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CMLS > SEC Filings for CMLS > Form 10-Q on 9-Aug-2012All Recent SEC Filings

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Form 10-Q for CUMULUS MEDIA INC


9-Aug-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

General

The following discussion of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and notes thereto included elsewhere in this quarterly report. This discussion, as well as various other sections of this quarterly report, contains and refers to statements that constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 and other federal securities laws. Such statements relate to our intent, belief or current expectations primarily with respect to our future operating, financial and strategic performance. Any such forward-looking statements are not guarantees of future performance and may involve risks and uncertainties. Actual results may differ from those contained in or implied by the forward-looking statements as a result of various factors, including, but not limited to, risks and uncertainties relating to the need for additional funds to execute our business strategy, our inability to renew one or more of our broadcast licenses, changes in interest rates, the timing, costs and synergies resulting from the integration of any completed acquisitions, our ability to eliminate certain costs, our ability to manage rapid growth, the popularity of radio as a broadcasting and advertising medium, changing consumer tastes, the impact of general economic conditions in the United States or in specific markets in which we currently do business, industry conditions, including existing competition and future competitive technologies and cancellation, disruptions or postponements of advertising schedules in response to national or world events, our ability to generate revenue from new sources, including technology-based initiatives. Many of these risks and uncertainties are beyond our control, and the unexpected occurrence or failure to occur of any such events or matters could significantly alter our actual results of operations or financial condition.

For additional information about certain of the matters discussed and described in the following Management's Discussion and Analysis of Financial Condition and Results of Operations, including certain defined terms used herein, see the notes to the accompanying unaudited condensed consolidated financial statements included elsewhere in this quarterly report.

Factors Affecting Comparability

Primarily as a result of the completion of the significant transactions described below in the third quarter of 2011, we believe that our results of operations for the three and six months ended June 30, 2012 will provide only limited comparability to our results of operations for the three and six months ended June 30, 2011. Investors are cautioned to not place undue reliance on any such comparison. Aggregate revenues of $44.1 million and $80.0 million for the three and six months ended June 30, 2012, respectively, attributable to Cumulus Media Partners LLC ("CMP") and $184.7 million and $339.4 million for the three and six months ended June 30, 2012, respectively, attributable to Citadel are included in the accompanying unaudited condensed consolidated financial statements for such periods.

On August 1, 2011, we completed our previously announced acquisition of the remaining 75.0% of the equity interests of CMP that we did not already own. CMP's results of operations have been included in the consolidated financial statements since the date of the completion of the CMP Acquisition. Pursuant to a management agreement, we had operated CMP's business since 2006. In connection with the CMP Acquisition, we issued 9.9 million shares of our common stock to the CMP Sellers. For additional information regarding the CMP Acquisition, see Note 1, "Basis of Presentation, Interim Financial Data and Basis of Presentation" and Note 2, "Acquisitions and Dispositions." Also in connection with the CMP Acquisition, the CMP Restated Warrants were amended and restated to become exercisable for up to 8.3 million shares of our common stock.

On September 16, 2011, we completed the previously announced Citadel Acquisition, pursuant to which we acquired Citadel for an aggregate purchase price of approximately $2.3 billion, consisting of approximately $1.4 billion in cash, the issuance of 23.6 million shares of Class A common stock, warrants to purchase 47.6 million shares of Class A common stock, and the assumption of outstanding debt, which was refinanced as part of our previously announced related global refinancing (the "Global Refinancing"). Citadel's results of operations have been included in the consolidated financial statements since the date of the completion of the Citadel Acquisition.

In connection with the closing of the Citadel Acquisition, we undertook a number of significant refinancing transactions, all as described in more detail in "-Liquidity and Capital Resources" below.

Operating Overview

We are the largest pure-play radio broadcaster in the United States based on number of stations. At June 30, 2012, we owned or operated more than 570 radio stations (including under LMAs) in 120 United States media markets and nationwide radio networks serving over 4,000 stations. Under LMAs, we provide sales and marketing services for eight radio stations in the United States in exchange for a management or consulting fee. In addition to entering into LMAs, we have in the past, and expect that we will from time to time in the future enter into management or consulting agreements that provide us with the ability, as contractually specified, to assist current owners in the management of radio station assets that we have contracted to purchase, subject to FCC approval. In such arrangements, we generally receive a contractually specified management fee or consulting fee in exchange for the services provided.


