INTEREP NATIONAL RADIO SALES INC - 10-Q Quarterly Report

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 x No ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

The number of shares of the registrant’s Common Stock outstanding as of the close of business on August 5, 2004, was 6,547,927 shares of Class A Common Stock, and 4,304,214 shares of Class B Common Stock.

The accompanying Notes to Unaudited Interim Consolidated Financial Statements are an integral part of these balance sheets.

The consolidated financial statements include the accounts of Interep National Radio Sales, Inc. (“Interep”), together with its subsidiaries (collectively, the “Company” or “we”), and have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted. All significant intercompany transactions and balances have been eliminated.

The consolidated financial statements as of June 30, 2004 are unaudited; however, in the opinion of management, such statements include all adjustments (consisting of normal recurring accruals) necessary for a fair presentation of the results for the periods presented. The interim financial statements should be read in conjunction with the audited financial statements and notes thereto included in our Consolidated Financial Statements for the year ended December 31, 2003, which are available upon request, at our website, www.interep.com, or at the Securities and Exchange Commission website, www.sec.gov. Due to the seasonal nature of our business, the results of operations for the interim periods are not necessarily indicative of the results that might be expected for future interim periods or for the full year ending December 31, 2004.

For the three and six months ended June 30, 2004 and 2003, our comprehensive loss was equal to the respective net loss for each of the periods presented.

We are a national representation (“rep”) firm serving radio broadcast clients and certain internet service providers throughout the United States. Commission revenues are derived from sales of advertising time for radio stations under representation contracts. Commissions and fees are recognized in the month the advertisement is broadcast. In connection with its unwired network business, we collect fees for unwired network radio advertising and, after deducting its commissions, remit the fees to the respective radio stations. In instances when we are not legally obligated to pay a station or service provider until the corresponding receivable is paid, fees payable to stations have been offset against the related receivable from advertising agencies in the accompanying consolidated balance sheets. We record all commission revenues on a net basis. Commissions are recognized based on the standard broadcast calendar that ends on the last Sunday in each reporting period. The broadcast calendars for the three and six months ended June 30, 2004 and 2003 both had 13 and 26 weeks, respectively.

Our station representation contracts usually renew automatically from year to year unless either party provides written notice of termination at least twelve months prior to the next automatic renewal date. In accordance with industry practice, in lieu of termination, an arrangement is normally made for the purchase of such contracts by a successor representative firm. The purchase price paid by the successor representation firm is generally based upon the historic commission income

projected over the remaining contract period plus two months. Income earned from the sale of station representation contracts (contract termination revenue) is recognized on the effective date of the buyout agreement. Costs of obtaining station representation contracts are deferred and amortized over the life of the new contract. Such amortization is included in the accompanying consolidated statements of operations as a component of depreciation and amortization expense. Amounts which are to be amortized during the next year are included as current assets in the accompanying consolidated balance sheets. From time to time, we have paid inducements to extend the life of contracts with its radio groups. These inducement payments are recorded as deferred costs or expensed in the period incurred, depending on the usage and purpose of the payment.

Basic loss per share applicable to common shareholders for each of the respective periods has been computed by dividing the net loss by the weighted average number of common shares outstanding during the period, amounting to 10,420,091 and 10,248,159 for the three months ended June 30, 2004 and 2003, respectively, and 10,334,125 and 10,248,159 for the six months ended June 30, 2004 and 2003, respectively. Diluted earnings per share applicable to common shareholders reflects the potential dilution that could occur if the outstanding options to purchase common stock were exercised, utilizing the treasury stock method, and also assumes conversion of outstanding convertible preferred stock into shares of common stock at the stated rate of conversion (Note 3). For the three and six months ended June 30, 2004 and 2003, the exercise of outstanding options would have an anti-dilutive effect and therefore have been excluded from the calculation.

During 2003, we offered an early retirement program, which was accepted by 17 people, including four executives, to reduce compensation costs on a going forward basis. This resulted in approximately $3,000 of termination benefits to be paid over an extended period of time, approximately $2,740 of which was recorded during 2003 at net present value. SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities requires us to record this new liability at fair value as of the time the liability was incurred. At December 31, 2003, the accompanying consolidated balance sheet includes an accrual relating to the restructuring program of $2,230. During the six months ended June 30, 2004, we paid approximately $849 of termination benefits under both programs, and also accreted approximately $76 of interest. As of June 30, 2004, the remaining accrual was $1,457, of which $1,179 is included in accrued employee related liabilities and $278 is included in other noncurrent liabilities.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

SFAS No. 131, Disclosure about Segments of an Enterprise and Related Information requires us to report segment financial information consistent with the presentation made to our management for decision making purposes. We are managed as one segment and all revenues are derived solely from representation operations and related activities.

