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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2008
OR
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 333-110122
LBI MEDIA HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
Delaware | 05-0584918 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
1845 West Empire Avenue, Burbank, CA | 91504 | |
(Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code: (818) 563-5722
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes x No ¨
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer | ¨ | Accelerated filer | ¨ | |||
Non-accelerated filer | x (Do not check if a smaller reporting company) | Smaller reporting company | ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
As of March 31, 2009, no shares of LBI Media Holdings, Inc.’s voting stock were held by non-affiliates.
As of March 31, 2009, there were 100 shares of common stock, $0.01 par value per share, of LBI Media Holdings, Inc. issued and outstanding.
Documents Incorporated by Reference: None.
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ITEM 1. | BUSINESS |
Market data and other statistical information included in this Business section are based on industry publications, government publications and reports by market research firms or other published independent sources, including the United States Census Bureau, Arbitron and Nielsen surveys, Television Bureau Advertising (TVB) and Geoscape American Marketspace DataStream.
Overview
We are one of the largest owners and operators of Spanish-language radio and television stations in the United States based on revenues and number of stations. We own 22 radio stations (fifteen FM and seven AM) and six television stations in the greater Los Angeles (including Riverside, San Bernardino and Orange Counties), Houston, Dallas-Fort Worth, Phoenix, San Diego and Salt Lake City, the first, fourth, fifth, eighth, thirteenth and thirtieth largest Hispanic markets in the United States, respectively, based on Hispanic television households. We own and/or operate radio and television stations in markets that comprise approximately 31% of the U.S. Hispanic population. We are also affiliated with certain television stations in Texas, serving the Brownsville-McAllen, El Paso, Waco-Temple and Jacksonville-Tyler-Longview markets. We expect to begin broadcasting our internally produced programming in these markets in the third quarter of 2009.
Our Los Angeles cluster (including Riverside, San Bernardino and Orange Counties) consists of six Spanish-language radio stations, one AM radio station with time-brokered programming and a television station. Our Houston cluster consists of eight Spanish-language radio stations, one AM radio station with time-brokered programming and a television station. Our Dallas-Fort Worth cluster consists of five Spanish-language radio stations, one FM radio station with time-brokered programming and one television station. We also own three television stations that service the Salt Lake City, Phoenix and San Diego markets, respectively. In addition, we operate a television production facility, Empire Burbank Studios, in Burbank, California that we use to produce approximately eleven hours of television programming each weekday. We also own television production facilities in Houston and Dallas-Fort Worth, Texas that allow us to produce programming in those markets as well.
We seek to own and operate radio and television stations in the nation’s largest and most densely populated Hispanic markets. Our strategy is to increase revenue and cash flow in our markets by reformatting acquired stations with programming that is focused on the demographic composition of the market, providing creative advertising solutions and value-added services for our clients, utilizing our own television and radio stations to cross-promote and execute marketing campaigns to develop listenership and viewership and implementing strict cost controls.
We were incorporated in Delaware on June 23, 2003. We are a wholly owned subsidiary of Liberman Broadcasting, Inc., a Delaware corporation (successor in interest to LBI Holdings I, Inc.).
We are highly leveraged. As of December 31, 2008, we had total indebtedness of $417.3 million.
Operating Strategy
The principal components of our operating strategy are set forth below:
Develop popular stations by targeting the local community
In order to attract the largest audience, we seek to create radio and television programming that resonates with Hispanics of different cultural and ethnic backgrounds. We believe that we are particularly adept at programming to the tastes and preferences of the Hispanics of Mexican heritage, which comprise approximately 81%, 77%, 86%, 88%, 91% and 76% of the Hispanic populations in Los Angeles, Houston, Dallas-Fort Worth, Phoenix, San Diego and Salt Lake City, respectively, according to a 2007 study conducted by the U.S. Census Bureau. We believe our ability to produce locally targeted programming gives us an advantage over most other Spanish-language broadcasters that develop and distribute their programming on a national basis and, as a result, we have generally been able to achieve and maintain strong station ratings in our markets.
Our television programming is designed and created to compete with the novellas, or soap operas, which we believe composes the majority of the programming for our primary competitors, Univision Communications, Inc. and Telemundo Communications Group, Inc. By offering an alternative to these novellas with programming that resonates with Hispanic viewers, we are able to generate competitive ratings and attract a large television audience.
Cross-promote our radio and television stations
We utilize a portion of our commercial inventory time at both our radio and television stations to run advertisements promoting our other stations and programming, which helps us capitalize on the strong ratings and targeted audience of our stations with no incremental cash outlay. In addition, we benefit from our knowledge in operating successful music oriented radio stations by obtaining valuable insights into the trends in the Hispanic market. With this experienced knowledge, we produce musical variety television shows that feature music industry news, interviews and live performances of artists featured and created on our popular radio stations.
Capitalize on our complementary radio and television stations to capture a greater share of advertising revenue
We create cross-selling opportunities by offering our advertisers customized marketing programs that allows them to cross-advertise on radio and television, as well as to cross-merchandise through product integration in our programming. This allows us to effectively compete for a significant portion of an advertiser’s Hispanic budget since advertisers have historically spent over 80% of their Hispanic advertising budgets on radio and television. We believe that we are able to capture a larger share of advertising revenues in our markets through our ability to cross-sell and cross-promote our radio and television stations.
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Offer cost-effective advertising and value-added services to our advertisers
We believe that we differentiate ourselves from other Spanish-language broadcasters by offering advertisers the greatest value for their advertising dollar. By supporting advertisers’ media campaigns with creative promotions and offering our studio facilities to provide value-added services, such as free production of television commercials, we are able to cross-sell our broadcasting properties and attract new customers currently not advertising on radio or television.
Provide product integration that allows us to differentiate ourselves from our competition
Because we produce over 55 hours of internal programming for our television stations each week, we are able to integrate the products of our advertisers into our television shows. The ability to provide product integration to our television advertisers in our television programming is a competitive advantage given the growing popularity of imbedding advertisers’ products and services in television shows and the inability of many of our competitors, who do not internally produce their own programs, to provide such services.
Form exclusive talent relationships
Each of the television shows we produce at our studios features actors we develop. Many of our television shows also feature, on a regular basis, famous actors from Latin America. Both the actors we develop and the established Latin American actors that appear in our internally produced programming are available to endorse the products or services of our advertisers, which we believe is one of our competitive advantages.
Develop a diverse local advertising base
Consistent with our locally targeted programming strategy, our regional sales strategy primarily focuses on establishing direct relationships with the local advertising community. Local advertising accounted for approximately 76% of our gross advertising revenue in 2008. Other advantages of our locally focused sales strategy include the following:
• | our cash flows have been generally less vulnerable to ratings fluctuations as a result of our strong relationships with our advertisers; and |
• | our large and diverse client base has resulted in no single advertiser accounting for more than 2% of our gross advertising revenues in 2008. |
Utilize cost-effective television programming to drive cash flow growth
Currently we produce over 55 hours of television programming each week. Our weekday programming consists primarily of internally produced shows between the hours of 7:00 AM and 11:00 PM (in Los Angeles), which creates a compelling programming line-up for our television stations. Our in-house television production facilities provide us with an efficient cost structure to create programming, such as our musical variety shows Estudio 2 and El Show de Lagrimita y Costel, our entertainment game showA Que No Puedes, our news programs Alarma TV and Noticieros STN, our procedural drama Secretos, our comedy show,Los Chuperamigos, and our popular daily talk show Jose Luis Sin Censura . We realize programming synergies between our radio and television assets by leveraging our dominant market presence in Spanish radio by creating music-based variety programs such as Estudio 2. Estudio 2 was the number two Hispanic television program in its time slot in prime time in the Los Angeles market for adults in the aged 18 to 34, 18 to 49 and 25 to 54 demographics during the November 2008 sweeps. Furthermore, we supplement our internally produced programming with purchased programs, primarily Spanish-language movies, which we obtain from producers in Latin America. If we acquire additional television stations, we will be able to further leverage our programming library across a broader base of stations, thereby potentially increasing our profitability.
Capitalize on our valuable programming library
Our internal production of television programming allows us to assemble a valuable programming library that can be exploited at limited additional cost through forming the EstrellaTV television network, syndication and by use on our other stations, DVDs, video on demand, the internet and other formats.
For example, we have entered into affiliation agreements with four television stations in Texas to broadcast our EstrellaTV network on their digital multicast channels: KVEO-TV, an NBC affiliate serving Brownsville-McAllen; KTSM-TV, an NBC affiliate serving El Paso; KWKT-TV, a Fox affiliate serving Waco-Temple; and KETK-TV, an NBC affiliate serving Jacksonville-Tyler-Longview. Collectively, these stations operate in markets that comprise approximately five percent of the U.S. Hispanic population. We expect that these affiliate stations will begin transmitting our programming in the third quarter of 2009. We expect that our percentage of gross advertising revenue from national advertising will continue to increase as we enter into new markets through affiliation agreements.
Acquisition Strategy
Our acquisition strategy focuses on identifying and acquiring selected assets of radio and television stations in the largest, most densely populated and fastest growing U.S. Hispanic markets to build market-leading Hispanic radio and television clusters. While our previous acquisitions have been concentrated in California and Texas, two of our more recent transactions have been the acquisition of certain assets of television stations in Arizona and in Utah. We may also acquire assets of radio and television stations in other U.S. markets that we have yet to enter. Although these stations often do not target the local Hispanic market at the time of acquisition, we believe they can be successfully reformatted to capture this audience. In analyzing our acquisition opportunities, we consider the following criteria for a station:
• | the size and density of the Hispanic population and general economic conditions in the market; |
• | our ability to expand coverage in an existing cluster or develop a new cluster in a market where we believe we can acquire a meaningful share of the Hispanic audience, particularly where we can own both radio and television stations in a market as a result of such acquisition and create the opportunity to cross-promote our new, existing and/or affiliate stations; |
• | our ability to acquire underdeveloped properties that offer the potential for significant improvement in revenues and cash flow through the application of our operating, administrative and programming expertise; and |
• | the power and quality of the station’s broadcasting signal. |
We have built a long-term track record of acquiring and developing underperforming radio and television stations that has enabled us to achieve significant increases in our net revenue over the past decade. Since our inception in 1987, we have acquired and programmed 19 radio stations and 6 television stations. By
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reformatting these 25 stations with our own original Spanish language programming, implementing strict cost controls and providing creative marketing programs to our clients, we believe we have successfully developed and grown our stations in each of our markets. We believe that our record of successfully executing our acquisition strategy in new Hispanic markets will position us to continue creating top-ranked Hispanic station clusters in other Hispanic markets.
Hispanic Market Opportunity
We believe the Hispanic community represents an attractive market for future growth. In 2007, according to the U.S. Census Bureau, the U.S. Hispanic population was the largest and fastest-growing minority group in the United States. According to a survey conducted by Geoscape International, the U.S. Hispanic population grew 34% from 2000 through 2008, accounting for about one-half of all U.S. population growth during that period. By 2013, the U.S. Hispanic population is expected to reach approximately 54.4 million people, or 17% of the total U.S. population. Our recent acquisition of the selected assets of television station KVPA in Phoenix, Arizona provides us access to a Hispanic population that has grown 268% since 1990. Further, according to the 2008 Geoscape International survey, California had the largest Hispanic population of any state in 2008, followed by Texas, the two states in which we primarily operate.
In addition, advertisers have been directing more advertising dollars towards U.S. Hispanics. According to a 2007 study performed by Kagan Research, “Economics of Hispanic TV and Radio in the U.S.”, Hispanic advertising growth is expected to outpace that of the general market, reaching $5.5 billion in gross advertising revenue by 2010.
Spanish-language advertising rates have been rising faster in recent years when compared to the general media, yet these rates are still lower than those for English-language media. As advertisers continue to recognize the buying power of the U.S. Hispanic population, especially in areas where the concentration of Hispanics is very high and where a growing percentage of the retail purchases are made by Hispanic customers, we expect the gap in advertising rates between Spanish-language and English-language media to narrow. As U.S. Hispanic consumer spending continues to grow relative to overall consumer spending, industry analysts expect that advertising expenditures targeted to Hispanics will increase significantly, eventually closing the gap between the current level of advertising targeted to Hispanic stations and the current level of advertising targeted to general market stations.
We believe we are well positioned to capitalize on the growing Hispanic advertising market given the concentration of the Hispanic population in certain markets in the United States and our attractive position in four of the ten largest Hispanic markets in the United States based on Hispanic television households, Los Angeles, Houston, Dallas-Fort Worth and Phoenix, as well as our record of successfully executing our acquisition strategy in new Hispanic markets.
Our Markets
The following table sets forth certain demographic information about the markets in which our radio and television stations operate.
Market | Total Population | Hispanic Population | % Hispanic Population | % Hispanic Population of Mexican Descent | Hispanic Population Growth (7) | ||||||||
Los Angeles(1) | 17,755,322 | 7,807,102 | 44 | % | 81 | % | 63 | % | |||||
Houston(2) | 5,733,861 | 1,904,290 | 33 | % | 77 | % | 147 | % | |||||
Dallas(3) | 6,494,107 | 1,691,688 | 26 | % | 86 | % | 222 | % | |||||
Phoenix(4) | 4,179,427 | 1,271,328 | 30 | % | 88 | % | 268 | % | |||||
San Diego(5) | 2,974,859 | 901,369 | 30 | % | 91 | % | 76 | % | |||||
Salt Lake City(6) | 1,614,098 | 222,305 | 14 | % | 76 | % | 259 | % | |||||
Total U.S. (for comparison) | 301,621,159 | 45,427,437 | 15 | % | 64 | % | 103 | % |
Source: American Community Survey Profile 2007 by the U.S. Census Bureau
(1) | Represents the Los Angeles, Long Beach and Riverside, CA combined statistical area. |
(2) | Represents the Houston combined statistical area. |
(3) | Represents the Dallas-Fort Worth combined statistical area. |
(4) | Represents the Phoenix combined statistical area. |
(5) | Represents the San Diego metropolitan statistical area. |
(6) | Represents the Salt Lake City-Ogden-Clearfield, Utah metropolitan statistical areas. |
(7) | Represents growth from 1990 to 2007. |
Our Radio and Television Stations
The following tables set forth certain information about our radio and television stations and their broadcast markets. For financial information on our radio and television segments, refer to the information in Note 9 to the Consolidated Financial Statements included in Item 15.
