ITEM 2. MANAGEMENTS 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 Managements 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 February 15, 2013.
General
We are a radio broadcasting company whose primary business is operating radio stations throughout the United States. We own and operate 44
radio stations in the following markets: Atlanta, GA, Augusta, GA, Boston, MA, Fayetteville, NC, Fort Myers-Naples, FL, Greenville-New Bern-Jacksonville, NC, Las Vegas, NV, Miami-Fort Lauderdale, FL, Philadelphia, PA, West Palm Beach-Boca Raton, FL,
and Wilmington, DE. We also operate one radio station in the expanded AM band in Augusta, GA. We refer to each group of radio stations in each radio market as a market cluster.
Recent Developments
On September 1,
2013, we completed the acquisition of KVGS-FM in Las Vegas, NV from GGB Las Vegas, LLC, which is owned by George G. Beasley, for $4.0 million in cash. The operations of KVGS-FM have been included in our results of operations from its acquisition
date. As of September 1, 2013, pursuant to the purchase option, an amount of $185,916 is due to GGB Las Vegas, LLC for unreimbursed management fee losses incurred by KVGS-FM during the term of the management agreement and an amount of $99,483
is due to GGB Las Vegas, LLC to purchase property and equipment acquired by GGB Las Vegas, LLC for KVGS-FM during the term of the management agreement.
Financial Statement Presentation
The
following discussion provides a brief description of certain key items that appear in our financial statements and general factors that impact these items.
Net Revenue.
Our net revenue is primarily derived from the sale of advertising airtime to local and national advertisers. Net revenue
is gross revenue less agency commissions, generally 15% of gross revenue. Local revenue generally consists of advertising airtime and digital sales to advertisers in a radio stations local market either directly to the advertiser or through
the advertisers agency. National revenue generally consists of advertising airtime sales to agencies purchasing advertising for multiple markets. National sales are generally facilitated by our national representation firm, which serves as our
agent in these transactions.
Our net revenue is generally determined by the advertising rates that we are able to charge and the number
of advertisements that we can broadcast without jeopardizing listener levels. Advertising rates are primarily based on the following factors:
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a radio stations audience share in the demographic groups targeted by advertisers as measured principally by quarterly reports issued by the Arbitron Ratings Company;
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the number of radio stations, as well as other forms of media, in the market competing for the attention of the same demographic groups;
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11
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the supply of, and demand for, radio advertising time; and
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the size of the market.
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Our net revenue is affected by general economic conditions,
competition and our ability to improve operations at our market clusters. Seasonal revenue fluctuations are also common in the radio broadcasting industry and are primarily due to variations in advertising expenditures by local and national
advertisers. Our revenues are typically lowest in the first calendar quarter of the year.
We use trade sales agreements to reduce cash
paid for operating costs and expenses by exchanging advertising airtime for goods or services; however, we endeavor to minimize trade revenue in order to maximize cash revenue from our available airtime.
We also continue to invest in digital support services to develop and promote our radio station websites. We derive revenue from our websites
through the sale of advertiser promotions and advertising on our websites and the sale of advertising airtime during audio streaming of our radio stations over the internet.
Operating Expenses.
Our operating expenses consist primarily of (1) programming, engineering, sales, advertising and promotion,
and general and administrative expenses incurred at our radio stations, (2) general and administrative expenses, including compensation and other expenses, incurred at our corporate offices, and (3) depreciation and amortization. We strive
to control our operating expenses by centralizing certain functions at our corporate offices and consolidating certain functions in each of our market clusters.
Critical Accounting Estimates
The
preparation of financial statements in conformity with U.S. generally accepted accounting principles requires us to make estimates and assumptions that affect reported amounts and related disclosures. We consider an accounting estimate to be
critical if:
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it requires assumptions to be made that were uncertain at the time the estimate was made; and
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changes in the estimate or different estimates that could have been selected could have a material impact on our results of operations or financial condition.
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Our critical accounting estimates are described in Item 7 of our annual report on Form 10-K for the year ended December 31, 2012.
