| CUMULUS MEDIA INC Item 1A Risk Factors Many statements contained in this report are forward-looking in nature |
| These statements are based on our current plans, intentions or expectations, and actual results could differ materially as we cannot guarantee that we will achieve these plans, intentions or expectations |
| ” Forward-looking statements are subject to numerous risks and uncertainties, including those specifically identified below |
| Risks Related to Our Business We operate in a very competitive business environment |
| The radio broadcasting industry is very competitive |
| Our stations compete for listeners and advertising revenues directly with other radio stations within their respective markets, and some of the owners of those competing stations may have greater financial resources than we do |
| Our stations also compete with other media, such as newspapers, magazines, cable and broadcast television, outdoor advertising, satellite radio, the Internet and direct mail |
| In addition, many of our stations compete with groups of two or more radio stations operated by a single operator in the same market |
| Audience ratings and market shares fluctuate, and any adverse change in a particular market could have a material adverse effect on the revenue of stations located in that market |
| While we already compete with other stations with comparable programming formats in many of our markets, any one of our stations could suffer a reduction in ratings or revenue and could require increased promotion and other expenses, and, consequently, could have a lower Station Operating Income, if: • another radio station in the market were to convert its programming format to a format similar to our station or launch aggressive promotional campaigns; • a new station were to adopt a competitive format; or • an existing competitor were to strengthen its operations |
| The Telecom Act allows for the consolidation of ownership of radio broadcasting stations in the markets in which we operate or may operate in the future |
| Some competing consolidated owners may be larger and have substantially more financial and other resources than we do |
| In addition, increased consolidation in our target markets may result in greater competition for acquisition properties and a corresponding increase in purchase prices we pay for these properties |
| A decrease in our market ratings or market share can adversely affect our revenues |
| The success of each of our radio stations, or station clusters, is primarily dependent upon its share of the overall advertising revenue within its market |
| Although we believe that each of our stations or clusters can compete effectively in its market, we cannot be sure that any of our stations can maintain or increase its current audience ratings or market share |
| In addition to competition from other radio stations and other media, shifts in population, demographics, audience tastes and other factors beyond our control could cause us to lose our audience ratings or market share |
| Our advertising revenue may suffer if any of our stations cannot maintain its audience ratings or market share |
| We must respond to the rapid changes in technology, services and standards that characterize our industry in order to remain competitive |
| The radio broadcasting industry is subject to technological change, evolving industry standards and the emergence of new media technologies and services |
| In some cases, our ability to compete will be dependent on our acquisition of new technologies and our provision of new services, and we cannot assure you that we will have the resources to acquire those new technologies or provide those new services; in 25 _________________________________________________________________ [75]Table of Contents other cases, the introduction of new technologies and services could increase competition and have an adverse effect on our revenue |
| Recent new media technologies and services include the following: • audio programming by cable television systems, direct broadcast satellite systems, Internet content providers (both landline and wireless), Internet-based audio radio services, satellite delivered digital audio radio service and other digital audio broadcast formats; • HD Radio^tm digital radio, which could provide 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 stations in markets where we have stations |
| We also cannot assure you that we will continue to have the resources to acquire other new technologies or to introduce new services that could compete with other new technologies |
| We cannot predict the effect, if any, that competition arising from new technologies may have on the radio broadcasting industry or on our business |
| We face many unpredictable business risks that could have a material adverse effect on our future operations |
| Our operations are subject to many business risks, including certain risks that specifically influence the radio broadcasting industry |
| These include: • changing economic conditions, both generally and relative to the radio broadcasting industry in particular; • shifts in population, listenership, demographics or audience tastes; • the level of competition from existing or future technologies for advertising revenues, including, but not limited to, other radio stations, satellite radio, television stations, newspapers, the Internet, and other entertainment and communications media; and • changes in laws as well as changes in governmental regulations and policies and actions of federal regulatory bodies, including the US Department of Justice, the Federal Trade Commission and the FCC Given the inherent unpredictability of these variables, we cannot with any degree of certainty predict what effect, if any, these risks will have on our future operations |
