UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
For the Quarterly Period Ended September 30, 2003
OR
Commission File No. 0-29253
BEASLEY BROADCAST GROUP, INC.
(Exact Name of Registrant as Specified in Its Charter)
(I.R.S. Employer
Identification Number)
3033 Riviera Drive, Suite 200
Naples, Florida 34103
(Address of Principal Executive Offices and Zip Code)
(239) 263-5000
(Registrant’s 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, and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes x No ¨
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, $.001 par value, 7,441,531 Shares Outstanding as of November 10, 2003
Class B Common Stock, $.001 par value, 16,832,743 Shares Outstanding as of November 10, 2003
INDEX
Page
No.
Item 1.
Financial Statements (Unaudited)
Notes to Condensed Consolidated Financial Statements (Unaudited)
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
Item 4.
Controls and Procedures
Legal Proceedings
Changes in Securities and Use of Proceeds
Defaults Upon Senior Securities
Submission of Matters to a Vote of Security Holders
Item 5.
Other Information
Item 6.
Exhibits and Reports on Form 8-K
SIGNATURES
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS
December 31,
2002
September 30,
2003
Current assets:
Cash and cash equivalents
Accounts receivable, less allowance for doubtful accounts of $415,814 in 2002 and $366,172 in 2003
Trade receivables
Other receivables
Prepaid expenses and other
Assets of discontinued operations
Deferred tax assets
Total current assets
Notes receivable
Property and equipment, net
FCC broadcasting licenses
Goodwill
Other intangibles, net
Investments
Other assets
Total assets
Current liabilities:
Current installments of long-term debt
Accounts payable
Accrued expenses
Trade payables
Liabilities of discontinued operations
Derivative financial instruments
Total current liabilities
Long-term debt, less current installments
Deferred tax liabilities
Total liabilities
Stockholders’ equity:
Preferred stock, $.001 par value, 10,000,000 shares authorized, none issued
Class A common stock, $.001 par value, 150,000,000 shares authorized, 7,440,698 and 7,441,531 issued and outstanding in 2002 and 2003 respectively
Class B common stock, $.001 par value, 75,000,000 shares authorized, 16,832,743 issued and outstanding
Additional paid-in capital
Accumulated deficit
Accumulated other comprehensive income
Total stockholders’ equity
Total liabilities and stockholders’ equity
See accompanying notes to condensed consolidated financial statements
1
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three months ended
Nine months ended
Net revenue
Costs and expenses:
Cost of services (exclusive of depreciation and amortization shown separately below)
Selling, general and administrative
Corporate general and administrative
Depreciation and amortization
Total costs and expenses
Operating income from continuing operations
Other income (expense):
Interest expense
Loss on extinguishment of long-term debt
Other non-operating expenses
Gain on sale of investments
Gain on increase in fair value of derivative financial instruments
Interest income
Other non-operating income
Income from continuing operations before income taxes
Income tax expense
Income from continuing operations before cumulative effect of accounting change and discontinued operations
Cumulative effect of accounting change (net of income tax benefit of $5,162,204)
Discontinued operations (net of income tax benefit of $66,373 and $320,156 for the three and nine months ended September 30, 2002, respectively and income tax expense of $137,463 for the nine months ended September 30, 2003)
Net income (loss)
Basic and diluted net income (loss) per share:
Cumulative effect of accounting change
Discontinued operations
Basic common shares outstanding
Diluted common shares outstanding
2
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
Other comprehensive income (loss):
Unrealized gain (loss) on investments (net of income tax benefit of $490,281 for the three months ended September 30, 2003 and income tax expense of $1,258,239 for the nine months ended September 30, 2003)
Unrealized gain on derivative and hedging activities (net of income tax expense of $82,283 and $57,180 for the three and nine months ended September 30, 2003, respectively)
Comprehensive income (loss)
3
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash flows from operating activities:
(Income) loss from discontinued operations
Income (loss) from continuing operations
Adjustments to reconcile income (loss) from continuing operations to net cash provided by continuing operations:
Income from trade sales
Loss on long-term receivable
Change in assets and liabilities net of effects of acquisitions and dispositions of radio stations:
Decrease in receivables
Increase in prepaid expenses and other
Increase in other assets
Increase (decrease) in payables and accrued expenses
Increase in deferred income taxes
Net cash provided by continuing operations
Net cash used in discontinued operations
Net cash provided by operating activities
Cash flows from investing activities:
Expenditures for property and equipment
Proceeds from disposition of radio stations
Proceeds from sale of investments
Repayment of notes receivable
Payments from related parties
Net cash provided by investing activities
Cash flows from financing activities:
Proceeds from issuance of indebtedness
Principal payments on indebtedness
Payments of loan fees
Proceeds from exercise of stock options
Net cash used in financing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
Cash paid for interest
Cash paid for income taxes
Supplement disclosure of non-cash operating and investing activities:
Trade revenue
Trade expenses
Property and equipment acquired through placement of advertising air time
Note received as partial consideration for disposition of radio stations
4
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(1) Interim Financial Statements
In the opinion of management, the accompanying unaudited condensed consolidated financial statements include all adjustments deemed necessary to summarize fairly and reflect the financial position and results of operations of Beasley Broadcast Group, Inc. (“the Company”) for the interim periods presented. Results of the third quarter of 2003 are not necessarily indicative of results for the full year. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto contained in the Annual Report on Form 10-K for the year ended December 31, 2002.
Certain amounts previously reported in the 2002 condensed consolidated statements of operations and cash flows have been reclassified to conform to the 2003 presentation.
(2) Stock-Based Employee Compensation
As of September 30, 2003, the Company has one stock-based employee compensation plan. The Company accounts for this plan under the recognition and measurement principles of APB Opinion 25, Accounting for Stock Issued to Employees. No stock-based employee compensation cost is reflected in the accompanying condensed consolidated statements of operations, as all options granted under the plan had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on the net loss and net loss per share as if the Company had applied the fair value recognition provisions of SFAS 123, Accounting for Stock-Based Compensation, to stock-based employee compensation.
Total stock-based employee compensation expense determined under fair value based methods for all awards (net of income tax benefit of $725,512 and $2,176,536 for the three and nine months ended September 30, 2002, respectively, and $189,125 and $663,663 for the three and nine months ended September 30, 2003, respectively)
Adjusted net income (loss)
Net income (loss) per share:
Basic and diluted—as reported
Basic and diluted—as adjusted
On June 3, 2003, the Board of Directors authorized the reserve of an additional 1,000,000 shares of Class A common stock for issuance under the Company’s stock-based employee compensation plan subject to stockholder approval at the 2004 Annual Meeting. Approval by stockholders is expected to be a formality as members of the Board of Directors control enough votes to approve the additional reserve, therefore the Company will continue to account for all option grants under this plan, including the additional reserve, in accordance with APB Opinion 25. As of September 30, 2003, no options had been granted from the additional reserve.