We have elected to continue to account for our employee stock-based compensation plan using the intrinsic value method, as prescribed by APB No. 25 Accounting for Stock Issued to Employees and interpretations thereof (collectively “APB 25”) versus the fair value method allowed by SFAS No. 123. We have implemented the disclosure provision of SFAS No. 148, Accounting for Stock-Based Compensation - Transition and Disclosure. This statement amended the disclosure provisions of Financial Accounting Standards Board (“FASB”) SFAS No. 123, Accounting for Stock Based Compensation, to require prominent disclosure of the effect on reported net income of an entity’s accounting policy decisions with respect to stock-based employee compensation and amended APB Opinion No. 28, Interim Financial Reporting, to require disclosure of those effects in interim financial information. Accordingly, no compensation cost has been recognized in the accompanying Consolidated Statements of Operations for the six months ended June 30, 2004 and 2003 in respect of stock options granted during those periods. See Note 2 to Consolidated Financial Statements for further discussion of our accounting for our stock-based compensation plans. Had compensation cost for these options been determined consistent with SFAS No. 123 and SFAS No. 148, our net loss applicable to common shareholders, basic and diluted loss per share would have been as follows:

As required, the pro forma disclosures above include options granted since January 1, 1995. Consequently, the effects of applying SFAS No. 123 for providing pro forma disclosures may not be representative of the effects on reported net income (loss) for future years until all options outstanding are included in the pro forma disclosures. For purposes of pro forma disclosures, the estimated fair value of stock-based compensation plans and other options is amortized to expense primarily over the vesting period.

Certain reclassifications have been made to prior period financial statements to conform to the current period’s presentation.

FASB’s Interpretation No. 46, Consolidation of Variable Interest Entities (FIN No. 46) was originally issued in January 2003 and was subsequently revised in December 2003. FIN No. 46 attempts to clarify the application of Accounting Research Bulletin No. 51, Consolidated Financial Statements, to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support. In general, a Variable Interest Entity (VIE) is an entity that has (1) an insufficient amount of equity for the entity to carry on its principal operations without additional subordinated financial support from other parties, (2) a group of equity owners that are unable to make decisions about the entity’s activities or (3) equity that does not absorb the entity’s

losses or receive the benefits of the entity. The December 2003 revision of FIN No. 46 excludes operating businesses from its application, unless (1) the reporting company and its related parties were involved in the formation of the entity (excluding operating joint ventures under joint control of the company and one or more independent parties), (2) substantially all of the activities of the entity are conducted on behalf of the reporting company, (3) the reporting company provides more than half of the equity, subordinated debt or other forms of subordinated support and (4) the activities of the entity primarily relate to securitizations or other forms of asset backed financing.

We follow APB 25 and related Interpretations in accounting for our employee stock options. Under APB 25, because the exercise price of our employee stock options equals the market price of the underlying stock on the date of grant, generally no compensation expense is recognized.

Pro forma information regarding net income and earnings per share, as presented in Note 1, is required by SFAS No. 123, as amended by SFAS No. 148, and has been determined as if we had accounted for our employee stock options under the fair value method of SFAS No. 123 as of its effective date. The weighted average fair value for options was estimated at the dates of grants using the Black-Scholes option-pricing model to be $1.18 for the six months ended June 30, 2004 and $1.77 for the six months ended June 30, 2003, with the following weighted average assumptions: risk free interest rate of 3.25% for the six months ended June 30, 2004 and 2003; expected volatility factors of 107% and 174% for six months ended June 30, 2004 and 2003, respectively; expected dividend yield of 0% for the six months ended June 30, 2004 and 2003; and estimated option lives of 5 years for the six months ended June 30, 2004 and 2003.

In prior years, we repriced 775,300 options with an exercise price of $8.77 to an exercise price of $2.81, which represented the fair market value on the date of the repricing. In accordance with generally accepted accounting principles, we have adopted variable plan accounting for these options from the date of the repricing. The price of the stock dropped below the repriced levels after trading at prices higher than the repriced levels. No compensation expense was required in June 30, 2004 and 2003.

On January 5, 2004, we granted 50,000 options to an executive at an exercise price of $1.50, which was the fair market value at the date of grant. These options vest over a three-year period. On March 19, 2003, we granted 40,000 options to an executive at an exercise price of $1.73, which was the fair market value at the date of grant. These options vest over a three-year period. On November 21, 2003, we granted 250,000 options to an executive at an exercise price of $2.00, which was the below fair market value at the date of grant. We recorded compensation expense of $38 related to these options, since they were granted at below market value. These options vest over a three-year period.

We are authorized to issue Series A Convertible Preferred Stock (the “Series A Stock”) with a face value of $100 per share and a liquidation preference in such amount in priority over the Company’s Class A and Class B common stock. Each share of the Series A Stock may be converted at the option of the holder at any time into 25 shares of Class A common stock at an initial

conversion price of $4.00 per share (subject to anti-dilution adjustments). If the market price of our Class A common stock is $8.00 or more for 30 consecutive trading days, the Series A Stock will automatically be converted into shares of Class A common stock at the then applicable conversion price. The Series A Stock bears a 4% annual cumulative dividend that may be paid in cash or in kind (in additional shares of the Series A Stock) at the Company’s discretion. We expect to pay such dividends in kind for the foreseeable future. Holders of shares of the Series A Stock vote on an “as converted” basis, together with the holders of Class A and Class B common stock. A stock dividend for the Series A Stock in the amount of 4,561 and 4,037 shares was paid as of May 1, 2004 and 2003, respectively.

On June 30, 2004, the Interep Stock Growth Plan (“SGP”) paid us $537 to purchase 365,223 shares of Class B common stock. In March 2004, the SGP paid us $544 to purchase 238,759 shares of Class B common stock, which were not issued until the second quarter of 2004. The shares were issued at the current fair market value on the date of purchase. During 2003, the SGP purchased Class A common stock in the open market rather than shares of Class B common stock from the Company.

Long-term debt at June 30, 2004 was comprised of $99,000 in 10.0% Senior Subordinated Notes due July 1, 2008 (the “Notes”) and $5,000 of the $10,000 senior secured revolving credit facility, as described below.