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Radio Stations
Market/Station(1) | Market Rank (2) | Hispanic Market Rank (3) | Frequency | Format | ||||
Los Angeles | 2 | 1 | ||||||
KBUE-FM/KBUA-FM/KEBN-FM(4) | 105.5/94.3/94.3 | Regional Mexican | ||||||
KRQB-FM | 96.1 | Regional Mexican | ||||||
KHJ-AM | 930 | Ranchera/Sports | ||||||
KWIZ-FM | 96.7 | Regional Mexican | ||||||
KVNR-AM(5) | 1480 | Time Brokered | ||||||
Houston | 11 | 3 | ||||||
KQQK-FM/KXGJ-FM(6) | 107.9/101.7 | Spanish Pop | ||||||
KTJM-FM/KJOJ-FM(7) | 98.5/103.3 | Regional Mexican | ||||||
KNTE-FM/KQUE-AM/KJOJ-AM(8) | 96.9/1230/880 | Regional Mexican | ||||||
KEYH-AM | 850 | Ranchera/Sports | ||||||
KSEV-AM(5) | 700 | Time Brokered | ||||||
Dallas-Fort Worth | 6 | 6 | ||||||
KNOR-FM | 93.7 | Regional Mexican | ||||||
KBOC-FM | 98.3 | Regional Mexican | ||||||
KTCY-FM | 101.7 | Spanish Pop | ||||||
KZZA-FM | 106.7 | Spanish Dance/Sports | ||||||
KZMP-AM | 1540 | Ranchera/Sports | ||||||
KZMP-FM(5) | 104.9 | Time Brokered |
(1) | Our radio stations are in some instances licensed to communities other than the named principal community for the market. |
(2) | Represents rank among U.S. designated market areas by television households. Designated market areas are geographic markets as defined by A.C. Nielsen Company based on historical television viewing patterns and are updated annually. |
(3) | Represents rank among U.S. Hispanic markets by Hispanic television households. A ranking of 1, for example, means that Los Angeles has the most Hispanic television households in the United States. |
(4) | KBUA-FM and KEBN-FM simulcast the signal of KBUE-FM in the San Fernando Valley and Orange County, respectively. We have upgraded the signals of KBUA-FM and KEBN-FM from 3kW to 6kW, thereby improving our coverage of the Los Angeles market and enabling us to use the stations for purposes other than to simulcast with KBUE-FM, if we so choose. |
(5) | Three of our stations, KVNR-AM, KSEV-AM and KZMP-FM are operated by third parties under time brokerage agreements. We receive a monthly fee from the third parties for the air time and the third parties receive revenues from their sale of advertising spots. |
(6) | KXGJ-FM simulcasts the signal of KQQK-FM. |
(7) | KJOJ-FM simulcasts the signal of KTJM-FM. |
(8) | KNTE-FM (formerly KIOX-FM) is simulcast with KQUE-AM and KJOJ-AM. |
Television Stations
Station | Channel | Market | DMA Rank(1) | Hispanic Market Rank (2) | Number of Hispanic TV Households | |||||
KRCA | 62 | Los Angeles | 2 | 1 | 1,854,810 | |||||
KZJL | 61 | Houston | 11 | 3 | 549,890 | |||||
KMPX | 29 | Dallas-Fort Worth | 6 | 6 | 488,150 | |||||
KVPA | 42 | Phoenix | 12 | 8 | 381,180 | |||||
KSDX | 29 | San Diego | 17 | 13 | 237,690 | |||||
KPNZ | 24 | Salt Lake City | 30 | 29 | 84,430 |
Source: Nielsen Media Research-NSI, January, 2009
(1) | Represents rank among U.S. designated market areas by television households. Designated market areas are geographic markets as defined by A.C. Nielsen Company based on historical television viewing patterns and are updated annually. |
(2) | Represents rank among U.S. Hispanic markets by number of persons in Hispanic TV households. A ranking of 1, for example, means that Los Angeles has the most Hispanic television households in the United States. |
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Programming
Radio. Our Spanish-language radio stations are targeted to the Spanish-speaking portion of the Hispanic population that is dominant in the local markets in which we operate. We tailor the format of each of our radio stations to appeal to a specific target demographic in order to maximize our overall listener base without causing direct format competition among our stations. We determine the optimal format for each of our stations based upon local market research. To create brand awareness and loyalty in the local community, we seek to enhance our market positions by sending on-air talent to participate in local promotional activities, such as concerts and live special events or promotions at client locations and other street level activities. These types of events also provide attractive promotional and advertising opportunities for our clients. We also promote our radio stations during our television programming airing in these markets.
The following provides a brief description of our Spanish-language radio station formats:
• | KBUE-FM/KBUA-FM/KEBN-FM (Que Buena) plays contemporary, up-tempo, regional Mexican music that includes Norteña, Banda, Corrido and Ranchera music. The target audience for these stations is adult listeners aged 18 to 34. The station features morning programming with our nationally recognized radio personality, Don Cheto. |
• | KHJ-AM (La Ranchera) plays traditional Ranchera, also known as Mariachi music, and is the official station of the Los Angeles Dodgers Major League Baseball team. The target audience for this station is adult listeners aged 25 to 54. |
• | KWIZ-FM (La Rockola) plays regional Mexican music that includes Banda, Ranchera and Norteña music. The target audience for this station is adult listeners aged 18 to 49. |
• | KRQB-FM (Que Buena) plays contemporary, up-tempo, regional Mexican music that includes Norteña, Banda, Corrido and Ranchera music. The target audience for this station is adult listeners 18 to 34. The station features morning programming with our nationally recognized radio personality, Don Cheto. |
• | KTJM-FM/KJOJ-FM (La Raza) plays contemporary, up-tempo, regional Mexican music, similar to the music played on Que Buena, which includes Norteña, Banda, Corrido and Ranchera music. The target audience for these stations is adult listeners aged 18 to 34 and the station adjusts its music to the preferences of Hispanics in the Houston market. |
• | KQQK-FM/KXGJ-FM (XO) plays contemporary, up-tempo, Spanish pop music. The target audience for these stations is adult listeners aged 18 to 34. |
• | KEYH-AM (La Ranchera) plays traditional Ranchera music, which is also known as Mariachi, and carries various soccer tournaments, the Houston Rockets National Basketball Association team and the Houston Dynamos Major League Soccer team. The target audience for this station is adult listeners aged 25 to 54. |
• | KNTE-FM/KQUE-AM/KJOJ-AM (El Norte) plays Norteña music from the northern portion of Mexico. The target audience for these stations is adult listeners aged 18 to 49. The station features morning programming with our nationally recognized radio personality, Don Cheto. |
• | KNOR-FM (La Raza) plays contemporary, up-tempo, regional Mexican music, similar to the music played on Que Buena and La Razain Houston, which includes Norteña, Banda, Corrido and Ranchera music. The station adjusts its music to the preferences of Hispanics in the Dallas market. The target audience for this station is adult listeners 18 to 34. The station features morning programming with our nationally recognized radio personality, Don Cheto. |
• | KTCY-FM (XO) plays contemporary, up-tempo, Spanish pop music. The target audience for this station is adult listeners 18 to 34. |
• | KZZA-FM (Casa) plays Spanish dance music. The target audience for this station is bi-lingual Hispanic adult listeners 18 to 34. |
• | KZMP-AM (La Ranchera) plays traditional Ranchera, also known as Mariachi music, and carries various soccer tournaments and the FC Dallas Major League Soccer team. The target audience for this station is adult listeners 25 to 54. |
• | KBOC-FM (La Zeta) plays top 40 regional Mexican music. The target audience for this station is adult listeners 18 to 49. |
Three of our radio stations, KVNR-AM, KSEV-AM and KZMP-FM, are currently operated by third parties under time brokerage agreements. Currently, KVNR-AM, which is in the greater Los Angeles market, broadcasts Vietnamese-language programming. KSEV-AM in Houston broadcasts an English-language talk format that is operated by a local broadcaster. KZMP-FM in Dallas-Fort Worth broadcasts Indian and Pakistani-language programming.
Television. Our programming content consists primarily of internally produced programs such as comedy programs, news, procedural dramas, musical variety shows and a talk show, as well as purchased programs including Spanish-language movies. We own or have the rights to a library of more than 4,500 hours of Spanish-language movies, children’s shows and other programming content available for broadcast on our television stations. Currently we produce over 55 hours of television programming each week.
In February 2009, we entered into affiliation agreements with four television stations in Texas to broadcast our EstrellaTV network on their digital multicast channels: KVEO-TV, an NBC affiliate serving Brownsville-McAllen; KTSM-TV, an NBC affiliate serving El Paso; KWKT-TV, a Fox affiliate serving Waco-Temple; and KETK-TV, an NBC affiliate serving Jacksonville-Tyler-Longview. We expect that these stations will begin transmitting our programming in the third quarter of 2009.
We seek to maximize our television group’s profitability by broadcasting internally produced Spanish-language programming to stations we own and to our affiliated stations, marketing commercial time to advertisers and selling infomercial advertising.
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Production Facilities
We own Empire Burbank Studios, a fully equipped television production complex next to our corporate offices in Burbank, California. We also own studios and production facilities in Houston and Dallas, enabling us to produce local programming in those markets. The studios provide us with all of the physical facilities needed to produce our own Spanish-language television programming without the variable expense of renting these services from an outside vendor. We believe this enables us to produce our programming at a low cost relative to our competitors. By owning our production facilities we are able to control the content of the programs we produce and air. We currently produce the following Spanish-language programs at our Burbank facilities:
• | Noticias 62 En Vivo: three local newscasts airing on KRCA-TV, Channel 62, in Los Angeles that airs every weekday from 12:00 PM to 12:30 PM, 5:00 PM to 5:30 PM and 9:00 PM to 9:30 PM. Our 9:00 PM newscast is anchored by Emmy Award winner, Jesus Javier; |
• | Los Angeles En Vivo: a half-hour live mid-day show featuring two hosts and a team of reporters covering current topics and events, including on-air contests and live product integration from sponsors. The show airs every weekday on KRCA-TV from 12:30 PM to 1:00 PM; |
• | Alarma TV: a fast-paced news program featuring lifestyle stories taken from around the world. This show airs every weekday in Los Angeles and San Diego on KRCA-TV and KSDX-TV, respectively, from 8:00 AM to 8:30 AM, 5:00 PM to 5:30 PM and 10:00 PM to 10:30 PM. The show also airs every weekday in Salt Lake City on KPNZ-TV from 4:00 PM to 4:30 PM and 9:00 PM to 9:30 PM, in Houston on KZJL-TV from 4:30 PM to 5:00 PM and 9:00 PM to 9:30 PM and every weekday in Dallas on KMPX-TV from 4:30 PM to 5:00 PM and 9:00 PM to 9:30 PM; |
• | El Show de Lagrimita y Costel: a musical variety and comedy show hosted by famous father and son comedy/clown team, airing on KRCA-TV and KSDX-TV weekdays from 4:00 PM to 5:00 PM and on KZJL-TV, KMPX-TV and KPNZ-TV weekdays from 3:00 PM to 4:00 PM; |
• | Jose Luis Sin Censura: a fast-paced talk show hosted by well-known Spanish television personality Jose Luis Gonzales that airs every weekday on KRCA-TV and KSDX-TV from 11:00 AM to 12:00 PM and 6:00 PM to 7:00 PM. The show also airs every weekday in Houston, Dallas and Salt Lake City, respectively, on KZJL-TV, KMPX-TV and KPNZ-TV, from 12:00 PM to 1:00 PM and from 5:00 PM to 6:00 PM; |
• | Estudio 2: a musical variety show that features live performances by hit musical artists, a talent search and the performances of famous comedians. The show airs every weekday on KRCA-TV and KSDX-TV from 7:00 PM to 8:00 PM. The show also airs every weekday on KZJL-TV, KMPX-TV and KPNZ-TV from 6:00 PM to 7:00 PM; |
• | Secretos: a half-hour scripted procedural drama program that airs every weekday on KRCA-TV and KSDX-TV from 8:30 AM to 9:00 AM and 9:30 PM to 10:00 PM and on KPNZ-TV from 4:00 PM to 4:30 PM and 8:30 PM to 9:00 PM. The show also airs every weekday on KZJL-TV and KMPX-TV from 4:00 PM to 4:30 PM and from 8:30 PM to 9:00 PM; |
• | Los Chuperamigos: a comedy program which boasts an all-star cast of the best comedians in Mexico, top comedy writers and features a theme song performed by Spanish singing diva, Jenni Rivera. The show airs every weekday on KRCA-TV from 10:30 PM to 11:00 PM and on KZJL-TV, KPMX –TV and KPNZ-TV weekdays from 8:00 PM to 8:30PM; |
• | Noticiero STN: a half-hour national newscast hosted by Jesus Javier, which includes daily stories from STN reporters stationed in various locations throughout Mexico and Central and South America. The show airs every weekday on KRCA-TV and KSDX-TV from 5:30 PM to 6:00 PM. The show also airs every weekday on KZJL-TV, KMPX-TV and KPNZ-TV from 9:30 PM to 10:00 PM; and |
• | A Que No Puedes: an hour-long entertainment game show featuring famous personalities competing for charities by performing challenging physical activities presented by famous actors and who are judged by some of the top celebrities in Latin America. The show airs every weekday on KRCA-TV and KSDX-TV from 8:00 PM to 9:00 PM and on KZJL-TV, KMPX-TV and KPNZ-TV from 1:00 PM to 2:00 PM and from 7:00 PM to 8:00 PM. |
Throughout the year, we also program musical specials based on some of our bigger premier events from different markets. Premios de la Radio is a live, televised special of our musical awards show at the Gibson Amphitheater in Los Angeles. The awards show features some of the top artists in the Hispanic music industry performing and presenting awards. For the first time, our 2008Premios de la Radio received a 7.7 Nielsen rating among Hispanic persons 18-34, which was the number 1 position in Los Angeles for the three hour show that aired from 8 to 11 p.m. Our popular special features programs, the Cinco de Mayo and Fiestas Patrias concerts, are produced and recorded in each of our radio markets. These are daytime music festivals that have drawn crowds in excess of 60,000 and usually feature eight to ten bands.
