Item 1.
Business
All references to “we”, “us”, “our”, “SBS”, “our company” or “the Company” in this report mean Spanish Broadcasting System, Inc., a Delaware corporation, and all entities owned or controlled by Spanish Broadcasting System, Inc. and, if prior to 1994, mean our predecessor parent company Spanish Broadcasting System, Inc., a New Jersey corporation. Our executive offices are located at 2601 South Bayshore Drive, PH II, Coconut Grove, Florida 33133, our telephone number is (305) 441-6901, and our corporate website is www.spanishbroadcasting.com.
We are the largest publicly traded Hispanic-controlled media and entertainment company in the United States. We own and/or operate 21 radio stations in markets that reach approximately 48% of the U.S. Hispanic population, and two television stations, which reach approximately 2.0 million households in the South Florida market, and nationally throughout the U.S. on DirecTV Más. Our radio stations are located in six of the top-ten Hispanic markets of Los Angeles, New York, Puerto Rico, Chicago, Miami and San Francisco. The Los Angeles and New York markets have the largest and second largest Hispanic populations, and are also the largest and second largest radio markets in the United States in terms of advertising revenue, respectively. Our two television stations operate as one television operation, branded “MegaTV”. As part of our operating business, we also operate LaMusica.com, Mega.tv, and our radio station websites which are bilingual (Spanish - English) websites providing content related to Latin music, entertainment, news and culture. We also occasionally produce live concerts and events throughout the United States and Puerto Rico.
Mr. Raúl Alarcón, Jr. became our Chairman of the board of directors when we completed our initial public offering on November 2, 1999 and has been our Chief Executive Officer since June 1994 and our President and a member of the board of directors since October 1985. The Alarcón family has been involved in Spanish-language radio broadcasting since the 1950’s, when Mr. Pablo Raúl Alarcón, Sr., our Chairman Emeritus and a member of our board of directors, established his first radio station in Camagüey, Cuba. Members of our senior management team, on average, have over 20 years of experience in radio broadcasting.
Business Strategy
We focus on maximizing the revenue and profitability of our broadcast portfolio by strengthening the performance of our existing broadcast stations and making additional strategic media acquisitions in both our existing markets and in other U.S. markets that have a significant Hispanic population. We also focus on long-term growth by investing in advertising, programming research and on-air talent.
Our growth strategy includes evaluating strategic acquisitions and divestitures in order to achieve a significant presence with clusters of stations in the top U.S. Hispanic markets. We generally consider acquisitions of broadcast stations in markets where we can maximize our revenue through aggressive sales and programming efforts directed at U.S. Hispanic and general market advertisers. These acquisitions may include broadcast stations which do not currently target the U.S. Hispanic market, but which we believe can successfully be reformatted and programmed. Additionally, from time to time we explore investment opportunities in related media outlets targeting the U.S. Hispanic market.
Hispanic Market Opportunity
We believe that our focus on media formats targeting U.S. Hispanic audiences in the largest Hispanic media markets, together with our experience in programming and marketing to these audiences, provide us with significant opportunities for the following reasons:
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Hispanic Population Growth. The U.S. Hispanic population is the largest ethnic minority group and the fastest growing consumer market and demographic group of the U.S. population. Between 1990 and 2007, the Hispanic population growth surged by 100% compared to 13% for the non-Hispanic population and a 21% gain for the total population. The Hispanic population has grown 26.6% since 2000. By 2012, it is estimated that nearly one out of every six individuals living in the U.S. will be of Hispanic origin.
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Hispanic Buying Power. The U.S. Hispanic population accounted for an estimated buying power of $862 billion in 2007 and Hispanic buying power is growing at nearly twice the annual rate of non-Hispanic buying power. Hispanic buying power is expected to increase by 39.2% to $1.2 trillion by 2012, positioning the Hispanic demographic as an extremely attractive group for advertisers.
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Growth in Spanish Language Advertising Spending. In 2007, advertisers spent an estimated $3.8 billion on Spanish-language media advertising, compared to $3.3 billion in 2006, representing a 10.8% increase from the previous year.
The above market opportunity information is based on data provided by The Selig Center for Economic Growth, University of Georgia, July 2007 and Advertising Age, Hispanic Fact Pack, Annual Guide to Hispanic Marketing & Media, 2007 Edition.
Operating Strategy
Our operating strategy focuses on maximizing our broadcast stations’ appeal to our targeted audiences and advertisers in order to increase revenue and cash flow while controlling operating expenses. To achieve these goals, we focus on the following:
Format high quality programming. We format the programming of each of our broadcast stations to capture a significant share of the Spanish-language audience. We use market research, including third-party consultants, in-house research, periodic music testing and focus groups to assess audience preferences among the diverse groups in the Hispanic population in each broadcast station’s target demographic audience. We then refine our programming to reflect the results of this research and testing. Because the U.S. Hispanic population is so diverse, consisting of numerous identifiable groups from many different countries of origin, each with its own culture and heritage, we strive to become very familiar with the tastes and preferences of each of the various Hispanic ethnic groups, and we customize our broadcast programming accordingly.
Attract and retain strong local management teams. We employ local management teams in each of our markets that are responsible for the day to day operations of our broadcast stations. The teams typically
consist of a general manager, a general sales manager and a programming director. Broadcast stations are staffed with managers who have experience in, and knowledge of, the local market and/or the local Hispanic market because of the cultural diversity of the Hispanic population from market to market in the United States. We believe this approach improves our flexibility and responsiveness to changing conditions in each of the media markets we serve.
Utilize focused sales efforts and sales bundling. To capture greater market share, our sales force focuses on converting audience share into rate and revenue increases. We strategically hire sales professionals who are experts at Hispanic and general market advertising. We also value knowledgeable account managers skilled at dealing directly with clients in the local market. The Spanish-language consumer market is uniquely positioned for national campaigns, regional marketing plans and local promotions in our diverse markets. We believe that our focused sales efforts are working to increase media spending targeted at the Hispanic consumer market and will enable us to continue to achieve rate and revenue growth, and to narrow the gap between the level of advertising currently targeted towards U.S. Hispanics and the actual and potential buying power of their communities.
We utilize various sales strategies to sell and market our stations on a stand-alone basis, in combination with our other media properties within a given market, and across markets, where appropriate. We cross-promote, bundle, and sell our media properties to advertisers, thereby enhancing our revenue generating opportunities. We engage in joint sales and promotional activities across our various media properties in order to provide additional value to our advertisers and audience by creating a more efficient medium to reach and expand our Hispanic audience.
Control broadcast station operating costs. We employ a disciplined approach to operating our broadcast stations. We emphasize the control of each radio station’s operating costs through detailed budgeting, tight control over staffing levels and constant expense analysis. While local management is responsible for the day to day operation of each broadcast station, corporate management is responsible for long-term and strategic planning, establishing policies and procedures, maximizing cost savings through centralized processes where appropriate, allocating corporate resources and maintaining overall control of our broadcast stations.
Effective use of promotions and special events. We rely on our expertise in marketing to the Hispanic consumer in each of the media markets in which we operate to maximize our share of advertising revenue. We believe that our on-air talent combined with effective promotional efforts play a significant role in both adding new listeners and viewers and increasing listener and viewer loyalty. We organize special promotional appearances, such as station van appearances at client events, concerts and tie-ins to special events, which form an important part of our marketing strategy. Many of these events build advertiser loyalty because they enable us to offer advertisers an additional method of reaching the Hispanic consumer. In some instances, these events are co-sponsored by local television stations, newspapers, promoters and advertisers, allowing our mutual advertisers to reach a larger combined Hispanic audience.
Maintain strong community involvement. We have been, and will continue to be, actively involved in the local communities that we serve. Our broadcast stations participate in numerous community programs, fund-raisers and activities benefiting the local community and Hispanics abroad. Examples of our community involvement include free public service announcements, free equal-opportunity employment announcements, tours and discussions held by station personalities with school and community groups designed to deter drug and gang involvement, free concerts and events designed to promote family values within the local Hispanic communities, charitable contributions to organizations which benefit the Hispanic community, and extended coverage, when necessary, of significant events which have an impact on the U.S. Hispanic population. Our broadcast stations and members of our management have received numerous community service awards and acknowledgments from governmental entities and community and philanthropic organizations for their service. We believe that this involvement helps build and maintain broadcast station awareness and loyalty.
Expand branded content across multiple media platforms. We have found that our brands and the content that we have developed are well-positioned for expansion in other media outlets. As part of our long-term strategy, it is essential that we find ways to monetize our content and investments across multiple platforms such as the Internet, television and other new media alternatives, such as personal music and video
recording devices, cellular telephones and other new media technology. Since our content is unique to our brands and talent, expansion allows us to capture other advertising and sponsorship revenue. In addition, our key broadcast programs, on-air personalities and brands are being developed for downloadable video, ring-tone and interactive content use. We are also developing content from our production of musical events to create opportunities to sell, market and distribute such content through our websites and other media.
Recent Developments
Local Marketing Agreement
On January 1, 2008, we entered into a local marketing agreement with South Broadcasting System, Inc. (South Broadcasting), a company owned by our Chairman Emeritus and a member of our board of directors. Pursuant to the local marketing agreement, we are permitted to broadcast our Mexican Regional programming on radio station 106.3 FM (the LMA Station). We are required to pay the operating costs of the LMA Station and, in exchange, we will retain all revenues from the sale of the advertising within the programming we provide. The local marketing agreement will terminate, among other things, upon the first anniversary of the effective date, unless we provide 120 days written notice to South Broadcasting of our election to renew for a period of three years. Under the terms of the local marketing agreement, we have the right of first negotiation and the right of first refusal to match a competing offer. However, after the first anniversary of the effective date, if we do not agree to match the terms of the competing offer or fail to notify South Broadcasting of our intent to match the competing offer, then South Broadcasting has the right to accept such offer, provided South Broadcasting pays us the early termination fee equal to the lesser of 5% of the aggregate purchase price of the LMA Station or $1,000,000.
Operating Segments
Due to the recent commencement of our television operation, we are now reporting two operating segments, radio and television.
See “Item 8. Financial Statements and Supplementary Data” below.
Radio Overview
We operate stations in some of the top Hispanic radio markets in the United States, including Puerto Rico. We own radio stations in Los Angeles, New York, Puerto Rico, Chicago, Miami and San Francisco.
The following table sets forth certain statistical and demographic information relating to our radio markets:
(a)
Sources: Synovate 2008 Diversity Markets Report; U.S. Census Bureau Population Estimates for Puerto Rico, July 2007.
(b)
Source: BIA Financial Network Inc.’s Investing in Radio, 2007 Market Report.
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Puerto Rico is not ranked by the Synovate 2008 Diversity Markets Report.
Radio Station Portfolio
The following is a general description of each of our markets. The market revenue information is based on data provided by BIA Financial Network, Inc.’s 2007 Investing in Radio Market Report, Synovate 2008 Diversity Markets Report and the U.S. Census Bureau Population Estimates for Puerto Rico - 2007.
Los Angeles
The Los Angeles market is the largest radio market in terms of advertising revenue which was projected to be approximately $1.1 billion in 2007. In 2007, the Los Angeles market was projected to have the largest U.S. Hispanic population with approximately 8.5 million Hispanics, which is approximately 48% of the Los Angeles market’s total estimated population. The Los Angeles market experienced an annual radio revenue growth of 3.7% between 2001 and 2006. Radio revenue in the Los Angeles market is expected to grow at an annual rate of 1.8% between 2006 and 2011.
New York
The New York market is the second largest radio market in terms of advertising revenue which was projected to be approximately $791.0 million in 2007. In 2007, the New York market was projected to have the second largest U.S. Hispanic population, with approximately 4.4 million Hispanics, which is approximately 21% of the New York market’s total estimated population. We believe that we own the strongest franchise in our target demographic group, with two of the four FM Spanish-language radio stations in the New York market, WSKQ-FM and WPAT-FM. The New York market experienced an annual radio revenue increase of 1.4% between 2001 and 2006. Radio revenue in the New York market is expected to grow at an annual rate of 1.5% between 2006 and 2011.
Puerto Rico
The Puerto Rico market is the twenty-eighth largest radio market in terms of advertising revenue, which was projected to be approximately $119.1 million in 2007. In 2007, the Puerto Rico market was projected to have approximately 3.9 million Hispanics, which is estimated to be approximately 99% of the Puerto Rico market’s total estimated population. The Puerto Rico market experienced an annual radio revenue growth of 5.8% between 2001 and 2006. Radio revenue in the Puerto Rico market is expected to grow at an annual rate of 2.4% between 2006 and 2011.
Miami
The Miami market is the eleventh largest radio market in terms of advertising revenue which was projected to be approximately $315.2 million in 2007. In 2007, the Miami market was projected to have the third largest U.S. Hispanic population, with approximately 2.1 million Hispanics, which is approximately 49% of the Miami market’s total estimated population. The Miami market experienced an annual radio revenue growth of 3.2% between 2001 and 2006. Radio revenue in the Miami market is expected to grow at an annual rate of 3.2% between 2006 and 2011.
Chicago
The Chicago market is the third largest radio market in terms of advertising revenue which was projected to be approximately $586.1 million in 2007. In 2007, the Chicago market was projected to have the fourth largest U.S. Hispanic population, with approximately 1.9 million Hispanics, which is approximately 20% of the Chicago market’s total estimated population. The Chicago market experienced an annual radio revenue increase of 1.8% between 2001 and 2006. Radio revenue in the Chicago market is expected to grow at an annual rate of 1.3% between 2006 and 2011.
San Francisco
The San Francisco market is the fifth largest radio market in terms of advertising revenue which was projected to be approximately $419.8 million in 2007. In 2007, the San Francisco market had the sixth largest U.S. Hispanic population, with approximately 1.7 million Hispanics, which is approximately 24% of the San Francisco market’s total estimated population. The San Francisco market experienced an annual radio revenue increase of 0.8% between 2001 and 2006. Radio revenue in the San Francisco market is expected to grow at an annual rate of 1.1% between 2006 and 2011.
Radio Station Programming
We format the programming of each of our radio stations to capture a substantial share of the U.S. Hispanic audience in its respective market. The U.S. Hispanic population is diverse, consisting of numerous identifiable groups from many different countries of origin and each with its own musical and cultural heritage. The music, culture, customs and Spanish dialects vary from one radio market to another. We strive to become very familiar with the musical tastes and preferences of each of the various Hispanic ethnic groups and customize our programming to match the local preferences of our target demographic audience in each market we serve. We have in-house research departments located in Miami and Los Angeles, which conduct extensive market research on a recurring basis. By employing listener study groups and telephone surveys modeled after Arbitron® written survey methodology, we are able to assess listener preferences, track trends and gauge our success on a daily basis, well before Arbitron® quarterly results are published. In this manner, we can respond immediately, if necessary, to any changing preferences of listeners and/or trends by refining our programming to reflect the results of our research and testing. Each of our programming formats is described below.
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Spanish Tropical. The Spanish Tropical format primarily consists of salsa, merengue, bachata and reggaeton music. Salsa is dance music combining Latin Caribbean rhythms with jazz originating from Puerto Rico, Cuba and the Dominican Republic, which is popular with the Hispanics whom we target in New York, Miami and Puerto Rico. Merengue music is up-tempo dance music originating in the Dominican Republic. Bachata is a softer tempo dance music also originating in the Dominican Republic. Reggaeton is a modern rhythmic dance genre that incorporates certain elements of hip-hop music.
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Regional Mexican. The Regional Mexican format consists of various types of music played in different regions of Mexico such as ranchera, nortena, banda and cumbia. Ranchera music, originating from Jalisco, Mexico, is a traditional folkloric sound commonly referred to as mariachi music. Mariachi music features acoustical instruments and is considered the music indigenous to Mexicans who live in country towns. Nortena means northern, and is representative of Northern Mexico. Featuring an accordion, nortena has a polka sound with a distinct Mexican flavor. Banda is a regional format from the state of Sinalóa, Mexico and is popular in California. Banda resembles up-tempo marching band music with synthesizers.
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Spanish Adult Contemporary. The Spanish Adult Contemporary format includes soft romantic ballads and Spanish pop music, international hits from Puerto Rico, Mexico, Latin America and Spain.
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Spanish Oldies. The Spanish Oldies format includes a variety of Latin and English classics mainly from the 1960’s, 1970’s and 1980’s.
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Top 40. The Top 40 format consists of the most popular current chart hits.
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News Talk. Top local, national and world news along with local traffic and weather information. Moment by moment monitoring of breaking news as it happens along with compelling hard hitting topics that shape our world.
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Hurban. The Hispanic Urban (Hurban) format consists of “reggaeton”, which is dance music that originated in Panama and Puerto Rico more than a decade ago and has evolved into a mix of Spanish- and English-language dance hall, traditional reggae, Latin pop and Spanish hip-hop.
The following table lists the programming formats of our stations and the target demographic group of each station.
On-Line Properties (LaMusica.com)
As part of our operating business, we also operate LaMusica.com, Mega.tv, and our radio station websites which are bilingual (Spanish - English) websites providing content related to Latin music, entertainment, news and culture. LaMusica.com and our network of station websites generate revenue primarily from advertising and sponsorship. In addition, the majority of our station websites simultaneously streams our stations content, which has broadened our audience reach. In addition, we hope to generate revenue from our key radio programs, on-air personalities and brands, which are being developed for downloadable video, ring-tone and interactive content use through our network website, LaMusica.com. We are also developing content from our production of musical events to create opportunities to sell, market and distribute this content through our websites and other media.
We believe that LaMusica.com, together with our broadcast portfolio, enables our audience to enjoy targeted and culturally specific entertainment options, such as concert listings, music reviews, local entertainment calendars, and interactive content on popular Latin artists and entertainers. At the same time, our online properties enable our advertisers to reach their targeted Hispanic consumers through an additional and dynamic medium.
Television Overview and Programming
On March 1, 2006, we launched MegaTV, our general entertainment Spanish-language television operation serving the South Florida market. We created a unique television format which focuses on entertainment, events and variety with high-quality production. Our programming is formatted to capture shares of the market’s young U.S. Hispanic audience by focusing on our core strengths as an “entertainment”
company, thus offering a new alternative compared to the traditional Latino channels. MegaTV’s programming is based on a strategy designed to showcase a combination of programs, ranging from televised radio-branded shows to general entertainment programs, such as music, celebrity, debate, interviews and personality based shows. As part of our strategy, we have incorporated certain of our on-air personalities into our programming, as well as including interactive elements to compliment our Internet websites. We have developed approximately 70% of our programming and have commissioned other content from capable Spanish-language production partners. Our television revenue is generated primarily from the sale of local advertising and paid programming. Advertising rates depend primarily on our ability to attract an audience in the demographic groups targeted by our advertisers, the number of stations in the market we compete with for the same audience, the supply of and demand for television advertising time, as well as other qualitative factors. We also generate revenue from the sale of integrated sponsorships and program syndication.
Advertising Revenue
The vast majority of our revenue is derived from cash advertising sales. Advertising revenue is usually classified by two categories - “national” and “local”. “National” generally refers to advertising that is solicited by a representative firm for national advertisers. A subset category of National advertising revenue is network advertising revenue, which is advertising purchased by our other strategic alliance agreements. Our national sales representative for our radio stations is SBS/Interep LLC, a division of Interep National Radio Sales, Inc. and Hispanic Independent Television Sales, Inc. for our television stations. “Local” refers to advertising purchased by advertisers and agencies in the local market served by a particular station.
Current trends in the media advertising market have changed the long-established model for categorizing advertising revenue. In the past, media advertising was usually classified into two categories - “national” or “local” spot sales. We have expanded the conventional model by offering “integrated sponsorship” opportunities, which are highly sought after and command a higher investment from agencies, in order to maximize our advertisers’ opportunities. We expect that our primary source of revenue from our broadcast stations will be generated from the sale of national, local and integrated sponsorship advertising. In addition, we are anticipating that the television, radio and internet offerings will generate more advertising opportunities by offering multi-media packages.
The broadcasting industry is one of the most efficient and cost-effective means for advertisers to reach targeted demographic groups. Advertising rates charged by a station are based primarily on the station’s ability to attract an audience in a given market and on the attractiveness to advertisers of the station’s audience demographics, as well as the demand on available advertising inventory. Rates also vary depending upon a program’s popularity among the listeners/viewers an advertiser is seeking to attract and the availability of alternative media in the market. Radio advertising rates generally are highest during the morning drive-time hours which are the peak hours for radio audience listening. In general, television advertising rates are higher during prime time evening viewing periods. A broadcaster that has multiple stations in a market appeals to national advertisers because these advertisers can reach more listeners and viewers, thus enabling the broadcaster to attract a greater share of the advertising revenue in a given market. We believe that we will be able to continue increasing our rates as new and existing advertisers recognize the increasing desirability of targeting the growing U.S. Hispanic population.
Each station broadcasts a predetermined number of advertisements per hour with the actual number depending upon the format of a particular station and any programming strategy we are utilizing to attract an audience. We also determine the number of advertisements broadcast hourly that can maximize the station’s revenue without negatively impacting its audience listener/viewer levels. While there may be shifts from time to time in the number of advertisements broadcast during a particular time of the day, the total number of advertisements broadcast on a particular station generally does not vary significantly from year to year.
We have short and long-term contracts with our advertisers, although it is customary in the radio and television industry that the majority of advertising contracts are short-term and generally run for less than three months. This affords broadcasters the opportunity to modify advertising rates as dictated by changes in viewer ratings, changes in competitive dynamics and changes in the business climate within a particular
market. In each of our broadcasting markets, we employ sales personnel to obtain local advertising revenue. Our local sales force is responsible for maintaining relationships with key local advertisers and agencies and identifying new advertisers. We pay commissions to our local sales staff upon receipt of payment for their respective billings which assist in our collection efforts.
Seasonality
Seasonal broadcasting revenue fluctuations are common in the broadcasting industry and are primarily due to fluctuations in advertising expenditures by local and national advertisers. Our net broadcasting revenues vary throughout the year. Historically, our first calendar quarter (January through March) has generally produced the lowest net broadcasting revenue for the year because of routine post-holiday decreases in advertising expenditures.
Competition
The success of each of our broadcast stations depends significantly upon their audience ratings and their share of the overall advertising revenue within their markets. The radio and television broadcasting industries are highly competitive businesses. Each of our radio stations competes with both Spanish-language and English-language radio stations in their market, as well as other media, such as newspapers, broadcast television, cable television, the Internet, magazines, outdoor advertising, satellite radio, transit advertising and direct mail marketing. Our television operations compete for viewers and revenue with both Spanish-language and English-language television stations in the South Florida market, as well as nationally broadcast television operations, cable television, the Internet and other video media.
Several of the broadcast stations with which we compete are subsidiaries of larger national or regional companies that may have substantially greater financial resources than we do. Factors which are material to our competitive position include:
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management experience;
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talent and popularity of on-air personalities and television show hosts and actors;
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audience ratings and our broadcast stations’ rank in their markets;
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signal strength and frequency; and
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audience demographics, including the nature of the Spanish-language market targeted by a particular station.
Although the broadcast industry is highly competitive, some barriers to entry do exist. These barriers can be mitigated to some extent by changing existing broadcast station formats and programming and upgrading power, among other actions. The operation of a broadcast station requires a license or other authorization from the FCC. The number of AM radio stations that can operate in a given market is limited by the availability of AM radio frequencies spectrum in a given market. The number of FM radio frequencies and television stations that can operate in a given market is limited by the availability of those allotted by the FCC to communities in such market. In addition, the FCC’s multiple ownership rules regulate the number of stations that may be owned and controlled by a single entity in a given market. However, in recent years, these rules have changed significantly. For a discussion of FCC regulation, see “Federal Regulation of Radio and Television Broadcasting” below.
The radio industry is also subject to competition from new media technologies that are being developed or introduced, such as the delivery of audio programming by cable television systems and by satellite. The FCC has licensed companies for the use of a new technology, satellite digital audio radio services (known as SDARS), to deliver audio programming. SDARS provides a medium for the delivery by satellite of multiple new audio programming formats to local and national audiences. Some radio broadcast stations, including ours, are presently utilizing digital technology on their existing frequencies to deliver audio programming. The FCC also has begun granting licenses for a new “low power” radio or “microbroadcasting” service to provide low cost neighborhood service on frequencies which would not interfere with existing stations.
The FCC has selected In-Band On-Channeltm, or IBOC, as the exclusive technology for introduction of terrestrial digital operations by AM and FM radio stations. The technology is also known as “HD Radio®.” The FCC has authorized the commencement of “hybrid” IBOC transmissions, that is, simultaneous broadcast in both digital and analog format, pursuant to notification by the station. The advantages of digital audio broadcasting over traditional analog broadcasting technology include improved sound quality and the ability to offer a greater variety of auxiliary services. IBOC technology permits a station to transmit radio programming in both analog and digital formats, and eventually in digital only formats, using the bandwidth that the radio station is currently licensed to use. It is unclear what impact the introduction of digital broadcasting will have on the radio markets in which we compete. The FCC has authorized use of IBOC digital technology developed by iBiquity Digital Corporation, or iBiquity, on AM and FM stations full-time to both improve sound quality and provide spectrum for enhanced data services, multiple program streams and allowing radio stations to time broker unused digital bandwidth to third parties, thereby providing new business opportunities for radio broadcasters. Final digital radio rules, including the imposition of new public interest requirements and appropriate limits to the amount of subscription requirements, remain under consideration by the FCC.
We currently utilize HD Radio® digital technology on two of our stations and will install it on at least four of our stations over the next year. This digital technology, which is not required by the FCC, offers the possibility of multiple audio channels in our assigned frequency.
The delivery of information through the presently unregulated Internet also could create a new form of competition for both radio and television. Internet radio broadcasts have no geographic limitations and can provide listeners with radio programming from around the country and the world. Although we believe that the current sound quality of Internet radio is below standard and may vary depending on factors that can distort or interrupt the broadcast, such as network traffic, we expect that improvements from higher bandwidths, faster modems and wider programming selection may make Internet radio a more significant competitor in the future. The radio broadcasting industry historically has grown despite the introduction of new technologies for the delivery of entertainment and information, such as television broadcasting, cable television, audio tapes, portable digital music players and compact discs. Similarly, the television broadcasting industry has developed, notwithstanding the increasing popularity of portable compact disc players, digital video recorders and entertainment and media content delivered through cell phones and other wireless devices. A growing population and the greater availability of televisions and radios, particularly car and portable radios, have contributed to the growth of the radio and television industries. We cannot assure you, however, that the development or introduction of any new media technology will not have an adverse effect on the radio and television broadcasting industries.
We cannot predict what other matters may be considered in the future by the FCC, nor can we assess in advance what impact, if any, the implementation of any of these proposals or changes may have on our business. See “Federal Regulation of Radio and Television Broadcasting” below.
Trademarks, Copyrights and Licenses
In the course of our business, we use various trademarks, copyrights, trade names, domain names and service marks, including logos, with our products and services and in our programming, advertising and promotions. Trademarks and copyrights are of material importance to our business and are protected by registration or otherwise in the United States and Puerto Rico. We believe our trademarks, copyrights, trade names, domain names and service marks are important to our business and we intend to continue to protect and promote them where appropriate and to protect the registration of new trademarks and copyrights, including through legal action, each of which expires at various times between 2009 and 2017, and which may be extended. We do not hold or depend upon any material government license, franchise or concession, except the broadcast licenses granted by the FCC and the trademarks granted by the United States Patent and Trademark Office.
Antitrust
We have completed, and in the future may complete, strategic acquisitions and divestitures in order to achieve a significant presence with clusters of stations in the top U.S. Hispanic markets. Since the passage of
the Telecommunications Act of 1996, the Justice Department has become more aggressive in reviewing proposed acquisitions of broadcast stations and station networks. The Justice Department is particularly aggressive when the proposed buyer already owns one or more broadcast stations in the market of the station it is seeking to buy. Recently, the Justice Department has challenged a number of broadcasting transactions. Some of those challenges ultimately resulted in consent decrees requiring, among other things, divestitures of certain stations. Specifically, the Justice Department has more closely scrutinized broadcasting acquisitions that result in local market shares in excess of 40% of advertising revenue. Similarly, the FCC staff has announced new procedures to review proposed broadcasting transactions even if the proposed acquisitions otherwise comply with the FCC’s ownership limitations. In particular, the FCC may invite public comment on proposed transactions that the FCC believes, based on its initial analysis, may present ownership concentration concerns in a particular local market.