The Notes are general unsecured obligations of the Company, and the indenture for the Notes provides, among other things, restrictions on incurrence of additional indebtedness, payment of dividends, repurchase of equity interests (as defined), creation of liens (as defined), transactions with affiliates (as defined), sale of assets or certain mergers and consolidations. The Notes bear interest at the rate of 10.0% per annum, payable semiannually on January 1 and July 1. The Notes are subject to redemption at the option of the Company, in whole or in part. All of our subsidiaries are guarantors of the Notes. Each guarantee is full, unconditional and joint and several with the other guarantees. We have no other assets or operations separate from our investment in the subsidiaries. In July 2000, we repurchased $1,000 in principal of the Notes in an open market transaction.

We capitalized $4,689 of costs incurred in the offering of the Notes, which is being amortized over the ten-year life of the Notes.

In September 2003, we entered into a $10,000 senior secured revolving credit facility with Commerce Bank, N.A. to replace our $10,000 senior secured term loan facility with an institutional lender. The revolving credit facility enables us to efficiently manage our cash as we may borrow, repay and re-borrow funds as needed. The revolving credit facility has an initial term of three years. The credit facility is secured by a first priority lien on all of our and our subsidiaries’ property and assets, tangible and intangible. Interest is payable monthly on the borrowings at rates based on either a prime rate or LIBOR, plus a premium of 1% for prime rate borrowings, and 4% for LIBOR borrowings. In addition to covenants similar to those in the indenture governing the Notes, the credit facility requires, among other things, that we (i) maintain certain 12-month trailing Operating EBITDA levels (“Operating EBITDA” is defined in the Loan and Security Agreement as, for any period: (a) the Company’s consolidated net income (loss), plus (b) all taxes on income plus state and local franchise and corporation taxes paid by the Company and any of its Subsidiaries plus (c) all interest expense

deducted in determining such net income, plus (d) all depreciation and amortization expense and other non-cash charges (including, without limitation, non-cash charges resulting from the repricing of employee stock options), plus (e) severance costs expensed but not yet paid in cash, less (f) extraordinary gains, plus (g) extraordinary losses, less (h) contract termination revenue); (ii) have certain minimum accounts receivable as of the end of each quarter; (iii) have not less than $200,000 of representation contract value as of the end of each quarter; and (iv) have not less than $2,000 of cash and cash equivalents as of the end of each quarter. We incurred approximately $500 in legal and other costs directly related to the revolving credit facility, which are being amortized into interest expense over the life of the facility. Substantially all of our subsidiaries, jointly, severally and unconditionally guarantee the revolving credit facility.

We may be involved in various legal actions from time to time arising in the normal course of business. In the opinion of management, there are no matters outstanding that would have a material adverse effect on the consolidated financial position or results of our operations.

In October 2003, one of our subsidiaries instituted an arbitration proceeding in Las Vegas, Nevada against Citadel Broadcasting Corporation in connection with Citadel’s termination of its representation contract with us. We are seeking monetary damages from Citadel for, among other things, unpaid commissions to which we are contractually entitled and other damages arising from Citadel’s breach of the representation contract and certain other contracts to which Citadel is a party. We commenced the arbitration proceeding pursuant to the commercial arbitration rules of the American Arbitration Association. In November 2003, Citadel served its answer and several counterclaims. Arbitrators have been selected and the parties are proceeding with the arbitration. We believe that we have factual and legal defenses to the counterclaims and intend to pursue our claims and defend the counterclaims vigorously. The arbitration hearing is currently scheduled to commence in late November 2004.

Certain of our clients were served summons and complaints (on separate matters) for alleged breaches of various national sales representation agreements. We had agreed to indemnify our clients from and against any loss, liability, cost or expense incurred in the actions. In the first quarter of 2002, we entered into a settlement agreement regarding these contract acquisition claims. The settlement resulted in the offset of approximately $12,500 in representation contract buyout receivables and payables as well as additional contract termination revenue of $2,400. In addition, the settlement agreement includes amended payment schedules for approximately $1,000 in contract representation payables previously recorded.

The following discussion should be read in conjunction with our Consolidated Financial Statements, including the notes thereto, included elsewhere in this Report.

Throughout this Quarterly Report, when we refer to “Interep” or “the Company,” we refer collectively to Interep National Radio Sales, Inc. and all of our subsidiaries unless the context indicates otherwise or as otherwise noted.

Some of the statements made in this Quarterly Report are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are not statements of historical fact, but instead represent our belief about future events. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” “continue,” or the negative of these terms or other comparable terminology. These statements are based on many assumptions and involve known and unknown risks and uncertainties that are inherently uncertain and beyond our control. These risks and uncertainties may cause our or our industry’s actual results, levels of activity, performance or achievements to be materially different than any expressed or implied by these forward-looking statements. Although we believe that the expectations in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. You should review the factors noted in Management’s Discussion and Analysis of Financial Condition and Results of Operation – Certain Factors That May Affect Our Results of Operations below for a discussion of some of the things that could cause actual results to differ from those expressed in our forward-looking statements.

We derive a substantial majority of our revenues from commissions on sales of national spot radio advertising airtime for the radio stations we represent. Generally, advertising agencies or media buying services retained by advertisers purchase national spot advertising time. We receive commissions from our client radio stations based on the national spot radio advertising billings of the station, net of agency commissions, generally 15%. We enter into written representation contracts with our clients, which include negotiated commission rates. Because commissions are based on the prices paid to radio stations for spots, our revenue base is essentially adjusted for inflation.