Sales and Advertising
The majority of our net revenues are generated from the sale of local, regional and national advertising for broadcast on our radio and television stations. For the year ended December 31, 2008, approximately 76% of our gross advertising revenues were generated from the sale of local advertising and approximately 24% of our gross advertising revenues were generated from the sale of regional and national advertising. Local sales are made by our sales staffs located in Los Angeles, Riverside/San Bernardino and Santa Ana, California, Houston and Dallas, Texas and Salt Lake City, Utah. Our national sales are made by our sales staffs in Los Angeles, California, Chicago, Illinois, Miami, Florida, New York, New York and Dallas, Texas. We have recently entered into affiliation agreements to broadcast our internally produced programming on the digital multicast channels of four stations in Texas and we plan on entering into other affiliation agreements in the future. We expect that the majority of advertising revenues we will generate from the affiliate stations will be from national advertisers. As such, we expect that our percentage of advertising revenue from national advertisers will continue to increase.
We believe that advertisers can reach the Hispanic community more cost effectively through radio and television broadcasting than through outdoor advertising and printed advertisements. Advertising rates charged by radio and television stations are based primarily on:
• | A station’s audience share within the demographic groups targeted by the advertisers; |
• | The number of radio and television stations in the market competing for the same demographic groups; and |
• | The supply and demand for radio and television advertising time. |
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A radio or television station’s listenership or viewership is reflected in ratings surveys that estimate the number of listeners or viewers tuned to the station. Each station’s ratings are used by its advertisers to consider advertising with the radio or television station and are used by us to, among other things, chart audience growth, set advertising rates and adjust programming.
Competition
Radio and television broadcasting are highly competitive businesses. The financial success of each of our radio and television stations depends in large part on our ability to increase our market share of the available advertising revenue, the economic health of the market and our audience ratings. In addition, our advertising revenue depends upon the desire of advertisers to reach our audience demographic.
Our Spanish-language radio stations compete against other Spanish-language radio stations in their markets for audiences and advertising revenue. In Los Angeles (including Riverside and San Bernardino Counties), our radio stations compete primarily against Univision Radio, Spanish Broadcasting Systems, Inc. and Entravision Communications Corporation, three of the largest Hispanic group radio station operators in the United States. In both our Houston and Dallas-Fort Worth markets, our radio stations compete primarily against Univision Radio.
Our television stations primarily compete against Univision Communications, Inc. and Telemundo Communications Group, Inc. for audiences and advertising revenue in our Los Angeles, San Diego, Salt Lake City, Houston, Dallas-Fort Worth and Phoenix markets.
Employees
As of December 31, 2008, we had approximately 969 employees, of which approximately 738 were full-time employees. Of the full-time employees, approximately 376 were in television, approximately 330 were in radio and approximately 32 were corporate employees. None of our employees are represented by labor unions, and we have not entered into any collective bargaining agreements. We believe that we maintain good relations with our employees.
REGULATION OF TELEVISION AND RADIO BROADCASTING
General
The Federal Communications Commission (“FCC”) regulates television and radio broadcast stations pursuant to the Communications Act of 1934, as amended (“Communications Act” or “Communications Act of 1934”). Among other things, the FCC:
• | determines the particular frequencies, locations and operating power of stations; |
• | issues, renews, revokes and modifies station licenses; |
• | regulates equipment used by stations; and |
• | adopts and implements regulations and policies that directly or indirectly affect the ownership, changes in ownership, control, operation and employment practices of 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, in the case of 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.
Congress and the FCC have had under consideration or reconsideration, 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 television and radio stations, result in the loss of audience share and advertising revenue for our television and radio broadcast stations or affect our ability to acquire additional television and radio broadcast stations or finance such acquisitions. These matters may include:
• | changes to the license authorization and renewal process; |
• | proposals to impose spectrum use or other fees on FCC licensees; |
• | changes to the FCC’s equal employment opportunity regulations and other matters relating to involvement of minorities and women in the broadcasting industry; |
• | proposals to change rules relating to political broadcasting including proposals to grant free air time to candidates; |
• | changes regarding enforcement of the FCC’s rules on broadcasting indecent or obscene material, including increases in fines and changes in procedures for revocation of licenses; |
• | proposals to require broadcasters to air certain types and quantities of “local” programming; |
• | proposals to ban the broadcast of “violent” material; |
• | new, expanded obligations regarding children’s television programming on digital television channels; |
• | proposals to adopt new public interest obligations on television broadcasters during and after the transition to digital television; |
• | proposals to restrict or prohibit the advertising of beer, wine and other alcoholic beverages; |
• | changes in broadcast multiple ownership, foreign ownership, cross-ownership and ownership attribution policies; |
• | proposals to alter provisions of the tax laws affecting broadcast operations and acquisitions; |
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• | proposals to permit expanded use of FM translator stations, including use by AM stations; and |
• | proposals to reallocate spectrum associated with TV channels 5 and 6 for FM radio broadcasting. |
We cannot predict what changes, if any, might be adopted, nor can we predict what other matters might be considered in the future, nor can we judge in advance what impact, if any, the implementation of any particular proposal or change might have on our business.
FCC Licenses
Television and radio stations operate pursuant to licenses that are granted by the FCC for a term of eight years, subject to renewal upon application to the FCC. During the periods when renewal applications are pending, petitions to deny license renewal applications may be filed by interested parties, including members of the public. The FCC may hold hearings on renewal applications if it is unable to determine that renewal of a license would serve the public interest, convenience and necessity, or if a petition to deny raises a “substantial and material question of fact” as to whether the grant of the renewal applications would be consistent with the public interest, convenience and necessity. However, the FCC is prohibited from considering competing applications for a renewal applicant’s frequency, and is required to grant the renewal application if it finds:
• | that the station has served the public interest, convenience and necessity; |
• | that there have been no serious violations by the licensee of the Communications Act or the rules and regulations of the FCC; and |
• | that there have been no other violations by the licensee of the Communications Act or the rules and regulations of the FCC that, when taken together, would constitute a pattern of abuse. |
If as a result of an evidentiary hearing, the FCC determines that the licensee has failed to meet the requirements for renewal and that no mitigating factors justify the imposition of a lesser sanction, the FCC may deny a license renewal application. Historically, FCC licenses have generally been renewed. We have no reason to believe that our licenses will not be renewed in the ordinary course, although there can be no assurance to that effect. The non-renewal of one or more of our stations’ licenses could have a material adverse effect on our business.
The FCC licenses some television stations as low power television stations. Low power television stations generally operate at lower power and cover a smaller geographic area than full-service television stations, are not entitled to carriage by cable television and direct broadcast satellite operators and must accept interference from, and eliminate interference to, full-service television stations. Our stations in Phoenix (KVPA) and San Diego (KSDX) are low power television stations.
Transfer and Assignment of Licenses
The Communications Act requires prior consent of 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 television or radio broadcast license or a transfer of control of a broadcast licensee, the FCC considers a number of factors pertaining to the licensee including compliance with various rules limiting common ownership of media properties, the “character” of the licensee and those persons holding “attributable” interests therein, the Communications Act’s limitations on foreign ownership and compliance with the FCC rules and regulations.
To obtain the FCC’s prior consent to assign or transfer a broadcast license, appropriate applications must be filed with the FCC. If the application to assign or transfer the license involves a substantial change in ownership or control of the licensee, for example, the transfer or acquisition of more than 50% of the voting equity, 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. If an assignment application does not involve new parties, or if a transfer of control application does not involve a “substantial” change in ownership or control, it is a pro forma application, which is not subject to the public notice and 30-day petition to deny procedure. The regular and pro forma applications are nevertheless subject to informal objections that may be filed any time until the FCC acts on 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 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.
Foreign Ownership Rules
Under the Communications Act, a broadcast license may not be granted to or held by persons who are not U.S. citizens, 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 its capital stock is owned of record or voted by non-U.S. citizens or entities or their representatives, 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 similarly to partnerships, limited liability companies and other business organizations. 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 in excess of these limitations.
Multiple Ownership and Cross-Ownership Rules
The FCC generally applies its other broadcast ownership limits, as described below, to “attributable” interests held by an individual, corporation or other association or entity. 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 positions as an officer or director of a corporate parent of a broadcast licensee.
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.
A time brokerage agreement with another television or radio station in the same market creates an attributable interest in the brokered television or radio station as well for purposes of the FCC’s local television or radio station ownership rules, if the agreement affects more than 15% of the brokered television or radio station’s weekly broadcast hours.
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Debt instruments, non-voting stock, options and warrants for voting stock that have not yet been exercised, insulated limited partnership interests where the limited partner is not “materially involved” in the media-related activities of the partnership and minority voting stock interests in corporations where there is a single holder of more than 50% of the outstanding voting stock whose vote is sufficient to affirmatively direct the affairs of the corporation generally do not subject their holders to attribution.
However, the FCC now applies a rule, known as the equity-debt-plus rule, that causes certain creditors or investors to be attributable owners of a station, regardless of whether there is a single majority shareholder or other applicable exception to the FCC’s attribution rules. Under this rule, a major programming supplier (any programming supplier that provides more than 15% of the station’s weekly programming hours) or a same-market media entity will be an attributable owner of a station if the supplier or same-market media entity holds debt or equity, or both, in the station that is greater than 33% of the value of the station’s total debt plus equity. For purposes of the equity-debt-plus rule, equity includes all stock, whether voting or nonvoting, and, equity held by insulated limited partners in limited partnerships. Debt includes all liabilities, whether long-term or short-term. If a party were to purchase stock which, in combination with other of our debt or equity interests, amounts to more than 33% of the value of one or more of our station’s total debt plus equity and such party were a major programming supplier or held an attributable interest in a same-market media entity, such interest could result in a violation of one of the ownership rules. As a result of such violation, we may be unable to obtain from the FCC one or more authorizations needed to conduct our broadcast business and may be unable to obtain FCC consents for certain future acquisitions unless either we or the investor were to remedy the violation.
The FCC’s ownership rules affect the number, type, and location of broadcast and newspaper properties that we might acquire in the future. The ownership rules now in effect limit the aggregate audience reach of television stations that may be under common ownership, operation and control, or in which a single person or entity may hold office or have more than a specified interest or percentage of voting power, to 39% of the total national audience. FCC rules also place certain limits on common ownership, operation, and control of, or cognizable or “attributable” interests or voting power in:
• | television stations serving the same area (the so-called television “duopoly” rule); |
• | radio stations serving the same area; |
• | television stations and radio stations serving the same area (the radio/television cross ownership rule); and |
• | television and/or radio stations and daily newspapers serving the same area (the newspaper/broadcast cross-ownership ban). |
In September 2003, the FCC relaxed many of its ownership restrictions. In June 2004, the United States Court of Appeals for the Third Circuit rejected many of the Commission’s 2003 rule changes. The court remanded the rules to the Commission for further proceedings and extended a stay on the implementation of the new rules that the court had imposed in September 2003. In December 2007 the FCC adopted a Report and Order that left most of the Commission’s pre-2003 ownership restrictions in place, but made modifications to the newspaper/broadcast cross-ownership restriction. That Order is now the subject of federal court appeals by parties urging more restrictive ownership rules, as well as by parties arguing that the FCC did not go far enough in deregulating.
Local Television Ownership Rule
The FCC’s December 2007 action left in place the Commission’s current local television ownership rules. Under those rules, one entity may own two commercial television stations in a Designated Market Area (“DMA”) as long as no more than one of those stations is ranked among the top four stations in the DMA and eight independently owned, full-power stations will remain in the DMA.
Local Radio Ownership
The Communications Act and the FCC’s rules impose specific limits on the number of commercial radio stations an entity can own in a single market. The FCC’s December 2007 action left in place the Commission’s current local radio ownership rules. Under those rules:
• | in a radio market with 45 or more commercial 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). |
• | in a radio market with between 30 and 44 (inclusive) commercial 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). |
• | in a radio market with between 15 and 29 (inclusive) commercial 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). |
• | in a radio market with 14 or fewer commercial 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. |
In contrast to the other local media ownership rules, the FCC did not attempt to significantly relax its radio rules in 2003. The agency decided to retain these numerical caps, which were set by Congress in the Telecommunications Act of 1996 (“1996 Act”). The FCC did adjust certain aspects of the radio rules, however, by adopting a new definition of a “radio market,” deciding to take noncommercial radio stations into account in its determination of market size and limiting the transferability of existing radio clusters that would not comply with the new regulations. The rule that changes the way in which a radio “market” is defined is now in effect. This rule defines local radio markets using a geographic market approach assigned by Arbitron rather than a signal contour method. Because of the change in market definition, our Houston radio cluster does not comply with the new rules, but the “grandfathering” provisions of the FCC’s new rules permit us to retain it. Consequently, we may not be able to sell our entire Houston radio cluster to a single party in the future. In addition, the radio market definition under the new rules could limit the number of additional radio stations that we can acquire in the Houston market.