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Liquidity Considerations

Historically, our principal needs for funds have been for acquisitions of radio stations, expenses associated with our station and corporate operations, capital expenditures, and interest and debt service payments. We believe that our funding needs in the future will be for substantially similar matters including, but not limited to, expenses relating to our ongoing integration of Citadel and CMP and additional expenses incurred in connection with those operations, including the operations of our acquired radio network.

Our principal sources of funds historically have been cash flow from operations and borrowings under credit facilities in existence from time to time. Our cash flow from operations is subject to such factors as shifts in population, station listenership, demographics, or audience tastes, and fluctuations in preferred advertising media. In addition, customers may not be able to pay, or may delay payment of, accounts receivable that are owed to us, which risks may be exacerbated in challenging economic periods. In recent periods, management has taken steps to mitigate this risk through heightened collection efforts and enhancements to our credit approval process, although no assurances as to the longer-term success of these efforts can be provided.

On September 16, 2011 in connection with the closing of the Citadel Acquisition and to complete the Global Refinancing, we entered into the First Lien Facility and the Second Lien Facility (each as defined in "-Liquidity and Capital Resources - 2011 Refinancing Transactions"). The First Lien Facility consists of the $1.325 billion First Lien Term Loan and the $300.0 million Revolving Credit Facility. The Second Lien Facility consists of the $790.0 million Second Lien Term Loan. On that date and also in connection therewith, we used borrowings of $1.325 billion under the First Lien Term Loan, $200.0 million under the Revolving Credit Facility and $790.0 million under the Second Lien Term Loan, along with proceeds from the Equity Investment, to repay approximately $1.4 billion in outstanding senior or subordinated indebtedness and other obligations of (a) ours (including the repayment of amounts outstanding under, and the termination of, the Terminated Credit Facility), (b) certain of our wholly-owned subsidiaries, and (c) Citadel.

Also in connection with the Citadel Acquisition and as part of the transactions included in the Global Refinancing, we completed the previously announced internal restructuring into a holding company structure, which included transferring the remaining assets and operations held directly or indirectly by us, other than the equity interests of our direct wholly-owned subsidiary Cumulus Media Holdings Inc. ("Cumulus Holdings"), to Cumulus Holdings (the "Internal Restructuring") and in which, among other things, Cumulus Holdings was substituted for us as the issuer under the $610.0 million of 7.75% Senior Notes due 2019 (the "7.75% Senior Notes"), which remain outstanding.

Pursuant to the Equity Investment, on September 16, 2011, we issued and sold
(i) 51.8 million shares of Class A common stock to Crestview; (ii) 125,000 shares of Series A Preferred Stock to Macquarie; and (iii) 4.7 million shares of Class A common stock and immediately exercisable warrants to purchase 24.1 million shares of our Class A common stock to UBS and certain other investors. Also pursuant thereto, we issued the Crestview Warrants to purchase 7.8 million shares of Class A common stock, at an exercise price of $4.34 per share. Dividends on the Series A Preferred Stock accrued at a rate of 10.0% per annum from issuance until March 15, 2012, and accrue at 14.0% per annum for the period commencing on March 16, 2012 and ending on September 15, 2013, with additional increases for every two-year period thereafter. The dividends are payable in cash, except that, at our option, up to 50.0% of the dividends for any period may be paid through the issuance of additional shares of Series A Preferred Stock. Payment of dividends on the Series A Preferred Stock is in preference and prior to any dividends payable on any class of our common stock and, in the event of any liquidation, dissolution or winding up, holders of Series A Preferred Stock are entitled to the liquidation value thereof prior to, and in preference of, payment of any amounts to holders of any class of our common stock. Subsequent to June 30, 2012 we used approximately $50 million in cash to repurchase and reduce a portion of the outstanding shares of Series A Preferred Stock.

We have assessed the current and expected implications of our business climate, our current and expected needs for funds and our current and expected sources of funds and determined, based on our financial condition as of June 30, 2012, that cash on hand, cash expected to be generated from operating activities, borrowing availability under the Revolving Credit Facility and, if necessary, any further financing activities, will be sufficient to satisfy our anticipated financing needs for working capital, capital expenditures, interest and debt service payments, and repurchases of securities and other debt obligations through June 30, 2013. However, given the uncertainty of our markets' cash flows, the quality of our accounts receivable, uncertainties in connection with the integration of the CMP Acquisition and the Citadel Acquisition, including with respect to the timing and achievement of expected synergies therefrom, no assurances can be provided in this regard.