There have been no material changes to our critical accounting estimates during the third quarter of 2013.
Recent Accounting Pronouncements
Recent accounting pronouncements are described in Note 2 to the accompanying financial statements.
Three Months Ended September 30, 2013 Compared to the Three Months Ended September 30, 2012
The following summary table presents a comparison of our results of operations for the three months ended September 30, 2012 and 2013 with
respect to certain of our key financial measures. These changes illustrated in the table are discussed in greater detail below. This section should be read in conjunction with the financial statements and notes to financial statements included in
Item 1 of this report.
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Three months ended September 30,
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Change
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2012
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2013
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$
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%
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Net revenue
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$
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24,714,493
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$
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25,950,102
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$
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1,235,609
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5.0
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%
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Station operating expenses
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15,740,976
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16,506,148
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765,172
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4.9
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Corporate general and administrative expenses
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1,940,499
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2,157,138
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216,639
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11.2
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Other operating expenses
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185,916
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185,916
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Interest expense
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1,792,469
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1,337,605
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(454,864
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(25.4
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Loss on extinguishment of long-term debt
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2,608,158
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(2,608,158
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(100.0
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)
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Income tax expense
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766,033
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2,052,021
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1,285,988
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167.9
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Net income
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1,156,923
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3,186,891
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2,029,968
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175.5
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12
Net Revenue.
Net revenue increased $1.2 million during the three months ended
September 30, 2013. Significant factors affecting net revenue included a $0.8 million increase in advertising revenue from our Philadelphia market cluster, a $0.4 million increase in advertising revenue from our Miami-Fort Lauderdale market
cluster, and a $0.3 million decrease in advertising revenue from our Greenville-New Bern-Jacksonville market cluster. Net revenue was comparable to the same period in 2012 at our remaining market clusters.
Station Operating Expenses.
Station operating expenses increased $0.8 million during the three months ended September 30, 2013.
Significant factors affecting station operating expenses included a $0.4 million increase at our Philadelphia market cluster. Station operating expenses were comparable to the same period in 2012 at our remaining market clusters.
Corporate General and Administrative Expenses.
The $0.2 million increase in corporate general and administrative expenses during the
three months ended September 30, 2013 was primarily due to an increase in incentive-based compensation expense and stock-based compensation expense.
Other Operating Expenses.
As of September 1, 2013, pursuant to the purchase option, an amount of $185,916 is due to GGB Las Vegas,
LLC for unreimbursed management fee losses incurred by KVGS-FM during the term of the management agreement.
Interest
Expense.
Interest expense decreased $0.5 million during the three months ended September 30, 2013. Significant factors affecting interest expense included a decrease in long-term debt outstanding including the prepayment of the
second lien facility in the second quarter of 2013.
Loss on Extinguishment of Long-Term Debt.
In connection
with new credit agreements in 2012 we recorded a loss on extinguishment of long-term debt of $2.6 million during the three months ended September 30, 2012.
Income Tax Expense.
Our effective tax rate was approximately 40% and 39% for the three months ended September 30, 2012 and 2013,
respectively, which differ 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.
Net Income.
Net income during the three months ended September 30, 2013 increased $2.0 million as a result of the factors
described above.
Nine Months Ended September 30, 2013 Compared to the Nine Months Ended September 30, 2012
The following summary table presents a comparison of our results of operations for the nine months ended September 30, 2012 and 2013 with
respect to certain of our key financial measures. These changes illustrated in the table are discussed in greater detail below. This section should be read in conjunction with the financial statements and notes to financial statements included in
Item 1 of this report.
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Nine months ended September 30,
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Change
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2012
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2013
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$
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%
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Net revenue
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$
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72,804,066
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$
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77,618,204
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$
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4,814,138
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6.6
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%
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Station operating expenses
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45,881,166
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49,982,476
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4,101,310
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8.9
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Corporate general and administrative expenses
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5,921,193
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6,380,716
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459,523
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7.8
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Other operating expenses
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185,916
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185,916
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Interest expense
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4,404,625
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5,711,729
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1,307,104
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29.7
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Loss on extinguishment of long-term debt
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2,608,158
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1,260,784
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(1,347,374
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(51.7
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Income tax expense
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4,807,931
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4,597,221
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(210,710
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(4.4
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Net income
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7,425,989
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7,965,347
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539,358
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7.3
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Net Revenue.
