Company Quick10K Filing
Quick10K
Entercom Communications
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$6.24 143 $890
10-K 2018-12-31 Annual: 2018-12-31
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-K 2015-12-31 Annual: 2015-12-31
10-Q 2015-09-30 Quarter: 2015-09-30
10-Q 2015-06-30 Quarter: 2015-06-30
10-Q 2015-03-31 Quarter: 2015-03-31
10-K 2014-12-31 Annual: 2014-12-31
10-Q 2014-09-30 Quarter: 2014-09-30
10-Q 2014-06-30 Quarter: 2014-06-30
10-Q 2014-03-31 Quarter: 2014-03-31
10-K 2013-12-31 Annual: 2013-12-31
8-K 2019-04-08 Regulation FD
8-K 2019-02-22 Earnings, Exhibits
8-K 2018-12-18 Officers, Code of Ethics, Exhibits
8-K 2018-12-03 Officers, Exhibits
8-K 2018-11-06 Earnings, Exhibits
8-K 2018-10-11 Officers
8-K 2018-09-21 M&A, Exhibits
8-K 2018-08-08 Earnings, Exhibits
8-K 2018-05-16 Shareholder Vote
8-K 2018-05-08 Earnings, Exhibits
8-K 2018-03-08 Earnings, Exhibits
CSX CSX 61,670
FTNT Fortinet 16,050
PSEC Prospect Capital 2,460
EHTH Ehealth 1,480
GRC Gorman Rupp 930
HMST Homestreet 763
PLUG Plug Power 632
DGICA Donegal Group 358
LEE Lee Enterprises 178
HCHC HC2 102
ETM 2018-12-31
Part I
Item 1. Business
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Mine Safety Disclosure
Item 5. Market for Registrant's Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities
Item 6. Selected Financial Data
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A. Controls and Procedures
Item 9B. Other Information
Part III
Item 10. Directors, Executive Officers and Corporate Governance
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters
Item 13. Certain Relationships and Related Transactions and Director Independence
Item 14. Principal Accounting Fees and Services
Part IV
Item 15. Exhibits, Financial Statement Schedules
Item 16. Form 10-K Summary Page
EX-10.8 d712409dex108.htm
EX-10.12 d712409dex1012.htm
EX-21.1 d712409dex211.htm
EX-23.1 d712409dex231.htm
EX-31.1 d712409dex311.htm
EX-31.2 d712409dex312.htm
EX-32.1 d712409dex321.htm
EX-32.2 d712409dex322.htm

Entercom Communications Earnings 2018-12-31

ETM 10K Annual Report

Balance SheetIncome StatementCash Flow

10-K 1 d712409d10k.htm FORM 10-K Form 10-K
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-K

 

 

(Mark One)

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

For the fiscal year ended December 31, 2018

or

 

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

For the transition period from                      to                     

Commission File Number: 001-14461

 

 

Entercom Communications Corp.

(Exact name of registrant as specified in its charter)

 

 

 

Pennsylvania   23-1701044

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

401 E. City Avenue, Suite 809

Bala Cynwyd, Pennsylvania 19004

(Address of principal executive offices and zip code)

(610) 660-5610

(Registrant’s telephone number, including area code)

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

 

Title of each class

 

Name of exchange on which registered

Class A Common Stock, par value $.01 per share   New York Stock Exchange

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

NONE

 

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ☒    No  

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ☐    No  ☒

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ☒    No  

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ☒

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer      Accelerated filer  
Non-accelerated filer      Smaller reporting company  
     Emerging growth company  

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act and Section 13(a) of the Exchange Act.  ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ☐    No  ☒

The aggregate market value of the Class A common stock held by non-affiliates of the registrant as of the last business day of the Registrant’s most recently completed second fiscal quarter, which was June 30, 2018, was $924,006,999 based on the closing price of $7.55 on the New York Stock Exchange on such date.

Class A common stock, $0.01 par value 137,731,485 shares outstanding as of February 15, 2019

(Class A shares outstanding includes 3,545,802 unvested and vested but deferred restricted stock units).

Class B common stock, $0.01 par value 4,045,199 shares outstanding as February 15, 2019.

 

 

 


Table of Contents

DOCUMENTS INCORPORATED BY REFERENCE

Certain information in the registrant’s Definitive Proxy Statement for its 2019 Annual Meeting of Shareholders, pursuant to Regulation 14A, is incorporated by reference in Part III of this report, which will be filed with the Securities and Exchange Commission no later than 120 days after the end of the fiscal year.

TABLE OF CONTENTS

 

         Page  

PART I

    

Item 1.

 

Business

     1  

Item 1A.

 

Risk Factors

     6  

Item 1B.

 

Unresolved Staff Comments

     20  

Item 2.

 

Properties

     20  

Item 3.

 

Legal Proceedings

     20  

Item 4.

 

Mine Safety Disclosure

     21  

PART II

    

Item 5.

 

Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities

     21  

Item 6.

 

Selected Financial Data

     25  

Item 7.

 

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

     29  

Item 7A.

 

Quantitative and Qualitative Disclosures about Market Risk

     54  

Item 8.

 

Financial Statements and Supplementary Data

     54  

Item 9.

 

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

     54  

Item 9A.

 

Controls and Procedures

     54  

Item 9B.

 

Other Information

     56  

PART III

    

Item 10.

 

Directors, Executive Officers and Corporate Governance

     57  

Item 11.

 

Executive Compensation

     57  

Item 12.

 

Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters

     57  

Item 13.

 

Certain Relationships and Related Transactions and Director Independence

     57  

Item 14.

 

Principal Accounting Fees and Services

     57  

PART IV

    

Item 15.

 

Exhibits, Financial Statement Schedules

     58  

Item 16.

 

Form 10-K Summary

     133  

Signatures

       134  

 

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CERTAIN DEFINITIONS

Unless the context requires otherwise, all references in this report to “Entercom,” “we,” the “Company,” “us,” “our” and similar terms refer to Entercom Communications Corp. and its consolidated subsidiaries, which would include any variable interest entities that are required to be consolidated under accounting guidance.

With respect to annual fluctuations within “Management’s Discussion And Analysis Of Financial Condition and Results Of Operations”, the designation of “nmf” represents “no meaningful figure.” This designation is reserved for financial statement line items with such an insignificant change in annual activity, that the fluctuation expressed as a percentage would not provide the users of the financial statements with any additional useful information.

NOTE REGARDING FORWARD-LOOKING STATEMENTS

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

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

We report our financial information on a calendar-year basis. Any reference to activity during the year is for the year ended December 31.

Any reference to the number of radio markets covered by us in top 15, 25 and 50 markets is sourced to the Fall 2018 publication of Nielsen’s Radio Markets; Population, Rankings and Information.

In the practice of measuring the size of U.S. commercial broadcasting audiences, cume, short for “cumulative audience”, is a measure of the total number of consumers over a specified period.

You can identify forward-looking statements by our use of words such as “anticipates,” “believes,” “continues,” “expects,” “intends,” “likely,” “may,” “opportunity,” “plans,” “potential,” “project,” “will,” “could,” “would,” “should,” “seeks,” “estimates,” “predicts” and similar expressions which identify forward-looking statements, whether in the negative or the affirmative. We cannot guarantee that we actually will achieve these plans, intentions or expectations. These forward-looking statements are subject to risks, uncertainties and other factors, some of which are beyond our control, which could cause actual results to differ materially from those forecasted or anticipated in such forward-looking statements. These risks, uncertainties and factors include, but are not limited to, the factors described in Part I, Item 1A, “Risk Factors.”

Any pro forma information that may be included reflects adjustments and is presented for comparative purposes only and does not purport to be indicative of what has occurred or indicative of future operating results or financial position.

You should not place undue reliance on these forward-looking statements, which reflect our view only as of the date of this report. We do not intend, and we do not undertake any obligation, to update these statements or publicly release the result of any revision(s) to these statements to reflect events or circumstances after the date of this report or to reflect the occurrence of unanticipated events.

 

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PART I

 

ITEM 1.

BUSINESS

We are a leading American media and entertainment company, with a cume of 170 million people each month, with coverage of close to 90% of persons 12+ in the top 50 U.S. markets through our premier collection of highly-rated, award-winning radio stations, digital platforms and live events. We are the number one creator of live, original, local audio content and the nation’s unrivaled leader in news and sports radio. We are home to seven of the eight most listened to all-news stations in the U.S., as well as more than 40 professional sports teams and dozens of top college programs. As one of the country’s two largest radio broadcasters, we offer local and national advertisers integrated marketing solutions across audio, digital and event platforms to deliver the power of local connection on a national scale. We have a nationwide footprint of radio stations including positions in all of the top 16 markets and 22 of the top 25 markets. We were organized in 1968 as a Pennsylvania corporation.

On February 2, 2017, we and our wholly owned subsidiary (“Merger Sub”) entered into an Agreement and Plan of Merger (the “CBS Radio Merger Agreement”) with CBS Corporation (“CBS”) and its wholly-owned subsidiary CBS Radio Inc. (“CBS Radio”). Pursuant to the CBS Radio Merger Agreement, Merger Sub merged with and into CBS Radio with CBS Radio surviving as our wholly-owned subsidiary (the “Merger”). The parties to the Merger believe that the Merger was tax-free to CBS and its shareholders. The Merger was effected through a stock for-stock Reverse Morris Trust transaction.

In connection with the Reverse Morris Trust transaction, CBS commenced an exchange offer for the separation of its radio business to allow for the combination of CBS Radio and Entercom. CBS, certain of its subsidiaries and CBS Radio completed the following distributions and stock split (together referred to as the “Radio Reorganization”). At the time of the signing of the CBS Radio Merger Agreement on February 2, 2017, CBS Radio had two classes of common stock, the Radio Series 1 Common Stock, par value $0.01 per share (the “Radio Series 1 Common Stock”), and the Radio Series 2 Common Stock, par value $0.01 per share (the “Radio Series 2 Common Stock” and, together with the Radio Series 1 Common Stock, the “Radio Existing Common Stock”). As of February 2, 2017, CBS directly owned 100% of the equity of Westinghouse CBS Holding Company, Inc., a Delaware corporation (“Westinghouse”), Westinghouse directly owned 100% of the equity of CBS Broadcasting Inc., a New York corporation (“CBS Broadcasting”), and CBS Broadcasting directly owned 100% of the Radio Existing Common Stock. Prior to the consummation of the Final Distribution (defined below), CBS Broadcasting distributed all of the outstanding equity of CBS Radio to Westinghouse, and Westinghouse distributed all of the outstanding equity of CBS Radio to CBS. These distributions are referred to as the “Internal Distributions.”

Following completion of the Internal Distributions, CBS Radio: (i) took all necessary actions to ensure that Radio Series 1 Common Stock and the Radio Series 2 Common Stock were combined into a single class of common stock, par value $0.01 per share (the “Radio New Common Stock”); (ii) authorized the issuance of at least 101,407,494 shares of Radio New Common Stock; and (iii) effected a stock split of the outstanding shares of Radio New Common Stock, as a result of which, as of immediately prior to the effective time of the Final Distribution, 101,407,494 shares of Radio New Common Stock were issued and outstanding, all of which were owned directly by CBS (collectively, (i) through (iii), the “Stock Split”).

Prior to the effective time of the Merger, pursuant to a Master Separation Agreement entered into between CBS and CBS Radio (the “Separation Agreement” and, together with the Side Letter Agreement made as of February 2, 2017 by and among Entercom, Joseph M. Field, Marie Field, and David J. Field (the “Side Letter”) and the CBS Radio Merger Agreement, (the “Agreements”):

 

   

Certain subsidiaries of CBS consummated the Internal Distributions of all of the outstanding equity of CBS Radio that resulted in CBS Radio being a directly wholly owned subsidiary of CBS, and CBS Radio effected the Radio Reorganization, in each case on the terms and subject to the conditions set forth in the CBS Radio Merger Agreement and the Separation Agreement;

 

   

CBS consummated an offer to exchange (the “Exchange Offer”) all of the outstanding shares of Radio Common Stock for shares of Class B Common Stock of CBS, par value $0.001 per share (the “CBS Class B Common Stock”), then outstanding on the terms and subject to the conditions set forth in the CBS Radio Merger Agreement and the Separation Agreement; and

 

   

In the event that holders of CBS Class B Common Stock subscribed for less than all of the shares of Radio Common Stock in the Exchange Offer, CBS would distribute the remaining outstanding shares of Radio Common Stock on a pro rata basis to holders of CBS Class B Common Stock and Class A Common Stock of CBS, par value $0.001 per share (the “CBS Class A Common Stock” and, together with the CBS Class B Common Stock, the “CBS Common Stock”), whose shares of CBS Common Stock remain outstanding after consummation of the Exchange Offer, so that CBS

 

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would be treated for U.S. federal income tax purposes as having distributed all of the Radio Common Stock to its stockholders (the “Clean-Up Spin-Off”), considering for the purpose of calculating the pro rata distribution of Radio Common Stock pursuant to any Clean-Up Spin-Off, the CBS Class A Common Stock and CBS Class B Common Stock as a single class (collectively, the “Final Distribution”, and, together with the Internal Distributions, the “Distributions”), in each case on the terms and subject to the conditions set forth in the CBS Radio Merger Agreement and the Separation Agreement.

In the exchange offer, CBS shareholders had the opportunity to exchange their shares of CBS Class B common stock for shares of CBS Radio common stock, which were immediately converted into the right to receive an equal number of shares of Entercom Class A common stock upon completion of the Merger.    Under the terms of the exchange offer, 5.6796 shares of CBS Radio common stock were exchanged for each share of CBS Class B common stock accepted in the offer. CBS accepted 17,854,689 of the tendered shares in exchange for 101,407,494 shares of CBS Radio common stock, which upon closing of the Merger were immediately converted into an equal number of whole shares of Entercom Class A common stock.

On November 1, 2017, we entered into a settlement with the Antitrust Division of the U.S. Department of Justice (“DOJ”). The settlement with the DOJ together with several required station divestiture transactions with third parties, allowed us to move forward with the Merger. On November 9, 2017, we obtained approval from the Federal Communications Commission (the “FCC”) to consummate the Merger. The transactions contemplated by the CBS Radio Merger Agreement were approved by our shareholders on November 15, 2017. Upon the expiration of the exchange offer period on November 16, 2017, the Merger closed on November 17, 2017.    

Our Digital and Live Events Platforms

Radio.com delivers scale by unifying the listening experience of our broad portfolio of stations, leading podcasts, shows and talent. Harnessing the power of our cume of 170 million people, this robust platform is delivering fast growth and deep engagement twenty-four hours a day, seven days a week.

Through our 45% investment in Cadence13, we are the number three podcaster in the U.S. market creating, distributing and monetizing premium, personality-based podcasts to our audiences with approximately 101 million monthly downloads.

We are a leading creator of live, original events, including large-scale concerts, intimate live performances with big artists on small stages, and crafted food and beverage events, all supported by Eventful, our digital local event discovery business with 27 million registered users and 3.5 million monthly unique visitors.

Our Strategy

Our strategy focuses on accelerating growth by capitalizing on scale, efficiencies and operating expertise to consistently deliver the best local radio content, events and experiences in the communities we serve and, in turn, offer advertisers access to a highly effective marketing platform to reach large and targeted local audiences. The principal components of our strategy are to: (i) continue to be America’s number one creator of live, original, local audio content by building strongly branded radio stations with highly compelling content; (ii) focus on delivering effective integrated marketing solutions for our customers that incorporate audio, digital and experiential assets and leverage our national scale and digital and live events platforms; (iii) assemble and develop the strongest market leading station clusters; (iv) drive a positive perception of radio as the nation’s number one reach and ROI medium; and (v) offer a great place to work, where the most talented high achievers can grow and thrive.

Source Of Revenue

The primary source of revenue for our radio stations is the sale of advertising time to local, regional and national advertisers and national network advertisers who purchase commercials in varying lengths. A growing source of revenue is from station-related digital product suites, which allow for enhanced audience interaction and participation, and integrated digital advertising solutions. A station’s local sales staff generates the majority of its local and regional advertising sales through direct solicitations of local advertising agencies and businesses. We retain a national representation firm to sell to advertisers outside of our local markets.

Our stations are typically classified by their format, such as news, sports, talk, classic rock, urban, adult contemporary, alternative and country, among others. A station’s format enables it to target specific segments of listeners sharing certain demographics. Advertisers and stations use data published by audience measuring services to

 

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estimate how many people within particular geographical markets and demographics listen to specific stations. Our geographically and demographically diverse portfolio of radio stations allows us to deliver targeted messages to specific audiences for advertisers on a local, regional and national basis.

Competition

The radio broadcasting industry is highly competitive. Our stations compete for listeners and advertising revenue with other radio stations within their respective markets. In addition, our stations compete for audiences and advertising revenues with other media including: digital audio streaming, satellite radio, broadcast television, digital, satellite and cable television, newspapers and magazines, outdoor advertising, direct mail, yellow pages, wireless media alternatives, cellular phones and other forms of audio entertainment and advertisement.     

Federal Regulation of Radio Broadcasting

Overview. The radio broadcasting industry is subject to extensive and changing government regulation of, among other things, ownership limitations, program content, advertising content, technical operations and business and employment practices. The ownership, operation and sale of radio stations are subject to the jurisdiction of the FCC pursuant to the Communications Act of 1934, as amended (the “Communications Act”).

The following is a brief summary of certain provisions of the Communications Act and of certain specific FCC regulations and policies. This summary is not a comprehensive listing of all of the regulations and policies affecting radio stations. For further information concerning the nature and extent of federal regulation of radio stations, you should refer to the Communications Act, FCC rules and FCC public notices and rulings.

FCC Licenses. The operation of a radio broadcast station requires a license from the FCC. Certain of our subsidiaries hold the FCC licenses for our stations. The total number of radio stations that can simultaneously operate in any given area or market is limited by the amount of spectrum allotted by the FCC within the AM and FM radio bands, and by station-to-station interference within those bands. While there are no national radio station ownership caps, FCC rules do limit the number of stations within the same market that a single individual or entity may own or control.

Ownership Rules. The FCC sets limits on the number of radio broadcast stations an entity may permissibly own within a market. Same-market FCC numeric ownership limitations are based: (i) on markets as defined and rated by Nielsen Audio; and (ii) in areas outside of Nielsen Audio markets, on markets as determined by overlap of specified signal contours.

The total number of stations authorized to operate in a local market may fluctuate from time to time, and the number of stations that can be owned by a single individual or entity in a given market can therefore vary over time. Once the FCC approves the ownership of a cluster of stations in a market, that owner may continue to hold those stations under “grandfathering” policies, despite a decrease in the number of stations in the market.

Ownership Attribution. In applying its ownership limitations, the FCC generally considers only “attributable” ownership interests. Attributable interests generally include: (i) equity and debt interests which when combined exceed 33% of a licensee’s or other media entity’s total asset value, if the interest holder supplies more than 15% of a station’s total weekly programming or has an attributable interest in any same-market media (television, radio, cable or newspaper), with a higher threshold in the case of investments in certain “eligible entities” acquiring broadcast stations; (ii) a 5% or greater direct or indirect voting stock interest, including certain interests held in trust, unless the holder is a qualified passive investor, in which case the threshold is a 20% or greater voting stock interest; (iii) any equity interest in a limited liability company or a partnership, including a limited partnership, unless properly “insulated” from management activities; and (iv) any position as an officer or director of a licensee or of its direct or indirect parent.

Alien Ownership Rules. The Communications Act prohibits the issuance to, or holding of broadcast licenses by, foreign governments or aliens, non-U.S. citizens, whether individuals or entities, including any interest in a corporation which holds a broadcast license if more than 20% of the licensee’s capital stock is owned or voted by aliens. In addition, the FCC may prohibit any corporation from holding a broadcast license if the corporation is directly or indirectly controlled by any other corporation of which more than 25% of the capital stock is owned of record or voted by aliens if the FCC finds that the prohibition is in the public interest. The Communications Act gives the FCC discretion to allow greater amounts of alien ownership. The FCC considers investment proposals from international companies or individuals on a case-by-case basis. In September 2016, the FCC announced that it was streamlining foreign ownership rules and procedures to provide for a standardized filing and review process.

 

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The streamlined rules permit a broadcast licensee to file a petition with the FCC seeking approval for a proposed controlling investor to own up to 100% foreign ownership of the controlling parent entity and for a non-controlling foreign investor identified in the petition to increase its equity and/or voting interest in a parent entity at a future time up to 49.99%. This change will make it easier for broadcast licensees to seek foreign investors. The FCC also adopted a methodology for determining the citizenship of beneficial owners of publicly held shares that companies may use to ascertain compliance with the foreign ownership rules.

License Renewal. Radio station licenses issued by the FCC are ordinarily renewable for an eight-year term. A station may continue to operate beyond the expiration date of its license if a timely filed license renewal application is pending. All of our licenses have been renewed and are current.

The FCC is required to renew a broadcast station’s license if the FCC finds that the station has served the public interest, convenience and necessity; there have been no serious violations by the licensee of the Communications Act or the FCC’s rules and regulations; and there have been no other violations by the licensee of the Communications Act or the FCC’s rules and regulations that, taken together, constitute a pattern of abuse. If a challenge is filed against a renewal application, and, as a result of an evidentiary hearing, the FCC determines that the licensee has failed to meet certain fundamental requirements and that no mitigating factors justify the imposition of a lesser sanction, the FCC may deny a license renewal application. In certain instances, the FCC may renew a license application for less than a full eight-year term. Historically, our FCC licenses have generally been renewed for the full term.

The FCC initiated an investigation in January 2007, related to a contest at one of our stations. In October 2016, the FCC designated for a hearing whether we operated this station in the public interest and whether such station’s license should be renewed. In February 2017, in order to facilitate the Merger, we permanently discontinued operation of our only station subject to a petition to deny, in order to cancel the license, dismiss its renewal application and terminate the renewal hearing.

Transfer or Assignment of Licenses. The Communications Act prohibits the assignment of broadcast licenses or the transfer of control of a broadcast licensee without the prior approval of the FCC. In determining whether to grant such approval, the FCC considers a number of factors pertaining to the existing licensee and the proposed licensee, including:

 

   

compliance with the various rules limiting common ownership of media properties in a given market;

 

   

the “character” of the proposed licensee; and

 

   

compliance with the Communications Act’s limitations on alien ownership as well as general compliance with FCC regulations and policies.

To obtain FCC consent for the assignment or transfer of control of a broadcast license, appropriate applications must be filed with the FCC. Interested parties may file objections or petitions to deny such applications.

Programming and Operation. The Communications Act requires broadcasters to serve the “public interest.” A licensee is required to present programming that is responsive to issues in the station’s community of license and to maintain records demonstrating this responsiveness. The FCC regulates, among other things, political advertising; sponsorship identification; the advertisement of contests and lotteries; the conduct of station-run contests; obscene, indecent and profane broadcasts; certain employment practices; and certain technical operation requirements, including limits on human exposure to radio-frequency radiation. The FCC considers complaints from listeners concerning a station’s public-service programming, employment practices, or other operational issues when processing a renewal application filed by a station, but the FCC may consider complaints at any time and may impose fines or take other action for violations of the FCC’s rules separate from its action on a renewal application.

FCC regulations prohibit the broadcast of obscene material at any time as well as the broadcast, between the hours of 6:00 a.m. and 10:00 p.m., of material it considers “indecent” or “profane”. The FCC has historically enforced licensee compliance in this area through the assessment of monetary forfeitures. Such forfeitures may include: (i) imposition of the maximum authorized fine for egregious cases ($407,270 for a single violation, up to a maximum of $3,759,410 for a continuing violation); and (ii) imposition of fines on a per utterance basis instead of a single fine for an entire program. There may be indecency complaints which have been submitted to the FCC of which we have not yet been notified.

 

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Certain FCC rules regulate the conduct of on-air station contests, requiring in general that the material rules and terms of the contest be broadcast periodically or posted online and that the contest be conducted substantially as announced.

Enforcement Authority. The FCC has the power to impose penalties for violations of its rules under the Communications Act, including the imposition of monetary fines, the issuance of short-term licenses, the imposition of a condition on the renewal of a license, the denial of authority to acquire new stations, and the revocation of operating authority. The maximum fine for a single violation of the FCC’s rules (other than the rules regarding indecency and profanity) is $50,334.

Proposed and Recent Changes. Congress, the FCC and other federal agencies are considering or may in the future consider and adopt new laws, regulations and policies regarding a wide variety of matters that could: (i) affect, directly or indirectly, the operation, ownership and profitability of our radio stations; (ii) result in the loss of audience share and advertising revenues for our radio stations; and (iii) affect our ability to acquire additional radio stations or to finance those acquisitions.

Federal Antitrust Laws. The federal agencies responsible for enforcing the federal antitrust laws, the Federal Trade Commission (“FTC”) and the DOJ, may investigate certain acquisitions. For an acquisition meeting certain size thresholds, the Hart-Scott-Rodino Antitrust Improvements Act of 1976 requires the parties to file Notification and Report Forms with the FTC and the DOJ and to observe specified waiting-period requirements before consummating the acquisition. The Merger was subject to review by the FTC and the DOJ. On November 1, 2017, we entered into a consent decree with the DOJ that resolved the DOJ’s investigation into the Merger.

HD Radio

AM and FM radio stations may use the FCC selected In-Band On-Channel (“IBOC”) as the exclusive technology for terrestrial digital operations. IBOC, developed by iBiquity Digital Corporation, is also known as “HD Radio.”

HD Radio technology permits a station to transmit radio programming in digital format. We currently use HD Radio digital technology on most of our FM stations. The advantages of digital audio broadcasting over traditional analog broadcasting technology include improved sound quality, the availability of additional channels and the ability to offer a greater variety of auxiliary services.

Employees

As of February 5, 2019, we had 4,428 full-time employees and 3,198 part-time employees. With respect to certain of our stations in our Boston, Chicago, Detroit, Hartford, Kansas City, Los Angeles, Minneapolis, New York City, Philadelphia, Pittsburgh, San Francisco and St. Louis markets, we are a party to collective bargaining agreements with the Screen Actors Guild - American Federation of Television and Radio Artists (known as SAG-AFTRA). With respect to certain of our stations in our Chicago, Los Angeles, and New York City markets, we are a party to collective bargaining agreements with the Writers Guild of America East (known as WGAE) and Writers Guild of America West (known as WGAW). With respect to certain of our stations in our Chicago, New York City, and Philadelphia markets, we are a party to collective bargaining agreements with the International Brotherhood of Electrical Workers (known as IBEW). We believe that our relations with our employees are good.

Corporate Governance

Code Of Business Conduct And Ethics. We have a Code of Business Conduct and Ethics that applies to each of our employees, including our principal executive officers and senior members of our finance department. Our Code of Business Conduct and Ethics can be found on the “Investors” sub-page of our website located at www.entercom.com/investors.

Board Committee Charters. Each of our Audit Committee, Compensation Committee and Nominating/Corporate Governance Committee has a committee charter as required by the rules of the New York Stock Exchange (the “NYSE”). These committee charters can be found on the “Investors” sub-page of our website located at www.entercom.com/investors.

Corporate Governance Guidelines. NYSE rules require our Board of Directors (the “Board”) to establish certain Corporate Governance Guidelines. These guidelines can be found on the “Investors” sub-page of our website located at www.entercom.com/investors.

 

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Environmental Compliance

As the owner, lessee or operator of various real properties and facilities, we are subject to various federal, state and local environmental laws and regulations. Historically, compliance with these laws and regulations has not had a material adverse effect on our business.

Seasonality

Seasonal revenue fluctuations are common in the radio broadcasting industry and are due primarily to fluctuations in advertising expenditures. Typically, revenues are lowest in the first calendar quarter of the year.

Internet Address and Internet Access to Periodic and Current Reports

You can find more information about us that includes a list of our stations in each of our markets at our Internet website located at www.entercom.com. Our Annual Report on Form 10-K, our Quarterly Reports on Form 10-Q, our Current Reports on Form 8-K and any amendments to those reports are available free of charge through our Internet website as soon as reasonably practicable after we electronically file such material with the Securities and Exchange Commission (the “SEC”). The contents of our websites are not incorporated by reference into this Annual Report on Form 10-K or in any other report or document we file with the SEC, and any references to our websites are intended to be inactive textual references only. We will also provide a copy of our annual report on Form 10-K upon any written request.

 

ITEM 1A.

RISK FACTORS

Many statements contained in this report are forward-looking in nature. See “Note Regarding Forward-Looking Statements.” These statements are based on current plans, intentions or expectations, and actual results could differ materially as we cannot guarantee that we will achieve these plans, intentions or expectations. Among the factors that could cause actual results to differ are the following:

BUSINESS RISKS

Our results may be impacted by economic trends.

Our net revenues increased in 2018 as compared to the prior year primarily as a result of acquisitions made during 2017. Excluding the net revenues from those radio stations divested, exchanged or operated by third-parties as part of the Merger, net revenues were up in the low-single digits for the year ended December 31, 2018.

Our results of operations could be negatively impacted by economic fluctuations or by future economic downturns. Also, expenditures by advertisers tend to be cyclical, reflecting overall economic conditions. The risks associated with our business could be more acute in periods of a slowing economy or recession, which may be accompanied by a decrease in advertising. A decrease in advertising expenditures could adversely impact our business, financial condition and result of operations.

There can be no assurance that we will not experience an adverse impact on our ability to access capital, which could adversely impact our business, financial condition and results of operations. In addition, our ability to access the capital markets may be severely restricted at a time when we would like or need to do so, which could have an adverse impact on our capacity to react to changing economic and business conditions.

Our radio stations may be adversely affected by changes in programming and competition for advertising revenues.

We operate in a highly competitive business. Our radio stations compete for audiences with advertising revenue as our principal source of income. We compete directly with other radio stations, as well as with other media, such as broadcast, cable and satellite television, satellite radio and pure-play digital audio, newspapers and magazines, national and local digital services, outdoor advertising and direct mail. We also compete for advertising dollars with other large companies such as Facebook, Google and Amazon. Audience ratings and market shares are subject to change, and any decrease in our listenership ratings or market share in a particular market could have a material adverse effect on the revenue of our stations located in that market. Audience ratings and market shares could be affected by a variety of factors, including changes in the format or content of programming (some of which may be outside of our control), personnel changes, demographic shifts and general broadcast listening trends. Adverse changes in any of these areas or trends could adversely impact our business, financial condition, results of operations and cash flows.

 

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While we already compete in some of our markets with stations with similarly programmed formats, if another radio station in a market were to convert its programming format to a format similar to one of our stations or if an existing competitor were to garner additional market share, our stations could suffer a reduction in ratings and/or advertising revenue and could incur increased promotional and other expenses. Competing companies may be larger and/or have more financial resources than we do. There can be no assurance that any of our stations will be able to maintain or increase their current audience ratings and advertising revenues.