The effect of these factors on our financial condition and results of operations varies from period to period.

A number of factors influence the performance of the national spot radio advertising market, including, but not limited to, general economic conditions, consumer attitudes and spending patterns, the amount spent on advertising generally, the share of total advertising spent on radio and the share of total radio advertising represented by national spot radio.

Our share of the national spot advertising market changes as a result of increases and decreases in the amount of national spot advertising broadcast by our clients. Moreover, our market share increases as we acquire representation contracts with new client stations and decreases if current client representation contracts are terminated. Thus, our ability to attract new clients and to retain existing clients affects our market share.

The value of representation contracts that have been acquired or terminated during the last few years has tended to increase due to a number of factors, including the consolidation of ownership in the radio broadcast industry following the passage of the Telecommunications Act of 1996. In the period following that legislation, we increased our representation contract acquisition activity and devoted a significant amount of our resources to these acquisitions. While the pace of that activity significantly declined in recent years, it may again increase in light of recent Federal Communications Commission rule-making. We base our decisions to acquire a representation contract on the market share opportunity presented and an analysis of the costs and net benefits to be derived. We continuously seek opportunities to acquire additional representation contracts on attractive terms, while maintaining our current clients. Our ability to acquire and maintain representation contracts has had, and will continue to have, a significant impact on our revenues and cash flows.

We recognize revenues on a contract termination as of the effective date of the termination, except in the case of a material dispute. In that event, revenue is recognized when the dispute is resolved. When a contract is terminated, we write off in full the unamortized portion, if any, of the cost we originally incurred on our acquisition of the contract. When we enter into a representation contract with a new client, we amortize the contract acquisition cost in equal monthly installments over the life of the new contract. As a result, our operating income is affected, negatively or positively, by the acquisition or loss of client stations. We are unable to forecast any trends in contract buyout activity, or in the amount of revenues or expenses that will likely be associated with buyouts during a particular period. Generally, the amount of revenue resulting from the buyout of a representation contract depends on the length of the remaining term of the contract and the revenue generated under the contract during the 12-month “trailing period” preceding the date of termination. The amount recognized by us as contract termination revenue in any period is not, however, indicative of contract termination revenue that may be realized in any future period. Historically, the level of buyout activity has varied from period to period. Additionally, the length of the remaining terms, and the commission revenue generation, of the contracts which are terminated in any period vary to a considerable extent. Accordingly, while buyout activity and the size of buyout payments generally increased after 1996, their impact on our revenues and income is expected to be uncertain, due to the variables of contract length and commission generation.

Similar to radio representation, we sell advertising on behalf of Internet website clients. Revenues and expenses from this portion of our business are affected generally by the level of advertising on the Internet, and the portion of that advertising that we can direct to our clients’ websites, the prices obtained for advertising on the Internet and our ability to obtain contracts from high-traffic Internet websites and from Internet advertisers.

Our selling and corporate expense levels are dependent on management decisions regarding operating and staffing levels and inflation. Selling expenses represent all costs associated with our marketing, sales and sales support functions. Corporate expenses include items such as corporate management, corporate communications, financial services, advertising and promotion expenses and employee benefit plan contributions.

Our business generally follows the pattern of advertising expenditures. It is seasonal to the extent that radio advertising spending increases during the fourth calendar quarter in connection with the Christmas season and tends to be weaker during the first calendar quarter. Radio advertising also generally increases during the second and third quarters due to holiday-related advertising, school vacations and back-to-school sales. Additionally, radio tends to experience increases in the amount of

advertising revenues as a result of special events such as political election campaigns. Furthermore, the level of advertising revenues of radio stations, and therefore our level of revenues, is susceptible to prevailing general and local economic conditions and the corresponding increases or decreases in the budgets of advertisers, as well as market conditions and trends affecting advertising expenditures in specific industries.

Three Months Ended June 30, 2004 Compared to Three Months Ended June 30, 2003

Commission revenues. Commission revenues for the second quarter of 2004 decreased to $20.6 million from $22.8 million for the second quarter of 2003, or approximately 9.6%. This $2.2 million decrease was attributable primarily to the cancellation of our representation contract with Citadel Broadcasting in the fourth quarter of 2003. (See Note 6 to the unaudited interim consolidated financial statements.) Commission revenue was marginally down from other clients during the second quarter of 2004, primarily due to a general softness in national spot advertising.

Contract termination revenue. Contract termination revenue in the second quarter of 2004 increased by $0.3 million, or 62.8%, to $0.9 million from $0.6 million in the second quarter of 2003. This increase was attributable to a higher level of buyouts in the second quarter of 2004.

Selling expenses. Selling expenses for the second quarter of 2004 increased to $16.0 million from $15.9 million in the second quarter of 2003. This increase of $0.1 million, or approximately 0.6%, was, in large part, attributable to the cost of special promotion programs that were partially offset by lower compensation costs.

General and administrative expenses. General and administrative expenses of $3.9 million for the second quarter of 2004 increased $0.5 million, or 16.5%, from $3.4 million for the second quarter of 2003 primarily due to the increase in our legal expenses as a consequence of the Citadel litigation.

Operating income before depreciation and amortization. Operating income before depreciation and amortization decreased by $2.5 million for the second quarter of 2004 to $1.6 million, from $4.1 million for the second quarter of 2003, for the reasons discussed above. Operating income before depreciation and amortization is not a measure of performance calculated in accordance with GAAP and should not be considered in isolation from or as a substitute for operating income (loss), net income (loss), cash flow or other GAAP measurements. We believe it is useful in evaluating our performance, in addition to the GAAP data presented, as it is commonly used by lenders and the investment community to evaluate the performance of companies in our business. Moreover, the maintenance of certain levels of operating income before depreciation and amortization is required under the covenants of our revolving credit facility.