Federal Regulation of Radio and Television Broadcasting
The radio and television broadcasting industry is subject to extensive and changing regulation by the FCC of programming, technical operations, employment and other business practices. The FCC regulates broadcast stations pursuant to the Communications Act of 1934, as amended (the Communications Act). The Communications Act permits the operation of broadcast stations only in accordance with a license issued by the FCC upon a finding that the grant of a license would serve the public interest, convenience and necessity. The Communications Act provides for the FCC to exercise its licensing authority to provide a fair, efficient and equitable distribution of broadcast service throughout the United States. Among other things, the FCC:
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assigns frequency bands for radio and television broadcasting;
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determines the particular frequencies, locations and operating power of radio and television broadcast stations;
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issues, renews, revokes and modifies radio and television broadcast station licenses;
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establishes technical requirements for certain transmitting equipment used by radio and television broadcast stations;
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adopts and implements regulations and policies that directly or indirectly affect the ownership, operation, program content and employment and business practices of radio and television broadcast stations; and
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has the power to impose penalties, including monetary forfeitures, for violations of its rules and the Communications Act.
The Communications Act prohibits the assignment of an FCC license, or other transfer of control of an FCC licensee, without the prior approval of the FCC. In determining whether to approve assignments or transfers, and in determining whether to grant or renew a radio or television broadcast license, the FCC considers a number of factors pertaining to the licensee (and any proposed licensee), including restrictions on foreign ownership, compliance with FCC media ownership limits and other FCC rules, licensee character and compliance with the Anti-Drug Abuse Act of 1988.
The following is a brief summary of certain provisions of the Communications Act and specific FCC rules and policies. This summary does not purport to be complete and is subject to the text of the Communications Act, the FCC’s rules and regulations, and the rulings of the FCC. You should refer to the Communications Act and these FCC rules, regulations and rulings for further information concerning the nature and extent of federal regulation of broadcast stations.
A licensee’s failure to observe the requirements of the Communications Act or FCC rules and policies may result in the imposition of various sanctions, including admonishment, fines, the grant of renewal terms of less than eight years, the grant of a license with conditions or, for particularly egregious violations, the denial of a license renewal application, the revocation of an FCC license or the denial of FCC consent to acquire additional broadcast properties, all of which could have a material adverse impact on our operations.
Congress and the FCC have had under consideration, and may in the future consider and adopt, new laws, regulations and policies regarding a wide variety of matters that could, directly or indirectly, affect the operation, ownership and profitability of our broadcast stations, result in the loss of audience share and advertising revenue for our broadcast stations or affect our ability to acquire additional broadcast stations or finance these acquisitions. Such matters may include:
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changes to the license authorization and renewal process;
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proposals to impose spectrum use or other fees on FCC licensees;
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proposals to codify indecency regulations or increase sanctions for broadcasting indecent material;
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changes to the FCC’s equal employment opportunity regulations and other matters relating to the involvement of minorities and women in the broadcasting industry;
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proposals to change rules relating to political broadcasting including proposals to grant free air time to candidates, and other changes regarding program content;
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proposals to restrict or prohibit the advertising of beer, wine and other alcoholic beverages;
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proposals to increase and/or quantify locally oriented program content and diversity;
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proposals to change rules regarding studio location and operations;
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technical and frequency allocation matters;
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the implementation of digital audio broadcasting on a terrestrial basis;
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changes in broadcast, multiple ownership, foreign ownership, cross-ownership and ownership attribution policies;
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proposals to allow telephone companies to deliver audio and video programming to homes in their service areas; and
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proposals to alter provisions of the tax laws affecting broadcast operations and acquisitions.
We cannot predict what changes, if any, might be adopted, or what other matters might be considered in the future, nor can we judge in advance what impact, if any, the implementation of any particular proposals or changes might have on our business.
FCC Licenses
The Communications Act provides that a broadcast station license may be granted to any applicant if the granting of the application would serve the public interest, convenience and necessity, subject to certain limitations. In making licensing determinations, the FCC considers an applicant’s legal, technical, financial and other qualifications. The FCC grants radio and television broadcast station licenses for specific periods of time and, upon application, may renew them for additional terms. Under the Communications Act, radio and television broadcast station licenses may be granted for a maximum term of eight years.
The following table sets forth the license expiration dates of each of our media stations:
(a)
Application for renewal of license is pending. In the great majority of cases, radio broadcast licenses are renewed by the FCC even when petitions to deny are filed against license renewal applications. The FCC license for WSKQ-FM expired on June 10, 2006. A petition to deny the application for renewal was filed by several parties who alleged, inter alia, that WSKQ-FM had broadcast some indecent material over the license term. An opposition pleading was submitted to the Commission categorically stating that the allegations made did not raise sufficient questions to warrant non-renewal of the license. The application remains pending and the station continues to operate under its expired license until the FCC takes action on the renewal.
(b)
Broadcast station WRXD-FM was formerly known as WCMA-FM.
(c)
Pursuant to a Local Marketing Agreement between South Broadcasting Company, Inc. and SBS, the station is programmed by us and, therefore, attributable to us pursuant to FCC Rules.
Generally, the FCC renews broadcast licenses without a hearing upon a finding that:
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the station has served the public interest, convenience and necessity;
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there have been no serious violations by the licensee of the Communications Act or FCC rules and regulations; and
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there have been no other violations by the licensee of the Communications Act or FCC rules and regulations which, taken together, indicate a pattern of abuse.
After considering these factors, the FCC may grant the license renewal application without or with conditions, including renewal for a term less than the maximum term otherwise permitted by law, or hold an evidentiary hearing.
The Communications Act authorizes the filing of petitions to deny a license renewal application during specific periods of time after a renewal application has been filed. Interested parties, including members of the
public, may use these petitions to raise issues concerning a renewal applicant’s qualifications. If a substantial and material question of fact concerning a renewal application is raised by the FCC or other interested parties, or if for any reason the FCC cannot determine that granting a renewal application would serve the public interest, convenience and necessity, the FCC will hold an evidentiary hearing on the application. If, as a result of an evidentiary hearing, the FCC determines that the licensee has failed to meet the requirements specified above and that no mitigating factors justify the imposition of a lesser sanction, then the FCC may deny a license renewal application. Generally, our licenses have been renewed without any material conditions or sanctions being imposed, but we cannot assure that the licenses of each of our stations will continue to be renewed or will continue to be renewed without conditions or sanctions.
The FCC classifies each AM and FM radio station. An AM radio station operates on either a clear channel, regional channel or local channel. A clear channel is one on which AM radio stations are assigned to serve wide areas, particularly at night.
The minimum and maximum facilities requirements for an FM radio station are determined by its class. Possible FM class designations depend upon the geographic zone in which the transmitter of the FM radio station is located. In general, commercial FM radio stations are classified as follows, in order of increasing power and antenna height: Class A, B1, C3, B, C2, C1 or C radio stations. The FCC has created a subclass of Class C0 stations based on antenna height. Stations not meeting the minimum height requirement may be reclassified to a Class C0 category.
Ownership Matters. The Communications Act requires prior approval by the FCC for the assignment of a broadcast license or the transfer of control of a corporation or other entity holding a license. In determining whether to approve an assignment of a radio broadcast license or a transfer of control of a broadcast licensee, the FCC considers, among other things:
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the financial and legal qualifications of the prospective assignee or transferee, including compliance with FCC restrictions on non-U.S. citizens or entity ownership and control;
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compliance with FCC rules limiting the common ownership of attributable interests in broadcast and newspaper properties;
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the history of compliance with FCC operating rules; and
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the character qualifications of the transferee or assignee and the individuals or entities holding attributable interests in them.
To obtain the FCC’s prior consent to assign or transfer a broadcast license, appropriate applications must be filed with the FCC. The application must be placed on public notice for a period of 30 days during which petitions to deny the application may be filed by interested parties, including members of the public. Informal objections may be filed any time up until the FCC acts upon the application. If the FCC grants an assignment or transfer application, interested parties have 30 days from public notice of the grant to seek reconsideration of that grant. The FCC usually has an additional ten days to set aside such grant on its own motion. When ruling on an assignment or transfer application, the FCC is prohibited from considering whether the public interest might be served by an assignment or transfer to any party other than the assignee or transferee specified in the application.
Under the Communications Act, a broadcast license may not be granted to or held by any corporation that has more than 20% of its capital stock owned or voted by non-U.S. citizens or entities or their representatives, by foreign governments or their representatives, or by non-U.S. corporations. Furthermore, the Communications Act provides that no FCC broadcast license may be granted to or held by any corporation directly or indirectly controlled by any other corporation of which more than 25% of the capital stock of record is owned or voted by non-U.S. citizens or entities or their representatives, by foreign governments or their representatives, or by non-U.S. corporations, if the FCC finds the public interest will be served by the refusal or revocation of such license. These restrictions apply in modified form to other forms of business organizations, including partnerships and limited liability companies. Thus, the licenses for our stations could
be revoked if more than 25% of our outstanding capital stock is issued to or for the benefit of non-U.S. citizens.
The FCC generally applies its other broadcast ownership limits to “attributable” interests held by an individual, corporation, partnership or other association or entity, including limited liability companies. In the case of a corporation holding broadcast licenses, the interests of officers, directors and those who, directly or indirectly, have the right to vote 5% or more of the stock of a licensee corporation are generally deemed attributable interests, as are officer positions and directors of a corporate parent of a broadcasting licensee. The FCC treats all partnership interests as attributable, except for those limited partnership interests that under FCC policies are considered insulated from material involvement in the management or operation of the media-related activities of the partnership. The FCC currently treats limited liability companies like limited partnerships for purposes of attribution. Stock interests held by insurance companies, mutual funds, bank trust departments and certain other passive investors that hold stock for investment purposes only become attributable with the ownership of 20% or more of the voting stock of the corporation holding broadcast licenses.
To assess whether a voting stock interest in a direct or an indirect parent corporation of a broadcast licensee is attributable, the FCC uses a “multiplier” analysis in which noncontrolling voting stock interests are deemed proportionally reduced at each noncontrolling link in a multi-corporation ownership chain. A time brokerage agreement with another radio station in the same market creates an attributable interest in the brokered radio station, as well as for purposes of the FCC’s local radio station ownership rules, if the agreement affects more than 15% of the brokered radio station’s weekly broadcast hours.
Debt instruments, nonvoting stock options or other nonvoting interests with rights of conversion to voting interests that have not yet been exercised and insulated limited partnership interests where the limited partner is not materially involved in the media-related activities of the partnership generally do not subject their holders to attribution. However, the holder of an equity or debt instrument or interest in a broadcast licensee, cable television system, daily newspaper or other media outlet shall have that interest attributed if the equity (including all stock holdings, whether voting or nonvoting, common or preferred) and debt interest or interests in the aggregate exceed 33% of the total asset value, defined as the aggregate of all equity plus all debt of that media outlet and the interest holder also holds an interest in a broadcast licensee, cable television system, newspaper or other media outlet operating in the same market that is subject to the broadcast multiple ownership or cross-ownership rules and is otherwise attributable or if the interest holder supplies over 15% of the total weekly broadcast programming hours of the station in which the interest is held.
The Communications Act and FCC rules generally restrict ownership, operation or control of, or the common holding of attributable interests in:
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broadcast stations above certain limits serving the same local market; and
•
broadcast stations and a daily newspaper serving the same local market.
Although current FCC nationwide radio broadcast ownership rules allow one entity to own, control or hold attributable interests in an unlimited number of FM radio stations and AM radio stations nationwide, the Communications Act and the FCC’s rules limit the number of radio broadcast stations in local markets (defined as those counties in the Arbitron® defined market) in which a single entity may own an attributable interest as follows:
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In a radio market with 45 or more full-power commercial and noncommercial radio stations, a party may own, operate or control up to eight commercial radio stations, not more than five of which are in the same service (AM or FM).
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In a radio market with between 30 and 44 (inclusive) full-power commercial and noncommercial radio stations, a party may own, operate or control up to seven commercial radio stations, not more than four of which are in the same service (AM or FM).
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In a radio market with between 15 and 29 (inclusive) full-power commercial and noncommercial radio stations, a party may own, operate or control up to six commercial radio stations, not more than four of which are in the same service (AM or FM).
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In a radio market with 14 or fewer full-power commercial and noncommercial radio stations, a party may own, operate or control up to five commercial radio stations, not more than three of which are in the same service (AM or FM), except that a party may not own, operate, or control more than 50% of the radio stations in such market.
Under the ownership rules currently in place, the FCC generally permits an owner to have only one television station per market. A single owner is permitted to have two stations with overlapping signals so long as:
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the television stations do not have overlapping broadcast signals; or
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there will remain after the transaction eight independently owned, full power noncommercial or commercial operating television stations in the market and one of the two commonly owned stations is not ranked in the top four based upon audience share.
The FCC will consider waiving these ownership restrictions in certain cases involving failing or failed stations or stations which are not yet built.
The FCC permits a television station owner to own one radio station in the same market as its television station. In addition, a television station owner is permitted to own additional radio stations, not to exceed the local radio ownership limits for the market, as follows:
•
in markets where 20 media voices will remain, a television station owner may own an additional five radio stations, or, if the owner only has one television station, an additional six radio stations; and
•
in markets where ten media voices will remain, a television station owner may own an additional three radio stations.
The FCC presumes that it is “not inconsistent with the public interest” for one entity to own a newspaper and one broadcast station if (1) the market at issue is one of the twenty largest Nielsen Designated Market Areas (DMAs); (2) the transaction involves the combination of only one major daily newspaper and only one television or radio station; (3) if the transaction involves a television station, at least eight independently owned and operated major media voices would remain in the DMA following the transaction; and (4) if the transaction involves a television station, that station is not among the top 4 ranked stations in the DMA.
A “media voice” includes each independently owned and operated full-power television and radio station and each daily newspaper that has a circulation exceeding 5% of the households in the market, plus one voice for all cable television systems operating in the market.
The FCC rules impose a limit on the number of television stations a single individual or entity may own nationwide.
For the purpose of radio ownership caps, the FCC defines local radio markets as geographic market assigned by Arbitron®, the private audience measurement service for radio broadcasters. For non-Arbitron® markets, the FCC is conducting a rulemaking in order to define markets in a manner comparable to Arbitron®’s method. In the interim, the FCC will apply a “modified contour approach”, to non-Arbitron® markets. This modified approach will exclude any radio station whose transmitter site is more than 58 miles from the perimeter of the mutual overlap area.
With regard to the national television ownership limit, the FCC increased the national television ownership limit to 45% from 35%. Congress subsequently enacted legislation that reduced the nationwide cap to 39%. Accordingly, a company can now own television stations collectively reaching up to a 39% share of U.S. television households. Limits on ownership of multiple local television stations still apply, even if the 39% limit is not reached on a national level.
In establishing a national cap by statute, Congress did not make mention of the FCC’s ultra high frequency, or UHF, discount policy, whereby UHF stations are deemed to serve only one-half of the population in their television markets. The FCC may commence a proceeding to determine if the UHF discount policy should be retained, reused or eliminated. As the licensee of a UHF television station, the elimination or modification of the UHF discount policy could impact our ability to acquire television stations in the same or additional markets.
Programming and Operations. The Communications Act requires broadcasters to serve the public interest. A broadcast licensee is required to present programming in response to community problems, needs and interests and to maintain certain records demonstrating its responsiveness. The FCC will consider complaints from listeners about a broadcast station’s programming when it evaluates the licensee’s renewal application, but listeners’ complaints also may be filed and considered at any time. Stations also must pay regulatory and application fees, and follow various FCC rules that regulate, among other things, political advertising, equal employment opportunity, the broadcast of obscene or indecent programming, sponsorship identification, the broadcast of contests and lotteries and technical operation.
Indecency. Provisions of federal law regulate the broadcast of obscene, indecent, or profane material. The FCC has substantially increased its monetary penalties for violations of these regulations. Legislation enacted in 2006 provides the FCC with authority to impose fines of up to $325,000 per violation for the broadcast of such material. We cannot predict whether Congress will consider or adopt further legislation in this area.
Equal Employment Opportunities. The FCC requires that licensees not discriminate in hiring practices, develop and implement programs designed to promote equal employment opportunities and maintain reports on these matters annually and submit reports to the FCC in connection with each license renewal application and mid-term between renewal applications.
Simulcasting. The FCC rules also prohibit a licensee from simulcasting more than 25% of its programming on another radio station in the same broadcast service (that is, AM/AM or FM/FM). The simulcasting restriction applies if the licensee owns both radio broadcast stations or owns one and programs the other through a local marketing agreement, provided that the contours of the radio stations overlap in a certain manner.
Time Brokerage Agreements. Occasionally, stations enter into time brokerage agreements or local marketing agreements. These agreements take various forms. Separately owned and licensed stations may agree to function cooperatively in programming, advertising sales and other matters, subject to compliance with the antitrust laws and the FCC’s rules and policies, including the requirement that the licensee of each station maintain independent control over the programming and other operations of its own station.
Joint Sales Agreements. Over the past few years, a number of stations have entered into cooperative arrangements commonly known as joint sales agreements or JSAs. The FCC has determined that where two radio stations are both located in the same market and a party with a cognizable interest in one such station sells more than 15% of the advertising per week of the other station, that party shall be treated as if it has an attributable interest in that brokered station.
RF Radiation. In 1985, the FCC adopted rules based on a 1982 American National Standards Institute, or ANSI standard regarding human exposure to levels of radio frequency, or RF, radiation. These rules require applicants for renewal of broadcast licenses or modification of existing licenses to inform the FCC at the time of filing such applications whether an existing broadcast facility would expose people to RF radiation in excess of certain limits. In 1992, ANSI adopted a new standard for RF radiation exposure that, in some respects, was more restrictive in the amount of environmental RF radiation exposure permitted. The FCC has since adopted more restrictive radiation limits which became effective October 15, 1997, and which are based in part on the revised ANSI standard.
Digital Audio Radio Satellite Service. The FCC has adopted rules for the Digital Audio Radio Satellite Service, also known as DARS, in the 2310-2360 MHz frequency band. In adopting the rules, the FCC stated, “although healthy satellite DARS systems are likely to have some adverse impact on terrestrial radio audience
size, revenues and profits, the record does not demonstrate that licensing satellite DARS would have such a strong adverse impact that it threatens the provision of local service”. The FCC has granted two nationwide licenses, one to XM Satellite Radio, which began broadcasting in May 2001, and a second to Sirius Satellite Radio, which began broadcasting in February 2002. The satellite radio systems provide multiple channels of audio programming in exchange for the payment of a subscription fee. An application, filed on March 20, 2007, to merge XM Satellite Radio and Sirius Satellite Radio is currently pending before the FCC and the Department of Justice. We cannot predict whether the merger will be granted, or the extent to which the operation of the two nationwide licensees separately or as a merged company, will have an adverse impact on our business. However, the two nationwide licenses are presently competing with terrestrial radio for talent, audience and advertisers.
Terrestrial Digital Radio. The FCC has approved a technical standard for the provision of “in band, on channel” terrestrial digital radio broadcasting by existing radio broadcasters, and has allowed radio broadcasters to convert to a hybrid mode of digital/analog operation on their existing frequencies. We and other broadcasters have intensified efforts to roll out terrestrial digital radio service. The FCC has commenced a rulemaking to address formal standards and related licensing and service rule changes for terrestrial digital audio broadcasting. We cannot predict the impact of terrestrial digital audio radio service on our business.
Low Power Radio Broadcast Service. The FCC has adopted rules establishing two classes of a low power radio service, both of which will operate in the existing FM radio band; a primary class with a maximum operating power of 100 watts and a secondary class with a maximum power of 10 watts. These low power radio stations will have limited service areas of 3.5 miles and 1 to 2 miles, respectively. Implementation of a low power radio service or microbroadcasting will provide an additional audio programming service that could compete with our radio stations for listeners, but we cannot predict the effect upon us.
Change of Community. The FCC has adopted rules concerning the FM Table of Allotments to allow radio broadcasters to change their community of license more easily. We are evaluating our current licenses to see if a community of license change would be beneficial. We are aware that competitors may use this rule revision to improve their facilities, and other radio operators may use this rule in a way that would make them newly attractive acquisition targets for us.
“Must Carry” Rules. FCC regulations implementing the Cable Television Consumer Protection and Competition Act of 1992 require each full-service television broadcaster to elect, at three-year intervals beginning October 1, 1993, to either:
•
require carriage of its signal by cable systems in the station’s market, which is referred to as “must carry” rules; or
•
negotiate the terms on which such broadcast station would permit transmission of its signal by the cable systems within its market which is referred to as “retransmission consent”.
We have elected “must carry” with respect to our full-power television station.
Under the FCC’s rules currently in effect, cable systems are only required to carry one signal from each local broadcast television station. As our station begins broadcasting digital signals, the cable systems that carry our station’s analog signals will not be required to carry such digital signal until we discontinue our analog broadcasting. The FCC has considered rules to govern the obligations of cable systems to carry local stations’ signals during and following the transition from analog to digital television broadcasting. It has a “dual carriage” requirement obligating cable systems to carry a broadcaster’s paired analog and digital channels. It has also decided that cable systems will be required to carry only one channel of digital signal from our station, despite the fact that operating in the digital mode will allow us to be able to broadcast multiple digital services. While adoption of a multicast must-carry requirement might have enabled us to take advantage of this new technology with the guarantee that our multiple programming efforts would be entitled to cable carriage, such a requirement might also have subjected us to increased competition from other stations seeking to add programming that competes with our programming as one or more of their additional program streams. It also could have subjected the “must carry” regime to further judicial review that could have resulted in the elimination of “must carry” treatment which could have had detrimental consequences for us.
Digital Television Services. The FCC has adopted rules for implementing digital television service in the United States. Implementation of digital television will improve the technical quality of television signals and provide broadcasters the flexibility to offer new services, including high-definition television, broadband data transmission and additional video streams.
The FCC has established service rules and adopted a table of allotments for digital television. Under the table, certain eligible broadcasters with a full-service television station have been allocated a separate channel for digital television operation. Stations are permitted to phase in their digital television operations over a period of years after which they will be required to surrender their licenses to broadcast the analog, or nondigital, television signal to the government by February 17, 2009. Our full-power television station has completed construction of its DTV facility and is currently broadcasting on its analog and digital channels. No statutory deadline has been established for the mandatory conversion of Class A television stations, such as WSBS-CA, from analog to digital broadcasting.
Children’s Television Programming. The FCC has adopted rules on children’s television programming pursuant to the Children’s Television Act of 1990 and rules requiring closed captioning of television programming. Furthermore, the 1996 Act contains a number of provisions related to television violence. We cannot predict the effect of the FCC’s present rules or future actions on our television broadcasting operations.
Localism. In August 2003 the FCC introduced a “Localism in Broadcasting” initiative that, among other things, resulted in the creation of an FCC Localism Task Force, localism hearings at various locations throughout the country, and the July 2004 initiation of a proceeding to consider whether additional FCC rules and procedures are necessary to promote localism in broadcasting. In November 2007, the FCC adopted rules establishing a standardized form for reporting information on a television station’s public interest programming and requiring television broadcasters to post the new form - as well as all other documents in their public inspection files - on station websites. In January 2008, the FCC proposed rules designed to increase local news and public affairs programming, including the establishment of local advisory boards, changes to the broadcast station staffing and main studio rules, the use of FM translators by AM stations, specific guidelines on public affairs programming and revised license renewal processing guidelines. We can neither predict which of the FCC’s proposals may be adopted nor judge in advance what impact, if any, the implementation of any of these proposals or changes might have on our business.
Other Proceedings. The Satellite Home Viewer Improvement Act of 1999, or SHVIA, allows satellite carriers to deliver broadcast programming to subscribers who are unable to obtain television network programming over the air from local television stations. Congress in 1999 enacted legislation to amend the SHVIA to facilitate the ability of satellite carriers to provide subscribers with programming from local television stations. Any satellite company that has chosen to provide local-into-local service must provide subscribers with all of the local broadcast television signals that are assigned to the market and where television licensees ask to be carried on the satellite system. We plan to take advantage of this law to secure carriage of our full-service station in our markets where the satellite operators have implemented local-into-local service. The SHVIA expired in 2004 and Congress adopted the Satellite Home Viewer Extension and Reauthorization Act of 2004 (SHVERA). SHVERA extended the ability of satellite operators to implement local-into-local service and, among its other provisions, required that the use of second dishes by satellite operators be ended on or before June 8, 2006.
Proposed Changes. The United States Congress and the FCC continually consider new laws, regulations and policies regarding a wide variety of matters that could, directly or indirectly, affect our operations, ownership and profitability; result in the loss of audience share and advertising revenue; or affect our ability to acquire additional broadcast stations or to finance such acquisitions. We can neither predict what matters might be considered nor judge in advance what impact, if any, the implementation of any of these proposals or changes might have on our business.
Environmental Matters
As the owner, lessee or operator of various real properties and facilities, we are subject to various federal, state and local environmental laws and regulations. Historically, compliance with these laws and regulations
has not had a material adverse effect on our business. We cannot assure you, however, that compliance with existing or new environmental laws and regulations will not require us to make significant expenditures of funds.
On March 19, 2002, the Environmental Quality Board, Mayagüez, Puerto Rico Regional Office, or EQB, inspected our transmitter site in Maricao, Puerto Rico. Based on the inspection, EQB issued a letter to us on March 26, 2002 noting the following potential violations: (1) alleged violation of EQB’s Regulation for the Control of Underground Injection through construction and operation of a septic tank (for sanitary use only) at each of the two antenna towers without the required permits; (2) alleged violation of EQB’s Regulation for the Control of Atmospheric Pollution through construction and operation of an emergency generator of more than 10hp at each transmitter tower without the required permits; and (3) alleged failure to show upon request an EQB approved emergency plan detailing preventative measures and post-event steps that we will take in the event of an oil spill. We received the emergency plan approval and the emergency generator permit approval on April 30, 2003 and August 14, 2003, respectively. To date, no penalties or other sanctions have been imposed against us relating to these matters. We do not have sufficient information to assess our potential exposure to liability, if any, and no amounts have been accrued in the consolidated financial statements related to this contingency.
Management and Personnel
As of December 31, 2007, we had approximately 675 full-time employees and 74 part-time employees. None of our employees are organized or are covered by a collective bargaining agreement. We consider our relations with our employees to be satisfactory.
Our business depends upon the efforts, abilities and expertise of our executive officers and other key employees, including on-air talent, and our ability to hire and retain qualified personnel. The loss of any of these executive officers and key employees, particularly Raúl Alarcón, Jr., our Chairman of the board of directors, Chief Executive Officer and President, could have a material adverse effect on our business.
Available Information
We are subject to the reporting and other information requirements of the Exchange Act. We file reports and other information with the SEC. Such reports and other information filed by us pursuant to the Exchange Act may be inspected and copied at the public reference facility maintained by the SEC at 100 F Street, N.E., Washington D.C. 20549. If interested, please call 1-800-SEC-0330 for further information on the public reference room. The SEC maintains a website on the Internet containing reports, proxy materials, information statements and other items. The Internet website address is http://www.sec.gov.
Our reports, proxy materials, information statements and other information can also be inspected and copied at the offices of the NASDAQ Stock Market, on which our common stock is listed (symbol: SBSA). You can find more information about us at our Internet website located at www.spanishbroadcasting.com and our investor relations section of our website is located at www.spanishbroadcasting.com/investorinfo.shtml. Our annual report on Form 10-K, our quarterly reports on Form 10-Q, our current reports on Form 8-K and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act are available free of charge on our Internet website as soon as reasonably practicable after we electronically file such material with, or furnish such material to, the SEC.
The information on our Internet website is not, and shall not be deemed to be part of this report or incorporated into any other filings we make with the SEC.
Item 1A.
Item 1A. Risk Factors
You should carefully consider the risks and uncertainties described below and the other information in connetion with evaluating our business and the forward-looking statements in this report. These are not the only risks we face. Additional risks and uncertainties that we are not aware of or that we currently deem immaterial also may impair our business. If any of the following risks actually occur, our business, financial
condition and operating results could be materially adversely affected and the trading price of our common stock could decline.
Risks Related to our Indebtedness
Our substantial amount of debt could adversely affect our financial health.