(3) Accounting Change
Effective January 1, 2002, the Company adopted Statement of Financial Accounting Standards (“SFAS”) 142, Goodwill and Other Intangible Assets. SFAS 142 requires that goodwill and intangible assets with indefinite
5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)
useful lives no longer be amortized, but instead tested for impairment at least annually in accordance with the adoption of SFAS 142. In accordance with the provisions of SFAS 142, as of January 1, 2002, the Company tested its FCC broadcasting licenses, which were identified as intangible assets having indefinite useful lives, and goodwill for impairment. To estimate the fair value of its FCC broadcasting licenses and goodwill, the Company obtained appraisals from an independent appraisal company. As a result of the testing, the Company recognized an impairment of $17.5 million related to FCC broadcasting licenses and goodwill in the Radio Group Three segment and recorded the loss as a cumulative effect of accounting change in the condensed consolidated statement of operations for the nine months ended September 30, 2002. The cumulative effect of the accounting change, net of income taxes, decreased net income $12.1 million and earnings per share $0.50, of which $0.4 million or $0.02 per share is reported in discontinued operations.
(4) Recent Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board (“FASB”) issued SFAS 143, Accounting for Asset Retirement Obligations. SFAS 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. SFAS 143 amends SFAS 19 and is effective for financial statements issued for fiscal years beginning after June 15, 2002. The Company adopted SFAS 143 during the first quarter of 2003 with no material impact on its condensed consolidated financial statements.
In June 2002, FASB issued SFAS 146, Accounting for Costs Associated with Exit or Disposal Activities. SFAS 146 addresses financial accounting and reporting for costs associated with exit or disposal activities. SFAS 146 nullifies Emerging Issues Task Force Issue No. 94-3 and is effective for exit or disposal activities that are initiated after December 31, 2002. The Company adopted SFAS 146 with no material impact on its condensed consolidated financial statements.
In November 2002, FASB issued Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others (the Interpretation), which addresses the disclosure to be made by a guarantor in its interim and annual financial statements about its obligations under guarantees. The Interpretation also requires the recognition of a liability by a guarantor at the inception of certain guarantees. The Interpretation requires the guarantor to recognize a liability for the non-contingent component of the guarantee, which is the obligation to stand ready to perform in the event that specified triggering events or conditions occur. The initial measurement of this liability is the fair value of the guarantee at inception. The recognition of the liability is required even if it is not probable that payments will be required under the guarantee or if the guarantee was issued with a premium payment or as part of a transaction with multiple elements. The Company has adopted the disclosure requirements of the Interpretation and will apply the recognition and measurement provisions for all applicable guarantees entered into after December 31, 2002. To date, the Company has not entered into guarantees that would require recognition and measurement pursuant to the provisions of the Interpretation.
In January 2003, FASB issued Interpretation No. 46,Consolidation of Variable Interest Entities (the Interpretation), which clarifies the application of Accounting Research Bulletin No. 51, to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. At the present time, the adoption of the Interpretation is not expected to have a material impact on the Company’s condensed consolidated financial statements. Effective July 1, 2003, the Company adopted the Interpretation with no material impact on its condensed consolidated financial statements.
In May 2003, FASB issued SFAS 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. SFAS 150 establishes standards for how an issuer classifies and measures certain
6
financial instruments with characteristics of both liabilities and equity. SFAS 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. Effective July 1, 2003, the Company adopted SFAS 150 with no material impact on its condensed consolidated financial statements.
(5) Completed Disposition
On February 5, 2003, the Company completed the sale of WBYU-AM to ABC, Inc for $1.5 million. The proceeds from the sale were used to reduce the outstanding balance of the revolving credit loan under the Company’s credit facility. The Company recorded a pre-tax gain of $436,365 on the disposition. Upon completion of this sale the Company no longer has operations in New Orleans therefore the results of operations for WBYU-AM have been reported as discontinued operations in the condensed consolidated statements of operations for all periods presented.
A summary of discontinued operations is as follows:
Gain on disposal
Income (loss) before income taxes
Income tax expense (benefit)
Income (loss) before cumulative effect of accounting change
Cumulative effect of accounting change (net of income tax benefit of $197,122)
Net income (loss) from discontinued operations
(6) Investments
As of September 30, 2003, the Company’s investment in FindWhat.com is classified as available-for-sale and recorded at fair value based on its quoted market price. The unrealized gain on FindWhat.com is reported, net of income taxes, as a component of accumulated other comprehensive income in stockholders’ equity. The investment in FindWhat.com was originally recorded at historical cost due to restrictions that limited the Company’s ability to sell or otherwise dispose of the securities. These restrictions were completely removed during the first quarter of 2003. The Company’s investment in iBiquity is recorded at historical cost due to restrictions that limit the Company’s ability to sell or otherwise dispose of the securities.
Investments are comprised of the following:
Fair
value
Available-for-sale
Historical cost
December 31, 2002
7
(7) Long-Term Debt
Long-term debt is comprised of the following:
Credit facility:
Revolving credit loan
Term loan A
Term loan B
Other notes payable
Less current installments
As of September 30, 2003, the Company had $59.6 million in remaining commitments under its $103.5 million revolving credit loan; however, as of September 30, 2003, the Company’s maximum total leverage covenant would have limited additional borrowings to $12.2 million. The revolving credit loan includes a $50.0 million sub-limit for letters of credit. The revolving credit loan and term loan A bear interest at either the base rate or LIBOR plus a margin that is determined by the Company’s debt to operating cash flow ratio. The base rate is equal to the higher of the prime rate or the overnight federal funds rate plus 0.5%. The revolving credit loan and term loan A carried interest at 4.4375% and 3.375% as of December 31, 2002 and September 30, 2003, respectively. Term loan B bears interest at either the base rate plus 2.75% or LIBOR plus 4.0%. Term loan B carried interest at an average rate of 5.4375% and 5.1565% as of December 31, 2002 and September 30, 2003, respectively. Interest is payable monthly through maturity. The revolving credit loan and term loan A mature on June 30, 2008 and term loan B matures on December 31, 2009. The scheduled reductions in the amount available under the revolving credit loan may require principal repayments if the outstanding balance at that time exceeds the new maximum amount available under the revolving credit loan.
The credit facility is secured by substantially all of the Company’s assets and guaranteed jointly and severally by all of the Company’s subsidiaries. The guarantees were issued to the Company’s lenders for repayment of the outstanding balance of the credit facility. If the Company defaults on a payment under the terms of the credit facility, the subsidiaries may be required to perform under their guarantees. The maximum amount of undiscounted payments the subsidiaries would have to make in the event of default is $176.3 million. The guarantees for the revolving credit loan and term loan A expire on June 30, 2008 and the guarantees for term loan B expire on December 31, 2009.