Net revenue increased $4.8 million during the nine months ended September 30, 2013.
Significant factors affecting net revenue included a $2.5 million increase in advertising revenue from our Philadelphia market cluster, a $2.1 million increase in advertising revenue at our Las Vegas market cluster, which included a $2.2 million
increase in advertising revenue from KOAS-FM in Las Vegas, NV which was acquired in the third quarter of 2012, a $0.5 million increase in advertising revenue from our Fort Myers-Naples market cluster, and a $0.6 million decrease in advertising
revenue from our Greenville-New Bern-Jacksonville market cluster. Net revenue was comparable to the same period in 2012 at our remaining market clusters.
13
Station Operating Expenses.
Station operating expenses increased $4.1 million during the
nine months ended September 30, 2013. Significant factors affecting station operating expenses included a $1.3 million increase at our Las Vegas market cluster, which included a $1.0 million increase in station operating expenses from KOAS-FM
in Las Vegas, NV, a $1.2 million increase at our Philadelphia market cluster, a $0.6 million increase at our Miami-Fort Lauderdale market cluster, and a $0.5 million increase at our Fort Myers-Naples market cluster. In addition, station operating
expenses increased an aggregate amount of $0.8 million across ten of our eleven market clusters as a result of a BMI fee settlement in 2012. Station operating expenses were comparable to the same period in 2012 at our remaining market clusters.
Corporate General and Administrative Expenses.
The $0.5 million increase in corporate general and administrative expenses during the
nine months ended September 30, 2013 was primarily due to an increase in incentive-based compensation expense and stock-based compensation expense.
Other Operating Expenses.
As of September 1, 2013, pursuant to the purchase option, an amount of $185,916 is due to GGB Las Vegas,
LLC for unreimbursed management fee losses incurred by KVGS-FM during the term of the management agreement.
Interest
Expense.
Interest expense increased $1.3 million during the nine months ended September 30, 2013. Significant factors affecting interest expense included a $1.0 million fee in connection with the prepayment of the second lien
facility, an increase in borrowing costs under the credit agreements we entered into in the third quarter of 2012, and a decrease in long-term debt outstanding including the prepayment of the second lien facility.
Loss on Extinguishment of Long-Term Debt.
In connection with the amended first lien credit agreement and the prepayment
of the second lien facility we recorded a loss on extinguishment of long-term debt of $1.3 million during the nine months ended September 30, 2013. In connection with new credit agreements in 2012 we recorded a loss on extinguishment of
long-term debt of $2.6 million during the nine months ended September 30, 2012.
Income Tax Expense.
Our effective tax
rate was approximately 39% and 37% for the nine months ended September 30, 2012 and 2013, respectively, which differ 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. The effective tax rate for the nine months ended September 30, 2013, also reflects a $0.3 million decrease from a change to our state tax effective rate.
Net Income.
Net income during the nine months ended September 30, 2013 increased $0.5 million as a result of the factors described
above.
Liquidity and Capital Resources
Overview.
Our primary sources of liquidity are internally generated cash flow and our revolving credit loan. Our primary liquidity
needs have been, and for the next twelve months and thereafter are expected to continue to be, for working capital, debt service, and other general corporate purposes, including capital expenditures and radio station acquisitions. Historically, our
capital expenditures have not been significant. In addition to property and equipment associated with radio station acquisitions, our capital expenditures have generally been, and are expected to continue to be, related to the maintenance of our
studio and office space and the technological improvement, including upgrades necessary to broadcast HD Radio, and maintenance of our broadcasting towers and equipment. We have also purchased or constructed office and studio space in some of our
markets to facilitate the consolidation of our operations.