Our consolidated debt is substantial and we are highly leveraged, which could adversely affect our financial condition, limit our ability to grow and compete and prevent us from fulfilling our obligations relating to our registered 103/4% Series B cumulative exchangeable redeemable preferred stock, par value $0.01 per share and liquidation preference of $1,000 per share, or the Series B preferred stock, and, if issued, our registered 103/4% subordinated exchange notes due 2013, or the Exchange Notes. As of December 31, 2007, our ratio of total debt to last twelve months Consolidated EBITDA, as defined in our credit agreement governing our first lien credit facility term loan due 2012, or the First Lien Credit Facility, was 8.3 to 1.0. Our substantial level of debt could have several important consequences to the holders of our securities, including the following:
•
a significant portion of our net cash flow from operations will be dedicated to servicing our debt obligations and will not be available for operations, future business opportunities or other purposes;
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our ability to obtain additional financing in the future for working capital, capital expenditures, acquisitions, general corporate or other purposes will be limited;
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our substantial debt could make us more vulnerable to downturns in our business or in the general economy and increases in interest rates, limit our ability to withstand competitive pressures and reduce our flexibility in responding to changing business and economic conditions;
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our substantial debt could place us at a disadvantage compared to our competitors who have less debt; and
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it may be more difficult for us to satisfy our obligations relating to our Series B preferred stock and our Exchange Notes, if issued (for example, we may not be able to pay cash dividends and interest, respectively, or repurchase our Series B preferred stock when, and if, we are required to do so).
Our ability to satisfy all of our debt obligations depends upon our future operating performance. Our operating performance will be affected by prevailing economic conditions and financial, business and other factors, some of which are beyond our control. We believe that our operating cash flow will be sufficient to meet our operating expenses and to service our debt requirements as they become due. However, if we are unable to pay our debts, whether upon acceleration of our debt or in the ordinary course of business, we will be forced to pursue alternative strategies such as selling assets, restructuring our debt, or seeking additional equity capital. We cannot assure you that we can successfully complete any of these alternative strategies on satisfactory terms or that the approval of the FCC could be obtained on a timely basis, or at all, for the transfer of any of the stations’ licenses in connection with a proposed sale of assets.
We will require a significant amount of cash to service our debt and to make cash dividend payments under our Series B Preferred Stock. Our ability to generate cash depends on many factors, some of which are beyond our control.
For the year ended December 31, 2007, we had net cash interest expense of $16.9 million. Our net cash interest expense will increase when and if we exchange our Series B preferred stock for the Exchange Notes. If we acquire additional stations in the future, depending on the financing used to fund these acquisitions, our interest expense may increase as well. In addition, we have recently paid and will be required to pay dividends in cash on our Series B preferred stock after October 15, 2008.
During 2007, we paid dividends in cash to holders of the Series B preferred stock in an amount equal to $9.7 million. Our ability to make payments on and to refinance our debt, pay dividends in cash on our Series B preferred stock, repurchase our Series B preferred stock when, and if, we are required to do so and to fund necessary or desired capital expenditures and any future acquisitions, will depend on our ability to generate
and maintain cash in the future. Our ability to satisfy our obligations, including making the payments described above, and to reduce our total indebtedness will depend upon our future operating performance and on economic, financial, competitive, legislative, regulatory and other factors, many of which may be beyond our control.
Based on our current level of operations, we believe that our cash flow from operations, cash on hand and available borrowings under our First Lien Credit Facility will be adequate to meet our liquidity needs for the near future, barring any unforeseen circumstances. We cannot assure you, however, that our business will generate sufficient cash flow from operations or that future borrowings will be available to us under our First Lien Credit Facility or from other sources in an amount sufficient to enable us to pay our debt or to fund our other liquidity needs. We may need to refinance all or a portion of our debt on or before maturity. We cannot assure you that we will be able to refinance any of our debt, including our First Lien Credit Facility and the Exchange Notes, if issued, on commercially reasonable terms or at all.
Any acceleration of our debt or event of default would harm our business and financial condition.
If there were an event of default under our or our subsidiaries’ indebtedness, including the First Lien Credit Facility and our existing debt instruments, the holders of the affected indebtedness could elect to declare all of that indebtedness to be due and payable immediately, which in turn could cause some or all of our or our subsidiaries’ other indebtedness to become due and payable. We cannot assure you that we or our subsidiaries would have sufficient funds available, or that we or our subsidiaries would have access to sufficient capital from other sources, to repay the accelerated debt. Even if we or our subsidiaries could obtain additional financing, we cannot assure you that the terms would be favorable to us. Under the terms of our First Lien Credit Facility and our existing debt instruments, if the amounts outstanding under our indebtedness were accelerated, our lenders would have the right to foreclose on their liens on substantially all of our and our subsidiaries’ assets (with the exception of our FCC licenses held by certain of our subsidiaries, because a grant of a security interest therein would be prohibited by law, and certain general intangibles and fixed assets under particular limited circumstances) and on the stock of our subsidiaries. As a result, any event of default under our material debt instruments could have a material adverse effect on our business and financial condition.
Despite our current significant level of debt, we and our subsidiaries may still be able to incur substantially more debt, which, if increased, could further intensify the risks associated with our substantial leverage.
We and our subsidiaries may be able to incur substantial additional indebtedness in the future. Although the terms of our First Lien Credit Facility and debt instruments restrict our ability to incur additional debt, these restrictions are subject to a number of qualifications and exceptions and, under certain circumstances, debt incurred in compliance with these restrictions could be substantial. If we or our subsidiaries incur additional debt, the related risks described above that we and our subsidiaries face could intensify.
The terms of our existing debt and our preferred stock impose or will impose restrictions on us that may adversely affect our business.
The terms of our Series B preferred stock, our Series C convertible preferred stock, par value $0.01 per share, (the Series C preferred stock, together with the Series B preferred stock, the Preferred Stock), our First Lien Credit Facility, and, if issued, the Exchange Notes, contain covenants that, among other things, limit our ability to:
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incur additional debt, incur contingent obligations and issue additional preferred stock;
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redeem or repurchase securities ranking junior to our Series B preferred stock;
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create liens and encumbrances;
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pay dividends, distributions or make other specified restricted payments, and restrict the ability of certain of our subsidiaries to pay dividends or make other payments to us;
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sell assets;
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make certain capital expenditures, investments and acquisitions;
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change or add lines of business;
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enter into certain transactions with affiliates;
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enter into sale and leaseback transactions;
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issue capital stock or other equity interests;
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sell capital stock of our subsidiaries; and
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merge or consolidate with any other person, company or other entity or sell, assign, transfer, lease, convey or otherwise dispose of all, or substantially all, of our assets.
The terms of the First Lien Credit Facility and Series B preferred stock also require us to satisfy certain financial conditions, which could materially and adversely affect our ability to finance our future operations or capital needs and to engage in other business activities that may be in our best interest. All of these covenants may restrict our ability to expand or to pursue our business strategies. Our ability to comply with these covenants may be affected by our future operating performance and economic, financial, competitive, legislative, regulatory and other factors, many of which may be beyond our control. If one or more of these events occur, we cannot assure you that we will be able to comply with the covenants. A breach of any of these covenants could result in a default under one or more of our debt instruments.
If an event of default occurs under the First Lien Credit Facility, the lenders and/or the noteholders could elect to declare all amounts of debt outstanding, together with accrued interest, to be immediately due and payable. In addition, there are change of control provisions in the First Lien Credit Facility, the certificates of designations governing our Series B preferred stock and the indentures that will govern our Exchange Notes, if issued, each of which would cause an acceleration of the applicable indebtedness and/or require us to make an offer to repurchase all of the applicable notes and/or Series B preferred stock in the event that we experience a change of control.
We may not have the funds or the ability to raise the funds necessary to repurchase our Series B preferred stock if holders exercise their repurchase right, or to finance the change of control offer required by our Series B preferred stock and the indenture that would govern our Exchange Notes, if issued.
On October 15, 2013, each holder of Series B preferred stock will have the right to require us to redeem all or a portion of the Series B preferred stock at a purchase price of 100% of the liquidation preference thereof, plus all accumulated and unpaid dividends to the date of repurchase. In addition, if we experience certain kinds of changes of control as described in the certificate of designation creating the Series B preferred stock, subject to certain restrictions in our debt instruments we will be required to make an offer to purchase the Series B preferred stock for cash at a purchase price of 101% of the liquidation preference thereof, plus accumulated dividends. The source of funds for any such repurchases would be our available cash or cash generated from operations or other sources, including borrowings, sales of equity or funds provided by a new controlling person or entity. We cannot assure you that we will have sufficient funds available to us on favorable terms, or at all, to repurchase all tendered Series B preferred stock or Exchange Notes, if issued, pursuant to these requirements. Our failure to offer to repurchase or to repurchase Series B preferred stock or Exchange Notes tendered, as the case may be, will result in a voting rights triggering event under the certificate of designation governing our Series B preferred stock or a default under the indenture that would govern our Exchange Notes, if issued, as the case may be. Such events could lead to a cross-default under our First Lien Credit Facility and under the terms of our other existing debt. In addition, our First Lien Credit Facility would either prohibit or effectively prohibit us from making any such required repurchases. Prior to repurchasing our Series B preferred stock or Exchange Notes, if issued, on a change of control event, we must either repay outstanding debt under our First Lien Credit Facility or obtain the consent of the lenders under such facility. If we do not obtain the required consents or repay our outstanding debt under our First Lien
Credit Facility, we would remain effectively prohibited from offering to repurchase our Series B preferred stock or Exchange Notes, if issued.
We may not have the funds or the ability to obtain additional financing for working capital, capital expenditures, any business strategy or other general corporate purposes.
We believe we have sufficient cash available to fund our operations and to support our acquisition business strategy. We may need additional financing due to future developments or changes in our business plan. We must rely on cash from operations and our $25.0 million revolving loan facility to support our capital expenditures and acquisition business strategy. In addition, our actual funding requirements could vary materially from our current estimates. If additional financing is needed, we may not be able to raise sufficient funds on favorable terms or at all. If we fail to obtain any necessary financing on a timely basis, a number of adverse effects could occur.
A lowering of the ratings assigned to our debt securities by ratings agencies may further increase our future borrowing costs and reduce our access to capital.
Our debt ratings are below the “investment grade” category, which results in higher borrowing costs. There can be no assurance that our debt ratings will not be lowered in the future by a rating agency. A lowering in the rating may further increase our future borrowing costs and reduce our access to capital.
Capital requirements necessary to implement strategic initiatives could pose risks.
The purchase price of possible acquisitions and/or other strategic initiatives could require additional debt or equity financing on our part. Since the terms and availability of this financing depend to a large degree upon general economic conditions and third parties over which we have no control, we can give no assurance that we will obtain the needed financing or that we will obtain such financing on attractive terms. In addition, our ability to obtain financing depends on a number of other factors, many of which are also beyond our control, such as interest rates and national and local business conditions. If the cost of obtaining needed financing is too high or the terms of such financing are otherwise unacceptable in relation to the strategic opportunity we are presented with, we may decide to forego that opportunity. Additional indebtedness could increase our leverage and make us more vulnerable to economic downturns and may limit our ability to withstand competitive pressures. Additional equity financing could result in dilution to our shareholders.
Risks Related to our Business
We have experienced net losses in the past and, to the extent that we experience net losses in the future, our ability to raise capital and the market price of our common stock may be adversely affected.
We may not achieve sustained profitability. Failure to achieve sustained profitability may adversely affect the market price of our common stock, which in turn may adversely affect our ability to raise additional equity capital and to incur additional debt. Our inability to obtain financing in adequate amounts and on acceptable terms necessary to operate our business, repay our debt obligations or finance our proposed acquisitions could negatively impact our financial position and results of operations.
Our interest expense will increase if we incur any additional indebtedness under our First Lien Credit Facility. If we acquire additional broadcast stations in the future, depending on the financing used to fund these acquisitions, interest expense may increase as well.
We compete for advertising revenue with other broadcast stations, as well as other media, many operators of which have greater resources than we do.
The success of our stations is primarily dependent upon their share of overall advertising revenues within their markets, especially in New York, Los Angeles and Miami. In addition, both radio and television broadcasting are highly competitive businesses. Our broadcast stations compete in their respective markets for audiences and advertising revenues with other broadcast stations of all formats, as well as with other media,
such as newspapers, magazines, television, satellite radio, cable services, outdoor advertising, the Internet and direct mail. In addition, a new electronic audience measurement technology, the Arbitron® Portable People Metertm, is in the process of being introduced to all markets in the U.S. We will be monitoring the effects of this new ratings system but we are not able to ascertain the impact the Arbitron® Portable People Metertm will have on ratings and advertising sales in the markets in which we operate. As a result, our stations’ audience ratings, market shares and advertising revenues may decline and any adverse change in a particular market could have a material adverse effect on the revenue of our broadcast stations located in that market and on the financial condition of our business as a whole.
Although we believe that each of our broadcast stations is able to compete effectively in its respective market, we cannot assure you that any station will be able to maintain or increase its current audience ratings and advertising revenues. Specifically, radio stations can change formats quickly. Any other radio station currently broadcasting could shift its format to duplicate the format of, or develop a format which is more popular than, any of our stations. If a station converts its programming to a format similar to that of one of our stations, or if one of our competitors strengthens its operations, the ratings and station operating income of our station in that market could be adversely affected. In addition, other radio companies which are larger and have more resources may also enter markets in which we operate.
A large portion of our net revenue and operating income currently comes from our New York, Los Angeles and Miami markets.
Our New York, Los Angeles and Miami markets accounted for more than 70% of our revenue for the fiscal year ended December 31, 2007. Therefore, any volatility in our revenues or operating income attributable to stations in these markets could have a significant adverse effect on our consolidated net revenues or operating income. A significant decline in net revenue or operating income from our stations in any of these markets could have a material adverse effect on our financial position and results of operations.
Approximately 34% of all U.S. Hispanics live in the Los Angeles, New York and Miami markets. Our revenues are, therefore, concentrated in these key markets. As a result, an economic downturn, increased competition, or another significant negative event in any of these markets could reduce our revenues and results of operations more dramatically than other companies that do not depend as much on these markets.
Cancellations or reductions in advertising could adversely affect our net revenues.
We do not generally obtain long-term commitments from our advertisers. As a result, our advertisers may cancel, reduce or postpone orders without penalty. Cancellations, reductions or delays in purchases of advertising could adversely affect our net revenues, especially if we are unable to replace these purchases. Our expense levels are based, in part, on expected future net revenues and are relatively fixed once set. Therefore, unforeseen decreases in advertising sales could have a material adverse impact on our net revenues and operating income.
We may be unable to effectively integrate our acquisition of our television operation.
The integration of our acquisition of our television operation involves numerous risks. Our television operation was unprofitable in the fiscal years ended 2007 and 2006 and may fail to generate anticipated cash flows in the future. Additionally, we may have difficulties in the integration of its operations and systems.
We cannot assure you that we will be able to successfully integrate any operations, or systems that might be acquired in the future. In addition, in the event that the operations of a new business do not meet expectations, we may restructure or write off the value of some or all of the assets of the new business. Because our television operation is in its start-up stages, we cannot assure you that we will be successful in the television broadcast industry.
The success of our television operation depends upon our ability to attract viewers and advertisers to our broadcast television operation.
We cannot assure you that we will be able to attract viewers and advertisers to our broadcast television operation. If we cannot attract viewers, our television operation may suffer from a low rating, which in turn
may deter potential advertisers. The inability to successfully attract viewers and advertisers may adversely affect our revenue and operating results for our television operation. Television programming is a highly competitive business. Television stations compete in their respective markets for audiences and advertising revenues with other stations and larger, more established networks. As a result of this competition, our rating share may not grow and an adverse change in the South Florida market could have a material adverse impact on the revenue of our television operation.
Our industry is subject to rapid technological changes and, if we are unable to match or surpass such change, it may result in a loss of competitive advantage and market opportunity. The success of the television operation is largely dependent on certain factors, such as the extent of distribution of the developed programming, the ability to attract viewers, advertisers and acquire programming, and the market and advertiser acceptance of our programming. We cannot assure you that we will be successful in our initiative or that such initiatives will generate revenues or ultimately be profitable.
Our growth depends on successfully executing our expansion strategy.
We have pursued, and will continue to pursue, the expansion of media stations, through acquisitions, affiliations and other related media outlets, primarily in the largest U.S. Hispanic markets, as a growth strategy. We cannot assure you that our growth strategy will be successful. Our growth strategy is subject to a number of risks, including, but not limited to:
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the limits on our ability to acquire additional stations due to our substantial level of debt;
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the need to raise additional financing, which may be limited by the terms of our debt instruments and market conditions;
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the failure to increase our station operating income or yield other anticipated benefits for future acquired stations;
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the need for required regulatory approvals, including FCC and antitrust approvals;
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the challenges of managing any rapid growth; and
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the difficulties of programming newly acquired stations to attract listenership or viewership.
In addition, we may finance acquisitions with the issuance of, or through sales of, our common stock in the public market which could adversely affect our stock price, due to dilution, and our ability to raise funds necessary to grow our business through additional stock offerings.
Although we intend to pursue additional strategic acquisitions, our ability to do so is significantly restricted by the terms of the First Lien Credit Facility, the certificates of designations governing our Preferred Stock, the indenture that will govern the Exchange Notes, if issued, and our ability to raise additional funds. Additionally, our competitors, who may have greater resources than we do, may have an advantage over us in pursuing and completing strategic acquisitions.
Our business is dependent upon the performance of key employees, on-air talent and program hosts.
Our business depends upon the efforts, abilities and expertise of our executive officers and other key employees, including on-air talent, and our ability to hire and retain qualified personnel. We employ or independently contract with several on-air personalities and hosts with significant loyal audiences in their respective markets. Although we have entered into long-term agreements with some of our executive officers, key on-air talent and program hosts to protect our interests in those relationships, we can give no assurance that all or any of these key employees will remain with us or will retain their audiences. Competition for these individuals is intense and many of our key employees are at-will employees who are under no legal obligation to remain with us. Our competitors may choose to extend offers to any of these individuals on terms which we may be unwilling to meet. In addition, any or all of our key employees may decide to leave for a variety of personal or other reasons beyond our control. Furthermore, the popularity and audience loyalty of our key on-
air talent and program hosts is highly sensitive to rapidly changing public tastes. A loss of such popularity or audience loyalty is beyond our control and could limit our ability to generate ratings and revenues.
The loss of any of these executive officers and key employees, particularly Raúl Alarcón, Jr., our Chairman of the board of directors, Chief Executive Officer and President, could have a material adverse effect on our business. We do not maintain key man life insurance on any of our personnel.
Increased programming and content costs may adversely affect our profits.
We produce and acquire programming and content and incur costs for all types of creative talent, including actors, authors, writers and producers. An increase in the costs of such programming and content or in the costs for creative talent may lead to decreased profitability.
Piracy of our programming and other content, including digital and internet piracy, may decrease revenue received from the exploitation of our programming and other content and adversely affect our businesses and profitability
Piracy of programming is prevalent in many parts of the world and is made easier by technological advances allowing conversion of programming and other content into digital formats, which facilitates the creation, transmission and sharing of high quality unauthorized copies of our content. The proliferation of unauthorized copies and piracy of these products has an adverse effect on our businesses and profitability because these products reduce the revenue that we potentially could receive from the legitimate sale and distribution of our products and services.
Risks Related to Legislative and Regulatory Matters
Because our full-power television station relies on “must carry” rights to obtain cable carriage, new laws or regulations that eliminate or limit the scope of our cable carriage rights could have a material adverse impact on our television operation.
Under the Cable Act, every three years, each broadcast station is required to elect to exercise the right either to require cable television system operators in its local market to carry its signal, or to prohibit cable carriage or condition it upon payment of a fee or other consideration. Under these “must carry” provisions of the Cable Act, a broadcaster may demand carriage on a specific channel on cable systems within its market. These “must carry” rights are not absolute, and under some circumstances, a cable system may be entitled not to carry a given station. Our television station elected “must carry” on local cable systems for the three-year election period that commenced January 1, 2006 and has obtained the carriage it requested. The required election date for the next three-year election period commencing January 1, 2009 will be October 1, 2008.
Under current FCC rules, once we have relinquished our analog spectrum, cable systems will be required to carry our digital signals. The FCC’s current rules require cable operators to carry only one channel of digital signal from each of our stations, despite the capability of digital broadcasters to broadcast multiple program streams within one station’s digital allotment. The FCC has not yet set any rules for how direct broadcast satellite, or DBS, operators must handle digital station carriage, but we do not expect that they will be materially different from the obligations imposed on cable television systems.
We must be able to respond to rapidly changing technology, services and standards which characterize our industry in order to remain competitive.
The FCC has implemented new technologies in the broadcast industry, including satellite, and is considering introducing terrestrial delivery of digital audio broadcasting, and the standardization of available technologies which significantly enhance the sound quality of AM and FM broadcasts. We cannot predict the effect new technology of this nature will have on our financial condition and results of operations. Several new media technologies are being developed, including the following:
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cable television operators offer a service commonly referred to as “cable radio” which provides cable television subscribers with several high-quality channels of music, news and other information;
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the Internet offers new, diverse and evolving forms of video and audio program distribution;
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direct satellite broadcast television companies are supplying subscribers with several high quality music channels;
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the introduction of satellite digital audio radio technology has resulted in new satellite radio services with multi-channel programming and sound quality equivalent to that of compact discs;
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the introduction of in-band on-channel digital radio could provide multi-channel, multi-format digital radio services in the same bandwidth currently occupied by traditional AM and FM radio services; and
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the provision of video programming to cellular telephones, digital handheld devices and gaming consoles.
New technologies may affect our broadcasting operations
Our broadcasting businesses face increasing competition from new broadcast technologies, such as broadband wireless and satellite television and radio, and new consumer products, such as portable digital audio players and personal digital video recorders. These new technologies and alternative media platforms compete with our radio and television stations for audience share and advertising revenue, and in the case of some products, allow listeners and viewers to avoid traditional commercial advertisements. The FCC has also approved new technologies for use in the radio broadcasting industry, including the terrestrial delivery of digital audio broadcasting, which significantly enhances the sound quality of radio broadcasts. In the television broadcasting industry, the FCC has established standards and a timetable for the implementation of digital television broadcasting in the U.S. We are unable to predict the effect such technologies and related services and products will have on our broadcasting operations, but the capital expenditures necessary to implement such technologies could be substantial and other companies employing such technologies could compete with our businesses.
Our business depends on maintaining our FCC licenses, which we may be unable to maintain.
The domestic broadcasting industry is subject to extensive federal regulation which, among other things, requires approval by the FCC for the issuance, renewal, transfer and assignment of broadcasting station operating licenses and limits the number of broadcasting properties we may acquire. Federal regulations may create significant new opportunities for broadcasting companies but also create uncertainties as to how these regulations will be interpreted and enforced by the courts.
Our success depends in part on acquiring and maintaining broadcast licenses issued by the FCC, which are typically issued for a maximum term of eight years and are subject to renewal. Our FCC licenses are subject to renewal at various times. While we believe that the FCC will approve applications for renewal of our existing broadcasting licenses when made, we cannot guarantee that pending or future renewal applications submitted by us will be approved, or that renewals will not include conditions or qualifications that could adversely affect our operations. Although we may apply to renew our FCC licenses, interested third parties may challenge our renewal applications. In addition, if we or any of our significant stockholders, officers, or directors violate the FCC’s rules and regulations or the Communications Act, or are convicted of a felony or anti-trust violations, the FCC may commence a proceeding to impose sanctions upon us. Examples of possible sanctions include the imposition of fines, the revocation of our broadcasting licenses, or the renewal of one or more of our broadcasting licenses for a term of fewer than eight years. If the FCC were to issue an order denying a license renewal application or revoking a license, we would be required to cease operating the broadcast station covered by the license only after we had exhausted administrative and judicial review without success. Such an event would materially affect the carrying value of our intangible assets and would negatively impact our operating results.
There is significant uncertainty regarding the FCC’s media ownership rules, and such rules could restrict our ability to acquire stations.
The broadcasting industry is subject to extensive and changing federal regulation. Among other things, the Communications Act and FCC rules and policies limit the number of broadcasting properties that any
person or entity may own (directly or by attribution) in any market and require FCC approval for transfers of control and assignments. The FCC’s media ownership rules remain in flux and subject to further agency and court proceedings. The filing of petitions or complaints against us or any FCC licensee from which we acquire a station could result in the FCC delaying the grant of, or refusing to grant or imposing conditions on its consent to the assignment or transfer of licenses. The Communications Act and FCC rules also impose limitations on non-U.S. ownership and voting of our capital stock. Moreover, governmental regulations and policies may change over time and we cannot assure you that those changes would not have a material impact upon our business, financial position or results of operations.
Impairment of our goodwill and other intangible assets deemed to have indefinite useful lives can cause our net income or net loss to fluctuate significantly.
As of December 31, 2007, we had approximately $782.7 million of unamortized intangible assets, including goodwill of $32.8 million and FCC licenses of $749.9 million on our consolidated balance sheets. These unamortized intangible assets represented approximately 83.6% of our total assets. FASB Statement No. 142, Goodwill and Other Intangible Assets, or SFAS No. 142, requires that goodwill and other intangible assets deemed to have indefinite useful lives, such as FCC licenses, cease to be amortized. SFAS No. 142 requires that goodwill and certain intangible assets be tested at least annually for impairment. If we find that the carrying value of goodwill or FCC licenses exceeds its fair value, we will reduce the carrying value of the goodwill or intangible asset to the fair value, and will recognize an impairment loss in our results of operations.
We currently account for our FCC licenses as an indefinite life asset, per SFAS No. 142. In the event we are no longer able to conclude that our FCC licenses have indefinite lives, as defined in SFAS No. 142, we may be required to amortize such licenses. The amortization of our FCC licenses would affect our earnings and earnings per share.
The impairment tests require us to make an estimate of the fair value of intangible assets, which is determined using a discounted cash flow methodology. Since a number of factors may influence determinations of fair value of intangible assets, we are unable to predict whether impairments of goodwill or other indefinite lived intangibles will occur in the future. Any such impairment would result in our recognizing a corresponding operating loss, which could have an adverse effect on our business, financial condition and results of operations.
The FCC has begun more vigorous enforcement of its indecency rules against the broadcast industry, which could have a material adverse effect on our business.
The FCC’s rules and regulations prohibit the broadcast of obscene material at any time and indecent material between the hours of 6:00 a.m. and 10:00 p.m. The FCC in the last few years has stepped up its enforcement activities as they apply to indecency and has recently indicated that it is enhancing its enforcement efforts relating to the regulation of indecency. The FCC has threatened on more than one occasion to initiate license revocation or license renewal proceedings against a broadcast licensee who commits a “serious” indecency violation. Broadcasters risk violating the prohibition on the broadcast of indecent material because of the vagueness of the FCC’s definition of indecent material, coupled with the spontaneity of live programming. The FCC has also expanded the breadth of indecency regulation to include material that could be considered “blasphemy”, “personally reviling epithets”, “profanity” and vulgar or coarse words amounting to a nuisance. Legislation was introduced in Congress that significantly increased the penalties for broadcasting indecent programming and depending on the number of violations engaged in, would potentially subject us to license revocation, renewal or qualifications proceedings in the event that we broadcast indecent material. In addition, the FCC’s heightened focus on the indecency regulatory scheme, against the broadcast industry generally, may encourage third parties to oppose our license renewal applications or applications for consent to acquire broadcast stations.
We have in the past been the subject and may in the future become subject to additional inquiries or proceedings related to our stations’ broadcast of indecent or obscene material. To the extent that these pending
inquiries or other proceedings result in the imposition of fines, revocation of any of our station licenses or denials of license renewal applications, our results of operations and business could be materially adversely affected.
We may be adversely affected by new statutes dealing with indecency.
Provisions of federal law regulate the broadcast of obscene, indecent or profane material. The FCC has substantially increased its monetary penalties for violations of these regulations. Congressional legislation enacted in 2006 provides the FCC with authority to impose fines of up to $325,000 per violation for the broadcast of such material. We therefore face increased potential costs in the form of fines for indecency violations, and we cannot predict whether Congress will consider or adopt further legislation in this area.
We may face regulatory review for additional acquisitions and divestitures in our existing markets and, potentially, acquisitions in new markets.