Cross-Ownership Restrictions
The newspaper/broadcast cross-ownership rule generally prohibits one entity from owning both a commercial broadcast station and a daily newspaper in the same community as it is not viewed by the FCC to be in the public interest. The radio/television cross-ownership rule allows a party to own one or two TV stations and a varying number of radio stations within a single market. The FCC’s December 2007 decision leaves the newspaper/broadcast and radio/television cross-ownership prohibitions in place, but provides that the Commission will evaluate newly proposed newspaper/broadcast combinations under a non-exhaustive list of four public interest factors. The Commission will apply a presumption that the combination is in the public interest if it is located in a top 20 DMA and involves the combination of
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a newspaper and only one television station or radio station. If the combination involves a television station, the presumption will only apply where the station is not among the top 4 in the DMA and at least eight independently owned and operated newspapers and/or full-power commercial television stations remain in the DMA. All other combinations will be presumed not in the public interest. That negative presumption can be reversed if the combination will result in a new local news source that provides at least seven hours of local news programming or if the property being acquired has failed or is failing.
National TV Ownership Limit
The maximum percentage of U.S. households that a single owner can reach through commonly owned television stations is 39 percent and is not affected by the December 2007 decision.
The FCC’s latest actions concerning media ownership have been challenged in court, and we cannot predict the outcome of this litigation or of threatened Congressional intervention that would void the FCC’s new ownership rules. Our ability to acquire additional television and radio stations, our acquisition strategy and our business may be significantly affected by changes to the multiple ownership and cross-ownership rules, ongoing FCC or Congressional review or amendment to the rules, as well as litigation challenging and possible court action upon the rules.
Because of these multiple and cross-ownership rules, if a shareholder, officer or director of Liberman Broadcasting, Inc. or one of its subsidiaries holds an “attributable” interest in one or more of our stations, that shareholder, officer or director may violate the FCC’s rules if that person or entity also holds or acquires an attributable interest in other television or radio stations or daily newspapers, depending on their number and location. If an attributable shareholder, officer or director of Liberman Broadcasting, Inc. or one of its subsidiaries violates any of these ownership rules, we may be unable to obtain from the FCC one or more authorizations needed to conduct our broadcast business, and may be unable to obtain FCC consents for certain future acquisitions.
Programming and Operation
The Communications Act requires broadcasters to serve the “public interest.” Since 1981, the FCC has gradually relaxed or eliminated many of the more formalized procedures it developed to promote the broadcast of certain types of programming responsive to the needs of a broadcast station’s community of license. Nevertheless, a broadcast licensee continues to be 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 the public about a broadcast station’s programming when it evaluates the licensee’s renewal application, but complaints also may be filed and considered at any time. Stations also must follow various FCC rules that regulate, among other things, political broadcasting, children’s programming, the broadcast of obscene or indecent programming, sponsorship identification, the broadcast of contests and lotteries, certain types of advertising such as for out-of-state lotteries and gambling casinos, and technical operation.
The FCC requires that licensees must not discriminate in hiring practices. In light of a 2001 court ruling that vacated FCC requirements that licensees follow certain specific practices with respect to minority hiring, the FCC has adopted employment-related rules that require licensees to engage in certain recruiting and “outreach” efforts, among other things, and to make several new filings to the FCC. In late 2004, the FCC began monitoring broadcasters’ compliance with equal employment requirements through random audits and targeted investigations.
The FCC rules also prohibit a broadcast 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.
Cable and Satellite Transmission of Local Television Signals
Under FCC regulations, cable systems must devote a specified portion of their channel capacity to the carriage of the signals of local television stations. Television stations may elect between “must-carry rights” or a right to restrict or prevent cable systems from carrying the station’s signal without the station’s permission (retransmission consent). Stations must make this election once every three years, and did so most recently on October 1, 2008. All broadcast stations that made carriage decisions on October 1, 2008 will be bound by their decisions throughout the 2009-2011 cycle and will not be allowed to change their carriage decisions at the end of the digital television transition. The FCC has established a market-specific requirement for mandatory carriage of local television stations by direct broadcast satellite, or DBS, operators, similar to that applicable to cable systems, for those markets in which a DBS carrier provides any local signal. In addition, the FCC has adopted rules relating to station eligibility for DBS carriage and subscriber eligibility for receiving signals. There are also specific statutory requirements relating to satellite distribution of distant network signals to “unserved households” (that is, households that do not receive at least a Grade B signal from a local network affiliate).
We have elected “must carry” status for our Los Angeles, Houston, Dallas-Fort Worth and Salt Lake City stations on cable systems in those designated market areas. These elections will entitle our stations to carriage on those systems until December 31, 2011. We may also enter into retransmission consent agreements for carriage of our stations on certain cable systems.
We have also secured DBS carriage for full-service television stations in the Los Angeles, Houston, Dallas-Fort Worth and Salt Lake City markets through 2011.
In November 2007, the Commission decided that after the digital television transition, cable operators will have two options to ensure that all analog cable subscribers will continue to be able to receive the signals of stations electing must-carry status. Cable operators can choose to either broadcast the signal in digital format for digital customers and “down-convert” the signal to analog format for analog customers, or the cable operator may deliver the signal in digital format to all subscribers as long as the cable operator has ensured that all subscribers with analog service have set-top boxes that will convert the digital signal to analog format.
Time Brokerage Agreements
We have, from time to time, entered into time brokerage agreements giving third parties the right to broker time on our stations. We may also enter into agreements to broker time on stations owned by third parties. Historically, we have only purchased time on stations owned by third parties prior to purchasing selected assets of that station. By using time brokerage agreements, we can provide programming and other services to a station we expect to acquire before we receive all applicable FCC and other governmental approvals. We may also enter into agreements to broker time on stations owned by third parties outside of the acquisition context.
FCC rules and policies generally permit time brokerage agreements if the station licensee retains ultimate responsibility for and control of the applicable station. As a part of that requirement, the licensee of a time-brokered station is required to maintain certain personnel at the time-brokered station. We may not be able to air all of our scheduled programming on a station with which we have time brokerage agreements and we may not receive the anticipated revenue from the sale of advertising for that programming. Likewise, we may not receive the payments from the time brokers to whom we have sold time on our stations.
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Stations may enter into cooperative arrangements known as joint sales agreements. Under the typical joint sales agreement, a station licensee obtains, for a fee, the right to sell substantially all of the commercial advertising on a separately owned and licensed station in the same market. It also involves the provision by the selling party of certain sales, accounting and services to the station whose advertising is being sold. Unlike a time brokerage agreement, the typical joint sales agreement does not involve programming. The Third Circuit, however, upheld the FCC’s 2003 decision to make radio joint sales agreements attributable for multiple ownership purposes, and the new rule took effect in September 2004. The FCC has also initiated a rulemaking proceeding to consider whether television joint sales agreements should be attributable for purposes of its media ownership rules.
As part of its increased scrutiny of television and radio station acquisitions, the Department of Justice has stated publicly that it believes that time brokerage agreements and joint sales agreements could violate the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, if such agreements take effect prior to the expiration of the waiting period under that act. Furthermore, the Department of Justice has noted that joint sales agreements may raise antitrust concerns under Section 1 of the Sherman Antitrust Act and has challenged them in certain locations. The Department of Justice also has stated publicly that it has established certain revenue and audience share concentration benchmarks with respect to television and radio station acquisitions, above which a transaction may receive additional antitrust scrutiny.
Digital Television Services
The FCC has adopted rules for implementing digital television service in the U.S. Implementation of digital television will improve the technical quality of television signals and provide broadcasters the flexibility to offer new services, including, but not limited to, high-definition television and data broadcasting.
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 are allocated a separate channel for digital television operation. When the transition to digital television is complete, stations will be required to operate a single digital television channel and to surrender any other channel on which they previously operated. Federal legislation now specifies June 12, 2009 as the end of the transition, when broadcasters must cease analog operation. Congress could act to change the end-date of the transition.
The FCC adopted timetables that required stations to select their post-transition digital television channels, as well as deadlines for certain stations to increase their digital facilities to operate at full authorized power. Equipment and other costs are associated with these requirements.
We have elected the currently-allotted digital television channels for KZJL-TV and KMPX-TV as their permanent post-transition digital television channels. KPNZ-TV, which does not have an assigned digital channel, will convert to digital operation on its analog channel at the end of the end of the transition. In the case of KRCA-TV, the FCC has allotted a new post-transition digital channel because the current channel has been reallocated for public safety uses. We have completed construction of digital facilities for KZJL-TV and KMPX-TV at full authorized power. KPNZ-TV is not currently operating a digital channel. We have a construction permit for digital facilities for KPNZ-TV which authorizes use of the analog channel. We will complete the conversion to full-power digital operation on the analog channel on June 12, 2009 or by a subsequent date if the transition deadline is extended. In the case of KRCA-TV, we have completed construction of interim digital facilities that meet the FCC’s requirements for operation on its current digital television channel. We will continue to operate those facilities until the end of the transition, when we will be required to complete construction of digital facilities on the new channel allotted for post-transition operation. The FCC has authorized KRCA-TV to construct and operate temporary facilities on the new channel and has extended KRCA-TV’s deadline to complete its full-power permanent digital facilities until August 18, 2009. The temporary facilities on the new channel will result in coverage that exceeds KRCA-TV’s current analog service population and is 98.4 percent of its pre-transition digital service population. We expect the permanent post-transition facilities on the new channel to exceed both its current analog and its pre-transition digital service populations.
Broadcasters may either provide a single DTV signal or “multicast” several lower resolution DTV program streams. Broadcasters also may use some of their digital spectrum to provide non-broadcast “ancillary” services (i.e., subscription video, data transfer or audio signals), provided broadcasters pay the government a fee of five percent of gross revenues received from such services. Under the FCC’s rules relating to must-carry rights of digital broadcasters, which apply to cable and certain DBS systems: (1) broadcasters are not entitled to carriage of both their analog and their digital streams during the transition; (2) digital-only stations are entitled to must-carry rights; and (3) a digital-only station asserting must-carry rights is entitled to carriage of only a single programming stream and other “program related” content, even if the digital-only station multicasts. In November 2007, the FCC decided that after the transition, cable operators must ensure that all analog cable subscribers will continue to be able to receive the signals of stations electing must-carry status. Cable operators can choose either to deliver the signal in digital format for digital customers and “down convert” the signal to analog format for analog customers, or to deliver the signal in digital format to all subscribers but ensure that all subscribers with analog sets have set-top boxes that will convert the digital signal to analog format.
In December 2007, the FCC established policies to facilitate broadcasters’ construction of their final digital facilities by the transition deadline. Additionally, the FCC finalized most broadcasters’ post-transition DTV channel assignments in the Spring of 2008. The FCC also imposed consumer education requirements on broadcasters, effective March 31, 2008. Finally, Congress has charged the National Telecommunications and Information Administration (NTIA) with implementing a $1.5 million program to provide digital converter boxes to American households that do not have DTV sets or television sets connected to cable or satellite.
The FCC currently is considering issues such as whether a licensee’s public interest obligations attach to digital television service as a whole or to individual program streams and the expansion of political candidates’ access to television. We cannot predict the outcome of these proceedings.
Equipment and other costs associated with the transition to digital television, including the necessity of temporary dual-mode operations, the relocation of stations from one channel to another, and the buildout of full-power digital facilities, will impose some near-term financial costs on television stations providing the services. The potential also exists for new sources of revenue to be derived from digital television. We cannot predict the overall effect the transition to digital television might have on our business.
Indecency
Provisions of federal law regulate the broadcast of obscene, indecent or profane material. The FCC has increased its enforcement efforts regarding broadcast indecency and profanity over the past few years. In June 2006, the statutory maximum fine for broadcast indecency material increased from $32,500 to $325,000 per incident. Several judicial appeals of FCC indecency enforcement actions are currently pending, and their outcomes could affect future Commission policies in this area.
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Public Interest Programming
Broadcasters are required to air programming addressing the needs and interests of their communities of license, and to place “issues/programs lists” in their public inspection files to provide their communities with information on the level of “public interest” programming they air.
In November 2007, the FCC adopted an Order imposing new public file and public interest reporting requirements on broadcasters. These new requirements must be approved by the Office of Management and Budget, or the OMB, before they become effective, and the OMB has not yet approved them. Therefore, it is unclear when, if ever, these rules will be implemented. Pursuant to these new requirements, stations with Web sites will be obligated to make certain portions of their public inspection files available online and broadcast notifications on how to access the public file. Stations also will be required to file quarterly a new, standardized form that will track various types and quantities of local programming. The form will require, among other things, information about programming related to local civic affairs, local electoral affairs, public service announcements, and independently-produced programming. The new standardized form will significantly increase recordkeeping requirements for television broadcasters. Several station owners and other interested parties have asked the FCC to reconsider the new reporting requirements and have sought to postpone their implementation. In addition, the Order imposing the new rules is currently on appeal in the U.S. Court of Appeals for the District of Columbia Circuit.
In December 2007, the FCC issued a Report on Broadcast Localism and a Notice of Proposed Rulemaking. The Report tentatively concluded that broadcast licensees should be required to have regular meetings with permanent local advisory boards to ascertain the needs and interests of communities. The Report also tentatively adopted specific renewal application processing guidelines that would require broadcasters to air a minimum amount of local programming. The Report sought comment on a variety of other issues concerning localism including potential changes to the main studio rule, network affiliation rules, and sponsorship identification rules. The period for submitting comments on the rules proposed in this Report closed in June 2008, but the FCC has not yet issued a final Order on the matter. We cannot predict whether the FCC will codify some or all of the specific localism initiatives discussed in the Report.