Reconciliation of operating income before depreciation and amortization to GAAP Loss Data

Depreciation and amortization expense. Depreciation and amortization expense decreased $0.7 million, or 12.1%, during the second quarter of 2004, to $4.9 million from $5.6 million in the second quarter of 2003. This decrease was primarily the result of lower contract acquisition cost amortization.

Operating loss. Operating loss increased by $1.8 million, or 123.6%, for the second quarter of 2004 to $3.3 million, as compared to $1.5 million for the second quarter of 2003, for the reasons discussed above. Currently, we believe national radio advertising is experiencing a softness in revenues due to a combination of business and economic factors, and it is unclear when the trend will reverse itself and to what extent. However, historically, the level of national radio advertising tends to increase during the third and fourth quarters, and we anticipate such an increase for 2004. Additionally, we are exploring ways to increase capital and further decrease our expenses to offset the decline in revenues.

Interest expense, net. Interest expense, net, decreased $0.1 million, or 4.7%, to $2.7 million for the second quarter of 2004, from $2.8 million for the second quarter of 2003. This decrease primarily resulted from our replacement, in September 2003, of a prior term loan facility with a new revolving credit facility with a lower interest rate.

Provision for income taxes. Our current and deferred income taxes, and associated valuation allowances, are affected by events and transactions arising in the normal course of business as well as in connection with special and non-recurring items. Assessment of the appropriate amount and classification of income taxes is dependent on several factors, including estimates of the timing and realization of deferred income tax assets and the timing of income tax payments. Actual collections and payments may differ from these estimates as a result of changes in tax laws as well as unanticipated future transactions affecting related income tax balances. The provision for income taxes for the second quarter of 2004 was less than $0.1 million as compared to $0.1 million for the comparable 2003 period.

Net loss applicable to common shareholders. Our net loss applicable to common shareholders increased $1.6 million, or 34.9%, to $6.1 million for the second quarter of 2004, from $4.5 million for the second quarter of 2003, for the reasons discussed above.

Commission revenues. Commission revenues for the first six months of 2004 decreased to $37.5 million from $41.2 million for the first six months of 2003, or approximately 8.9%. This $3.7 million was attributable primarily to the cancellation of our representation contract with Citadel. While commission revenue was marginally down from other clients during the first six months of 2004, particularly in the second quarter, primarily due to a general softness in national spot advertising, the share of total national radio advertising dollars realized by these clients actually increased 3.8 points from the beginning to the end of the first half of 2004. This share increase is a result of companywide new business efforts and improved transactional sales performance. For the first six months of 2004, Interep’s marketing group generated $36 million in new business from major categories including pharmaceutical, automotive, beverage, financial and consumer packaged goods.

Contract termination revenue. Contract termination revenue in the first six months of 2004 increased by $0.6 million, or 102.4%, to $1.2 million from $0.6 million in the first six months of 2003. This decrease was attributable to an increase in buyouts in the first six months of 2004.

Selling expenses. Selling expenses for the first six months of 2004 decreased to $30.7 million from $31.3 million in the first six months of 2003. This decrease of $0.6 million, or approximately 2.0%, was, in large part due to lower compensation costs partially offset by the cost of special promotion programs.

General and administrative expenses. General and administrative expenses of $7.4 million for the first six months of 2004 increased $0.6 million, or 8.4%, from $6.8 million for the first six months of 2003 primarily due to the increase in our legal expenses as a consequence of the Citadel litigation.

Operating income before depreciation and amortization. Operating income before depreciation and amortization decreased by $3.1 million for the first six months of 2004 to $0.6 million, from $3.7 million for the first six months of 2003, for the reasons discussed above.

Reconciliation of operating income before depreciation and amortization to GAAP Loss Data

Depreciation and amortization expense. Depreciation and amortization expense decreased $1.0 million, or 8.6%, during the first six months of 2004, to $10.2 million from $11.2 million in the first six months of 2003. This decrease was primarily the result of lower contract acquisition cost amortization.

Operating loss. Operating loss increased by $2.1 million, or 27.4%, for the first six months of 2004 to $9.6 million, as compared to $7.5 million for the first six months of 2003, for the reasons discussed above. Currently, we believe national radio advertising is experiencing a softness in revenues due to a combination of business and economic factors, and it is unclear when the trend will reverse itself and to what extent. However, historically, the level of national radio advertising tends to increase during the third and fourth quarters, and we anticipate such an increase for 2004. Additionally, we are exploring ways to increase capital and further decrease our expenses to offset the decline in revenues.

Interest expense, net. Interest expense, net, increased $0.2 million, or 4.1%, to $5.3 million for the first six months of 2004, from $5.5 million for the first six months of 2003. This decrease primarily resulted from our replacement, in September 2003, of a prior term loan facility with a new revolving credit facility with a lower interest rate.

Provision for income taxes. Our current and deferred income taxes, and associated valuation allowances, are affected by events and transactions arising in the normal course of business as well as in connection with special and non-recurring items. Assessment of the appropriate amount and classification of income taxes is dependent on several factors, including estimates of the timing and realization of deferred income tax assets and the timing of income tax payments. Actual collections and payments may differ from these estimates as a result of changes in tax laws as well as unanticipated future transactions affecting related income tax balances. The provision for income taxes for the first six months of 2004 and 2003 was $0.2 million.