An important part of our growth strategy is the acquisition of additional media broadcast stations. Acquisitions and divestitures of broadcast stations by us are subject not only to obtaining FCC consent, but also to possible review by the U.S. Department of Justice, or the Justice Department, which has become more aggressive in reviewing proposed acquisitions of radio and television stations and station networks. In general, the Justice Department has more closely scrutinized radio broadcasting acquisitions that result in market shares in excess of 40% of local radio advertising revenue. Similarly, the FCC reviews proposed broadcasting transactions even if the proposed acquisition otherwise complies with the FCC’s ownership limitations. In particular, the FCC may invite public comment on proposed broadcast transactions that the FCC believes, based on its initial analysis, may present ownership concentration concerns in a particular local broadcast market.
Our operation of various real properties and station facilities could lead to environmental liability and increased compliance costs.
As the owner, lessee or operator of various real properties and station facilities, we are subject to various federal, state and local compliance and environmental laws and regulations. Historically, compliance with these laws and regulations has not had a material adverse effect on our business. However, there can be no assurance that compliance with existing or new laws and regulations will not require us to make significant expenditures of funds.
The market price of our shares of Class A common stock may fluctuate significantly.
Our Class A common stock has been publicly traded since November 1999. The market price for our Class A common stock has been subject to fluctuations since the date of our initial public offering. The stock market has from time to time experienced price and volume fluctuations, which have often been unrelated to the operating performance of the affected companies. We believe that the principal factors that may cause price fluctuations in our shares of Class A common stock are:
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fluctuations in our financial results;
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general conditions or developments in the media broadcasting industry and other media, and the national economy;
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significant sales of our common stock into the marketplace;
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significant decreases in our stations’ audience ratings;
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inability to implement our acquisition and operating strategy;
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a shortfall in revenue, gross margin, earnings or other financial results from operations or changes in analysts’ expectations; and
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developments in our relationships with our customers and suppliers.
We cannot assure you that the market price of our Class A common stock will not experience significant fluctuations in the future, including fluctuations that are adverse and unrelated to our operating performance.
The liquidity of our common stock could be adversely affected if we are delisted from the NASDAQ Global Market.
There can be no assurance that we will be able to maintain the listing of our common stock on the NASDAQ Global Market. The NASDAQ Stock Market, or NASDAQ, requires compliance with the $1.00 minimum bid price requirement for continued inclusion on the NASDAQ Global Market pursuant to Marketplace Rule 4450(a)(5). Delisting from NASDAQ would make trading our common stock more difficult for investors, potentially leading to further declines in our share price. Without a NASDAQ listing, stockholders may have a difficult time getting a quote for the sale or purchase of our stock, the sale or purchase of our stock would likely be made more difficult and the trading volume and liquidity of our stock would likely decline. Delisting from NASDAQ would also result in negative publicity and would also make it more difficult for us to raise additional capital. The absence of such a listing may adversely affect the acceptance of our common stock as currency or the value accorded it by other parties. Further, if we are delisted, we would also incur additional costs under state blue sky laws in connection with any sales of our securities. These requirements could severely limit the market liquidity of our common stock and the ability of our stockholders to sell our common stock in the secondary market.
If our common stock is delisted by NASDAQ, our common stock may be eligible to trade on the OTC Bulletin Board, an over-the-counter quotation system, or on the pink sheets where an investor may find it more difficult to dispose of or obtain accurate quotations as to the market value of our common stock. We cannot assure you that our common stock, if delisted from the NASDAQ Global Market, will be listed on a national securities exchange, a national quotation service, the OTC Bulletin Board or the pink sheets.
Current or future sales by existing stockholders could depress the market price of our Class A common stock.
The market price of our Class A common stock could drop as a result of sales of a large number of shares of Class A common stock or Class B common stock, par value $0.0001 per share (convertible into Class A common stock) by our existing stockholders or the perception that these sales may occur. These factors could make it more difficult for us to raise funds through future offerings of our Class A common stock.
Our failure to comply with the Sarbanes-Oxley Act of 2002 could cause a loss of confidence in the reliability of our financial statements and could have a material adverse effect on our business and the price of our Class A common stock.
We have undergone a comprehensive effort to comply with Section 404 of the Sarbanes-Oxley Act of 2002. Pursuant to Section 404, and the rules and regulations promulgated by the SEC to implement Section 404, we are required to furnish a report by our management to include in our annual report on Form 10-K regarding the effectiveness of our internal controls over financial reporting. This effort included documenting and testing our internal controls. As of December 31, 2007, we did not identify any material weaknesses in our internal controls over financial reporting as defined by the Public Company Accounting Oversight Board. In future years, there can be no assurance that we will not have material weaknesses that would be required to be reported. If we are unable to assert that our internal controls over financial reporting are effective in any future period (or if our independent registered public accounting firm was unable to express an opinion on the effectiveness of our internal controls), we could lose investor confidence in the accuracy and completeness of our financial reports, which would have a material adverse impact on our business and possibly, the price of our Class A common stock.
Our operating results could be adversely affected by a general deterioration in economic conditions.
Our operating results could be adversely affected by a recession and/or downturn in the United States economy since advertising expenditures generally decrease as the economy slows down. In addition, our operating results in individual geographic markets could be adversely affected by local or regional economic downturns. The risks associated with our businesses become more acute in periods of a slowing economy or recession, which may be accompanied by a decrease in advertising. A decline in the level of business activity of our advertisers could have an adverse effect on our revenues and profit margins. During the most recent economic slowdown in the United States, many advertisers reduced their advertising expenditures. The impact of slowdowns on our business is difficult to predict, but they may result in reductions in purchases of advertising. Our operating results have been adversely affected by past recessions.
We may be adversely affected by the occurrence of extraordinary events, such as terrorist attacks or natural disasters.
The occurrence of extraordinary events, such as terrorist attacks, natural disasters, intentional or unintentional mass casualty incidents or similar events may substantially impact our operations in specific geographic areas, as well as nationally, and it may decrease the use of and demand for advertising, which may decrease our revenues or expose us to substantial liability. The September 11, 2001 terrorist attacks, for example, caused a nationwide disruption of commercial activities. The occurrence of future terrorist attacks, military actions by the U.S., contagious disease outbreaks or other unforeseen similar events cannot be predicted, and their occurrence can be expected to further negatively affect the economies where we do business generally, specifically the market for advertising. In addition, natural disasters, such as hurricanes or earthquakes, could adversely impact any one or more of the markets where we do business.
Risks related to our Chairman, Chief Executive Officer, and President’s Controlling Position
Raúl Alarcón, Jr., our Chairman of the board of directors, Chief Executive Officer and President, has majority voting control and this control may discourage or influence certain types of transactions, including an actual or potential change of control such as a merger or sale.
Raúl Alarcón, Jr., our Chairman of the board of directors, Chief Executive Officer and President, beneficially owns shares of common stock representing approximately 80% of the combined voting power of our outstanding shares of common stock. As a result, Mr. Alarcón, Jr. will generally have the ability to control the outcome of all matters requiring stockholder approval, including the election of our entire board of directors, the approval of any merger or consolidation and the sale of all or substantially all of our assets. In addition, Mr. Alarcón Jr.’s voting power may have the effect of discouraging offers to acquire us because any such acquisition would require his consent.
We cannot assure you that Mr. Alarcón, Jr. will maintain all or any portion of his ownership or that he would continue as an officer or director if he sold a significant part of his stock. The disposition by Mr. Alarcón, Jr. of a sufficient number of shares could result in a change in control of our company, and we cannot assure you that a change of control would not adversely affect our business, financial condition or results of operations. As noted above, it could also result in a default under our subsidiary credit agreements, could trigger a variety of federal, state and local regulatory consent requirements and potentially limit our utilization of net operating losses for income tax purposes.
We may be influenced by our chairman of the board and our president and chief executive officer, whose interests may conflict with those of our other stockholders.
Mr. Alarcón, Jr. beneficially owns approximately 80% of the total voting power of our outstanding common stock. As such, he may be able to:
•
influence the election of our board of directors;
•
influence our management and policies; and
•
influence the outcome of any corporate transaction or other matter submitted to our stockholders for approval, including mergers, consolidations and the sale of all or substantially all of our assets.
Under Delaware law, although our directors and officers have a duty of loyalty to SBS, transactions that we enter into in which a director or officer has a conflict of interest are generally permissible so long as the material facts as to the director’s or officer’s relationship or interest as to the transaction are disclosed to our board of directors and a majority of our disinterested directors approves the transaction, or the transaction is otherwise fair to us.
Future sales by Raúl Alarcón, Jr. could adversely affect the price of our Class A common stock.
The price for our Class A common stock could substantially fluctuate if Mr. Alarcón, Jr. sells large amounts of shares in the public market, including any shares of our Class B common stock, which are automatically converted to Class A common stock when sold. These sales, or the possibility of such sales, could make it more difficult for us to raise capital by selling equity or equity-related securities in the future.
Item 1B.
Item 1B. Unresolved Staff Comments
None.
Item 2.
Item 2.
Properties
Each of our media segments requires offices, broadcasting studios, and transmission facilities to support our operations. Our corporate headquarters and corporate television operations are located at 2601 South Bayshore Drive, Coconut Grove, Florida, where we rent executive offices in space indirectly owned by Raúl Alarcón, Jr. The lease expires in 2015, with the right to renew for two consecutive five-year terms thereafter. The studios and offices of our Miami radio stations are currently located in leased facilities, which are indirectly owned by Raúl Alarcón, Jr. and Pablo Raúl Alarcón, Sr., with lease terms that expire in 2012.
At December 31, 2007, the principal buildings owned or leased by us and used primarily by our television and radio segments are described below:
Our Principal Properties(1)
(1)
Excludes properties less than 12,000 square feet.
(2)
Facility used for the offices and studios for WSKQ-FM and WPAT-FM and certain internet and television operations.
(3)
Facility used for the offices and studios for KLAX-FM and KXOL-FM and certain internet and television operations.
(4)
Facility under construction/renovation to house the consolidated Miami radio and television broadcasting operations. This facility was leased from November 25, 2006 to January 4, 2007, when the facility was purchased. We expect this facility to be operational in the 3rd quarter of 2008.
(5)
Building includes corporate space, and sales space for Miami radio and MegaTV.
In addition, we own the transmitter sites for five of our eleven radio stations in Puerto Rico. We also own a tower site in Signal Hill, California where we lease space to a public broadcast station and other members of the telecommunications industry.
We lease (i) all of our other transmitter sites, with lease terms that expire between 2008 and 2044, assuming all renewal options are exercised, (ii) the office and studio facilities for our radio stations in Chicago and San Francisco, and (iii) additional office space for our radio stations in New York.
We lease backup transmitter facilities for our New York stations WSKQ-FM and WPAT-FM in midtown Manhattan on the Four Times Square Building. We also lease backup transmitter sites for KLAX-FM and KXOL-FM in Los Angeles, WLEY-FM in Chicago, WRMA-FM, WCMQ-FM and WXDJ-FM in Miami, and KRZZ-FM in San Francisco. We own the back-up transmitter site in San Juan, Puerto Rico for the five radio stations covering the San Juan metropolitan area.
These backup transmitter facilities are a significant part of our disaster recovery plan to continue broadcasting to the public and to maintain our stations’ revenue streams in the event of an emergency. We have implemented a backup studio site for KRZZ-FM serving the San Francisco market in San Jose. We are planning to implement backup studio and alternate origination points to maintain operations in the event of a studio-site outage or emergency in the other cities of operation.
We lease all of the properties used for the operations of our television stations. These properties include offices, studios, master control, transmitter sites and production facilities. We lease a combination studio and tower site in Key West, Florida for WSBS-TV-DT and WSBS-CA, which operate as one television operation.
The studio, office and transmitter sites of our media stations are vital to our overall operation. Management believes that our properties are in good condition and are suitable for our operations; however, we continually assess the need to upgrade our properties.
See “Item 1. Business - Environmental Matters” and “Item 13. Certain Relationships and Related Transactions”.
Item 3.
Item 3.
Legal Proceedings
From time to time we are involved in various routine legal and administrative proceedings and litigation incidental to the conduct of our business, such as contractual matters and employee-related matters. In the opinion of management, such litigation is not likely to have a material adverse effect on our business, operating results or financial condition.
Wolf, et al., Litigation
On November 28, 2001, a complaint was filed against us in the United States District Court for the Southern District of New York (the District Court) and was amended on April 19, 2002. The amended complaint alleges that the named plaintiff, Mitchell Wolf, purchased shares of our Class A common stock pursuant to the October 27, 1999 prospectus and registration statement relating to our initial public offering which closed on November 2, 1999 (the initial public offering). The complaint was brought on behalf of Mr. Wolf and an alleged class of similarly situated purchasers against us, eight underwriters and/or their successors-in-interest who led or otherwise participated in our initial public offering, two members of our senior management team, one of whom is our Chairman of the Board of Directors, and an additional director, referred to collectively as the individual defendants. To date, the complaint, while served upon us, has not been served upon the individual defendants, and no counsel has appeared for them. On September 21, 2007, Kaye Scholer LLP, on behalf of the individual defendants, executed a tolling agreement with the plaintiffs providing for the dismissal without prejudice of all claims against the individual defendants upon the provision to plaintiffs of documentation showing that we had entity coverage for the period in question. Documentation of such coverage was subsequently provided to the plaintiffs on December 19, 2007, and the plaintiffs are expected to file a stipulation order, dismissing without prejudice, all claims against the individual defendants.
This case is one of more than 300 similar cases brought by similar counsel against more than 300 issuers, 40 underwriters and 1,000 individual defendants alleging, in general, violations of federal securities laws in connection with initial public offerings, in particular, failing to disclose that the underwriters allegedly solicited and received additional, excessive and undisclosed commissions from certain investors in exchange for which they allocated to those investors material portions of the restricted shares issued in connection with each offering. All of these cases, including the one involving us, have been assigned for consolidated pretrial purposes to one judge of the United States District Court for the Southern District of New York. The issuer defendants in the consolidated cases (collectively, the Issuer Defendants) filed motions to dismiss the
consolidated cases. These motions to dismiss covered issues common among all Issuer Defendants and issues common among all underwriter defendants (collectively, the Underwriter Defendants) in the consolidated cases. As a result of these motions, the Individual Defendants were dismissed from one of the claims against them, specifically the Section 10b-5 claim.
On August 31, 2005, the District Court issued an order of preliminary approval of a settlement proposal among the investors in the plaintiffs’ class, the issuer defendants and the issuer defendants’ insurance carriers (the Issuers Settlement). The principal components of the Issuers Settlement were: (1) a release of all claims against the Issuer Defendants and their directors, officers and certain other related parties arising out of the alleged wrongful conduct in the amended complaint; (2) the assignment to the Plaintiffs of certain of the Issuer Defendants’ potential claims against the Underwriters; and (3) a guarantee by the Insurers to the Plaintiffs of the difference between $1 billion and any lesser amount recovered by the Plaintiffs from the Underwriter Defendants. The payments were to be charged to each Issuer Defendant’s insurance policy on a pro rata basis.
On October 13, 2004, the District Court granted Plaintiffs’ motion for class certification in six “focus cases” out of the more than 300 consolidated class actions, but on December 5, 2006, the United States Court of Appeals for the Second Circuit (the Second Circuit) reversed the order, holding that Plaintiffs could not satisfy the predominance requirement for a Federal Rule of Civil Procedure 23(b)(3) class action. On June 25, 2007, in light of the Second Circuit’s reversal of the class certification order and its subsequent denial of plaintiffs’ petition for a rehearing or rehearing en banc, the District Court entered a stipulation between plaintiffs and the Issuer Defendants, terminating the proposed Issuers Settlement which the court had preliminarily approved on August 31, 2005.
On May 30, 2007, the District Court held a status conference to discuss the impact of the Second Circuit’s December 5, 2006 decision and plaintiffs made an oral motion for class certification with respect to all of the consolidated actions, based on newly proposed class definitions.
On August 14, 2007, Plaintiffs filed amended complaints in the six “focus cases” and amended master allegations in the consolidated actions. On November 13, 2007, the Issuer Defendants moved to dismiss the amended complaints in the six “focus cases.” The motion is fully briefed. We are not named in any of the six “focus cases.”
On December 21, 2007, the Underwriter Defendants and Issuer Defendants filed oppositions to plaintiffs’ motion for class certification in the six “focus cases.” Plaintiffs’ reply brief is due on March 28, 2008 and the Underwriter Defendants’ and Issuer Defendants’ surreply briefs are due on April 22, 2008. The District Court has not set a date for oral argument.
On January 7, 2008, the Underwriter Defendants filed a motion (in which the Issuer Defendants joined) to strike class allegations in 26 of the consolidated cases, including the case against us, on the ground that plaintiffs lacked a putative class representative in those cases at the time of their May 30, 2007 oral motion. Plaintiffs filed an opposition to the motion on February 8, 2008, and the Underwriter Defendants’ filed a reply brief on February 29, 2008. We do not have sufficient information at this time to determine our ultimate exposure, if any, with respect to this matter.
Amigo Broadcasting Litigation
On December 5, 2003, Amigo Broadcasting, L.P. (Amigo) filed an original petition and application for temporary injunction in the District Court of Travis County, Texas (the Court), against us, Raul Bernal (Bernal) and Joaquin Garza (Garza). Amigo filed a first and second amended petition and application for temporary injunction on June 25, 2004 and February 18, 2005, respectively. The second amended petition alleged that we (1) misappropriated Amigo’s proprietary interests by broadcasting the characters and concepts portrayed by the Bernal and Garza radio show (the Property); (2) wrongfully converted the Property to our own use and benefit; (3) induced Bernal and Garza to breach their employment agreements with Amigo; (4) used and continued to use Amigo’s confidential information and property with the intention of diverting profits from Amigo and of inducing Amigo’s potential customers to do business with us and our syndicators;
(5) invaded Amigo’s privacy by misappropriating the names and likenesses of Bernal and Garza; and (6) committed violations of the Lanham Act by diluting and infringing on Amigo’s trademarks. Based on these claims, Amigo seeks damages in excess of $5.0 million.
On December 5, 2003, the Court issued a temporary injunction against all of the defendants and scheduled a hearing before the Court on December 17, 2003. The temporary injunction dissolved by its terms on December 1, 2004. On December 17, 2003, the parties entered into a settlement agreement, whereby the Court entered an Order on Consent of the settling parties, permitting Bernal and Garza’s radio show to be broadcast on our radio stations. In addition, we agreed that we would not broadcast the Bernal and Garza radio show in certain prohibited markets and that we would not distribute certain promotional materials that were developed by Amigo. On January 5, 2004, we answered the remaining claims asserted by Amigo for damages. On March 18, 2005, the case was removed to the United States District Court for the Western District of Texas (the District Court) and a trial date was scheduled for May 2006. On January 17, 2006, we filed a motion for summary judgment with the District Court. On March 2, 2006, the parties conducted mediation but were unable to reach a settlement. The case was thereafter tried before a jury the week of May 1, 2006. At the close of plaintiff’s evidence, defendants presented a motion for judgment as a matter of law and the motion was granted on all counts. The District Court entered judgment for the defendants - Garza, Bernal and us.
On June 2, 2006, Plaintiff filed a notice of appeal to the Fifth Circuit Court of Appeals. All briefs have been submitted and the Fifth Circuit Court of Appeals heard oral arguments on December 5, 2007. Based on the existing circumstances, we believe that it is unlikely that the appeal will result in a material adverse outcome to us.
See “Item 1. Business - Environmental Matters”.
Item 4.
Item 4.
Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year ended December 31, 2007.
Item 4A.
Directors and Executive Officers of the Registrant
The following table sets forth the names, ages and positions of our directors, executive officers and certain key employees as of December 31, 2007. Each of our directors and officers serves until his successor is elected and qualified.
Raúl Alarcón, Jr. joined us in 1983 as an account executive and has been our President and a director since October 1985 and our Chief Executive Officer since June 1994. On November 2, 1999, Mr. Alarcón, Jr. became our Chairman of the board of directors and continues as our Chief Executive Officer and President. Currently, Mr. Alarcón, Jr. is responsible for our long-range strategic planning and operational matters and is instrumental in the acquisition and related financing of each of our stations. Mr. Alarcón, Jr. is the son of Pablo Raúl Alarcón, Sr.
Pablo Raúl Alarcón, Sr. is our founder and was our Chairman of the board of directors from March 1983 until November 2, 1999, when he became Chairman Emeritus. Mr. Alarcón, Sr. continues to be one of our directors. Mr. Alarcón, Sr. has been involved in Spanish-language radio broadcasting since the early 1950’s when he established his first radio station in Camagüey, Cuba. Upon his arrival in the United States, Mr. Alarcón, Sr. continued his career in radio broadcasting and was an on-air personality for a New York radio station before being promoted to programming director. Mr. Alarcón, Sr. subsequently owned and operated a recording studio and an advertising agency before purchasing our first radio station in 1983. Mr. Alarcón, Sr. is Raúl Alarcón, Jr.’s father.
Joseph A. García has been our Chief Financial Officer since 1984, Executive Vice President since 1996 and Secretary since November 2, 1999. Mr. García is responsible for our financial affairs, operational matters and investor relations, and he has been instrumental in the acquisition and related financing of our stations. Before joining us in 1984, Mr. García spent thirteen years in international financial planning positions with Philip Morris Companies, Inc. and Revlon, Inc., where he was manager of financial planning for Revlon - Latin America.
Marko Radlovic became our Chief Operating Officer of the Radio Segment on November 7, 2007 and has been our Executive Vice President since July 21, 2005. Previously, Mr. Radlovic was our Chief Operating Officer of the Company from July 21, 2005 through November 6, 2007 and was our Chief Revenue Officer from December 2003 through July 2005. Mr. Radlovic is responsible for day to day operational matters and overseeing the revenue and profit performance of all of our radio stations. Mr. Radlovic was Vice President/General Manager for our Los Angeles radio cluster from January 2002 until November 2003 and previously served as Vice President of Sales for the Los Angeles cluster. Prior to joining us, he was Market Manager for Cumulus Media in Southern California from January 2001 until August 2001 and was Vice President/General Manager for AM/FM Inc. in Los Angeles from October 1998 to October 2000.
Cynthia Hudson became our Chief Creative Officer and Executive Vice President on January 3, 2006. Ms. Hudson is responsible for MegaTV and our bilingual Internet portals. From 1997-2005, Ms. Hudson served as Senior Vice President and Editorial Director of Cosmopolitan Television (a Hearst Entertainment and Syndication Group division), heading up the creation and development of the Cosmopolitan TV Networks. Ms. Hudson led the research, development and creation of Cosmo TV, overseeing design of original programs, on-air packaging, promotions and program acquisitions, as well as the creation and production of original formats. Ms. Hudson is an eight-time Emmy Award winning producer, writer and international television executive with over 20 years experience in both the U.S. broadcast and international cable TV industries.
Antonio S. Fernandez became one of our directors on June 30, 2004. Mr. Fernandez was the founder and former head of the International Investment Banking Department at Oppenheimer & Co., Inc. Mr. Fernandez’s tenure at Oppenheimer & Co., Inc. from 1979 to 1999 also included terms as Executive Vice President, Director of Operations, Treasurer, Chief Financial Officer and Director. He has been a member of the investment committees for several private equity funds and a director of a closed end fund. Earlier in his career, Mr. Fernandez held management positions at Electronic Data Systems, duPont Glore Forgan and Thomson McKinnon. Mr. Fernandez served on the board of directors of Banco Latinoamericano de Exportaciones from 1992 until 1999 and in September 2003 was elected to the board of directors of Terremark Worldwide Inc.
Jose A. Villamil became one of our directors on June 30, 2004. Mr. Villamil has over 25 years of experience as a private business economist and as a senior policymaker of both the federal and State of Florida governments. Mr. Villamil is the Chief Executive Officer of The Washington Economics Group, Inc., serving in such position from 1993 to 1998 and from 2000 to the present. From 1999 to 2000, he was Director for Tourism, Trade and Economic Development of Florida. Mr. Villamil served most recently as Chairman of the Council of Economic Advisors of Florida and a member of the board of directors of Enterprise Florida, Inc. Since April 2003, Mr. Villamil has been director of Mercantile CommerceBank, N.A. and CommerceBank Holding Corp. Most recently, Mr. Villamil was appointed to President George W. Bush’s Advisory Committee on Trade Policy and Negotiations. From 1989-1993, Mr. Villamil served as Chief Economist and later as Undersecretary for Economic Affairs at the United States Department of Commerce.
Mitchell A. Yelen became one of our directors on October 1, 2007. Mr. Yelen is currently the Director of tax services at Pinchasik, Strongin, Muskat, Stein & Company, P.A. where he has been employed since 1984 specializing in litigation support, complex tax research and financial planning. Mr. Yelen previously held positions at CPA firms: Kaufman, Rossin & Co., P.A. and Alexander Grant & Co., P.A. Among other degrees, he holds an M.B.A. in Finance from Northwestern University and a J.D. and L.L.M. in taxation from the University of Miami.
Jason L. Shrinsky became one of our directors on November 2, 1999. Mr. Shrinsky is a retired partner from the law firm Kaye Scholer LLP, which he joined as a partner in 1986. Mr. Shrinsky has been a lawyer counseling corporations and high net worth individuals on financings, mergers and acquisitions, other related financial transactions and regulatory procedures since 1964. Kaye Scholer LLP has served as our legal counsel for more than 20 years.
PART II
Item 5.
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
(a)
Market Information
Our Class A common stock is traded on the NASDAQ Global Market under the symbol “SBSA”. The tables below show, for the quarters indicated, the reported high and low bid quotes for our Class A common stock on the NASDAQ Global Market.
(b)
Record Holders
As of March 13, 2008, there were approximately 127 record holders of our Class A common stock, par value $0.0001 per share and four record holders of our Class B common stock, par value $0.0001 per share (Class B common stock). These figures do not include an estimate of the indeterminate number of beneficial holders whose shares may be held of record by brokerage firms and clearing agencies. There is no established trading market for our Class B common stock, par value $0.0001 per share. However, the Class B common stock is convertible to our Class A common stock on a share-for-share basis.
(c)
Dividends
We have not declared or paid any cash or stock dividends on any class of our common stock in the last two fiscal years. We intend to retain future earnings for use in our business and do not anticipate declaring or paying any cash or stock dividends on shares of our Class A or Class B common stock in the near future. In addition, any determination to declare and pay dividends will be made by our board of directors based upon our earnings, financial position, capital requirements and other factors that our board of directors deems relevant. Furthermore, the indentures governing our First Lien Credit Facility contain some restrictions on our ability to pay dividends.
Under the terms of our Series B preferred stock, we are required to pay dividends at a rate of 103/4% per year of the $1,000 liquidation preference per share of Series B preferred stock. We may pay these dividends in either cash or additional shares of Series B preferred stock until October 15, 2008. After October 15, 2008, we will be required to pay the dividends on our Series B preferred stock only in cash. From October 30, 2003 to July 15, 2005, the dividends on the Series B preferred stock were paid with additional shares of Series B preferred stock. Subsequent to July 15, 2005, all the dividends on the Series B preferred stock were paid in cash.
Under the terms of our Series C preferred stock, we are required to pay dividends on parity with our Class A common stock and Class B common stock and any other class or series of capital stock we create after December 23, 2004.
See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” below.
Recent Sales of Unregistered Securities
We have not made any sales of unregistered securities for the period covered by this annual report on Form 10-K.
Issuer Purchases of Equity Securities
We did not repurchase any of our outstanding equity securities for the period covered by this annual report on Form 10-K.
(d)
Stock Performance Graph
The following graph is not deemed to be “soliciting material” or to be “filed” with the SEC or subject to the liabilities of Section 18 of the Securities Exchange Act of 1934, and the report shall not be deemed to be incorporated by reference into any prior or subsequent filing by the Company under the Securities Act of 1933 or the Securities Exchange Act of 1934 except to the extent the Company specifically requests that such information be incorporated by reference or treated as soliciting material.
Stockholder Return Performance Presentation
The graph below compares the cumulative total stockholder return on our Class A common stock with the cumulative total return on the NASDAQ Stock Market (U.S.) and the NASDAQ Telecommunications Index, from December 31, 2002 to December 31, 2007. The data set forth below assumes that the value of an investment in our Class A common stock and in each index on December 31, 2002 was $100, and assumes the reinvestment of dividends.