| Any one or more of these variables may have a material adverse effect on our future operations |
| There are risks associated with our acquisition strategy |
| We intend to continue to grow through internal expansion and by acquiring radio station clusters and individual radio stations primarily in mid-size markets |
| We cannot predict whether we will be successful in pursuing these acquisitions or what the consequences of these acquisitions will be |
| Consummation of our pending acquisitions and any acquisitions in the future are subject to various conditions, such as compliance with FCC and antitrust regulatory requirements |
| The FCC requirements include: • approval of license assignments and transfers; • limits on the number of stations a broadcaster may own in a given local market; and • other rules or policies, such as the ownership attribution rules, that could limit our ability to acquire stations in certain markets where one or more of our stockholders has other media interests |
| The antitrust regulatory requirements include: • filing with the US Department of Justice and the Federal Trade Commission under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, referred to as the HSR Act, where applicable; 26 _________________________________________________________________ [76]Table of Contents • expiration or termination of the waiting period under the HSR Act; and • possible review by the US Department of Justice or the Federal Trade Commission of antitrust issues under the HSR Act or otherwise |
| We cannot be certain that any of these conditions will be satisfied |
| In addition, the FCC has asserted the authority to review levels of local radio market concentration as part of its acquisition approval process, even where proposed assignments would comply with the numerical limits on local radio station ownership in the FCC’s rules and the Communications Act of 1934, referred to as the Communications Act |
| Our acquisition strategy involves numerous other risks, including risks associated with: • identifying acquisition candidates and negotiating definitive purchase agreements on satisfactory terms; • integrating operations and systems and managing a large and geographically diverse group of stations; • diverting our management’s attention from other business concerns; • potentially losing key employees at acquired stations; and • the diminishing number of properties available for sale in mid-size markets |
| We cannot be certain that we will be able to successfully integrate our acquisitions or manage the resulting business effectively, or that any acquisition will achieve the benefits that we anticipate |
| In addition, we are not certain that we will be able to acquire properties at valuations as favorable as those of previous acquisitions |
| Depending upon the nature, size and timing of potential future acquisitions, we may be required to raise additional financing in order to consummate additional acquisitions |
| We cannot assure you that our debt agreements will permit the necessary additional financing or that additional financing will be available to us or, if available, that financing would be on terms acceptable to our management |
| We may be restricted in pursuing certain strategic acquisitions because of our agreement with CMP Under an agreement that we will enter into with CMP and the other investors in CMP in connection with the formation of CMP, we have agreed to allow CMP the right to pursue first any business opportunity primarily involving the top-50 radio markets in the United States |
| We are allowed to pursue such business opportunities only after CMP has declined to pursue them |
| As a result, we may be limited in our ability to pursue strategic acquisitions or alternatives primarily involving large-sized markets (including opportunities that primarily involve large-sized markets but also involve mid-sized markets) that may present attractive opportunities for us in the future |
| We have written off, and could in the future be required to write off, a significant portion of the fair market value of our FCC broadcast licenses and goodwill, which may adversely affect our financial condition and results of operations |
| As of December 31, 2005, our FCC licenses and goodwill comprise 87prca of our assets |
| Each year, we are required by SFAS Nodtta 142, Goodwill and Other Intangible Assets, to assess the fair market value of our FCC broadcast licenses and goodwill to determine whether the fair market value of those assets is impaired |
| In 2005, we recorded impairment charges of approximately dlra264dtta1 million in order to reduce the carrying value of certain broadcast licenses and goodwill to their respective fair market values |
| Our future impairment reviews could result in additional impairment charges |
| Such additional impairment charges would reduce our reported earnings for the periods in which they are recorded |
| Our results of operations could be adversely affected by a downturn in the US economy or in the economies of the markets in which we operate |
| Revenue generated by our radio stations depends primarily upon the sale of advertising |