Equal Employment Opportunity
The FCC’s equal employment opportunity rules generally require broadcasters to engage in broad and inclusive recruitment efforts to fill job vacancies, keep a considerable amount of recruitment data and report much of this data to the FCC and to the public via stations’ public files and websites. The FCC is still considering whether to apply these rules to part-time employment positions. Broadcasters are also obligated not to engage in employment discrimination based on race, color, religion, national origin or sex.
Digital Radio Services
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, which provides multi-channel, multi-format digital radio services in the same bandwidth currently occupied by traditional AM and FM radio services. We may not, however, have the resources to acquire new digital radio technologies or to introduce new services that could compete with other new technologies.
The FCC has also adopted spectrum allocation, licensing and service rules for satellite digital audio radio service. Satellite digital audio radio service systems can provide regional or nationwide distribution of radio programming with fidelity comparable to compact discs. Two companies—Sirius Satellite Radio Inc. and XM Radio—which launched satellite digital audio radio service systems, have merged and are currently providing nationwide service. The FCC also 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 cannot predict the impact of either satellite or terrestrial digital audio radio service on our business.
Radio Frequency Radiation
The FCC has adopted rules limiting human exposure to levels of radio frequency radiation. These rules require applicants for renewal of broadcast licenses or modification of existing licenses to inform the FCC whether the applicant’s broadcast facility would expose people or employees to excessive radio frequency radiation. We believe that all of our stations are in compliance with the FCC’s current rules regarding radio frequency radiation exposure.
Low-Power Radio Broadcast Service
The Commission has adopted rules implementing a new low power FM, or LPFM, service and approximately 800 such stations are in operation. In November 2007, the FCC adopted rules that, among other things, enhance LPFM’s interference protection from subsequently authorized full-service stations. The FCC has also proposed to reduce interference protection to FM stations from LPFM stations operating on certain adjacent frequencies. We cannot predict whether any LPFM stations will interfere with the coverage of our radio stations.
Other Regulations Affecting Broadcast Stations
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 and the FCC has issued a report to Congress recommending that the government assume a greater role in regulating violent program content. We cannot predict the effect of the FCC’s present rules or future actions on our television broadcasting operations.
Finally, Congress and the FCC from time to time consider, and may in the future adopt, new laws, regulations and policies regarding a wide variety of other matters that could affect, directly or indirectly, the operation and ownership of our broadcast properties. In addition to the changes and proposed changes noted above, such matters have included, for example, spectrum use fees, political advertising rates, and potential restrictions on the advertising of certain products such as prescription drugs, beer and wine. Other matters that could affect our broadcast properties include technological innovations and developments generally affecting competition in the mass communications industry, such as direct broadcast satellite service, the continued establishment of wireless cable systems and low power television stations, “streaming” of audio and video programming via the Internet, digital television and radio technologies, the establishment of a low power FM radio service, and telephone company participation in the provision of video programming service.
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The foregoing does not purport to be a complete summary of the Communications Act, other applicable statutes or the FCC’s rules, regulations and policies. Proposals for additional or revised regulations and requirements are pending before, and are considered by, Congress and federal regulatory agencies from time to time. We cannot predict the effect of existing and proposed federal legislation, regulations and policies on our business. Also, several of the foregoing matters are now, or may become, the subject of litigation and we cannot predict the outcome of any such litigation or the effect on our business.
ITEM 1A. | RISK FACTORS |
Risks Related to Our Business
Our television and radio stations have been impacted by the general downturn in the U.S. economy and the local economies of the regions in which we operate and our stations could be adversely affected by other changes in the advertising market as well.
Revenue generated by our television and radio stations depends primarily upon the sale of advertising and is, therefore, subject to various factors that influence the advertising market for the broadcasting industry as a whole. Because advertising is largely a discretionary business expense, advertising expenditures generally tend to decline during an economic recession or downturn, such as the one we are currently experiencing in the U.S. The continuation or worsening of the current financial crisis and recession has had an adverse effect on the advertising market, the industry of the advertisers that advertise on our stations and the fundamentals of our business, results of operations and/or financial position. As a result, in part, of the general economic downturn and the expected lower net revenue growth projections for the broadcast industry, we incurred an $83.6 million increase in non-cash broadcast license charges in the second half of 2008. There can be no assurance that we will not experience any further material adverse effect on our business as a result of the current economic conditions or that the actions of the United States Government, Federal Reserve or other governmental and regulatory bodies for the reported purpose of stabilizing the economy or financial markets will achieve their intended effect. Additionally, some of these actions, including changes in tax laws applicable to advertisers, may adversely affect financial institutions, capital providers, advertisers or other consumers or our financial condition, results of operations or the trading price of our securities. Potential consequences of the continuing current global financial crisis and recession include:
• | the financial condition of companies that advertise on our stations, which may file for bankruptcy protection or face severe cash flow issues, may deteriorate and may result in a significant decline in our advertising revenue; |
• | our ability to borrow capital on terms and conditions that we find acceptable, or at all, may be limited, which could limit our ability to refinance our existing debt; |
• | our ability to pursue the acquisition or divestiture of television or radio assets may be limited, as a result of these factors; |
• | the possibility that our business partners could be negatively impacted and our ability to maintain these business relationships; |
• | the possible further impairment of some or all of the value of our broadcast licenses; and |
• | the possibility that one or more of the lenders under our bank credit facility could refuse to fund its commitment to us or could fail, and we may not be able to replace the financing commitment of any such lenders on favorable terms, or at all. |
Furthermore, because a substantial portion of our revenue is derived from local advertisers, our ability to generate advertising revenue in specific markets is directly affected by local or regional economic conditions. A concentration of stations in any particular market intensifies our exposure to regional economic declines.
In addition, shifts in populations and demographics could adversely affect advertising expenditures. Consequently, our television and radio station revenues are likely to be adversely affected by shifts in Hispanic populations and demographics, a recession or downturn in the economies of Southern California, Phoenix, Houston, Dallas or Salt Lake City or other events or circumstances that adversely affect advertising activity.
Our debt service obligations will require a significant amount of cash and could adversely affect our ability to operate our company successfully and achieve growth through acquisitions.
We currently have a substantial amount of debt. At December 31, 2008, we had total indebtedness of approximately $417.3 million, representing approximately 97% of our total assets.
Based on interest rates as of December 31, 2008 and assuming no additional borrowings or principal payments on LBI Media’s senior revolving credit facility until its maturity on March 31, 2012 or on our other indebtedness, as of December 31, 2008, we would need approximately $323.1 million over the next five years to meet our principal and interest payments under our debt agreements, of which approximately $28.9 million would be due over the next year.
Because we are highly leveraged, we will need to dedicate a substantial portion of our cash flow from operations to pay principal and interest on our debt, which may reduce our ability to fund working capital and to expand our business through capital expenditures, acquisitions and other means. In addition, our senior discount notes began accruing cash interest at a rate of 11% per year on October 15, 2008, with the first payment due on April 15, 2009. Prior to October 15, 2008, our senior discount notes had not been accruing cash interest and instead the accreted value of the notes had been increasing. The interest payments will be payable on April 15 and October 15 of each year until the notes mature on October 15, 2013. As a result of our principal and interest payments on our debt and the debt of our subsidiaries, we may not be able to expand our business or increase our net revenues.
In addition, if we are not able to pay our debts as they become due, we will be required to pursue one or more alternative strategies, such as, refinancing or restructuring our indebtedness, selling additional debt or equity securities or selling assets. The current situation in the global credit markets and the disruption in the normal flow of credit among financial institutions may adversely impact the availability and cost of credit, which could adversely affect our ability to refinance or restructure our debt or obtain any additional financing. There can be no assurances that government responses to the disruptions in the financial and credit markets will restore consumer confidence, stabilize the markets or increase liquidity and the availability of credit. As a result, we may not be able to refinance our debt or issue additional debt or equity securities on favorable terms, if at all, and if we must sell our assets, it may negatively affect our ability to generate net revenues.
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Cancellations or reductions of advertising could adversely affect our results of operations.
We do not generally obtain long-term commitments from our advertisers. As a result, our advertisers may cancel, reduce or postpone orders without penalty, which is more likely in a recessionary period like the one we are currently experiencing. Cancellations, reductions or delays in purchases of advertising could adversely affect our results of operations, especially if we are unable to replace these purchases. While a portion of our expenses are variable, the majority of our operating expenses are relatively fixed. Therefore, unforeseen decreases in advertising sales could have a material adverse impact on our results of operations.
We may suffer a decrease in advertising revenues due to competitive forces.
The success of our radio and television stations is primarily dependent upon their share of overall advertising revenues within their markets. Our stations compete for audiences and advertising revenue directly with other Spanish-language radio and television stations, and many of the owners of those competing stations have greater resources than we do. When two of our largest competitors merged with each other in 2003, the resulting company, with resources greater than ours, became our first competitor to operate both radio and television stations in Los Angeles, Houston and Dallas, markets in which we derive substantially all of our revenues. As the Hispanic population grows in the United States, more stations may begin competing with us by converting to a format similar to that of our stations.
In addition, our stations have experienced increased competition for audiences and advertising revenue with other media, including cable television and to a lesser extent, satellite television, newspapers, magazines, the Internet, portable digital music players and outdoor advertising. Our radio stations also compete with satellite-based radio services. Our failure to offer advertisers effective, high quality media outlets could cause them to allocate more of their advertising budgets to our competitors, which could cause a decrease in our net revenues.
The loss of key personnel could disrupt our business and result in a loss of advertising revenues.
Our success depends in large part on the continued efforts, abilities and expertise of our officers and key employees and our ability to hire and retain qualified personnel. The loss of any member of our management team, particularly either of our founders, Jose and Lenard Liberman, could disrupt our operations and hinder or prevent implementation of our business plan, which could have a material and adverse effect on our business, financial condition and results of operations.
Our growth depends on successfully executing our acquisition strategy.
As we have done in the past, we intend to continue to supplement our internal growth by acquiring media properties that complement or augment our existing markets. We may be unable to identify or complete acquisitions for many reasons, including:
• | competition among buyers; |
• | the need for regulatory approvals, including FCC and antitrust approvals; |
• | revisions to the FCC’s restrictions on cross-ownership and on the number of stations or the market share that a particular company may own or control, locally or nationally; and |
• | the need to raise additional financing, which may be limited by the terms of our debt instruments, including LBI Media’s senior credit facilities and the indentures governing LBI Media’s senior subordinated notes and our senior discount notes. |
If we are unable to successfully execute our acquisition strategy, our growth may be impaired.
In addition, future acquisitions by us could also result in the following consequences:
• | issuances of equity securities; |
�� | incurrence of debt and contingent liabilities; |
• | impairment of our broadcast licenses; and |
• | other acquisition-related expenses. |
Furthermore, after we have completed an acquisition, our management must be able to assume significantly greater responsibilities, which may cause them to divert their attention from our existing operations. We believe that these challenges are more pronounced when we enter new markets rather than expand further in existing markets.
If we cannot successfully develop and integrate our recent and future acquisitions, our financial results could be adversely affected.
To develop and integrate our recent and future acquisitions, we may need to:
• | reformat stations with Spanish-language programming and build advertiser, listener and/or viewer support; |
• | integrate and improve operations and systems and the management of a station or group of stations; |
• | retain or recruit key personnel to manage acquired assets; |
• | realize sales efficiencies and cost reduction benefits from acquired assets; and |
• | operate successfully in markets in which we may have little or no prior experience. |
In addition, there is a risk that the stations we have acquired or may acquire in the future may not enhance our financial performance or yield other anticipated benefits. If we are unable to completely integrate into our business the operations of the properties that we have recently acquired or that we may acquire in the future, our costs could increase. Also, in the event that the operations of a new station do not meet our expectations, we may restructure or write off the value of some portion of the assets of the new station.
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If we are unable to convert acquired stations successfully to a Spanish-language format, anticipated revenues from these acquisitions may not be realized.
Our acquisition strategy has often involved acquiring non-Spanish language stations and converting them to a Spanish-language format. We intend to continue this strategy with our future acquisitions. This conversion process may require a heavy initial investment of both financial and management resources. We may incur losses for a period of time after a format change due to the time required to build up ratings and station loyalty. These format conversions may be unsuccessful in any given market, and we may incur substantial costs and losses in implementing this strategy.
The restrictive covenants in our debt instruments may affect our ability to operate our business successfully.
The indentures governing LBI Media’s senior subordinated notes and our senior discount notes and the terms of LBI Media’s senior credit facilities contain various provisions that limit our ability to, among other things:
• | incur or guarantee additional debt and issue preferred stock; |
• | receive dividends or distributions from our subsidiaries; |
• | make investments and other restricted payments; |
• | issue or sell capital stock of restricted subsidiaries; |
• | grant liens; |
• | transfer or sell assets; |
• | engage in different lines of business; |
• | consolidate, merge or transfer all or substantially all of our assets; and |
• | enter into transactions with affiliates. |
These covenants may affect our ability to operate and finance our business as we deem appropriate. In addition, we are dependent on our subsidiaries for cash, and the covenants in our debt instruments restrict the ability of our subsidiaries to make cash distributions which could affect our ability to meet our cash obligations, including obligations under our indebtedness. If we are unable to meet our obligations as they become due or to comply with various financial covenants contained in the instruments governing our current or future indebtedness, this could constitute an event of default under the instruments governing our indebtedness.
If there were an event of default under the instruments governing our indebtedness, the holders of the affected indebtedness could declare all of that indebtedness immediately due and payable, which, in turn, could cause the acceleration of the maturity of all of our other indebtedness. We may not have sufficient funds available, or we may not have access to sufficient capital from other sources, to repay any accelerated debt. Even if we could obtain additional financing, the terms of the financing may not be favorable to us. In addition, substantially all of LBI Media’s assets are subject to liens securing its senior credit facilities. If amounts outstanding under LBI Media’s senior credit facilities are accelerated, its lenders could foreclose on these liens. Our assets may not be sufficient to repay borrowings under LBI Media’s senior credit facilities and the amounts due under LBI Media’s and our notes in full. Any event of default under the instruments governing our indebtedness could have a material adverse effect on our business, financial condition and results of operations.