The comparisons in the graph below are based upon historical data and are not indicative of, nor intended to forecast, future performance of our Class A common stock.
Comparsion of 5 Year Cumulative Total Return* from December 31, 2002 to December 31, 2007
Among Spanish Broadcasting System, Inc., The NASDAQ Composite Index And The NASDAQ Telecommunications Index
*
$100 INVESTED ON DECEMBER 31, 2002 IN STOCK OR INDEX, INCLUDING REINVESTMENT OF DIVIDENDS.
(e)
Equity Compensation Plans
Information called for by Item 5 is set forth under the heading “Directors and Executive Officers of the Registrant” in Item 4A of this annual report and in our proxy statement relating to the 2008 Annual Meeting of Stockholders (the Proxy Statement), which information is incorporated herein by this reference.
Item 6.
Item 6.
Selected Financial Data
SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION
(In thousands, except ratios, shares outstanding and per share data)
The following table sets forth the historical consolidated financial information of our business. The selected historical consolidated financial information presented below under the caption “Statement of Operations Data”, “Other Financial Data” and “Consolidated Balance Sheet Data”, as of and for the fiscal years ended December 31, 2004 and 2003, are derived from our historical audited consolidated financial statements but not included in this annual report on Form 10-K.
Effective December 30, 2002, we changed our fiscal year end from a broadcast calendar 52-53-week fiscal year ending on the last Sunday in December to a calendar year ending on December 31. Financial results for December 30 and 31, 2002 are included in our financial results for the fiscal year ended December 31, 2003.
Our selected historical consolidated financial data should be read in conjunction with our historical consolidated financial statements as of December 31, 2007 and 2006, and for the fiscal years ended December 31, 2007, 2006 and 2005, the related notes included in Item 15 of this report. For additional information see the financial section of this report and “Item 7.
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
We are the largest publicly traded Hispanic-controlled media and entertainment company in the United States. We own and/or operate 21 radio stations in markets that reach approximately 48% of the U.S. Hispanic population, and two television stations, which reach approximately 2.0 million households in the South Florida market, and nationally throughout the U.S. on DirecTV Más. Our radio stations are located in six of the top-ten Hispanic markets of Los Angeles, New York, Puerto Rico, Chicago, Miami and San Francisco. Los Angeles and New York have the largest and second largest Hispanic populations, and are also the largest and second largest radio markets in the United States in terms of advertising revenue, respectively. Our two television stations operate as one television operation, branded “MegaTV”. As part of our operating business, we also operate LaMusica.com, Mega.tv, and our radio station websites which are bilingual (Spanish - English) websites providing content related to Latin music, entertainment, news and culture. We also occasionally produce live concerts and events throughout the United States and Puerto Rico.
On March 1, 2006, we acquired television stations WSBS-TV (Channel 22, formerly known as WDLP-TV) and its derivative digital television station WSBS-DT (Channel 3, formerly known as WDLP-DT) in Key West, Florida and WSBS-CA (Channel 50, formerly known as WDLP-CA) in Miami, Florida, serving the South Florida market. On March 1, 2006, we also launched MegaTV, our general interest Spanish-language television operation. MegaTV’s programming is based on a strategy designed to showcase a combination of programs, ranging from televised radio-branded shows to general entertainment programs, such as music, celebrity, debate, interviews and personality based shows. As part of our strategy, we have incorporated certain of our on-air personalities into our programming, as well as including interactive elements to complement our Internet websites. We have developed approximately 70% of our programming and have commissioned other content from Spanish-language production partners. Our television revenue is generated primarily from the sale of local advertising and paid programming.
The success of each of our stations depends significantly upon its audience ratings and share of the overall advertising revenue within its market. The broadcasting industry is a highly competitive business, but some barriers to entry do exist. Each of our stations competes with both Spanish-language and English-language stations in its market, as well as with other advertising media, such as newspapers, cable television, the Internet, magazines, outdoor advertising, satellite radio and television, transit advertising and direct mail marketing. Factors which are material to our competitive position include management experience, our stations’ rank in their markets, signal strength and frequency, and audience demographics, including the nature of the Spanish-language market targeted by a particular station.
Our primary source of revenue is the sale of advertising time on our stations to local and national advertisers. Our revenue is affected primarily by the advertising rates that our stations are able to charge, as well as the overall demand for advertising time in each respective market. Seasonal net broadcasting revenue fluctuations are common in the broadcasting industry and are primarily due to fluctuations in advertising demand from local and national advertisers. Typically for the broadcasting industry, the first calendar quarter generally produces the lowest revenue. Our most significant operating expenses are compensation expenses, programming expenses, professional fees and advertising and promotional expenses. Our senior management strives to control these expenses, as well as other expenses, by working closely with local station management and others, including vendors.
Fiscal Year Ended 2007 Compared to Fiscal Year Ended 2006
The following summary table presents separate financial data for each of our operating segments (in thousands).
The following summary table presents a comparison of our operating results of operations for the fiscal years ended December 31, 2007 and 2006. Various fluctuations illustrated in the table are discussed below. This section should be read in conjunction with our consolidated financial statements and notes.
Net Revenue
The increase in our consolidated net revenue of $2.8 million or 2% was due to the increase in net revenue from our television segment of $5.3 million or 110%, offset by our radio segment net revenue decrease of $2.5 million or 1%. Our television segment growth was primarily due to (a) MegaTV establishing itself within the South Florida advertising community during the past 22 months, which resulted in an ability to increase advertising rates and sell more inventory, and (b) our television results reflecting a full year of revenue compared to the prior period’s results reflecting only ten-months of revenue. Our radio segment had a decrease in net revenue primarily due to lower local sales. The decrease in local sales occurred primarily in our Los Angeles, Miami, Chicago and Puerto Rico markets, offset by an increase in our New York and San Francisco markets.
Engineering and Programming Expenses
Our consolidated engineering and programming expenses were flat compared to the prior year. Our television segment expenses decreased $2.2 million or 13%, primarily due to a decrease in programming pre-launch costs, original produced programming, and compensation and benefits for our television programming personnel due to a reduction of headcount. Our radio segment expenses increased $2.1 million or 6%, primarily related to an increase in compensation and benefits for our radio programming personnel and higher music license fees.
Selling, General and Administrative Expenses
Our consolidated selling, general and administrative expenses were flat compared to the prior year. Our radio segment expenses increased $0.7 million or 1%, primarily due to an increase in professional fees and legal settlements. These increases in our radio segment’s expenses were offset by a decrease in local sales commissions related to lower sales. Our television segment expenses decreased $0.4 million or 5%, primarily due to the decrease in cash advertising, promotional and marketing costs related to the prior year launching of MegaTV.
Corporate Expenses
The increase in corporate expenses was mainly a result of an increase in employee compensation and benefits, offset by a decrease in legal and professional fees, and directors and officers insurance.
Loss (Gain) on Sales of Assets, Net
The prior period gain on sale of assets, net, is related to the sale of radio stations KZAB-FM and KZBA-FM, serving the Los Angeles, California market, which was completed on January 31, 2006, at which time we recognized a pre-tax gain of approximately $50.8 million.
Operating Income
The decrease in operating income was primarily attributed to the gain on sale of assets, net, of $50.8 million which was recognized in the prior period, offset by an increase in consolidated net revenue and decreases in operating expenses.
Interest Expense, Net
The decrease in interest expense, net, was primarily due to the elimination of interest expense incurred on our $100.0 million Second Lien Credit Facility, which was repaid on February 17, 2006.
Loss on Early Extinguishment of Debt
The prior period loss on early extinguishment of debt of $3.0 million was due to the prepayment premium and the write-off of unamortized deferred financing costs related to the repayment of our $100.0 million Second Lien Credit Facility.
Other Income (Expense)
The increase in other income relates to the write-off of the unused portion of unearned revenue that expired on March 1, 2007. This unearned revenue relates to the MegaTV acquisition advertising agreement that provides the seller with the opportunity to use $2.0 million of advertising per year, for three years.
Income Taxes
The increase in income taxes was primarily due to the income tax benefit recognized in the prior period, which was related to the sale of radio stations KZAB-FM and KZBA-FM. Our effective tax rate continues to be impacted by a valuation allowance on substantially all of our deferred tax assets.
Net Income
The decrease in net income was primarily due to the gain on sale of assets of $50.8 million and its related income tax benefit of $6.4 million, which were recognized in the prior period.
Fiscal Year Ended 2006 Compared to Fiscal Year Ended 2005
The following summary table presents separate financial data for each of our operating segments (in thousands).
The following summary table presents a comparison of our operating results of operations for the fiscal years ended December 31, 2006 and 2005. Various fluctuations illustrated in the table are discussed below. This section should be read in conjunction with our consolidated financial statements and notes.
Net Revenue
The growth of 4% in consolidated net revenue was due to an increase in net revenue from our radio and television segments. Our radio segment had net revenue growth of 1% or $2.2 million primarily from local revenues. The increase in radio’s local revenue was offset by decreases in national sales of $3.0 million, promotional event sales of $3.8 million and other revenues of $2.2 million related to LMA fees received for KZAB-FM and KZBA-FM. This radio net revenue growth was primarily in our San Francisco and Puerto Rico markets. In addition, our new television segment “MegaTV”, which debuted on March 1, 2006, generated net revenue of $4.9 million primarily from local revenues.
Engineering and Programming Expenses
The increase of 49% or $16.6 million in consolidated engineering and programming expenses was mainly due to our new television segment, which had an increase of $14.9 million in expenses, primarily related to programming costs for originally produced programming, and employee compensation and benefits. Our radio segment’s engineering and programming expenses increased $1.7 million or 5%, as a result of an increase in our music licenses fees and employee compensation and benefits costs, which includes SFAS No. 123(R) stock-based compensation, offset by a decrease in severance pay.
Selling, General and Administrative Expenses
The increase of 8% or $5.3 million in consolidated selling, general and administrative expenses was mainly due to our new television segment, which had an increase of $6.8 million in expenses, primarily related to (a) advertising and promotions costs, (b) employee compensation and benefits, (c) rent expense and (d) rating service fees. Our radio segment had a decrease of 2% or $1.5 million in selling, general and
administrative expenses, as a result of decreases in (i) advertising and promotions costs, (ii) promotional events expense and (iii) professional fees, mainly related to our in-house compliance with the Sarbanes-Oxley Act of 2002. These decreases in our radio segment’s selling, general and administrative expenses were offset by increases in radio’s (a) local commissions due to the increase in net revenue, (b) employee compensation and benefits costs, which includes SFAS No. 123(R) stock based-compensation, (c) provision for doubtful accounts receivable, (d) rent expense, and (e) tax and license fees.
Corporate Expenses
The increase in corporate expenses was mainly a result of an increase in employee compensation and benefits, which includes SFAS No. 123(R) stock-based compensation. This increase was partially offset by decreases in legal fees, accounting fees and directors and officers insurance.
Gain on Sales of Assets, Net
The gain on sales of assets, net, is related to the sale of our radio stations KZAB-FM and KZBA-FM, serving the Los Angeles, California market, which was completed on January 31, 2006 and we recognized a pre-tax gain of approximately $50.8 million.
Operating Income from Continuing Operations
The increase in operating income of 75% or $36.0 million was primarily attributed to the increase in our radio segment’s operating income of approximately $53.2 million, which includes the gain on sales of assets, net of $50.8 million, offset by the increase in our new television segment’s operating loss of approximately $17.2 million.
Interest Expense, Net
The decrease in interest expense, net, was primarily due to lower interest expense incurred with respect to the senior secured credit facilities we entered into on June 10, 2005 as compared to interest expense incurred on our prior debt structure. In addition, on February 17, 2006, we repaid our $100.0 million Second Lien Credit Facility. Interest expense, net, also decreased due to an increase in interest income resulting from a general increase in interest rates on our cash balances.
Loss on Early Extinguishment of Debt
The 2006 loss on early extinguishment of debt was due to the $1.0 million prepayment premium paid and the $2.0 million write-off of unamortized deferred financing costs related to the repayment of our $100.0 million Second Lien Credit Facility. The 2005 loss on early extinguishment of debt was due to (a) call premiums paid and the write-off of unamortized discount and deferred financing costs related to the redemption of the 95/8% senior subordinated notes, due 2009, on July 12, 2005 and (b) the write-off of deferred financing costs related to the pay-down of the $135.0 million senior secured credit facility term loan due 2009, on June 10, 2005.
Income Taxes
The decrease in income tax expense was primarily due to the reversal of the deferred tax liability associated with our Los Angeles radio stations KZAB-FM and KZBA-FM, as a result of the book/tax basis differences on the date of sale, which caused the decrease of our effective tax rate. Our effective tax rate continues to be impacted by a valuation allowance on substantially all of our deferred tax assets.
Net Income (Loss)
The increase in net income was primarily due to the gain on sales of assets, net, the decrease in interest expense, net, and a decrease in income tax expense, offset by a decrease in other income and the television segment’s operating loss.
Liquidity and Capital Resources
Our primary sources of liquidity are cash on hand, cash provided by operations and, to the extent necessary, undrawn commitments that are available under our $25.0 million revolving credit facility. Our ability to raise funds by increasing our indebtedness is limited by the terms of the certificates of designations governing our preferred stock and the credit agreement governing our First Lien Credit Facility. Additionally, our certificates of designations and credit agreement each place restrictions on us with respect to the sale of assets, liens, investments, dividends, debt repayments, capital expenditures, transactions with affiliates and consolidations and mergers, among other things.
Management believes that cash from operating activities, together with cash on hand, should be sufficient to permit us to meet our operating obligations in the foreseeable future, including, among other things, required quarterly interest and principal payments pursuant to the credit agreement governing our First Lien Credit Facility and capital expenditures, excluding the acquisitions of FCC licenses. Assumptions (none of which can be assured) which underlie management’s beliefs, include the following:
•
the demand for advertising within the broadcasting industry and economic conditions in general will not deteriorate in any material respect;
•
we will continue to successfully implement our business strategy; and
•
we will not incur any material unforeseen liabilities, including environmental liabilities and legal judgments.
Our strategy is to primarily utilize cash flows from operations to meet our capital needs and contractual obligations. However, we also have bank borrowings available to meet our capital needs and contractual obligations and, when appropriate and, if available, will obtain financing by issuing debt or equity.
We continuously evaluate opportunities to make strategic acquisitions, primarily in the largest Hispanic markets in the United States. We engage in discussions regarding potential acquisitions from time to time in the ordinary course of business. We anticipate that any future acquisitions would be financed through funds generated from permitted debt financing, equity financing, operations, asset sales or a combination of these or other available sources. However, there can be no assurance that financing from any of these sources, if necessary and available, can be obtained on favorable terms for future acquisitions.
We had cash and cash equivalents of $61.1 million and $66.8 million as of December 31, 2007 and 2006, respectively.
The following summary table presents a comparison of our capital resources for the fiscal years ended December 31, 2007 and 2006, with respect to certain of our key measures affecting our liquidity. The changes set forth in the table are discussed below. This section should be read in conjunction with the consolidated financial statements and notes.
Net Cash Flows Provided by Operating Activities
Changes in our net cash flows from operating activities were primarily a result of a decrease in cash received from our customers, and an increase in cash paid for prepaid expenses and other current assets and other assets.
Net Cash Flows (Used in) Provided by Investing Activities
Changes in our net cash flows from investing activities were primarily a result of the following: (a) in 2007, we acquired a building and its related land and have begun making significant improvements to that building totaling $4.3 million and other capital expenditures of $6.2 million, and (b) in 2006, we received proceeds of $64.8 million for the sale of our Los Angeles stations KZAB-FM and KZBA-FM, offset by $18.5 million of payments made to acquire our television operation “MegaTV” and capital expenditures of $9.6 million.
Net Cash Flows Used in Financing Activities
Changes in our net cash flows from financing activities were primarily a result of the prior period repayment of our $100.0 million Second Lien Credit Facility and its related prepayment premium of $1.0 million.
The following summary table presents a comparison of our capital resources for the fiscal years ended December 31, 2006 and 2005, with respect to certain of our key measures affecting our liquidity. The changes set forth in the table are discussed below. This section should be read in conjunction with the consolidated financial statements and notes.
Net Cash Flows Provided by Operating Activities
Changes in our net cash flows from operating activities were primarily a result of a decrease in cash paid for interest, and an increase in cash received from our customers.
Net Cash Flows Provided by Investing Activities
Changes in our net cash flows from investing activities were primarily a result of the following: (a) in 2006, we received proceeds of $64.8 million for the sale of our Los Angeles stations KZAB-FM and KZBA-FM, offset by $18.5 million of payments made to acquire our television operation “MegaTV” and other capital expenditures, while (b) in 2005, we received deposits totaling $35.0 million for the sale of Los Angeles stations KZAB-FM and KZBA-FM, offset by capital expenditures.
Net Cash Flows Used in Financing Activities
Changes in our net cash flows from financing activities were primarily a result of the following: (a) in 2006, we repaid our $100.0 million Second Lien Credit Facility and paid cash dividends on our Series B
preferred stock, while (b) in 2005, we refinanced our prior debt structure which consisted of a $135.0 million senior secured credit facility term loan due 2009 and the 95/8% senior subordinated notes due 2009.
Recent Developments
Local Marketing Agreement
On January 1, 2008, we entered into a local marketing agreement with South Broadcasting System, Inc. (South Broadcasting), a company owned by our Chairman Emeritus and a member of our board of directors. Pursuant to the local marketing agreement, we are permitted to broadcast our Mexican Regional programming on radio station 106.3 FM (the LMA Station). We are required to pay the operating costs of the LMA Station and in exchange we will retain all revenues from the sale of the advertising within the programming we provide. The local marketing agreement will terminate, among other things, upon the first anniversary of the effective date, unless we provide 120 days written notice to South Broadcasting of our election to renew for a period of three years. Under the terms of the local marketing agreement, we have the right of first negotiation and the right of first refusal to match a competing offer. However, after the first anniversary of the effective date, if we do not agree to match the terms of the competing offer or fail to notify South Broadcasting of our intent to match the competing offer, then South Broadcasting has the right to accept such offer, provided South Broadcasting pays us the early termination fee equal to the lesser of 5% of the aggregate purchase price of the LMA Station or $1.0 million.
Acquisition of a Facility and Related Financing
On January 4, 2007, SBS, through its wholly owned subsidiary, SBS Miami Broadcast Center, Inc. (SBS Miami Broadcast Center), completed the acquisition of certain real property located in Miami-Dade County, Florida pursuant to the purchase and sale agreement, dated August 24, 2006, as amended on September 25, 2006, as further amended on October 25, 2006 (the Purchase Agreement). The real property consists of 5.47 acres (234,208 square feet) and approximately 62,000 square feet of office space (the Property). The Property was acquired from 7007 Palmetto Investments, LLC (Seller), an unrelated third party, for a total purchase price of approximately $8.9 million, excluding closing costs and broker’s fees. During 2007, pursuant to the terms of the Purchase Agreement, we made deposits totaling $1.0 million in escrow that were released at the closing and was applied to the purchase price. At December 31, 2006, these deposits were included in other assets in the accompanying consolidated balance sheets. We funded the purchase price using cash on hand and borrowings and we expect to incur significant construction costs for the new broadcasting facility. Upon the completion of construction at the building, we will consolidate our Miami radio and television operations at the new broadcasting facility.
In connection with the acquisition of the Property, on January 4, 2007, SBS Miami Broadcast Center, entered into a loan agreement (the Loan Agreement), a ten-year promissory note in the original principal amount of $7.7 million (the Note), and a Mortgage, Assignment of Rents and Security Agreement (the Mortgage) in favor of Wachovia Bank, National Association (Wachovia). The Promissory Note bears an interest rate equal to one-month LIBOR plus 125 basis points and requires monthly principal payments of $0.03 million with any unpaid balance due on its maturity date of January 4, 2017. The Promissory Note is secured by the Property and any related collateral.
The terms of the loan include certain restrictions and covenants for SBS Miami Broadcast Center, which limit, among other things, the incurrence of additional indebtedness and liens. The Loan Agreement specifies a number of events of default (some of which are subject to applicable cure periods), including, among others, the failure to make payments when due, noncompliance with covenants and defaults under other agreements or instruments of indebtedness. Upon the occurrence of an event of default and expiration of any applicable cure periods, Wachovia may accelerate the loan and declare all amounts outstanding to be immediately due and payable.
Additionally, on January 4, 2007, SBS Miami Broadcast Center entered into an interest rate swap arrangement (the Swap Agreement) for the original notional principal amount of $7.7 million whereby it will pay a fixed interest rate of 6.31% as compared to interest at a floating rate equal to one-month LIBOR plus
125 basis points on the Promissory Note. The interest rate swap amortization schedule is identical to the Promissory Note amortization schedule, which has an effective date of January 4, 2007, monthly notional reductions and an expiration date of January 4, 2017.
In connection with the acquisition of the property, we agreed to unconditionally guaranty all obligations of SBS Miami Broadcast Center pursuant to the Promissory Note, the Loan Agreement, the Mortgage, the loan documents thereto, and the Swap Agreement, for the benefit of Wachovia and its affiliates (the Guaranty). In addition, the terms of the Guaranty contain certain financial covenants, which require us to maintain available liquidity of not less than 1.2 times the then outstanding principal balance of the loan made to SBS Miami Broadcast Center by Wachovia.
Contractual Obligations
The following table summarizes our principal and interest contractual obligations at December 31, 2007, and the effect such obligations are expected to have on our liquidity and cash flows in 2008 and future periods (in thousands):
(a)
Our First Lien Credit Facility is a variable-rate debt instrument, but we entered into an interest rate swap to hedge (fix) our interest rate until June 2010. See notes 2(v) and 7 to our consolidated financial statements for additional information. For the purpose of calculating our contractual obligations, we assumed an interest rate of approximately 6.0% after the interest rate swap terminates.
(b)
In connection with the acquisition of MegaTV, we entered into a thirty-four month, non-interest-bearing secured promissory note in the principal amount of $18.5 million, which is due on January 6, 2009.
(c)
Other long-term debt relates to a capital lease and mortgage related to a building (see note 9 to our consolidated financial statements).
(d)
Our Series B preferred stock has no specified maturity. However, holders of the preferred stock may exercise an option on October 15, 2013, to require us to redeem all or a portion of their preferred stock. The holders of shares of Series B preferred stock are entitled to receive cumulative dividends at a rate of 103/4% per year of the $1,000 liquidation preference per share. All dividends are cumulative from the date of issuance of the Series B preferred stock and are payable quarterly in arrears on October 15, January 15, April 15 and July 15 of each year. On or before October 15, 2008, we, at our option, may pay dividends in cash or in additional fully paid and nonassessable shares of Series B preferred stock (including fractional shares or, at our option, cash in lieu of fractional shares) having an aggregate liquidation preference equal to the amount of such dividends. After October 15, 2008, dividends may be paid only in cash, which are included in this contractual obligation table. Our ability to pay cash dividends is subject to the terms of our First Lien Credit Facility. For the purpose of calculating our contractual obligations we assumed that the Series B preferred stock will pay dividends in cash going forward as of December 31, 2007.
(e)
Included in our noncancelable operating lease obligations are minimum lease payments for office space and facilities and certain equipment.
(f)
We are committed to employment and service contracts for certain executives, on-air talent, managers and others expiring through 2013.
(g)
Included are contracts for rating services, programming contracts, software contracts and others.
We have contingencies that are deemed not reasonably likely and thus not included in the above contractual obligation table. See note 14 to the consolidated financial statements for further discussion.
Our strategy is to primarily utilize cash flows from operations to meet our capital needs and contractual obligations. However, we also have bank borrowings available to meet our capital needs and contractual obligations and, when appropriate and if available, will obtain financing by issuing debt or common stock.
We are in compliance with all covenants under our First Lien Credit Facility and all other debt instruments as of December 31, 2007, and expect to continue to be in compliance in the foreseeable future.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that have, or are reasonably likely to have, a current or future material effect on our financial condition, changes in financial condition, revenue or expenses, results of operations, liquidity, capital expenditures or capital resources.
Critical Accounting Policies
The preparation of financial statements in conformity with generally accepted accounting principles in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, 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 ultimately differ from those estimates. The following accounting policies require significant management judgments, assumptions and estimates.
Accounting for Intangible Assets
Our indefinite-lived intangible assets consist of FCC broadcast licenses. FCC licenses are granted to stations for up to eight years under the Telecommunications Act of 1996 (the Act). The Act requires the FCC to renew a broadcast license if: (i) it finds that the station has served the public interest, convenience and necessity; (ii) there have been no serious violations of either the Communications Act of 1934 or the FCC’s rules and regulations by the licensee; and (iii) there have been no other serious violations, which taken together, constitute a pattern of abuse. We intend to renew our licenses indefinitely and evidence supports our ability to do so. Historically, there has been no material challenge to our license renewals. In addition, the technology used in broadcasting is not expected to be replaced by another technology any time in the foreseeable future.
In accordance with SFAS No. 142, Goodwill and Other Intangible Assets (SFAS No. 142) we do not amortize our FCC licenses. We test these indefinite-lived intangible assets for impairment at least annually or when an event occurs that may indicate that impairment may have occurred. Our valuations principally use the discounted cash flow methodology. This income approach consists of a quantitative model, which assumes the FCC licenses are acquired and operated by a third-party. This income approach incorporates variables such as types of signals, media competition, audience share, market advertising revenue, market revenue projections, anticipated operating profit margins and various discount rates. In the preparation of the FCC license appraisals, we make estimates and assumptions that affect the valuation of the intangible asset. These estimates and assumptions could differ from actual results.
We generally test for impairment on our FCC license intangible assets at the individual license level. However, we have applied the guidance in EITF 02-07, Unit of Accounting for Testing Impairment of Indefinite-Lived Intangible Assets (EITF 02-07), to certain of our FCC license intangible assets. EITF 02-07 states that separately recorded indefinite-lived intangible assets should be combined into a single unit of accounting for purposes of testing impairment if they are operated as a single asset and, as such, are
essentially inseparable from one another. We aggregate FCC licenses for impairment testing if their signals are simulcast and are operating as one revenue-producing asset.
Our “goodwill” consists of the excess of the purchase price over the fair value of tangible and identifiable intangible net assets acquired in business combinations, when a “business” has been acquired under the applicable accounting literature. SFAS No. 142 requires us to test goodwill for impairment at least annually at the reporting unit level in lieu of being amortized. We have determined that we have two reporting units under SFAS No. 142, Radio and Television.
The goodwill impairment test is a two-step test. Under the first step, the fair value of the reporting unit is compared with its carrying value (including goodwill). If the fair value of the reporting unit is less than its carrying value, an indication of goodwill impairment exists for the reporting unit. Accordingly, the enterprise must perform step two of the impairment test (measurement).
During the fourth quarter of the fiscal years ended 2007, 2006 and 2005, we performed an annual impairment review of our indefinite-lived intangible assets and determined that there was no impairment of intangible assets and goodwill.
Accounting for Income Taxes
The preparation of our consolidated financial statements requires us to estimate our actual current tax exposure together with our temporary differences resulting from differing treatment of items for financial statement and tax reporting purposes. These temporary differences result in the recognition of deferred tax assets and liabilities, which are included in our consolidated balance sheet. SFAS No. 109, Accounting for Income Taxes, requires the establishment of a valuation allowance to reflect the likelihood of the realization of deferred tax assets. Significant management judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities and any valuation allowance recorded against our net deferred tax assets. We evaluate the weight of all available evidence to determine whether it is more likely than not that some portion or all of the deferred income tax assets will not be realized. As a result of adopting SFAS No. 142, amortization of intangible assets and goodwill ceased for financial statement purposes. As a result, we could not be assured that the reversals of the deferred tax liabilities relating to those intangible assets and goodwill would occur within our net operating loss carry-forward period. Therefore, on the date of adoption, we established a valuation allowance for the full amount of our deferred tax assets due to uncertainties surrounding our ability to utilize some or all of our deferred tax assets, primarily consisting of net operating losses, as well as other temporary differences between financial statement and tax reporting purposes. We expect to continue to reserve for any increase in our deferred tax assets in the foreseeable future. If the realization of deferred tax assets in the future is considered more likely than not, an adjustment to the deferred tax assets would increase net income in the period such determination is made. In the event that actual results differ from these estimates or we adjust these estimates in future periods, we may need to adjust our valuation allowance, which could materially affect our financial position and results of operations.