Advertising Revenue and Adjusted EBITDA

Our primary source of revenues is the sale of advertising time on our radio stations. Our sales of advertising time are primarily affected by the demand for advertising time from local, regional and national advertisers and the advertising rates charged by our radio stations. Advertising demand and rates are based primarily on a station's ability to attract audiences in the demographic groups targeted by its advertisers, as measured principally by various ratings agencies on a periodic basis. We endeavor to develop strong listener loyalty and we believe that the diversification of formats on our stations helps to insulate them from the effects of changes in the musical tastes of the public with respect to any particular format. In addition, we believe that the radio station portfolio that we now own and operate, including as a result of the CMP Acquisition and the Citadel Acquisition, which has increased diversity in terms of format, listener base, geography, advertiser base and revenue stream, is designed to reduce our revenue dependence on any single demographic, region or industry.


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Our radio stations strive to maximize revenue by managing their on-air inventory of advertising. The optimal number of advertisements available for sale depends on the programming format of a particular station. Each of our stations has a general target level of on-air inventory available for advertising. This target level of inventory for sale may vary at different times of the day but tends to remain stable over time. We seek to broaden our base of advertisers in each of our markets by providing a wide array of audience demographic segments across our cluster of stations, thereby providing each of our potential advertisers with an effective means of reaching a targeted demographic group. Our selling and pricing activity is based on demand for our radio stations' on-air inventory. In the broadcasting industry, radio stations sometimes utilize trade or barter agreements that exchange advertising time for goods or services such as travel or lodging, instead of for cash. Trade revenue totaled $13.6 million and $7.6 million in the six months ended June 30, 2012 and 2011, respectively. Our advertising contracts are generally short-term. We generate most of our revenue from local and regional advertising, which is sold primarily by a station's sales staff. Local advertising represented approximately 72.3% and 79.8% of our total revenues during the six months ended June 30, 2012 and 2011, respectively.

Our advertising revenues vary by quarter throughout the year. As is typical in the radio broadcasting industry, our first calendar quarter generally produces the lowest revenues of each annual period as advertising generally declines following the winter holidays. The second and fourth calendar quarters typically produce the highest revenues in each year. Our operating results in any period may be affected by the incurrence of advertising and promotion expenses that typically do not have an effect on revenue generation until future periods, if at all. We continually evaluate opportunities to increase revenues through new platforms, including technology-based initiatives.

Adjusted EBITDA is the financial metric utilized by management to analyze the cash flow generated by our business. The Company presents Adjusted EBITDA including the impact of both continuing and discontinued operations. This measure isolates the amount of income generated by our radio stations after the incurrence of corporate general and administrative expenses. Management also uses this measure to determine the contribution of our radio station portfolio, including the corporate resources employed to manage the portfolio, to the funding of our other operating expenses and to the funding of debt service and acquisitions. In addition, Adjusted EBITDA is a key metric for purposes or calculating and determining our compliance with certain covenants contained in our first lien credit facility.

In deriving this measure, management excludes depreciation, amortization and stock-based compensation expense, as these do not represent cash payments for activities related to the operation of the radio stations. In addition, we also exclude LMA fees from our calculation of Adjusted EBITDA, even though such fees require a cash settlement, because they are excluded from the definition of Adjusted EBITDA contained in our First Lien Facility. Management excludes any gain or loss on the exchange or sale of radio stations as it does not represent a cash transaction. Management also excludes any realized gain or loss on derivative instruments as it does not represent a cash transaction nor is it associated with radio station operations. Management excludes any impairment of goodwill and intangible assets as it does not require a cash outlay. Management believes that Adjusted EBITDA, although not a measure that is calculated in accordance with GAAP, nevertheless is commonly employed by the investment community as a measure for determining the market value of a radio company. Management has also observed that Adjusted EBITDA is routinely employed to evaluate and negotiate the potential purchase price for radio broadcasting companies. Given the relevance to our overall value, management believes that investors consider the metric to be extremely useful.