Net loss applicable to common shareholders. Our net loss applicable to common shareholders increased $1.8 million, or 13.6%, to $15.3 million for the first six months of 2004, from $13.5 million for the first six months of 2003 for the reasons discussed above.

Our cash requirements have been primarily funded by cash provided from operations and financing transactions. At June 30, 2004, we had cash and cash equivalents of $7.6 million and working capital of $8.6 million and availability under our credit facility of $5.0 million.

Cash provided by operating activities during the first six months of 2004 was $1.6 million, as compared to $6.9 million during the first six months of 2003. This fluctuation was primarily attributable to working capital components.

Net cash used in investing activities is attributable to capital expenditures. Net cash used in investing activities during the first six months of 2004 and 2003 were $0.6 million and $0.5 million, respectively. The payments made in 2004 include $0.3 million, which was capitalized in 2003.

Cash used for financing activities of $1.1 million during the first six months of 2004 consisted of $3.2 million for representation contract acquisition payments and $13.5 million of gross repayments on the credit facility, which was offset by $14.5 million of gross borrowings on the credit facility and $1.1 million for the Class B common stock issued to our SGP. Cash used for financing activities of $6.8 million for the comparable period of 2003 consisted of representation contract acquisition payments.

In general, as we acquire new representation contracts, we use more cash and, as our contracts are terminated, we receive additional cash. For the reasons noted above in “Overview”, we are not able to predict the amount of cash we will require for contract acquisitions, or the cash we will receive on contract terminations, from period to period.

We do not have any written options on financial assets, nor do we have any special purpose entities. We have not guaranteed any obligations of our unconsolidated investments.

The Senior Subordinated Notes were issued under an indenture that limits our ability to engage in various activities. Among other things, we are generally not able to pay any dividends to our shareholders, other than dividends payable in shares of common stock; we can only incur additional indebtedness under limited circumstances, and certain types of mergers, asset sales and changes of control either are not permitted or permit the note holders to demand immediate redemption of their Senior Subordinated Notes.

Our Senior Subordinated Notes are redeemable by us. If certain events occurred which would be deemed to involve a change of control under the indenture, we would be required to offer to repurchase all of the Senior Subordinated Notes at a price equal to 101% of their aggregate principal, plus unpaid interest.

In September 2003, we entered into a $10 million senior secured revolving credit facility with Commerce Bank, N.A. to replace our $10 million senior secured term loan facility with an institutional lender. The revolving credit facility enables us to more efficiently manage our cash as we may borrow, repay and re-borrow funds as needed. The revolving credit facility has an initial term of three years. The credit facility is secured by a first priority lien on all of our and our subsidiaries’ property and assets, tangible and intangible. Interest is payable monthly on the borrowings at rates based on either a prime rate or LIBOR, plus a premium of 1% for prime rate borrowings, and 4% for LIBOR borrowings. In addition to covenants similar to those in the indenture governing the Notes, the credit facility requires, among other things, that we (i) maintain certain 12-month trailing Operating EBITDA levels (“Operating EBITDA” is defined in the Loan and Security Agreement as, for any period: (a) our consolidated net income (loss), plus (b) all taxes on income plus state and local franchise and corporation taxes paid by us and any of our subsidiaries plus (c) all interest expense deducted in determining such net income, plus (d) all depreciation and amortization expense and other non-cash charges (including, without limitation, non-cash charges resulting from the repricing of employee stock options), plus (e) severance costs expensed but not yet paid in cash, less (f) extraordinary gains, plus (g) extraordinary losses, less (h) contract termination revenue); (ii) have certain minimum accounts receivable as of the end of each quarter; (iii) have not less than $200 million of representation contract value as of the end of each quarter; and (iv) have not less than $2 million of cash and cash equivalents as of the end of each quarter. We incurred approximately $0.5 million in legal and other costs directly related to the revolving credit facility, which are being amortized into interest over the life of the facility. The remaining $1.2 million of unamortized financing costs related to the superseded term loan facility, as well as the remaining $0.4 million of unamortized discount related to the warrants issued in conjunction with that facility, were written off to interest expense during the third quarter of 2003. Substantially all of our subsidiaries, jointly, severally and unconditionally guarantee the revolving credit facility. At June 30, 2004, we had $5.0 million outstanding under our revolving credit facility.

On November 7, 2002, we entered into an agreement with an institutional lender to provide us with a $10 million term loan facility. The loan had a five-year term, was secured by an interest in substantially all of our assets and required that interest at a rate of 8.125% be paid quarterly. In connection with the loan, we issued a warrant to an affiliate of the lender to purchase 225,000 shares of our Class A common stock for nominal consideration. These warrants were valued at $0.5 million using a Black-Scholes model and were recorded as a discount to the term loan facility, which was being amortized as interest expense based on an effective interest rate method over the life of the loan. In addition, 50,000 shares of our Class A common stock were issued to an advisor in connection with the term loan. These shares were recorded at fair value at the time of issuance, which was $0.1 million, and was recorded as deferred loan cost, which was being amortized on a straight-line basis over the term of the loan. This obligation was repaid with the proceeds from our revolving credit facility and the commitment was terminated.