Our independent registered public accounting firm will be required to attest to the effectiveness of our internal controls over financial reporting beginning with the year ending December 31, 2009. If material weaknesses in our internal control over financing reporting are identified and not remedied effectively, it could cause our independent registered accounting firm to not be able to provide reasonable assurance regarding the reliability of our financial statements. As a result, our business and reputation may be adversely affected.
Beginning with the year ending December 31, 2007, we have been required to evaluate internal controls over financial reporting in order to allow management to report on the effectiveness of our internal controls over financial reporting as required by Section 404 of the Sarbanes-Oxley Act of 2002, which we refer to as Section 404. Our independent registered public accounting firm will also be required to attest to the effectiveness of our internal controls over financial reporting beginning with the year ending December 31, 2009. Section 404 requires us to, among other things, annually review and disclose the effectiveness of our internal controls over financial reporting, and evaluate and disclose changes in our internal controls over financial reporting quarterly. Internal control over financial reporting is a process to provide reasonable assurance regarding the reliability of financial reporting for external purposes in accordance with accounting principles generally accepted in the U.S. Internal control over financial reporting includes: (i) maintaining reasonably detailed records that accurately and fairly reflect our transactions; and (ii) providing reasonable assurance that we (a) record transactions as necessary to prepare the financial statements, (b) make receipts and expenditures in accordance with management authorizations, and (c) will timely prevent or detect any 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 is not intended to provide absolute assurance that we could prevent or detect a misstatement of our financial statements or fraud.
Management, through documentation, testing and assessment of our internal control over financial reporting concluded that as of December 31, 2007, we had material weaknesses insofar as we did not properly implement and maintain logical security or access controls related to our critical information technology systems, including our general ledger system, payroll system and traffic/revenue application. Because of these material weaknesses, our management concluded that, as of December 31, 2007, we did not maintain effective internal control over financial reporting. In 2008, we remediated these deficiencies and management concluded that our internal control over financial reporting was effective as of December 31, 2008.
In future periods, if the process required by Section 404 of the Sarbanes-Oxley Act reveals material weaknesses or significant deficiencies, the correction of any such material weakness or significant deficiency could require additional remedial measures including additional personnel which could be costly and time-consuming. If a material weakness exists as of a future period year-end (including a material weakness identified prior to year-end for which there is an insufficient period of time to evaluate and confirm the effectiveness of the corrections or related new procedures), our management will be unable to report favorably as of such future period year-end to the effectiveness of our control over financing reporting. If we fail to remedy our material weaknesses or should we, or our independent registered public accounting firm, determine in future fiscal periods that we have additional material weaknesses in our internal control over financial reporting, the reliability of our financial reports may be impacted, and our results of operations or financial condition may be harmed.
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Some of our future actions may require the consent of minority stockholders of our parent.
In connection with the sale of Liberman Broadcasting’s Class A common stock, our parent, Liberman Broadcasting, and stockholders of Liberman Broadcasting entered into an investor rights agreement on March 30, 2007. Pursuant to this investor rights agreement, some of the minority stockholders of Liberman Broadcasting have the right to consent, in their sole discretion, to certain transactions involving us, Liberman Broadcasting, and our subsidiaries, including, among other things, certain acquisitions or dispositions of assets by us, our parent, or our subsidiaries. As a result, we may not be able to complete certain desired transactions if we are unable to obtain the consent of the required stockholders.
We may be adversely affected by disruptions in our ability to receive or transmit programming.
The transmission of programming is subject to risks of equipment failure, including those failures caused by radio or television tower defects and destruction, natural disasters, power losses, low-flying aircraft, software errors or telecommunications errors. Disruption of our programming transmissions may occur in the future and other comparable transmission equipment may not be available. Any natural disaster or extreme climatic event, such as fire, could result in the loss of our ability to broadcast. In September 2008, for example, Hurricane Ike caused substantial damage to several of our broadcast facilities in Texas, and resulted in many advertising cancellations and lost revenue from our inability to broadcast during that period. Also in October 2007, wildfires burned down our San Diego television station’s broadcasting facility, causing a disruption to service in that market until we resumed broadcasting in January 2008.
Further, we own or lease antenna and transmitter space for each of our stations. If we were to lose any of our antenna tower leases or if any of our towers or transmitters were damaged, we may not be able to secure replacement leases on commercially reasonable terms, or at all, which could also prevent us from transmitting our signals. Disruptions in our ability to receive or transmit our broadcast signals could have a material adverse effect on our audience levels, advertising revenues and future results of operations.
If we are unable to maintain our FCC license for any station, we would have to cease operations at that station.
The success of our television and radio operations depends 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. The license renewal applications for our radio stations have been granted by the FCC, and the licenses have been extended through 2013. The license renewal applications for our television stations are pending before the FCC. Any renewal applications submitted by us may not be approved, and the FCC may impose conditions or qualifications that could restrict our television and radio operations. In addition, third parties may challenge our renewal applications.
If we violate the Communications Act of 1934, or the rules and regulations of the FCC, the FCC may issue cease-and-desist orders or admonishments, impose fines, renew a license for less than eight years or revoke our licenses. The FCC has been aggressively enforcing its rules on broadcasting indecent or obscene material, and has stated that, in addition to increased fines, the FCC may initiate license revocation procedures against licensees that broadcast material the FCC considers to be indecent. The FCC has the right to revoke a license before the end of its term for acts committed by the licensee or its officers, directors or stockholders. 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 radio or television station covered by the license, which could have a material adverse effect on our financial condition and results of operations. In addition, Congress, from time to time, considers legislation that addresses the FCC’s enforcement of its rules concerning the broadcast of obscene, indecent, or profane material. Potential changes to enhance the FCC’s authority in this area include the ability to impose additional monetary penalties, consider violations to be “serious” offenses in the context of license renewal applications, and, under certain circumstances, designate a license for hearing to determine whether such license should be revoked. In the event that such legislation is enacted into law, we could face increased costs in the form of fines and a greater risk that we could lose one or more of our broadcasting licenses.
Our failure to maintain our FCC broadcast licenses could cause a default under LBI Media’s senior credit facilities and cause an acceleration of our indebtedness.
LBI Media’s senior credit facilities require us to maintain all of our material FCC licenses. If the FCC were to revoke any of our material licenses, our lenders could declare all amounts outstanding under the senior credit facilities to be immediately due and payable, which would cause a cross-default under the indentures governing LBI Media’s senior subordinated notes and our senior discount notes. If our indebtedness is accelerated, we may not have sufficient funds to pay the amounts owed.
We have a significant amount of intangible assets and we may never realize the full value of our intangible assets. We have recently recorded impairments of our television and radio assets.
Broadcast licenses totaled $292.3 million and $382.6 million at December 31, 2008 and 2007, respectively, primarily attributable to acquisitions in recent years. At the date of these acquisitions, the fair value of the acquired broadcast licenses equaled its book value. At least annually, we test our broadcast licenses for impairment. Impairment may result from, among other things, deterioration in our performance, adverse market conditions, adverse changes in applicable laws and regulations, including changes that restrict the activities of or affect the products or services sold by our businesses and a variety of other factors.
In the third quarter of 2008, we determined that the carrying values of certain radio and television FCC licenses exceeded their fair values and we recognized impairment charges of $34.0 million and $12.7 million, respectively. In the fourth quarter of 2008, we had additional impairment charges of $26.3 million for our radio broadcast licenses, and $18.7 million for our television broadcast licenses, for a total of $91.7 million for the year ended December 31, 2008. Appraisals of any of our reporting units or changes in estimates of our future cash flows could affect our impairment analysis in future periods and cause us to record either an additional expense for impairment of assets previously determined to be impaired or record an expense for impairment of other assets. Depending on future circumstances, we may never realize the full value of our intangible assets. Any determination of impairment of our broadcast licenses could have an adverse effect on our financial condition and results of operations.
Our broadcast licenses could be revoked if more than 25% of our outstanding capital stock is owned of record or voted by non-U.S. citizens, foreign governments or non-U.S. corporations.
Under the Communications Act of 1934, 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 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
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25% of its capital stock is owned of record 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. Because of these restrictions, the licenses for our television and radio 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 in excess of these limitations.
Risks Related to the Television and Radio Industries
Changes in the rules and regulations of the FCC could result in increased competition for our broadcast stations that could lead to increased competition in our markets.
Certain actions by the FCC could cause us to face increased competition in the future. These actions currently include or may include:
• | relaxation of restrictions on the participation by regional telephone operating companies in cable television and other direct-to-home audio and video technologies; |
• | establishment of a Class A television service for low-power stations that makes those stations primary stations and gives them protection against full-service stations; |
• | licensing of low-power FM radio stations designed to serve small localized areas and niche audiences; |
• | competition from direct broadcast satellite television providing the programming of traditional over-the-air stations, including local and out-of-market network stations; |
• | competition from satellite radio companies providing continuous, nationwide digital radio services; and |
• | revision of restrictions on cross-ownership (that is, ownership of both television and radio stations in combination with newspapers in the same market) and caps on the number of stations or market share that a particular company may own or control, locally or nationally. |
The required conversion to digital television may impose significant costs that might not be balanced by consumer demand.
The FCC adopted rules for implementing a digital television service in the U.S. Under these rules, stations are required to build out and begin broadcasting a digital television signal. Federal legislation specifies June 12, 2009 as the date by which stations will be required to operate as a single digital television channel and to surrender any other channels on which they previously operated. Our final costs to convert our television stations to full-service digital television have been significant, and there may not be sufficient consumer demand for digital television services to recover our investment in digital television facilities.
Any change in current laws or regulations that eliminate or limit our ability to require cable systems to carry our full power television stations could result in the loss of coverage in those markets, which could result in a decrease in our market ratings and a potential loss of advertising revenues.
Pursuant to the Cable Television Consumer Protection and Competition Act of 1992, or the 1992 Cable Act, we currently may demand carriage of our full power television stations on a specific channel on cable systems within our local markets. Alternatively, television stations may be carried on cable systems pursuant to retransmission consent agreements negotiated between the television station and the cable operator. Our television stations in Los Angeles, Houston, Dallas-Fort Worth and Salt Lake City currently rely on “must carry” rights to gain access to the local cable. We may acquire other full power television stations that secure cable carriage through retransmission consent agreements. If the current laws or regulations were changed or new laws were adopted that eliminate or limit our ability to require cable systems to carry our full power television stations and/or if we are unable to successfully negotiate for carriage through retransmission consent agreements, this could result in the loss of market coverage of our television stations, which would decrease our market ratings in those cities and potentially result in a decrease in our net advertising revenues or an increase in our operating expenses to maintain the same coverage.
Direct broadcast satellite companies may not continue to carry our local television stations, which could result in a decrease in our market ratings and a potential loss of advertising revenues.
Similar to the 1992 Cable Act, the 1999 Satellite Act requires direct broadcast satellite companies that elect to transmit local television stations to offer all other qualified local television stations in that market. This is known as the “carry one/carry all” rule. We have qualified our television stations in Los Angeles, Houston, Dallas-Fort Worth and Salt Lake City under this rule, and these stations are currently being broadcast on the satellite systems electing to carry local television stations in those markets. Because we rely on the carry one/carry all rule in these markets, if the satellite providers in Los Angeles, Houston, Dallas-Fort Worth or Salt Lake City elect to discontinue transmitting local television stations or if the current laws or regulations were changed or new laws were adopted, this could result in the loss of market coverage of our television stations, which would decrease our market ratings in those cities and potentially result in a decrease in our net advertising revenues or an increase in our operating expenses to maintain the same coverage.
We may have difficulty obtaining regulatory approval for acquisitions in our existing markets and, potentially, new markets.
We have acquired in the past, and may continue to acquire in the future, additional television and radio stations. Revisions to the FCC’s restrictions on the number of stations or market share that a particular company may own or control, locally or nationally, and to its restrictions on cross-ownership (that is, ownership of both television and radio stations in the same market) may limit our ability to acquire additional broadcast properties. The agencies responsible for enforcing the federal antitrust laws, the Federal Trade Commission, or FTC, and the Department of Justice, may investigate certain acquisitions. These agencies have, in certain cases, examined proposed acquisitions or combinations of broadcasters, and in certain cases, required divestiture of one or more stations to complete a transaction.
Any decision by the Department of Justice or FTC to challenge a proposed acquisition could affect our ability to consummate an acquisition or to consummate it on the proposed terms. The FTC or Department of Justice could seek to bar us from acquiring additional television or radio stations in any market where our existing stations already have a significant market share.
We must respond to the rapid changes in technology, services and standards which characterize our industry in order to remain competitive.
The television and radio broadcasting industry is subject to technological change, evolving industry standards and the emergence of new media technologies. Several new media technologies are being employed or developed, including the following:
• | audio programming by cable television systems, direct broadcast satellite systems, Internet content providers and Internet-based audio radio services; |
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• | satellite digital audio radio service with numerous channels and sound quality equivalent to that of compact discs; |
• | In-Band On-Channel ™ digital radio, which provides multi-channel, multi-format digital radio services in the same bandwidth currently occupied by traditional AM and FM radio services; |
• | low-power FM radio, with additional FM radio broadcast outlets that are designed to serve local interests; |
• | streaming video programming delivered via the Internet; |
• | video-on-demand programming offered by cable television and telephone companies; and |
• | digital video recorders with hard-drive storage capacity that offer time-shifting of programming and the capability of deleting advertisements when playing back the recorded programs. |
We may not have the resources to acquire new technologies or to introduce new services that could compete with other new technologies. We may encounter increased competition arising from new technologies. If we are unable to keep pace with and adapt our television and radio stations to these developments, our competitive position could be harmed, which could result in a decrease in our market ratings and a potential decrease in net advertising revenues.