Adjusted EBITDA should not be considered in isolation of, or as a substitute for, net income, operating income, cash flows from operating activities or any other measure for determining our operating performance or liquidity that is calculated in accordance with GAAP.

A quantitative reconciliation of Adjusted EBITDA to net income, the most directly comparable financial measure calculated and presented in accordance with GAAP, follows in this section.


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Results of Operations

Analysis of the Condensed Consolidated Results of Operations. The following analysis of selected data from our unaudited condensed consolidated statements of operations and other supplementary data includes the results of CMP and Citadel from the dates of acquisition, August 1, 2011 and September 16, 2011, respectively, and should be referred to while reading the results of operations discussion that follows (dollars in thousands):

                                       Three Months Ended             Six Months Ended             % Change           % Change
                                            June 30,                      June 30,               Three Months        Six Months
                                       2012           2011           2012           2011             Ended             Ended
STATEMENT OF OPERATIONS DATA:
Net revenues                         $ 281,041      $ 62,241      $  517,036      $ 113,907              351.5 %           353.9 %
Direct operating expenses
(excluding depreciation,
amortization and LMA fees)             168,746        35,281         322,442         68,981              378.3 %           367.4 %
Depreciation and amortization           36,200         1,769          71,007          3,677                  * *               * *
LMA fees                                   885           560           1,724          1,141               58.0 %            51.1 %
Corporate, general and
administrative expenses
(including stock-based
compensation expense)                   16,802         9,139          33,494         17,271               83.8 %            93.9 %
Gain on exchange of assets or
stations                                    -           (120 )            -         (15,278 )                * *               * *
Realized losses on derivative
instrument                                 841         1,205             753          1,244              -30.2 %           -39.5 %
Impairment of intangible assets         12,435            -           12,435             -                   * *               * *

Operating income                        45,132        14,407          75,181         36,871              213.3 %           103.9 %
Interest expense, net                  (49,619 )      (9,178 )      (100,422 )      (15,496 )            440.6 %           548.1 %
Loss on early extinguishment of
debt                                        -         (4,366 )            -          (4,366 )                * *               * *
Other (expense) income, net                (74 )         (92 )           190            (93 )            -19.6 %               * *

(Loss) income from continuing
operations before income taxes          (4,561 )         771         (25,051 )       16,916                  * *               * *
Income tax benefit (expense)             2,798        (1,582 )        10,689         (3,483 )                * *               * *

Income (loss) from continuing
operations                              (1,763 )        (811 )       (14,362 )       13,433                  * *               * *
Income from discontinued
operations, net of taxes                 9,906         2,152          10,375          4,027              360.3 %           157.6 %

Net income (loss)                    $   8,143      $  1,341      $   (3,987 )    $  17,460              507.2 %               * *

OTHER DATA:
Adjusted EBITDA (1)                  $ 110,875      $ 21,479      $  187,740      $  34,240              416.2 %           448.3 %

** Calculation is not meaningful.

(1) Adjusted EBITDA consists of net income before depreciation and amortization, LMA fees, franchise taxes, acquisition costs, stock-based compensation expense, gain or loss on the exchange or sale of assets or stations, any realized gain or loss on derivative instruments, any impairment of intangibles, interest expense, net, any gain or loss on the early extinguishment of debt, other income or expense, gain on equity investment in CMP and income tax expense. Adjusted EBITDA is not a measure of financial performance calculated in accordance with GAAP. See management's explanation of this measure and the reasons for its use and presentation, along with a quantitative reconciliation of Adjusted EBITDA to its most directly comparable financial measure calculated and presented in accordance with GAAP, above under "Advertising Revenue and Adjusted EBITDA" and below under "Adjusted EBITDA."

Three Months Ended June 30, 2012 Compared to the Three Months Ended June 30, 2011

Net Revenues. Net revenues for the three months ended June 30, 2012 increased $218.8 million, or 351.5%, to $281.0 million, compared to $62.2 million for the three months ended June 30, 2011. This increase reflects the impact of net revenues from CMP and Citadel, as well as a $2.7 million increase in political advertising. Revenue growth was partially offset by short term revenue impacts resulting from strategic format changes in some markets, general downward trends in the overall macro economic environment and reduced use of trade advertising on acquired stations. Additionally, management fee income decreased $0.8 million primarily related to the completion of the CMP Acquisition and related discontinuation of the CMP management agreement.

