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DIAL > SEC Filings for DIAL > Form 10-Q on 15-May-2012All Recent SEC Filings

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Form 10-Q for DIAL GLOBAL, INC. /DE/


15-May-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
(In thousands, except share and per share amounts)

OVERVIEW

The following discussion should be read in conjunction with our unaudited condensed consolidated financial statements and notes thereto included elsewhere in this report and the annual audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K filed on March 30, 2012 for the year ended December 31, 2011 ("2011 Form 10-K").

We are organized as a single business segment, which is our Radio business. We are an independent, full-service network radio company that distributes, produces, and/or syndicates programming and services to more than 8,500 radio stations nationwide. We produce and/or distribute over 200 news, sports, music, talk and entertainment radio programs, services and digital applications, as well as audio content from live events, turn-key music formats (the 24/7 Radio Formats), prep services, jingles and imaging. In addition, we are as the largest sales representative for independent third party providers of audio content. We have no operations outside the United States, but sell to customers outside of the United States.

We derive substantially all of our revenue from the sale of 30 and 60 second commercial airtime to advertisers. Our advertisers that target national audiences generally find that a cost effective way to reach their target consumers is to purchase 30 or 60 second advertisements, which are principally broadcast in our formats, news, talk, sports, music and entertainment related programming and content. In addition in exchange for services we receive airtime from radio stations.

We produce and distribute regularly scheduled and special sporting events and sports features, news programs, exclusive live events, music and interview shows, national music countdowns, lifestyle short features and talk programs.

Our revenue is influenced by a variety of factors, including but not limited to:
(1) economic conditions and the relative strength or weakness in the United States economy; (2) advertiser spending patterns, the timing of the broadcasting of our programming, principally the seasonal nature of sports programming and the perceived quality and cost-effectiveness of our programming by advertisers and affiliates; (3) advertiser demand on a local/regional or national basis for radio related advertising products; (4) increases or decreases in our portfolio of program offerings and the audiences of our programs, including changes in the demographic composition of our audience base; and (5) competitive and alternative programs and advertising mediums.

Commercial airtime is sold and managed on an order-by-order basis. We take the following factors, among others, into account when pricing commercial airtime:
(1) length and breadth of the order; (2) the desired reach and audience demographic; (3) the quantity of commercial airtime available for the desired demographic requested by the advertiser for sale at the time their order is negotiated; and (4) the proximity of the date of the order placement to the desired broadcast date of the commercial airtime.

Our revenue consists of gross billings, net of the fees (generally 15% is industry-standard) that advertising agencies receive from the advertisements broadcast on our airtime, fees to the producers of and stations that own the programming during which the advertisements are broadcast, and certain other less significant fees. Revenue from radio advertising is recognized when the advertising has aired. Revenue generated from charging fees to radio stations and networks for music libraries, audio production elements, and jingle production services are recognized upon delivery or on a straight-line basis over the term of the contract, depending on the terms of the respective contracts. Our revenue reflects a degree of seasonality, with the first and fourth quarters historically exhibiting higher revenue as a result of our professional football and college basketball programming.

In those instances where we function as the principal in the transaction, the revenue and associated operating costs are presented on a gross basis. In those instances where we function as an agent or sales representative, our effective commission is presented within revenue. Although no individual relationship is significant, the relative mix of such arrangements is significant when evaluating our operating margin and/or increases and decreases in operating expenses.

The principal components of our cost of revenue are programming, production and distribution costs (including affiliate compensation and broadcast rights fees), as well as compensation costs directly related to our revenue.

Our significant other operating expenses are rental of premises for office facilities and studios, promotional expenses, research, and accounting and legal fees. Depreciation and amortization is shown as a separate line item in our financial statements.

Our compensation costs consist of compensation expenses associated with our personnel who are not associated with the cost of revenue, including our corporate staff and all stock-based compensation related to stock option awards and RSUs. Stock-based compensation is recognized using a straight-line basis over the requisite service period for the entire award.


Transaction costs include one-time expenses associated with the merger with Westwood One, Inc. (the "Merger") on October 21, 2011 (see below for additional details). Restructuring charges include the costs related to the restructuring program we announced in the fourth quarter of 2011 ("2011 Program") that includes the consolidation of certain operations that reduced our workforce levels, the termination of certain contracts and the assumption of Westwood's restructuring program liabilities related to closed facilities from its former Metro Traffic business.