On January 1, 2007, we adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes-an interpretation of FASB Statement No. 109 (FIN 48). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement 109, Accounting for Income Taxes, and prescribes a recognition threshold and measurement process for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. Interest and penalties on tax liabilities, if any, would be recorded in interest expense and other non-interest expense, respectively.
Valuation of Accounts Receivable
We review accounts receivable to determine which accounts are doubtful of collection. In making the determination of the appropriate allowance for doubtful accounts, we consider our history of write-offs, relationships with our customers, age of the invoices and the overall creditworthiness of our customers. For the years ended December 31, 2007, 2006 and 2005, we incurred bad debt expense of $1.5 million, $1.4 million
and $1.0 million, respectively. Changes in the credit worthiness of customers, general economic conditions and other factors may impact the level of future write-offs.
Revenue Recognition
We recognize broadcasting revenue as advertisements are aired on our stations, subject to meeting certain conditions such as persuasive evidence that an arrangement exists, a fixed and determinable price, and reasonable assurance of collection. Agency commissions, where applicable, are calculated based on a stated percentage applied to gross billing revenue. Advertisers remit the gross billing amount to the agency and the agency remits gross billings, less their commission, to us when the advertisement is not placed directly by the advertiser. Payments received in advance of being earned are recorded as customer advances.
Contingencies and Litigations
We are currently involved in certain legal proceedings and, as required, have accrued our estimate of the probable costs for the resolution of these claims. These estimates have been developed in consultation with counsel and are based upon an analysis of potential results, assuming a combination of litigation and settlement strategies. It is possible, however, that future results of operations for any particular period could be materially affected by changes in our assumptions or the effectiveness of our strategies related to these proceedings.
New Accounting Pronouncements
In September 2006, the Financial Accounting Standards Board (FASB) issued SFAS No. 157, Fair Value Measurements (SFAS No. 157), which defines fair value, establishes a framework for measuring fair value in GAAP, and enhances disclosures about fair value measurements. SFAS No. 157 applies when other accounting pronouncements require fair value measurements; it does not require new fair value measurements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007 or fiscal year 2008 for us. The adoption of SFAS No. 157 did not have an impact on our consolidated financial statements.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Liabilities - Including an Amendment of FASB Statement No. 115 (SFAS No. 159). SFAS No. 159 permits entities to choose to measure certain financial assets and liabilities at fair value. Unrealized gains and losses, arising subsequent to adoption, are reported in earnings. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007 or fiscal year 2008 for us. The adoption of SFAS No. 159 did not have an impact on our consolidated financial statements.
In December 2007, the FASB issued SFAS No. 141R, Business Combinations (SFAS No. 141R) and SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements - an amendment to ARB No. 51 (SFAS No. 160). SFAS No. 141R and SFAS No. 160 require most identifiable assets, liabilities, noncontrolling interests, and goodwill acquired in a business combination to be recorded at “full fair value” and require noncontrolling interests (previously referred to as minority interests) to be reported as a component of equity, which changes the accounting for transactions with noncontrolling interest holders. Both SFAS No. 141R and SFAS No. 160 are effective for periods beginning on or after December 15, 2008 or fiscal year 2009 for us. SFAS No. 141R will be applied to business combinations occurring after the effective date. SFAS No. 160 will be applied prospectively to all noncontrolling interests, including any that arose before the effective date. We are currently evaluating the impact of adopting SFAS No. 141R and SFAS No. 160 on its results of operations and financial position.
Impact on Inflation
We believe that inflation has not had a material impact on our results of operations for each of our fiscal years ended December 31, 2007 and 2006, respectively. However, there can be no assurance that inflation will not have an adverse impact on our future operating results and financial condition.
Item 7A.
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
Market risk represents the risk of loss that may impact our financial position, results of operations or cash flows due to adverse changes in interest rates and other relevant market risks. Our primary market risk is a change in interest rates associated with borrowings under the First Lien Credit Facility. Advances under the First Lien Credit Facility bear base rate or Eurodollar rate interest, plus applicable margins, which vary in accordance with prevailing economic conditions. Our earnings are affected by changes in interest rates due to the impact those changes have on interest expense from variable-rate debt instruments and on interest income generated from our cash and investment balances.
At December 31, 2007, all of our debt, other than our First Lien Credit Facility and the mortgage for the SBS Miami Broadcast Center, had fixed interest rates. As part of our efforts to mitigate interest rate risk, on June 29, 2005, we entered into a five-year interest rate swap agreement that hedged (fixed) the interest rate, based on LIBOR, on our current Eurodollar rate of our $319.3 million First Lien Credit Facility at an interest rate for five years at 4.23%, plus the applicable margin of 1.75%. Also, on January 4, 2007, we entered into a ten-year interest rate swap agreement that hedged (fixed) the interest rate, based on LIBOR, on our current Eurodollar rate of our $7.4 million mortgage at an interest rate for ten years at 6.31%. These agreements are intended to reduce our exposure to interest rate fluctuations and were not entered into for speculative purposes. As a result, we believe that interest rate risk is not material to our consolidated financial position or results of operations. As of December 31, 2007, the rates under our swap agreement were unfavorable compared to the market. We will continue to evaluate swap rates as the market dictates. They serve to stabilize our cash flow and expense but ultimately may cost more or less in interest than if we had carried all of our debt at a variable rate over the swap term.
Under a hypothetical situation, if variable interest rates average 10% higher in 2008 than they did during 2007, our variable interest expense would increase by approximately $2.0 million, compared to $19.8 million for 2007. If interest rates average 10% lower in 2008 than they did during 2007, our interest income from cash and investment balances would decrease by approximately $0.3 million, compared to $3.1 million for 2007. These amounts are determined by considering the impact of the hypothetical interest rates on our variable-rate debt, cash equivalents and short-term investment balances at December 31, 2007.
Our credit exposure under our interest rate swap agreement reflects the cost of replacing an agreement in the event of nonperformance by our counter-party. As a result, we selected a high credit quality financial institution as a counter-party. We do not anticipate nonperformance by such counter-party, and no material loss would be expected in the event of the counter-party’s nonperformance.
Our credit exposure related to our accounts receivable does not represent a significant concentration of credit risk due to the broad range of markets in which we operate and a diverse group of advertisers.
Item 8.
Item 8.
Financial Statements and Supplementary Data
The information called for by this Item 8 is included in Item 15, under “Financial Statements” and “Financial Statement Schedule” appearing at the end of this annual report on Form 10-K.
Item 9.
Item 9.
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
There have been no changes in our independent registered public accounting firm or disagreements between us and them on accounting or financial disclosure during our two most recent fiscal years or any subsequent interim period.
Item 9A.
Item 9A.
Controls and Procedures
Conclusion Regarding the Effectiveness of Disclosure Control and Procedures
Disclosure controls and procedures are designed to ensure that information required to be disclosed in our periodic reports filed or submitted under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the required time periods. As of December 31, 2007, the end of the period
covered by this report, we carried out an evaluation under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer of the effectiveness of our disclosure controls and procedures. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective. We review our disclosure controls and procedures, on an ongoing basis, and may from time to time make changes aimed at enhancing their effectiveness and to ensure that they evolve with our business.
In addition, no change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934) occurred during the fourth quarter of our fiscal year ended December 31, 2007 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Management’s Report On Internal Control Over Financial Reporting.
As members of management of the Company, we are responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is a process designed by, or under our supervision, and effected by our board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Internal control over financial reporting includes those policies and procedures that pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting, no matter how well designed, may not prevent or detect misstatements and can only provide reasonable assurance with respect to the financial statement preparation and presentation even when those systems are determined to be effective. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies and procedures may deteriorate. These inherent limitations are an intrinsic part of the financial reporting process. Therefore, although we are unable to eliminate this risk, it is possible to develop safeguards to reduce it. We are responsible for establishing and maintaining adequate internal control over financial reporting for the Company.
Under the supervision of and with the participation of our management, we assessed the Company’s internal control over financial reporting, based on criteria for effective internal control over financial reporting described in “Internal Control - Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on our evaluation, we concluded that we maintained effective internal control over financial reporting as of December 31, 2007 in accordance with the COSO criteria.
Item 9B.
Item 9B. Other Information
None.
PART III
Item 10.
Item 10. Directors, Executive Officers and Corporate Governance
Information called for by Item 10 is set forth under the heading “Directors, Executive Officers and Corporate Governance” in Item 4A of this annual report and in our proxy statement relating to the 2008 Annual Meeting of Stockholders (the Proxy Statement), which information is incorporated herein by this reference.
Code of Ethics
We have adopted a Code of Business Conduct and Ethics (Code of Ethics) within the meaning of Item 406(b) of Regulation S-K. This Code of Ethics applies to our employees, officers and directors and is publicly available on our Internet website at www.spanishbroadcasting.com. If we make substantive amendments to this Code of Ethics or grant any waiver from its provisions to our principal executive, financial or accounting officers, or persons performing similar functions, including any implicit waiver, we will disclose the nature of such amendment or waiver on our website or in a report on Form 8-K within five days of such amendment or waiver.
Item 11.
Item 11.
Executive Compensation
Information called for by Item 11 is set forth in our Proxy Statement, which information is incorporated herein by this reference.
Item 12.
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Information called for by Item 12 is set forth in our Proxy Statement, which information is incorporated herein by this reference.
Item 13.
Item 13.
Certain Relationships and Related Transactions, and Director Independence
Information called for by Item 13 is set forth in our Proxy Statement, which information is incorporated herein by this reference.
Item 14.
Item 14.
Principal Accountant Fees and Services
Information called for by Item 14 is set forth in our Proxy Statement, which information is incorporated herein by this reference.
PART IV
Item 15.
Item 15.
Exhibits, Financial Statement Schedules
1.
Financial Statements
The following financial statements have been filed as required by Item 8 of this report:
Reports of Independent Registered Public Accounting Firm;
Consolidated Balance Sheets as of December 31, 2007 and 2006;
Consolidated Statements of Operations for the fiscal years ended December 31, 2007, 2006 and 2005;
Consolidated Statements of Changes in Stockholders’ Equity and Comprehensive (Loss) Income for the fiscal years ended December 31, 2007, 2006 and 2005;
Consolidated Statements of Cash Flows for the fiscal years ended December 31, 2007, 2006 and 2005; and
Notes to Consolidated Financial Statements.
2.
Financial Statement Schedule
The following financial statement schedule has been filed as required by Item 8 of this report:
Financial Statement Schedule - Valuation and Qualifying Accounts.
SPANISH BROADCASTING SYSTEM, INC.
AND SUBSIDIARIES
Index
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Spanish Broadcasting System, Inc.:
We have audited Spanish Broadcasting System, Inc.’s internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Spanish Broadcasting System, Inc.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying management’s Report on Internal Control over Financial Reporting under Item 9A. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Spanish Broadcasting System, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control - Integrated Framework issued by the COSO.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements of Spanish Broadcasting System, Inc. as listed in the Index at Item 15, and our report dated March 17, 2008 expressed an unqualified opinion on those consolidated financial statements.
/s/ KPMG LLP
Ft. Lauderdale, Florida
March 17, 2008
Certified Public Accountants
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Spanish Broadcasting System, Inc.:
We have audited the accompanying consolidated financial statements of Spanish Broadcasting System, Inc. and subsidiaries as listed in the Index at Item 15. In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedule listed in the Index. These consolidated financial statements and the financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and the financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Spanish Broadcasting System, Inc. and subsidiaries as of December 31, 2007 and 2006, and the results of their operations and their cash flows for each of the years in the three year period ended December 31, 2007, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements, taken as a whole, present fairly, in all material respects, the information set for therein.
As discussed in note 13 to the consolidated financial statements, effective December 31, 2006, the Company changed its method of quantifying errors by adopting Securities and Exchange Commission Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements. As discussed in notes 2(r) and 11(d) to the consolidated financial statements, effective January 1, 2007, the Company changed its method of accounting for share-based compensation by adopting Statement of Financial Accounting Standards No. 123(R), Share-Based Payment. As discussed in notes 2(k) and 13 to the consolidated financial statements, the Company changed its method of accounting for uncertain tax positions by adopting Statement of Financial Accounting Standards Interpretation No. 48, Accounting for Uncertain Income Taxes, effective January 1, 2007.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Spanish Broadcasting System, Inc.’s internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 17, 2008 expressed an unqualified opinion on the Company’s internal control over financial reporting.
/s/ KPMG LLP
Ft. Lauderdale, Florida
March 17, 2008
Certified Public Accountants
SPANISH BROADCASTING SYSTEM, INC.
AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 2007 and 2006
See accompanying notes to consolidated financial statements.
SPANISH BROADCASTING SYSTEM, INC.
AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended December 31, 2007, 2006 and 2005
See accompanying notes to consolidated financial statements.
SPANISH BROADCASTING SYSTEM, INC.
AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders’ Equity and Comprehensive (Loss) Income
Years ended December 31, 2007, 2006 and 2005
See accompanying notes to consolidated financial statements.
SPANISH BROADCASTING SYSTEM, INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 2007, 2006 and 2005
See accompanying notes to consolidated financial statements.
SPANISH BROADCASTING SYSTEM, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(1)
Organization and Nature of Business
Spanish Broadcasting System, Inc., a Delaware corporation, and its subsidiaries (the Company, we, us, our or SBS) owns and/or operates 21 radio stations, serving six of the top-ten U.S. Hispanic markets, which include Los Angeles, New York, Puerto Rico, Chicago, Miami and San Francisco, and two television stations, serving the South Florida market. Our two television stations are operating as one television operation, branded as “MegaTV”, which debuted on the air on March 1, 2006. As part of our operating business, we also operate LaMusica.com, Mega.tv, and our radio station websites, which are bilingual Spanish-English websites providing content related to Latin music, entertainment, news and culture. We also occasionally produce live concerts and events throughout the United States and Puerto Rico.
Our primary source of revenue is the sale of advertising time on our stations to local and national advertisers. Our revenue is affected primarily by the advertising rates that our stations are able to charge, as well as the overall demand for advertising time in each respective market. Seasonal net broadcasting revenue fluctuations are common in the broadcasting industry and are due to fluctuations in advertising expenditures by local and national advertisers. Typically for the broadcasting industry, the first calendar quarter generally produces the lowest revenue.
The broadcasting industry is subject to extensive federal regulation which, among other things, requires approval by the Federal Communications Commission (FCC) for the issuance, renewal, transfer and assignment of broadcasting station operating licenses and limits the number of broadcasting properties we may acquire. We operate in the broadcasting industry which is subject to extensive and changing regulations by the FCC.
(2)
Summary of Significant Accounting Policies and Related Matters
(a)
Basis of Presentation
The consolidated financial statements include the accounts of Spanish Broadcasting System, Inc. and its subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.
(b)
Revenue Recognition
We recognize broadcasting revenue as advertisements are aired on our stations, which are subject to meeting certain conditions, such as persuasive evidence that an agreement exists, a fixed and determinable price and reasonable assurance of collection. Agency commissions are calculated based on a stated percentage applied to gross billing revenue. Advertisers remit the gross billing amount to the agency, and then the agency remits gross billings less their commission to us when the advertisement is not placed directly by the advertiser. Payments received in advance of being earned are recorded as customer advances, which are included in accounts payable and accrued expenses.
(c)
Valuation of Accounts Receivable
We review accounts receivable to determine which accounts are doubtful of collection. In making the determination of the appropriate allowance for doubtful accounts, we consider our history of write-offs, relationships with our customers, age of the invoices and the overall creditworthiness of our customers. For the years ended December 31, 2007, 2006 and 2005, we incurred bad debt expense of $1.5 million, $1.4 million and $1.0 million, respectively. Changes in the credit worthiness of customers, general economic conditions and other factors may impact the level of future write-offs.
(d)
Property and Equipment
Property and equipment, including capital leases, are stated at historical cost, less accumulated depreciation and amortization. We depreciate the cost of our property and equipment using the straight-line method
SPANISH BROADCASTING SYSTEM, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (Continued)
over the respective estimated useful lives (see note 5). Leasehold improvements are amortized on a straight-line basis over the shorter of the remaining life of the lease or the useful life of the improvements.
Maintenance and repairs are charged to expense as incurred; improvements are capitalized. When items are retired or are otherwise disposed of, the related costs and accumulated depreciation and amortization are removed from the accounts and any resulting gains or losses are credited or charged to income.
(e)
Impairment or Disposal of Long-Lived Assets
We account for long-lived assets in accordance with Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standards (SFAS) No. 144, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of (SFAS No. 144). SFAS No. 144 requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized in the amount by which the carrying amount of the asset exceeds the estimated fair value of the asset. SFAS No. 144 also requires companies to separately report discontinued operations and extends the reporting requirements to a component of an entity that either has been disposed of (by sale, abandonment, or in a distribution to owners) or is classified as held for sale. Assets to be disposed of are reported at the lower of the carrying amount or estimated fair value less costs to sell.
(f)
Indefinite-Lived Intangible Assets (FCC Licenses) and Goodwill
Our indefinite-lived intangible assets consist of FCC broadcast licenses and goodwill. FCC licenses are granted to stations for up to eight years under the Telecommunications Act of 1996 (the Act). The Act requires the FCC to renew a broadcast license if: it finds that the station has served the public interest, convenience and necessity; there have been no material violations of either the Communications Act of 1934 or the FCC’s rules and regulations by the licensee; and there have been no other serious violations, which taken together, constitute a pattern of abuse. We intend to renew the licenses indefinitely and evidence supports our ability to do so. Generally, there are no compelling challenges to our license renewals. Technology used in broadcasting is not expected to be replaced by another technology any time in the foreseeable future.
In accordance with SFAS No. 142, Goodwill and Other Intangible Assets (SFAS No. 142), we do not amortize our FCC licenses. We test our indefinite-lived intangible assets for impairment at least annually. Our valuations principally use the discounted cash flow methodology. This income approach consists of a quantitative model, which assumes the FCC licenses are acquired and operated by a third party. This income approach incorporates variables such as types of signals, media competition, audience share, market advertising revenues, market revenue projections, anticipated operating profit margins and various discount rates. In the preparation of the FCC license appraisals, we make estimates and assumptions that affect the valuation of the intangible asset. These estimates and assumptions could differ from actual results.
We generally test for impairment on our FCC license intangible assets at the individual license level. However, we applied the guidance in EITF 02-07, Unit of Accounting for Testing Impairment of Indefinite-Lived Intangible Assets (EITF 02-07), for certain of our FCC license intangible assets. EITF 02-07 states that separately recorded indefinite-lived intangible assets should be combined into a single unit of accounting for purposes of testing impairment if they are operated as a single asset and, as such, are essentially inseparable from one another. We aggregate FCC licenses for impairment testing if their signals are simulcast and are operating as one revenue-producing asset.
Goodwill consists of the excess of the purchase price over the fair value of tangible and identifiable intangible net assets acquired in business combinations. SFAS No. 142 requires us to test goodwill for
SPANISH BROADCASTING SYSTEM, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (Continued)
impairment at least annually at the reporting unit level in lieu of being amortized. We have determined that we have two reporting units under SFAS No. 142; Radio and Television.
The goodwill impairment test is a two-step test. Under the first step, the fair value of the reporting unit is compared with its carrying value (including goodwill). If the fair value of the reporting unit is less than its carrying value, an indication of goodwill impairment exists for the reporting unit and the enterprise must perform step two of the impairment test (measurement). If the fair value of the reporting unit exceeds its carrying value, step two does not need to be performed.
We performed an annual impairment review of our indefinite-lived intangible assets and determined that there was no impairment of intangible assets and goodwill as of December 31, 2007, 2006 and 2005, respectively.
(g)
Other Intangible Assets, Net
Other intangible assets, net, consist of favorable tower leases acquired. These assets are being amortized over the life of the lease; however, not to exceed 40 years.
Estimated amortization expense for the five years subsequent to December 31, 2007 are as follows:
(h)
Deferred Financing Costs
Deferred financing costs relate to the refinancing of our debt in June 2005 (see note 7). Deferred financing costs are being amortized using the effective interest method.
(i)
Barter Transactions and Unearned Revenue
Barter transactions represent advertising time exchanged for non-cash goods and/or services, such as promotional items, advertising, supplies, equipment and services. Revenue from barter transactions are recognized as income when advertisements are broadcasted. Expenses are recognized when goods or services are received or used. We record barter transactions at the fair value of goods or services received or advertising surrendered, whichever is more readily determinable. Barter revenue amounted to $8.1 million, $8.2 million and $8.5 million for the fiscal years ended December 31, 2007, 2006 and 2005, respectively. Barter expense amounted to $7.8 million, $8.0 million and $8.3 million for the fiscal years ended December 31, 2007, 2006 and 2005, respectively.
Unearned revenue consists of the excess of the aggregate fair value of goods or services received by us, over the aggregate fair value of advertising time delivered by us on certain barter customers.
(j)
Cash and Cash Equivalents
Cash and cash equivalents consist of cash, money market accounts and certificates of deposit at various commercial banks. All cash equivalents have original maturities of 90 days or less.
SPANISH BROADCASTING SYSTEM, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (Continued)
(k)
Income Taxes
We file a consolidated federal income tax return for substantially all of our domestic operations. We are also subject to foreign taxes on our Puerto Rico operations. We account for income taxes under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date (see note 13).
On January 1, 2007, we adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes-an interpretation of FASB Statement No. 109 (FIN 48). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement 109, Accounting for Income Taxes, and prescribes a recognition threshold and measurement process for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. Interest and penalties on tax liabilities, if any, would be recorded in interest expense and other non-interest expense, respectively. The adoption of FIN 48 did not have any effect on our financial statements on the adoption date (see note 13).
(l)
Advertising Costs
We incur advertising costs to add and maintain listeners. These costs are charged to expense in the period incurred. Cash advertising costs amounted to $8.1 million, $6.2 million and $7.9 million in fiscal years ended December 31, 2007, 2006 and 2005, respectively.
(m)
Deferred Commitment Fee
In December 2003, we entered into an agreement with a national advertising agency (the Agency), whereby the Agency would serve as our exclusive sales representative for all national sales for an eight-year period. Pursuant to this agreement, we will pay the Agency a commission percentage determined based on achieving certain national sales volume and the Agency agreed to pay a commitment fee of $0.6 million to us. The commitment fee is recognized on a straight-line basis over the eight-year contractual term of the arrangement as a reduction of agency commission, which is included in net revenue. Deferred commitment fee represents the excess of payments received from the Agency over the amount recognized.
(n)
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles in the United States of America 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. Significant items subject to such estimates and assumptions, include the useful lives of fixed assets; allowance for doubtful accounts; the valuation of derivatives; deferred tax assets; fixed assets, and stock-based compensation. Actual results could differ from those estimates.
(o)
Concentration of Business and Credit Risks
Financial instruments that potentially subject us to concentrations of risk include primarily cash, trade receivables and financial instruments used in hedging activities. We place our cash with highly rated credit
SPANISH BROADCASTING SYSTEM, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (Continued)
institutions. Although we try to limit the amount of credit exposure with any one financial institution, we do in the normal course of business maintain cash balances in excess of federally insured limits.
Our operations are conducted in several markets across the United States, including Puerto Rico. Our New York, Miami and Los Angeles markets accounted for more than 70% of net revenue for the fiscal years ended December 31, 2007, 2006 and 2005. Our credit risk is spread across a large number of diverse customers in a number of different industries, thus spreading the trade credit risk. We do not normally require collateral on credit sales; however, a credit analysis is performed before extending substantial credit to any customer. We establish an allowance for doubtful accounts based on customers’ payment history and perceived credit risks.
The counterparties to our interest rate swap agreements (hedge) are major banking institutions. We do not believe that there is significant risk of nonperformance by these counterparties as we monitor their credit ratings, which limits our financial exposure with any one banking institution.
(p)
Basic and Diluted Net (Loss) Income Per Common Share
Basic net (loss) income per common share was computed by dividing net (loss) income applicable to common stockholders by the weighted average number of shares of common stock and convertible preferred stock outstanding for each period presented. Diluted net (loss) income per common share is computed by giving effect to common stock equivalents as if they were outstanding for the entire period. Common stock equivalents were not considered for the fiscal years ended December 31, 2007 and 2005 since its effect would be anti-dilutive. Common stock equivalents for the fiscal year ended December 31, 2007 and 2005 amounted to 0 and 136,973, respectively. The following table summarizes the net (loss) income applicable to common stockholders and the net (loss) income per common share for the fiscal years ended December 31, 2007, 2006 and 2005 (in thousands, except per share data):
(q)
Fair Value of Financial Instruments
SFAS No. 107, Disclosures About Fair Value of Financial Instruments, requires disclosure of the fair value of certain financial instruments. Cash and cash equivalents, receivables, prepaids and other current
SPANISH BROADCASTING SYSTEM, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (Continued)
assets, as well as accounts payable, accrued expenses, and other current liabilities, as reflected in the consolidated financial statements, approximate fair value because of the short-term maturity of these instruments. The estimated fair value of our other long-term debt instruments, including our senior secured credit facility, approximate their carrying amounts as the interest rates approximate our current borrowing rate for similar debt instruments of comparable maturity, or have variable interest rates.
Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.
The estimated fair value of our financial instrument is as follows (in millions):
The fair value estimates of the financial instrument was based upon quotes from major financial institutions taking into consideration current rates offered to us for debt or equity instruments of the same remaining maturities.
(r)
Stock Option Plans
We adopted SFAS No. 123(R), Share-Based Payment (SFAS No. 123(R)), using the modified prospective transition method beginning January 1, 2006 (see note 11(d)). Accordingly, we recorded stock-based compensation expense for awards granted prior to, but not yet vested, as of January 1, 2006, as if the fair value method required for pro forma disclosure under SFAS No. 123 Accounting for Stock-Based Compensation, were in effect for expense recognition purposes, adjusted for estimated forfeitures. For stock-based awards granted after January 1, 2006, we have recognized compensation expense based on the estimated grant date fair value method using the Black-Scholes option pricing model. For these awards, we have recognized compensation expense using a straight-line amortization method (prorated). As SFAS No. 123(R) requires that stock-based compensation expense be based on awards that are ultimately expected to vest, stock-based compensation for the fiscal years ended December 31, 2007 and 2006 were reduced for estimated forfeitures. When estimating forfeitures, we consider voluntary termination behaviors, as well as trends of actual option forfeitures.
(s)
Leasing (Operating Leases)
We recognize rent expense for operating leases with periods of free rent (including construction periods), step rent provisions and escalation clauses on a straight line basis over the applicable lease term. We consider lease renewals in the useful life of its leasehold improvements when such renewals are reasonably assured. We take these provisions into account when calculating minimum aggregate rental commitments under noncancelable operating leases (see note 12). From time to time, we receive capital improvement funding from our lessors. These amounts are recorded as deferred liabilities and amortized over the remaining lease term as a reduction of rent expense.
SPANISH BROADCASTING SYSTEM, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (Continued)
(t)
Segment Reporting
SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information, establishes standards for the way public business enterprises report information about operating segments in annual financial statements and requires those enterprises to report selected information about operating segments in interim financial reports issued to stockholders. We have two reportable segments: radio and television (see note 19).
(u)
Other, net
In fiscal year ended December 31, 2007, the amount in other, net in our statement of operations was primarily related to the write-off of the unused portion of unearned revenue that expired on March 1, 2007. This unearned revenue relates to the MEGA TV acquisition advertising agreement that provides the seller with the opportunity to use $2.0 million of advertising per year, for three years (see note 3).
In fiscal year ended December 31, 2005, the amount in other, net, was primarily related to the reversal of a legal judgment upon appeal, which had been expensed in a prior period.
(v)
Derivative Instrument
We only enter into derivative contracts to hedge against the potential impact of increases in interest rates on our debt instruments. We only enter into derivative contracts that we intend to designate as a hedge of the variability of cash flows to be paid related to a recognized asset or liability (cash flow hedge).
By using derivative financial instruments to hedge exposures to changes in interest rates, we expose ourselves to credit risk and market risk. Credit risk is the failure of the counterparty to perform under the terms of the derivative contract. When the fair value of a derivative contract is positive, the counterparty owes us, which creates credit risk for us. When the fair value of a derivative contract is negative, we owe the counterparty and, therefore, it does not possess credit risk. We minimize the credit risk in derivative instruments by entering into transactions with high-quality counterparties whose credit rating is higher than Aa.