8
As of September 30, 2003, the scheduled repayments of the credit facility for the remainder of fiscal 2003, the next four years and thereafter are as follows:
Total Credit
Facility
2004
2005
2006
2007
Thereafter
Total
The Company is required to satisfy financial covenants, which require us to maintain specified financial ratios and to comply with financial tests, such as ratios for maximum total leverage, minimum interest coverage and minimum fixed charges. As of September 30, 2003, these financial covenants included:
As of September 30, 2003, management of the Company believed it was in compliance with applicable financial covenants.
Failure to comply with these financial covenants, scheduled interest payments, scheduled principal repayments, or any other terms of its credit facility could result in the acceleration of the maturity of its outstanding debt. The Company believes that it will have sufficient liquidity and capital resources to permit it to meet its financial obligations for at least the next twelve months.
(8) Derivative Financial Instruments
On May 23, 2003, the Company entered into three swap agreements to reduce interest rate risk associated with its credit facility. The three swap agreements were designated and accounted for as cash flow hedges of the Company’s credit facility in accordance with the provisions of SFAS 133. The swap agreements are reported at fair value in the balance sheet and any changes in fair value are reported, net of income taxes, as a component of accumulated other comprehensive income in stockholders’ equity.
9
As of September 30, 2003, the swap agreements designated as cash flow hedges are summarized in the following table:
Agreement
Notional
Amount
Floor
Cap
Swap
Expiration
Estimated
Value
Interest rate swap
The collar, cap and swap agreements that were not designated as hedges continue to be reported at fair value in the balance sheet and any changes in fair value continue to be reported in the statement of operations.
As of September 30, 2003, the collar, cap and swap agreements that were not designated as hedges are summarized in the following table:
EstimatedFair
Interest rate collar
Interest rate cap
(9) Other Non-Operating Expenses
Other non-operating expenses include a $0.6 million loss on a long-term receivable arising from a split-dollar life insurance arrangement for the three and nine months ended September 30, 2003. The life insurance policies underlying the split-dollar life insurance arrangement are expected to be formally canceled during the fourth quarter of 2003 and, accordingly, the carrying amount of the long-term receivable was reduced to the cash surrender value of the underlying life insurance policies.
(10) Income Taxes
The Company’s effective tax rate is approximately 40%, which differs from the federal statutory rate of 34% due to the effect of state income taxes and certain expenses that are not deductible for tax purposes. For the three and nine months ended September 30, 2003, the effective tax rate was increased by a non-deductible $0.6 million loss on a long-term receivable arising from a split-dollar life insurance arrangement. For the nine months ended September 30, 2002, the effective tax rate was decreased by adjustments totaling $0.2 million as a result of the completion of Company’s 2001 income tax returns.
10
(11) Earnings Per Share
Income from continuing operations before cumulative effect of accounting change and discontinued operations per share calculation information is as follows:
Weighted-average shares outstanding:
Basic
Effect of dilutive stock options
Diluted
Income from continuing operations before cumulative effect of accounting change and discontinued operations per basic and diluted share
11
(12) Segment Information
Segment information is as follows:
Radio
Group
One
Two
Three months ended September 30, 2003
Station operating income
Operating income (loss) from continuing operations
Other non-operating income (expense)
Capital expenditures
Three months ended September 30, 2002
Income (loss) from continuing operations before income taxes
Income (loss) from continuing operations before discontinued operations
Nine months ended September 30, 2003
12
Other non-operating expense
Nine months ended September 30, 2002
Income (loss) from continuing operations before cumulative effect of accounting change and discontinued operations
Total Assets
September 30, 2003
Radio Group One includes radio stations located in Miami-Ft. Lauderdale, FL, West Palm Beach-Boca Raton, FL, Ft. Myers-Naples, FL and Greenville-New Bern-Jacksonville, NC. Radio Group Two includes radio stations located in Atlanta, GA, Boston, MA, Philadelphia, PA, Fayetteville, NC, and Augusta, GA. Radio Group Three includes radio stations located in Las Vegas, NV and New Orleans, LA. Corporate total assets include cash and cash equivalents, deferred tax assets, property and equipment and certain other assets.
13
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion together with the financial statements and related notes included elsewhere in this report. The results discussed below are not necessarily indicative of the results to be expected in any future periods. This report contains “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. All statements other than statements of historical fact are “forward-looking statements” for purposes of federal and state securities laws, including 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. Forward-looking statements may include the words “may,” “will,” “estimate,” “intend,” “continue,” “believe,” “expect” or “anticipate” and other similar words. Such forward-looking statements may be contained in “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” among other places. Although we believe that the expectations reflected in any of our forward-looking statements are reasonable, actual results could differ materially from those projected or assumed in any of our forward-looking statements. Our future financial condition and results of operations, as well as any forward-looking statements, are subject to change and to inherent risks and uncertainties, such as unforeseen events that would cause us to broadcast commercial-free for any period of time, and changes in the radio broadcasting industry generally. We do not intend, and undertake no obligation, to update any forward-looking statement. Key risks to our company are described in our annual report on Form 10-K, filed with the Securities and Exchange Commission on March 10, 2003.
General
A radio broadcasting company derives its revenues primarily from the sale of advertising air time to local and national advertisers. The advertising rates that a radio station is able to charge and the number of advertisements that can be broadcast without jeopardizing listener levels largely determine those revenues. Advertising rates are primarily based on three factors:
Our operations are divided into three reportable segments, Radio Group One, Radio Group Two, and Radio Group Three. Our Radio Group One segment includes the operations of our Miami-Ft. Lauderdale, FL, West Palm Beach-Boca Raton, FL, Ft. Myers-Naples, FL and Greenville-New Bern-Jacksonville, NC market clusters. Our Radio Group Two segment includes the operations of our Atlanta, GA, Boston, MA, Philadelphia, PA, Fayetteville, NC and Augusta, GA market clusters. Radio Group Three segment includes the operations of our Las Vegas, NV market cluster. A market cluster consists of all of the radio stations we own in a designated or specified radio market. Net revenues and other financial information for these segments are contained in the notes to our unaudited condensed consolidated financial statements included in Item 1 of this report and an analysis of the results of operations of our segments is contained herein in this Item 2.