| Advertising expenditures, which we believe to be largely a discretionary business expense, generally tend to decline 27 _________________________________________________________________ [77]Table of Contents during an economic recession or downturn |
| Furthermore, because a substantial portion of our revenue is derived from local advertisers, our ability to generate advertising revenue in specific markets is directly affected by local or regional economic conditions |
| Consequently, a recession or downturn in the national economy or the economy of an individual geographic market in which we own or operate stations could adversely affect our advertising revenue and, therefore, our results of operations |
| Our broadcasting revenues could be materially adversely affected by recessions, which may be triggered by economic forces such as the business cycle or by cataclysmic human events |
| Future acts of war and terrorism against the United States, and the country’s response thereto, could cause our advertising revenues to decline due to advertising cancellations, delays or defaults in payment for advertising time, and the adverse impact on the general economic activity in the United States |
| Even in the absence of a general recession or downturn in the economy, an individual business sector that tends to spend more on advertising than other sectors might be forced to reduce its advertising expenditures if that sector experiences a downturn |
| If that sector’s spending represents a significant portion of our advertising revenues, any reduction in its expenditures may affect our revenue |
| We are dependent on key personnel |
| Our business is managed by a small number of key management and operating personnel, and our loss of one or more of these individuals could have a material adverse effect on our business |
| We believe that our future success will depend in large part on our ability to attract and retain highly skilled and qualified personnel and to expand, train and manage our employee base |
| We have entered into employment agreements with some of our key management personnel that include provisions restricting their ability to compete with us under specified circumstances |
| We also employ several on-air personalities with large loyal audiences in their individual markets |
| On occasion, we enter into employment agreements with these personalities to protect our interests in those relationships that we believe to be valuable |
| The loss of one or more of these personalities could result in a short-term loss of audience share in that particular market |
| The broadcasting industry is subject to extensive and changing Federal regulation |
| The radio broadcasting industry is subject to extensive regulation by the FCC under the Communications Act of 1934 |
| We are required to obtain licenses from the FCC to operate our 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, we cannot assure you that the FCC will grant our existing or future renewal applications or that the renewals will not include conditions out of the ordinary course |
| The non-renewal or renewal with conditions, of one or more of our licenses could have a material adverse effect on us |
| We must also comply with the 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 acquire radio stations that would be material to our financial performance in a particular market or overall |
| The FCC also requires radio stations to comply with certain technical requirements to limit interference between two or more radio stations |
| Despite those limitations, a dispute could arise whether another station is improperly interfering with the operation of one of our stations or another radio licensee could complain to the FCC that one our stations is improperly interfering with that licensee’s station |
| There can be no assurance as to how the FCC might resolve that dispute |
| These FCC regulations and others may change over time, and we cannot assure you that those changes would not have a material adverse effect on us |
| 28 _________________________________________________________________ [78]Table of Contents In recent years, the FCC has engaged in more 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” material between the hours of 6:00 a |
| The FCC has recently increased its enforcement efforts with respect to these regulations |
| Further, Congress has introduced legislation that would substantially increase the penalties for broadcasting indecent programming and potentially subject broadcasters to license revocation, renewal or qualification proceedings in the event that they broadcast indecent material |
| We may in the future become subject to inquiries or proceedings related to our stations’ broadcast of allegedly indecent or obscene material |
| To the extent that such an inquiry or proceeding results in the imposition of fines, a settlement with the FCC, revocation of any of our station licenses or denials of license renewal applications, our results of operation and business could be materially adversely affected |
| We are required to obtain prior FCC approval for each radio station acquisition |
| The acquisition of a radio station requires the prior approval of the FCC To obtain that approval, we would have to file a transfer of control or assignment application with the FCC The Communications Act and FCC rules allow members of the public and other interested parties to file petitions to deny or other objections to the FCC grant of any transfer or assignment application |