RESULTS OF OPERATIONS

Presentation of Results

On October 21, 2011, we announced the consummation of the Merger contemplated by the Merger Agreement, by and among Westwood, Radio Network Holdings, LLC, a Delaware corporation (since renamed Verge Media Companies LLC), and Verge. The Merger is accounted for as a reverse acquisition of Westwood by Verge under the acquisition method of accounting in conformity with the FASB ASC - 805 Business Combinations. Under this guidance, the transaction has been recorded as the acquisition of Westwood by the Company.
The preliminary purchase accounting allocations have been recorded in the consolidated financial statements appearing in this report as of, and for the period subsequent to, the Merger Date. The valuation of the net assets acquired and allocation of the consideration transferred will be finalized within a year of the Merger Date (see Note 3 - Acquisition of Westwood One, Inc. for a summary of changes in the first three months of 2012). As a result of the Merger, Westwood's results are included in the consolidated results for the first three months of 2012, but are not included in the consolidated results for the first three months of 2011 in accordance with generally accepted accounting principles in the United States.

In the fourth quarter of 2011, we announced the 2011 Program to restructure certain areas of our business in connection with the acquisition of Westwood. The 2011 Program includes charges related to the consolidation of certain facilities and operations that reduced our workforce levels during 2011 and 2012. Payments related to the 2011 Program during the next year are expected to be $2,768, with an additional $1,456 to be paid in subsequent years until 2018.

On July 29, 2011, the then Board of Directors of Verge (pre-Merger) approved a spin-off of the Digital Services business to Triton Media LLC ("Triton"). For all periods presented in this report, the results of the Digital Services business are presented as a discontinued operation and will continue to be presented as discontinued operations in all future filings in accordance with generally accepted accounting principles in the United States.

We evaluate our performance based on revenue and operating income (as described below). Westwood's former operations and financial information were integrated and as a result of this integration, we no longer have financial information to clearly determine the impact of Westwood's former operations to revenue, cost of revenue or operating expenses.

Three Months Ended March 31, 2012 Compared with the Three Months Ended March 31, 2011

Revenue, Cost of Revenue and Gross Profit

Revenue, cost of revenue and gross profit for the three months ended March 31,
2012 and 2011, respectively, are as follows:
                   Three Months Ended March 31,
                      2012               2011          Change     Percent
Revenue         $      68,286       $      20,077     $ 48,209     240.1 %
Cost of revenue        50,583               9,679       40,904     422.6 %
Gross profit    $      17,703       $      10,398     $  7,305      70.3 %
Gross margin             25.9 %              51.8 %

For the three months ended March 31, 2012, revenue increased $48,209, or 240.1%, to $68,286 compared with $20,077 for the three months ended March 31, 2011. The increase is primarily the result of an increase in advertising revenue from the acquisition of Westwood.

For the three months ended March 31, 2012, cost of revenue increased $40,904, or 422.6%, to $50,583 compared with $9,679 for the three months ended March 31, 2011. The increase in cost of revenue for the three months ended March 31, 2012 were from increases in expenses for broadcast rights of $13,901, station compensation of $9,769, revenue sharing of $6,215, news content of $5,107, employee compensation of $3,212, and costs associated with talent, contractors and production of $2,292. These increases are primarily a result of the acquisition of Westwood.


For the three months ended March 31, 2012, gross profit increased $7,305, or 70.3%, to $17,703 compared with $10,398 for the three months ended March 31, 2011. The increase is primarily due to the acquisition of Westwood which increased our revenue and cost of revenue.

Our gross margin declined from 51.8% for the three months ended March 31, 2011, to 25.9% for the three months ended March 31, 2012 primarily as a result of the Westwood acquisition. Prior to the acquisition of Westwood, our mix of business was almost equally split between being an agent and a principal. After the acquisition, our mix of business shifted towards being more of a principal as a result of Westwood's business. In those instances where we function as the principal, the revenue and associated operating costs are presented on a gross basis which results in a lower gross margin. In those instances where we function as an agent, our effective commission is presented within net revenue which results in a higher gross margin.

Compensation Costs

Compensation costs increased $4,481 to $8,057 for the three months ended March 31, 2012 compared to $3,576 for to the same period in 2011, primarily due to the additional employees assumed as part of our acquisition of Westwood and stock-based compensation expense of $1,675 for the three months ended March 31, 2012.