Our credit agreement permits us to repurchase additional shares of our common
stock, subject to compliance with financial covenants, up to an aggregate amount of $0.5 million per year. We paid $0.2 million to repurchase 36,363 shares during the nine months ended September 30, 2013.
Our credit agreement permits us to pay cash dividends, subject to compliance with financial covenants, up to an aggregate amount of $4.0
million for 2013, $5.0 million for each of 2014 and 2015, and $6.0 million for each year thereafter. We did not pay any cash dividends during the nine months ended September 30, 2013.
We expect to provide for future liquidity needs through one or a combination of the following sources of liquidity:
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internally generated cash flow;
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additional borrowings, other than under our existing credit facilities, to the extent permitted thereunder; and
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additional equity offerings.
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We believe that we will have sufficient liquidity and capital
resources to permit us to provide for our liquidity requirements and meet our financial obligations for the next twelve months. However, poor financial results or unanticipated expenses could give rise to defaults under our credit facilities,
additional debt servicing requirements or other additional financing or liquidity requirements sooner than we expect and we may not secure financing when needed or on acceptable terms.
Our ability to reduce our consolidated total debt ratio, as defined by our credit agreement, by increasing operating cash flow and/or
decreasing long-term debt will determine how much, if any, of the remaining commitments under our revolving 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 consolidated total debt ratio and we may not be permitted to make any additional borrowings under our revolving credit facility.
The following summary table presents a comparison of our capital resources for the nine months ended September 30, 2012 and 2013 with
respect to certain of our key measures affecting our liquidity. The changes set forth in the table are discussed in greater detail below. This section should be read in conjunction with the financial statements and notes to financial statements
included in Item 1 of this report.
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Nine months ended September 30,
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2012
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2013
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Net cash provided by operating activities
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$
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15,598,697
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$
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14,047,435
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Net cash used in investing activities
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(3,251,021
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)
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(5,965,856
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)
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Net cash used in financing activities
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(14,606,024
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)
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(7,252,496
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)
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Net increase (decrease) in cash and cash equivalents
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$
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(2,258,348
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)
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$
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829,083
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Net Cash Provided By Operating Activities.
Net cash provided by operating activities decreased
$1.6 million during the nine months ended September 30, 2013. Significant factors affecting net cash provided by operating activities included a $3.4 million increase in cash paid for station operating expenses, a $1.2 million increase in
interest payments, a $0.8 million increase in income tax payments, and a $4.0 million increase in cash receipts from the sale of advertising airtime.
Net Cash Used In Investing Activities.
Net cash used in investing activities during the nine months ended September 30, 2013
included a payment of $4.0 million for the acquisition of KVGS-FM in Las Vegas, NV and payments of $2.1 million for capital expenditures. Net cash used in investing activities for the same period in 2012 included a payment of $2.0 million for the
acquisition of KOAS-FM in Las Vegas, NV and payments of $1.3 million for capital expenditures.
Net Cash Used In Financing
Activities.
Net cash used in financing activities during the nine months ended September 30, 2013 included repayments of $6.5 million under our credit facilities, and payments of $0.6 million for loan fees related to the amended first
lien credit agreement. Net cash used in financing activities for the same period in 2012 included repayments of $7.9 million under our credit facility, payments of $4.1 million for loan fees related to new credit agreements, and a repayment of $2.5
million under a note payable to related party for the acquisition of KOAS-FM in Las Vegas, NV.
Credit Facility.
As of
October 25, 2013, the aggregate outstanding balance of our credit facility was $110.2 million. On April 3, 2013, we amended our first lien credit agreement. The amendment waived certain restrictions to permit the prepayment of the $25.0
million second lien facility in full with $20.0 million of additional term loan borrowings and $2.0 million of additional revolving credit facility borrowings from the first lien facility and $3.0 million of cash on hand. The amendment also modified
the interest rate margins on the term loan. In connection with the prepayment of the second lien facility, we recorded a prepayment fee of $1.0 million in interest expense during the second quarter of 2013. In connection with the amended first lien
credit agreement and the prepayment of the second lien facility, we also recorded a loss on extinguishment of long-term debt of $1.3 million during the second quarter of 2013.