| The FCC could rely on those objections or its own initiative to deny a transfer or assignment application or to require changes in the transaction as a condition to having the application granted |
| The FCC could also change its existing rules and policies to reduce the number of stations that we would be permitted to acquire in some markets |
| For these and other reasons, there can be no assurance that the FCC will approve potential future acquisitions that we deem material to our business |
| Risks Related to Our Indebtedness We have a substantial amount of indebtedness, which may adversely affect our cash flow and our ability to operate our business, remain in compliance with debt covenants and make payments on our indebtedness |
| As of December 31, 2005, our long-term debt, including the current portion, was dlra569dtta0 million, representing approximately 97prca of our stockholders’ equity |
| Our credit facilities have interest and principal repayment obligations that are substantial in amount |
| Our substantial indebtedness could have important consequences for you, including: • requiring a substantial portion of cash flow from operations to be dedicated to the payment of principal and interest on our indebtedness, therefore reducing our ability to use our cash flow to fund our operations, capital expenditures and future business opportunities; • exposing us to the risk of increased interest rates as certain of our borrowings are at variable rates of interest; • increasing our vulnerability to general economic downturns and adverse industry conditions; • limiting our ability to obtain additional financing for working capital, capital expenditures, debt service requirements, acquisitions and general corporate or other purposes; and • limiting our ability to adjust to changing market conditions and placing us at a disadvantage compared to our competitors who have less debt |
| • restricting us from making strategic acquisitions or causing us to make non-strategic divestitures; We and our restricted subsidiaries may be able to incur substantial additional indebtedness in the future, subject to the restrictions contained in our credit facilities |
| If new indebtedness is added to our current debt levels, the related risks that we now face could intensify |
| 29 _________________________________________________________________ [79]Table of Contents The credit agreement governing our credit facility imposes significant restrictions on us |
| Our credit agreement limits or restricts, among other things, our ability to: • incur additional indebtedness or grant additional liens or security interests in our assets; • pay dividends, make payments on certain types of indebtedness or make other restricted payments; • make particular types of investments or enter into speculative hedging agreements; • enter into some types of transactions with affiliates; • merge or consolidate with any other person or make changes to our organizational documents or other material agreement to which we are a party; • sell, assign, transfer, lease, convey or otherwise dispose of our assets (except within certain limits) or enter into sale-leaseback transactions; or • make capital expenditures |
| Our credit agreement also requires us to maintain specified financial ratios and to satisfy certain financial condition tests |
| Our ability to meet those financial ratios and financial condition tests can be affected by events beyond our control, and we cannot be sure that we will maintain those ratios or meet those tests |
| A breach of any of these restrictions could result in a default under our debt agreements |
| Our lenders have taken security interests in substantially all of our consolidated assets, and we have pledged the stock of our subsidiaries to secure the debt under our credit facility |
| If an event of default under our credit agreement occurs, our lenders could declare all amounts outstanding, including accrued interest, immediately due and payable |
| If we could not repay those amounts, those lenders could proceed against the collateral pledged to them to secure that indebtedness |
| If our credit facility indebtedness were accelerated, our assets may not be sufficient to repay in full that indebtedness |
| Our ability to comply with the covenants in our credit agreement will depend upon our future performance and various other factors, such as business, competitive, technological, legislative and regulatory factors, some of which are beyond our control |
| If we fail to comply with the covenants in our credit agreement, our lenders could declare all amounts owed to them immediately due and payable |
| Risks Related to Our Class A Common Stock The public market for our Class A Common Stock may be volatile |
| We cannot assure you that the market price of our Class A Common Stock will not decline, and the market price could be subject to wide fluctuations in response to such factors as: • conditions and trends in the radio broadcasting industry; • actual or anticipated variations in our quarterly operating results, including audience share ratings and financial results; • changes in financial estimates by securities analysts; • technological innovations; • competitive developments; • adoption of new accounting standards affecting companies in general or affecting companies in the radio broadcasting industry in particular; and • general market conditions and other factors |