Other Operating Costs

Other operating costs for the three months ended March 31, 2012 increased $3,393, or 81.8% to $7,540 from $4,147 for the three months ended March 31, 2011. The increase is the result of higher travel-related costs of $1,032, professional fees primarily related to integration activities (primarily accounting, legal and technology) of $1,007, research fees of $960, facility costs (including rent, repairs, and communications) of $652, all primarily resulting from our acquisition of Westwood, and greater bad debt expense of $230. These increases were partially offset by the absence in 2012 of the $660 license fee related to the 24/7 Formats business that we purchased in July 2011.

Depreciation and Amortization

Depreciation and amortization increased $3,095, or 91.7%, to $6,470 for the three months ended March 31, 2012 from $3,375 for the comparable period of 2011. The increase is primarily attributable to the amortization expense of Westwood's purchase accounting intangible assets of $2,738 and higher depreciation expense of $463, primarily as a result of the Westwood acquisition.

Restructuring and Other Charges

For the three months ended March 31, 2012, we recorded $2,370 for restructuring charges related to the 2011 Program and other charges of $3,525 in connection with a content agreement which we no longer utilize after March 31, 2012. The restructuring charges include costs associated with the reduction in our workforce levels of $1,564, contract termination costs of $483, and costs of $323 related to closed Westwood facilities.

Operating Loss

The operating loss for the three months ended March 31, 2012 is $10,259, an increased loss of $9,559, compared to an operating loss of $700 for the comparable period of 2011. The increase in operating loss is the result of increases in compensation costs of $4,481, other operating costs of $3,393, depreciation and amortization of $3,095, and restructuring and other charges of $5,895, partially offset by an increase in gross profits of $7,305.

Interest Expense, Net

Interest expense, net for the three months ended March 31, 2012, is $9,065, compared to $5,309 for the three months ended March 31, 2011, an increase of $3,756, primarily from higher interest expense on higher levels of debt (approximately $77,400) incurred as a result of the Merger.

Preferred Stock Dividend

For the three months ended March 31, 2012, we recognized an expense of $221 for the accrued Series A Preferred Stock dividends.

Provision for Income Taxes

Income tax benefit from continuing operations for the three months ended March 31, 2012 is $7,180, compared to an income tax


provision for continuing operations of $740 for the year ended March 31, 2011. The 2012 income tax benefit from continuing operations is primarily the result of the increase in our 2012 losses from continuing operations before taxes of $13,536. The 2011 tax provision is the result of our provision for state and local taxes and the tax amortization of goodwill, a portion of which is not presumed to reverse in a definite period of time and therefore, cannot be utilized to support our deferred tax assets.

Loss from Discontinued Operations

Our loss from discontinued operations, net of taxes was $1,150 for the three months ended March 31, 2011. The Digital Services business was spun-off on July 29, 2011.

Net Loss

Our net loss for the three months ended March 31, 2012 increased $4,466 to $12,365 from a net loss of $7,899 for the three months ended March 31, 2011. Net loss per share for basic and diluted shares for the three months ended March 31, 2012 and 2011 was $0.22 and $0.23, respectively. The 2012 loss per share was lower than 2011, primarily as a result of higher weighted-average shares outstanding during 2012.

Liquidity, Cash Flow and Debt as of and for the Three Months Ended March 31,

2012

Cash Flows
                                                         Three Months Ended March 31,
                                                        2012          2011        Change
Net cash (used in) provided by operating activities $   (1,601 )   $  2,700     $ (4,301 )
Net cash used in investing activities                   (1,005 )     (1,143 )        138
Net cash provided by (used in) financing activities      1,798       (2,801 )      4,599
Net decrease in cash and cash equivalents                 (808 )     (1,244 )   $    436
Cash and cash equivalents, beginning of period           5,627       13,948
Cash and cash equivalents, end of period            $    4,819     $ 12,704

Our net cash used in operating activities during the three months ended March 31, 2012 was $1,601 as compared to cash provided by operating activities of $2,700 during the three months ended March 31, 2011. The decrease in net cash provided by operating activities of $4,301 was due to an increase in net loss, changes in deferred taxes, and lower non-cash interest expense, which was partially offset by a decrease in working capital, an increased stock-based compensation, depreciation and amortization, and amortization of original issue discount and deferred financing costs for the three months ended March 31, 2012 as compared to the three months ended March 31, 2011. The decrease in working capital was primarily due to an increase in accrued expenses and other liabilities, partially offset by a lower decrease in accounts receivable during the three months ended March 31, 2012 compared to the three months ended March 31, 2011.