We may be unable to effectively integrate our acquisitions, including the Merger with the CBS Radio business.

The integration of acquisitions involves numerous risks.

In particular, we now have significantly more sales, assets and employees than we did prior to the Merger. The integration process requires us to expend significant capital and expand the scope of our operations and financial systems. We have been required to devote a significant amount of time and attention to the process of integrating the operations of the CBS Radio business. There is a great degree of difficulty and management involvement inherent in that process, which is not yet complete. These difficulties include:

 

   

Continuing the integration process of the CBS Radio business while carrying on the ongoing operations of our business;

 

   

managing a significantly larger company than before consummation of the Merger;

 

   

the possibility of faulty assumptions underlying our expectations regarding the integration process;

 

   

coordinating a greater number of diverse businesses and businesses located in a greater number of geographic locations;

 

   

CBS Radio’s performance in the past was well below others in the industry and we may not be able to improve their results;

 

   

retaining existing customers and attracting new customers;

 

   

the potential diversion of management’s focus and resources from other strategic opportunities and from operational matters;

 

   

managing tax costs or inefficiencies associated with integrating the operations of the combined company;

 

   

unforeseen expenses or delays associated with the Merger;

 

   

integrating two separate employee cultures;

 

   

attracting and retaining the necessary personnel for the combined company;

 

   

creating uniform standards, controls, procedures, policies and information systems and controlling the costs associated with such matters; and

 

   

integrating accounting, finance, sales, billing, payroll, purchasing and regulatory compliance systems.

There is no assurance that the CBS Radio business will be successfully or cost-effectively integrated into our business. The process of integrating the CBS Radio business into our operations may cause an interruption of, or loss of momentum in, the activities of our business. If we are not able to effectively manage the integration process, or if any significant business activities are interrupted as a result of the integration process, our business could suffer and our liquidity, results of operations and financial condition could be adversely impacted.

 

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If any of the Internal Distributions or the Final Distribution does not qualify as a transaction that is tax-free for U.S. federal income tax purposes under Section 355 of the Internal Revenue Code (the “Code”) or the Merger does not qualify as a tax-free “reorganization” under Section 368(a) of the Code, including as a result of actions taken in connection with the Internal Distributions, the Final Distribution or the Merger or as a result of subsequent acquisitions of shares of CBS, Entercom or CBS Radio, then CBS and/or holders of CBS Common Stock that received Radio Common Stock in the Final Distribution may be required to pay substantial U.S. federal income taxes, and, in certain circumstances, CBS Radio (now known as “Entercom Media Corp.”) and Entercom may be required to indemnify CBS for any such tax liability.

Stockholders of CBS generally will not recognize any gain or loss for U.S. federal income tax purposes as a result of the exchange offer or the Merger, except for any gain or loss attributable to the receipt of cash in lieu of fractional shares of Entercom Class A Common Stock received in the Merger. CBS received an opinion from Wachtell, Lipton, Rosen & Katz, counsel to CBS, that each of the Internal Distributions and the Final Distributions qualified as a tax-free transaction under Section 355 of the Code (the “Distribution Tax Opinion”).

It was intended that the Merger qualify as a “reorganization” within the meaning of Section 368(a) of the Code. It was a condition to Entercom’s obligation to complete the Merger that Entercom receive an opinion from Latham & Watkins LLP, counsel to Entercom, to the effect that the Merger be treated as a “reorganization” within the meaning of Section 368(a) of the Code, and it was a condition to CBS and CBS Radio’s obligations to complete the Merger that CBS receive an opinion from Wachtell, Lipton, Rosen & Katz, counsel to CBS, to the effect that the Merger be treated as a “reorganization” within the meaning of Section 368(a) of the Code (each such opinion, a “Merger Tax Opinion”).

The Separation Agreement provided that if the condition that the Distribution Tax Opinion be delivered is waived by CBS, then unless such condition cannot be met solely as a result of one or more events, facts or circumstances that are not within the control of CBS, CBS shall pay to Entercom the Tax Opinion Waiver Penalty. The “Tax Opinion Waiver Penalty” means a dollar amount equal to the product of (a) the sum of (i) the number of shares of CBS Common Stock subject to CBS options held by CBS Radio employees immediately prior to the effective time of the Merger and (ii) the number of CBS Restricted Stock Unit (“RSU”) awards held by a CBS Radio employee outstanding as of immediately prior to the effective time of the Merger, multiplied by (b) the Tax Opinion Waiver Ratio Impact, multiplied by (c) the volume-weighted average per share closing price of Entercom Class A Common Stock for the five consecutive trading days beginning 15 trading days prior to the date CBS publicly discloses that it has waived the condition regarding the Distribution Tax Opinion (the “Tax Opinion Waiver Date”), as listed on the NYSE (the “Entercom Unaffected Stock Value”). The “Tax Opinion Waiver Ratio Impact” means an amount equal to the greater of (a) (i) the quotient obtained by dividing the (A) volume-weighted average per-share closing price of CBS Class B Common Stock on the five trading days immediately prior to the date of the consummation of the Merger, as listed on the NYSE, by (B) volume-weighted average per-share closing price of Entercom Class A common Stock on the five trading days immediately following the date of the consummation of the Merger, as listed on the NYSE, minus (ii) (A) the volume-weighted average per-share closing price of CBS Class B Common Stock for the five consecutive trading days beginning 15 trading days prior to the Tax Opinion Waiver Date, as listed on the NYSE, divided by (B) the Entercom Unaffected Stock Value, or (b) zero.

The consummation of the separation of the radio business from the other businesses of CBS pursuant to the terms of the Separation Agreement (the “Separation” and, together with the other transactions contemplated in the Separation Agreement and the CBS Radio Merger Agreement, the “Transactions”) was conditioned on the receipt by CBS of the Distribution Tax Opinion and a Merger Tax Opinion and by Entercom of a Merger Tax Opinion and a copy of the Distribution Tax Opinion.

Entercom, CBS, CBS Radio and Merger Sub or their respective subsidiaries, in each case as applicable, have entered into certain other agreements relating to the Transactions and various interim and ongoing relationships between CBS, CBS Radio and Entercom.

To enable Entercom to manage an orderly transition in its operation of CBS Radio, CBS and Entercom entered into an agreement, pursuant to which CBS will provide certain services to Entercom in support of CBS Radio and Entercom will provide certain limited services to CBS for a period not to exceed twenty-four months following the consummation of the Transactions (the “Transition Service Agreement”).

 

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CBS Local Digital Media operates CBS local websites, which combine local radio and television content within markets where both CBS Radio and CBS television stations operate. CBS and Entercom entered into an agreement, pursuant to which CBS Local Digital Media will continue to operate the digital presences for CBS Radio’s Sports and news Stations and CBS television stations (the “Joint Digital Sales Agreement”). The Joint Digital Sales Agreement represents a collaborative agreement between CBS and Entercom, providing for the sharing of revenues, costs and content, in connection with the operation of the CBS local websites.

Pursuant to an agreement executed by and between CBS Broadcasting, CBS Mass Media Corporation and other subsidiaries of CBS (together, the “Licensors”), Entercom Media Corp. and certain subsidiaries of Entercom Media Corp., as the licensees, Entercom Media Corp. will have the right to continue to use certain licensed trademarks and related property to operate various Entercom Media Corp. stations, subject to the terms and conditions of this license agreement (the “Trademark License Agreement (TV Station Brands)”). Pursuant to an agreement executed by and between CBS Broadcasting as licensor, CSTV Networks, Inc. d/b/a CBS Sports Network, on the one hand, and CBS Sports Radio Network Inc. and Entercom Media Corp., on the other hand as the licensees, the licensees will have the right to continue to use the CBS SPORTS RADIO trademark in connection with the CBS Sports Radio network and certain marketing and promotional uses (the “Trademark License Agreement (CBS SPORTS RADIO Brand)” and, together with the Trademark License Agreement (TV Station Brands), the “Trademark License Agreements”).

Concurrently with the execution of the CBS Radio Merger Agreement, Entercom and Joseph M. Field, who held a controlling voting interest in Entercom, entered into a Voting Agreement dated as of February 2, 2017 (the “Voting Agreement”). Pursuant to the Voting Agreement, Mr. Field committed to vote in favor of the issuance of shares of Entercom Class A Common Stock in the Merger, an amendment to Entercom’s Amended and Restated Articles of Incorporation (“Entercom Articles”) to provide that the Entercom board of directors will be classified after the Merger and not to tender into or vote for any alternative proposal for one year after the termination of the CBS Radio Merger Agreement (but only through the termination provisions as identified in the Voting Agreement).

Together, the Tax Matters Agreement (defined below), the Transition Service Agreement, the Joint Digital Services Agreement and the Trademark License Agreements are referred to as the “Ancillary Agreements.” The Ancillary Agreements together with the Voting Agreement, the Side Letter, CBS Radio Merger Agreement and the Separation Agreement, are referred to as the “Transaction Agreements”.

The opinions of counsel were based upon and relied on, among other things, current law, certain facts and assumptions, as well as certain representations, statements, and undertakings of CBS, CBS Radio (now Entercom Media Corp.), Entercom, and Merger Sub, including those relating to the past and future conduct of CBS, CBS Radio, Entercom, and Merger Sub. If any of these representations, statements or undertakings are, or become, inaccurate or incomplete, or if CBS, Entercom Media Corp., Entercom, or Merger Sub breaches any of its covenants in the Transaction Agreements, the opinions of counsel may be invalid and the conclusions reached therein could be jeopardized. Notwithstanding the opinions of counsel, the Internal Revenue Service (the “IRS”) could determine that the Final Distribution and/or the Merger should be treated as a taxable transaction if it determines that any of the facts, assumptions, representations, statements or undertakings upon which the opinions of counsel were based are false or have been violated, or if it disagrees with the conclusions in the opinions of counsel. The opinions of counsel are not binding on the IRS and there can be no assurance that the IRS will not assert a contrary position.

If the Final Distribution fails to qualify as a transaction that is tax-free, for U.S. federal income tax purposes, under Section 355 of the Code, in general, CBS would recognize taxable gain as if it had sold the Radio Common Stock in a taxable sale for its fair market value, and holders of CBS Common Stock who received shares of Radio Common Stock in the Final Distribution would be subject to tax as if they had received a taxable distribution equal to the fair market value of such shares.

Even if the Final Distribution were to otherwise qualify as a tax-free transaction under Section 355 of the Code, the Final Distribution or either Internal Distribution would be taxable to CBS (but not to CBS stockholders) pursuant to Section 355(e) of the Code if there is a 50% or greater change in ownership of either CBS or CBS Radio (including stock of Entercom after the Merger), directly or indirectly, as part of a plan or series of related transactions that include the Final Distribution or such Internal Distribution, as applicable. For this purpose, any acquisitions of CBS or CBS Radio stock (including stock of Entercom after the Merger) within the period beginning two years before the Final Distribution or such Internal Distribution, as applicable, and ending two years after the Final Distribution or such Internal Distribution, as applicable, are presumed to be part of such a plan, although CBS may be able to rebut that presumption. Further, for purposes of this test, the Merger will be treated as part of such a plan, but the Merger standing alone should not cause the Final Distribution or either Internal Distribution to be taxable to

 

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CBS under Section 355(e) of the Code because pre-Merger holders of Radio Common Stock will hold at least 50.25% of the aggregate value of Entercom Common Stock and at least 50.25% of the aggregate voting power of Entercom Common Stock, in each case, immediately following the Merger. However, if the IRS were to determine that other acquisitions of CBS or CBS Radio stock (including stock of Entercom after the Merger), either before or after the Final Distribution or either Internal Distribution, were part of a plan or series of related transactions that included the Final Distribution or such Internal Distribution, as applicable, such determination could result in significant tax to CBS.

Under the agreement entered into by CBS, CBS Radio, and Entercom in connection with the Transactions, CBS Radio (and Entercom, if applicable) will be required to indemnify CBS against all or a portion of any taxes on the Internal Distributions and Final Distribution that arise as a result of certain actions or failures to act by Entercom or CBS Radio, certain events (or series of events) after the Transactions involving the stock or assets of CBS Radio or Entercom, or any breach by Entercom or, after the Transactions, CBS Radio of any representation or covenant made by them in the agreement (the “Tax Matters Agreement”) (a “disqualifying action”). If CBS were to recognize gain on either Internal Distribution or the Final Distribution for reasons not related to a disqualifying action by CBS Radio or Entercom, CBS would generally not be entitled to be indemnified under the Tax Matters Agreement and the resulting tax to CBS could have a material adverse effect on CBS. In addition, in certain circumstances, under the Tax Matters Agreement, CBS Radio (and Entercom) will be required to indemnify CBS against taxes on the Merger that arise as a result of a disqualifying action by CBS Radio or Entercom. If CBS were to recognize gain on the Merger for reasons not related to a disqualifying action by CBS Radio or Entercom, CBS would generally not be entitled to indemnification by CBS Radio (or Entercom) under the Tax Matters Agreement. If CBS Radio (or Entercom, if applicable) is required to indemnify CBS if the Final Distribution or the Merger is taxable, this indemnification obligation could be substantial and could have a material adverse effect on Entercom, including with respect to its financial condition and results of operations. In addition, even if Entercom and CBS Radio are not responsible for tax liabilities of CBS under the Tax Matters Agreement, CBS Radio nonetheless could be liable under applicable tax law for such liabilities if CBS were to fail to pay such taxes.

Entercom Media Corp. and Entercom may be affected by significant restrictions following the Transactions in order to avoid significant tax-related liabilities.

The Tax Matters Agreement generally prohibits Entercom Media Corp., Entercom and their affiliates from taking certain actions that could cause the Internal Distributions, the Final Distribution and the Merger to fail to qualify as tax-free transactions. In particular, for a two-year period following the date of the Final Distribution (the “Final Distribution Date”), except as described below, neither Entercom Media Corp. nor Entercom may:

 

   

enter into any transaction or series of transactions (or any agreement, understanding or arrangement) as a result of which one or more persons would acquire (directly or indirectly) stock comprising 50% or more of the vote or value of Entercom Media Corp. or Entercom (taking into account the stock of CBS Radio acquired pursuant to the Merger);

 

   

redeem or repurchase any stock or stock rights, other than in certain open-market transactions;

 

   

amend its certificate of incorporation or take any other action affecting the relative voting rights of its capital stock;

 

   

merge or consolidate with any other person (other than pursuant to the Merger or mergers or consolidations that do not result in Entercom Media Corp. ceasing to exist as a corporation for U.S. federal income tax purposes);

 

   

take any other actions that would, when combined with any other direct or indirect changes in ownership of Entercom Media Corp. and Entercom capital stock (including pursuant to the Merger), have the effect of causing one or more persons to acquire stock comprising 50% or more of the vote or value of Entercom Media Corp. or Entercom, or would reasonably be expected to result in a failure to preserve the tax-free status of the Transactions;

 

   

cause Entercom Media Corp. to liquidate;

 

   

cause Entercom Media Corp. to discontinue the active conduct of certain of its businesses; or

 

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sell, transfer or otherwise dispose of assets (including stock of subsidiaries) of certain of Entercom Media Corp.’s business beyond certain thresholds (subject to exceptions for, among other things, ordinary course dispositions and repayments or prepayments of Entercom Media corp. debt).

If Entercom Media Corp. (or Entercom, if applicable) intends to take any such restricted action, Entercom Media Corp. (or Entercom, if applicable) will be required to cooperate with CBS in obtaining an IRS ruling or an unqualified tax opinion satisfactory to CBS in its reasonable discretion to the effect that such action will not affect the status of any of the Internal Distributions, the Final Distribution or the Merger as tax-free transactions, unless CBS waives such requirement. However, if Entercom Media Corp. (or Entercom, if applicable) takes any of the actions above and such actions result in tax-related losses to CBS, then Entercom Media Corp. (or Entercom, if applicable) generally will be required to indemnify CBS for such losses, without regard to whether CBS has given Entercom Media Corp. and/or Entercom prior consent. In the event CBS does not receive a tax opinion from Wachtell, Lipton, Rosen & Katz concluding at a comfort level of “should” or higher that each of the Internal Distributions and the Final Distribution qualifies as a tax-free transaction under Section 355 of the Code or takes or fails to take, or permits any of its affiliates to take or fail to take, any action solely as a result of which (together with other actions or failures to act by CBS and its affiliates) either of the Internal Distributions and/or the Final Distribution would reasonably be expected to fail to qualify as tax-free transactions, then the restrictions set forth above shall not apply.

Due to these restrictions and indemnification obligations under the Tax Matters Agreement, Entercom may be limited in its ability to pursue strategic transactions, equity or convertible debt financings or other transactions that may otherwise be in Entercom’s best interests. Also, Entercom’s potential indemnity obligation to CBS might discourage, delay or prevent a change of control during this two-year period that Entercom shareholders may consider favorable and its ability to pursue strategic transactions, equity or convertible debt financings, or other transactions that may otherwise be in Entercom’s best interests.

The loss of key personnel could have a material adverse effect on our business.

Our business depends upon the continued efforts, abilities and expertise of our executive officers and other key personnel. We believe that the loss of one or more of these individuals could adversely impact our business, financial condition, results of operations and cash flows.

Our radio stations compete for creative and on-air talent with other radio stations and other media, such as broadcast, cable and satellite television, digital media and satellite radio. Our on-air talent are subject to change, due to competition and for other reasons. Changes in on-air talent could materially and negatively affect our ratings and our ability to attract local and national advertisers, which could in turn adversely affect our revenues.

The Merger with CBS Radio may not achieve its intended benefits.

Even if we are able to successfully combine the two business operations, it may not be possible to realize the full benefits of the increased sales volume and other benefits, including the expected synergies, which we anticipate will result from the Merger, or realize these benefits within the time frame that is expected. For example, the elimination of duplicative costs may not be possible or may take longer than anticipated, or the benefits from the Merger may be offset by costs incurred or delays in integrating the companies. If we fail to realize the benefits we anticipate from the acquisition, our liquidity, results of operations or financial condition could be adversely impacted.

We have incurred transaction- and merger-related costs in connection with the Merger.

We have incurred and expect to incur a number of non-recurring direct and indirect costs associated with the Merger. These costs and expenses include fees paid to financial, legal and accounting advisors, severance and other potential employment-related costs, including payments that may be made to certain Entercom and former CBS Radio executives, filing fees, printing expenses and other related charges. There are also processes, policies, procedures, operations, technologies and systems that must be integrated in connection with the Merger and the integration of the two companies’ businesses. While we have assumed that a certain level of expenses would be incurred in connection with the Merger and the other operations contemplated by the CBS Radio Merger Agreement and continue to assess the magnitude of these costs, there are many factors beyond our control that could affect the total amount or the timing of the integration and implementation expenses.

There may also be additional unanticipated costs in connection with the Merger that we may not recoup. These costs and expenses could reduce the realization of efficiencies and strategic benefits we can expect to achieve from the Merger. Although we expect that these benefits will offset the transaction expenses and implementation costs over time, this net benefit may not be achieved in the near term or at all.

 

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Increases in or new royalties, including through legislation, could adversely impact our business, financial condition and results of operations.

We pay royalties to song composers and publishers through performance rights organizations (“PROs”), currently American Society of Composers, Authors and Publishers (ASCAP), Broadcast Music, Inc. (BMI), SESAC, Inc. and Global Music Rights (“GMR”) for the performance of music on our radio stations and websites. The emergence of new PROs could increase the royalties that we pay. Although we pay royalties to record labels and recording artists for distributing music content online, we do not pay royalties to record labels or recording artists for terrestrial broadcasts of music on our radio stations. From time to time, Congress considers legislation that could require that radio broadcasters pay performance royalties on terrestrial broadcasts of music to record labels and recording artists. The proposed legislation has been the subject of considerable debate and activity by the radio broadcast industry and other parties that could be affected. We cannot predict whether any proposed legislation will become law. In addition, royalty rates are subject to adjustment and it is possible that our royalty rates associated with obtaining rights to use musical compositions and sound recordings in our programming content could increase as a result of private negotiations, regulatory rate-setting processes, or administrative and court decisions. Various independent record companies that claim to own the rights to several hundred sound recordings created prior to February 15, 1972 (the “Pre-1972 Recordings”) have sued several radio broadcasters (including CBS Radio) for allegedly infringing their exclusive right of public performance in certain states. In August 2015, CBS Radio was named as a defendant in two separate putative class action lawsuits in a federal court in each of California and New York for common law copyright infringement as well as related state law claims. In May 2016, the California court dismissed the California case against CBS Radio. In June 2016, the plaintiff record companies appealed this judgment to the U.S. Court of Appeals for the Ninth Circuit. In March 2017, the New York federal court dismissed the New York suit with prejudice. In the California case, the plaintiffs sought to certify a class action related to other pre-1972 recordings. The California trial court: (a) struck the class certification claims; and (b) granted summary judgment in CBS’ favor on the basis that CBS had publicly performed post-1972 digitally remastered recordings; those remastered recordings were derivative works sufficiently original to be copyrightable; and thus those works were governed exclusively by federal law, rather than California state law which governs the public performance of the original recordings. In August 2018, the Ninth Circuit reversed the District Court opinion. The Company filed a petition for rehearing en banc on September 18, 2018. That petition was denied, however, the original decision was amended in part. Following remand, the trial court entered a stay, pending the outcome of a separate case, Flo & Eddie, Inc. v. Pandora Media, Inc., in which the California Supreme Court will decide whether California law recognizes a public performance right for pre-1972 works. An adverse decision in the California case against the Company could impede our ability to broadcast or stream the Pre-1972 Recordings and/or increase our royalty payments, as well as expose the Company to liability for past broadcasts. New or increased royalty payments could increase our expenses, which could adversely impact our businesses, financial condition, results of operations and cash flows.

The failure to protect our intellectual property could adversely impact our business, financial condition and results of operations.

We have limited rights to use the trademark,” “CBS Sports Radio” and certain other trademarks owned by CBS, subject in each case to certain license agreements entered into upon consummation of the Merger. Certain trademarks may be limited to a period of no more than twelve months after the Merger. Any substantial failure to protect and enforce our intellectual property rights prior to the expiration of these rights to use Trademarks owned by CBS and its subsidiaries could adversely impact our business, financial condition and results of operations. In addition, early termination of the trademark licenses could result in our rebranding such trademarks before we are prepared to do so and could require that we spend significant unanticipated resources.

Our ability to protect and enforce our intellectual property rights is important to the success of our business. We endeavor to protect our intellectual property under trade secret, trademark, copyright and patent law, and through a combination of employee and third-party non-disclosure agreements, other contractual restrictions, and other methods. We have registered trademarks in state and federal trademark offices in the United States and enforce our rights through, among other things, filing oppositions with the U.S. Patent and Trademark Offices. There is a risk that unauthorized digital distribution of our content could occur, and competitors may adopt names similar to ours or use confusingly similar terms as keywords in internet search engine advertising programs, thereby impeding our ability to build brand identity and leading to confusion among our audience or advertisers. Moreover, maintaining and policing our intellectual property rights may require us to spend significant resources as litigation or proceedings

 

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before the U.S. Patent and Trademark Office, courts or other administrative bodies, is unpredictable and may not always be cost-effective. There can be no assurance that we will have sufficient resources to adequately protect and enforce our intellectual property. The failure to protect and enforce our intellectual property could adversely impact our business, financial condition, results of operations and cash flows.

We may be subject to claims and litigation from third parties claiming that our operations infringe on their intellectual property. Any intellectual property litigation could be costly and could divert the efforts and attention of our management and technical personnel, which could have a material adverse effect on our business, financial condition and results of operations. If any such actions are successful, in addition to any potential liability for damages, we could be required to obtain a license in order to continue to operate our business.

We cannot predict the competitive effect on the radio broadcasting industry of changes in audio content distribution, changes in technology or changes in regulations.

The radio broadcasting industry is subject to rapid technological change, evolving industry standards and the emergence of new media technologies and services. We may lack the resources to acquire new technologies or introduce new services to allow us to compete with these new offerings. Competing technologies and services, some of which are commercial-free, include: personal audio devices; national and local digital audio services; satellite-delivered digital radio services; smart speaker driven services; content available over the Internet; HD Radio, which provides multi-channel, multi-format digital radio services in the same bandwidth currently occupied by traditional AM and FM radio services; and low-power FM radio, which could result in additional FM radio broadcast outlets, including additional low-power FM radio signals authorized under the Local Community Radio Act of 2010.

We cannot predict the effect, if any, that competition arising from new technologies or regulatory changes may have on the radio broadcasting industry or on our financial condition, results of operations and cash flows.

We are subject to extensive regulations and are dependent on federally-issued licenses to operate our radio stations. Failure to comply with such regulations could damage our business.

The radio broadcasting industry is subject to extensive regulation by the FCC under the Communications Act. See Federal Regulation of Radio Broadcasting under Part I, Item 1, “Business.” We are required to obtain licenses from the FCC to operate our radio stations. Licenses are normally granted for a term of eight years and are renewable. Although the vast majority of FCC radio station licenses are routinely renewed, there can be no assurance that the FCC will approve our future renewal applications or that the renewals will not include conditions or qualifications. During the periods when a renewal application is pending, informal objections and petitions to deny the renewal application can be filed by interested parties, including members of the public, on a variety of grounds. The non-renewal, or renewal with substantial conditions or modifications, of one or more of our licenses could adversely impact our business, financial condition, results of operations and cash flows.

We must comply with extensive FCC regulations and policies in the ownership and operation of our radio stations. FCC regulations limit the number of radio stations that a licensee can own in a market, which could restrict our ability to consummate future transactions and in certain circumstances could require us to divest some radio stations. The FCC’s rules governing our radio station operations impose costs on our operations, and changes in those rules could have an adverse effect on our business. The FCC also requires radio stations to comply with certain technical requirements to limit interference between two or more radio stations. If the FCC relaxes these technical requirements, it could impair the signals transmitted by our radio stations and could adversely impact our business, financial condition and results of operation. Moreover, these FCC regulations may change over time, and there can be no assurance that changes would not adversely impact our business, financial condition and results of operations. We are currently the subject of several pending investigations by the FCC.

Congress or federal agencies that regulate us could impose new regulations or fees on our operations that could have a material adverse effect on us.

There has been in the past and there could be again in the future proposed legislation that requires radio broadcasters to pay additional fees such as a spectrum fee for the use of the spectrum. In addition, there has been proposed legislation which would impose a new royalty fee that would be paid to record labels and performing artists for use of their recorded music. It is currently unknown what impact any potential required royalty payments or fees would have on our business, financial condition, results of operations and cash flows.

 

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We depend on selected market clusters of radio stations for a material portion of our revenues.

For 2018, we generated over 50% of our as reported net revenues in 10 of our 48 markets, which were Boston, Chicago, Dallas, Detroit, Los Angeles, Miami, New York City, Philadelphia, San Francisco and Washington, D.C. Accordingly, we have greater exposure to adverse events or conditions in any of these markets, such as changes in the economy, shifts in population or demographics, or changes in audience tastes, which could adversely impact our business, financial condition, results of operations and cash flows.

We may have difficulty attracting, motivating and retaining key employees as a result of the merger with CBS Radio.

As a result of the Merger, our employees may experience uncertainty about their future roles with us, which may adversely affect our ability to attract and retain key personnel. Key employees may depart because of the uncertainty or potential difficulty of integration or a desire not to remain with the combined company.

Impairments to our broadcasting licenses and goodwill have reduced our earnings.

We have incurred impairment charges that resulted in non-cash write-downs of our broadcasting licenses and goodwill. A significant amount of these impairment losses were recorded in 2008 during the recession, and the most recent impairment loss to goodwill and broadcasting licenses was recorded in the fourth quarter of 2018 as a result of an interim impairment assessment. As of December 31, 2018, our broadcasting licenses and goodwill comprised approximately 76% of our total assets. Subsequent to the annual impairment test conducted during the second quarter of 2018, we determined that a sustained decrease in our share price required us to conduct an interim impairment assessment on our broadcasting licenses and goodwill. Due to changes in facts and circumstances, we revised our estimates with respect to our estimated operating profit margins and long-term revenue growth rates used in the interim impairment assessment. The interim impairment conducted during the fourth quarter of the current year indicated that the carrying value of our goodwill and broadcasting licenses exceeded their respective carrying amount. Accordingly, we recorded a $147.9 million impairment charge ($108.8 million, net of tax) on our broadcasting licenses and a $317.1 million impairment charge ($314.4 million, net of tax) on our goodwill in the fourth quarter of 2018. The valuation of our broadcasting licenses and goodwill is subjective and based on our estimates and assumptions rather than precise calculations. The fair value measurements for both our broadcast licenses and goodwill use significant unobservable inputs and reflect our own assumptions, including market share and profit margin for an average station, growth within a radio market, estimates of costs and losses during early years, potential competition within a radio market and the appropriate discount rate used in determining fair value. If events occur or circumstances change that would reduce the fair value of the broadcasting licenses and goodwill below the amount reflected on the balance sheet, we may be required to recognize impairment charges, which may be material, in future periods. Current accounting guidance does not permit a valuation increase.

We have significant obligations relating to our current operating leases.

As of December 31, 2018, we had future operating lease commitments of approximately $394.3 million that are disclosed in Note 20, Contingencies And Commitments, in the accompanying notes to our audited consolidated financial statements. We are required to make certain estimates at the inception of a lease in order to determine whether the lease is operating or capital. In February 2016, the accounting guidance was modified to increase transparency and comparability among organizations by requiring the recognition of right-of-use (“ROU”) assets and lease liabilities on the balance sheet. The most notable change in the standard is the recognition of ROU assets and lease liabilities by lessees for those leases classified as operating leases with a term of more than one year. This change will apply to our leased assets such as real estate and broadcasting towers. While we are currently reviewing the effects of this guidance, we believe that this standard will have a material impact on our consolidated balance sheets but will not have a material impact on our consolidated statements of operations. We believe that this modification to operating leases would result in: (i) an increase in the ROU assets and lease liabilities reflected on our consolidated balance sheets to reflect the rights and obligations created by operating leases with a term of greater than one year; and (ii) no material change to the expense associated with the ROU assets. This guidance is effective for us as of January 1, 2019.

Our business is dependent upon the proper functioning of our internal business processes and information systems, and modification or interruption of such systems may disrupt our business, processes and internal controls.