Market risk is the adverse effect on the value of a derivative instrument that results from a change in interest rates. The market risk associated with interest-rate contracts is managed by establishing and monitoring parameters that limit the types and degree of market risk that may be undertaken.
For all hedging relationships, we formally document the hedging relationship and its risk-management objective and strategy for undertaking the hedge, the hedging instrument, the hedged item, the nature of the risk being hedged, how the hedging instrument’s effectiveness in offsetting the hedged risk will be assessed prospectively and retrospectively, and a description of the method of measuring ineffectiveness. We also formally assesses, both at the hedge’s inception and on an ongoing basis, whether the derivatives that are used in hedging transactions are highly effective in offsetting cash flows of hedged items.
On January 4, 2007, we entered into a ten-year interest rate swap agreement for the original notional principal amount of $7.7 million whereby it will pay a fixed interest rate of 6.31% as compared to interest at a floating rate equal to one month LIBOR plus 125 basis points. The interest rate swap amortization schedule is identical to the promissory note amortization schedule, which has an effective date of January 4, 2007, monthly notional reductions and an expiration date of January 4, 2017 (see note 9).
Additionally, on June 29, 2005, we entered into a five-year interest rate swap agreement for the original notional principal amount of $324.2 million whereby it will pay a fixed interest rate of 4.23% as compared to interest at a floating rate equal to three month LIBOR. The interest rate swap amortization schedule is identical to the First Lien Credit Facility amortization schedule during June 30, 2005 to June 30, 2010, which
SPANISH BROADCASTING SYSTEM, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (Continued)
has an effective date of June 29, 2005, quarterly notional reductions and an expiration date of June 30, 2010 (see note 7).
We are accounting for our interest rate swaps as cash flow hedges under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended by SFAS No. 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities, which requires us to recognize all derivative instruments on the balance sheet at fair value. The related gains or losses on these instruments are deferred in stockholders’ equity as a component of accumulated other comprehensive income (loss). The deferred gains or losses on these transactions are recognized in income in the period in which the related items being hedged are recognized in expense. However, to the extent that the change in value of the derivative contracts does not perfectly offset the change in the value of the underlying transaction being hedged, that ineffective portion is immediately recognized into income. We recognize gains and losses immediately when the underlying transaction settles.
These swaps had notional amounts of $323.4 million and $319.3 million and a fair market value of $(3.6) million and $7.8 million at December 31, 2007 and 2006, respectively. These swaps were determined to be highly effective during the years ended December 31, 2007, 2006 and 2005; accordingly, no ineffectiveness was recognized in earnings. At December 31, 2007 and 2006, the unrealized (loss) gain related to our hedges included in accumulated other comprehensive income (loss) was $(3.6) million and $7.8 million, respectively.
(w)
Comprehensive Income (Loss)
Our comprehensive income (loss) consists of net income (loss) and other items recorded directly to the equity accounts. The objective is to report a measure of all changes in equity of an enterprise that result from transactions and other economic events during the period. Our other comprehensive income (loss) consists of net income (loss) and gains and losses on derivative instruments that qualify for cash flow hedge treatment.
(x)
Capitalized Interest
Our policy is to capitalize interest cost incurred on debt during the construction of major projects exceeding one year. A reconciliation of total interest cost to “Interest Expense” as reported in the consolidated statements of operations for the fiscal years 2007, 2006 and 2005, is as follows:
(y)
Reclassification
Certain prior year amounts were reclassified to conform with the current year presentation.
(3)
Station Acquisitions
Miami, Florida Television Station WSBS-TV Asset Acquisition
On March 1, 2006, our wholly owned subsidiaries, Mega Media Holdings, Inc. (Mega Media Holdings) and WDLP Licensing, Inc. (Mega-Sub, and, together with Mega Media Holdings, Mega Media), completed the acquisition of certain assets, which we determined did not constitute a business, including licenses, permits and authorizations issued by the Federal Communications Commission (the FCC) used in or related to the operation of television stations WSBS-TV (Channel 22, formerly known as WDLP-TV), its derivative digital
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Notes to Consolidated Financial Statements - (Continued)
television station WSBS-DT (Channel 3, formerly known as WDLP-DT) in Key West, Florida and WSBS-CA (Channel 50, formerly known as WDLP-CA) in Miami, Florida, pursuant to that certain asset purchase agreement, dated as of July 12, 2005, as amended on September 19, 2005, October 19, 2005 and January 6, 2006, with WDLP Broadcasting Company, LLC, WDLP Licensed Subsidiary, LLC, Robin Broadcasting Company, LLC, and Robin Licensed Subsidiary, LLC (collectively, the Sellers). WSBS-TV-DT and WSBS-CA are operating as one television operation, branded as “MegaTV”, serving the South Florida market. MEGA TV debuted on the air on March 1, 2006.
In connection with the closing, Mega Media paid an aggregate purchase price equal to $37.6 million, consisting of: (i) cash in the amount of $17.0 million; (ii) a thirty-four month, non-interest-bearing secured promissory note in the principal amount of $18.5 million (present valued at approximately $14.8 million at the closing), which we have guaranteed and is secured by the assets acquired in the transaction; (iii) deposits of $0.5 million and $1.0 million made on July 13, 2005 and January 6, 2006, respectively; and (iv) two extension payments of $0.3 million made on September 1, 2005 and January 6, 2006, respectively, in consideration for the extensions of the closing date.
In addition, as part of the television station asset acquisition, we entered into an advertising agreement with the Sellers that provides them with up to $2.0 million per year, for each of the three years from the date of closing, of commercial advertising time on any of our radio stations. Accordingly, we recognized this liability to provide commercial advertising as part of consideration given for the acquisition and recorded a liability (unearned revenue) of approximately $5.3 million at the closing, which represented the present value of the commercial advertising due.
We allocated the total cost of the purchase price of WSBS-TV based on the fair value of the consideration given and assets acquired as follows: $39.4 million for FCC licenses, $0.4 million for property and equipment, $5.3 million for unearned revenue and $14.8 million for a non-interest bearing promissory note.
Our consolidated statements of operations include the results of WSBS-TV and WSBS-DT from the respective dates of acquisition. These acquisitions have been accounted for under the purchase method of accounting. The purchase price has been allocated to the assets acquired, principally FCC licenses.
(4)
Dispositions of Stations Not Classified as Discontinued Operations
Los Angeles, California Radio Stations KZAB-FM and KZBA-FM Disposition
On January 31, 2006, we completed the sale of the assets of our radio stations KZAB-FM and KZBA-FM, serving the Los Angeles, California market, for a cash purchase price of $120.0 million (the LA Asset Sale), to Styles Media Group, LLC, a Florida limited liability company (Styles Media Group), pursuant to that certain asset purchase agreement, dated as of August 17, 2004, by and among Styles Media Group, Spanish Broadcasting System SouthWest, Inc., one of our subsidiaries, and us.
In connection with the closing of the LA Asset Sale, Styles Media Group paid a cash purchase price of $120.0 million, consisting of $65.0 million paid at closing and $55.0 million previously paid to us as nonrefundable deposits. As a result of the LA Asset Sale, we recognized a pre-tax gain on the sale of assets, net of disposal costs, of approximately $50.8 million during the year ended December 31, 2006.
Previously, on August 17, 2004, Spanish Broadcasting System SouthWest, Inc., also entered into a time brokerage agreement with Styles Media Group pursuant to which Styles Media Group was permitted to begin broadcasting its programming on radio stations KZAB-FM and KZBA-FM beginning on September 20, 2004. On January 31, 2006, the time brokerage agreement was terminated upon the completion of the sale.
Under the terms of the original asset purchase agreement, at signing, Styles Media Group made a nonrefundable $6.0 million deposit on the purchase price. On February 18, 2005, Styles Media Group
SPANISH BROADCASTING SYSTEM, INC.
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Notes to Consolidated Financial Statements - (Continued)
exercised its right under the agreement to extend the closing date until March 31, 2005, by releasing the $6.0 million deposit from escrow to us. On March 30, 2005, we entered into an amendment to the asset purchase agreement with Styles Media Group. In connection with this amendment, Styles Media Group made an additional $14.0 million nonrefundable deposit to the purchase price and we agreed to extend the closing date from March 31, 2005, to the later date of July 31, 2005 or five days following the grant of the FCC Final Order. On July 29, 2005, we entered into a second amendment to the asset purchase agreement with Styles Media Group. In connection with this second amendment, Styles Media Group made an additional $15.0 million nonrefundable deposit to the purchase price and we agreed to extend the closing date from July 31, 2005, to the date that is designated by Styles Media Group, but no later than January 31, 2006. On December 22, 2005, Styles Media Group made an additional $20.0 million nonrefundable deposit towards the purchase price two days following the grant of the FCC license renewals.
In 2005, we determined that, since we were not eliminating all significant revenues and expenses generated in this market, the pending LA Asset Sale did not meet the criteria to classify the stations’ operations as discontinued operations. However, we reclassified the stations’ assets as assets held for sale. On December 31, 2005, we had assets held for sale consisting of $63.9 million of intangible assets and $1.2 million of property and equipment, net, for radio stations KZAB-FM and KZBA-FM.
KZAB-FM and KZBA-FM generated net revenues of $0.2 million and $2.3 million and generated station operating income of $0.1 million and $1.7 million for the years ended December 31, 2006 and 2005, respectively. These stations’ net revenue and station operating income were mainly generated from the monthly fees received related to the time brokerage agreement.
(5)
Property and Equipment, Net
Property and equipment, net consists of the following at December 31, 2007 and 2006 (in thousands):
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Notes to Consolidated Financial Statements - (Continued)
(6)
Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses at December 31, 2007 and 2006 consists of the following (in thousands):
(7)
Senior Secured Credit Facilities
Senior secured credit facilities consist of the following at December 31, 2007 and 2006 (in thousands):
The maturities of our senior credit facilities are as follows at December 31, 2007 (in thousands):
(a)
Senior Secured Credit Facilities due 2012 and 2013
Senior Secured Credit Facility due 2012 (First Lien Credit Facility)
On June 10, 2005, we entered into a first lien credit agreement with Merrill Lynch, Pierce Fenner & Smith, Incorporated, as syndication agent (Merrill Lynch), Wachovia Bank, National Association, as documentation agent (Wachovia), Lehman Commercial Paper Inc., as administrative agent (Lehman), and certain other lenders (the First Lien Credit Facility). The First Lien Credit Facility consists of a term loan in the amount of
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AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (Continued)
$325.0 million, payable in twenty-eight consecutive quarterly installments commencing on June 30, 2005, and continuing on the last day of each of December, March, June and September of each year thereafter, through, and including, March 31, 2012. The amount of the quarterly installment due on each such payment date is equal to 0.25% of the original principal balance of the term loan funded on June 10, 2005, which is approximately $0.8 million. The term loan is due and payable on June 10, 2012. The First Lien Credit Facility also includes a revolving credit loan in an aggregate principal amount of $25.0 million. The initial scheduled maturity of the revolving credit line is June 10, 2010. We have not currently drawn any funds from the revolving credit loan.
Senior Secured Credit Facility due 2013 (Second Lien Credit Facility)
On June 10, 2005, we also entered into a second lien term loan agreement with Merrill Lynch, Wachovia, Lehman and certain other lenders (the Second Lien Credit Facility; together with the First Lien Credit facility, the Credit Facilities). The Second Lien Credit Facility provided for a term loan in the amount of $100.0 million with a scheduled maturity of, and being fully payable on, June 10, 2013.
On February 17, 2006, we repaid and terminated our Second Lien Credit Facility by using approximately $101.0 million of the net cash proceeds from our LA Asset Sale. Accordingly, we have no further obligations remaining under the Second Lien Credit Facility. As a result of the prepayment of the Second Lien Credit Facility, we recognized a loss on early extinguishment of debt related to the prepayment premium and the write-off of unamortized deferred financing costs of approximately $3.0 million during the fiscal year ended December 31, 2006.
Use of Proceeds from Senior Credit Facilities
On June 10, 2005, approximately $123.7 million of the proceeds from the Credit Facilities were used to repay our prior $135.0 million senior secured credit facility due 2009 and related accrued interest. As a result, in fiscal year ended December 31, 2005, we incurred a loss on early extinguishment of debt, totaling approximately $3.2 million, related to write-offs of deferred financing costs. The remaining proceeds, together with cash on hand, totaling approximately $357.5 million, were placed in escrow with the trustee to redeem all of our $335.0 million aggregate principal amount of our 95/8% senior subordinated notes due 2009, including the redemption premium and accrued interest through redemption. On July 12, 2005 (Redemption Date), we redeemed $335.0 million in the aggregate principal amount of the 95/8% senior subordinated notes due 2009 at a price of $1,048.13 per $1,000, plus accrued interest through the Redemption Date. As a result of the early extinguishment of the 95/8% senior subordinated notes due 2009, we recognized a loss on early extinguishment of debt related to call premiums and the write-off of unamortized discount and deferred financing costs of approximately $29.4 million during the fiscal year ended December 31, 2005.
Interest and Fees
The interest rates per annum applicable to loans under the First Lien Credit Facility are, at our option, the Base Rate or Eurodollar Base Rate (as defined in the respective credit agreement) plus, in each case, an applicable margin. The applicable margin under our First Lien Credit Facility was reduced by 0.25% upon the repayment of the Second Lien Credit Facility. As of December 31, 2007, the applicable margin of the First Lien Credit Facility was (i) 1.75% per annum for Eurodollar loans and (ii) 0.75% per annum for Base Rate loans. The Base Rate is a fluctuating interest rate equal to the greater of (1) the Prime Rate in effect on such day and (2) the Federal Funds Effective Rate in effect on such day plus one-half of 1%. On June 29, 2005, we entered into a five-year interest rate swap agreement to hedge against the potential impact of increases in interest rates on our First Lien Credit Facility. The interest rate swap fixed our LIBOR interest rate for five years at 4.23% (see note 2(v)).
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Notes to Consolidated Financial Statements - (Continued)
As of December 31, 2007, the applicable margin of the revolving credit facility was (i) 2.00% per annum for Eurodollar loans and (ii) 1.00% per annum for Base Rate loans. In addition, we will be required to pay the lenders under the revolving credit loan under the First Lien Credit Facility a commitment fee with respect to any unused commitments thereunder, at a per annum rate of 0.50%.
Collateral and Guarantees
Our domestic subsidiaries, including any future direct or indirect subsidiaries that may be created or acquired by us, with certain exceptions as set forth in the First Lien Credit Facility credit agreement, guarantee our obligations therein. The guarantee is secured by a perfected first priority security interest in substantially all of the guarantors’ tangible and intangible assets (including, without limitation, intellectual property and all of the capital stock of each of our direct and indirect domestic subsidiaries and 65% of the capital stock of certain of our first-tier foreign subsidiaries), subject to certain exceptions.
Covenants and Other Matters
Our First Lien Credit Facility includes certain negative covenants restricting or limiting our ability to, among other things:
•
incur additional debt, incur contingent obligations and issue additional preferred stock;
•
create liens;
•
pay dividends, distributions or make other specified restricted payments, and restrict the ability of certain of our subsidiaries to pay dividends or make other payments to us;
•
sell assets;
•
make certain capital expenditures, investments and acquisitions;
•
enter into certain transactions with affiliates;
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enter into sale and leaseback transactions; and
•
merge or consolidate with any other person or sell, assign, transfer, lease, convey or otherwise dispose of all or substantially all of our assets.
The First Lien Credit Facility contains certain customary representations and warranties, affirmative covenants and events of default, including failure to pay principal, interest or fees, material inaccuracy of representations and warranties, violations of covenants, certain bankruptcy and insolvency events, certain ERISA events, certain events related to our FCC licenses, a change of control, cross-defaults to other debt and material judgments.
(8)
Non-Interest Bearing Promissory Note due 2009, Net
Mega Media partially financed the acquisition of certain assets used in, or related to, the operation of MegaTV by entering into a 34-month secured non-interest bearing promissory note due 2009, in the principal amount of $18.5 million, to and made in favor of WDLP Broadcasting Company, LLC and Robin Broadcasting Company, LLC. The promissory note is a non-interest bearing note provided that the balance is paid by January 2, 2009. Subsequent to the due date, the promissory note will bear an interest rate of 10% annually. This promissory note is guaranteed by us and secured by the assets acquired in the transaction as discussed in note 3. We discounted the promissory note using an effective interest rate of approximately 8.25%, which had a present value at closing of approximately $14.8 million. The discount is being amortized over the life of the promissory note using the effective interest method.
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Notes to Consolidated Financial Statements - (Continued)
(9)
Other Long-Term Debt
Other long-term debt consists of the following at December 31, 2007 and 2006 (in thousands):
The scheduled maturities of other long-term debt are as follows at December 31, 2007 (in thousands):
On January 4, 2007, SBS, through its wholly owned subsidiary, SBS Miami Broadcast Center, Inc. (SBS Miami Broadcast Center), completed the acquisition of certain real property located in Miami-Dade County, Florida pursuant to the purchase and sale agreement, dated August 24, 2006, as amended on September 25, 2006, as further amended on October 25, 2006 (the Purchase Agreement). The real property consists of 5.47 acres (234,208 square feet) and approximately 62,000 square feet of office space (the Property). The Property was acquired from 7007 Palmetto Investments, LLC (Seller), an unrelated third party, for a total purchase price of approximately $8.9 million, excluding closing costs and broker’s fees. During 2006, pursuant to the terms of the Purchase Agreement, we made deposits totaling $1.0 million in escrow that were released at the closing and was applied to the purchase price. At December 31, 2006, these deposits were included in other assets in the accompanying consolidated balance sheets. We funded the purchase price using cash on hand and borrowings and we expect to incur significant construction costs for the new broadcasting facility. Upon the completion of construction at the building, we will consolidate our Miami radio and television operations at the new broadcasting facility.
In connection with the acquisition of the Property, on January 4, 2007, SBS Miami Broadcast Center, entered into a loan agreement (the Loan Agreement), a ten-year promissory note in the original principal amount of $7.7 million (the Promissory Note), and a Mortgage, Assignment of Rents and Security Agreement (the Mortgage) in favor of Wachovia Bank, National Association (Wachovia). The Promissory Note bears an interest rate equal to one-month LIBOR plus 125 basis points and requires monthly principal payments of $0.03 million with any unpaid balance due on its maturity date of January 4, 2017. The Promissory Note is secured by the Property and any related collateral.
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Notes to Consolidated Financial Statements - (Continued)
The terms of the loan include certain restrictions and covenants for SBS Miami Broadcast Center, which limit, among other things, the incurrence of additional indebtedness and liens. The Loan Agreement specifies a number of events of default (some of which are subject to applicable cure periods), including, among others, the failure to make payments when due, noncompliance with covenants and defaults under other agreements or instruments of indebtedness. Upon the occurrence of an event of default and expiration of any applicable cure periods, Wachovia may accelerate the loan and declare all amounts outstanding to be immediately due and payable.
Additionally, on January 4, 2007, SBS Miami Broadcast Center entered into an interest rate swap arrangement (the Swap Agreement) for the original notional principal amount of $7.7 million whereby it will pay a fixed interest rate of 6.31% as compared to interest at a floating rate equal to one-month LIBOR plus 125 basis points on the Note. The interest rate swap amortization schedule is identical to the Promissory Note amortization schedule, which has an effective date of January 4, 2007, monthly notional reductions and an expiration date of January 4, 2017.
In connection with the acquisition of the property, we agreed to unconditionally guaranty all obligations of SBS Miami Broadcast Center pursuant to the Promissory Note, the Loan Agreement, the Mortgage, the loan documents thereto, and the Swap Agreement, for the benefit of Wachovia and its affiliates (the Guaranty). In addition, the terms of the Guaranty contain certain financial covenants, which require us to maintain available liquidity of not less than 1.2 times the then outstanding principal balance of the loan made to SBS Miami Broadcast Center by Wachovia.
(10)
103/4% Series A and B Cumulative Exchangeable Redeemable Preferred Stock
On October 30, 2003, we partially financed the purchase of radio station KXOL-FM with proceeds from the sale, through a private placement, of 75,000 shares of our 103/4% Series A cumulative exchangeable redeemable preferred stock, par value $0.01 per share, with a liquidation preference of $1,000 per share (Series A Preferred Stock), without a specified maturity date. The offering was made within the United States only to qualified institutional buyers in reliance on Rule 144A under the Securities Act and outside the United States only to non-U.S. persons in reliance on Regulation S under the Securities Act. The gross proceeds from the issuance of the Series A Preferred Stock amounted to $75.0 million.
On February 18, 2004, we commenced an offer to exchange registered shares of our 103/4% Series B cumulative exchangeable redeemable preferred stock, par value $0.01 per share and liquidation preference of $1,000 per share (the Series B Preferred Stock) for any and all shares of our outstanding unregistered Series A Preferred Stock. Our registration statement on Form S-4, which registered the Series B Preferred Stock and the 103/4% subordinated exchange notes due 2013 that may be issued by us in exchange for the Series B Preferred Stock under certain circumstances, was declared effective by the SEC on February 13, 2004. The exchange offer expired on March 26, 2004, with full participation in the exchange offer by all holders of our Series A Preferred Stock. On April 5, 2004, we completed the exchange offer and exchanged 76,702,083 shares of our Series B Preferred Stock for all of our then outstanding shares of Series A Preferred Stock.
We have the option on or after October 15, 2008, to redeem all or some of the registered Series B Preferred Stock for cash on October 15, 2008 at 105.375%, October 15, 2009 at 103.583%, October 15, 2010 at 101.792 and October 15, 2011 and thereafter at 100%, plus accumulated and unpaid dividends to the redemption date. On October 15, 2013, each holder of Series B Preferred Stock will have the right to require us to redeem all or a portion of such holder’s Series B Preferred Stock at a purchase price of 100% of the liquidation preference thereof, plus accumulated and unpaid dividends.
Under the terms of our Series B preferred stock, we are required to pay dividends at a rate of 103/4% per year of the $1,000 liquidation preference per share of Series B preferred stock. From October 30, 2003 to
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Notes to Consolidated Financial Statements - (Continued)
October 15, 2008, we may pay these dividends in either cash or additional shares of Series B preferred stock. After October 15, 2008, we will be required to pay the dividends on our Series B preferred stock only in cash.
During the fiscal years ended December 31, 2005, 2004 and 2003, we increased the carrying amount of the Series B Preferred Stock by approximately $5.0 million, $8.5 million and $1.4 million, respectively, for stock dividends, which were calculated using the effective interest method. In addition, for the fiscal years ended December 31, 2007, 2006, and 2005, we paid cash dividends of approximately $9.7 million, $9.7 million and $2.4 million and as of December 31, 2007 and 2006, we had accrued dividends of approximately $2.0 million of which were paid in cash in January 2008 and 2007, respectively.
(11)
Stockholders’ Equity
(a)
Series C Convertible Preferred Stock
On December 23, 2004, in connection with the closing of the merger agreement, dated October 5, 2004, with Infinity Media Corporation (Infinity), Infinity Broadcasting Corporation of San Francisco (Infinity SF) and SBS Bay Area, LLC, a wholly owned subsidiary of SBS (SBS Bay Area), we issued to Infinity (i) an aggregate of 380,000 shares of Series C convertible preferred stock, $0.01 par value per share (the Series C preferred stock), each of which is convertible at the option of the holder into twenty fully paid and nonassessable shares of our Class A common stock; and (ii) a warrant to purchase an additional 190,000 shares of Series C preferred stock, exercisable at any time from December 23, 2004 until December 23, 2008, at an exercise price of $300.00 per share (the Warrant).
Under the terms of the certificate of designation governing the Series C preferred stock, the holder of Series C preferred stock has the right to convert each share of Series C preferred stock into twenty fully paid and nonassessable shares of our Class A common stock. The shares of Series C preferred stock issued at the closing of the merger are convertible into 7,600,000 shares of our Class A common stock, subject to adjustment, and the Series C preferred stock issuable upon exercise of the Warrant is convertible into an additional 3,800,000 shares of our Class A common stock, subject to adjustment. To date, none of these warrants have been exercised.
In connection with the closing of the merger transaction, we also entered into a registration rights agreement with Infinity, pursuant to which, following a period of one year (or earlier if we take certain actions), Infinity may instruct us to file up to three registration statements, on a best efforts basis, with the Securities and Exchange Commission (SEC) providing for the registration for resale of the Class A common stock issuable upon conversion of the Series C preferred stock.
We are required to pay holders of Series C preferred stock dividends on parity with our Class A common stock and Class B common stock, and each other class or series of our capital stock, if created, after December 23, 2004.
(b)
Class A and B Common Stock
The rights of the holders of shares of Class A common stock and Class B common stock are identical, except for voting rights and conversion provisions. The Class A common stock is entitled to one vote per share and the Class B common stock is entitled to ten votes per share. The Class B common stock is convertible to Class A common stock on a share-for-share basis at the option of the holder at any time, or automatically upon the transfer to a person or entity which is not a permitted transferee. Holders of each class of common stock are entitled to receive dividends and, upon liquidation or dissolution, are entitled to receive all assets available for distribution to stockholders. The holders of each class have no preemptive or other subscription rights and there are no redemption or sinking fund provisions with respect to such shares. Each class of common stock is subordinate to our 103/4% Series B cumulative exchangeable redeemable preferred
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Notes to Consolidated Financial Statements - (Continued)
stock, par value $0.01 per share and liquidation preference of $1,000 per share (the Series B preferred stock) and on parity with the Series C preferred stock with respect to dividend rights and rights upon liquidation, winding up and dissolution of SBS.
(c)
Warrants
In connection with the merger agreement with Infinity, as discussed in note 11(a), we have a warrant outstanding to ultimately purchase an aggregate of 3,800,000 shares of our Class A common stock, which expires on December 23, 2008.
(d)
Share-Based Payment Plans
Omnibus Equity Compensation Plan
On July 16, 2006, we adopted an omnibus equity compensation plan (the Omnibus Plan) in which grants can be made to participants in any of the following forms: (i) incentive stock options, (ii) nonqualified stock options, (iii) stock appreciation rights (SARs), (iv) stock units, (v) stock awards, (vi) dividend equivalents, and (vii) other stock-based awards. The Omnibus Plan authorizes up to 3,500,000 shares of our Class A common stock for issuance, subject to adjustment in certain circumstances. The Omnibus Plan provides that the maximum aggregate number of shares of Class A common stock that may be made with respect to grants, other than dividend equivalents, to any individual during any calendar year is 1,000,000 shares, subject to adjustments. In addition, the maximum aggregate number of shares of Class A common stock with respect to grants of stock units, stock awards and other stock-based awards that may be made to any individual during a calendar year is also 1,000,000 shares, subject to adjustments.
Stock Option Plans
In September 1999, we adopted an employee incentive stock option plan (the 1999 ISO Plan) and a nonemployee director stock option plan (the 1999 NQ Plan). Options granted under the 1999 ISO Plan will vest according to terms to be determined by the compensation committee of our board of directors, and will have a contractual life of up to 10 years from the date of grant. Options granted under the 1999 NQ Plan will vest 20% upon grant and 20% each year for the first four years from grant. All options granted under the 1999 ISO Plan and the 1999 NQ Plan vest immediately upon a change in control of SBS, as defined therein. A total of 3,000,000 shares and 300,000 shares of Class A common stock were reserved for issuance under the 1999 ISO Plan and the 1999 NQ Plan, respectively. Additionally, on November 2, 1999, we granted a stock option to purchase 250,000 shares of Class A common stock to a former director. This option vested immediately, and expires 10 years from the date of grant.
Impact of the Adoption of SFAS No. 123(R), Share-Based Payment
We adopted SFAS No. 123(R) using the modified prospective transition method beginning January 1, 2006. Accordingly, we recorded stock-based compensation expense for awards granted prior to, but not yet vested, as of January 1, 2006, as if the fair value method required for pro forma disclosure under SFAS No. 123, Accounting for Stock-Based Compensation, were in effect for expense recognition purposes, adjusted for estimated forfeitures. For stock-based awards granted after January 1, 2006, we have recognized compensation expense based on the estimated grant date fair value method using the Black-Scholes option pricing model. For these awards, we have recognized compensation expense using a straight-line amortization method (prorated). As SFAS No. 123(R) requires that stock-based compensation expense be based on awards that are ultimately expected to vest, stock-based compensation for the fiscal years ended December 31, 2007 and 2006 have been reduced for estimated forfeitures. When estimating forfeitures, we consider voluntary termination behaviors, as well as trends of actual option forfeitures.