Our net cash used in investing activities was $1,005 during the three months ended March 31, 2012 as compared to $1,143 during the three months ended March 31, 2011. The decrease in cash used in investing activities during the three months ended March 31, 2012 compared to the same period in 2011 was primarily due to lower cash expended on acquisition of property and equipment during the three months ended March 31, 2012 as compared to the three months ended March 31, 2011, partially offset by the investment in a joint venture during the three months ended March 31, 2012.

Our net cash provided by financing activities was $1,798 during the three months ended March 31, 2012 as compared to cash used in financing activities of $2,801 during the three months ended March 31, 2011. The increase in net cash provided by financing activities was primarily due to net borrowings under the Revolving Credit Facility of $3,000 during the three months ended March 31, 2012 and lower repayment of debt of $1,816 during the three months ended March 31, 2012 compared to the three months ended March 31, 2011.

Liquidity and Capital Resources

We continually project anticipated cash requirements, which may include potential acquisitions, capital expenditures and principal and interest payments on our outstanding indebtedness, dividends and working capital requirements. To date, funding requirements have been financed through cash flows from operations, the issuance of equity and the issuance of long-term debt.


At March 31, 2012, our principal sources of liquidity are our cash and cash equivalents of $4,819 and borrowing availability of $14,416 under our Revolving Credit Facility, which equals $19,235 in total liquidity. Cash flow from operations is expected to be a principal source of funds. We estimate that cash flows from operations and availability on our Revolving Credit Facility will be sufficient to fund our cash requirements, including scheduled interest and required principal payments on our outstanding indebtedness and projected working capital needs, and provide us sufficient Consolidated EBITDA to comply with our debt covenants for at least the next 12 months. As of May 3, 2012, our cash and cash equivalents were $3,723 and borrowing availability was $12,916 (taking into account the $9,100 borrowed under our Revolving Credit Facility and $2,984 used for letters of credit), which equals $16,639 in total liquidity.

Existing Indebtedness

As of March 31, 2012, our existing debt totaled $268,033 and consisted of $145,760 under the First Lien Term Loan Facility, net of original issue discount, $82,646 under the Second Lien Term Loan Facility, net of original issue discount, $32,027 under PIK Notes and $7,600 under the First Lien Revolving Credit Facility (not including $2,984 of letters of credit issued under the First Lien Revolving Credit Facility). Based on current rates, the annual rates of interest currently applicable to the Credit Facilities are: 8.0% on the First Lien Term Loan Facility, 8.75% on the Revolving Credit Facility and 13.0% on the Second Lien Term Loan Facility. The PIK Notes are unsecured and accrue interest at the rate of 15% per annum, which compounds quarterly for the first five years and will compound annually thereafter, mature on the six-year three-month anniversary of the issue date and are subordinated in right of payment to the Credit Facilities.

During the three months ended March 31, 2012, we borrowed, $3,000, net of repayments, under the Revolving Credit Facility and repaid $969 of the First Lien Term Loan Facility. Payments totaling $4,844 under the First Lien Term Loan Facility are mandatory within the next twelve months and are included in current portion of long-term debt in the consolidated balance sheets.

We were in compliance with all applicable covenants under our Credit Agreements as of March 31, 2012.

For further detail regarding our long-term debt instruments, please refer to Note 9, "Debt," to the Consolidated Financial Statements in our 2011 Form 10-K, as well as "Management's Discussion and Analysis of Financial Condition and Results of Operations - Financial Condition, Liquidity and Capital Resources" in our 2011 Form 10-K.

Cautionary Statement Concerning Forward-Looking Statements and Factors Affecting Forward-Looking Statements

This quarterly report on Form 10-Q, including "Item 1A-Risk Factors" and "Item 2-Management's Discussion and Analysis of Results of Operations and Financial Condition," contains both historical and forward-looking statements. All statements other than statements of historical fact are, or may be deemed to be, forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Exchange Act. The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements we make or others make on our behalf. Forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. These statements are not based on historical fact but rather are based on management's views and assumptions concerning future events and results at the time the statements are made. No assurances can be given that management's expectations will come to pass. There may be additional risks, uncertainties and factors that we do not currently view as material or that are not necessarily known. Any forward-looking statements included in this document are only made as of the date of this document and we do not have any obligation to publicly update any forward-looking statement to reflect subsequent events or circumstances.

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