The proper functioning of our internal business processes and information systems is critical to the efficient operation and management of our business. If these information technology systems fail or are interrupted, our

 

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operations and operating results may be adversely affected. Our business processes and information systems need to be sufficiently scalable to support the future growth of our business and may require modifications or upgrades that expose us to a number of operational risks. Our information technology systems, and those of third-party providers, may also be vulnerable to damage or disruption caused by circumstances beyond our control. These include catastrophic events, power anomalies or outages, computer system or network failures and natural disasters. Any material disruption, malfunction or similar challenges with our business processes or information systems, or disruptions or challenges relating to the transition to new processes, systems or providers, could adversely impact our business, financial position, results of operations and cash flow.

The FCC has engaged in vigorous enforcement of its indecency rules against the broadcast industry, which could have a material adverse effect on our business.

FCC regulations prohibit the broadcast of obscene material at any time and indecent or profane material between the hours of 6:00 a.m. and 10:00 p.m. Over the last decade, the FCC has increased its enforcement efforts relating to the regulation of indecency and has threatened on more than one occasion to initiate license revocation proceedings against a broadcast licensee who commits a “serious” indecency violation. Congress has dramatically increased the penalties for broadcasting obscene, indecent or profane programming, and these penalties may potentially subject broadcasters to license revocation, renewal or qualification proceedings in the event that they broadcast such material. In addition, the FCC’s heightened focus on the indecency regulatory scheme, against the broadcast industry generally, may encourage third parties to oppose our license renewal applications or applications for consent to acquire broadcast stations. We may in the future become subject to inquiries or proceedings related to our stations’ broadcast of obscene, indecent or profane material. To the extent that these inquiries or other proceedings result in the imposition of fines, a settlement with the FCC, revocation of any of our station licenses or denials of license renewal applications, our business, financial condition, results of operations and cash flow could be adversely impacted.

Cybersecurity threats could have a material adverse effect on our business

The use of our computers and digital technology in substantially all aspects of our business operations give rise to cybersecurity risks, including viruses or malware, physical or electronic intrusions and unauthorized access to our data. A cybersecurity attack could compromise confidential information. There can be no assurance that we, or the security systems we implement, will protect against all of these rapidly changing risks. A cybersecurity incident could increase our operating costs, disrupt our operations, harm our reputation, or subject us to liability under laws and regulations that protect personal data. We maintain insurance coverage against certain of such risks, but cannot guarantee that such coverage will be applicable or sufficient with respect to any given incident or on-going incidents that go undetected.

Cybersecurity breaches may increase our costs and cause losses.

Our security systems and processes, which are designed to protect information and prevent data loss and other security breaches, cannot provide absolute security. Cybersecurity breaches could result in an increase in costs related to redeveloping our systems, defending against litigation, responding to regulatory investigation, and other remediation costs associated with cybersecurity incidents.

We are exposed to credit risk on our accounts receivable. This risk is heightened during periods of uncertain economic conditions.

Our outstanding accounts receivable are not covered by collateral or credit insurance. While we have procedures to monitor and limit exposure to credit risk on our receivables, which risk is heightened during periods of uncertain economic conditions, there can be no assurance such procedures will effectively limit our credit risk and enable us to avoid losses, which could have a material adverse effect on our financial condition, results of operations and cash flow.

We rely on key contracts and business relationships, and if our business partners or contracting counterparties fail to perform, or terminate, any of their contractual arrangements with us for any reason or cease operations, our business could be disrupted and our revenues could be adversely affected.

We rely on key contracts and business relationships, and if our business partners or contracting counterparties fail to perform, or terminate, any of their contractual arrangements with us for any reason or cease operations, our business could be disrupted and our revenues could be adversely affected. For instance, if

 

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one of our business partners or counterparties is unable (including as a result of any bankruptcy or liquidation proceeding) or unwilling to continue operating in the line of business that is the subject of our contract, we may not be able to obtain similar relationships and agreements on terms acceptable to us or at all. The failure to perform or termination of any of the agreements by a partner or a counterparty, the discontinuation of operations of a partner or counterparty, the loss of good relations with a partner or counterparty or our inability to obtain similar relationships or agreements, may have an adverse effect on our financial condition, results of operations and cash flow.

RISKS RELATED TO OUR INDEBTEDNESS

We have substantial indebtedness, which could adversely impact our business, financial condition and results of operations.

We have substantial indebtedness. As of December 31, 2018, we had a senior secured credit agreement (the “Credit Facility”) of $1.5 billion outstanding that is comprised of: (a) a $1,291.7 million term B-1 loan (the “Term B-1 Loan”) and (b) a $250.0 million senior secured revolving credit facility (the “Revolver”), of which $180.0 million was outstanding at December 31, 2018. In addition to the Credit Facility, we also have outstanding $400.0 million aggregate principal amount of 7.250% senior notes due October 2024 (the “Senior Notes”).

This significant amount of indebtedness could have an adverse impact on us. For example, these obligations:

 

   

make it more difficult for us to satisfy our financial obligations with respect to our indebtedness;

 

   

require us to dedicate a substantial portion of our cash flow from operations to payments on indebtedness, thereby reducing the availability of cash flow to fund working capital, capital expenditures and other corporate purposes;

 

   

increase our vulnerability to and limit the flexibility in planning for, or reacting to, changes in our business, the industry in which we operate, the economy and government regulations;

 

   

restrict us from making strategic acquisitions or cause us to make non-strategic divestitures;

 

   

limit or prohibit our ability to pay dividends and make other distributions including share repurchases

 

   

place us at a competitive disadvantage compared to our competitors that have less indebtedness;

 

   

expose us to the risk of increased interest rates as borrowing under the Term B-1 Loan and Revolver are subject to variable rates of interest; and

 

   

limit or prohibit our ability to borrow additional funds.

The undrawn amount of the Revolver was $64.1 million as of December 31, 2018. The amount of the Revolver available to us is a function of covenant compliance at the time of borrowing. Based on our financial covenant analysis as of December 31, 2018, we would not be limited in these borrowings.

We may from time to time seek to amend our existing indebtedness agreements or obtain funding or additional debt financing, which may result in higher interest rates.

The terms of the Credit Facility and the Senior Notes may restrict our current and future operations.

The Credit Facility and the Indenture governing the Senior Notes (the “Senior Notes Indenture”) contain a number of restrictive covenants that impose significant operating and financial restrictions on us and limit our ability to engage in actions that may be in our long-term best interests, including restrictions on our ability to:

 

   

incur additional indebtedness;

 

   

pay dividends on, repurchase or make distributions in respect of our stock;

 

   

make investments or acquisitions;

 

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sell, transfer or otherwise convey certain assets;

 

   

incur liens;

 

   

enter into Sale and Lease-Back Transactions (as defined in the Senior Notes Indenture);

 

   

enter into agreements restricting our ability to pay dividends or make other intercompany transfers

 

   

consolidate, merge, sell or otherwise dispose of all or substantially all of our assets;

 

   

enter into transactions with affiliates;

 

   

prepay certain kinds of indebtedness;

 

   

issue or sell stock; and

 

   

change the nature of our business.

As a result of our substantial indebtedness, we may be:

 

   

limited in how we conduct our business;

 

   

unable to raise additional debt or equity financing to operate during general economic or business downturns; or

 

   

unable to compete effectively or to take advantage of new business opportunities.

These restrictions could hinder our ability to pursue our business strategy or inhibit our ability to adhere to our intended dividend policies.

We may still be able to incur substantial additional amounts of indebtedness, including secured indebtedness, which could further exacerbate the risks associated with our indebtedness and adversely impact our business, financial condition and results of operations.

We may incur substantial additional amounts of indebtedness, which could further exacerbate the risks associated with the indebtedness described above. Although the terms of the agreements governing our existing indebtedness contain restrictions on the incurrence of additional indebtedness and additional liens, these restrictions are subject to a number of qualifications and exceptions, and the additional indebtedness incurred in compliance with these restrictions could be substantial. These restrictions also will not prevent us from incurring obligations that do not constitute indebtedness. If new indebtedness is added to our existing indebtedness levels, the related risks that we face would intensify, and we may not be able to meet all of our respective indebtedness obligations. The incurrence of additional indebtedness may adversely impact our business, financial condition and results of operations.

We must comply with the covenants in our debt agreements, which restrict our operational flexibility.

The Credit Facility contains provisions which, under certain circumstances: limit our ability to borrow money; make acquisitions, investments or restricted payments, including without limitation dividends and the repurchase of stock; swap or sell assets; or merge or consolidate with another company. To secure the indebtedness under our Credit Facility, we have pledged substantially all of our assets, including the stock or equity interests of our subsidiaries.

The Credit Facility requires us to maintain compliance with a financial covenant, including a maximum Consolidated Net Secured Leverage Ratio (as defined in the Credit Facility) that cannot exceed 4.0 times as of December 31, 2018. Under certain circumstances, the Consolidated Net Secured Leverage Ratio can increase to 4.5 times for a limited period of time.

Our ability to comply with these financial covenants may be affected by operating performance or other events beyond our control, and there can be no assurance that we will comply with these covenants. A default under the Credit Facility could have a material adverse effect on our business.

 

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Failure to comply with our financial covenants or other terms of these financial instruments and the failure to negotiate and obtain any required relief from our lenders could result in the acceleration of the maturity of our outstanding indebtedness and our lenders could proceed against our assets, including the equity interests of our subsidiaries. Under these circumstances, the acceleration of our indebtedness could have a material adverse effect on our business.

A breach of the covenants under the Senior Notes Indenture or under the Credit Facility could result in an event of default under the applicable agreement. Such a default would allow the lenders under the Credit Facility and/or the holders of the Senior Notes to accelerate the repayment of such indebtedness and may result in the acceleration of the repayment of any other indebtedness to which a cross-acceleration or cross-default provision applies. In addition, an uncured event of default under the Credit Facility would also permit the lenders under the Credit Facility to terminate all other commitments to extend additional credit under the Credit Facility.

Furthermore, if we are unable to repay the amounts due and payable under the Credit Facility, those lenders could seek to foreclose on the collateral that secures such indebtedness. In the event that creditors accelerate the repayment of our borrowings, we may not have sufficient assets to repay that indebtedness.

Because of our holding company structure, we depend on our subsidiaries for cash flow, and our access to this cash flow is restricted.

We operate as a holding company. All of our radio stations are currently owned and operated by our subsidiaries. Entercom Media Corp., our 100% owned subsidiary, is the borrower under the Credit Facility. All of our station operating subsidiaries and FCC license subsidiaries are subsidiaries of Entercom Media Corp. Entercom Media Corp.’s subsidiaries are all full and unconditional joint and several guarantors under the Credit Facility.

As a holding company, our only source of cash to pay our obligations, including corporate overhead and other expenses, is cash distributed from our subsidiaries. We currently expect that the majority of the net earnings and cash flow of our subsidiaries will be retained and used by them in their operations, including servicing Entercom Media Corp.’s indebtedness obligations. Even if our subsidiaries elect to make distributions to us, there can be no assurance that applicable state law and contractual restrictions, including the restricted payments covenants contained in our Credit Facility, would permit such dividends or distributions.

Our variable-rate indebtedness gives rise to interest rate risk, which could cause our debt service obligations to increase significantly. Any increase in our debt service obligations could adversely impact our business, financial condition and results of operations.

Borrowings under the Term B-1 Loan and the Revolver are at variable rates of interest and expose us to interest rate risk. If interest rates increase, our debt service obligations under the Credit Facility could increase even though the amount borrowed remains the same, and our net income and cash flows, including cash available for servicing our indebtedness, could correspondingly decrease.

As of December 31, 2018, if the borrowing rates under London Interbank Offered Rate (“LIBOR”) were to increase 100 basis points above the current rates, our interest expense on: (i) the Term B-1 Loan would increase $12.9 million on an annual basis; and (ii) the Revolver would increase by $2.5 million, assuming our entire Revolver was outstanding as of December 31, 2018.    

In the future, we may enter into interest rate swaps that involve the exchange of floating for fixed rate interest payments in order to reduce interest rate risk. We may, however, not maintain interest rate swaps with respect to all of our variable-rate indebtedness, and any swaps we enter into may not fully mitigate our interest rate risk. An increase in our debt service obligations could adversely impact our business, financial condition and results of operations.

To service our indebtedness and other cash needs, we require a significant amount of cash. Our ability to generate cash depends on many factors beyond our control.

Our ability to satisfy our indebtedness obligations and to fund any planned capital expenditures, dividends and other cash needs will depend in part upon our future financial and operating performance, and upon our ability renew or refinance borrowings. There can be no assurance that we will generate cash flow from operations, or that we will be able to draw under the Revolver or otherwise, in an amount sufficient to fund our liquidity needs, including the payment of principal and interest on our indebtedness.

 

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Prevailing economic conditions and financial, business, competitive, legislative, regulatory and other factors, many of which are beyond our control, will affect our ability to make these payments.

If we are unable to make payments or refinance our indebtedness or obtain new financing under these circumstances, we may consider other options, including:

 

   

sales of assets;

 

   

sales of equity;

 

   

reduction or delay of capital expenditures, strategic acquisitions, investments and alliances; or

 

   

negotiations with lenders to restructure the applicable indebtedness.

These alternative measures may not be successful and may not enable us to meet scheduled indebtedness service obligations. Our ability to restructure or refinance our indebtedness will depend on the condition of the capital markets and our financial conditions at such time. Any refinancing of our indebtedness could be at higher interest rates and may require us to comply with more onerous covenants, which could further restrict our business operations. In addition, the terms of existing or future indebtedness agreements may restrict us from adopting some of these alternatives. In the absence of sufficient cash flow from operating results and other resources, we could face substantial liquidity problems and could be required to dispose of material assets or operations to meet our debt service and other obligations. We may not be able to consummate those dispositions for fair market value, or at all. Furthermore, any proceeds that we could realize from any such dispositions may not be adequate to meet our debt service obligations then due. Our inability to generate sufficient cash flow to satisfy our indebtedness obligations, or to refinance such indebtedness on commercially reasonable terms or at all, could adversely impact our business, financial condition and results of operations.

A lowering or withdrawal of the ratings assigned to our debt securities by rating agencies may increase our future borrowing costs and reduce our access to capital.

Any decline in the ratings of our corporate credit or any indications from the rating agencies that their ratings on our corporate credit are under surveillance or review with possible negative implications could adversely impact our ability to access capital, which could adversely impact our business, financial condition and results of operations.

RISKS ASSOCIATED WITH OUR STOCK

Our Chairman Emeritus and our Chairman, President and Chief Executive Officer own a large minority equity interest in us and have substantial influence over our Company. Their interests may conflict with your interest.

As of February 15, 2019, Joseph M. Field, our Chairman Emeritus, beneficially owned 10,444,334 shares of our Class A common stock; and 3,295,949 shares of our Class B common stock, representing approximately 24.9% of the total voting power of all of our outstanding common stock. As of February 15, 2019, David J. Field, our Chairman, President and Chief Executive Officer, one of our directors and the son of Joseph M. Field, beneficially owned 3,485,135 shares of our Class A common stock and 749,250 shares of our Class B common stock, representing approximately 6.3% of the total voting power of all of our outstanding common stock. Joseph M. Field and David J. Field, beneficially own all outstanding shares of our Class B common stock. Other members of the Field family and trusts for their benefit also own shares of Class A common stock.

Shares of our Class B common stock are transferable only to Joseph M. Field, David J. Field, certain of their family members or trusts for any of their benefit. Upon any other transfer, shares of our Class B common stock automatically convert into shares of our Class A common stock on a one-for-one basis. Shares of our Class B common stock are entitled to ten votes only when Joseph M. Field or David J. Field vote them, subject to certain exceptions when they are restricted to one vote. Joseph M. Field is able to significantly influence the vote on all matters submitted to a vote of shareholders.

 

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Our Class A common stock price and trading volume could be volatile.

Our Class A common stock has been publicly traded on the NYSE since January 29, 1999. The market price of our Class A common stock and our trading volume have been subject to fluctuations since the date of our initial public offering. As a result, the market price of our Class A common stock could experience volatility, regardless of our operating performance.

The difficulties associated with any attempt to gain control of our Company could adversely affect the price of our Class A common stock.

There are certain provisions contained in our articles of incorporation, by-laws and Pennsylvania law that could make it more difficult for a third party to acquire control of our Company. In addition, FCC approval for transfers of control of FCC licenses and assignments of FCC licenses is required. These restrictions and limitations could adversely affect the trading price of our Class A common stock.

 

ITEM 1B.

UNRESOLVED STAFF COMMENTS

None.

 

ITEM 2.

PROPERTIES

The types of properties required to support each of our radio stations include offices, studios and transmitter/antenna sites. We lease most of these sites. A station’s studios are generally housed with its offices in business districts. Our studio and office space leases typically contain lease terms with expiration dates of five to 15 years, which may contain options to renew. Our transmitter/antenna sites, which may include an auxiliary transmitter/antenna as a back-up to the main site, contain lease terms that generally range from five to 30 years, which may include options to renew.

The transmitter/antenna site for each station is generally located so as to provide maximum market coverage. In general, we do not anticipate difficulties in renewing facility or transmitter/antenna site leases or in leasing additional space or sites if required.

As of December 31, 2018, we had approximately $394.3 million in future minimum rental commitments under these leases. Many of these leases contain clauses such as defined contractual increases or cost of living adjustments.

Our principal executive office is located at 401 E. City Avenue, Suite 809, Bala Cynwyd, Pennsylvania 19004, in 14,061 square feet of leased office space. This lease is due to expire on October 31, 2021. We have the ability, however, to vacate at any time, upon short notice. We expect to vacate the premises in the second half of 2019 as we are consolidating all of our operations in the Philadelphia radio market to operate more efficiently. Our future principal executive offices will be located at 2400 Market Street, Suite 400, Philadelphia, Pennsylvania 19103, in 67,031 square feet of leased office space, of which approximately half of the space is dedicated to principal executive offices. The new lease will expire 15 years from the date the leasehold is delivered, and includes several optional renewal periods.

 

ITEM 3.

LEGAL PROCEEDINGS

We currently and from time to time are involved in litigation incidental to the conduct of our business. Management anticipates that any potential liability of ours that may arise out of or with respect to these matters will not materially adversely affect our business, financial position, results of operations or cash flows.

Broadcast Licenses

We could face increased costs in the form of fines and a greater risk that we could lose any one or more of our broadcasting licenses if the FCC concludes that programming broadcast by our stations is obscene, indecent or profane and such conduct warrants license revocation. The FCC’s authority to impose a fine for the broadcast of such material is $407,270 for a single incident, with a maximum fine of up to $3,759,410 for a continuing violation.

Performance Fees

We incur fees from PROs to license our public performance of the musical works contained in each PRO’s repertoire. The Radio Music Licensing Committee (the “RMLC”), of which we are a represented participant: (i) entered into an industry-wide settlement with ASCAP that became effective January 1, 2017 for a five-year term; (ii)

 

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is currently seeking reasonable industry-wide fees from BMI through rate court proceedings; (iii) is currently subject to arbitration proceedings with SESAC, Inc. to determine fair and reasonable fees that would be effective January 1, 2019; and (iv) filed in November 2016 a motion in the U.S. District Court for the Eastern District of Pennsylvania against Global Music Rights (“GMR”) arguing that GMR is a monopoly demanding monopoly prices and asking the Court to subject GMR to an antitrust consent decree. GMR filed a counterclaim in the U.S. District Court for the Central District of California and a motion to dismiss the RMLC’s claim in the U.S. District Court for the Eastern District of Pennsylvania. There have been subsequent claims and counterclaims to establish jurisdiction. In January 2017, we obtained an interim license from GMR for fees effective January 1, 2017 to avoid any infringement claims by GMR for using GMR’s repertory without a license. This license, including several extensions, is expected to expire March 31, 2019.

 

ITEM 4.

MINE SAFETY DISCLOSURE

Not applicable.

 

ITEM 5.

MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Information for Our Common Stock

Our Class A common stock, $0.01 par value, is listed on the New York Stock Exchange under the symbol “ETM.”

There is no established trading market for our Class B common stock, $0.01 par value.

Holders

As of February 15, 2019, there were approximately 568 shareholders of record of our Class A common stock. Based upon available information, we believe we have approximately 33,500 beneficial owners of our Class A common stock. There are two shareholders of record of our Class B common stock, $0.01 par value, and no shareholders of record of our Class C common stock, $0.01 par value. In connection with the Merger, we refinanced our then-outstanding indebtedness in the fourth quarter of 2017 and in the process we fully redeemed our outstanding perpetual cumulative convertible preferred stock (“Preferred”). As a result, there were no holders of our Preferred as of December 31, 2018 or December 31, 2017.

Dividends

Effective as of the second quarter of 2016 and continuing through the period prior to the Merger, our Board commenced an annual common stock dividend program of $0.30 per share, with payments that approximated $2.9 million per quarter. In addition to the quarterly dividend, we paid a special one-time cash dividend of $0.20 per share of common stock on August 30, 2017, which approximated $7.8 million.

On November 2, 2017, our Board approved an increase to the annual dividend program to $0.36 per share, with payments that approximated $12.4 million per quarter. Any future dividends will be at the discretion of the Board based upon the relevant factors at the time of such consideration, including, without limitation, compliance with the restrictions set forth in the Credit Facility and the Senior Notes.

In connection with the refinancing of our then-outstanding credit facility during the fourth quarter of 2017, the following funds were paid in November 2017 in order to fully redeem our Preferred: (i) $27.5 million to fully redeem the amount of Preferred previously outstanding; and (ii) $0.2 million in unpaid dividends through the redemption date. Quarterly dividends on our Preferred were paid in each of the quarters beginning in October 2015 at an annual rate of 6% that increased over time to 10% at the time of redemption. No further dividends on our Preferred were paid during 2018.

For a summary of restrictions on our ability to pay dividends, see Liquidity under Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and Note 10, Long-Term Debt, in the accompanying notes to our audited consolidated financial statements.

 

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Sales of Unregistered Securities

We did not sell any equity securities during 2018 that were not registered under the Securities Act.

Repurchases of Our Stock

The following table provides information on our repurchases of stock during the quarter ended December 31, 2018:

 

                          Maximum  
                   Total      Approximate  
                   Number      Dollar  
                   of Shares      Value of  
                   Purchased      Shares that  
     Total             as Part of      May Yet Be  
     Number      Average      Publicly      Purchased  
     of      Price      Announced      Under the  
     Shares      Paid per      Plans or      Plans or  

Period (1)

   Purchased      Share      Programs      Programs  

October 1, 2018 - October 31, 2018

     —        $ —          —        $ 69,946,034  

November 1, 2018 - November 30, 2018 (1)(2)

     1,393,999      $ 7.20        1,393,100      $ 59,918,176  

December 1, 2018 - December 31, 2018 (1)

     239      $ 6.53        —        $ 59,918,176  
  

 

 

       

 

 

    

Total

     1,394,238           1,393,100     
  

 

 

       

 

 

    

 

(1) 

We withheld shares upon the vesting of RSUs in order to satisfy employees’ tax obligations. As a result, we are deemed to have purchased: (i) 899 shares at an average price of $6.49 in November 2018; and (ii) 239 shares at an average price of $6.53 per share in December 2018.

(2)

On November 2, 2017, our Board announced a share repurchase program (the “2017 Share Repurchase Program”) to permit us to purchase up to $100.0 million of our issued and outstanding shares of common stock through open market purchases. In connection with the 2017 Share Repurchase Program, we purchased: (i) 1,393,100 shares at an average price of $7.20 in November 2018.

 

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Equity Compensation Plan Information

The following table sets forth, as of December 31, 2018, the number of securities outstanding upon the exercise of outstanding options under our equity compensation plan, the weighted average exercise price of such securities and the number of securities available for grant under these plans:

 

Equity Compensation Plan Information as of December 31, 2018

 
     (a)      (b)      (c )  
                   Number Of  
     Number Of      Weighted      Securities  
     Shares To Be      Average      Remaining  
     Issued Upon      Exercise      Available For  
     Exercise Of      Price Of      Future Issuance  
     Outstanding      Outstanding      Under Equity  
     Options,      Options,      Compensation  
     Warrants      Warrants      Plans (Excluding  

Plan Category

   And Rights      And Rights      Column (a))  

Equity Compensation Plans Approved by Shareholders:

        

Entercom Equity Compensation Plan (1)

     755,210      $ 9.42        1,718,841  
  

 

 

       

 

 

 

Total

     755,210           1,718,841  
  

 

 

       

 

 

 

 

(1) 

On January 1 of each year, the number of shares of Class A common stock authorized under the Entercom Equity Compensation Plan (the “Plan”) is automatically increased by 1.5 million, or a lesser number as may be determined by our Board. The Board elected to forgo the January 1, 2016 increase in the shares available for grant. On November 30, 2017, we filed a registration statement on Form S-8 to register an additional 2,941,525 shares under the Plan. These additional shares were registered in order to address CBS equity compensation awards which were being converted to our awards in connection with the Merger. The amount of shares available for grant automatically increased by 1.5 million on January 1, 2018 and January 1, 2017. As of December 31, 2018: (i) the maximum number of shares authorized under the Plan was 14.8 million shares; and (ii) 1.7 million shares remain available for future grant under the Plan. The amount of shares available for grant automatically increased by 1.5 million on January 1, 2019 to 3.2 million shares.

For a description of the Plan, refer to Note 14, Share-Based Compensation, in the accompanying notes to our audited consolidated financial statements.

 

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Performance Graph

 

The following Comparative Stock Performance Graph shall not be deemed incorporated by reference by any general statement incorporating by reference this Form 10-K into any filing under the Securities Act or the Exchange Act, except to the extent that we specifically incorporate this information by reference. This Comparative Stock Performance Graph is being furnished with this Form 10-K and shall not otherwise be deemed filed under such acts.

The following line graph compares the cumulative five-year total return provided to shareholders of our Class A common stock relative to the cumulative total returns of: (i) the S&P 500 index; (ii) a peer group index consisting of Urban One, Inc., Beasley Broadcast Group, Inc., and Saga Communications, Inc. (the “2018 Peer Group”); and (iii) a peer group index consisting of Emmis Communications Corp., Urban One, Inc., Beasley Broadcast Group, Inc. (“Beasley”), and Saga Communications, Inc. (the “2017 Peer Group”). An investment of $100 (with reinvestment of all dividends) is assumed to have been made on December 31, 2013. The change in peer group resulted from the removal of Emmis Communications Corp. due to its radio station sales activities which significantly reduced the number of stations it operates and reduced the number of markets in which it maintains a presence.

Cumulative Five-Year Return Index Of A $100 Investment

 

LOGO

 

*

$100 invested on 12/31/13 in stock or index, including reinvestment of dividends.

Fiscal year ending December 31.

Copyright© 2019 Standard & Poor’s, a division of S&P Global. All rights reserved.

 

     12/13      12/14      12/15      12/16      12/17      12/18  

Entercom Communications Corp.

     100.00        115.70        106.85        148.01        109.41        60.61  

S&P 500

     100.00        113.69        115.26        129.05        157.22        150.33  

2018 Peer Group

     100.00        83.49        74.12        103.92        119.13        72.35  

2017 Peer Group

     100.00        80.10        61.39        85.56        97.13        61.88  

 

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ITEM 6.

SELECTED FINANCIAL DATA

The selected financial data below, as of and for the year ended 2018 and the four prior years, were derived from our audited consolidated financial statements. The selected financial data for 2018, 2017 and 2016 and balance sheets as of December 31, 2018 and 2017 are qualified by reference to, and should be read in conjunction with, the corresponding audited consolidated financial statements, the notes thereto and Management’s Discussion and Analysis of Financial Condition and Results of Operations included elsewhere in this annual report. The selected financial data for 2015 and 2014 and the balance sheets as of December 31, 2016, 2015 and 2014 are derived from financial statements not included herein.

Our financial results are not comparable from year to year due to acquisitions and dispositions of radio stations, impairments of broadcasting licenses and goodwill, adoption of new accounting standards, and other significant events.

Merger, Acquisition and Disposition Activities

 

   

In the third quarter of 2018, we sold eight radio stations in Sacramento, California, and San Francisco, California to Bonneville International Corporation (“Bonneville”) for $141.0 million in cash (the “Bonneville Transaction”), which resulted in a loss of approximately $0.2 million.

 

   

In the third quarter of 2018, we sold a radio station in Philadelphia, Pennsylvania for $38.0 million in cash (the “WXTU Transaction”) that resulted in a decrease in our net revenues and station operating expenses and a $4.4 million gain on the sale of assets.

 

   

In the third quarter of 2018, we acquired a radio station in Philadelphia, Pennsylvania for a purchase price of $57.5 million, less certain working capital and other credits (the “Jerry Lee Transaction”), which resulted in an increase in our net revenues and station operating expenses. We used proceeds from the WXTU Transaction and cash on hand to fund this acquisition.

 

   

In the second quarter of 2018, we acquired two radio stations in St. Louis, Missouri for a purchase price of $15.0 million in cash, which resulted in an increase in our net revenues and station operating expenses. We borrowed under our Revolver to fund this acquisition.

 

   

During the fourth quarter of 2017, we assigned assets to a trust, which subsequently entered into a time brokerage agreement (“TBA”) that allowed a third party to operate eight of our radio stations, which decreased our net revenues and station operating expenses and increased our TBA income.

 

   

We sold three radio stations in the fourth quarter of 2017 for $57.8 million that resulted in a decrease in net revenues and station operating expenses and a $2.6 million gain on the sale of assets.

 

   

In connection with the Merger with CBS Radio which closed in November 2017,

 

   

we acquired multiple radio stations, net of certain dispositions and radio station exchanges with other third parties, which significantly increased in 2018 and 2017 our net revenues, station operating expenses, depreciation and amortization expenses and interest expense. In addition, we issued 101,407,494 shares of our Class A Common Stock.

 

   

we incurred: (i) merger and acquisition costs, including legal, advisory services and professional fees of $3.0 million in 2018, $41.3 million in 2017 and $0.7 million in 2016; (ii) restructuring charges of $5.8 million in 2018 and $16.9 million in 2017; and (iii) integration costs of $25.4 million in 2018.

 

   

we refinanced our then-outstanding credit facility and retired our Preferred. As a result of this refinancing, we recognized a loss on extinguishment of indebtedness of approximately $4.1 million during 2017.

 

   

we consolidated our indebtedness and CBS Radio’s indebtedness under the Credit Facility, which increased our outstanding indebtedness significantly.

 

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In January 2017, we acquired four radio stations in Charlotte, North Carolina (the “Charlotte Acquisition”) for $24.0 million in cash, using cash on hand to fund the acquisition. We commenced operations under a TBA for three of the stations on November 1, 2016 and the fourth upon acquisition on January 6, 2017, which increased in 2017 our net revenues, station operating expenses and depreciation and amortization expenses.