During 2002, we completed a series of private placements to issue 110,000 units for an aggregate purchase price of $11 million, less related costs. Each unit consists of one share of Series A Convertible Preferred Stock (“Series A Preferred Stock”) and 6.25 warrants to acquire the same number of shares of our Class A common stock. The warrants are exercisable at any time from the date of grant and expire at various times in 2007. We also issued warrants to acquire 5,000 shares of our Class A common stock to a placement agent in connection with the sale of 10,000 units. We incurred approximately $0.8 million in legal and other costs directly related to the private placements.

We believe that the liquidity resulting from the transactions described above, together with anticipated cash from continuing operations, should be sufficient to fund our operations and anticipated needs for required representation contract acquisition payments, and to make the required 10% annual interest payments on the Senior Subordinated Notes, as well as the monthly interest payments under our senior secured revolving loan facility, for at least the next 12 months. We may not, however, generate sufficient cash flow for these purposes or to repay the notes at maturity. We are exploring additional sources of capital and ways to reduce our expenses.

Our ability to fund our operations and required contract acquisition payments and to make scheduled principal and interest payments will depend on our future performance, which, to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control. We may also need to refinance all or a portion of the Senior Subordinated Notes on or prior to maturity. There can be no assurance that we will be able to effect any such refinancing on commercially reasonable terms, if at all.

The following factors are some, but not all, of the variables that may have an impact on our results of operations:

Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. Preparation of these statements requires management to make judgments and estimates. Some accounting policies have a significant impact on amounts reported in these financial statements. A summary of significant accounting policies and a description of accounting policies that are considered critical may be found in our 2003 Annual Report on Form 10-K, filed on March 29, 2004, in the Notes to the Consolidated Financial Statements, Note 1, and the Critical Accounting Policies section of Item 7 of Part II.

We are exposed to market risk from changes in interest rates that may adversely affect our results of operations and financial condition. We seek to minimize the risks from these interest rate fluctuations through our regular operating and financing activities. Our policy is not to use financial instruments for trading or other speculative purposes. We are not currently a party to any financial instruments.

Because our obligation under the senior secured revolving credit facility bears interest at a variable rate, we are sensitive to changes in prevailing interest rates. A one-point fluctuation in market rates would not have had a material impact on 2004 earnings.

An evaluation as of the end of the period covered by this quarterly report was carried out under the supervision and with the participation of our management, including the Chairman and Chief Executive Officer and our Senior Vice President and Chief Financial Officer, of the effectiveness

of the design and operation our “disclosure controls and procedures” (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities and Exchange Act of 1934). Based upon that evaluation, our Chairman and Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures were effective.

There have not been any changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal period covered by this Quarterly Report on Form 10-Q that have materially affected, or are reasonably likely to materially affect, our control over financial reporting.

We are involved in judicial and administrative proceedings from time to time concerning matters arising in connection with the conduct of our business. We believe, based on currently available information, that the results of such proceedings, in the aggregate, will not have a material adverse effect on our financial condition.

There have been no material changes in the previously reported legal proceedings.

In June 2004, our Stock Growth Plan and Trust purchased 365,223 shares of our Class B common stock at a price of $1.47 per share for net cash proceeds of $0.5 million. In March 2004, our Stock Growth Plan and Trust purchased 238,759 shares of our Class B common stock at a price of $2.28 per share for net cash proceeds of $0.5 million. These shares were not issued until the second quarter of 2004. The purchase price per share represented the average closing sales price of our Class A common stock on the Nasdaq OTC Bulletin Board for the 20-day trading period ending immediately prior to the date the shares were purchased. We believe the issuance of these shares is exempt pursuant to Section 4(2) of the Securities Act of 1933.

* The information furnished in Exhibit 32.1 shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or otherwise subject to the liabilities of that section, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933, as amended, or the Exchange Act, regardless of any general incorporation language in such filing.

We have filed the following current reports on Form 8-K during our second fiscal quarter:

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized in the City of New York, State of New York.


INTEREP NATIONAL RADIO SALES, INC.

By:		/s/ WILLIAM J. MCENTEE, JR.
		William J. McEntee, Jr.
		Senior Vice President and
		Chief Financial Officer


New York		13-1865151
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)

100 Park Avenue, New York, New York		10017
(Address of Principal Executive Offices)		(Zip Code)


	June 30, 2004			December 31, 2003
	(unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	7,570		$	7,661
Receivables, less allowance for doubtful accounts of $765 and $808, respectively		19,457			27,585
Representation contract buyouts receivable		545			437
Current portion of deferred representation contract costs		15,185			15,225
Prepaid expenses and other current assets		1,019			1,107

Total current assets		43,776			52,015

Fixed assets, net		4,127			5,050
Deferred representation contract costs		38,445			44,830
Representation contract buyouts receivable		744			31
Investments and other assets		5,749			6,315

Total assets	$	92,841		$	108,241

LIABILITIES AND SHAREHOLDERS’ DEFICIT
Current liabilities:
Accounts payable and accrued expenses	$	21,083		$	20,670
Accrued interest		4,974			4,950
Representation contract buyouts payable		6,641			7,431
Accrued employee-related liabilities		2,509			3,313