As of September 30, 2013, the first lien facility consisted of a term loan with a remaining balance of $103.2 million and a revolving
credit facility with a maximum commitment of $20.0 million. As of September 30, 2013, we had $13.0 million in remaining
15
commitments available under our revolving credit facility. At our election, the first lien facility may bear interest at either (i) the adjusted LIBOR rate, as defined in the first lien
credit agreement, plus a margin ranging from 3.5% to 5.0% that is determined by our consolidated total debt ratio, as defined in the first lien credit agreement or (ii) the base rate, as defined in the first lien credit agreement, plus a margin
ranging from 2.5% to 4.0% that is determined by our consolidated total debt ratio. Interest on adjusted LIBOR rate loans is payable at the end of each applicable interest period and, for those interest periods with a duration in excess of three
months, the three month anniversary of the beginning of such interest period. Interest on base rate loans is payable quarterly in arrears. The first lien facility carried interest, based on the adjusted LIBOR rate, at 4.18% as of September 30,
2013 and matures on August 9, 2017.
The first lien credit agreement requires mandatory prepayments equal to 50% of consolidated
excess cash flow, as defined in the first lien credit agreement, when our consolidated total debt is equal to or greater than three times our consolidated operating cash flow as defined in the first lien credit agreement. The mandatory prepayments
decrease to 25% of excess cash flow when our consolidated total debt is less than three times our consolidated operating cash flow. Mandatory prepayments of consolidated excess cash flow are due 120 days after year end. The credit agreement also
requires mandatory prepayments for defined amounts from net proceeds of asset sales, net insurance proceeds, and net proceeds of debt issuances.
The first lien facility requires us to comply with certain financial covenants which are defined in the first lien credit agreement. These
financial covenants include:
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Consolidated Total Debt Ratio.
Our consolidated total debt on the last day of each fiscal quarter through December 31, 2013 must not exceed 5.0 times our consolidated operating cash flow for the four
quarters then ended. The maximum ratio is 4.5 times for 2014, 4.0 times for 2015, 3.5 times for 2016, and 3.0 times for 2017.
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Interest Coverage Ratio.
Our consolidated operating cash flow for the four quarters ending on the last day of each fiscal quarter through maturity must not be less than 2.0 times our consolidated cash interest
expense for the four quarters then ended.
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The first lien facility is secured by a first-priority lien on substantially all
of the Companys assets and the assets of substantially all of its subsidiaries and is guaranteed jointly and severally by the Company and substantially all of its subsidiaries. The guarantees were issued to our lenders for repayment of the
outstanding balance of the first lien facility. If we default under the terms of the first lien credit agreement, the Company and its applicable subsidiaries may be required to perform under their guarantees. As of September 30, 2013, the
maximum amount of undiscounted payments the Company and its applicable subsidiaries would have had to make in the event of default was $110.2 million. The guarantees for the first lien facility expire on August 9, 2017.
The aggregate scheduled principal repayments of the credit facility for the remainder of 2013 and the next four years are as follows:
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Term
loan
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Revolving
credit
facility
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Total
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2013
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$
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750,000
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$
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$
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750,000
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2014
|
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|
6,875,000
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6,875,000
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2015
|
|
|
8,250,000
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8,250,000
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2016
|
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9,625,000
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|
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|
9,625,000
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2017
|
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|
77,750,000
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|
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7,000,000
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|
|
84,750,000
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Total
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$
|
103,250,000
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|
$
|
7,000,000
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$
|
110,250,000
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Failure to comply with financial covenants, scheduled interest payments, scheduled principal repayments, or
any other terms of our 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. As of September 30, 2013, we were in
compliance with all applicable financial covenants under our credit agreement; our consolidated total debt ratio was 3.32 times, and our interest coverage ratio was 4.19 times.