 

   

In 2015, we acquired multiple radio stations, net of certain dispositions. Related to these transactions, we incurred: (i) merger and acquisition costs of $4.0 million in 2015 and $1.0 million in 2014; and (ii) a restructuring charge of $2.9 million in 2015.

Impairment Loss

 

   

In the fourth quarter of 2018, we conducted an interim impairment assessment on our broadcasting licenses and goodwill. As a result of this assessment, we determined the carrying value of our broadcasting licenses and goodwill were impaired and recorded an impairment loss during the fourth quarter of 2018 in the amount of $465.0 million ($423.2 million net of tax). Of this amount, $147.9 million ($108.8 million, net of tax) of the impairment charge was attributed to the broadcasting licenses and $317.1 million ($314.4 million, net of tax) of the impairment charge was attributed to goodwill.

 

   

In the second quarter of 2018, we determined the carrying value of certain assets to be disposed to Bonneville exceeded their fair value. Based upon the agreed-upon price in the asset purchase agreement, we recorded a non-cash impairment charge of $25.6 million.

Other Activities

 

   

During 2018, we disposed of various non-core assets and recorded a gain of $7.4 million.

 

   

Due to the tax legislation enacted during the fourth quarter of 2017, we recognized a $291.5 million income tax benefit from continuing operations due to the reduction to our effective tax rate and its impact on our deferred income taxes.

 

   

We recorded a $13.5 million loss in the first quarter of 2017 as a result of permanently discontinuing the operation of one of our stations and returning the station’s license to the FCC for cancellation, in order to facilitate the Merger. This loss is included within net (gain) loss on sale or disposal of assets.

 

   

In November 2016, we refinanced our outstanding former senior credit facility and retired our former senior notes. As a result of the refinancing, we recognized a loss on extinguishment of indebtedness of approximately $10.9 million in 2016.

 

   

During 2016, we settled a legal claim with British Petroleum and recovered $2.3 million on a net basis after deducting certain related expenses. This amount was included in other income and expense.

 

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SELECTED FINANCIAL DATA  

(amounts in thousands, except per share data)

 

 
     Years Ended December 31,  
     2018     2017     2016     2015     2014  

Operating Data:

          

Net revenues

   $ 1,462,567     $ 592,884     $ 464,771     $ 414,481     $ 380,376  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating (income) expenses:

          

Station operating expenses, including non-cash compensation expense

     1,099,278       443,512       323,270       290,814       259,771  

Depreciation and amortization

     44,288       15,546       9,793       8,419       7,794  

Corporate general and administrative expenses

     69,492       47,859       33,328       26,479       26,572  

Integration costs

     25,372       —         —         —         —    

Restructuring charges

     5,830       16,922       —         2,858       —    

Impairment loss

     493,988       952       254       —         —    

Merger and acquisition costs

     3,014       41,313       708       3,978       1,042  

Other expenses related to financing

     —         2,213       565       —         —    

Net time brokerage agreement fees (income)

     (918     130       417       (1,285     —    

Net (gain) loss on sale or disposal of assets

     (12,158     11,853       (1,621     (2,364     (379
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     1,728,186       580,300       366,714       328,899       294,800  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     (265,619     12,584       98,057       85,582       85,576  

Other (income) expense:

          

Net interest expense

     101,121       32,521       36,639       37,961       38,821  

Other income

     —         —         (2,299     —         —    

(Gain) loss on early extinguishment of debt

     —         4,135       10,858       —         —    

Net loss on investments

     —         —         —         —         21  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other expense

     101,121       36,656       45,198       37,961       38,842  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes (benefit)

     (366,740     (24,072     52,859       47,621       46,734  

Income taxes (benefit)

     (4,153     (257,085     14,794       18,437       19,911  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income available to the Company - continuing operations

     (362,587     233,013       38,065       29,184       26,823  

Preferred stock dividend

     —         (2,015     (1,901     (752     —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income available to common shareholders - continuing operations

     (362,587     230,998       36,164       28,432       26,823  

Income (loss) from discontinued operations, net of taxes (benefit)

     1,152       836       —         —         —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to common shareholders

   $ (361,435   $ 231,834     $ 36,164     $ 28,432     $ 26,823  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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SELECTED FINANCIAL DATA  

(amounts in thousands, except per share data)

 

 
     Years Ended December 31,  
     2018     2017     2016     2015     2014  

Operating Data (continued):

          

Net Income (Loss) Per Common Share - Basic:

          

Income (loss) from continuing operations

   $ (2.63   $ 4.49     $ 0.94     $ 0.75     $ 0.71  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss from discontinued operations, net of taxes (benefit)

     0.01       0.02       —         —         —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) per common share - basic

   $ (2.62   $ 4.51     $ 0.94     $ 0.75     $ 0.71  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net Income (Loss) Per Common Share - Diluted:

          

Income (loss) from continuing operations

   $ (2.63   $ 4.37     $ 0.91     $ 0.73     $ 0.69  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss from discontinued operations, net of taxes (benefit)

     0.01       0.02       —         —         —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) per common share - diluted

   $ (2.62   $ 4.38     $ 0.91     $ 0.73     $ 0.69  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average shares - basic

     138,070       51,393       38,500       38,084       37,763  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average shares - diluted

     138,070       52,885       39,568       39,038       38,664  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash Flows Data:

          

Cash flows related to:

          

Operating activities

   $ 102,249     $ 29,112     $ 72,030     $ 64,790     $ 65,296  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Investing activities

   $ 141,478     $ 17,310     $ 495     $ (91,744   $ (7,055
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Financing activities

   $ (85,636   $ (59,098   $ (34,851   $ 4,583     $ (38,932
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other Data:

          

Common stock dividends declared and paid

   $ 49,770     $ 29,296     $ 8,666     $ —       $ —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash dividends declared per common share

   $ 0.360     $ 0.515     $ 0.225     $ —       $ —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Perpetual cumulative convertible preferred stock dividends declared and paid

   $ —       $ 2,574     $ 1,788     $ 413     $ —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     December 31,  
     2018     2017     2016     2015     2014  

Balance Sheet Data:

          

Cash, cash equivalents and restricted cash

   $ 192,258     $ 34,167     $ 46,843     $ 9,169     $ 31,540  

Total assets

     4,020,358       4,539,201       1,076,233       1,022,108       926,615  

Senior secured debt and other, including current portion

     1,475,082       1,475,974       480,087       268,750       262,000  

Senior unsecured notes, senior subordinated notes and other

     414,158       416,584       —         218,269       217,929  

Deferred tax liabilities and other long-term liabilities

     635,150       717,356       119,759       109,251       89,904  

Perpetual cumulative convertible preferred stock (mezzanine)

     —         —         27,732       27,619       —    

Total shareholders’ equity

     1,334,260       1,764,360       393,374       361,450       329,021  

 

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ITEM 7.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

We are a leading American media and entertainment company, with a cume of 170 million people each month, with coverage close to 90% of persons 12+ in the top 50 U.S. markets through our premier collection of highly-rated, award-winning radio stations, digital platforms and live events. We are the number one creator of live, original, local audio content and the nation’s unrivaled leader in news and sports radio. We are home to seven of the eight most listened to all-news stations in the U.S., as well as more than 40 professional sports teams and dozens of top college programs. As one of the country’s two largest radio broadcasters, we offer local and national advertisers integrated marketing solutions across audio, digital and event platforms to deliver the power of local connection on a national scale. We have a nationwide footprint of radio stations including positions in all of the top 16 markets and 22 of the top 25 markets. We were organized in 1968 as a Pennsylvania corporation.

On February 2, 2017, we and Merger Sub entered into the CBS Radio Merger Agreement with CBS and CBS Radio, pursuant to which Merger Sub merged with and into CBS Radio with CBS Radio surviving as our wholly-owned subsidiary. In 2018, we changed the name of CBS Radio to Entercom Media Corp. The parties to the Merger believe that the Merger was tax-free to CBS and its shareholders. The Merger was effected through a stock-for-stock Reverse Morris Trust transaction.

In connection with the Reverse Morris Trust transaction, CBS commenced an exchange offer for the separation of its radio business to allow for the combination of CBS Radio and Entercom. In the exchange offer, CBS shareholders had the opportunity to exchange their shares of CBS Class B common stock for shares of CBS Radio common stock, which were immediately converted into the right to receive an equal number shares of Entercom Class A common stock upon completion of the Merger. Under the terms of the exchange offer, 5.6796 shares of CBS Radio common stock were exchanged for each share of CBS Class B common stock accepted in the offer. CBS accepted 17,854,689 of the tendered shares in exchange for 101,407,494 shares of CBS Radio common stock, which upon closing of the Merger were immediately converted into an equal number of whole shares of Entercom Class A common stock.

On November 1, 2017, we entered into a settlement with the Antitrust Division of the DOJ. The settlement with the DOJ together with several required station divestiture transactions with third parties, allowed us to move forward with the Merger. On November 9, 2017, we obtained approval from the FCC to consummate the Merger. The transactions contemplated by the CBS Radio Merger Agreement were approved by our shareholders on November 15, 2017. Upon the expiration of the exchange offer period on November 16, 2017, the Merger closed on November 17, 2017.

Our results are based upon the aggregate performance of our radio stations. The following are some of the factors that impact a radio station’s performance at any given time: (i) audience ratings; (ii) program content; (iii) management talent and expertise; (iv) sales talent and expertise; (v) audience characteristics; (vi) signal strength; and (vii) the number and characteristics of other radio stations and other advertising media in the market area.

As opportunities arise, we may, on a selective basis, change or modify a station’s format due to changes in listeners’ tastes or changes in a competitor’s format. This could have an initial negative impact on a station’s ratings and/or revenues, and there are no guarantees that the modification or change will be beneficial at some future time. Our management is continually focused on these opportunities as well as the associated risks and uncertainties. We strive to develop compelling content and strong brand images to maximize audience ratings that are crucial to our stations’ financial success.

A radio broadcasting company derives its revenues primarily from the sale of broadcasting time to local, regional and national advertisers and national network advertisers who purchase spot commercials in varying lengths. A growing source of revenue is from station-related digital platforms, which allow for enhanced audience interaction and participation, integrated local digital marketing solutions and station events. A station’s local sales staff generates the majority of its local and regional advertising sales through direct solicitations of local advertising agencies and businesses. We retain a national representation firm to sell to advertisers outside of our local markets.

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.

 

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In 2018, we generated the majority of our net revenues from local advertising, which is sold primarily by each individual local radio station’s sales staff, and the next largest amount from national advertising, which is sold by an independent national representation firm. This includes, but is not limited to, the sale of advertising during audio streaming of our radio stations over the Internet and the sale of advertising on our stations’ websites. We generated the balance of our 2018 revenues principally from network compensation, non-spot revenue, event marketing, e-commerce and our suite of digital products.

The majority of our revenue is recorded on a net basis, which is gross revenue less advertising agency commissions. Revenues from digital marketing solutions and e-commerce are reflected on a net basis when appropriate. Revenues from event marketing are reflected on a net basis when we are not the primary party hosting the event. The revenues are determined by the advertising rates charged and the number of advertisements broadcast. We maximize our revenues by managing the inventory of advertising spots available for broadcast, which can vary throughout the day but is fairly consistent over time.

Our most significant station operating expenses are employee compensation, programming and promotional expenses, and audience measurement services. Other significant expenses that impact our profitability are interest and depreciation and amortization expense.

You should read the following discussion and analysis of our financial condition and results in conjunction with our consolidated financial statements and related notes included elsewhere in this report. The following results of operations include a discussion of 2018 as compared to the prior year and a discussion of 2017 as compared to the prior year.

Results Of Operations

The year 2018 as compared to the year 2017

 

The following significant factors affected our results of operations for 2018 as compared to the prior year:

Merger with CBS Radio

On February 2, 2017, we and Merger Sub entered into the CBS Radio Merger Agreement with CBS and CBS Radio, pursuant to which Merger Sub merged with and into CBS Radio with CBS Radio surviving as our wholly-owned subsidiary. The parties to the Merger believe that the Merger was tax-free to CBS and its shareholders. The Merger was effected through a stock-for-stock Reverse Morris Trust transaction.

In connection with the Merger with CBS Radio, which closed on November 17, 2017, we acquired multiple radio stations, net of certain dispositions and acquisitions of radio stations through exchanges with third parties, which significantly increased in 2018 our net revenues, station operating expenses, depreciation and amortization expenses and interest expense.

Debt Assumed in Merger Increased our Interest Expense

In connection with the Merger, we refinanced our then-outstanding credit facility and redeemed our Preferred, which resulted in a decrease in our interest expense. These reductions in our interest expense were offset by the interest expense incurred on the indebtedness assumed from the Merger. Our outstanding indebtedness upon which interest is computed increased significantly on November 17, 2017 as a result of the Merger and our assumption of CBS Radio’s outstanding indebtedness.

Merger and Acquisition Costs

During the year ended December 31, 2018 and 2017, transaction costs were $3.0 million and $41.3 million, respectively, and were expensed as incurred.

Impairment Loss

The significant increase in impairment loss was primarily attributable to: (i) a $465.0 million impairment ($423.2 million net of tax) on our broadcasting licenses and goodwill recorded in the fourth quarter of 2018; and (ii) a non-cash impairment charge on assets which had previously been classified as held for sale.

 

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Our annual goodwill impairment test conducted during the second quarter of 2017 indicated that the goodwill allocated to one of our markets was impaired. As a result, we wrote off approximately $0.4 million of goodwill during the second quarter of 2017.

Integration Costs and Restructuring Charges

Integration costs incurred, including transition services, consulting services and professional fees of $25.4 million were expensed as incurred during the year ended December 31, 2018 and are included in integration costs. During the year ended December 31, 2018 and 2017, restructuring charges, including costs to exit duplicative contracts, lease abandonment costs, workforce reductions and other restructuring costs were $5.8 million and $16.9 million, respectively. Amounts were expensed as incurred and are included in restructuring charges.

Other Operating (Income) Expenses

During the year ended December 31, 2018, we disposed of various non-core assets and certain radio stations and recorded a gain of $10.8 million in net gain/loss on sale or disposal of assets.

We recorded a $13.5 million loss in 2017 in net gain/loss on sale or disposal of assets as a result of permanently discontinuing the operation of one of our stations and returning the station’s license to the FCC for cancellation, in order to facilitate the Merger. This activity was nonrecurring in nature.

Other

Due to the tax legislation enacted during the fourth quarter of 2017, we recognized an income tax benefit from continuing operations of $291.5 million during the year ended December 31, 2017 due to the reduction to our effective tax rate and its impact on our deferred income taxes. Our income tax expense for 2018 was calculated using the reduced U.S. federal corporate tax rate of 21%.

In connection with the Merger, which closed on November 17, 2017, we refinanced our then-outstanding credit facility and redeemed our Preferred. As a result of the refinancing, we recognized a loss on extinguishment of indebtedness of approximately $4.1 million during the year ended December 31, 2017.

 

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     YEARS ENDED DECEMBER 31,  
     2018      2017      % Change  
     (dollars in millions)  

NET REVENUES

   $ 1,462.6      $ 592.9        147
  

 

 

    

 

 

    

OPERATING EXPENSE:

        

Station operating expenses

     1,099.3        443.5        148

Depreciation and amortization expense

     44.3        15.5        186

Corporate general and administrative expenses

     69.5        47.9        45

Integration costs

     25.4        —          100

Restructuring charges

     5.8        16.9        (66 %) 

Impairment loss

     494.0        1.0        nmf  

Merger and acquisition costs

     3.0        41.3        (93 %) 

Other expenses related to financing

     —          2.2        (100 %) 

Other operating (income) expenses

     (13.1      12.0        (209 %) 
  

 

 

    

 

 

    

Total operating expense

     1,728.2        580.3        198
  

 

 

    

 

 

    

OPERATING INCOME (LOSS)

     (265.6      12.6        nmf  
  

 

 

    

 

 

    

NET INTEREST EXPENSE

     101.1        32.5        211

OTHER (INCOME) EXPENSE

     —          4.1        (100 %) 
  

 

 

    

 

 

    

INCOME (LOSS) BEFORE INCOME TAXES (BENEFIT)

     (366.7      (24.0      nmf  

INCOME TAXES (BENEFIT)

     (4.1      (257.1      98
  

 

 

    

 

 

    

NET INCOME (LOSS) AVAILABLE TO THE COMPANY - CONTINUING OPERATIONS

     (362.6      233.1        (256 %) 

Preferred stock dividend

     —          (2.0      100
  

 

 

    

 

 

    

NET INCOME (LOSS) AVAILABLE TO COMMON SHAREHOLDERS - CONTINUING OPERATIONS

     (362.6      231.1        (257 %) 

Income from discontinued operations, net of income taxes (benefit)

     1.2        0.8        50
  

 

 

    

 

 

    

NET INCOME (LOSS) AVAILABLE TO COMMON SHAREHOLDERS

   $ (361.4    $ 231.9        (256 %) 
  

 

 

    

 

 

    

Net Revenues

The increase in net revenues was primarily attributable to the Merger, net of certain divestitures and acquisitions through exchanges with third parties. Net revenues from the new stations together with our existing stations contributed to overall 147% growth over prior year results. Excluding the net revenues from these acquisitions and dispositions, net revenues were up in the low-single digits for the year.

Excluding new markets and overlap markets, net revenues increased the most for our stations located in the Austin and Greenville markets.

Excluding new markets and overlap markets, net revenues decreased the most for our stations located in the Denver and Indianapolis markets.

Station Operating Expenses

The increase in station operating expenses was primarily attributable to the acquisition of new stations, net of certain divestitures and radio stations acquired through exchanges with third parties. Station operating expenses increased 148% over prior year results, primarily due to an increase in the variable expenses associated with the increase in net revenues.

Station operating expenses included non-cash compensation expense of $6.9 million and $1.7 million for the years ended December 31, 2018 and December 31, 2017, respectively.

 

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Depreciation and Amortization Expense

Depreciation and amortization expense increased in 2018 primarily due to the acquisition of assets included in the Merger and an increase in capital expenditures. The increase in capital expenditures in 2018 was primarily due to the consolidation and relocation of several studio facilities in larger markets, an increase in our size and capital needs associated with the integration of common systems across the new markets.

Corporate General and Administrative Expenses

Corporate general and administrative expenses increased primarily due to: (i) an increase in compensation expense and benefits of $13.8 million due to an expanded workforce together with the hiring of additional corporate employees as a result of the Merger; and (ii) an increase in legal expense of $2.8 million due to the increased level of professional services required of a larger company after the Merger.

Corporate, general and administrative expenses included non-cash compensation expense of $8.3 million and $7.9 million for the years ended December 31, 2018 and December 31, 2017, respectively.

Integration Costs

Integration costs were incurred in 2018 as a result of the Merger. These costs primarily consisted of expenses related to effectively combining and incorporating the CBS Radio business into our operations.

Restructuring Charges

We incurred restructuring charges in 2018 and 2017 primarily as a result of the restructuring of operations for the Merger. These costs primarily included workforce reduction charges, the abandonment of excess studio space in certain markets, costs to exit duplicative contracts and other charges and were expensed as incurred.

Impairment Loss

Our annual goodwill impairment test conducted during the second quarter of 2018 indicated that the fair value of our goodwill and broadcasting licenses exceeded their carrying value and there was no need for an impairment charge. Due to a sustained decline in our share price which occurred subsequent to the annual impairment test conducted in the second quarter of 2018, we determined that the changes in circumstances warranted an interim impairment assessment on our broadcasting licenses and goodwill during the fourth quarter of 2018.

In connection with an interim impairment assessment conducted in the fourth quarter of 2018, we determined our broadcasting licenses and goodwill were impaired. Accordingly, we recorded a $147.9 million impairment ($108.8 million, net of tax) on our broadcasting licenses and a $317.1 million impairment ($314.4 million, net of tax) on our goodwill.

In connection with the Merger, we entered into two local marketing agreements (“LMAs”) with Bonneville and assigned the assets of eight radio stations in the San Francisco, California and Sacramento, California markets into a trust. Based upon the agreed-upon price in the asset purchase agreement, we determined that the carrying value of these assets was greater than the fair value and recorded a non-cash impairment charge of $25.6 million.

Merger and Acquisition Costs

There was a significant reduction in the amount of legal, professional, and other advisory services incurred as the Merger closed in the fourth quarter of 2017.

Other Operating (Income) Expenses

During the year ended December 31, 2017, we incurred a $13.5 million loss from permanently discontinuing the operation of one of our stations and returning the station’s license to the FCC for cancellation, in order to facilitate the Merger. This activity was nonrecurring in nature.

During the year ended December 31, 2018, we disposed of: (i) several radio stations in Sacramento, California and San Francisco, California; (ii) land and land improvements in Chicago, Illinois; (iii) a radio station in

 

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Philadelphia, Pennsylvania; (iv) land and land improvements and buildings in Los Angeles, California; (v) land and land improvements and buildings in San Diego, California; (vi) land and land improvements and a building in Dallas, Texas; (vii) land and land improvements and a building in Sacramento, California; and (viii) land and land improvements in Austin, Texas. As a result of these disposal activities, we recorded a net gain in net gain/loss on sale or disposal of assets of $10.0 million. Additionally, in connection with the purchase and sale of radio stations, we generated TBA income of $0.9 million during the year ended December 31, 2018. The change in other operating (income) expense is primarily attributable to the change in these activities between periods.

Operating Income

Operating income this year decreased primarily due to: (i) an increase in impairment loss of $493.0 million; (ii) an increase in depreciation and amortization expense of $28.7 million; (iii) an increase in integration costs of $25.4 million; and (iv) an increase in corporate, general and administrative expenses of $21.6 million.

These decreases in operating income were partially offset by: (i) an increase in net revenues, net of station operating expenses, of $213.9 million; (ii) a decrease in merger and acquisition costs of $38.3 million; (iii) a net increase in other operating income of $25.1 million; and (iv) a decrease in restructuring charges of $11.1 million.

Interest Expense

In connection with the Merger, we assumed CBS Radio’s (now Entercom Media Corp.’s) indebtedness on November 17, 2017. We incurred an additional $68.6 million of interest expense due to a significant increase in our net outstanding indebtedness upon which interest is computed. Assuming that LIBOR is flat, we expect interest expense to decrease in future periods as a result of the decrease in future outstanding indebtedness upon which interest is computed. We expect to use cash on hand and expected cash available from operations to reduce outstanding debt in future periods.

The weighted average variable interest rate for our credit facilities as of December 31, 2018 and 2017 was 5.2% and 4.2%, respectively.

Other (Income) Expense

In connection with the Merger, we refinanced our then outstanding pre-merger indebtedness in the fourth quarter of 2017 and recorded a loss on extinguishment of indebtedness of $4.1 million.

Income (Loss) Before Income Taxes (Benefit)

The generation of loss before income tax benefit was primarily attributable to increases in: (i) impairment losses; (ii) net interest expense; (iii) depreciation and amortization expenses; (iv) integration costs; and (v) corporate, general and administrative expenses. This activity was partially offset by: (i) an increase in net revenues, net of station operating expenses; (ii) a net increase in other operating (income) expenses; (iii) a decrease in merger and acquisition costs; and (iv) a decrease in restructuring charges.

Income Taxes (Benefit)

The effective income tax rate 1.1% for 2018. This rate was lower than the federal statutory rate of 21% primarily due to an impairment on the Company’s goodwill during the fourth quarter of 2018 which is not deductible for income tax purposes. The income tax rate is lower than in previous years primarily due to an income tax benefit resulting from the Tax Cuts and Jobs Act (“TCJA”) that was enacted on December 22, 2017, which reduced the U.S. federal corporate tax rate from the previous rate of 35% to 21%.

The effective income tax rate from continuing operations for 2017 was significantly impacted by a $291.5 million income tax benefit that reduced our income tax expense. The TCJA was enacted on December 22, 2017, which contained significant changes to the U.S. Federal tax law, including a reduction in the U.S. federal corporate tax rate from the previous rate of 35% to 21%. The Company recorded an estimated benefit from continuing operations of $291.5 million to adjust our deferred income tax balances as a result of the reduced corporate income tax rate. The estimated amounts are included as components of income tax expense from continuing operations.

 

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Estimated Income Tax Rate For 2019

We estimate that our 2019 annual tax rate before discrete items, which may fluctuate from quarter to quarter, will be between 30% and 32%. We anticipate that we will be able to utilize certain net operating loss carryovers to reduce future payments of federal and state income taxes. We anticipate that our rate in 2019 could be affected primarily by: (i) changes in the level of income in any of our taxing jurisdictions; (ii) adding facilities through mergers or acquisition in states that on average have different income tax rates from states in which we currently operate and the resulting effect on previously reported temporary differences between the tax and financial reporting bases of our assets and liabilities; (iii) the effect of recording changes in our liabilities for uncertain tax positions; (iv) taxes in certain states that are dependent on factors other than taxable income; (v) the limitations on the deduction of cash and certain non-cash compensation expense for certain key employees; and (vi) any tax benefit shortfall associated with share-based awards. Our annual effective tax rate may also be materially impacted by: (a) tax expense associated with non-amortizable assets such as broadcasting licenses and goodwill; (b) regulatory changes in certain states in which we operate; (c) changes in the expected outcome of tax audits; (d) changes in the estimate of expenses that are not deductible for tax purposes; and (e) changes in the deferred tax valuation allowance.

In the event we determine at a future time that it is more likely than not that we will not realize our net deferred tax assets, we will increase our deferred tax asset valuation allowance and increase income tax expense in the period when we make such a determination.

Net Deferred Tax Liabilities

As of December 31, 2018 and 2017, our total net deferred tax liabilities were $546.0 million and $609.8 million, respectively. The decrease in deferred tax liabilities was primarily the result of: (i) the recording of an impairment charge of $465.0 million on our broadcasting licenses and goodwill during the fourth quarter of 2018; and (ii) various sales of radio stations during 2018. Our net deferred tax liabilities primarily relate to differences between book and tax bases of certain of our indefinite-lived intangibles (broadcasting licenses and goodwill). The amortization of our indefinite-lived assets for tax purposes but not for book purposes creates deferred tax liabilities. A reversal of deferred tax liabilities may occur when indefinite-lived intangibles: (i) become impaired; or (ii) are sold, which would typically only occur in connection with the sale of the assets of a station or groups of stations or the entire company in a taxable transaction. Due to the amortization for tax purposes and not book purposes of our indefinite-lived intangible assets, we expect to continue to generate deferred tax liabilities in future periods.

Income (Loss) From Discontinued Operations, Net of Income Taxes (Benefit)

Several stations acquired from CBS Radio, which were operated under a LMA, immediately met the criteria to be classified as held for sale. In addition, the results of operations for these stations were presented as discontinued operations as these stations were never expected to be operated by us. Amounts of net revenues, station operating expenses, depreciation and amortization and LMA income earned from these stations was not included in our income from continuing operations. The income generated from these stations during the period of the LMA, for the period from November 17, 2017 through September 21, 2018, is separately presented net of income taxes (benefit). The LMA terminated on September 21, 2018, upon the consummation of a final agreement to divest the stations as required under a DOJ consent order agreed to by us, as a condition to complete the Merger.

Net Income (Loss) Available To The Company

The change in net income (loss) available to the Company was primarily attributable to the reasons described above under Income (Loss) Before Income Taxes (Benefit) and Income Taxes (Benefit).

Results Of Operations

The year 2017 as compared to the year 2016

 

The following significant factors affected our results of operations for 2017 as compared to the prior year:

Business Combinations

In connection with the Merger with CBS Radio, which closed on November 17, 2017, we acquired multiple radio stations, net of certain dispositions and acquisitions of radio stations through exchanges with third parties, which significantly increased in 2017 our net revenues, station operating expenses and depreciation and amortization expenses.

 

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Related to the Merger, we incurred: (i) merger and acquisition costs, including legal, advisory services and professional fees of $41.3 million in 2017 and $0.7 million in 2016; and (ii) restructuring charges and transition services costs of $16.9 million in 2017.

On January 6, 2017, we acquired four radio stations in Charlotte, North Carolina for $24.0 million in cash, using cash on hand to fund the acquisitions. We commenced operations under a TBA for three of the stations on November 1, 2016, and the fourth upon acquisition on January 6, 2017, which increased our net revenues, station operating expenses and depreciation and amortization expense.

During the fourth quarter of 2017, we assigned assets to a trust, which subsequently entered into a TBA that allowed a third party to operate eight of our radio stations, which decreased our net revenues and station operating expenses and increased our TBA income.

We sold three radio stations in the fourth quarter of 2017, which resulted in a decrease to net revenues and station operating expenses and a $2.6 million gain on the sale of assets.

We recorded a $13.5 million loss in the first quarter of 2017 as a result of permanently discontinuing the operation of one of our stations and returning the station’s license to the FCC for cancellation, in order to facilitate the Merger. The loss is included within net (gain) loss on sale or disposal of assets.

Other

Due to the tax legislation enacted during the fourth quarter of 2017, we recognized an income tax benefit from continuing operations of $291.5 million due to the reduction to our effective tax rate and its impact on our deferred income taxes.

In connection with the Merger, which closed on November 17, 2017, we refinanced our then-outstanding credit facility and redeemed our Preferred. As a result of the refinancing, we recognized a loss on extinguishment of indebtedness of approximately $4.1 million.

Our outstanding indebtedness upon which interest is computed increased significantly on November 17, 2017 as a result of the Merger and our assumption of CBS Radio’s (now Entercom Media Corp.’s) outstanding indebtedness.

In November 2016, we refinancing our outstanding former senior credit facility and retired our formerly outstanding Senior Notes. As a result of the refinancing, we recognized a loss on extinguishment of debt of approximately $10.9 million in 2016.

During the third quarter of 2016, we settled a legal claim with British Petroleum as a result of their Deepwater Horizon oil spill in the Gulf of Mexico that occurred in 2010 and recovered $2.3 million on a net basis after deducting certain related expenses. The claim was a result of lost business due to the oil spill. This amount was included in other income and expense.