Total current liabilities		35,207			36,364
Long-term debt		104,000			103,000
Representation contract buyouts payable		4,239			4,779
Other noncurrent liabilities		2,957			3,880
Shareholders’ deficit:
4% Series A cumulative convertible preferred stock, $0.01 par value –400,000 shares authorized, 118,598 and 114,037 shares issued and outstanding at June 30, 2004 and December 31, 2003,
respectively (aggregate liquidation preference – $11,859)		1			1
Class A common stock, $0.01 par value – 20,000,000 shares authorized, 6,480,566 and 6,189,460 shares issued and outstanding at June 30,
2004 and December 31, 2003, respectively		65			62
Class B common stock, $0.01 par value – 10,000,000 shares authorized, 4,371,575 and 4,058,699 shares issued and outstanding at June 30,
2004 and December 31, 2003, respectively		44			40
Additional paid-in-capital		52,449			51,149
Accumulated deficit		(106,121	)		(91,034	)

Total shareholders’ deficit		(53,562	)		(39,782	)

Total liabilities and shareholders’ deficit	$	92,841		$	108,241


	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2004			2003			2004			2003
Commission revenues	$	20,632		$	22,832		$	37,521		$	41,174
Contract termination revenue		928			570			1,164			575

Total revenues		21,560			23,402			38,685			41,749

Operating expenses:
Selling expenses		16,004			15,901			30,650			31,266
General and administrative expenses		3,949			3,391			7,396			6,820
Depreciation and amortization expense		4,916			5,590			10,216			11,178

Total operating expenses		24,869			24,882			48,262			49,264

Operating loss		(3,309	)		(1,480	)		(9,577	)		(7,515	)
Interest expense, net		2,660			2,792			5,318			5,548

Loss before provision for income taxes		(5,969	)		(4,272	)		(14,895	)		(13,063	)
Provision for income taxes		28			131			192			177

Net loss		(5,997	)		(4,403	)		(15,087	)		(13,240	)
Preferred stock dividend		117			130			231			240

Net loss applicable to common shareholders	$	(6,114	)	$	(4,533	)	$	(15,318	)	$	(13,480	)

Basic and fully diluted loss per share applicable to common shareholders	$	(0.59	)	$	(0.44	)	$	(1.48	)	$	(1.32	)


	For the Six Months Ended June 30,
	2004			2003
Cash flows from operating activities:
Net loss	$	(15,087	)	$	(13,240	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization		10,216			11,178
Noncash interest expense		—			52
Changes in assets and liabilities:
Receivables		8,128			6,783
Representation contract buyouts receivable		(821	)		185
Prepaid expenses and other current assets		88			(462	)
Other noncurrent assets		(119	)		(759	)
Accounts payable and accrued expenses		909			3,424
Accrued interest		24			81
Accrued employee-related liabilities		(804	)		(406	)
Other noncurrent liabilities		(923	)		46

Net cash provided by operating activities		1,611			6,882

Cash flows from investing activities:
Additions to fixed assets		(608	)		(546	)
Increase in other investments		(5	)		—

Net cash used in investing activities		(613	)		(546	)

Cash flows from financing activities:
Station representation contract payments		(3,170	)		(6,847	)
Gross borrowings on credit facility		14,500			—
Gross repayments on credit facility		(13,500	)		—
Issuance of Class B common stock		1,081			—

Net cash used in financing activities		(1,089	)		(6,847	)

Net decrease in cash and cash equivalents		(91	)		(511	)
Cash and cash equivalents, beginning of period		7,661			18,114

Cash and cash equivalents, end of period	$	7,570		$	17,603

Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest	$	5,112		$	5,275
Income taxes		192			177
Non-cash investing and financing activities:
Station representation contracts acquired	$	1,943		$	3,008
Preferred stock dividend		231			240


	June 30, 2004			June 30, 2003
Net loss applicable to common shareholders, as reported	$	(15,318	)	$	(13,480	)
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects		(398	)		(420	)

Pro forma net loss	$	(15,716	)	$	(13,900	)

Loss per share:
Basic and diluted—as reported		$(1.48	)		$(1.32	)
Basic and diluted—pro forma		$(1.52	)		$(1.36	)


	June 30, 2004			June 30, 2003
	*(dollars in thousands)*
Net loss applicable to common shareholders	$	(6,114	)	$	(4,533	)
Add back:
Depreciation and amortization		4,916			5,590
Preferred stock dividend		117			130
Tax provision		28			131
Interest expense, net		2,660			2,792

Operating income before depreciation and amortization	$	1,607		$	4,110


	Payments Due by Period
	Total		Remainder 2004		2005-2006		2007-2008		2009- Thereafter
	*(Dollars in Millions)*
Long term debt	$	104.0	$	—	$	5.0	$	99.0	$	—
Operating leases		11.9		2.5		5.2		3.5		0.7
Interest expense		39.2		4.5		19.8		14.9		—
Annual fees for accounting services		13.5		1.6		7.7		4.2		—
Representation contract buyouts		10.9		5.2		4.7		0.6		0.4

Total	$	179.5	$	13.8	$	42.4	$	122.2	$	1.1


Exhibit No.		Description
3.1		Certificate of Correction (filed herewith)

31.1		Certification of Chief Executive Officer pursuant to Rule 15d-14(a) (filed herewith)

31.2		Certification of Chief Financial Officer pursuant to Rule 15d-14(a) (filed herewith)

32.1		Certification pursuant to Rule 15d-14(b) and Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. § 1350(a), (b)) (furnished herewith)*


Date of Report	Items Reported	Financial Statements Filed
May 14, 2004	Item 12	No


Exhibit No.		Description
3.1		Certificate of Correction

31.1		Certification of Chief Executive Officer pursuant to Rule 15d-14(a)

31.2		Certification of Chief Financial Officer pursuant to Rule 15d-14(a)

32.1		Certification pursuant to Rule 15d-14(b) and Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. § 1350(a), (b))