Several factors may adversely affect a radio broadcasting company’s performance in any given period. In the radio broadcasting industry, seasonal revenue fluctuations are common and are due primarily to variations in advertising expenditures by local and national advertisers. Typically, revenues are lowest in the first calendar quarter of the year. In order to increase listenership and Arbitron ratings, we engage in promotional activities and incurred related expenses through-out the year. However, because Arbitron reports ratings quarterly in most of our markets, any change in ratings, and therefore changes in advertising revenues, tend to lag behind the incurrence of promotional spending.
14
In the broadcasting industry, radio stations often utilize trade agreements to reduce cash paid for expenses by exchanging advertising air time for goods or services, however, we minimize our use of trade agreements to maximize cash revenue from our inventory of air time. Trade revenue was $1.6 million or 5.6% of our net revenue, trade cost of services were $0.9 million or 9.2% of our cost of services, and trade selling, general and administrative were $0.6 million or 6.3% of our selling, general and administrative for the three months ended September 30, 2003. Trade revenue was $4.5 million or 5.4% of our net revenue, trade cost of services were $2.5 million or 9.0% of our cost of services, and trade selling, general and administrative were $1.8 million or 6.1% of our selling, general and administrative for the nine months ended September 30, 2003.
We calculate same station results by comparing the performance of radio stations operated by us at the end of a relevant period to the performance of those same stations in the prior year’s corresponding period, including the effect of trade revenue and expenses. For the nine months ending September 30, 2002, these results exclude two radio stations that were sold in New Orleans during the first quarter of 2002. We have not presented a reconciliation between reported and same station net revenue for the three months ended September 30, 2003 and 2002 and cost of services and selling, general and administrative for the three and nine months ended September 30, 2003 and 2002 as there are no difference between reported and same station results.
Results of Operations
Other non-operating expenses for the three and nine months ended September 30, 2003 include a $0.6 million loss on a long-term receivable arising from a split-dollar life insurance arrangement for our Chief Executive Officer. Pursuant to the split-dollar life insurance agreement, insurance policies on the life of our Chief Executive Officer were purchased by an irrevocable trust dated November 21, 1994. In accordance with the terms of this agreement, we paid a portion of the premiums on behalf of the trust until July 30, 2002 and received a collateral assignment of the insurance policies to secure repayment of these amounts. As the result of certain regulatory changes effecting executive compensation, the life insurance policies underlying the arrangement are expected to be formally canceled during the fourth quarter of 2003. Upon cancellation, the trust will receive the cash surrender values of the life insurance policies, which totaled $1.9 million as of September 30, 2003. Upon receipt, the cash surrender values will represent all of the assets held by the trust and the only amounts collectible with respect to our long-term receivable.
On February 5, 2003, we completed the sale of WBYU-AM to ABC, Inc for $1.5 million. The proceeds from the sale were used to reduce the outstanding balance of the revolving credit loan under our credit facility. Upon completion of this sale we no longer have operations in New Orleans, therefore the results of operations for WBYU-AM have been reported as discontinued operations in the condensed consolidated statements of operations for all periods presented.
Effective January 1, 2002, we adopted Statement of Financial Accounting Standards (“SFAS”) 142, Goodwill and Other Intangible Assets. SFAS 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually in accordance with the adoption of SFAS 142. In accordance with the provisions of SFAS 142, as of January 1, 2002, we tested our FCC broadcasting licenses, which were identified as intangible assets having indefinite useful lives, and goodwill for impairment. To determine the fair value of our FCC broadcasting licenses and goodwill, we obtained appraisals from an independent appraisal company. As a result of the testing, we recognized an impairment of $17.5 million related to FCC broadcasting licenses and goodwill in the Radio Group Three segment and recorded the loss as a cumulative effect of accounting change in the condensed consolidated statement of operations for the nine months ended September 30, 2002. The cumulative effect of the accounting change, net of income tax effect, decreased net income $12.1 million and earnings per share $0.50, of which $0.4 million or $0.02 per share is reported in discontinued operations.
15
Three Months Ended September 30, 2003 Compared to the Three Months Ended September 30, 2002
Consolidated
Net Revenue. Reported and same station net revenue increased 2.0% to $29.4 million for the three months ended September 30, 2003 from $28.8 million for the three months ended September 30, 2002. The increase was partially due to a $0.2 million increase in revenue from our Miami-Ft. Lauderdale market cluster, a $0.2 million increase in revenue from our Ft. Myers-Naples market cluster, a $0.2 million increase in revenue from our Greenville-New Bern-Jacksonville market cluster, a $0.2 million increase in revenue from our Las Vegas market cluster in each case due to improved performance. These increases were partially offset by a $0.3 million decrease in revenue from our Fayetteville market cluster, which is located near several military bases.
Cost of Services. Reported and same station cost of services increased 8.8% to $9.8 million for the three months ended September 30, 2003 from $9.0 million for the three months ended September 30, 2002. The increase was primarily due to a $0.9 million increase in costs at our Miami-Ft. Lauderdale market cluster primarily due to a $0.5 million increase in program rights fees associated with the Florida Marlins baseball club and an increase in other programming and promotional expenses.
Selling, General and Administrative Expenses. Reported and same station selling, general and administrative expenses decreased 2.4% to $10.1 million for the three months ended September 30, 2003 from $10.3 million for the three months ended September 30, 2002. The decrease was primarily due to a $0.3 million decrease in expenses at our Miami-Ft. Lauderdale market cluster primarily due to cost containment measures. This decrease was partially offset by a $0.2 million increase in expenses at our Ft. Myers-Naples market cluster primarily due to increased sales commissions associated with the increased revenues.
Corporate General and Administrative Expenses. Corporate general and administrative expenses remained stable at $1.3 million for the three months ended September 30, 2003 and 2002. Corporate general and administrative expenses consist primarily of compensation, insurance and other expenses incurred at our corporate offices.
Depreciation and Amortization Expenses. Depreciation and amortization expenses decreased 6.6% to $0.9 million for the three months ended September 30, 2003 from $1.0 million for the three months ended September 30, 2002. The decrease was primarily due to a decrease in new expenditures for property and equipment combined with existing fixed assets reaching the end of their useful lives and becoming fully depreciated.
Interest Expense. Interest expense decreased 20.0% to $3.0 million for the three months ended September 30, 2003 from $3.8 million for the three months ended September 30, 2002. The decrease was primarily due to a general decline in interest rates and a reduction of the outstanding balance under our credit facility.
Gain on Sale of Investments. The $1.2 million gain on sale of investments in 2003 was the result of a sale of 50,000 shares of common stock of FindWhat.com during the three months ended September 30, 2003.
Gain on Increase in Fair Value of Derivative Financial Instruments. In accordance with SFAS 133, Accounting for Derivative Instruments and Hedging Activities, our interest rate collar, cap and swap agreements are carried at fair value. The estimated fair value of each agreement is based on the amounts we would expect to receive or pay to terminate the agreement. The gain on increase in fair value of derivative financial instruments of $0.6 million for the three months ended September 30, 2003 and $0.7 million for the three months ended September 30, 2002 reflects the decrease in the amounts we would expect to pay to terminate our interest rate collar, cap and swap agreements not designated as hedges in accordance with SFAS 133.