Cautionary Statement Regarding Forward-Looking Statements
This Annual Report on Form 10-K contains forward-looking statements, as defined in the Private Securities Litigation Reform Act of 1995. You can identify these statements by the use of words like “may,” “will,” “could,” “continue,” “expect” and variations of these words or comparable words. Actual results could differ substantially from the results that the forward-looking statements suggest for various reasons. The risks and uncertainties include but are not limited to:
• | our dependence on advertising revenues; |
• | general economic conditions in the United States and in the regions in which operate; |
• | sufficient cash to meet our debt service obligations; |
• | our ability to reduce costs without adversely impacting revenues; |
• | changes in rules and regulations of the FCC; |
• | our ability to attract, motivate and retain salespeople and other key personnel; |
• | our ability to successfully convert acquired radio and television stations to a Spanish-language format; |
• | our ability to maintain FCC licenses for our radio and television stations; |
• | successful integration of acquired radio and television stations; |
• | potential disruption from natural hazards; |
• | our ability to remediate or otherwise mitigate any material weaknesses in internal control over financial reporting or significant deficiencies that may be identified in the future; |
• | our ability to protect our intellectual property rights; |
• | strong competition in the radio and television broadcasting industries; and |
• | our ability to obtain regulatory approval for future acquisitions. |
The foregoing factors are not exhaustive, and new factors may emerge or changes to the foregoing factors may occur that could impact our business. The forward-looking statements in this Annual Report, as well as subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf, are hereby expressly qualified in their entirety by the cautionary statements in this report, including the risk factors noted elsewhere in this Annual Report or other documents that we file from time to time with the Securities and Exchange Commission, particularly Quarterly Reports on Form 10-Q and any Current Reports on Form 8-K. We are not obligated to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
ITEM 1B. | UNRESOLVED STAFF COMMENTS |
Not applicable.
ITEM 2. | PROPERTIES |
The types of properties required to support our radio and television stations include offices, studios and transmitter and antenna sites. Through our indirect, wholly owned subsidiary, we own studio and office space at 1845 West Empire Avenue, Burbank, California 91504. This property is subject to a mortgage in favor of Jefferson Pilot Financial, with whom one of our indirect subsidiaries has entered into a loan agreement. See “Item 7. Management’s Discussion and Analysis of
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Financial Condition and Results of Operations—Liquidity and Capital Resources—Empire Burbank Studios’ Mortgage Note.” We also own studio and office space at 1813 Victory Place, Burbank, California 91504. In addition, we own offices, studio and production facilities in Houston and Dallas, Texas for our operations there. We own a number of our transmitter and antenna sites and lease or license the remainder from third parties. We generally select our tower and antenna sites to provide maximum market coverage. In general, we do not anticipate difficulties in renewing these site leases. We believe our facilities are generally in good condition and suitable for our operations.
ITEM 3. | LEGAL PROCEEDINGS |
In 2008, we began negotiations with Broadcast Music, Inc., or BMI, related to royalties due to BMI in the amount of approximately $1.1 million. As of December 31, 2008, we had reserved approximately $0.6 million related to this dispute. In February 2009, we submitted our third formal offer to settle all amounts due related to all disputed matters with BMI totaling approximately $0.6 million. We believe the remaining portion of the total disputed amounts is attributable primarily to billings related to our time-brokered and simulcast stations, as well as other differences, for which we were improperly billed. BMI has yet to respond to our third offer, and therefore, the parties are continuing their discussions.
In 2008, we also began negotiations with the American Society of Composers, Authors and Publishers, or ASCAP, related to royalties owed to ASCAP. In September 2008, we submitted a formal offer and paid $0.8 million to ASCAP which represented settlement of all music license fees owed to date. Although no formal settlement agreement was obtained from ASCAP, we believe that the matter had been satisfactorily resolved. The settlement resulted in a charge of approximately $0.1 million, as approximately $0.7 million had been previously accrued.
We are subject to pending litigation arising in the normal course of business. While it is not possible to predict the results of such litigation, we do not believe the ultimate outcome of these matters will have a materially adverse effect on our financial positions or results of operations.
ITEM 4. | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS |
No matters were submitted to a vote of our stockholders during the last quarter of our fiscal year ended December 31, 2008.
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ITEM 5. | MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
Market Information and Holders
There is currently no established public trading market for the common stock of LBI Media Holdings, Inc. LBI Media Holdings, Inc. is a wholly owned subsidiary of Liberman Broadcasting, Inc., a Delaware corporation.
Dividends
LBI Media Holdings paid distributions to its parent of $0.3 million and $1.5 million for the years ended December 31, 2008 and 2007, respectively. LBI Media’s senior credit facilities, the indentures governing its senior subordinated notes and LBI Media Holdings’ senior discount notes impose restrictions on the payment of cash dividends or payments on account of or on redemption, retirement or purchase of its common stock or other distributions. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources.”
Securities Authorized for Issuance under Equity Compensation Plans
Not applicable.
Performance Graph
Not applicable.
Recent Sales of Unregistered Securities
LBI Media Holdings did not sell any securities during the fourth quarter of the fiscal year ended December 31, 2008.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
LBI Media Holdings has not reacquired any of its equity securities during the fourth quarter of the fiscal year ended December 31, 2008.
ITEM 6. | SELECTED FINANCIAL DATA |
The following selected financial data is derived from our audited consolidated financial statements. The financial data set forth below should be read in conjunction with, and is qualified in its entirety by, the corresponding audited consolidated financial statements, related notes and Management’s Discussion and Analysis of Financial Condition and Results of Operations included under Item 7 in this annual report.
Year Ended December 31, | ||||||||||||||||||
2008 | 2007 | 2006 | 2005 | 2004 | ||||||||||||||
(in thousands) | ||||||||||||||||||
Consolidated Statement of Operations Data: | ||||||||||||||||||
Net revenues: | ||||||||||||||||||
Radio | $ | 66,694 | $ | 61,239 | $ | 51,394 | $ | 49,882 | $ | 44,780 | ||||||||
Television | 51,011 | 54,428 | 56,572 | 47,620 | 46,655 | |||||||||||||
Total net revenues | 117,705 | 115,667 | 107,966 | 97,502 | 91,435 | |||||||||||||
Operating expenses (exclusive of deferred (benefit) compensation, depreciation and amortization, loss on sale and disposal of property and equipment and impairment of broadcast licenses shown below) | 73,139 | 66,836 | 58,852 | 51,416 | 47,082 | |||||||||||||
Deferred (benefit) compensation | — | (3,952 | ) | 948 | (2,422 | ) | 2,924 | |||||||||||
Depreciation and amortization | 10,013 | 9,006 | 7,079 | 7,164 | 5,125 | |||||||||||||
Loss on sale and disposal of property and equipment | 3,512 | — | — | — | — | |||||||||||||
Impairment of broadcast licenses | 91,740 | 8,143 | 2,844 | 10,282 | — | |||||||||||||
Offering costs (1) | — | — | — | 287 | 1,450 | |||||||||||||
Total operating expenses | 178,404 | 80,033 | 69,723 | 66,727 | 56,581 | |||||||||||||
Operating (loss) income | (60,699 | ) | 35,634 | 38,243 | 30,775 | 34,854 |
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Year Ended December 31, | ||||||||||||||||||||
2008 | 2007 | 2006 | 2005 | 2004 | ||||||||||||||||
(in thousands) | ||||||||||||||||||||
Consolidated Statement of Operations Data (continued): | ||||||||||||||||||||
Gain (loss) on note purchases and redemptions | 12,495 | (8,776 | ) | — | — | — | ||||||||||||||
Interest expense and other income, net | (36,993 | ) | (36,286 | ) | (31,297 | ) | (29,122 | ) | (25,856 | ) | ||||||||||
Interest rate swap expense | (3,433 | ) | (2,410 | ) | (1,784 | ) | — | — | ||||||||||||
Equity in losses of equity method investment | (280 | ) | — | — | — | — | ||||||||||||||
Impairment of equity method investment | (160 | ) | — | — | — | — | ||||||||||||||
Gain on sale of investments | — | — | — | 13 | — | |||||||||||||||
(Loss) gain on sale of property and equipment | — | — | — | (3 | ) | 2 | ||||||||||||||
(Loss) income before income taxes | (89,070 | ) | (11,838 | ) | 5,162 | 1,663 | 9,000 | |||||||||||||
Benefit from (provision for) income taxes | 26,105 | (48,661 | ) | (70 | ) | (162 | ) | (881 | ) | |||||||||||
Net (loss) income from continuing operations | $ | (62,965 | ) | $ | (60,499 | ) | $ | 5,092 | $ | 1,501 | $ | 8,119 | ||||||||
Other Data: | ||||||||||||||||||||
Adjusted EBITDA (2) | $ | 44,566 | $ | 45,189 | $ | 48,166 | $ | 48,221 | $ | 39,980 | ||||||||||
Cash interest expense (3) | $ | 28,929 | $ | 29,653 | $ | 24,050 | $ | 22,950 | $ | 19,979 | ||||||||||
Cash flows provided by operating activities | $ | 15,775 | $ | 7,099 | $ | 25,422 | $ | 23,255 | $ | 23,515 | ||||||||||
Cash flows used in investing activities | $ | (17,537 | ) | $ | (50,288 | ) | $ | (109,617 | ) | $ | (13,458 | ) | $ | (62,441 | ) | |||||
Cash flows provided by (used in) financing activities | $ | 515 | $ | 43,385 | $ | 83,899 | $ | (13,742 | ) | $ | 37,998 |
Year Ended December 31, | |||||||||||||||||
2008 | 2007 | 2006 | 2005 | 2004 | |||||||||||||
(in thousands) | |||||||||||||||||
Balance Sheet Data: | |||||||||||||||||
Cash and cash equivalents | $ | 450 | $ | 1,697 | $ | 1,501 | $ | 1,797 | $ | 5,742 | |||||||
Working capital (deficit) | $ | 2,529 | $ | 4,187 | $ | (7,339 | ) | $ | 2,190 | $ | 10,456 | ||||||
Broadcast licenses, net | $ | 292,343 | $ | 382,574 | $ | 357,870 | $ | 278,536 | $ | 288,810 | |||||||
Total assets | $ | 428,053 | $ | 516,556 | $ | 482,063 | $ | 378,285 | $ | 390,093 | |||||||
Total debt (4) | $ | 417,345 | $ | 422,761 | $ | 413,827 | $ | 319,314 | $ | 327,627 | |||||||
Total stockholder’s (deficiency) equity | $ | (40,806 | ) | $ | 22,401 | $ | 37,254 | $ | 33,995 | $ | 38,287 |
(1) | On February 12, 2004, our parent, Liberman Broadcasting, filed a registration statement on Form S-1 with the Securities and Exchange Commission for a proposed initial public offering of its Class A common stock. The offering was withdrawn and, as a result, approximately $0.3 million and $1.5 million of costs initially deferred in connection with the registration process were written-off in the years ended December 31, 2005 and 2004, respectively. The offering costs were expensed by us, because we advanced the funds used by Liberman Broadcasting to pay the offering costs and a portion of the net proceeds from the offering were to be used to repay borrowings under LBI Media’s senior revolving credit facility. |
(2) | We define Adjusted EBITDA as net income or loss plus income tax expense or benefit, gain or loss on sale and disposal of property and equipment, gain or loss on sale of investments, net interest expense, interest rate swap expense or income, impairment of broadcast licenses, depreciation and amortization and other non-cash gains and losses. Management considers this measure an important indicator of our liquidity relating to our operations because it eliminates the effects of certain non-cash items and our capital structure. This measure should be considered in addition to, but not as a substitute for or superior to, other measures of liquidity and financial performance prepared in accordance with U.S. generally accepted accounting principles, such as cash flows from operating activities, operating income or loss and net income or loss. In addition, our definition of Adjusted EBITDA may differ from those of many companies reporting similarly named measures. |
In determining our Adjusted EBITDA in past years, we treated deferred (benefit) compensation as a non-cash item, because we had the option and the intention to pay such amounts in the common stock of our parent after our parent’s initial public offering. Our first payment became due in 2006, and we had additional payments due in 2007. We determined that we no longer met the conditions necessary to pay the deferred compensation in stock upon our first payment in 2006. Accordingly, we settled our deferred compensation amounts in cash in 2006 and 2007. We have presented prior years’ Adjusted EBITDA to conform to this current treatment. As a result, Adjusted EBITDA for prior years may appear as a different amount from what we have reported in prior years.
We discuss Adjusted EBITDA and the limitations of this financial measure in more detail under “Item 7. Management’s Discussion and Analysis of Finance Condition and Results of Operations—Non-GAAP Financial Measure.”