 

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     YEARS ENDED DECEMBER 31,  
     2017      2016      % Change  
     (dollars in millions)  

NET REVENUES

   $ 592.9      $ 464.8        28
  

 

 

    

 

 

    

OPERATING EXPENSE:

        

Station operating expenses

     443.5        323.3        37

Depreciation and amortization expense

     15.5        9.8        58

Corporate general and administrative expenses

     47.9        33.3        44

Restructuring charges

     16.9        —          100

Impairment loss

     1.0        0.2        400

Merger and acquisition costs

     41.3        0.7        nmf  

Other expenses related to financing

     2.2        0.6        267

Other operating (income) expenses

     12.0        (1.2      nmf  
  

 

 

    

 

 

    

Total operating expense

     580.3        366.7        58
  

 

 

    

 

 

    

OPERATING INCOME (LOSS)

     12.6        98.1        (87 %) 
  

 

 

    

 

 

    

NET INTEREST EXPENSE

     32.5        36.6        (11 %) 

OTHER (INCOME) EXPENSE

     4.1        8.6        (52 %) 
  

 

 

    

 

 

    

INCOME (LOSS) BEFORE INCOME TAXES (BENEFIT)

     (24.0      52.9        (145 %) 

INCOME TAXES (BENEFIT)

     (257.1      14.8        nmf  
  

 

 

    

 

 

    

NET INCOME (LOSS) AVAILABLE TO THE COMPANY - CONTINUING OPERATIONS

     233.1        38.1        512

Preferred stock dividend

     (2.0      (1.9      (5 %) 
  

 

 

    

 

 

    

NET INCOME (LOSS) AVAILABLE TO COMMON SHAREHOLDERS - CONTINUING OPERATIONS

     231.1        36.2        538

Income from discontinued operations, net of income taxes (benefit)

     0.8        —          100
  

 

 

    

 

 

    

NET INCOME (LOSS) AVAILABLE TO COMMON SHAREHOLDERS

   $ 231.9      $ 36.2        541
  

 

 

    

 

 

    

Net Revenues

The increase in net revenues was primarily attributable to the Merger, net of certain divestitures and acquisitions through exchanges with third parties. Net revenues from the new stations together with our existing stations contributed to overall 28% growth over prior year results. Excluding the net revenues from these acquisitions and dispositions, net revenues were flat for the year.

Excluding new markets and overlap markets, net revenues increased the most for our stations located in the Greensboro and Indianapolis markets.

Excluding new markets and overlap markets, net revenues decreased the most for our stations located in the Denver and Sacramento markets.

Station Operating Expenses

The increase in station operating expenses was primarily attributable to the acquisition of new stations, net of certain divestitures and radio stations acquired through exchanges with third parties. Station operating expenses from the new stations together with our existing stations contributed to the reported 37% increase over prior year results, primarily due to an increase in the variable expenses associated with the increase in net revenues.

 

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Depreciation and Amortization Expense

Depreciation and amortization expense increased in 2017 primarily due to the acquisition of assets included in the Merger and in the Charlotte Acquisition and an increase in capital expenditures. The increase in capital expenditures in 2017 was primarily due to the consolidation and relocation of several studio facilities in larger markets together with an increase in the size of our Company.

Corporate General and Administrative Expenses

Corporate general and administrative expenses increased primarily due to: (i) an increase in non-cash equity compensation expense of $2.7 million, which includes the non-cash compensation expenses associated with the conversion of equity awards assumed in the Merger; (ii) an increase in compensation expense of $2.4 million due to an expanded workforce in anticipation of the Merger together with additional corporate employees added as a result of the Merger; (iii) an increase in consulting expenses of $2.2 million in connection with additional services provided related to the Merger; (iv) an increase in deferred compensation expense of $1.7 million as our deferred compensation liability generally tracks the movements in the stock market; and (v) certain contractual obligations of $1.3 million to a senior executive as a result of the non-renewal of an employment agreement.

Merger and Acquisition Costs

Merger and acquisition costs increased due to transaction costs relating to the Merger. These costs primarily consisted of legal, professional, and other advisory services.

Restructuring Charges

We incurred restructuring charges and transition services costs of $16.9 million in 2017 primarily as a result of the restructuring of operations for the Merger. These costs primarily included workforce reduction charges and the abandonment of excess studio space in certain markets.

Other Operating Income and Expenses

Other operating expenses increased primarily as a result of incurring a $13.5 million loss from permanently discontinuing the operation of one of our stations and returning the station’s license to the FCC for cancellation, in order to facilitate the Merger. Offsetting this loss, in the fourth quarter of 2017, we sold three radio stations in order to facilitate the Merger and recognized a gain of $2.6 million.

Operating Income

Operating income in 2017 decreased primarily due to: (i) an increase in merger and acquisition costs of $41.3 million in connection with the Merger; (ii) the recognition of a $13.5 million loss from permanently discontinuing the operation of one of our stations and returning the license to the FCC for cancellation, in order to facilitate the Merger; (iii) an increase in restructuring charges as described above; (iv) an increase in station operating expenses for the reasons described above; and (v) an increase in corporate, general and administrative expenses for the reasons described above.

Interest Expense

Net interest expense decreased $4.1 million for the year. This decrease was primarily due to the decrease for the 2017 period prior to the Merger in our average outstanding interest rate on our average outstanding indebtedness upon which interest is computed as compared to 2016. The decrease in interest expense was due to the refinancing in the fourth quarter of 2016 of our senior secured credit facility with lower interest rates that replaced our former Senior Notes with higher interest rates.

The interest expense decrease was offset by the interest expense incurred on the indebtedness assumed from the Merger for the period of November 17, 2017 through the end of the year. As a result of the Merger and subsequent refinancing of our then-outstanding credit facility, we incurred interest expense on additional net outstanding indebtedness upon which interest is computed. Assuming that LIBOR is flat, we expect interest expense to increase in future periods as a result of the significant increase in outstanding indebtedness upon which interest is computed.

The weighted average variable interest rate as of December 31, 2017 and 2016 was 4.2% and 4.5%, respectively.

 

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Other (Income) Expense

In connection with the Merger, we refinanced our then outstanding pre-Merger indebtedness in the fourth quarter of 2017 and recorded a loss on extinguishment of indebtedness of $4.1 million.

We also refinanced our outstanding indebtedness in the fourth quarter of 2016 and recorded a loss on extinguishment of indebtedness of approximately $10.9 million. This loss was partially offset by the recovery of $2.3 million on a net basis from the settlement of a legal claim with British Petroleum as a result of their Deepwater Horizon oil spill in the Gulf of Mexico that occurred in 2010. The claim was a result of lost business due to the oil spill.

The decrease in the amount of loss on extinguishment of indebtedness is primarily attributable to the inclusion of a $5.8 million call premium on the early retirement of our indebtedness in 2016, which was non-recurring in nature.

Income (Loss) Before Income Taxes (Benefit)

The generation of income (loss) before income taxes (benefit) was largely attributable to: (i) the merger and acquisition costs and restructuring charges and transition services costs incurred in connection with the Merger; and (ii) the $13.5 million loss from permanently discontinuing the operation of one of our stations and returning the station’s license to the FCC for cancellation, in order to facilitate the Merger.

Income Taxes (Benefit)

The effective income tax rate from continuing operations for 2017 was significantly impacted by a $291.5 million income tax benefit that reduced our income tax expense. The TCJA, enacted on December 22, 2017, contained significant changes to U.S. federal tax law, including a reduction in the U.S. federal corporate tax rate from the previous rate of 35% to 21%. The Company recorded an estimated benefit from continuing operations of $291.5 million to adjust our deferred income tax balances as a result of the reduced corporate income tax rate. The estimated amounts are included as components of income tax expense from continuing operations.

The effective income tax rate was 28.0% for 2016, which was impacted by: (i) discrete income tax benefits from the reversal of valuation allowances against net operating losses for certain single member states due to changes in future estimated income; (ii) the reversal of partial valuation allowances in certain single member states as a result of internal restructuring; and (iii) a retroactive decrease in deferred tax liabilities associated with non-amortizable assets such as broadcasting licenses and goodwill. Our income tax rate has been trending down as expenses for tax purposes have decreased due to the issuance to senior management of a higher percentage of awards that were fully deductible for tax purposes.

Income (Loss) From Discontinued Operations, Net of Income Taxes (Benefit)

Several stations acquired from CBS Radio, which were operated under an LMA, immediately met the criteria to be classified as held for sale. In addition, the results of operations for these stations are presented as discontinued operations as these stations are never expected to be operated by us. Amounts of net revenues, station operating expenses, depreciation and amortization and LMA income earned from these stations is not included in our income from continuing operations. The income generated from these stations during the period of the LMA through December 31, 2017, is separately presented net of income taxes (benefit).

Net Income (Loss) Available to the Company

The change in net income (loss) available to us was primarily attributable to the reasons described above under Income (Loss) Before Income Taxes and Income Taxes (Benefit).

Future Impairments

We may determine that it will be necessary to take impairment charges in future periods if we determine the carrying value of our intangible assets is more than the fair value. Our annual impairment test of our broadcasting licenses and goodwill conducted in the second quarter of 2018 indicated that the fair value of our goodwill and broadcasting licenses exceeded their carrying value and there was no need to record an impairment charge.

 

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Due to a sustained decline in our share price from the time of the annual impairment test conducted in the second quarter of 2018, we determined this triggering event warranted an interim impairment assessment on our broadcasting licenses and goodwill during the fourth quarter of 2018. Due to changes in facts and circumstances, we revised our estimates with respect to our estimated operating profit margins and long-term revenue growth rates used in the impairment assessment. As a result of this interim impairment tests conducted in the fourth quarter of 2018, we determined our broadcasting licenses and goodwill were impaired. Accordingly, we recorded a $147.9 million impairment ($108.8 million, net of tax) on our broadcasting licenses and a $317.1 million impairment ($314.4 million, net of tax) on our goodwill.

We may be required to retest prior to our next annual evaluation, which could result in an impairment.

Liquidity and Capital Resources

Refinancing – CBS Radio (Now Entercom Media Corp.) Indebtedness

In connection with the Merger, we assumed CBS Radio’s (now Entercom Media Corp.’s) indebtedness outstanding under: (i) a credit agreement (the “Credit Facility”) among CBS Radio (now Entercom Media Corp.), the guarantors named therein, the lenders named therein, and JPMorgan Chase Bank, N.A., as administrative agent; and (ii) the senior notes (described below).

On March 3, 2017, CBS Radio entered into an amendment to the Credit Facility, to, among other things, create a tranche of Term B-1 Loans (the “Term B-1 Tranche”) in an aggregate principal amount not to exceed $500 million. The Term B-1 Tranche is governed by the Credit Facility and will mature on November 17, 2024.

Immediately prior to the Merger, the Credit Facility was comprised of a revolving credit facility and a term B loan. On the closing date of the Merger and the refinancing, the term B loan was converted into the Term B-1 Tranche and both were simultaneously refinanced (the “Term B-1 Loan”).

As a result of the refinancing activities described above, in the fourth quarter of 2017, we wrote off $3.1 million of unamortized deferred financing costs and recorded a loss on the extinguishment of indebtedness of $4.1 million. The loss included the write off of deferred financing expense, a loss on the early retirement of the Preferred, and certain fees paid to lenders in connection with the refinancing activities.

Liquidity

Immediately following the refinancing activities described above, the Credit Facility, as amended, was comprised of a $250.0 million Revolver and a $1,330.0 million Term B-1 Loan.

As of December 31, 2018, we had $1,291.7 million outstanding under the Term B-1 Loan and $180.0 million outstanding under the Revolver. In addition, we had $5.9 million in outstanding letters of credit. As of December 31, 2018, we had $122.9 million in cash and cash equivalents, exclusive of restricted cash. In connection with our outstanding indebtedness, we have restrictions in the ability of our subsidiaries to distribute cash to our Parent, as more fully described in the accompanying notes to our audited consolidated financial statements. We do not anticipate that these restrictions will limit our ability to meet our future obligations over the next 12 months.

Over the past several years, we have used a significant portion of our cash flow to reduce our indebtedness. Generally, our cash requirements are funded from one or a combination of internally generated cash flow, cash on hand and borrowings under our Revolver.

We may also use our capital resources to repurchase shares of our Class A common stock, to pay dividends to our shareholders, and to make acquisitions. We may from time to time seek to repurchase and retire our outstanding indebtedness through open market purchases, privately negotiated transactions or otherwise.    

The Credit Facility

The $250.0 million Revolver has a maturity date of November 17, 2022 and provides for interest based upon the prime rate or LIBOR plus a margin. The margin may increase or decrease based upon our Consolidated Net

 

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Secured Leverage Ratio as defined in the agreement. The initial margin is at LIBOR plus 2.25% or the prime rate plus 1.25%. In addition, the Revolver requires the payment of a commitment fee of 0.5% per annum on the unused amount. The amount available under the Revolver, which includes the impact of outstanding letters of credit, was $64.1 million as of December 31, 2018.

The Term B-1 Loan has a maturity date of November 17, 2024 and provides for interest based upon the Base Rate or LIBOR, plus a margin. The initial rate is at LIBOR plus 2.75%, or the Base Rate plus 1.75%. The Base Rate is the highest of: (a) the administrative agent’s prime rate; (b) the Federal Reserve Bank of New York’s Rate plus 0.5%; or (c) the LIBOR Rate plus 1.0%.

The Term B-1 Loan amortizes: (i) with equal quarterly installments of principal in annual amounts equal to 1.0% of the original principal amount of the Term B-1 Loan; and (ii) mandatory yearly prepayments based upon a percentage of Excess Cash Flow as defined in the agreement.

The Term B-1 Loan requires mandatory prepayments equal to a percentage of Excess Cash Flow, subject to incremental step-downs, depending on the Consolidated Net Secured Leverage Ratio. The first Excess Cash Flow payment will be due in the first quarter of 2019 and then each subsequent year, and is based on the Excess Cash Flow and Leverage Ratio for the prior year.

We expect to use the Revolver to provide for: (i) working capital; and (ii) general corporate purposes, including capital expenditures and any or all of the following (subject to certain restrictions): repurchase of Class A common stock, dividends, investments and acquisitions. All of our wholly-owned subsidiaries, jointly and severally guaranteed the Credit Facility. The Credit Facility is secured by a pledge of 66% of our outstanding voting stock and other equity interests in all of our wholly owned subsidiaries. In addition, the Credit Facility is secured by a lien on substantially all of our assets, with limited exclusions (including our real property). The assets securing the Credit Facility are subject to customary release provisions which would enable us to sell such assets free and clear of encumbrance, subject to certain conditions and exceptions.

The Credit Facility has usual and customary covenants including, but not limited to, a senior secured leverage ratio, limitations on restricted payments and the incurrence of additional borrowings. Specifically, the Credit Facility requires us to comply with a maximum Consolidated Net Secured Leverage Ratio that cannot exceed 4.0 times. In the event that we consummate additional acquisition activity permitted under the terms of the Credit Facility, the Consolidated Net Secured Leverage Ratio will be increased to 4.5 times for a one year period following the consummation of such permitted acquisition. As of December 31, 2018, our Consolidated Net Secured Leverage Ratio was 3.6 times.

As of December 31, 2018, we were in compliance with the financial covenant then applicable and all other terms of the Credit Facility in all material respects. Our ability to maintain compliance with our covenants under the Credit Facility is highly dependent on our results of operations. Management believes that over the next 12 months we can continue to maintain compliance. Our operating cash flow remains positive, and we believe that it is adequate to fund our operating needs. We believe that cash on hand and cash from operating activities will be sufficient to permit us to meet our liquidity requirements over the next 12 months, including our debt repayments.

Failure to comply with our financial covenants or other terms of its Credit Facility and any subsequent failure to negotiate and obtain any required relief from its lenders could result in a default under the Credit Facility. Any event of default could have a material adverse effect on our business and financial condition.

The Former Credit Facility

On November 1, 2016, Entercom Communications Corp. and its wholly-owned subsidiary, Entercom Radio, LLC (“Radio”), entered into the Former Credit Facility with a syndicate of lenders for a $540 million Former Credit Facility, which was initially comprised of: (i) the $60 million Former Revolver that was set to mature on November 1, 2021; and (ii) the $480 million Former Term B Loan that was set to mature on November 1, 2023.

The Former Term B Loan amortized with: (i) equal quarterly installments of principal in annual amounts equal to 1.0% of the original principal amount of the Former Term B Loan; and (ii) mandatory yearly prepayments based upon a percentage of Excess Cash Flow as defined within the agreement and was subject to incremental step-downs depending on the consolidated Leverage Ratio.

 

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Senior Notes

Simultaneously with entering into the Merger and assuming the Credit Facility on November 17, 2017, we also assumed the Senior Notes that mature on October 17, 2024 in the amount of $400.0 million. The Senior Notes, which were originally issued by CBS Radio (now Entercom Media Corp.) on October 17, 2016, were valued at a premium as part of the fair value measurement on the date of the Merger. The premium on the Senior Notes will be amortized over the term under the effective interest rate method. As of any reporting period, the unamortized premium on the Senior Notes is reflected on the balance sheet as an addition to the $400.0 million liability.

Interest on the Senior Notes accrues at the rate of 7.250% per annum and is payable semi-annually in arrears on May 1 and November 1 of each year.

The Senior Notes may be redeemed at any time on or after November 1, 2019 at a redemption price of 105.438% of their principal amount plus accrued interest. The redemption price decreases to 103.625% of their principal amount plus accrued interest on or after November 1, 2020, 101.813% of their principal amount plus accrued interest on or after November 1, 2021, and 100% of their principal amount plus accrued interest on or after November 1, 2022.

The Senior Notes are unsecured and ranked: (i) senior in right of payment to our future subordinated indebtedness; (ii) equally in right of payment with all of our existing and future senior indebtedness; (iii) effectively subordinated to our existing and future secured indebtedness (including the indebtedness under our Credit Facility), to the extent of the value of the collateral securing such indebtedness; and (iv) structurally subordinated to all of the liabilities of our subsidiaries that do not guarantee the Senior Notes, to the extent of the assets of those subsidiaries.

All of our existing subsidiaries, other than Entercom Media Corp., jointly and severally guaranteed the Senior Notes.

A default under our Senior Notes could cause a default under our Credit Facility. Any event of default, therefore, could have a material adverse effect on our business and financial condition.

We may from time to time seek to repurchase or retire our outstanding indebtedness through open market purchases, privately negotiated transactions or otherwise. Such repurchases, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors.

The Senior Notes are not a registered security and there are no plans to register our Senior Notes as a security in the future. As a result, Rule 3-10 of Regulation S-X promulgated by the SEC is not applicable and no separate financial statements are required for the guarantor subsidiaries as of December 31, 2018 and 2017 and for the years ended December 31, 2018, 2017 and 2016.

The Former Senior Notes

In 2016, we issued a call notice to redeem our $220.0 million 10.5% unsecured Senior Notes due December 1, 2019 (the “Former Senior Notes”) in full with an effective date of December 1, 2016, that was funded by the proceeds of the Former Credit Facility. As a result of the full redemption of the Former Senior Notes with replacement indebtedness at a lower interest rate, the net interest expense incurred in 2017 through the date of the Merger was reduced and does not include amortization of original issue discount of Former Senior Notes. This reduction in net interest expense was partially offset by the increase in net interest expense incurred from the closing date of the Merger through December 31, 2018 due to the significant increase in the amount of indebtedness outstanding.

In addition to the parent, Entercom Communications Corp., all of our existing subsidiaries (other than Radio, which is a finance subsidiary and was the issuer of the Senior Notes), jointly and severally guaranteed the Senior Notes.

Perpetual Cumulative Convertible Preferred Stock

As discussed above, a portion of the proceeds from the debt refinancing that occurred on November 17, 2017 was used to fully redeem the Preferred. As a result of this redemption, we: (i) removed the net carrying value of the Preferred of $27.5 million from our books, which included accrued dividends through the date of redemption of $0.2 million; and (ii) recognized a loss on extinguishment of the Preferred of $0.2 million.

 

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In connection with an acquisition on July 16, 2015, we issued $27.5 million of Preferred that in the event of a liquidation, ranked senior to liquidation payments to our common shareholders. We incurred issuance costs, which were recorded as a reduction of the Preferred.

The Preferred was convertible by Lincoln Financial Media Company (“Lincoln”) into a fixed number of shares after a three-year waiting period, subject to customary anti-dilution provisions. At certain times (including the first three years after issuance), we could redeem the Preferred in cash at a price of 100%. The initial dividend rate on the Preferred was 6% and increased over time to 12%.

Operating Activities

Net cash flows provided by operating activities were $102.2 million and $29.1 million for 2018 and 2017, respectively. The cash flows from operating activities increased primarily due to an increase in net income available to the Company, as adjusted for non-cash charges and income tax benefits, of $99.5 million. This increase was partially offset by an increase in net investment in working capital of $36.1 million. The increase in net investment in working capital was primarily due to: (i) the timing of settlements of other long term liabilities; and (ii) the timing of settlements of accrued expenses.

Net cash flows provided by operating activities were $29.1 million and $72.0 million for 2017 and 2016, respectively. The cash flows from operating activities decreased primarily due to the increases in our merger and acquisition costs, restructuring costs and other costs and corporate, general and administrative expenses of $40.6 million, $16.9 million and $14.5 million, respectively.

This net decrease was partially offset by a $18.9 million decrease in net investment in working capital in 2017 as compared to 2016.

Investing Activities

For 2018, net cash flows provided by investing activities were $141.5 million, which primarily reflected the proceeds received from dispositions of assets and radio stations in the amount of $255.9 million, less: (i) cash paid to acquire a radio station in Philadelphia, Pennsylvania from Jerry Lee Radio, LLC (“Jerry Lee”) for $56.4 million in cash (the “Jerry Lee Transaction”); (ii) additions to property and equipment of $41.8 million; and (iii) cash paid to complete the acquisition of two radio stations in St. Louis, Missouri from Emmis Communications Corporation (“Emmis”) for a purchase price of $15.0 million (the “Emmis Acquisition”).

For 2017, net cash flows provided by investing activities were $17.3 million, which primarily reflected the proceeds of: (i) $57.8 million from the sales of three FM radio stations in Los Angeles, San Diego, and Wilkes Barre, (ii) $12.0 million in cash as partial consideration for an exchange of a radio station; and (iii) $3.0 million from the sale of a parcel of land in Atlanta. These proceeds were partially offset by: (i) cash paid to complete an acquisition in Charlotte, North Carolina of $24.0 million; (ii) additions to property, plant and equipment of $21.2 million; and (iii) $9.7 million of cash paid to acquire a preferred stock interest in a privately held company.

Financing Activities

For 2018, net cash flows used in financing activities were $85.6 million, which primarily reflect: (i) the payment of dividends on common stock of $49.8 million; and (ii) the payment for repurchases of common stock of $30.0 million.

For 2017, net cash flows used in financing activities were $59.1 million, which primarily reflect: (i) the payment of common stock dividends of $29.3 million; (ii) the retirement of our Preferred of $27.7 million; (iii) the payment of debt issuance costs related to our Credit Facility of $16.3 million; and (iv) the repurchase of $10.7 million in outstanding common stock, of which $10.0 million was paid in cash as of December 31, 2017. This activity was partially offset by an increase in our net borrowings of $30.8 million.

Income Taxes

During 2018, we paid approximately $54.2 million in estimated federal and state income taxes.

For federal income tax purposes, the acquisition of CBS Radio was treated as a reverse acquisition which caused us to undergo an ownership change under Section 382 of the Code. This ownership change will limit the utilization of our net operating losses (“NOLs”) for post-acquisition tax years. As a result, we commenced the payment of estimated federal, state and local taxes of approximately $2.0 million during the fourth quarter of 2017.

 

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During 2016, we paid a nominal amount in income taxes (state income taxes) as we have benefited from the tax deductions available on acquired assets, which were primarily intangible assets such as broadcasting licenses and goodwill.

Dividends

On November 2, 2017, our Board approved an increase to the annual common stock dividend program to $0.36 per share from $0.30 per share, beginning with the dividend paid in the fourth quarter of 2017. We estimate quarterly dividend payments to approximate $12.4 million per quarter (after considering the reduction in shares from our stock buyback program in the fourth quarter of 2018). Any future dividends will be at the discretion of the Board based upon the relevant factors at the time of such consideration, including, without limitation, compliance with the restrictions set forth in our Credit Facility and the Senior Notes.

Quarterly dividends on our Preferred were paid in each of the quarters beginning in October 2015 at an annual rate of 6% that increased over time to 10%. On November 17, 2017, our Preferred was retired in full.

During the second quarter of 2016, we commenced an annual $0.30 per share common stock dividend program, with payments that approximated $2.9 million per quarter. In addition to a quarterly dividend, we paid a special one-time cash dividend of $0.20 per share of common stock on August 30, 2017, which was approximately $7.8 million.

See Liquidity under Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” Note 10, Long-Term Debt, and Note 11, Perpetual Cumulative Convertible Preferred Stock, in the accompanying notes to our audited consolidated financial statements.

Share Repurchase Programs

On November 2, 2017, our Board announced a share repurchase program (the “2017 Share Repurchase Program”) to permit us to purchase up to $100.0 million of our issued and outstanding shares of Class A common stock through open market purchases. Shares repurchased by us under the 2017 Share Repurchase Program will be at our discretion based upon the relevant factors at the time of such consideration, including, without limitation, compliance with the restrictions set forth in our Credit Facility and the Senior Notes.

During the year ended December 31, 2018, we repurchased 3,226,300 shares of our Class A common stock at an aggregate average price of $9.11 per share for a total of $29.4 million. As of December 31, 2018, $59.9 million is available for future share repurchase under the 2017 Share Repurchase Program.

Capital Expenditures

Capital expenditures for 2018, 2017 and 2016 were $41.8 million, $21.2 million and $7.6 million, respectively.

Credit Rating Agencies

On a continuing basis, Standard and Poor’s, Moody’s Investor Services and other rating agencies may evaluate our indebtedness in order to assign a credit rating. Any significant downgrade in our credit rating could adversely impact our future liquidity by limiting or eliminating our ability to obtain debt financing.

 

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Contractual Obligations

The following table reflects a summary of our contractual obligations as of December 31, 2018:

 

     Payments Due By Period  

Contractual Obligations:

   Total      Less than
1 Year
     1 to 3
Years
     3 to 5
Years
     More Than
5 Years
 

Long-term debt obligations (1)

   $ 2,353,893      $ 91,169      $ 181,258      $ 359,873      $ 1,721,593  

Operating lease obligations (2)

     394,318        51,375        97,351        79,687        165,905  

Purchase obligations (3)

     549,917        221,180        207,414        103,756        17,567  

Other long-term liabilities (4)

     635,150        12,409        18,449        13,166        591,126  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 3,933,278      $ 376,133      $ 504,472      $ 556,482      $ 2,496,191  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)

The total amount reflected in the above table includes principal and interest.

 

  a.

Our Credit Facility had outstanding indebtedness in the amount of $1,291.7 million under our Term B-1 Loan and $180.0 million outstanding under our Revolver as of December 31, 2018. The maturity under our Credit Facility could be accelerated if we do not maintain compliance with certain covenants. The principal maturities reflected exclude any impact from required principal payments based upon our future operating performance. The above table includes projected interest expense under the remaining term of our Credit Facility.

 

  b.

Under our Senior Notes, the maturity could be accelerated under an event of default or could be repaid in cash by us at our option prior to maturity. The above table includes projected interest expense under the remaining term of the agreement.

 

(2)

The operating lease obligations represent scheduled future minimum operating lease payments under non-cancellable operating leases, including rent obligations under escalation clauses. The minimum lease payments do not include common area maintenance, variable real estate taxes insurance and other costs for which the Company may be obligated as most of these payments are primarily variable rather than fixed.

(3)

We have purchase obligations that include contracts primarily for on-air personalities and other key personnel, ratings services, sports programming rights, software and equipment maintenance and certain other operating contracts.

(4)

Included within total other long-term liabilities of $635.2 million are deferred income tax liabilities of $546.0 million. It is impractical to determine whether there will be a cash impact to an individual year. Therefore, deferred income tax liabilities, together with liabilities for deferred compensation and uncertain tax positions (other than the amount of unrecognized tax benefits that are subject to the expiration of various statutes of limitation over the next 12 months) are reflected in the above table in the column labeled as “More Than 5 Years.” See Note 15, Income Taxes, in the accompanying notes to our audited consolidated financial statements for a discussion of deferred tax liabilities.

Off-Balance Sheet Arrangements

As of December 31, 2018 and as of the date this report was filed (other than as described below), we did not have any material off-balance sheet transactions, arrangements, or obligations, including contingent obligations.

During 2018, we disposed of certain property that we considered as surplus to our operations and that resulted in significant gains reportable for tax purposes. In order to minimize the tax impact on a certain portion of these taxable gains, we created an entity that serves as a qualified intermediary (“QI”) for tax purposes and that held the net sales proceeds of $70.2 million from these transactions. As of December 31, 2018, the balances in the account of the QI is $69.4 million and these amounts are reflected as restricted cash on our balance sheet. We plan to use a portion of these funds in a tax-free exchange by using the net sales proceeds from relinquished property for the purchase of replacement property. This entity was treated as a variable interest entity (“VIE”) and is included in our consolidated financial statements as we are considered the primary beneficiary.

 

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The use of a QI in a like-kind exchange enables us to effectively minimize our tax liability in connection with certain asset dispositions. As discussed in Note 19, Assets Held For Sale And Discontinued Operations, we sold: (i) a parcel of land in Chicago, Illinois during the third quarter of the current year for net proceeds of $45.5 million; and (ii) a former studio building in Los Angeles, California for net proceeds of $24.7 million. These net sales proceeds were deposited into the account of the QI to comply with requirements under Section 1031 of the Code to execute a like-kind exchange and are reflected as restricted cash on our consolidated balance sheet as of December 31, 2018. Restrictions on these deposits will lapse prior to the end of the first quarter of 2019.

We do not have any other relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet financial arrangements or other contractually narrow or limited purposes as of December 31, 2018. Accordingly, we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in such relationships.

Market Capitalization

As of December 31, 2018 and 2017, our total equity market capitalization was $813.8 million and $1,535 million, respectively, which was $520.5 million lower and $229.4 million lower, respectively, than our book equity value on those dates. As of December 31, 2018 and 2017, our stock price was $5.71 per share and $10.80 per share, respectively. Due to a sustained decrease in our share price, we conducted an interim impairment test on our broadcasting licenses and goodwill during the fourth quarter of 2018. Refer to the sections below for additional information.

Intangibles

As of December 31, 2018, approximately 76% of our total assets consisted of radio broadcast licenses and goodwill, the value of which depends significantly upon the operational results of our business. We could not operate our radio stations without the related FCC license for each station. FCC licenses are subject to renewal every eight years. Consequently, we continually monitor the activities of our stations to ensure they comply with all regulatory requirements. See Part I, Item 1A, “Risk Factors”, for a discussion of the risks associated with the renewal of licenses.