Income Tax Expense. Our effective tax rate is approximately 40%, which differs from the federal statutory rate of 34% due to the effect of state income taxes and certain expenses that are not deductible for tax purposes. For the three months ended September 30, 2003, the increase in our effective tax rate was due to the non-deductible $0.6 million loss arising from the split-dollar life insurance arrangement.
16
Discontinued Operations. On October 3, 2002, we entered into a definitive agreement with ABC, Inc. to sell WBYU-AM in the New Orleans market for $1.5 million, subject to certain adjustments. As of the completion of this sale on February 5, 2003, we no longer had operations in New Orleans therefore the results of operations for WBYU-AM have been reported as discontinued operations in the condensed consolidated statements of operations for all periods presented.
Net Income. As a result of the factors described above, net income for the three months ended September 30, 2003 was $3.1 million compared to a net income of $1.5 million for the three months ended September 30, 2002.
Radio Group One Segment
Net Revenue. Net revenue increased 4.3% to $17.1 million for the three months ended September 30, 2003 from $16.4 million for the three months ended September 30, 2002. The increase was partially due to a $0.2 million increase in revenue from our Miami-Ft. Lauderdale market cluster, a $0.2 million increase in revenue from our Ft. Myers-Naples market cluster, a $0.2 million increase in revenue from our Greenville-New Bern-Jacksonville market cluster in each case due to improved performance.
Cost of Services. Cost of services increased 16.5% to $6.5 million for the three months ended September 30, 2003 from $5.6 million for the three months ended September 30, 2002. The increase was primarily due to a $0.9 million increase in costs at our Miami-Ft. Lauderdale market cluster primarily due to a $0.5 million increase in program rights fees associated with the Florida Marlins baseball club and an increase in other programming and promotional expenses.
Selling, General and Administrative Expenses. Selling, general and administrative expenses decreased 4.1% to $5.3 million for the three months ended September 30, 2003 from $5.6 million for the three months ended September 30, 2002. The decrease was primarily due to a $0.3 million decrease in expenses at our Miami-Ft. Lauderdale market cluster primarily due to cost containment measures. This decrease was partially offset by a $0.2 million increase in expenses at our Ft. Myers-Naples market cluster primarily due to increased sales commissions associated with the increased revenues.
Operating Income from Continuing Operations. Operating income from continuing operations remained stable at $4.1 million for the three months ended September 30, 2003 and 2002.
Radio Group Two Segment
Net Revenue. Net revenue decreased 3.1% to $9.3 million for the three months ended September 30, 2003 from $9.6 million for the three months ended September 30, 2002. The decrease was primarily due to a $0.3 million decrease in revenue from our Fayetteville market cluster, which is located near several military bases.
Cost of Services. Cost of services remained stable at $2.7 million for the three months ended September 30, 2003 and 2002.
Selling, General and Administrative Expenses. Selling, general and administrative expenses decreased 2.3% to $3.6 million for the three months ended September 30, 2003 from $3.7 million for the three months ended September 30, 2002. The decrease was primarily due to decreased sales commissions associated with the decreased revenues.
Operating Income from Continuing Operations. Operating income from continuing operations was $2.2 million for the three months ended September 30, 2003 compared to $2.4 million for the three months ended September 30, 2002 primarily due to the changes in net revenue and selling, general and administrative described above.
17
Radio Group Three Segment
Net Revenue. Net revenue increased 5.8% to $2.9 million for the three months ended September 30, 2003 from $2.8 million for the three months ended September 30, 2002. The increase was primarily due to a $0.2 million increase in revenue from our Las Vegas market cluster due to improved performance.
Cost of Services. Cost of services remained stable at $0.6 million for the three months ended September 30, 2003 and 2002.
Selling, General and Administrative Expenses. Selling, general and administrative expenses increased 6.2% to $1.2 million for the three months ended September 30, 2003 from $1.1 million for the three months ended September 30, 2002. The increase was primarily due to increased sales commissions associated with the increased revenues.
Operating Income from Continuing Operations. Operating income from continuing operations was $1.0 million for the three months ended September 30, 2003 compared to $0.8 million for the three months ended September 30, 2002 primarily due to the changes in net revenue and selling, general and administrative described above.
Nine Months Ended September 30, 2003 Compared to the Nine Months Ended September 30, 2002
Net Revenue. Net revenue increased 0.4% to $82.3 million for the nine months ended September 30, 2003 from $82.0 million for the nine months ended September 30, 2002. The increase were partially due to a $0.7 million increase in revenue from our Las Vegas market cluster and a $0.5 million increase in revenue from our Ft. Myers-Naples market cluster due to improved performance. The increases were partially offset by a $0.8 million decrease in revenue from our Fayetteville market cluster, which is located near several military bases. On a same station basis, net revenue increased 0.6% to $82.3 million for the nine months ended September 30, 2003 from $81.9 million for the nine months ended September 30, 2002. The following table reconciles reported net revenue to same station net revenue for the nine months ended September 30, 2002 and 2003.
Reported net revenue
Sold stations in New Orleans
Same station net revenue
Cost of Services. Reported and same station cost of services increased 5.6% to $27.2 million for the nine months ended September 30, 2003 from $25.8 million for the nine months ended September 30, 2002. The increase was partially due to a $1.1 million net increase in costs at our Miami-Ft. Lauderdale market cluster primarily due to a $1.0 million increase in program rights fees associated with the Florida Marlins baseball club and an increase in other programming and promotional expenses but partially offset by a $0.2 million decrease in program rights fees due to the absence of a Miami Dolphins play-off game in 2003. The increase was also partially due to a $0.3 million increase in costs at our Philadelphia market cluster primarily due to increased programming and promotional expenses.
Selling, General and Administrative Expenses. Reported and same station selling, general and administrative expenses decreased 2.3% to $29.3 million for the nine months ended September 30, 2003 from $30.0 million for the nine months ended September 30, 2002. The decrease was partially due to a $0.8 million decrease in expenses at our Miami-Ft. Lauderdale market cluster primarily due to cost containment measures. The decrease was also partially due to a $0.3 million decrease in expenses at our Fayetteville market cluster primarily due to decreased sales commissions associated with the decreased revenues. These decreases were partially offset by a $0.4 million increase in expenses at our Ft. Myers-Naples market cluster primarily due to increased sales commissions associated with the increased revenues.
