We define Adjusted EBITDA as operating income before LMA fees, depreciation and amortization, non-cash stock-based compensation expense, gain or loss on exchange of assets or stations and any realized gain or loss on derivative instruments.
Adjusted EBITDA is the financial metric utilized by management to analyze the cash flow generated by the Company’s business. This measure isolates the amount of income generated by its radio stations after the incurrence of corporate general and administrative expenses. Management uses this measure to determine the contribution of the Company’s radio station portfolio, including the corporate resources employed to manage the portfolio, to the funding of its other operating expenses and to the funding of debt service and acquisitions.
In deriving this measure, management removes the non-cash impact of our asset base by excluding depreciation and amortization. Management excludes non-cash stock-based compensation expense from the measure as it does not represent cash payments for activities related to operations. The Company's credit agreement contains a material covenant regarding Adjusted EBITDA, the definition of which excludes LMA fees, which represent a cash payment made by the Company and as a result, we exclude these fees from Adjusted EBITDA. Management excludes any gain on the exchange of assets or 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 our operations. Management excludes 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 the overall value of the Company, management believes that investors consider the metric to be extremely useful.