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Notes to Consolidated Financial Statements - (Continued)
The impact on our statements of operations of recording stock-based compensation for the fiscal year ended December 31, 2007 and 2006 was as follows (in thousands):
As of December 31, 2007, there was $0.9 million of total unrecognized compensation cost related to nonvested stock-based compensation arrangements granted under all of our plans. The cost is expected to be recognized over a weighted average period of approximately 11/2 years.
SFAS No. 123(R) requires cash flows resulting from excess tax benefits to be classified as a part of cash flows from financing activities. Excess tax benefits are realized tax benefits related to tax deductions for exercised options in excess of the deferred tax asset attributable to stock compensation costs for such options.
During the fiscal years ended December 31, 2007 and 2006, no stock options were exercised; therefore, no cash payments were received. In addition, during the fiscal years ended December 31, 2007 and 2006, we did not recognize a tax benefit on our stock-based compensation expense due to our valuation allowance on substantially all of our deferred tax assets.
Valuation Assumptions
We calculated the fair value of each option award on the date of grant using the Black-Scholes option pricing model. The per share weighted average fair value of stock options granted to employees during the fiscal years ended December 31, 2007, 2006 and 2005 were $1.66, $3.26 and $4.60, respectively. The following weighted average assumptions were used for each respective period:
Our computation of expected volatility for the fiscal years ended December 31, 2007 and 2006 was based on a combination of historical and market-based implied volatility from traded options on our stock. Prior to 2006, our computation of expected volatility was based on historical volatility. Our computation of expected term in 2007 and 2006 was determined based on historical experience of similar awards, giving consideration to the contractual terms of the stock-based awards, vesting schedules and expectations of future employee behavior. The range provided above results from the behavior patterns of separate groups of employees that have similar historical experience. The interest rate for periods within the contractual life of the award is based on the U.S. Treasury yield curve in effect at the time of grant.
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Notes to Consolidated Financial Statements - (Continued)
Stock Options Activity
Stock options have only been granted to employees or directors under our 1999 Stock Option Plans. Our stock options have various vesting schedules and are subject to the employees continuing service to SBS. We recognize compensation expense based on the estimated grant date fair value using the Black-Scholes option pricing model and recognize the compensation expense using a straight-line amortization method. When estimating forfeitures, we consider voluntary termination behaviors, as well as trends of actual option forfeitures. Ultimately, our stock-based compensation expense is based on awards that vest. Our stock-based compensation has been reduced for estimated forfeitures.
A summary of the status of our stock options, as of December 31, 2007, 2006 and 2005, and changes during the fiscal years ended December 31, 2007, 2006 and 2005, is presented below (in thousands, except per share data and contractual life):
During the fiscal years 2007, 2006 and 2005, no stock options were exercised.
The following table summarizes information about our stock options outstanding and exercisable at December 31, 2007 (in thousands, except per share data and contractual life):
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Notes to Consolidated Financial Statements - (Continued)
Nonvested Shares Activity
Nonvested shares (restricted stock) are awarded to employees under our Omnibus Plan. In general, nonvested shares vest over three to five years and are subject to the employees continuing service to SBS. The cost of nonvested shares is determined using the fair value of our common stock on the date of grant. The compensation expense is recognized over the vesting period.
A summary of the status of our nonvested shares, as of December 31, 2007 and 2006, and changes during the year-ended December 31, 2007, is presented below (in thousands, except per share data):
Pro forma Information for Periods Prior to the Adoption of SFAS 123(R)
Prior to the adoption of SFAS No. 123(R), we provided the disclosures required under SFAS No. 123, as amended by SFAS No. 148, Accounting for Stock-Based Compensation - Transition and Disclosures. Employee stock-based compensation expense recognized under SFAS No. 123(R) was not reflected in our statement of operations for the fiscal year ended December 31, 2005 for employee stock option awards as all options were granted with an exercise price equal to the market value of the underlying common stock on the date of grant.
The pro forma information for the fiscal year ended December 31, 2005 was as follows (in thousands, except per share amounts):
(12)
Commitments
(a)
Leases
We occupy a building under a capital lease agreement with our Chairman Emeritus and Chief Executive Officer expiring in June 2012. Also, we have furniture & fixtures under various capital leases. These amounts
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Notes to Consolidated Financial Statements - (Continued)
capitalized under these lease agreements and included in property and equipment at December 31, 2007 and 2006 are as follows (in thousands):
We lease office space and facilities and certain equipment under operating leases, some of which are with related parties (see note 15), that expire at various dates through 2082. Certain leases provide for base rental payments plus escalation charges for real estate taxes and operating expenses.
At December 31, 2007, future minimum lease payments under such leases are as follows (in thousands):
In connection with an operating lease, we have a standby letter of credit of $0.1 million, which was required under the lease terms.
Total rent expense for the fiscal years ended December 31, 2007, 2006 and 2005 amounted to $7.6 million, $7.8 million and $3.9 million, respectively.
SPANISH BROADCASTING SYSTEM, INC.
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Notes to Consolidated Financial Statements - (Continued)
We have agreements to sublease our radio frequencies and portions of our tower sites and buildings. Such agreements provide for payments through 2016. The future minimum rental income to be received under these agreements as of December 31, 2007 is as follows (in thousands):
(b)
Employment and Service Agreements
At December 31, 2007, we are committed to employment and service contracts for certain executives, on-air talent, general managers, and others expiring through 2013. Future payments under such contracts are as follows (in thousands):
Included in the future payments schedule is our Chief Executive Officer’s (CEO) employment agreement expiring on December 31, 2008. Our CEO’s annual base salary is $1.25 million, and is eligible to receive a cash bonus equal to 7.5% of the dollar increase in same station operating income, as defined, for any fiscal year, including acquired stations on a pro forma basis.
Under the terms of the agreement, the board of directors, in its sole discretion, may increase the CEO’s annual base salary and cash bonus. The total cash bonus awarded to our CEO for fiscal years ended December 31, 2007, 2006 and 2005 was approximately $0.7 million, $0.7 million and $1.0 million, respectively, of which $0.7 million was included in accounts payable and accrued expenses in the accompanying consolidated balance sheets as of December 31, 2007 and 2006, respectively.
Certain employees’ contracts provide for additional amounts to be paid if station ratings or cash flow targets are met.
(c)
401(k) Profit-Sharing Plan
In September 1999, we adopted a tax-qualified employee savings and retirement plan (the 401(k) Plan). We can make matching and/or profit sharing contributions to the 401(k) Plan on behalf of all participants at our sole discretion. All employees over the age of 21 that have completed at least 500 hours of service are eligible to participate in the 401(k) Plan. To date, we have not made contributions to this plan.
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Notes to Consolidated Financial Statements - (Continued)
(d)
Other Commitments
At December 31, 2007, we have commitments to vendors that provide us with goods or services. These commitments included services for rating services, programming contracts, software contracts and others. Future payments under such commitments are as follows (in thousands):
(13)
Income Taxes
Total income taxes for the years ended December 31, 2007, 2006 and 2005 were allocated as follows (in thousands):
For the years ended December 31, 2007, 2006 and 2005, income from continuing operations before taxes consists of the following (in thousands):
SPANISH BROADCASTING SYSTEM, INC.
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Notes to Consolidated Financial Statements - (Continued)
The components of the provision for income tax expense included in the consolidated statements of operations are as follows for the fiscal years ended December 31, 2007, 2006 and 2005 (in thousands):
For fiscal year ended December 31, 2007, no net operating loss carry-forwards were utilized. For fiscal years ended December 31, 2006 and 2005, approximately $0.9 million and $1.1 million net operating losses were utilized.
The tax effect of temporary differences and carry-forwards that give rise to deferred tax assets and deferred tax liabilities at December 31, 2007 and 2006 are as follows (in thousands):
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Notes to Consolidated Financial Statements - (Continued)
Total income tax expense from continuing operations differed from the amounts computed by applying the U.S. federal income tax rate of 35% for the fiscal years ended December 31, 2007, 2006 and 2005, as a result of the following:
The valuation allowance for deferred tax assets increased by $13.4 million during the fiscal year ended December 31, 2007 and decreased by $19.8 million during the fiscal year ended December 31, 2006. The change in the valuation allowance reflected in the rate reconciliation reflects only the change relating to continuing operations. As a result of adopting SFAS No. 142 on December 31, 2001, amortization of intangible assets ceased for financial statement purposes. As a result, we could not be assured that the reversals of the deferred tax liabilities relating to those intangible assets would occur within our net operating loss carry-forward period.
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. If the realization of deferred tax assets in the future is considered more likely than not, an adjustment to the deferred tax assets would increase net income in the period such determination is made.
Based upon the level of historical taxable income and projections for future taxable income over the periods which the deferred tax assets are deductible, at this time, management believes it is more likely than not that we will not realize the benefits of the majority of these deductible differences. As a result, we have established and maintained a valuation allowance for that portion of the deferred tax assets we believe will not be realized.
At December 31, 2007, we have federal and state net operating loss carry-forwards of approximately $140.7 million and $92.8 million, respectively. These net operating loss carry-forwards are available to offset future taxable income and expire from the years 2008 through 2027.
In addition, at December 31, 2007, we have foreign net operating loss carry-forwards of approximately $34.3 million available to offset future taxable income expiring from the years 2007 through 2014.
Our income tax expense differs from the statutory federal tax rate of 35% and related statutory state tax rates, primarily as a result of the application of SFAS No. 142, Goodwill and Other Intangible Assets (SFAS No. 142). Under SFAS No. 142, the reversal of our deferred tax liabilities related to our intangible assets could no longer be assured over our net operating loss carry forward period. Therefore, our effective book income tax rate is impacted by establishing a valuation allowance on substantially all of our deferred tax assets.
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Notes to Consolidated Financial Statements - (Continued)
The U.S. Federal jurisdiction, Florida, New York, California, Illinois and Puerto Rico are the major tax jurisdictions where we file income tax returns. The tax years that remain subject to assessment of additional liabilities by the federal, state, and local tax authorities are 2004 through 2007. The tax years that remain subject to assessment of additional liabilities by the Puerto Rico tax authority are 2002 through 2007. The Puerto Rico taxing authority is currently auditing the 2002 tax year. This audit may result in proposed assessments where the ultimate resolution may result in additional taxes. We believe that our tax positions in Puerto Rico comply with applicable tax laws and that we have adequately provided for these matters.
We have adopted the provisions of FIN 48 on January 1, 2007. No liability for unrecognized tax benefits was recorded as a result of implementing FIN 48. For the year ended December 31, 2007, we did not have any unrecognized tax benefits as a result of tax positions taken during a prior period or during the current period. No interest or penalties have been recorded as a result of tax uncertainties. Our evaluation was performed for the tax years ended December 31, 2002 through December 31, 2007; the tax years which remain subject to examination by tax jurisdictions as of December 31, 2007.
Effective December 31, 2006, we have adopted the Securities and Exchange Commission (SEC) released Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements (SAB 108). Upon the initial adoption of SAB 108, we have reduced our accumulated deficit as of January 1, 2006 by $5.2 million for a historical misstatement in deferred income taxes. This adjustment relates to a historical misstatement in deferred income taxes relating to the full valuation allowance we recorded on our net operating losses upon the adoption of SFAS No. 142 in the first quarter of 2002 that did not exclude amounts that were already fully reserved. The excess deferred tax liability related to this misstatement was included within other long-term liabilities on our consolidated balance sheet as of December 31, 2005. Based on our approach for assessing uncorrected misstatements, prior to the adoption of SAB 108, we have concluded that these amounts were immaterial to prior periods but material under the dual method.
(14)
Contingencies
(a)
Environmental Matters
As the owner, lessee or operator of various real properties and facilities, we are subject to various federal, state and local environmental laws and regulations. Historically, compliance with these laws and regulations has not had a material adverse effect on our business. We cannot assure you, however, that compliance with existing or new environmental laws and regulations will not require us to make significant expenditures of funds.
On March 19, 2002, the Environmental Quality Board, Mayagüez, Puerto Rico Regional Office, or EQB, inspected our transmitter site in Maricao, Puerto Rico. Based on the inspection, EQB issued a letter to us on March 26, 2002 noting the following potential violations: (1) alleged violation of EQB’s Regulation for the Control of Underground Injection through construction and operation of a septic tank (for sanitary use only) at each of the two antenna towers without the required permits; (2) alleged violation of EQB’s Regulation for the Control of Atmospheric Pollution through construction and operation of an emergency generator of more than 10hp at each transmitter tower without the required permits; and (3) alleged failure to show upon request an EQB approved emergency plan detailing preventative measures and post-event steps that we will take in the event of an oil spill. We received the emergency plan approval and the emergency generator permit approval on April 30, 2003 and August 14, 2003, respectively. To date, no penalties or other sanctions have been imposed against us relating to these matters. We do not have sufficient information to assess our potential exposure to liability, if any, and no amounts were accrued in the consolidated financial statements related to this contingency.
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Notes to Consolidated Financial Statements - (Continued)
(b)
FCC Licenses Matters
The broadcasting industry is subject to extensive regulation by the FCC under the Communications Act of 1996. 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. We have timely filed license renewal applications for all of our radio stations, however, certain licenses were not renewed prior to their expiration dates. Based on having filed timely renewal applications, we continue to operate the radio stations operating under these licenses and anticipate that they will be renewed.
(15)
Related-Party Transactions
Our corporate headquarters are located in office space owned by Irradio Holdings Ltd., a Florida limited partnership, for which the general partner is Irradio Investments, Inc., a Florida subchapter S corporation, wholly owned by our Chief Executive Officer. Since November 1, 2000, we have leased our office space under a ten year lease, with the right to renew for two consecutive five year terms (as amended, the Lease).
On March 7, 2006, we entered into a third amendment to the Lease providing for the expansion of our office space at our corporate headquarters. We previously entered into a second amendment to the Lease, effective as of December 1, 2004, which extended the term of the Lease to April 30, 2015 and further expanded the office space leased. The additional office space is used for the operation of our Miami broadcasting stations and corporate offices. We currently pay a monthly rent of approximately $0.2 million for all the space leased under the Lease.
We also occupy a building that hosts part of our Miami radio station operations under a capital lease agreement, which is owned by our Chairman Emeritus and Chief Executive Officer (see note 12(a)). The building lease expires in 2012 and calls for an annual base rent of approximately $0.1 million.
On January 1, 2008, we entered into a local marketing agreement with South Broadcasting System, Inc., a company owned by our Chairman Emeritus and a member of our board of directors (see note 20).
During the fiscal years ended December 31, 2007 and 2006, one of our members of the board of directors was special counsel to a law firm that provides legal services to us, for which we paid the law firm approximately $3.1 million and $2.3 million, respectively. During fiscal year ended December 31, 2005, he was an active partner in that law firm, for which we paid the law firm approximately $5.0 million. We had outstanding payables included in accounts payable and accrued expenses to the law firm for approximately $0.6 million as of December 31, 2007 and 2006, respectively.
In addition, effective January 1, 2008, pursuant to a consulting agreement dated January 31, 2008, the retired partner serves as our business consultant. The term of the agreement is for one year and may be renewed at our option on or before December 31st of each succeeding year. Under the terms of that agreement, he is paid a retainer of $0.3 million per year to advise us with respect to various business matters.
(16)
Litigation
From time to time we are involved in various routine legal and administrative proceedings and litigation incidental to the conduct of our business, such as contractual matters and employee-related matters. In the opinion of management, such litigation is not likely to have a material adverse effect on our business, operating results or financial condition.
(a)
Wolf, et al., Litigation
On November 28, 2001, a complaint was filed against us in the United States District Court for the Southern District of New York (the District Court) and was amended on April 19, 2002. The amended
SPANISH BROADCASTING SYSTEM, INC.
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Notes to Consolidated Financial Statements - (Continued)
complaint alleges that the named plaintiff, Mitchell Wolf, purchased shares of our Class A common stock pursuant to the October 27, 1999 prospectus and registration statement relating to our initial public offering which closed on November 2, 1999 (the initial public offering). The complaint was brought on behalf of Mr. Wolf and an alleged class of similarly situated purchasers against us, eight underwriters and/or their successors-in-interest who led or otherwise participated in our initial public offering, two members of our senior management team, one of whom is our Chairman of the Board of Directors, and an additional director, referred to collectively as the individual defendants. To date, the complaint, while served upon us, has not been served upon the individual defendants, and no counsel has appeared for them. On September 21, 2007, Kaye Scholer LLP, on behalf of the individual defendants, executed a tolling agreement with the plaintiffs providing for the dismissal without prejudice of all claims against the individual defendants upon the provision to plaintiffs of documentation showing that we had entity coverage for the period in question. Documentation of such coverage was subsequently provided to the plaintiffs on December 19, 2007, and the plaintiffs are expected to file a stipulation order, dismissing without prejudice, all claims against the individual defendants.
This case is one of more than 300 similar cases brought by similar counsel against more than 300 issuers, 40 underwriters and 1,000 individual defendants alleging, in general, violations of federal securities laws in connection with initial public offerings, in particular, failing to disclose that the underwriters allegedly solicited and received additional, excessive and undisclosed commissions from certain investors in exchange for which they allocated to those investors material portions of the restricted shares issued in connection with each offering. All of these cases, including the one involving us, have been assigned for consolidated pretrial purposes to one judge of the United States District Court for the Southern District of New York. The issuer defendants in the consolidated cases (collectively, the Issuer Defendants) filed motions to dismiss the consolidated cases. These motions to dismiss covered issues common among all Issuer Defendants and issues common among all underwriter defendants (collectively, the Underwriter Defendants) in the consolidated cases. As a result of these motions, the Individual Defendants were dismissed from one of the claims against them, specifically the Section 10b-5 claim.
On August 31, 2005, the District Court issued an order of preliminary approval of a settlement proposal among the investors in the plaintiffs’ class, the issuer defendants and the issuer defendants’ insurance carriers (the Issuers Settlement). The principal components of the Issuers Settlement were: (1) a release of all claims against the Issuer Defendants and their directors, officers and certain other related parties arising out of the alleged wrongful conduct in the amended complaint; (2) the assignment to the Plaintiffs of certain of the Issuer Defendants’ potential claims against the Underwriters; and (3) a guarantee by the Insurers to the Plaintiffs of the difference between $1 billion and any lesser amount recovered by the Plaintiffs from the Underwriter Defendants. The payments were to be charged to each Issuer Defendant’s insurance policy on a pro rata basis.
On October 13, 2004, the District Court granted Plaintiffs’ motion for class certification in six “focus cases” out of the more than 300 consolidated class actions, but on December 5, 2006, the United States Court of Appeals for the Second Circuit (the Second Circuit) reversed the order, holding that Plaintiffs could not satisfy the predominance requirement for a Federal Rule of Civil Procedure 23(b)(3) class action. On June 25, 2007, in light of the Second Circuit’s reversal of the class certification order and its subsequent denial of plaintiffs’ petition for a rehearing or rehearing en banc, the District Court entered a stipulation between plaintiffs and the Issuer Defendants, terminating the proposed Issuers Settlement which the court had preliminarily approved on August 31, 2005.
On May 30, 2007, the District Court held a status conference to discuss the impact of the Second Circuit’s December 5, 2006 decision and plaintiffs made an oral motion for class certification with respect to all of the consolidated actions, based on newly proposed class definitions.
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Notes to Consolidated Financial Statements - (Continued)
On August 14, 2007, Plaintiffs filed amended complaints in the six “focus cases” and amended master allegations in the consolidated actions. On November 13, 2007, the Issuer Defendants moved to dismiss the amended complaints in the six “focus cases.” The motion is fully briefed. We are not named in any of the six “focus cases.”
On December 21, 2007, the Underwriter Defendants and Issuer Defendants filed oppositions to plaintiffs’ motion for class certification in the six “focus cases.” Plaintiffs’ reply brief is due on March 28, 2008 and the Underwriter Defendants’ and Issuer Defendants’ surreply briefs are due on April 22, 2008. The District Court has not set a date for oral argument.
On January 7, 2008, the Underwriter Defendants filed a motion (in which the Issuer Defendants joined) to strike class allegations in 26 of the consolidated cases, including the case against us, on the ground that plaintiffs lacked a putative class representative in those cases at the time of their May 30, 2007 oral motion. Plaintiffs filed an opposition to the motion on February 8, 2008, and the Underwriter Defendants’ filed a reply brief on February 29, 2008. We do not have sufficient information at this time to determine our ultimate exposure, if any, with respect to this matter.
(b)
Amigo Broadcasting Litigation
On December 5, 2003, Amigo Broadcasting, L.P. (Amigo) filed an original petition and application for temporary injunction in the District Court of Travis County, Texas (the Court), against us, Raul Bernal (Bernal) and Joaquin Garza (Garza). Amigo filed a first and second amended petition and application for temporary injunction on June 25, 2004 and February 18, 2005, respectively. The second amended petition alleged that we (1) misappropriated Amigo’s proprietary interests by broadcasting the characters and concepts portrayed by the Bernal and Garza radio show (the Property); (2) wrongfully converted the Property to our own use and benefit; (3) induced Bernal and Garza to breach their employment agreements with Amigo; (4) used and continued to use Amigo’s confidential information and property with the intention of diverting profits from Amigo and of inducing Amigo’s potential customers to do business with us and our syndicators; (5) invaded Amigo’s privacy by misappropriating the names and likenesses of Bernal and Garza; and (6) committed violations of the Lanham Act by diluting and infringing on Amigo’s trademarks. Based on these claims, Amigo seeks damages in excess of $5.0 million.
On December 5, 2003, the Court issued a temporary injunction against all of the defendants and scheduled a hearing before the Court on December 17, 2003. The temporary injunction dissolved by its terms on December 1, 2004. On December 17, 2003, the parties entered into a settlement agreement, whereby the Court entered an Order on Consent of the settling parties, permitting Bernal and Garza’s radio show to be broadcast on our radio stations. In addition, we agreed that we would not broadcast the Bernal and Garza radio show in certain prohibited markets and that we would not distribute certain promotional materials that were developed by Amigo. On January 5, 2004, we answered the remaining claims asserted by Amigo for damages. On March 18, 2005, the case was removed to the United States District Court for the Western District of Texas (the District Court) and a trial date was scheduled for May 2006. On January 17, 2006, we filed a motion for summary judgment with the District Court. On March 2, 2006, the parties conducted mediation but were unable to reach a settlement. The case was thereafter tried before a jury the week of May 1, 2006. At the close of plaintiff’s evidence, defendants presented a motion for judgment as a matter of law and the motion was granted on all counts. The District Court entered judgment for the defendants - Garza, Bernal and us.
On June 2, 2006, Plaintiff filed a notice of appeal to the Fifth Circuit Court of Appeals. All briefs have been submitted and the Fifth Circuit Court of Appeals heard oral arguments on December 5, 2007. Based on the existing circumstances, we believe that it is unlikely that the appeal will result in a material adverse outcome to us.
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Notes to Consolidated Financial Statements - (Continued)
(17)
New Accounting Pronouncements
In September 2006, the Financial Accounting Standards Board (FASB) issued SFAS No. 157, Fair Value Measurements (SFAS No. 157), which defines fair value, establishes a framework for measuring fair value in GAAP, and enhances disclosures about fair value measurements. SFAS No. 157 applies when other accounting pronouncements require fair value measurements; it does not require new fair value measurements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007 or fiscal year 2008 for us. The adoption of SFAS No. 157 did not have an impact on our consolidated financial statements.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Liabilities - Including an Amendment of FASB Statement No. 115 (SFAS No. 159). SFAS No. 159 permits entities to choose to measure certain financial assets and liabilities at fair value. Unrealized gains and losses, arising subsequent to adoption, are reported in earnings. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007 or fiscal year 2008 for us. The adoption of SFAS No. 159 did not have an impact on our consolidated financial statements.
In December 2007, the FASB issued SFAS No. 141R, Business Combinations (SFAS No. 141R) and SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements - an amendment to ARB No. 51 (SFAS No. 160). SFAS No. 141R and SFAS No. 160 require most identifiable assets, liabilities, noncontrolling interests, and goodwill acquired in a business combination to be recorded at “full fair value” and require noncontrolling interests (previously referred to as minority interests) to be reported as a component of equity, which changes the accounting for transactions with noncontrolling interest holders. Both SFAS No. 141R and SFAS No. 160 are effective for periods beginning on or after December 15, 2008 or fiscal year 2009 for us. SFAS No. 141R will be applied to business combinations occurring after the effective date. SFAS No. 160 will be applied prospectively to all noncontrolling interests, including any that arose before the effective date. We are currently evaluating the impact of adopting SFAS No. 141R and SFAS No. 160 on its results of operations and financial position.
(18)
Quarterly Results of Operations (Unaudited)
The following is a summary of the quarterly results of operations for the fiscal year ended December 31, 2007 (in thousands, except per share data):
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Notes to Consolidated Financial Statements - (Continued)
The following is a summary of the quarterly results of operations for the fiscal year ended December 31, 2006 (in thousands, except per share data):
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Notes to Consolidated Financial Statements - (Continued)
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Segment Data
The following summary table presents separate financial data for each of our operating segments. The accounting polices applied to determine the segment information are generally the same as those described in the summary of significant accounting polices (see note 2(t)). We evaluate the performance of our operating segments based on separate financial data for each operating segment as provided below (in thousands):
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Notes to Consolidated Financial Statements - (Continued)
(20)
Subsequent Events
On January 1, 2008, we entered into a local marketing agreement with South Broadcasting System, Inc. (South Broadcasting), a company owned by our Chairman Emeritus and a member of our board of directors. Pursuant to the local marketing agreement, we are permitted to broadcast our Mexican Regional programming on radio station 106.3 FM (the LMA Station). We are required to pay the operating costs of the LMA Station and in exchange we will retain all revenues from the sale of the advertising within the programming we provide. The local marketing agreement will terminate, among other things, upon the first anniversary of the effective date, unless we provide 120 days written notice to South Broadcasting of our election to renew for a period of three years. Under the terms of the local marketing agreement, we have the right of first negotiation and the right of first refusal to match a competing offer. However, after the first anniversary of the effective date, if we do not agree to match the terms of the competing offer within the ten (10) business day period or fail to notify South Broadcasting of our intent to match the competing offer, then South Broadcasting has the right to accept such offer, provided South Broadcasting pays us the early termination fee equal to the lesser of 5% of the aggregate purchase price of the LMA Station or $1.0 million.
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Financial Statement Schedule - Valuation and Qualifying Accounts
Years Ended December 31, 2007, 2006 and 2005
(1)
True-up to tax returns of deferred tax accounts.
(2)
Cash write-offs, net of recoveries.
(3)
Amounts charged to other comprehensive income related to derivative instruments.
See accompanying independent auditors’ report.
(b) Exhibits:
The following exhibits, which are numbered in accordance with Item 601 of Regulation S-K, are filed herewith or, as noted, incorporated by reference herein:
*
Indicates a management contract or compensatory plan or arrangement, as required by Item 15(a)(3) of Form 10-K.
Signatures
Pursuant to the requirements of Section 13 or 15(d) 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, on the 17th day of March, 2008.
Spanish Broadcasting System, Inc.
By:
/s/ Raúl Alarcón, Jr.
Name: Raúl Alarcón, Jr.
Title:
Chairman of the Board of Directors,
Chief Executive Officer and President
Each person whose signature appears below hereby constitutes and appoints Raúl Alarcón, Jr. and Joseph A. García, and each of them, his true and lawful agent, proxy and attorney-in-fact, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to (i) act on, sign and file with the Securities and Exchange Commission any and all amendments to this report together with all schedules and exhibits thereto, (ii) act on, sign and file such certificates, instruments, agreements and other documents as may be necessary or appropriate in connection therewith, and (iii) take any and all actions which may be necessary or appropriate in connection therewith, granting unto such agent, proxy and attorney-in-fact full power and authority to do and perform each and every act and thing necessary or appropriate to be done, as fully for all intents and purposes as he might or could do in person, hereby approving, ratifying and confirming all that such agents, proxies and attorneys-in-fact or any of their substitutes may lawfully do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on the 17th day of March, 2008.
EXHIBIT INDEX
*
Indicates a management contract or compensatory plan or arrangement, as required by Item 15(a)(3) of Form 10-K.