Impact On Future Revenues And Advertising Network Services

We had a relationship with United States Traffic Network (“USTN”), a vendor that provided short duration advertising network services (e.g., sponsored traffic reports) and guaranteed revenue to the Company. On April 27, 2018, we executed a series of agreements (the “April 27, 2018 agreements”) with USTN which replaced outstanding accounts receivable from USTN with a senior secured note and an equity interest in USTN. On June 30, 2018, we entered into an agreement to acquire USTN by the end of July 2018, subject to certain closing conditions. The closing conditions were not met by USTN and we did not complete this transaction. On July 30, 2018, USTN filed a lawsuit against the Company seeking damages. On July 31, 2018, USTN failed to make required payments due under the April 27, 2018 agreements. On August 6, 2018, we notified USTN of its default and accelerated all amounts due. On September 6, 2018, USTN filed a motion to dismiss its own lawsuit, with prejudice.

Inflation

Inflation has affected our performance by increasing our radio station operating expenses in terms of higher costs for wages and multi-year vendor contracts with assumed inflationary built-in escalator clauses. The exact effects of inflation, however, cannot be reasonably determined. There can be no assurance that a high rate of inflation in the future would not have an adverse effect on our profits, especially since our Credit Facility is variable rate.

Recent Accounting Pronouncements

For a discussion of recently issued accounting standards, see Note 2, Significant Accounting Policies, in the accompanying consolidated financial statements.

 

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Critical Accounting Policies

Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements 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 amounts of revenues and expenses during the reporting period. We base our estimates on historical experience and various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily available from other sources. Actual results may differ from these estimates under different circumstances or by using different assumptions.

We consider the following policies to be important in understanding the judgments involved in preparing our consolidated financial statements and the uncertainties that could affect our financial position, results of operations or cash flows:

Revenue Recognition

In May 2014, the accounting guidance for revenue recognition was modified and subsequently updated several times with amendments. We adopted the amended accounting guidance for revenue recognition on January 1, 2018 using the modified retrospective transition method. As a result, we changed our accounting policy for revenue recognition. Refer to Note 4, Revenue, included elsewhere in this report for additional information. Except for this change, we consistently applied our accounting policies to all periods presented in these consolidated financial statements.

We generate revenue from the sale to advertisers of various services and products, including but not limited to: (i) commercial broadcast time; (ii) digital advertising; (iii) local events; (iv) e-commerce where an advertiser’s goods and services are sold through our websites; and (v) integrated digital advertising solutions.

Revenue from services and products is recognized when delivered.

Advertiser payments received in advance of when the products or services are delivered are recorded on our balance sheet as unearned revenue.

Revenues presented in the consolidated financial statements are reflected on a net basis, after the deduction of advertising agency fees by the advertising agencies. We also evaluate when it is appropriate to recognize revenue based on the gross amount invoiced to the customer or the net amount retained by us if a third party is involved.

Allowance for Doubtful Accounts

We evaluate our allowance for doubtful accounts on an ongoing basis. We establish our allowance for doubtful accounts based upon our collection experience and the assessment of the collectability of specific amounts. Our historical estimates have been a reliable method to estimate future allowances.

Contingencies and Litigation

On an ongoing basis, we evaluate our exposure related to contingencies and litigation and record a liability when available information indicates that a liability is probable and estimable. We also disclose significant matters that may reasonably result in a loss or are probable but not estimable.

Estimation of Our Tax Rates

We must make certain estimates and judgments in determining income tax expense for financial statement purposes. These estimates and judgments must be used in the calculation of certain tax assets and liabilities because of differences in the timing of recognition of revenue and expense for tax and financial statement purposes. As changes occur in our assessments regarding our ability to recover our deferred tax assets, our tax provision is increased in any period in which we determine that the recovery is not probable.

We expect our effective tax rate, before discrete items, changes in the valuation allowance, the tax expense associated with non-amortizable assets and impairment losses, to be between 30% and 32%. We also have certain NOLs to utilize that will be available to reduce the amount of cash taxes payable in future years. This rate reflects a reduction in the federal corporate income tax rate to 21% beginning in 2018 as a result of the enactment of the TCJA.

 

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In 2018, our tax rate was 1.1%. This rate was lower than the federal statutory rate of 21% primarily due to an impairment on our goodwill during the fourth quarter of 2018 which is not deductible for income tax purposes. The income tax rate is lower than in previous years primarily due to an income tax benefit resulting from the TCJA that was enacted on December 22, 2017, which reduced the federal corporate tax rate from the previous rate of 35% to 21%.

The income tax rate in 2017 of (1068.0%) was significantly impacted by an income tax benefit related to TCJA legislation enacted in December 2017, which resulted in a re-measurement of our deferred tax assets and liabilities at the new federal corporate income tax rate of 21%.

The income tax rate in 2016 of 28.0% was lower due to certain discrete income tax benefits.

The calculation of our tax liabilities requires us to account for uncertainties in the application of complex tax regulations. We recognize liabilities for uncertain tax positions based on the two-step process prescribed within the interpretation of accounting for uncertain tax positions. The first step is to evaluate the tax position for recognition of a tax benefit by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit based upon its technical merits, including resolution of related appeals or litigation processes, if any. The second step requires us to estimate and measure the tax benefit as the largest amount that has greater than a 50% likelihood of being realized upon ultimate settlement. It is inherently difficult and subjective to estimate such amounts, as this requires us to determine the probability of various possible outcomes. We evaluate these uncertain tax positions, and review whether any new uncertain tax positions have arisen, on a quarterly basis. This evaluation is based on factors including, but not limited to, changes in facts or circumstances, changes in tax law, effectively settled issues under audit, historical experience with similar tax matters, guidance from our tax advisors, and new audit activity. A change in recognition or measurement would result in the recognition of a tax benefit or an additional charge to the tax provision in the period in which the change occurs.

We believe our estimates of the value of our tax contingencies and valuation allowances are critical accounting estimates, as they contain assumptions based on past experiences and judgments about potential actions by taxing jurisdictions. It is reasonably likely that the ultimate resolution of these matters may be greater or less than the amount that we have currently accrued. The effect of a 1% change in our estimated tax rate as of December 31, 2018 would be a change in income tax benefit, and a change in net income available to common shareholders of $3.7 million. This change in income tax benefit would result in a change of $0.03 to net income available to common shareholders per basic and diluted share for 2018.

Radio Broadcasting Licenses and Goodwill

We have made acquisitions in the past for which a significant amount of the purchase price was allocated to broadcasting licenses and goodwill assets. As of December 31, 2018, we recorded approximately $3,056 million in radio broadcasting licenses and goodwill, which represented approximately 76% of our total assets as of that date. We must conduct impairment testing at least annually, or more frequently if events or changes in circumstances indicate that the assets might be impaired, and charge to operations an impairment expense in the periods in which the recorded value of these assets is more than their fair value. Any such impairment could be material. After an impairment expense is recognized, the recorded value of these assets will be reduced by the amount of the impairment expense and that result will be the assets’ new accounting basis.

Prior to 2018, our most recent impairment loss to our broadcasting licenses was in 2012 and our most recent impairment loss to our goodwill was in 2017. As a result of our annual impairment test during the second quarter of 2018, we did not recognize an impairment loss on our broadcasting licenses or goodwill.

The annual impairment test in 2018 did not include the broadcasting licenses or goodwill acquired in the Jerry Lee Transaction during the third quarter of 2018. For the station acquired in the Jerry Lee Transaction, similar valuation techniques that were used in the annual impairment testing process were applied to the valuation of the broadcasting licenses and goodwill under purchase price accounting. The valuation of the acquired broadcasting licenses and goodwill approximates the fair value.

In evaluating whether events or changes in circumstances indicate that an interim impairment assessment is required, we consider several factors in determining whether it is more likely than not that the carrying value of our broadcasting licenses or goodwill exceeds the fair value of our broadcasting licenses or goodwill. Our qualitative analysis considers: (i) macroeconomic conditions such as deterioration in general economic conditions, limitations

 

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on accessing capital, or other developments in equity and credit markets; (ii) industry and market considerations such as deterioration in the environment in which we operate, an increased competitive environment, a change in the market for our products or services, or a regulatory or political development; (iii) cost factors such as increases in labor or other costs that have a negative effect on earnings and cash flows; (iv) overall financial performance such as negative or declining cash flows or a decline in actual or planned revenue or earnings compared with actual and projected results of relevant prior periods; (v) other relevant entity-specific events such as changes in management, key personnel, strategy, or customers, bankruptcy, or litigation; (vi) events affecting a reporting unit such as a change in the composition or carrying amount of our net assets; and (vii) a sustained decrease in our share price.

We evaluate the significance of identified events and circumstances on the basis of the weight of evidence along with how they could affect the relationship between our broadcasting licenses and goodwill’s fair value and carrying amount, including positive mitigating events and circumstances.

Subsequent to the annual impairment test conducted during the second quarter of 2018, we continued to monitor these factors listed above and determined that a sustained decrease in our share price required us to conduct an interim impairment assessment on our broadcasting licenses and goodwill. Due to changes in facts and circumstances, we revised our estimates with respect to our estimated operating profit margins and long-term revenue growth rates used in the impairment assessment. As a result of our interim impairment assessment conducted in the fourth quarter of 2018, we recorded a $147.9 million impairment ($108.8 million, net of tax) on our broadcasting licenses and a $317.1 million impairment ($314.4 million, net of tax) on our goodwill. The interim impairment assessment conducted on our broadcasting licenses and goodwill in the fourth quarter of 2018 followed the same methodology used in the annual impairment assessment conducted in the second quarter of 2018.

We believe our estimate of the value of our radio broadcasting licenses and goodwill assets is an important accounting estimate as the value is significant in relation to our total assets, and our estimate of the value uses assumptions that incorporate variables based on past experiences and judgments about future performance of our stations.

Broadcasting Licenses Impairment Test

We perform our annual broadcasting license impairment test by evaluating our broadcasting licenses for impairment at the market level using the Greenfield method.

During the second quarter of the current year and each of the past several years, we completed our annual impairment test for broadcasting licenses and determined that the fair value of our broadcasting licenses was greater than the amount reflected in the balance sheet for each of our markets and, accordingly, no impairment was recorded.

We perform our broadcasting license impairment test by using the Greenfield method at the market level. Each market’s broadcasting licenses are combined into a single unit of accounting for purposes of testing impairment, as the broadcasting licenses in each market are operated as a single asset. We determine the fair value of the broadcasting licenses in each of our markets by relying on a discounted cash flow approach (a 10-year income model) assuming a start-up scenario in which the only assets held by an investor are broadcasting licenses. Our fair value analysis contains assumptions based upon past experience, reflects expectations of industry observers and includes judgments about future performance using industry normalized information for an average station within a certain market. These assumptions include, but are not limited to: (i) the discount rate; (ii) the market share and profit margin of an average station within a market based upon market size and station type; (iii) the forecast growth rate of each radio market; (iv) the estimated capital start-up costs and losses incurred during the early years; (v) the likely media competition within the market area; (vi) the tax rate; and (vii) future terminal values. Changes in our estimates of the fair value of these assets could result in material future period write-downs of the carrying value of our broadcasting licenses and goodwill assets.

The methodology used by us in determining our key estimates and assumptions was applied consistently to each market. Of the seven variables identified above, we believe that the assumptions in items (i) through (iii) above are the most important and sensitive in the determination of fair value.

 

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Assumptions and Results – Broadcasting Licenses

The following table reflects the estimates and assumptions used in the interim impairment test conducted in the fourth quarter of the 2018 and the annual impairment test conducted in the second quarter of 2018 as compared to the second quarter of 2017, the date of the most recent prior impairment test:

 

    

Estimates And Assumptions

     Fourth    Second    Second
     Quarter    Quarter    Quarter
    

2018

  

2018

  

2017

Discount rate

   9.00%    9.00%    9.25%

Operating profit margin ranges expected for average stations in the markets where the Company operates

   22% to 37%    22% to 37%    19% to 40%

Long-term revenue growth rate range of the Company’s markets

   0.0% to 0.9%    0.5% to 1.0%    1.0% to 2.0%

We believe we have made reasonable estimates and assumptions to calculate the fair value of our broadcasting licenses; however, these estimates and assumptions could be materially different from actual results.

If actual market conditions are less favorable than those projected by the industry or by us, or if events occur or circumstances change that would reduce the fair value of our broadcasting licenses below the amount reflected on the balance sheet, we may be required to conduct an interim test and possibly recognize impairment charges, which could be material, in future periods.

The table below: (i) includes the station acquired in the Jerry Lee Transaction; (ii) excludes the station divested in the WXTU Transaction; and (iii) reflects the $147.9 million impairment ($108.8 million, net of tax) recorded on the broadcasting licenses in the fourth quarter of 2018. This table presents the percentage within a range by which the fair value exceeded the carrying value of our radio broadcasting licenses as of December 31, 2018 for 44 units of accounting (44 geographical markets) where the carrying value of the licenses is considered material to our financial statements. Four of our 48 markets that were subject to testing are considered immaterial.

Rather than presenting the percentage separately for each unit of accounting, management’s opinion is that this table in summary form is more meaningful to the reader in assessing the recoverability of the broadcasting licenses. In addition, the units of accounting are not disclosed with the specific market name as such disclosure could be competitively harmful to us.

 

     Units of Accounting as of December 31, 2018  
     Based Upon the Valuation as of December 31, 2018  
     Percentage Range by Which Fair Value Exceeds the Carrying Value  
            Greater      Greater      Greater  
     0% To      Than 5%      Than 10%      Than  
     5%      To 10%      To 15%      15%  

Number of units of accounting

     22        4        2        16  

Carrying value (in thousands)

   $ 1,458,968      $ 388,281      $ 142,308      $ 525,158  

Broadcasting Licenses Valuation at Risk

After the interim impairment test conducted on our broadcasting licenses in the fourth quarter of 2018, the results indicated that there were 26 units of accounting where the fair value exceeded their carrying value by 10% or less. As stated above, this figure includes the impact of: (i) the addition of broadcasting licenses in the Jerry Lee Transaction; (ii) the disposition of broadcasting licenses in the WXTU Transaction; and (iii) the impairment charge recorded in the fourth quarter of 2018. In aggregate, these 26 units of accounting have a carrying value of $1,847.2 million. As a result of the $147.9 million impairment ($108.8 million, net of tax) booked in the fourth quarter of 2018, we wrote down the carrying value of our broadcasting licenses in 22 markets. As a result, the percentage by which fair value of our broadcasting licenses exceeds carrying value is 0% in 22 of our 48 markets. If overall market conditions or the performance of the economy deteriorates, advertising expenditures and radio industry results could be negatively impacted, including expectations for future growth. This could result in future impairment charges for these or other of our units of accounting, which could be material.

 

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Goodwill Impairment Test

We perform our annual goodwill impairment test during the second quarter of each year.

The amended accounting guidance for accounting for goodwill impairment eliminated the second step of the goodwill impairment test, which reduced the cost and complexity of evaluating goodwill for impairment. We adopted this amended accounting guidance in the second quarter of 2017. Under the former accounting guidance, the second step of the impairment test required us to compute the implied fair value of goodwill by assigning the fair value of a reporting unit to all of its assets and liabilities as if that reporting unit had been acquired in a business combination. Under the amended guidance, if the carrying amount of goodwill of a reporting unit exceeds its fair value, we will consider the goodwill to be impaired.

In prior years, we determined that each individual radio market was a reporting unit and we assessed goodwill in each of our markets. Under the amended guidance, if the fair value of any reporting unit was less than the amount reflected on the balance sheet, we would recognize an impairment charge for the amount by which the carrying amount exceeded the reporting unit’s fair value. The loss recognized would not exceed the total amount of goodwill allocated to the reporting unit.

Following our Merger with CBS Radio in November 2017, our radio broadcasting operations increased from 28 radio markets to 48 radio markets. In response to the realignment in our operating segments and reporting units, we considered whether the event represented a triggering event for the interim goodwill impairment testing. During the three months ended June 30, 2018, and prior to conducting the current year annual impairment testing described below, we made an evaluation, based on factors such as each reporting unit’s total market share and changes in operating cash flow margins, and concluded that it was more likely than not that the fair value of each of our reporting units exceeded their carrying values at the time of the realignment.

Current Year Methodology

In connection with our current year annual and interim goodwill impairment assessment, we used an income approach in computing the fair value of the Company. This approach utilized a discounted cash flow method by projecting our income over a specified time and capitalizing at an appropriate market rate to arrive at an indication of the most probable selling price. We believe that this approach is commonly used and is an appropriate methodology for valuing the Company. Factors contributing to the determination of our operating performance were historical performance and/or our estimates of future performance.

Prior Year Methodology

In connection with our prior year annual goodwill impairment assessment, we first assessed qualitative factors to determine whether it was necessary to perform a quantitative assessment for each reporting unit. These qualitative factors included, but were not limited to: (i) macroeconomic conditions; (ii) radio broadcasting industry considerations; (iii) financial performance of reporting units; (iv) Company-specific events; and (v) a sustained decrease in our share price. If the quantitative assessment was necessary, we determined the fair value of the goodwill allocated to each reporting unit.

To determine the fair value, we used a market approach and, when appropriate, an income approach in computing the fair value of each reporting unit. The market approach calculated the fair value of each market’s radio stations by analyzing recent sales and offering prices of similar properties expressed as a multiple of cash flow. The income approach utilized a discounted cash flow method by projecting the subject property’s income over a specified time and capitalizing at an appropriate market rate to arrive at an indication of the most probable selling price. We believe that these approaches are commonly used and appropriate methodologies for valuing broadcast radio stations. Factors contributing to the determination of the reporting unit’s operating performance were historical performance and/or our estimates of future performance.

 

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Assumptions and Results - Goodwill

The following table reflects certain key estimates and assumptions used in the interim impairment test conducted in the fourth quarter of 2018 and the annual impairment test conducted in the second quarter of 2018 as compared to the second quarter of 2017, the date of the most recent prior annual impairment test:

 

    

Estimates And Assumptions

     Fourth    Second    Second
     Quarter    Quarter    Quarter
    

2018

  

2018

  

2017

Discount rate

   9.00%    9.00%    9.25%

Market multiple used in the market valuation approach

   not applicable    not applicable    7.5x to 8.0x

We believe we have made reasonable estimates and assumptions to calculate the fair value of our goodwill; however, these estimates and assumptions could be materially different from actual results.

During the second quarter of the current year, our quantitative assessment indicated that the fair value of goodwill exceeded the carrying amount of goodwill allocated to the Company. Accordingly, we did not recognize an impairment charge during the second quarter of 2018.

All of our goodwill, with the exception of the goodwill acquired in the Jerry Lee Transaction during the third quarter of the current year, was subject to the annual impairment test conducted in the second quarter of the current year. For the station acquired in the Jerry Lee Transaction, similar valuation techniques that were used in the annual impairment testing process were applied to the valuation of the goodwill under purchase price accounting. The valuation of the acquired goodwill approximates fair value.

If actual market conditions are less favorable than those projected by the industry or us, or if events occur or circumstances change that would reduce the fair value of our goodwill below the amount reflected in the balance sheet, we may be required to conduct an interim test and possibly recognize impairment charges, which could be material, in future periods.    

Goodwill Valuation At Risk

The second quarter 2018 impairment test of our goodwill indicated that the fair value exceeded the carrying value. After the interim impairment test conducted on our goodwill in the fourth quarter of 2018, the results indicated that the carrying value of goodwill exceeded the fair value. As a result of the $317.1 million goodwill impairment ($314.4 million, net of tax) booked in the fourth quarter of 2018, the percentage by which fair value of our goodwill exceeds carrying value is 0%.

Future impairment charges may be required on our goodwill, as the discounted cash flow model is subject to change based upon our performance, our stock price, peer company performance and their stock prices, overall market conditions, and the state of the credit markets. We continue to monitor these relevant factors to determine if an interim impairment assessment is warranted. If there is a continued and sustained decline in the share price of our common stock, we may need to conduct an interim impairment test, which could result in an impairment charge in future periods.

 

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Sensitivity of Key Broadcasting Licenses and Goodwill Assumptions

If we were to assume a 100 basis point change in certain of our key assumptions (a reduction in the long-term revenue growth rate, a reduction in the operating performance cash flow margin and an increase in the weighted average cost of capital) used to determine the fair value of our broadcasting licenses and goodwill using the income approach during the fourth quarter of 2018, the following would be the incremental impact:

 

Sensitivity Analysis (1)

 
     Results of             Results of  
     Long-Term      Results of      Weighted  
     Revenue      Operating      Average  
     Growth      Profit      Cost of  
     Rate      Margin      Capital  
     Decrease      Decrease      Increase  
     (amounts in thousands)  

Broadcasting Licenses

        

Incremental broadcasting licenses impairment

   $ 287,284      $ 206,186      $ 384,763  
  

 

 

    

 

 

    

 

 

 

Goodwill (2)

        

Incremental goodwill impairment

   $ 227,374        not applicable      $ 303,096  
  

 

 

    

 

 

    

 

 

 

 

(1) 

Each assumption used in the sensitivity analysis is independent of the other assumptions.

(2) 

The sensitivity goodwill analysis is computed using data from testing goodwill using the income approach under step 1. The goodwill valuation is based on discrete projections of revenue and expenses. As such, the operating performance cash flow margin is a derived result rather than an input. Accordingly, computation of a change in this figure is not applicable.

To determine the radio broadcasting industry’s future revenue growth rate, management uses publicly available information on industry expectations rather than management’s own estimates, which could be different. In addition, these long-term market growth rate estimates could vary in each of our markets. Using the publicly available information on industry expectations, each market’s revenues were forecasted over a ten-year projection period to reflect the expected long-term growth rate for the radio broadcast industry, which was further adjusted for each of our markets. If the industry’s growth is less than forecasted, then the fair value of our broadcasting licenses could be negatively impacted.

Operating profit is defined as profit before interest, depreciation and amortization, income tax and corporate allocation charges. Operating profit is then divided by broadcast revenues, net of agency and national representative commissions, to compute the operating profit margin. For the broadcast license fair value analysis, the projections of operating profit margin that are used are based upon industry operating profit norms, which reflect market size and station type. These margin projections are not specific to the performance of our radio stations in a market, but are predicated on the expectation that a new entrant into the market could reasonably be expected to perform at a level similar to a typical competitor. For the goodwill fair value analysis, the projections of operating margin are based on our actual historical performance. If the outlook for the radio industry’s growth declines, then operating profit margins in both the broadcasting license and goodwill fair value analyses would be negatively impacted, which would decrease the value of those assets.

The discount rate to be used by a typical market participant reflects the risk inherent in future cash flows for the broadcast industry. The same discount rate was used for each of our markets. The discount rate is calculated by weighting the required returns on interest-bearing indebtedness and common equity capital in proportion to their estimated percentages in an expected capital structure. The capital structure was estimated based upon data available for publicly traded companies in the broadcast industry.

See Note 6, Intangible Assets and Goodwill, in the accompanying notes to our audited consolidated financial statements, for a discussion of intangible assets and goodwill.

For a more comprehensive list of our accounting policies, see Note 2, Significant Accounting Policies, accompanying the consolidated financial statements included within this annual report. Note 2 to our audited consolidated financial statements contains several other policies, including policies governing the timing of revenue and expense recognition, that are important to the preparation of our consolidated financial statements, but do not meet the SEC’s definition of critical accounting policies because they do not involve subjective or complex judgments. In addition, for further discussion of new accounting policies that were effective for us on January 1, 2018, see the new accounting standards under Note 2, Significant Accounting Policies, to the accompanying notes to our audited consolidated financial statements.

 

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ITEM 7A.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to market risk from changes in interest rates on our variable rate senior indebtedness (the Term B-1 Loan and Revolver).

If the borrowing rates under LIBOR were to increase 1% above the current rates as of December 31, 2018, our interest expense on: (i) our Term B-1 Loan would increase $12.9 million on an annual basis; and (ii) our Revolver would increase by $2.5 million, assuming our entire Revolver was outstanding as of December 31, 2018. From time to time, we may seek to limit our exposure to interest rate volatility through the use of interest rate hedging instruments.

Assuming LIBOR remains flat, interest expense in 2019 versus 2018 is expected to be lower as we anticipate reducing our outstanding debt upon which interest is computed. We may seek from time to time to amend our Credit Facility or obtain additional funding, which may result in higher interest rates on our indebtedness and could increase our exposure to variable rate indebtedness.

As of December 31, 2018, there were no interest rate hedging transactions outstanding.

Our credit exposure under hedging agreements similar to the agreements that we have entered into in the past, or similar agreements that we may enter into in the future, is the cost of replacing such agreements in the event of nonperformance by our counterparty. To minimize this risk, we select high credit quality counterparties. We do not anticipate nonperformance by such counterparties who we may enter into agreements with in the future, but we could recognize a loss in the event of nonperformance.

From time to time, we may invest all or a portion of our cash in cash equivalents, which are money market instruments consisting of short-term government securities and repurchase agreements that are fully collateralized by government securities. As of December 31, 2018, we have investments in money market instruments of approximately $69.4 million, which are reflected on our balance sheet as restricted cash. We deposited proceeds from the sale of a parcel of land in Chicago, Illinois and proceeds from the sale of land and buildings in Los Angeles, California into accounts of a QI. We deposited the proceeds into an account of a QI to comply with requirements under Section 1031 of the Code to execute a like-kind exchange. This process will allow us to effectively minimize our tax liability in connection with the gains recognized on these asset sales. The cash proceeds in the accounts of the QIs are invested in money market accounts. We do not believe that we have any material credit exposure with respect to these assets.

Our credit exposure related to our accounts receivable does not represent a significant concentration of credit risk due to the quantity of advertisers, the minimal reliance on any one advertiser, the multiple markets in which we operate and the wide variety of advertising business sectors.

See also additional disclosures regarding liquidity and capital resources made under Part II, Item 7, above.

 

ITEM 8.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Our consolidated financial statements, together with related notes and the report of PricewaterhouseCoopers LLP, our independent registered public accounting firm, are set forth on the pages indicated in Part IV, Item 15.

 

ITEM 9.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

 

ITEM 9A.

CONTROLS AND PROCEDURES

Evaluation of Controls and Procedures

We maintain “disclosure controls and procedures” (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act that are designed to ensure that: (i) information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms; and (ii) such information is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In

 

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designing and evaluating our disclosure controls and procedures, our 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 our management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

Changes in Internal Control over Financial Reporting

On November 17, 2017, we completed the Merger with CBS Radio as described elsewhere in this report. The completion of this Merger had a material impact on our financial position, results of operations and cash flows from the date of acquisition through December 31, 2018. The Merger also resulted in significant changes to our internal control environment over financial reporting.

During our most recent fiscal quarter ended December 31, 2018, we completed the process of integrating CBS Radio’s systems of internal control over financial reporting into our internal control over financial reporting structure. We included these newly incorporated controls in our evaluation of internal control over financial reporting and related disclosure controls and procedures.

Other than incorporating CBS Radio as mentioned above, there has been no change in the Company’s internal controls over financial reporting during the Company’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal controls over financial reporting.

Management’s Report on Internal Control over Financial Reporting

Internal control over financial reporting refers to the process designed by, or under the supervision of, our Chief Executive Officer and Chief Financial Officer, and effected by our Board, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles, and includes those policies and procedures that:

 

   

pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company;

 

   

provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and

 

   

provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the consolidated financial statements.

Management has used the criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission to evaluate the effectiveness of the Company’s internal control over financial reporting. Based on this evaluation, management has concluded that the Company’s internal control over financial reporting was effective as of December 31, 2018. The effectiveness of the Company’s internal control over financial reporting as of December 31, 2018 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which appears under Item 15.

Inherent Limitations on Effectiveness of Controls

Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of its inherent limitations. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Internal control over financial reporting also can be circumvented by collusion or improper management override. Because of such limitations, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. However, these inherent limitations are known features of the financial reporting process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk. Management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company.

 

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David J. Field, Chairman, Chief Executive Officer and President

Richard J. Schmaeling, Executive Vice President & Chief Financial Officer

 

ITEM 9B.

OTHER INFORMATION

 

  None.

 

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PART III

 

ITEM 10.

DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The information required by this Item 10 is incorporated in this report by reference to the applicable information set forth in our proxy statement for the 2019 Annual Meeting of Shareholders, which we expect to file with the SEC prior to 120 days after the end of the fiscal year.

 

ITEM 11.

EXECUTIVE COMPENSATION

The information required by this Item 11 is incorporated in this report by reference to the applicable information set forth in our proxy statement for the 2019 Annual Meeting of Shareholders, which we expect to file with the SEC prior to 120 days after the end of the fiscal year.

 

ITEM 12.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED SHAREHOLDER MATTERS

The information required by this Item 12 is incorporated in this report by reference to the applicable information set forth in our proxy statement for the 2019 Annual Meeting of Shareholders, which we expect to file with the SEC prior to 120 days after the end of the fiscal year.

 

ITEM 13.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE

The information required by this Item 13 is incorporated in this report by reference to the applicable information set forth in our proxy statement for the 2019 Annual Meeting of Shareholders, which we expect to file with the SEC prior to 120 days after the end of the fiscal year.

 

ITEM 14.

PRINCIPAL ACCOUNTING FEES AND SERVICES

The information required by this Item 14 is incorporated in this report by reference to the applicable information set forth in our proxy statement for the 2019 Annual Meeting of Shareholders, which we expect to file with the SEC prior to 120 days after the end of the fiscal year.

 

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PART IV

 

ITEM 15.

EXHIBITS, FINANCIAL STATEMENT SCHEDULES

(a)    The following documents are filed as part of this Report:

 

Document

   Page  

Consolidated Financial Statements

  

Report of Independent Registered Public Accounting Firm

     59  

Consolidated Financial Statements

  

Balance Sheets as of December 31, 2018 and December 31, 2017

     61  

Statements of Operations for the Years Ended December  31, 2018, 2017 and 2016

     62  

Statements of Shareholders’ Equity for the Years Ended December  31, 2018, 2017 and 2016

     63  

Statements of Cash Flows for the Years Ended December  31, 2018, 2017 and 2016

     64  

Notes to Consolidated Financial Statements

     66  

Index to Exhibits

     131  

Form 10-K Summary Page

     133  

 

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Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders of Entercom Communications Corp.:

Opinions on the Financial Statements and Internal Control over Financial Reporting

We have audited the accompanying consolidated balance sheets of Entercom Communications Corp. and its subsidiaries (the “Company”) as of December 31, 2018 and 2017, and the related consolidated statements of operations, shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2018, including the related notes (collectively referred to as the “consolidated financial statements”). We also have audited the Company’s internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2018 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.

Change in Accounting Principles

As discussed in Note 2 to the consolidated financial statements, the Company changed the manner in which it accounts for revenue from contracts with customers in 2018 and the manner in which it accounts for stock-based compensation in 2017.

Basis for Opinions

The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.

Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

Definition and Limitations of Internal Control over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail,

 

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accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ PricewaterhouseCoopers LLP

Philadelphia, Pennsylvania

February 27, 2019

We have served as the Company’s auditor since 2002.

 

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CONSOLIDATED FINANCIAL STATEMENTS OF ENTERCOM COMMUNICATIONS CORP.

ENTERCOM COMMUNICATIONS CORP.

CONSOLIDATED BALANCE SHEETS

(amounts in thousands, except share data)

 

     DECEMBER 31,     DECEMBER 31,  
     2018     2017  

ASSETS:

    

Cash

   $ 122,893     $ 34,167  

Restricted cash

     69,365       —    

Accounts receivable, net of allowance for doubtful accounts

     342,766       341,989  

Prepaid expenses, deposits and other

     25,205       24,347  
  

 

 

   

 

 

 

Total current assets

     560,229       400,503  

Investments

     11,205       9,955  

Net property and equipment

     317,030       346,507  

Radio broadcasting licenses

     2,516,625       2,649,959  

Goodwill

     539,469       862,000  

Assets held for sale

     19,603       212,320  

Other assets, net of accumulated amortization

     56,197       57,957  
  

 

 

   

 

 

 

TOTAL ASSETS

   $ 4,020,358     $ 4,539,201  
  

 

 

   

 

 

 

LIABILITIES:

    

Accounts payable

   $ 1,858     $ 598  

Accrued expenses

     58,449       76,565  

Other current liabilities

     118,438       107,561  

Long-term debt, current portion

     —         13,319  
  

 

 

   

 

 

 

Total current liabilities

     178,745       198,043  
  

 

 

   

 

 

 

Long-term debt, net of current portion

     1,872,203       1,859,442  

Deferred tax liabilities

     545,982       609,789  

Other long-term liabilities

     89,168       107,567  
  

 

 

   

 

 

 

Total long-term liabilities

     2,507,353       2,576,798  
  

 

 

   

 

 

 

Total liabilities

     2,686,098       2,774,841  
  

 

 

   

 

 

 

CONTINGENCIES AND COMMITMENTS

    

SHAREHOLDERS’ EQUITY:

    

Class A common stock $0.01 par value; voting; authorized 200,000,000 shares; issued and outstanding 137,180,213 in 2018 and 139,675,781 in 2017

     1,372       1,397  

Class B common stock $0.01 par value; voting; authorized 75,000,000 shares; issued and outstanding 4,045,199 in 2018 and 2017

     40       40  

Class C common stock $0.01 par value; nonvoting; authorized 50,000,000 shares; no shares issued and outstanding

     —         —    

Additional paid-in capital

     1,693,512       1,737,132  

Retained earnings (accumulated deficit)

     (360,664     25,791  
  

 

 

   

 

 

 

Total shareholders’ equity

     1,334,260       1,764,360  
  

 

 

   

 

 

 

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

   $ 4,020,358     $ 4,539,201  
  

 

 

   

 

 

 

See notes to consolidated financial statements.

 

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ENTERCOM COMMUNICATIONS CORP.

CONSOLIDATED STATEMENTS OF OPERATIONS

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

 

     YEARS ENDED DECEMBER 31,  
     2018     2017     2016  

NET REVENUES

   $ 1,462,567     $ 592,884     $ 464,771  
  

 

 

   

 

 

   

 

 

 

OPERATING EXPENSE:

      

Station operating expenses

     1,099,278       443,512       323,270  

Depreciation and amortization expense

     44,288       15,546       9,793  

Corporate general and administrative expenses

     69,492       47,859       33,328  

Integration costs

     25,372       —         —    

Restructuring charges

     5,830       16,922       —    

Impairment loss

     493,988       952       254  

Merger and acquisition costs

     3,014       41,313       708  

Other expenses related to financing

     —         2,213       565  

Net time brokerage agreement (income) fees

     (918     130       417  

Net (gain) loss on sale or disposal of assets

     (12,158     11,853       (1,621
  

 

 

   

 

 

   

 

 

 

Total operating expense

     1,728,186       580,300       366,714  
  

 

 

   

 

 

   

 

 

 

OPERATING INCOME (LOSS)

     (265,619     12,584       98,057  
  

 

 

   

 

 

   

 

 

 

NET INTEREST EXPENSE

     101,121       32,521       36,639  
  

 

 

   

 

 

   

 

 

 

Net (gain) loss on extinguishment of debt

     —         4,135       10,858  

Net recovery of a claim

     —         —         (2,299
  

 

 

   

 

 

   

 

 

 

OTHER (INCOME) EXPENSE

     —         4,135       8,559  
  

 

 

   

 

 

   

 

 

 

INCOME (LOSS) BEFORE INCOME TAXES (BENEFIT)

     (366,740     (24,072     52,859  

INCOME TAXES (BENEFIT)

     (4,153     (257,085     14,794  
  

 

 

   

 

 

   

 

 

 

NET INCOME (LOSS) AVAILABLE TO THE COMPANY - CONTINUING OPERATIONS

     (362,587     233,013       38,065  

Preferred stock dividend

     —         (2,015     (1,901
  

 

 

   

 

 

   

 

 

 

NET INCOME (LOSS) AVAILABLE TO COMMON SHAREHOLDERS - CONTINUING OPERATIONS

     (362,587     230,998       36,164  

Income from discontinued operations, net of income taxes (benefit)

     1,152       836       —    
  

 

 

   

 

 

   

 

 

 

NET INCOME (LOSS) AVAILABLE TO COMMON SHAREHOLDERS

   $ (361,435   $ 231,834     $ 36,164  
  

 

 

   

 

 

   

 

 

 

NET INCOME (LOSS) AVAILABLE TO COMMON SHAREHOLDERS PER SHARE - BASIC AND DILUTED

      

Net income (loss) from continuing operations per share available to common shareholders - Basic and Diluted

   $ (2.63   $ 4.49     $ 0.94  
  

 

 

   

 

 

   

 

 

 

Net income (loss) from discontinued operations per share available to common shareholders - Basic and Diluted

   $ 0.01     $ 0.02     $ —    
  

 

 

   

 

 

   

 

 

 

NET INCOME (LOSS) AVAILABLE TO COMMON SHAREHOLDERS PER SHARE - BASIC AND DILUTED

   $ (2.62   $ 4.51     $ 0.94  
  

 

 

   

 

 

   

 

 

 

NET INCOME (LOSS) AVAILABLE TO COMMON SHAREHOLDERS PER SHARE - DILUTED

      

Net income (loss) from continuing operations per share available to common shareholders - Diluted

   $ (2.63   $ 4.37     $ 0.91  
  

 

 

   

 

 

   

 

 

 

Net income (loss) from discontinued operations per share available to common shareholders - Diluted

   $ 0.01     $ 0.02     $ —    
  

 

 

   

 

 

   

 

 

 

NET INCOME (LOSS) AVAILABLE TO COMMON SHAREHOLDERS PER SHARE - DILUTED

   $ (2.62   $ 4.38     $ 0.91  
  

 

 

   

 

 

   

 

 

 

WEIGHTED AVERAGE SHARES:

      

Basic

     138,069,608       51,392,899       38,500,495  
  

 

 

   

 

 

   

 

 

 

Diluted

     138,069,608       52,885,156       39,568,062  
  

 

 

   

 

 

   

 

 

 

See notes to consolidated financial statements.

 

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ENTERCOM COMMUNICATIONS CORP.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016

(amounts in thousands, except share data)

 

                                  Retained        
    Common Stock     Additional     Earnings        
    Class A     Class B     Paid-in     (Accumulated        
    Shares     Amount     Shares     Amount     Capital     Deficit)     Total  

Balance, December 31, 2015

    32,480,551     $ 325       7,197,532     $ 72     $ 611,754     $ (250,701   $ 361,450  

Net income (loss) available to the Company

    —         —         —         —         —         38,065       38,065  

Compensation expense related to granting of stock awards

    1,095,759       11       —         —         6,528       —         6,539  

Issuance of common stock related to the Employee Stock Purchase Plan (“ESPP”)

    31,933       —         —         —         379       —         379  

Exercise of stock options

    134,238       1       —         —         264       —         265  

Purchase of vested employee restricted stock units

    (232,297     (2     —         —         (2,266     —         (2,268

Payment of dividends on common stock

    —         —         —         —         (8,666     —         (8,666

Payment of dividends on preferred stock

    —         —         —         —         (1,788     —         (1,788

Dividend equivalents, net of forfeitures

    —         —         —         —         (602     —         (602
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, December 31, 2016

    33,510,184       335       7,197,532       72       605,603       (212,636     393,374  

Net income (loss) available to the Company

    —         —         —         —         —         233,849       233,849  

Conversion of Class B common stock to Class A common stock in the Merger

    3,152,333       32       (3,152,333     (32     —         —         —    

Issuance of Class A common stock in the Merger

    101,407,494       1,014       —         —         1,160,102       —         1,161,116  

Equity awards assumed in the Merger

    618,325       6       —         —         6,771       —         6,777  

Stock options assumed in the Merger

    —         —         —         —         1,007       —         1,007  

Compensation expense related to granting of stock awards

    2,066,241       21       —         —         9,546       —         9,567  

Issuance of common stock related to the Employee Stock Purchase Plan (“ESPP”)

    14,833       —         —         —         182       —         182  

Exercise of stock options

    8,250       —         —         —         42       —         42  

Common stock repurchase

    (932,600     (9     —         —         (10,666     —         (10,675

Purchase of vested employee restricted stock units

    (169,279     (2     —         —         (2,563     —         (2,565

Payment of dividends on common stock

    —         —         —         —         (29,296     —         (29,296

Dividend equivalents, net of forfeitures

    —         —         —         —         (1,556     —         (1,556

Payment of dividends on preferred stock

    —         —         —         —         (2,574     —         (2,574

Modified retrospective application of stock-based compensation guidance

    —         —         —         —         534       4,578       5,112  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, December 31, 2017

    139,675,781       1,397       4,045,199       40       1,737,132       25,791       1,764,360  

Net income (loss) available to the Company

    —         —         —         —         —         (361,435     (361,435

Compensation expense related to granting of stock awards

    895,834       9       —         —         15,140       —         15,149  

Issuance of common stock related to the Employee Stock Purchase Plan (“ESPP”)

    228,227       2       —         —         1,426       —         1,428  

Exercise of stock options

    113,137       1       —         —         152       —         153  

Common stock repurchase

    (3,226,300     (32     —         —         (29,375     —         (29,407

Purchase of vested employee restricted stock units

    (506,466     (5     —         —         (5,181     —         (5,186

Payment of dividends on common stock

    —         —         —         —         (25,782     (24,861     (50,643

Dividend equivalents, net of forfeitures

    —         —         —         —         —         (159     (159
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, December 31, 2018

    137,180,213     $ 1,372       4,045,199     $ 40     $ 1,693,512     $ (360,664   $ 1,334,260  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See notes to consolidated financial statements.

 

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ENTERCOM COMMUNICATIONS CORP.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(amounts in thousands)

 

     YEARS ENDED DECEMBER 31,  
     2018     2017     2016  

OPERATING ACTIVITIES:

      

Net income (loss) available to the Company

   $ (361,435   $   233,849     $       38,065  

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:

      

Depreciation and amortization

     44,288       15,546       9,793  

Net amortization of deferred financing costs (net of original issue discount and debt premium)

     327       1,371       2,897  

Net deferred taxes (benefit) and other

     (61,798     (263,551     14,688  

Provision for bad debts

     8,909       3,715       1,330  

Net (gain) loss on sale or disposal of assets

     (12,158     11,853       (1,621

Non-cash stock-based compensation expense

     15,149       9,567       6,539  

Deferred rent

     5,345       324       138  

Net loss on extinguishment of debt

     —         4,135       10,858  

Deferred compensation

     (1,357     4,247       1,683  

Impairment loss

     493,988       952       254  

Accretion expense (income), net of asset retirement obligation adjustments

     60       37       27  

Changes in assets and liabilities (net of effects of acquisitions, dispositions, consolidation, and deconsolidation of Variable Interest Entities (VIEs)):

      

Accounts receivable

     1,777       (14,127     (4,202

Prepaid expenses, deposits and other

     1,431       14,267       (1,368

Accounts payable, accrued expenses and other current liabilities

     1,217       8,370       (739

Accrued interest expense

     (6,278     4,169       40  

Accrued liabilities - long-term

     (27,216     (2,738     (1,894

Prepaid expenses - long-term

     —         (2,874     (4,458
  

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) operating activities

     102,249       29,112       72,030  
  

 

 

   

 

 

   

 

 

 

INVESTING ACTIVITIES:

      

Additions to property and equipment

     (29,837     (20,530     (7,336

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

     185,761       60,505       7,974  

Purchases of radio station assets

     (71,434     (24,000     (92

Additions to amortizable intangible assets

     (11,949     (663     (241

Purchases of investments

     (1,250     (9,700     —    

Proceeds from sale of property reflected as restricted cash

     70,187       —         —    

(Deconsolidation) consolidation of a VIE

     —         (302     302  

Additions to non-amortizable intangible assets

     —         —         (112

Proceeds from disposition of radio stations

     —         12,000       —    
  

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) investing activities

     141,478       17,310       495  
  

 

 

   

 

 

   

 

 

 

 

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ENTERCOM COMMUNICATIONS CORP.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(amounts in thousands)

 

     YEARS ENDED DECEMBER 31,  
     2018     2017     2016  

FINANCING ACTIVITIES:

      

Proceeds from issuance of long-term debt

     —         500,000       480,000  

Borrowing under the revolving senior debt

        80,000       200,500       24,500  

Proceeds from capital lease obligations and other

     —         —         102  

Payments of long-term debt

     (81,348     (669,750     (293,266

Payment of call premium and other fees

     —         —         (5,977

Retirement of senior subordinated notes

     —         —         (220,000

Payment for debt issuance costs

     —         (16,302     (8,038

Proceeds from issuance of employee stock plan

     1,428       182       379  

Retirement of perpetual cumulative convertible preferred stock

     —         (27,737     —    

Proceeds from the exercise of stock options

     153       42       265  

Purchase of vested employee restricted stock units

     (5,186     (2,565     (2,268

Payment of dividends on common stock

     (49,770     (29,296     (8,666

Payment of dividend equivalents on vested restricted stock units

     (873     (1,556     (94

Repurchase of common stock

     (30,040     (10,042     —    

Payment of dividends on preferred stock

     —         (2,574     (1,788
  

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     (85,636     (59,098     (34,851
  

 

 

   

 

 

   

 

 

 

NET INCREASE (DECREASE) IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH

     158,091       (12,676     37,674  

CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR

     34,167       46,843       9,169  
  

 

 

   

 

 

   

 

 

 

CASH, CASH EQUIVALENTS AND RESTRICTED CASH, END OF YEAR

   $ 192,258     $ 34,167     $ 46,843  
  

 

 

   

 

 

   

 

 

 

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

      

Cash paid during the period for:

      

Interest

   $ 96,843     $ 24,813     $ 34,568  
  

 

 

   

 

 

   

 

 

 

Income taxes

   $ 54,217     $ 2,030     $ 381  
  

 

 

   

 

 

   

 

 

 

Dividends on common stock

   $ 49,770     $ 29,296     $ 8,666  
  

 

 

   

 

 

   

 

 

 

Dividends on preferred stock

   $ —       $ 2,574     $ 1,788  
  

 

 

   

 

 

   

 

 

 

See notes to consolidated financial statements.

 

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ENTERCOM COMMUNICATIONS CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016

1.     BASIS OF PRESENTATION AND SIGNIFICANT POLICIES

Nature of Business – Entercom Communications Corp. (the “Company”) is the second-largest radio broadcasting company in the United States. The Company is also a leading local media and entertainment company with a nationwide footprint of stations including positions in all of the top 16 markets and 22 of the top 25 markets.

On February 2, 2017, the Company and its wholly-owned subsidiary (“Merger Sub”), entered into an Agreement and Plan of Merger (the “CBS Radio Merger Agreement”) with CBS Corporation (“CBS”) and its wholly-owned subsidiary CBS Radio Inc. (“CBS Radio”). Pursuant to the CBS Merger Agreement, Merger Sub merged with and into CBS Radio with CBS Radio surviving as the Company’s wholly-owned subsidiary (the “Merger”). On November 13, 2018, the Company changed the name of CBS Radio Inc. to Entercom Media Corp. The parties to the Merger believe that the Merger was tax-free to CBS and its shareholders. The Merger was effected through a stock for stock Reverse Morris Trust transaction.

The Merger was subject to approval by the Company’s shareholders and customary regulatory approvals. As a result of the Merger, the Company would have owned radio stations in seven markets in excess of the limits set forth in the Federal Communications Commission’s (the “FCC”) local radio ownership rule. In order to comply with this FCC rule, and to obtain clearance for the Merger from the Antitrust Division of the U.S. Department of Justice (“DOJ”), the Company agreed to divest a total of nineteen stations in such markets, consisting of eight stations owned by the Company and eleven stations owned by CBS Radio. Refer to additional information on divestitures in Note 3, Business Combinations.

On November 1, 2017, the Company entered into a settlement with the DOJ. On November 9, 2017, the FCC released an order, pursuant to the Communications Act of 1934, as amended, and the rules and regulations promulgated thereunder, approving the applications filed by CBS Radio and the Company requesting FCC consent to the CBS Radio Merger Agreement. Obtaining the FCC Consent, and its effectiveness in accordance with applicable law and the rules and regulations of the FCC, was a condition to the obligation of CBS, CBS Radio, the Company, and Merger Sub to the consummation of the Merger. On November 15, 2017, the Company’s shareholders voted to approve the Merger.

Upon obtaining all required approvals, the Merger closed on November 17, 2017. The results of CBS Radio have been included in the Company’s consolidated financial statements since the date of acquisition. Refer to Note 3, Business Combinations, for additional information.

The Company’s strategy focuses on providing compelling content in the communities it serves to enable the Company to offer its advertisers an effective marketing platform to reach a large targeted local audience. The principal components of the Company’s strategy are to: (i) focus on creating effective integrated marketing solutions for its customers that incorporate its audio, digital and experiential assets; (ii) build strongly-branded radio stations with highly compelling content; (iii) develop market leading station clusters; and (iv) recruit, develop, motivate and retain superior employees.

Changes in Operating Segment

Following the Company’s Merger with CBS Radio in November 2017, the Company’s radio broadcasting operations increased from 28 radio markets to 48 markets. In connection with the Merger, management further considered its operating segment and reportable segment conclusions.

Management considered factors including, but not limited to: (i) the favorable impact of the significant synergies generated through more centralized operating activities; and (ii) how the value of the portfolio of radio markets is greater than the sum of the value of the individual radio markets in that portfolio. These factors impacted how the Chief Operating Decision Maker (“CODM”) evaluates the results of a significantly larger company and how operating decisions are made, which are now performed at the Company level.

This approach is consistent with how operating and capital investment decisions are made as needed, at the Company level, irrespective of any given market’s size or location. Furthermore, technological enhancements and systems integration decisions are reached at the Company level and applied to all markets rather than to specific or

 

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individual markets to ensure that each market has the same tools and opportunities as every other market. Management also considered its organizational structure in assessing its operating segments and reportable segments. Managers at the market level are often responsible for the operational oversight of multiple markets, the assignment of which is neither dependent upon geographical region nor size. Managers at the market level do not report to the CODM and instead report to other senior management, who are responsible for the operational oversight of all 48 radio markets and for communication of results to the CODM.

After consideration of the above, the Company changed its operating segment conclusions during the second quarter of 2018. The Company now has one operating segment and continues to have one reportable segment.

Changes in Accounting Policies – Revenue Recognition

The Company adopted the amended accounting guidance for revenue recognition on January 1, 2018 using the modified retrospective transition method, without a need to make a cumulative-effect adjustment to retained earnings as of the effective date. As a result, the Company has changed its accounting policy for revenue recognition as described below. Except for the changes below, the Company has consistently applied its accounting policies to all periods presented in these consolidated financial statements. Refer to Note 4, Revenue, for additional information.

Under certain practical expedients elected, the Company did not disclose the amount of consideration allocated to the remaining performance obligations or an explanation of when the Company expects to recognize that amount as revenue for all reporting periods presented before January 1, 2018.

Results for reporting periods beginning after January 1, 2018 are presented under the amended accounting guidance, while prior period amounts are not adjusted and continue to be reported in accordance with the Company’s historical accounting guidance. Based upon the Company’s assessment, the impact of this guidance is not material to the Company’s financial position, results of operations or cash flows through December 31, 2018.

The Company recognizes revenue when it satisfies a performance obligation by transferring control over a product or service to a customer, in an amount that reflects the consideration it expects to be entitled to in exchange for those products or services.

Revenues presented in the consolidated financial statements are reflected on a net basis, after the deduction of advertising agency fees by the advertising agencies. The Company also evaluates when it is appropriate to recognize revenue based on the gross amount invoiced to the customer or the net amount retained by the Company if a third party is involved.

Reclassifications

Certain reclassifications have been made to the prior years’ statements of cash flow and notes to the consolidated financial statements to conform to the presentation in the current year, which did not have a material impact on the Company’s previously reported financial statements.

2.    SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation – The accompanying consolidated financial statements include the accounts of the Company and its subsidiaries, all of which are 100% owned by the Company. All intercompany transactions and balances have been eliminated in consolidation. The Company also considers the applicability of any variable interest entities (“VIEs”) that are required to be consolidated by the primary beneficiary. From time to time, the Company may enter into a time brokerage agreement (“TBA”) or local marketing agreement (“LMA”) in connection with a pending acquisition or disposition of radio stations and the requirement to consolidate or deconsolidate a VIE or separately present activity as discontinued operations may apply, depending on the facts and circumstances related to each transaction.

As of December 31, 2018, there was one VIE that required consolidation in these consolidated financial statements. During 2018, the Company entered into an agreement with a third party qualified intermediary (“QI”), under which the Company is primarily responsible for the oversight and completion of certain construction projects. This agreement relates to the creation of leasehold improvement assets on property that has already been made available for tenant use. The Company also believes it is the primary beneficiary of the VIE as the Company has the power to direct the activities that are most significant to the VIE and the Company has the obligation to absorb losses or the right to receive returns that would be significant to the VIE during the period of the agreement.

 

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Total results of operations of the VIE for the year ended December 31, 2018 were not significant. The consolidated VIE has a material amount of cash as of December 31, 2018, which was reflected as restricted cash on the consolidated balance sheet. As restricted cash balances of the QI are used to pay for project costs, restricted cash balances are released and leasehold improvements are established. The VIE has no other assets or liabilities aside from the restricted cash balances and capitalized leasehold improvements as of December 31, 2018. The assets of the Company’s consolidated VIE can only be used to settle the obligations of the VIE. There is a lack of recourse by the creditors of the VIE against the Company’s general creditors.

As of December 31, 2017, there were no outstanding VIEs. As of December 31, 2016, there was one VIE requiring consolidation in these financial statements. Refer to Note 20, Contingencies And Commitments, for further discussion of VIEs requiring consolidation. See Note 19, Assets Held For Sale And Discontinued Operations, for further discussion on discontinued operations.

Reportable SegmentThe Company operates under one reportable business segment, radio broadcasting, for which segment disclosure is consistent with the management decision-making process that determines the allocation of resources and the measuring of performance. As discussed above, the Company has one operating segment.

Managements Use of Estimates – The preparation of consolidated financial statements, in conformity with accounting principles generally accepted in the United States of America, requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities, and the disclosure of contingent assets and liabilities, as of the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. Significant estimates and assumptions are used for, but not limited to: (i) asset impairments, including broadcasting licenses and goodwill; (ii) income tax valuation allowances for deferred tax assets; (iii) allowance for doubtful accounts and allowance for sales reserves; (iv) self-insurance reserves; (v) fair value of equity awards; (vi) estimated lives for tangible and intangible assets; (vii) contingency and litigation reserves; (viii) fair value measurements; (ix) acquisition purchase price asset and liability allocations; and (x) uncertain tax positions. The Company’s accounting estimates require the use of judgment as future events and the effect of these events cannot be predicted with certainty. The accounting estimates may change as new events occur, as more experience is acquired and as more information is obtained. The Company evaluates and updates assumptions and estimates on an ongoing basis and may use outside experts to assist in the Company’s evaluation, as considered necessary. Actual results could differ from those estimates.

Income Taxes – The Company applies the asset and liability method to the accounting for deferred income taxes. Deferred income taxes are recognized for all temporary differences between the tax and financial reporting bases of the Company’s assets and liabilities based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. A valuation allowance is recorded for a net deferred tax asset balance when it is more likely than not that the benefits of the tax asset will not be realized. The Company reviews on a continuing basis the need for a deferred tax asset valuation allowance in the jurisdictions in which it operates. Any adjustment to the deferred tax asset valuation allowance is recorded in the consolidated statements of operations in the period that such an adjustment is required.

The Company applies the guidance for income taxes and intra-period allocation to the recognition of uncertain tax positions. This guidance clarifies the recognition, de-recognition and measurement in financial statements of income tax positions taken in previously filed tax returns or tax positions expected to be taken in tax returns, including a decision whether to file or not to file in a particular jurisdiction. The guidance requires that any liability created for unrecognized tax benefits is disclosed. The application of this guidance may also affect the tax bases of assets and liabilities and therefore may change or create deferred tax liabilities or assets. This guidance also clarifies the method to allocate income taxes (benefit) to the different components of income (loss), such as: (i) income (loss) from continuing operations; (ii) income (loss) from discontinued operations; (iii) other comprehensive income (loss); (iv) the cumulative effects of accounting changes; and (v) other charges or credits recorded directly to shareholders’ equity. See Note 15, Income Taxes, for a further discussion of income taxes.

Property and Equipment Property and equipment are carried at cost. Major additions or improvements are capitalized, including interest expense when material, while repairs and maintenance are charged to expense when incurred. Upon sale or retirement, the related cost and accumulated depreciation are removed from the accounts, and any gain or loss is recognized in the statement of operations. Depreciation expense on property and equipment is determined on a straight-line basis.

 

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Depreciation expense for property and equipment, which includes amounts from the VIE in 2016, is reflected in the following table:

 

     Property And Equipment  
     Years Ended December 31,  
     2018      2017      2016  
     (amounts in thousands)  

Depreciation expense

   $ 28,709      $ 13,215      $ 8,689  
  

 

 

    

 

 

    

 

 

 

As of December 31, 2018, the Company had capital expenditure commitments outstanding of $45.9 million.

The following is a summary of the categories of property and equipment along with the range of estimated useful lives used for depreciation purposes:

 

     Depreciation Period      Property And Equipment  
     In Years      December 31,  
     From      To      2018     2017  

Land, land easements and land improvements

     —          15      $ 110,570     $ 137,160  

Buildings

     20        40        36,038       46,195  

Equipment

     3        40        222,847       199,044  

Furniture and fixtures

     5        10        18,426       23,859  

Capital leases

                     44       44  

Leasehold improvements

                     71,688       54,829  
        

 

 

   

 

 

 
           459,613       461,131  

Accumulated depreciation

           (158,341     (132,209
        

 

 

   

 

 

 
           301,272       328,922  

Capital improvements in progress

           15,758       17,585  
        

 

 

   

 

 

 

Net property and equipment

         $ 317,030     $ 346,507  
        

 

 

   

 

 

 

 

*

Shorter of economic life or lease term

Long-Lived Assets - The Company evaluates the recoverability of its long-lived assets, which include property and equipment, broadcasting licenses (subject to an eight-year renewal cycle), goodwill, deferred charges, and other assets. See Note 6, Intangible Assets And Goodwill, for further discussion. Certain of the Company’s equipment, such as broadcast towers, can provide economic benefit over a longer period of time resulting in the use of longer lives of up to 40 years.

If events or changes in circumstances were to indicate that an asset’s carrying value is not recoverable, a write-down of the asset would be recorded through a charge to operations. The determination and measurement of the fair value of long-lived assets requires the use of significant judgments and estimates. Future events may impact these judgments and estimates.

Revenue Recognition – The Company generates revenue from the sale to advertisers of various services and products, including but not limited to: (i) commercial broadcast time; (ii) digital advertising; (iii) local events; (iv) e-commerce where an advertiser’s goods and services are sold through the Company’s websites; and (v) a suite of digital products.

Revenue from services and products is recognized when delivered. Advertiser payments received in advance of when the products or services are delivered are recorded on the Company’s balance sheet as unearned revenue.

Revenues presented in the consolidated financial statements are reflected on a net basis, after the deduction of advertising agency fees by the advertising agencies. The Company also evaluates when it is appropriate to recognize revenue based on the gross amount invoiced to the customer or the net amount retained by the Company if a third party is involved.

 

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Refer to the recent accounting pronouncements section within this note for additional information on recently issued accounting guidance on revenue recognition. Refer to Note 4, Revenue, for additional information on the Company’s revenue.

The Company acquired certain contracts in the Merger, which resulted in a significant increase in the amount of unearned revenue recorded in the consolidated financial statements. Additionally, the Company may also receive customer advances and deposits. Refer to Note 4, Revenue, Note 8, Other Current Liabilities, and Note 9, Other Long-Term Liabilities, for additional information.

The following table presents the amounts of unearned revenues as of the periods indicated:

 

          Unearned Revenues  
          December 31,  
    

Balance Sheet Location

   2018      2017  
          (amounts in thousands)  

Current

   Other current liabilities    $ 22,692      $ 17,519  
     

 

 

    

 

 

 

Long-term

   Other long-term liabilities    $ 1,138      $ 13,000  
     

 

 

    

 

 

 

Concentration of Credit Risk – The Company’s revenues and accounts receivable relate primarily to the sale of advertising within its radio stations’ broadcast areas. Credit is extended based on an evaluation of the customers’ financial condition and, generally, collateral is not required. Credit losses are provided for in the financial statements and consistently have been within management’s expectations. Accounts receivable are recorded at the invoiced amount and do not bear interest. The allowance for doubtful accounts is the Company’s best estimate of the amount of probable credit losses in the Company’s existing accounts receivable. The balance in the Company’s allowance for doubtful accounts is based on the Company’s historical collections, the age of the receivables, specific customer information, and current economic conditions. Delinquent accounts are written off if collections efforts have been unsuccessful and the likelihood of recovery is considered remote.

Debt Issuance Costs and Original Issue DiscountThe costs related to the issuance of debt are capitalized and amortized over the lives of the related debt and such amortization is accounted for as interest expense. See Note 10, Long-Term Debt, for further discussion for the amount of deferred financing expense that was included in interest expense in the accompanying consolidated statements of operations.