Direct Operating Expenses, Excluding Depreciation and Amortization. Direct operating expenses for the three months ended June 30, 2012 increased $133.4 million, or 378.3%, to $168.7 million, compared to $35.3 million for the three months ended June 30, 2011. This increase reflects the impact of direct operating expenses from CMP and Citadel in addition to a $1.3 million increase in broadcast rights. Previously announced synergies resulted in additional expense decreases due to reduced compensation costs, discretionary spending related to promotions and nontraditional revenue generating events, and enhanced expense controls.


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Depreciation and Amortization. Depreciation and amortization for the three months ended June 30, 2012 increased $34.4 million to $36.2 million, compared to $1.8 million for the three months ended June 30, 2011. This increase reflects the impact of additional depreciation and amortization expense from assets acquired in the Citadel Acquisition and the CMP Acquisition, partially offset by a $0.4 million decrease in depreciation expense on assets within our legacy markets due to a more fully depreciated asset base.

Corporate General and Administrative Expenses, Including Stock-based Compensation Expense. Corporate general and administrative expenses, including stock-based compensation expense, for the three months ended June 30, 2012 increased $7.7 million, or 83.8%, to $16.8 million, compared to $9.1 million for the three months ended June 30, 2011. This increase is primarily comprised of a $5.3 million increase in stock-based compensation expense and $2.5 million related to the restructuring and consolidation of leased properties, which is included in acquisition-related costs.

Realized Losses on Derivative Instrument. For the three months ended June 30, 2012 and 2011, we recorded losses of $0.8 million and $1.2 million, respectively, related to the fair value adjustment of the put option on five Green Bay stations we operate under an LMA.

Impairment of Intangible Assets. For the three months ended June 30, 2012, we recorded a definite-lived intangible asset impairment of $12.4 million related to the cancellation of a contract. There was no similar impairment for the three months ended June 30, 2011.

Interest Expense, net. Total interest expense, net of interest income, for the three months ended June 30, 2012 increased $40.4 million, or 440.6%, to $49.6 million compared to $9.2 million for the three months ended June 30, 2011. Interest expense associated with outstanding debt increased by $38.9 million to $47.7 million as compared to $8.8 million in the prior year period. Interest expense increased due to a higher average amount of indebtedness outstanding as a result of the Acquisition of CMP and Citadel and the Global Refinancing in the third quarter of 2011. The following summary details the components of our interest expense, net of interest income (dollars in thousands):

                                                Three Months Ended
                                                     June 30,                      2012 vs 2011
                                                2012           2011         $ Change         % Change
7.75% Senior Notes                           $   11,819       $ 6,435       $   5,384             83.7 %
Bank borrowings - term loans and
revolving credit facilities                      35,848         2,350          33,498                * *
Other interest expense                            2,089           395           1,694            428.9 %
Change in fair value of interest rate cap           165            -              165                * *
Interest income                                    (302 )          (2 )          (300 )              * *

Interest expense, net                        $   49,619       $ 9,178       $  40,441            440.6 %

** Calculation is not meaningful.

Loss on Early Extinguishment of Debt. For the three months ended June 30, 2011, we recorded $4.4 million in loss on early extinguishment of debt as a result of our debt refinancing in May 2011. There was no similar extinguishment of debt during the three months ended June 30, 2012.

Other Expense, net. Other expense, net, was $0.1 million for each of the three months ended June 30, 2012 and 2011 and represents a loss on disposition of assets.

Income Taxes. For the three months ended June 30, 2012, the Company recorded a tax benefit of $2.8 million on a pre-tax loss from continuing operations of $4.6 million, resulting in an effective tax rate of approximately 60.9%. For the three months ended June 30, 2011, the Company recorded income tax expense of $1.6 million on pre-tax income of $0.8 million, resulting in an effective tax rate of 200.0%.

The difference between the effective tax rate for each period and the federal statutory rate of 35.0% primarily relates to state and local income taxes and the change in the estimated amount of valuation allowance recorded on the Company's net deferred tax assets.

Adjusted EBITDA. As a result of the factors described above, Adjusted EBITDA for the three months ended June 30, 2012 increased $89.4 million to $110.9 million from $21.5 million for the three months ended June 30, 2011.

Six Months Ended June 30, 2012 Compared to the Six Months Ended June 30, 2011

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