18
Corporate General and Administrative Expenses. Corporate general and administrative expenses increased 6.6% to $4.1 million for the nine months ended September 30, 2003 from $3.8 million for the nine months ended September 30, 2002. Corporate general and administrative expenses consist primarily of compensation, insurance and other expenses incurred at our corporate offices. The increase is primarily due to increased compensation, insurance premiums and legal expenses.
Depreciation and Amortization Expenses. Depreciation and amortization expenses decreased 7.5% to $2.7 million for the nine months ended September 30, 2003 from $2.9 million for the nine months ended September 30, 2002. The decrease was primarily due to a decrease in new expenditures for property and equipment combined with existing fixed assets reaching the end of their useful lives and becoming fully depreciated.
Interest Expense. Interest expense decreased 23.0% to $8.9 million for the nine months ended September 30, 2003 from $11.6 million for the nine months ended September 30, 2002. The decrease was primarily due to a general decline in interest rates and a reduction of the outstanding balance under our credit facility.
Gain on Sale of Investments. The $4.5 million gain on sale of investments in 2003 was the result of several sales totaling 300,000 shares of common stock of FindWhat.com during the nine months ended September 30, 2003.
Gain on Increase in Fair Value of Derivative Financial Instruments. In accordance with SFAS 133, Accounting for Derivative Instruments and Hedging Activities, our interest rate collar, cap and swap agreements are carried at fair value. The estimated fair value of each agreement is based on the amounts we would expect to receive or pay to terminate the agreement. The gain on increase in fair value of derivative financial instruments of $1.4 million for the nine months ended September 30, 2003 and $2.6 million for the nine months ended September 30, 2002 reflects the decrease in the amounts we would expect to pay to terminate our interest rate collar, cap and swap agreements not designated as hedges in accordance with SFAS 133.
Income Tax Expense. Our effective tax rate is approximately 40%, which differs from the federal statutory rate of 34% due to the effect of state income taxes and certain expenses that are not deductible for tax purposes. For the nine months ended September 30, 2003, the increase in our effective tax rate was due to the non-deductible $0.6 million loss arising from the split-dollar life insurance arrangement. For the nine months ended September 30, 2002, the effective tax rate was decreased by adjustments totaling $0.2 million as a result of the completion of our 2001 income tax returns.
Cumulative Effect of Accounting Change. As a result the adoption of SFAS 142 effective January 1, 2002, we recognized an impairment loss of $17.5 million related to FCC broadcasting licenses and goodwill in the Radio Group Three segment, of which $11.7 million, net of income taxes, was reported as a cumulative effect of accounting change and $0.4 million, net of income taxes, was reported in discontinued operations for the nine months ended September 30, 2002.
Discontinued Operations. On October 3, 2002, we entered into a definitive agreement with ABC, Inc. to sell WBYU-AM in the New Orleans market for $1.5 million, subject to certain adjustments. As of the completion of this sale on February 5, 2003, we no longer had operations in New Orleans therefore the results of operations for WBYU-AM have been reported as discontinued operations in the condensed consolidated statements of operations for all periods presented. Net income from discontinued operations was $0.3 million for the nine months ended September 30, 2003, which included a gain on disposal of $0.3 million, net of income taxes, compared to a net loss from discontinued operations of $0.6 million for the nine months ended September 30, 2002, which included the $0.4 million impairment loss, net of income taxes, due to the adoption of SFAS 142.
Net Income (Loss). As a result of the factors described above, net income for the nine months ended September 30, 2003 was $9.5 million compared to a net loss of $6.9 million for the nine months ended September 30, 2002.
19
Net Revenue. Net revenue increased 1.5% to $46.8 million for the nine months ended September 30, 2003 from $46.1 million for the nine months ended September 30, 2002. The increase was primarily due to a $0.5 million increase in revenue from our Ft. Myers-Naples market cluster due to improved performance.
Cost of Services. Cost of services increased 7.4% to $17.0 million for the nine months ended September 30, 2003 from $15.9 million for the nine months ended September 30, 2002. The increase was primarily due to a $1.1 million net increase in costs at our Miami-Ft. Lauderdale market cluster primarily due to a $1.0 million increase in program rights fees associated with the Florida Marlins baseball club and an increase in other programming and promotional expenses but partially offset by a $0.2 million decrease in program rights fees due to the absence of a Miami Dolphins play-off game in 2003.
Selling, General and Administrative Expenses. Selling, general and administrative expenses decreased 3.7% to $15.5 million for the nine months ended September 30, 2003 from $16.1 million for the nine months ended September 30, 2002. The decrease was primarily due to a $0.8 million decrease in expenses at our Miami-Ft. Lauderdale market cluster primarily due to cost containment measures. This decrease was partially offset by a $0.4 million increase in expenses at our Ft. Myers-Naples market cluster primarily due to increased sales commissions associated with the increased revenues.
Operating Income from Continuing Operations. Operating income from continuing operations was $10.8 million for the nine months ended September 30, 2003 compared to $10.7 million for the nine months ended September 30, 2002 primarily due to the changes in net revenue, cost of services and selling, general and administrative described above.
Net Revenue. Net revenue decreased 3.2% to $27.2 million for the nine months ended September 30, 2003 from $28.1 million for the nine months ended September 30, 2002. The decrease was primarily due to a $0.8 million decrease in revenue from our Fayetteville market cluster which is located near several military bases.
Cost of Services. Cost of services increased 4.7% to $8.3 million for the nine months ended September 30, 2003 from $8.0 million for the nine months ended September 30, 2002. The increase was primarily due to a $0.3 million increase in costs at our Philadelphia market cluster primarily due to increased programming and promotional expenses.
Selling, General and Administrative Expenses. Selling, general and administrative expenses decreased 2.2% to $10.5 million for the nine months ended September 30, 2003 from $10.7 million for the nine months ended September 30, 2002. The decrease was primarily due to a $0.3 million decrease in expenses at our Fayetteville market cluster primarily due to decreased sales commissions associated with the decreased revenues.
Operating Income from Continuing Operations. Operating income from continuing operations was $5.8 million for the nine months ended September 30, 2003 compared to $6.8 million for the nine months ended September 30, 2002 primarily due to the changes in net revenue, cost of services and selling, general and administrative described above.
Net Revenue. Net revenue increased 7.5% to $8.4 million for the nine months ended September 30, 2003 from $7.8 million for the nine months ended September 30, 2002. The increase was primarily due to a $0.7 million increase in revenue from our Las Vegas market cluster due to improved performance.
Cost of Services. Cost of services remained stable at $1.9 million for the nine months ended September 30, 2003 and 2002.
20
Selling, General and Administrative Expenses. Selling, general and administrative expenses increased 5.0% to $3.3 million for the nine months ended September 30, 2003 from $3.1 million for the nine months ended September 30, 2002. The increase was primarily due to increased sales commissions associated with the increased revenues.