| Further, the stock markets, and in particular the NASDAQ National Market, on which our Class A Common Stock is listed, from time to time have experienced extreme price and volume fluctuations that were not necessarily related or proportionate to the operating performance of the affected companies |
| In 30 _________________________________________________________________ [80]Table of Contents addition, general economic, political and market conditions such as recessions, interest rate movements or international currency fluctuations, may adversely affect the market price of our Class A Common Stock |
| Certain stockholders control or have the ability to exert significant influence over the voting power of our capital stock |
| As of February 28, 2006, and after giving effect to the exercise of all of their options exercisable within 60 days of that date, Lewis W Dickey, Jr, our Chairman, President, Chief Executive Officer and a director, and his brother, John W Dickey, our Executive Vice President, collectively beneficially own 6cmam607cmam505 shares, or approximately 12dtta5prca, of our outstanding Class A Common Stock, and 2cmam145cmam561 shares, or 100dtta0prca, of our outstanding Class C Common Stock, which collectively represent approximately 37dtta7prca of the outstanding voting power of our common stock |
| Consequently, they have the ability to exert significant influence over our policies and management |
| The interests of these stockholders may differ from the interests of our other stockholders |
| As of February 28, 2006, BA Capital Company, LP, referred to as BA Capital, and its affiliate, BancAmerica Capital Investors SBIC I, LP, referred to as BACI, together own 840cmam250 shares, or 1dtta7prca, of our Class A Common Stock and 11cmam630cmam759 shares, or 100dtta0prca, of our nonvoting Class B Common Stock, which is convertible into shares of Class A Common Stock |
| BA Capital also holds options exercisable within 60 days of February 28, 2006 to purchase 105cmam000 shares of our Class A Common Stock and Robert H Sheridan, III, one of our directors and a senior vice president and managing director with an economic interest in the general partners of both BA Capital and BACI, holds options exercisable within 60 days of February 18, 2006 to purchase 102cmam499 shares of our Class A Common Stock |
| Assuming that those options were exercised for shares of our Class A Common Stock, and giving effect to the conversion into shares of our Class A Common Stock of all shares of our Class B Common Stock held by BA Capital and BACI, BA Capital and BACI would hold approximately 20dtta7prca of the total voting power of our common stock |
| BA Capital and BACI are both affiliates of Bank of America Corporation |
| BA Capital has the right to designate one member of our Board and Mr |
| Sheridan currently serves on our Board as BA Capital’s designee |
| As a result, BA Capital, BACI and Mr |
| Sheridan have the ability to exert significant influence over our policies and management, and their interests may differ from the interests of our other stockholders |
| Cautionary Statement Regarding Forward-Looking Statements In various places in this annual report on Form 10-K, we use statements that constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 |
| These statements relate to our future plans, objectives, expectations and intentions |
| Although we believe that, in making any of these statements, our expectations are based on reasonable assumptions, these statements may be influenced by factors that could cause actual outcomes and results to be materially different from these projected |
| When used in this document, words such as “anticipates,” “believes,” “expects,” “intends,” and similar expressions, as they relate to us or our management, are intended to identify these forward-looking statements |
| These forward-looking statements are subject to numerous risks and uncertainties, including those referred above to under “Risk Factors” and as otherwise described in our periodic filings with the SEC from time to time |
| Important facts that could cause actual results to differ materially from those in forward-looking statements, certain of which are beyond our control, include: • 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; • the popularity of radio as a broadcasting and advertising medium; • cancellations, disruptions or postponements of advertising schedules in response to national or world events; 31 _________________________________________________________________ [81]Table of Contents • our capital expenditure requirements; • legislative or regulatory requirements; • risks and uncertainties relating to our leverage; • interest rates; • our continued ability to identify suitable acquisition targets; • consummation and integration of pending or future acquisitions; • access to capital markets; and • fluctuations in exchange rates and currency values |
| Our actual results, performance or achievements could differ materially from those expressed in, or implied by, the forward-looking statements |
| Accordingly, we cannot be certain that any of the events anticipated by the forward-looking statements will occur or, if any of them do occur, what impact they will have on us |
| We assume no obligation to update any forward-looking statements as a result of new information or future events or developments, except as required under federal securities laws |
| We caution you not to place undue reliance on any forward-looking statements, which speak only as of the date of this annual report on Form 10-K |