

1,674,773

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY:

 

 

 

 

 

 

 

 

 

Current liabilities

 

$

(2,967

)

$

30,935

 

$

 

$

27,968

 

Long-term liabilities

 

3,768

 

700,874

 

 

704,642