In 2017, the Company refinanced its outstanding debt in conjunction with the Merger. In connection with this refinancing activity, a portion of the unamortized deferred financing costs associated with the Company’s former revolving credit facility and a portion of the unamortized deferred financing costs associated with the Company’s former term loan was written off and included in the statement of operations under loss on extinguishment of debt. Lender fees and third party fees incurred during the refinancing were capitalized or expensed as appropriate based on accounting guidance for debt modifications and extinguishments.

During the year ended December 31, 2016, the Company refinanced its previously outstanding debt that included retiring its $220.0 million 10.5% Senior Notes due December 1, 2019 (the “Former Senior Notes”). In connection with this refinancing, the unamortized original issue discount associated with the Former Senior Notes was written off and included in the statement of operations under loss on extinguishment of debt. Refer to Note 10, Long-Term Debt, for further discussion of the 2017 and 2016 refinancing activity.

Extinguishment of Debt –The Company may amend, append or replace, in part or in full, its outstanding debt. The Company reviews its unamortized financing costs associated with its outstanding debt to determine the amount subject to extinguishment under the accounting provisions for an exchange of debt instruments with substantially different terms or changes in a line-of-credit or revolving-debt arrangement.

On November 17, 2017 and November 1, 2016, the Company refinanced certain of its outstanding debt. In each refinancing event, a portion of the Company’s outstanding debt was accounted for as an extinguishment. See Note 10, Long-Term Debt for a discussion of the Company’s long-term debt.

 

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Corporate General and Administrative Expense – Corporate general and administrative expense consists of corporate overhead costs and non-cash compensation expense. Included in corporate general and administrative expenses are those costs not specifically allocable to any of the Company’s individual business properties.

Time Brokerage Agreement (Income) Fees – TBA fees or income consist of fees paid or received under agreements which permit an acquirer to program and market stations prior to an acquisition. The Company sometimes enters into a TBA prior to the consummation of station acquisitions and dispositions. The Company may also enter into a Joint Sales Agreement to market, but not to program, a station for a defined period of time. A portion of the Company’s TBA income earned is presented in income (loss) from discontinued operations, net of income taxes (benefit) in the Company’s consolidated statement of operations. TBA fees or income earned from continuing operations are recorded as a separate line item in the Company’s consolidated statement of operations.    

Trade and Barter Transactions – The Company provides advertising broadcast time in exchange for certain products, supplies and services. The terms of the exchanges generally permit the Company to preempt such broadcast time in favor of advertisers who purchase time on regular terms. The Company includes the value of such exchanges in both broadcasting net revenues and station operating expenses. Trade and Barter valuation is based upon management’s estimate of the fair value of the products, supplies and services received. See Note 16, Supplemental Cash Flow Disclosures On Non-Cash Activities, for a summary of the Company’s barter transactions.

Business Combinations Accounting guidance for business combinations provides the criteria to recognize intangible assets apart from goodwill. Other than goodwill, the Company uses an income or cost method to determine the fair value of all intangible assets required to be recognized for business combinations. For a discussion of impairment testing of those assets acquired in a business combination, including goodwill, see Note 6, Intangible Assets And Goodwill.

Asset Retirement Obligations The Company reasonably estimates the fair value of an asset retirement obligation. For an asset retirement obligation that is conditional (uncertainty about the timing and/or method of settlement), the Company factors into its fair value measurement a probability factor as the obligation depends upon a future event that may or may not be within the control of the Company.

The following table presents the changes in asset retirement obligations:

 

     Asset Retirement Obligations  
     December 31,  
     2018      2017  
     (amounts in thousands)  

Beginning Balance

   $ 1,714      $ 1,044  

Additions

     456        1,006  

Settlements

     (204      (525

Revision of estimate

     4        152  

Accretions

     60        37  
  

 

 

    

 

 

 

Ending Balance

   $ 2,030      $ 1,714  
  

 

 

    

 

 

 

Asset retirement obligations - short term

   $ 342      $ 457  

Asset retirement obligations - long term

     1,688        1,257  
  

 

 

    

 

 

 

Total asset retirement obligations

   $ 2,030      $ 1,714  
  

 

 

    

 

 

 

Accrued Compensation Certain types of employee compensation are paid in subsequent periods. See Note 8, Other Current Liabilities, for amounts reflected in the balance sheets.

Cash, Cash Equivalents and Restricted Cash – Cash consists primarily of amounts held on deposit with financial institutions. The Company’s cash deposits with banks are insured by the Federal Deposit Insurance Corporation up to $250,000 per account. At times, the cash balances held by the Company in financial institutions may exceed these insured limits. The risk of loss attributable to these uninsured balances is mitigated by depositing funds in high credit quality financial institutions. The Company has not experienced any losses in such accounts. From time to time, the Company may invest in cash equivalents, which consists of investments in immediately available money market accounts and all highly liquid debt instruments with initial maturities of three months or less. The Company

 

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considers all highly liquid investments with a maturity of three months or less to be cash equivalents. Restricted cash balances consist of amounts that the Company may be restricted in its ability to access or amounts that are reserved for a specific purpose and therefore not available for immediate or general business use.

As of December 31, 2018, the Company has investments in money market instruments of approximately $69.4 million, which are reflected on the consolidated balance sheet as restricted cash as the Company is temporarily restricted in its ability to access these funds. The Company deposited proceeds from the sale of a parcel of land in Chicago, Illinois and proceeds from the sale of land and buildings in Los Angeles, California into accounts of a QI. Refer to Note 19, Assets Held For Sale And Discontinued Operations, and Note 20, Contingencies and Commitments, for additional information on these transactions. The Company deposited these proceeds into a QI account to comply with requirements under Section 1031 of the Internal Revenue Code (the “Code”) to execute a like-kind exchange. This process will allow the Company to effectively minimize its current tax liability in connection with the gains recognized on these asset sales. The cash proceeds in the accounts of the QIs are invested in money market accounts. The Company does not believe it has any material credit exposure with respect to these assets. Restrictions on these restricted cash deposits will lapse prior to the end of the first quarter of 2019. As of December 31, 2018, the Company had no other cash equivalents on hand.

Derivative Financial Instruments – The Company follows accounting guidance for its derivative financial instruments that it enters into from time to time, including certain derivative instruments embedded in other contracts, and hedging activities.

LeasesThe Company follows accounting guidance for its leases, which includes the recognition of escalated rents on a straight-line basis over the term of the lease agreement, as described further in Note 9, Other Long-Term Liabilities.

The operating lease obligations represent scheduled future minimum operating lease payments under non-cancellable operating leases, including rent obligations under escalation clauses that are defined increases and not escalations that depend on variable indices. The minimum lease payments do not include common area maintenance, variable real estate taxes, insurance and other costs for which the Company may be obligated as most of these payments are primarily variable rather than fixed.

See Note 20, Contingencies and Commitments, for a discussion of the Company’s leases. In addition, refer to the recent accounting pronouncements section of this note, Leasing Transactions, for a change in the Company’s reporting requirements as of January 1, 2019.

Share-Based CompensationThe Company records compensation expense for all share-based payment awards made to employees and directors, at estimated fair value. The Company also uses the simplified method in developing an estimate of the expected term of certain stock options. For further discussion of share-based compensation, see Note 14, Share-Based Compensation.

Investments – For those investments in which the Company has the ability to exercise significant influence over the operating and financial policies of the investee, the investment is accounted for under the equity method. At December 31, 2018 and 2017, the Company held no equity method investments. For those investments in which the Company does not have such significant influence, the Company applies the accounting guidance for certain investments in debt and equity securities. An investment is classified into one of three categories: held-to-maturity, available-for-sale, or trading securities, and, depending upon the classification, is carried at fair value based upon quoted market prices or historical cost when quoted market prices are unavailable.

The Company has minority equity investments in privately held companies that are separately presented in the Investments line item. The Company monitors these investments for impairment and makes appropriate reductions to the carrying value when events and circumstances indicated that the carrying value of the investments may not be recoverable. In determining whether a decline in fair value exists, the Company considers various factors, including market price (when available), investment ratings, the financial condition and near-term prospects of the investee, the length of time and the extent to which the fair value has been less than the Company’s cost basis, and the Company’s intent and ability to hold the investment for a period of time sufficient to allow for any anticipated recovery in market value. The Company also provides certain quantitative and qualitative disclosures for those investments that are impaired at the balance sheet date and for those investments for which an impairment has not been recognized. Refer to Note 18, Fair Value Of Financial Instruments, for additional information on the Company’s investments valued under the measurement alternative.

 

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Advertising and Promotion Costs Costs of media advertising and associated production costs are expensed when incurred. For the years ended December 31, 2018, 2017, and 2016, the costs incurred were $3.6 million, $0.7 million, and $0.3 million.

Insurance and Self-Insurance Liabilities The Company uses a combination of insurance and self-insurance mechanisms to provide for the potential liabilities for workers’ compensation, general liability, property, director and officers’ liability, vehicle liability and employee health care benefits. Liabilities associated with the risks that are retained by the Company are estimated, in part, by considering claims experience, demographic factors, severity factors, outside expertise and other actuarial assumptions. For any legal costs expected to be incurred in connection with a loss contingency, the Company recognizes the expense as incurred.

Recognition of Insurance Claims and Other Recoveries The Company recognizes insurance recoveries and other claims when all contingencies have been satisfied. During 2016, the Company recovered $2.3 million related to a legal claim. This amount was recorded on a net basis after deducting certain related expenses. For further discussion, see Note 20, Contingencies And Commitments.

Sports Programming Costs and Unfavorable/Favorable Sports Liabilities/AssetsSports programming costs which are for a specified number of events are amortized on an event-by-event basis, and programming costs which are for a specified season are amortized over the season on a straight-line basis. Prepaid expenses which are not directly allocable to any one particular season are amortized on a straight-line basis over the life of the agreement. In connection with certain acquisitions, the Company assumed contracts at above or below market rates. These liabilities and assets are being amortized over the life of the contracts and are reflected within current and long-term assets and liabilities.

Accrued Litigation - The Company evaluates the likelihood of an unfavorable outcome in legal or regulatory proceedings to which it is a party and records a loss contingency when it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. These judgments are subjective, based on the status of such legal or regulatory proceedings, the merits of the Company’s defenses and consultation with corporate and external legal counsel. Actual outcomes of these legal and regulatory proceedings may materially differ from the Company’s estimates. The Company expenses legal costs as incurred in professional fees. See Note 20, Contingencies and Commitments.

Software Costs The Company capitalizes direct internal and external costs incurred to develop internal-use software during the application development stage. Internal-use software includes website development activities such as the planning and design of additional functionality and features for existing sites and/or the planning and design of new sites. Costs related to the maintenance, content development and training of internal-use software are expensed as incurred. Capitalized costs are amortized over the estimated useful life of three years using the straight-line method.

Recent Accounting Pronouncements

All new accounting pronouncements that are in effect that may impact the Company’s financial statements have been implemented. The Company does not believe that there are any other new accounting pronouncements that have been issued, other than those listed below, that might have a material impact on the Company’s financial position or results of operations.

Definition of a Business

In January 2017, the accounting guidance was amended to clarify the definition of a business to assist entities with evaluating whether transactions should be accounted for as acquisitions or disposals of assets or businesses. The guidance was effective for the Company as of January 1, 2018 under a prospective application method. Based upon the Company’s assessment, the impact of this guidance was not material to the Company’s financial position, results of operations or cash flows. The guidance could have an impact in a future period if the Company acquires or disposes of radio stations that do not meet the definition of a business under the amended guidance.

Restricted Cash

In November 2016, the accounting guidance on the classification and presentation of restricted cash in the statement of cash flows was enhanced and clarified to reduce diversity in practice. Restricted cash and cash

 

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equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts presented on the statement of cash flows. This guidance was effective for the Company as of January 1, 2018, under a retrospective application method. As the Company did not have any restricted cash or cash equivalents as of December 31, 2017, the impact of this guidance was not material to the Company’s presentation of historical financial information. As a result of the Company’s consolidation of a VIE described above, the guidance had an impact on the Company’s presentation of the current period statements of financial position, cash flows and notes to the financial statements. The guidance could have an impact in a future period if the Company engages in transactions which result in restrictions on its cash or cash equivalents.

Cash Flow Classification

In August 2016, the accounting guidance for classifying elements of cash flow was modified. The guidance was effective for the Company as of January 1, 2018 under a retrospective application method. Based upon the Company’s assessment, the impact of this guidance was not material to the Company’s financial position, results of operations or cash flows.

Stock-Based Compensation

In June 2018, the accounting guidance was amended to address several aspects of accounting for nonemployee share-based payment transactions to include share-based payment transactions for acquiring goods and services from nonemployees. The guidance is effective for the Company as of January 1, 2019. The Company will adopt the new guidance using a modified retrospective approach through a cumulative-effect adjustment to retained earnings, if applicable, as of the effective date. While the Company is currently reviewing the effects of this guidance, the Company believes that this amendment to the accounting guidance will not have a material impact on the Company’s financial position, results of operations or cash flows.

In May 2017, the accounting guidance was amended to clarify modification accounting for stock-based compensation. The guidance was effective for the Company as of January 1, 2018, on a prospective basis. Under the amended guidance, the Company will only apply modification accounting for stock-based compensation if there are: (i) changes in the fair value or intrinsic value of share-based compensation; (ii) changes in the vesting conditions of awards; and (iii) changes in the classification of awards as equity instruments or liability instruments. Based upon the Company’s assessment, the impact of this guidance was not material to the Company’s financial position, results of operations or cash flows.

In March 2016, the accounting guidance for stock-based compensation was modified primarily to: (i) record excess tax benefits or deficiencies on stock-based compensation in the statement of operations, regardless of whether the tax benefits reduce taxes payable in the period; (ii) allow an employee’s use of shares to satisfy the employer’s statutory income tax withholding obligation up to the maximum statutory tax rates in the applicable jurisdictions; and (iii) allow entities to make an accounting policy election to either estimate the number of award forfeitures or to account for forfeitures when they occur. The guidance was effective for the Company on January 1, 2017.

As of January 1, 2017, the Company recorded a cumulative-effect adjustment to its accumulated deficit of $5.1 million on a modified retrospective transition basis. This adjustment was comprised of previously unrecognized excess tax benefits of $4.6 million as adjusted for the Company’s effective income tax rate, and a change to recognize stock-based compensation forfeitures when they occur of $0.5 million, net of tax.

Financial Instruments

In January 2016, the accounting guidance was modified with respect to recognition, measurement, presentation and disclosure of financial instruments. The most notable impact of the amended accounting guidance for the Company is that this modification effectively supersedes and eliminates current accounting guidance for cost-method investments. Refer to Note 18, Fair Value Of Financial Instruments, for additional information on the Company’s investments valued under the measurement alternative.

The guidance was effective for the Company as of January 1, 2018. The Company adopted the new guidance using a modified retrospective approach, without a need to make a cumulative-effect adjustment to retained earnings as of the effective date.

The Company’s investments continue to be carried at their original cost. There have been no impairments in the investments valued under the measurement alternative, returns of capital, or any adjustments resulting from

 

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observable price changes in orderly transactions for the investments. Based upon the Company’s assessment, the adoption of this modified accounting guidance did not have a material impact on the Company’s financial position, results of operations, or cash flows.

Revenue Recognition

In May 2014, the accounting guidance for revenue recognition was modified and subsequently updated with several amendments. Along with these modifications, most industry-specific revenue guidance was eliminated, including a current broadcasting exemption for reporting revenue from network barter programming. The new guidance provides companies with a revenue recognition model for recognizing revenue from contracts with customers. The core principle of the new standard is to recognize revenue when promised goods or services are transferred to customers, in an amount that reflects the consideration that the Company expects to be entitled to in exchange for such goods or services. The new guidance also requires additional disclosure about the nature, amount, timing, and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract.

The Company has identified changes to its revenue recognition policies related to contracts that contain performance bonuses. The impact of this guidance was not material to the Company’s financial position, results of operations or cash flows. The Company enhanced its disclosures to allow users of the financial statements to comprehend information about the nature, amount, timing and uncertainty of revenue and cash flows arising from the Company’s contracts with its customers. Refer to Note 4, Revenue, for additional information.

Leasing Transactions

In February 2016, the accounting guidance was modified to increase transparency and comparability among organizations by requiring the recognition of right-of-use (“ROU”) assets and lease liabilities on the balance sheet. The most notable change in the standard is the recognition of ROU assets and lease liabilities by lessees for those leases classified as operating leases with a term of more than one year. This change will primarily apply to the Company’s leased assets such as real estate and broadcasting towers. Additionally, the Company will be required to provide additional disclosures to meet the objective of enabling users of the financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases.

While the Company is currently reviewing the effects of this guidance, the Company believes the standard will have a material impact on its consolidated balance sheets but will not have a material impact on its consolidated statements of operations. The Company believes that this modification to operating leases will result in: (i) an increase in the ROU assets and lease liabilities reflected on the Company’s consolidated balance sheets to reflect the rights and obligations created by operating leases with a term of greater than one year; and (ii) no material change to the expense associated with the ROU assets.

This guidance is effective for the Company as of January 1, 2019, and must be implemented using a modified retrospective approach, with certain practical expedients available. The Company will elect the package of practical expedients which will allow the Company to waive reassessing: (i) whether any expired or existing contracts are or contain leases; (ii) the lease classification for any expired or existing leases; and (iii) initial direct costs for any existing leases. As a practical expedient, the Company may choose not to separate nonlease components from lease components as an accounting policy election by class of underlying asset. The Company will elect this practical expedient by all classes of underlying assets in instances where leases contain common area maintenance. Under certain available practical expedients, the Company will exclude short term leases from the amended leasing guidance. Lease payments associated with short term leases with terms of 12 months or less will be recognized on a straight-line basis over the lease term without recognizing a ROU asset or lease liability on the balance sheet.

The Company plans to adopt this new accounting guidance effective January 1, 2019 and intends to elect the available practical expedients upon adoption. The Company’s implementation of the amended accounting guidance depends upon system readiness, including software, completion of analysis of the Company’s lease portfolio, and the ability to prepare financial information upon adoption. The Company believes it is on schedule to implement the amended accounting guidance in the first quarter of 2019.

In July 2018, the accounting guidance was further modified to provide for an additional transition method which allows entities to: (i) apply the new lease requirements at the effective date and recognize a cumulative effect adjustment to the opening balance of retained earnings in the period of adoption; (ii) continue to report comparative

 

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periods presented in the financial statements in the period of adoption under current U.S. GAAP; and (iii) provide the required disclosures under current U.S. GAAP for all periods presented under current U.S. GAAP. The Company plans to adopt the amended accounting guidance using this transition method which facilitates comparative reporting upon adoption.

3.    BUSINESS COMBINATIONS

The Company records acquisitions under the acquisition method of accounting, and allocates the purchase price to the assets and liabilities based upon their respective fair values as determined as of the acquisition date. Merger and acquisition costs are excluded from the purchase price as these costs are expensed for book purposes and amortized for tax purposes.

2018 WXTU Transaction

On July 18, 2018, the Company entered into an agreement with Beasley Broadcast Group, Inc. (“Beasley”) to sell certain assets of WXTU-FM, serving the Philadelphia, Pennsylvania radio market for $38.0 million in cash (the “WXTU Transaction”). The Company also simultaneously entered into a TBA with Beasley where Beasley commenced operations of WXTU-FM on July 23, 2018. During the period of the TBA, the Company excluded net revenues and station operating expenses associated with operating WXTU-FM in the Company’s consolidated financial statements. The Company completed this disposition, which was subject to customary regulatory approvals, during the third quarter of 2018 and recognized a gain of approximately $4.4 million.

2018 Jerry Lee Transaction

On September 27, 2018, the Company completed a transaction to acquire the assets of WBEB-FM, serving the Philadelphia, Pennsylvania radio market from Jerry Lee Radio, LLC (“Jerry Lee”) for a purchase price of $57.5 million in cash, less certain working capital and other credits (the “Jerry Lee Transaction”). The Company used proceeds from the WXTU Transaction and cash on hand to fund this acquisition. Upon the completion of the WTXU Transaction and the Jerry Lee Transaction, the Company will continue to operate six radio stations in the Philadelphia, Pennsylvania market.

On August 7, 2018, the Company entered into a TBA with Jerry Lee. During the period of the TBA, the Company included net revenues, station operating expenses and monthly TBA fees associated with operating WBEB-FM in the Company’s consolidated financial statements.

The allocations presented in the table below are based upon management’s estimate of the fair values using valuation techniques including income, cost and market approaches. In estimating the fair value of the acquired FCC broadcasting licenses, the fair value estimates are based on, but not limited to, expected future revenue and cash flows that assume an expected future growth rate of 1.0% and an estimated discount rate of 9.0%. The gross profit margins utilized were considered appropriate based on management’s expectations and experience in equivalent sized markets. The Company determines the fair value of the broadcasting licenses by relying on a discounted cash flow approach assuming a start-up scenario in which the only assets held by an investor are broadcasting licenses. The Company’s fair value analysis contains assumptions based upon past experience, reflects expectations of industry observers and includes judgments about future performance using industry normalized information for an average station within a certain market. Any excess of the purchase price over the assets acquired was reported as goodwill. The Company recorded goodwill on its books, which is fully deductible for income tax purposes. Management believes that this acquisition provides the Company with an opportunity to benefit from operational efficiencies from combining operations of the acquired station with the Company’s existing stations within the Philadelphia market.

The following preliminary purchase price allocations are based upon the valuation of assets and these estimates and assumptions are subject to change as the Company obtains additional information during the measurement period, which may be up to one year from the acquisition date. These assets pending finalization include intangible assets. Differences between the preliminary and final valuation could be substantially different from the initial estimates.

 

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            Useful Lives in Years  
     Preliminary Value      From      To  
     (amounts in thousands)                

Assets

        

Equipment

   $ 981        3        7  
  

 

 

       

Total tangible property

     981        
  

 

 

       

Advertising contracts

     477        1        1  

Radio broadcasting licenses

     27,346        non-amortizing  

Goodwill

     24,396        non-amortizing  

Net working capital

     3,234        not applicable  
  

 

 

    

Total intangible and other assets

     55,453        
  

 

 

       

Total assets

   $ 56,434        
  

 

 

       

Preliminary fair value of net assets acquired

   $ 56,434        
  

 

 

       

2018 Emmis Acquisition

On April 30, 2018, the Company completed a transaction to acquire two radio stations in St. Louis, Missouri from Emmis Communications Corporation (“Emmis”) for a purchase price of $15.0 million in cash (the “Emmis Acquisition”). The Company borrowed under its revolving credit facility (the “Revolver”) to fund the acquisition. With this acquisition, the Company increased its presence in St. Louis, Missouri, to five radio stations.

On March 1, 2018, the Company entered into an asset purchase agreement and a TBA with Emmis to operate two radio stations. During the period of the TBA, the Company included in net revenues, station operating expenses and monthly TBA fees associated with operating these stations in the Company’s consolidated financial statements.

The allocations presented in the table below are based upon management’s estimate of the fair values using valuation techniques including income, cost and market approaches. In estimating the fair value of the acquired FCC broadcasting licenses, the fair value estimates are based on, but not limited to, expected future revenue and cash flows that assume an expected future growth rate of 1.0% and an estimated discount rate of 9.0%. The gross profit margins utilized were considered appropriate based on management’s expectations and experience in equivalent sized markets. The Company determines the fair value of the broadcasting licenses by relying on a discounted cash flow approach assuming a start-up scenario in which the only assets held by an investor are broadcasting licenses. The Company’s fair value analysis contains assumptions based upon past experience, reflects expectations of industry observers and includes judgments about future performance using industry normalized information for an average station within a certain market. Any excess of the purchase price over the assets acquired was reported as goodwill.

The following preliminary purchase price allocations are based upon the valuation of assets and these estimates and assumptions are subject to change as the Company obtains additional information during the measurement period, which may be up to one year from the acquisition date. These assets pending finalization include intangible assets. Differences between the preliminary and final valuation could be substantially different from the initial estimates.

 

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            Useful Lives in Years  
     Preliminary Value      From      To  
     (amounts in thousands)                

Assets

        

Equipment

   $ 1,558        3        7  
  

 

 

       

Total tangible property

     1,558        
  

 

 

       

Advertiser relationships

     207        5        15  

Advertising contracts

     114        1        1  

Radio broadcasting licenses

     12,785        non-amortizing  

Goodwill

     332        non-amortizing  

Other noncurrent assets

     4        2        2  
  

 

 

       

Total intangible and other assets

     13,442        
  

 

 

       

Total assets

   $ 15,000        
  

 

 

       

Preliminary fair value of assets acquired

   $ 15,000        
  

 

 

       

2017 CBS Radio Business Acquisition

On November 17, 2017, the Company acquired the CBS Radio business from CBS to further strengthen its scale and capabilities to compete more effectively with other media for a larger share of advertising dollars. The purchase price was $2.56 billion and consisted of $1.17 billion of total equity consideration and $1.39 billion of assumed debt.

The CBS Radio business acquisition was completed pursuant to the CBS Radio Merger Agreement, dated February 2, 2017, by and among the Company, CBS, CBS Radio, and Merger Sub. On November 17, 2017, (i) Merger Sub was merged with and into CBS Radio, with CBS Radio continuing as the surviving corporation and a direct, wholly-owned subsidiary of the Company and (ii) each share of CBS Radio common stock was converted into one share of the Company’s common stock.

The Company issued 101,407,494 shares of its Class A common Stock to the former holders of CBS Radio common stock. At the time of the Merger, each outstanding restricted stock unit (“RSU”) and stock option with respect to CBS Class B common stock held by employees of CBS Radio was canceled and converted into equity awards for the Company’s Class A common stock. The conversion was based on the ratio of the volume-weighted average per share closing prices of CBS stock on the five trading days prior to the date of acquisition and the Company’s stock on the five trading days following the date of acquisition. Entercom Communications Corp. is considered to be the acquiring company for accounting purposes.

To complete the Merger, certain divestitures were required by the FCC in order to comply with the FCC’s ownership rules and policies. These divestitures consisted of: (i) the exchange transaction with iHeartMedia, Inc. (“iHeart”); (ii) a station exchange with Beasley; (iii) a cash sale to Bonneville International Corporation (“Bonneville”); and (iv) a cash sale to Educational Media Foundation (“EMF”).

Due to the structure of the transaction, there was no step-up in tax basis for the assets acquired as the Company assumed the existing tax basis in the assets of CBS Radio. The absence of a step-up in tax basis will limit the Company’s tax deductions in future years and impacts the amount of deferred tax liabilities recorded as part of purchase price accounting. If any of the Internal Distributions or the Final Distribution, each as defined in the CBS Radio Merger Agreement, does not qualify as a transaction that is tax-free for U.S. federal income tax purposes under Section 355 of the Code or the Merger does not qualify as a tax-free “reorganization” under Section 368(a) of the Code, including as a result of actions taken in connection with the distributions made by CBS to facilitate the Merger or as a result of subsequent acquisitions of shares of CBS, Entercom, or CBS Radio, then CBS and/or holders of CBS Common Stock that received Radio Common Stock in the Final Distribution may be required to pay substantial U.S. federal income taxes, and, in certain circumstances, CBS Radio and Entercom may be required to indemnify CBS for any such tax liability.

The allocations presented in the table below are based upon management’s estimate of the fair values using valuation techniques including income, cost and market approaches. In estimating the fair value of the acquired FCC broadcasting licenses, the fair value estimates are based on, but not limited to, hypothetical expected future revenue and cash flows that assume an expected future growth rate of 1.0% and an estimated discount rate of 9.0%. The gross profit margins utilized were considered appropriate based on management’s expectations and experience in

 

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equivalent sized markets. The Company determines the fair value of the broadcasting licenses by relying on a discounted cash flow approach assuming a start-up scenario in which the only assets held by an investor are broadcasting licenses. The Company’s fair value analysis contains assumptions based upon past experience, reflects expectations of industry observers and includes judgments about future performance using industry normalized information for an average station within a certain market. Any excess of the purchase price over the net assets acquired was reported as goodwill. The goodwill recorded reflects management’s expectations of its ability to gain access to and penetrate CBS Radio’s customer base and the benefits of being able to leverage operational efficiencies with favorable growth opportunities as a results of a large national presence. A portion of the goodwill carryover basis is tax deductible.

The following table reflects: (i) the Company’s preliminary allocation of the purchase price to the assets acquired and liabilities assumed as of the acquisition date; (ii) measurement period adjustments made to the preliminary allocation during the measurement period; and (iii) the final allocation of the purchase price to the assets acquired and liabilities assumed.

 

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     Preliminary Value                
     as of acquisition date                
     (as previously      Measurement         
     reported as of      Period         

Description

   December 31, 2017)      Adjustment      As Adjusted  
     (amounts in thousands)  

Assets

        

Accounts receivable

   $ 241,548      $ —        $ 241,548  

Prepaid sports rights and favorable sports contracts

     4,160        —          4,160  

Prepaid expenses, deposits and other

     20,625        476        21,101  

Other current assets

     7,350        1,741        9,091  
  

 

 

    

 

 

    

 

 

 

Total current assets

     273,683        2,217        275,900  
  

 

 

    

 

 

    

 

 

 

Land

     112,880        —          112,880  

Land improvements

     3,988        (2,640      1,348  

Leasehold improvements

     26,255        9,774        36,029  

Buildings

     19,246        (5,206      14,040  

Furniture and fixtures

     10,929        (6,849      4,080  

Equipment and towers

     76,486        21,346        97,832  

Construction in process

     14,598        —          14,598  
  

 

 

    

 

 

    

 

 

 

Total tangible property

     264,382        16,425        280,807  
  

 

 

    

 

 

    

 

 

 

Advertiser relationships

     27,453        —          27,453  

Radio broadcasting licenses

     1,880,400        —          1,880,400  

Goodwill

     820,961        (21,498      799,463  

Assets held for sale

     255,650        —          255,650  

Favorable leases

     16,580        —          16,580  

Other noncurrent assets

     1,050        4,176        5,226  
  

 

 

    

 

 

    

 

 

 

Total intangible and other assets

     3,002,094        (17,322      2,984,772  
  

 

 

    

 

 

    

 

 

 

Total assets

   $ 3,540,159      $ 1,320      $ 3,541,479  
  

 

 

    

 

 

    

 

 

 

Liabilities

        

Accounts payable

   $ 36,137      $ 421      $ 36,558  

Accrued expenses

     35,154        2,309        37,463  

Accrued salaries and benefits

     26,324        —          26,324  

Current portion of long-term debt

     10,600        —          10,600  

Unfavorable sports liability - current portion

     4,803        —          4,803  

Accrued interest

     4,529        —          4,529  

Unearned revenues - current portion

     14,971