Operating Income from Continuing Operations. Operating income from continuing operations was $2.5 million for the nine months ended September 30, 2003 compared to $2.0 million for the nine months ended September 30, 2002 primarily due to the changes in net revenue and selling, general and administrative described above.
Liquidity and Capital Resources
Overview. Our primary sources of liquidity are internally-generated cash flow and our credit facility. Our liquidity needs have been, and for the next twelve months and thereafter are expected to continue to be, for working capital, debt service, radio station acquisitions and other general corporate purposes, including capital expenditures. We expect to provide for future liquidity needs through one or a combination of the following:
We believe these sources will provide sufficient liquidity and capital resources to permit us to meet our financial obligations for at least the next twelve months. Poor financial results, unanticipated opportunities or unanticipated expenses could give rise to additional debt servicing requirements or other additional financing requirements sooner than we expect; and, we may not secure financing when needed or on acceptable terms.
As of September 30, 2003, we held $7.7 million in cash and cash equivalents and we had $59.6 million in remaining commitments under our $103.5 million revolving credit loan; however, as of September 30, 2003 our maximum total leverage covenant would have limited additional borrowings to $12.2 million. Our ability to reduce our total leverage ratio by increasing operating cash flow or decreasing long-term debt will determine how much, if any, of the remaining commitments under our credit facility will be available to us in the future. Poor financial results or unanticipated expenses could result in our failure to maintain or lower our total leverage ratio and we may not be permitted to make any additional borrowings under our credit facility.
Net Cash Provided By (Used In) Operating Activities. Net cash provided by operating activities was $13.7 million in 2003. Net cash provided by operating activities was $9.0 million in 2002. The change was primarily due to a $3.6 million decrease in cash paid for interest resulting from a general decline in interest rates and a reduction of the outstanding balance under our credit facility, a $1.5 million decrease in cash paid for station operating expenses partially offset by a $0.6 million decrease in cash receipts from sales.
Net Cash Provided By (Used In) Investing Activities. Net cash provided by investing activities was $8.7 million in 2003. Net cash provided by investing activities was $17.8 million in 2002. The change is primarily due to the receipt of cash proceeds of $3.35 million from the repayment of a note receivable and $1.5 million from the sale of one radio station in New Orleans in 2003 compared to the receipt of cash proceeds of $19.65 million from the sale of two radio stations in New Orleans for $23.0 million in 2002. Net cash provided by investing activities also included $4.8 million from the sale of available-for-sale investments in 2003. Cash expenditures for property and equipment were $1.1 million in 2003 compared to $2.0 million in 2002.
Net Cash Provided By (Used In) Financing Activities. Net cash used in financing activities was $20.1 million in 2003. Net cash used in financing activities was $29.1 million in 2002. The change is primarily due to
21
the repayment of borrowings under our credit facility with $5.5 million of scheduled repayments, $3.8 million of cash proceeds, including interest, from the repayment of a note receivable, $1.5 million of cash proceeds from the sale of one radio station in New Orleans in 2003, and $9.2 million of additional repayments in 2003 compared to the repayment of borrowings under our credit facility with $7.6 million of scheduled repayments and $19.5 million of cash proceeds from the sale of two radio stations in New Orleans in 2002. Net cash used in financing activities also included payments of loan fees of $2.0 million for changes to our credit facility during the first and third quarters of 2002 and proceeds of $100.0 million from the issuance of term loan B under our amended and restated credit facility which were used to repay $16.0 million of the revolving credit loan and $84.0 million of term loan A.
Credit Facility. As of September 30, 2003, we had $59.6 million in remaining commitments under our $103.5 million revolving credit loan; however, as of September 30, 2003, our maximum total leverage covenant would have limited additional borrowings to $12.2 million. The revolving credit loan includes a $50.0 million sub-limit for letters of credit. The revolving credit loan and term loan A bear interest at either the base rate or LIBOR plus a margin that is determined by our debt to operating cash flow ratio. The base rate is equal to the higher of the prime rate or the overnight federal funds rate plus 0.5%. The revolving credit loan and term loan A carried interest at 4.4375% and 3.375% as of December 31, 2002 and September 30, 2003, respectively. Term loan B bears interest at either the base rate plus 2.75% or LIBOR plus 4.0%. Term loan B carried interest at an average rate of 5.4375% and 5.1565% as of December 31, 2002 and September 30, 2003. Interest is payable monthly through maturity. The revolving credit loan and term loan A mature on September 30, 2008 and term loan B matures on December 31, 2009. The scheduled reductions in the amount available under the revolving credit loan may require principal repayments if the outstanding balance at that time exceeds the new maximum amount available under the revolving credit loan.
The credit facility is secured by substantially all of our assets and guaranteed jointly and severally by all of our subsidiaries. The guarantees were issued to our lenders for repayment of the outstanding balance of the credit facility. If we default on a payment under the terms of the credit facility, the subsidiaries may be required to perform under their guarantees. The maximum amount of undiscounted payments the subsidiaries would have to make in the event of default is $176.3 million. The guarantees for the revolving credit loan and term loan A expire on September 30, 2008 and the guarantees for term loan B expire on December 31, 2009.
We must pay a quarterly unused commitment fee, which is based upon our total leverage to operating cash flow ratio and ranges from 0.25% to 0.375% of the unused portion of the maximum commitment. If the unused portion exceeds 50% of the maximum commitment, the fee is increased by 0.375%. For the three and nine months ended September 30, 2003, our unused commitment fee was $49,000 and $138,000, respectively.
We are required to satisfy financial covenants, which require us to maintain specified financial ratios and to comply with financial tests. As of September 30, 2003, these financial covenants included:
Maximum Total Leverage Test. As of September 30, 2003, our total debt must not have exceeded 6.0 times our consolidated operating cash flow for the four quarters ending on that day (as such terms are
22
defined in our amended and restated credit agreement). For the period from October 1, 2003 through December 31, 2003, the maximum ratio remains 6.0 times. For the period from January 1, 2004 through June 30, 2004, the maximum ratio is 5.75 times. For the period from July 1, 2004 through December 31, 2004, the maximum ratio is 5.25 times. For the period from January 1, 2005 through December 31, 2005, the maximum ratio is 4.5 times. For all periods after January 1, 2006, the maximum ratio is 4.0 times.
As of September 30, 2003, we believe that we were in compliance with all applicable financial covenants. As of September 30, 2003, as calculated pursuant to the terms of our amended and restated credit agreement, our total leverage ratio was 5.61 times consolidated operating cash flow, our interest coverage ratio was 2.5 times interest expense, and our fixed charges ratio was 1.52 times fixed charges.
Failure to comply with these financial covenants, scheduled interest payments, scheduled principal repayments, or any other terms of our amended and restated credit agreement could result in the acceleration of the maturity of our outstanding debt which could have a material adverse effect on our business or results of operations.
The credit facility also prohibits us from paying cash dividends and restricts our ability to make other distributions with respect to our capital stock. The credit facility also contains other customary restrictive covenants. These covenants limit our ability to:
Critical Accounting Policies
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements, and the reported amount of revenues and expenses during the reporting period. We base our estimates on historical experience and assumptions we consider reasonable at the time of making those estimates. We evaluate our estimates on an on-going basis. Actual results may differ from these estimates under different circumstances or using different assumptions.
We have recorded an allowance for doubtful accounts for estimated losses resulting from customers’ inability to make payments to us. We review specific accounts by station, the current financial condition of our customers and historical write-off experience when evaluating the adequacy of the allowance for doubtful accounts. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, then additional allowances may be required.
23
We have recorded certain deferred tax assets, which we consider realizable due to the existence of certain deferred tax liabilities that are anticipated to reverse during similar future periods; however, we have recorded a valuation allowance to reduce our deferred tax assets related to net operating losses in certain states. If we were to determine that we would be unable to fully realize some or all of our remaining deferred tax assets in the future, an adjustment to our deferred tax assets would be recorded as an expense in the period such determination was made.
We have significant property and equipment recorded in our financial statements. We assess the recoverability of our property and equipment on an on-going basis using estimates of future undiscounted cash flows that we expect to generate from these assets. Our radio stations operate in competitive markets and as such could experience adverse changes in listenership and cash flows. These adverse changes may result in an impairment of our property and equipment in the future.
We have significant FCC broadcasting licenses and goodwill recorded in our financial statements. We test FCC broadcasting licenses and goodwill for impairment at least annually using estimates of fair value based on an appraisal from a qualified independent appraisal company or management’s estimates of future discounted cash flows. Such estimates of fair value, whether by appraisal or management estimate, may result in an impairment of our FCC broadcasting licenses and goodwill in the future. In addition, the use of different underlying assumptions by an appraisal company or management, such as determining future cash flows and discount rates, could result in materially different estimates of fair value and therefore could result in a material impairment of our FCC broadcasting licenses and goodwill.
Radio station acquisitions are accounted for by the purchase method for financial statement purposes, and accordingly, the purchase price is allocated to the tangible and intangible assets acquired based upon their estimated fair market values as of the acquisition date. The estimated fair market values are generally based upon an appraisal of the tangible and intangible assets obtained from a qualified independent appraisal company.
Recent Pronouncements
In June 2001, FASB issued SFAS 143, Accounting for Asset Retirement Obligations. SFAS 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. SFAS 143 amends SFAS 19 and is effective for financial statements issued for fiscal years beginning after June 15, 2002. We adopted SFAS 143 during the first quarter of 2003 with no material impact on our condensed consolidated financial statements.
In June 2002, FASB issued SFAS 146, Accounting for Costs Associated with Exit or Disposal Activities. SFAS 146 addresses financial accounting and reporting for costs associated with exit or disposal activities. SFAS 146 nullifies Emerging Issues Task Force Issue No. 94-3 and is effective for exit or disposal activities that are initiated after December 31, 2002. We have adopted SFAS 146 with no material impact on its condensed consolidated financial statements.
In November 2002, FASB issued Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others (the Interpretation), which addresses the disclosure to be made by a guarantor in its interim and annual financial statements about its obligations under guarantees. The Interpretation also requires the recognition of a liability by a guarantor at the inception of certain guarantees. The Interpretation requires the guarantor to recognize a liability for the non-contingent component of the guarantee, which is the obligation to stand ready to perform in the event that specified triggering events or conditions occur. The initial measurement of this liability is the fair value of the guarantee at inception. The recognition of the liability is required even it is not probable that payments will be required under the guarantee or if the guarantee was issued with a premium payment or as part of a transaction with multiple elements. We have adopted the disclosure requirements of the Interpretation and will apply the recognition and measurement provisions for all applicable guarantees entered into after December 31, 2002. To date, we have not entered into guarantees, which would require recognition and measurement pursuant to the provisions of the Interpretation.
24
In January 2003, FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities(the Interpretation), which clarifies the application of Accounting Research Bulletin No. 51, to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. Effective July 1, 2003, we adopted the Interpretation with no material impact on our condensed consolidated financial statements.
In May 2003, FASB issued SFAS 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. SFAS 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. SFAS 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after September 15, 2003. Effective July 1, 2003, we adopted SFAS 150 with no material impact on our condensed consolidated financial statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Market risk is the risk of loss arising from adverse changes in market rates and prices such as interest rates, foreign currency exchange rate and commodity prices. Our primary exposure to market risk is interest rate risk associated with our credit facility. Amounts borrowed under the credit facility incur interest at the London Interbank Offered Rate, or LIBOR, plus additional basis points depending on the outstanding principal balance under the credit facility. As of September 30, 2003, $176.3 million was outstanding under our credit facility. We evaluate our exposure to interest rate risk by monitoring changes in interest rates in the market place.
To manage interest rate risk associated with our credit facility, we have entered into several interest rate collar, cap and swap agreements. Under the collar agreements, our base LIBOR cannot exceed the cap interest rate and our base LIBOR cannot fall below our floor interest rate. Under the cap agreement, our base LIBOR cannot exceed the cap interest rate. Under the swap agreement, we pay a fixed interest rate and the other party pays us a variable amount based on LIBOR. Notional amounts are used to calculate the contractual payments to be exchanged under the contract. As of December 31, 2002 and September 30, 2003, the notional amount upon maturity of these cap and collar agreements was $100.0 million and $150.0 million, respectively. Our collar, cap and swap agreements as of September 30, 2003 are summarized in the following table:
October 2003
May 2004
November 2004
May 2006
25
ITEM 4. CONTROLS AND PROCEDURES.
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
As required by SEC Rule 13a-15(b), we carried out an evaluation, under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the quarter covered by this report. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level.
There has been no change in our internal controls over financial reporting during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.
26
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
We currently and from time to time are involved in litigation incidental to the conduct of our business, but we are not a party to any lawsuit or proceeding which, in the opinion of management, is likely to have a material adverse effect on us.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
ITEM 5. OTHER INFORMATION.
27
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
Exhibit
Number
Description
We filed a Current Report on Form 8-K on August 4, 2003 furnishing under Item 12 our earnings release dated August 4, 2003 regarding our second quarter 2003 financial results.
28
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.
Dated: November 11, 2003
/S/ GEORGEG. BEASLEY
/S/ CAROLINE BEASLEY
29