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The table set forth below reconciles net cash provided by operating activities, calculated and presented in accordance with U.S. generally accepted accounting principles, to Adjusted EBITDA:
Year Ended December 31, | ||||||||||||||||||||
2008 | 2007 | 2006 | 2005 | 2004 | ||||||||||||||||
(in thousands) | ||||||||||||||||||||
Net cash provided by operating activities | $ | 15,775 | $ | 7,099 | $ | 25,422 | $ | 23,255 | $ | 23,515 | ||||||||||
Add: | ||||||||||||||||||||
Gain on sale of investments | — | — | — | — | 46 | |||||||||||||||
Income tax (benefit) expense | (26,105 | ) | 48,661 | 70 | 162 | 881 | ||||||||||||||
Interest expense and other income, net | 36,993 | 36,286 | 31,297 | 29,122 | 25,856 | |||||||||||||||
Less: | ||||||||||||||||||||
Provision for doubtful accounts | (1,906 | ) | (1,376 | ) | (1,330 | ) | (959 | ) | (955 | ) | ||||||||||
Accretion on discount notes | (5,542 | ) | (6,386 | ) | (5,738 | ) | (5,155 | ) | (4,630 | ) | ||||||||||
Amortization of discount on subordinated notes | (251 | ) | (105 | ) | — | — | — | |||||||||||||
Amortization of deferred financing costs | (1,413 | ) | (1,260 | ) | (1,091 | ) | (994 | ) | (883 | ) | ||||||||||
Amortization of program rights | (593 | ) | (565 | ) | (781 | ) | (912 | ) | (1,292 | ) | ||||||||||
Deferred compensation benefit (expense) | — | 3,952 | (948 | ) | 2,422 | (2,924 | ) | |||||||||||||
Offering costs | — | — | — | (287 | ) | (1,450 | ) | |||||||||||||
Changes in operating assets and liabilities: | ||||||||||||||||||||
Cash overdraft | (395 | ) | — | — | — | — | ||||||||||||||
Accounts receivable | 2,370 | 1,660 | 2,800 | 2,648 | 794 | |||||||||||||||
Deferred compensation payments | — | 4,377 | 1,627 | — | — | |||||||||||||||
Program rights | 705 | — | (13 | ) | 325 | 968 | ||||||||||||||
Amounts due from related parties | 61 | (11 | ) | (221 | ) | (460 | ) | 371 | ||||||||||||
Prepaid expenses and other current assets | 696 | (198 | ) | 33 | 49 | 126 | ||||||||||||||
Employee advances | 424 | (59 | ) | — | 353 | 98 | ||||||||||||||
Accounts payable and accrued liabilities | (1,086 | ) | 1,071 | (2,172 | ) | (954 | ) | 264 | ||||||||||||
Accrued interest | (932 | ) | (195 | ) | (537 | ) | (105 | ) | (433 | ) | ||||||||||
Program rights payable | — | — | — | 33 | 36 | |||||||||||||||
Amounts due to related parties | — | — | — | — | 190 | |||||||||||||||
Deferred income taxes | 25,824 | (48,640 | ) | (9 | ) | (100 | ) | (530 | ) | |||||||||||
Other assets and liabilities | (59 | ) | 878 | (243 | ) | (222 | ) | (68 | ) | |||||||||||
Adjusted EBITDA | $ | 44,566 | $ | 45,189 | $ | 48,166 | $ | 48,221 | $ | 39,980 | ||||||||||
Excluding the one-time charge of $7.6 million related to the early redemption premium paid on LBI Media’s 10 1/8% senior subordinated notes in 2007, Adjusted EBITDA for the year ended December 31, 2008 decreased to $44.6 million as compared to $52.8 million for the same period last year. The following is a reconciliation of our Adjusted EBITDA, as reported, to our Adjusted EBITDA excluding this one-time redemption charge:
Twelve Months Ended December 31, | ||||||
2008 | 2007 | |||||
Adjusted EBITDA, as reported | $ | 44,566 | $ | 45,189 | ||
Early redemption premium on 10 1/8% senior subordinated notes | — | 7,594 | ||||
Adjusted EBITDA, excluding one-time redemption charge | $ | 44,566 | $ | 52,783 | ||
(3) | Represents cash paid for interest. Does not include accrued but unpaid interest expense. |
(4) | Total debt does not include the 9% subordinated notes issued by Liberman Broadcasting, Inc., our parent, for the years ended December 31, 2006, 2005 and 2004. These notes were repaid in March 2007 with a portion of the proceeds from the sale of Liberman Broadcasting, Inc.’s Class A common stock. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Sale and Issuance of Liberman Broadcasting’s Class A Common Stock.” |
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ITEM 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Overview
We own and operate radio and television stations in Los Angeles (including Riverside and San Bernardino Counties), California, Houston, Texas and Dallas, Texas and television stations in San Diego, California, Salt Lake City, Utah and Phoenix, Arizona. Our radio stations consist of five FM and two AM stations serving Los Angeles, California and its surrounding areas, five FM and four AM stations serving Houston, Texas and its surrounding areas, and five FM stations and one AM station serving Dallas-Fort Worth, Texas and its surrounding areas. Our six television stations consist of four full-power stations serving Los Angeles, California, Houston, Texas, Dallas-Fort Worth, Texas and Salt Lake City, Utah. We also have two low-power television stations serving the San Diego, California and Phoenix, Arizona markets.
In addition, we operate a television production facility, Empire Burbank Studios, in Burbank, California that we use to produce our core programming for all of our television stations, and we have television production facilities in Houston and Dallas-Fort Worth that allow us to produce programming in those markets as well.
We are also affiliated with certain television stations in Texas, serving the Brownsville-McAllen, El Paso, Waco-Temple and Jacksonville-Tyler-Longview markets.
We operate in two reportable segments, radio and television. We generate revenue from sales of local, regional and national advertising time on our radio and television stations and the sale of time to brokered or infomercial customers on our radio and television stations. Beginning in the third quarter of 2009, we also expect to generate advertising sales on our affiliated stations that will broadcast our internally produced programming. Advertising rates are, in large part, based on each station’s ability to attract audiences in demographic groups targeted by advertisers. Our stations compete for audiences and advertising revenue directly with other Spanish-language radio and television stations, and we generally do not obtain long-term commitments from our advertisers. As a result, our management team focuses on creating a diverse advertiser base, producing cost-effective, locally focused programming, providing creative advertising solutions for clients, executing targeted marketing campaigns to develop a local audience and implementing strict cost controls. We recognize revenues when the commercials are broadcast or the brokered time is made available to the customer. We incur commissions from agencies on local, regional and national advertising, and our net revenue reflects deductions from gross revenue for commissions to these agencies.
Our primary expenses are employee compensation, including commissions paid to our local and national sales staffs, promotion, selling, programming and engineering expenses, general and administrative expenses, and interest expense. Our programming expenses for television consist of costs related to the production of original programming content, production of local newscasts and, to a lesser extent, the acquisition of programming content from other sources. Because we are highly leveraged, we will need to dedicate a substantial portion of our cash flow from operations to pay interest on our debt. We may need to pursue one or more alternative strategies in the future to meet our debt obligations, such as refinancing or restructuring our indebtedness, selling equity securities or selling assets.
We are organized as a Delaware corporation. Prior to March 30, 2007, we were a qualified subchapter S subsidiary as we were deemed for tax purposes to be part of our parent, an S corporation under federal and state tax laws. Accordingly, our taxable income was reported by the stockholders of our parent on their respective federal and state income tax returns. As a result of the sale of Class A common stock of our parent (as described below under “—Sale and Issuance of Liberman Broadcasting’s Class A Common Stock”), Liberman Broadcasting, Inc., a Delaware corporation and successor in interest to LBI Holdings I, Inc., no longer qualified as an S Corporation, and none of its subsidiaries, including us, are able to qualify as qualified subchapter S subsidiaries. Thus, we have been taxed at regular corporate rates since March 30, 2007.
Acquisitions
In December 2008, two of our indirect, wholly owned subsidiaries, KRCA Television LLC and KRCA License LLC, consummated the acquisition of selected assets of low-power television station KVPA-LP, Channel 42, licensed to Phoenix Arizona, from Latin America Broadcasting of Arizona, Inc., pursuant to an asset purchase agreement entered into by the parties in August 2008. The total purchase price of approximately $1.4 million (including approximately $0.1 million in acquisition costs) was primarily paid for in cash. The assets acquired included, among other things, (i) licenses and permits authorized by the Federal and Communications Commission, or FCC, for or in connection with the operation of the station and (ii) transmission and other broadcast equipment used to operate the station. The purchase of these assets marked our first entry into the Phoenix market.
In November 2008, KRCA Television LLC and KRCA License LLC, entered into an asset purchase agreement with Venture Technologies Group, LLC, as seller, pursuant to which we have agreed to acquire selected assets of low-power television station WASA-LP, licensed to Port Jervis, New York, from the seller. The selected assets include, among other things, licenses and permits authorized by the FCC for or in connection with the operation of the station. The total purchase price will be $6.0 million in cash, subject to certain adjustments, of which $0.6 million has been deposited into escrow. Consummation of the acquisition is subject to customary closing conditions and regulatory approval from the FCC.
In September 2008, two of our indirect, wholly owned subsidiaries, Liberman Broadcasting of California LLC and LBI Radio License LLC, as buyers, entered into an asset purchase agreement with Sun City Communications, LLC and Sun City Licenses, LLC, as sellers, or together, Sun City, pursuant to which we agreed to acquire certain assets of radio station KVIB-FM, 95.1 FM, licensed to Phoenix, Arizona, from Sun City. Those assets included, among other things, (i) licenses and permits authorized by the FCC for or in connection with the operation of the station, (ii) antenna and transmitter facilities, (iii) broadcast and other studio equipment used to operate the station, and (iv) contract rights and other intangible assets. The total purchase price was approximately $15.0 million in cash, subject to certain adjustments, of which $0.8 million has been deposited into escrow.
In December 2008, we submitted a formal notice to Sun City to terminate the asset purchase agreement as a result of a material adverse event which we believe to have occurred since we entered into the agreement. As such, we wrote-off approximately $0.3 million in pre-acquisition costs related to this proposed acquisition in the fourth quarter of 2008. We expect to recoup the $0.8 million escrow deposit paid once the agreement has been formally terminated.
In November 2007, KRCA Television LLC and KRCA License LLC, consummated the acquisition of selected assets of television station KPNZ-TV, Ogden, Utah, that was owned and operated by Utah Communications, LLC pursuant to an asset purchase agreement entered into by the parties in May 2007. The selected assets included, among other things, (i) licenses and permits authorized by the FCC for or in connection with the operation of the television station and (ii) broadcast and other television studio equipment used to operate the television station. The purchase of these assets marked our first entry into this market. The total purchase price of approximately $10.0 million was paid in cash through borrowings under LBI Media’s senior secured revolving credit facility.
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In November 2007, Liberman Broadcasting of California LLC and LBI Radio License LLC, entered into an asset purchase agreement with R&R Radio Corporation, as the seller, pursuant to which we have agreed to acquire selected assets of radio station KDES-FM, located in Palm Springs, California, from the seller. The selected assets include, among other things, (i) licenses and permits authorized by the FCC for or in connection with the operation of the station, (ii) transmitter and other broadcast equipment used to operate the station, and (iii) other related assets. We intend to change the programming format and the location of KDES-FM from Palm Springs, California to Redlands, California. The aggregate purchase price will be approximately $17.5 million in cash, subject to certain adjustments, of which $0.5 million has been deposited in escrow. We will pay $10.5 million of the aggregate purchase price to the seller and $7.0 million to Spectrum Scan-Idyllwild, LLC, or Spectrum Scan. As a condition to our purchase of the assets from the seller, Liberman Broadcasting of California has entered into an agreement with Spectrum Scan whereby it will pay $7.0 million to Spectrum Scan in exchange for Spectrum Scan’s agreement to terminate its option to purchase KWXY-FM, located in Cathedral City, California, and Spectrum Scan’s assistance in the relocation of KDES-FM from Palm Springs, California to Redlands, California. Payment to Spectrum Scan is conditioned on the completion of the purchase of the assets from the seller. If we received final FCC approval and the purchase of KDES-FM is not completed, we must pay a $500,000 fee to Spectrum Scan. Consummation of the acquisition is subject to regulatory approval from the FCC, including consent to the relocation of KDES-FM from Palm Springs, California to Redlands, California, and to other customary closing conditions. As of the date of this report, this proposed transaction is still under a review by the FCC. The delay in consummating the acquisition has been the result of an objection filed by a third party.
In September 2007, Liberman Broadcasting of California LLC and LBI Radio License LLC, consummated the acquisition of selected assets of radio station KWIE-FM (currently known as KRQB-FM), 96.1 FM, licensed to San Jacinto, California, from KWIE, LLC, KWIE Licensing LLC and Magic Broadcasting, Inc. pursuant to an asset purchase agreement dated in July 2007. The total purchase price of approximately $25.0 million was paid for in cash primarily through borrowings under LBI Media’s senior secured revolving credit facility. The assets that were acquired included, among other things, (i) licenses and permits authorized by the FCC for or in connection with the operation of the radio station and (ii) broadcast and other studio equipment used to operate the station.
In November 2006, two of our indirect, wholly owned subsidiaries, Liberman Broadcasting of Dallas, Inc. (predecessor in interest to Liberman Broadcasting of Dallas LLC) and Liberman Broadcasting of Dallas License Corp. (predecessor in interest to Liberman Broadcasting of Dallas License LLC), purchased selected assets of five radio stations owned and operated by Entravision Communications Corporation, or Entravision, and certain subsidiaries of Entravision pursuant to an asset purchase agreement dated in August 2006, as amended in November 2006. The total purchase price of the selected radio station assets was approximately $92.5 million and was paid for in cash primarily through borrowings under LBI Media’s senior revolving credit facility. The assets that were acquired included, among other things, (i) licenses and permits authorized by the FCC for or in connection with the operation of each of the radio stations, (ii) tower and transmitter facilities, and (iii) broadcast and other studio equipment used to operate the following five stations: KTCY-FM (101.7 FM, licensed to Azle, TX), KZZA-FM (106.7 FM, licensed to Muenster, TX), KZMP-FM (104.9 FM, licensed to Pilot Point, TX), KZMP-AM (1540 AM, licensed to University Park, TX), and KBOC-FM (98.3 FM, licensed to Bridgeport, TX). The programming of KZMP-FM is provided by, and we anticipate it will continue to be provided by, a third-party broker.
We generally experience lower operating margins for several quarters following the acquisition of radio and television stations. This is primarily due to the time it takes to fully implement our format changes, build our advertiser base and gain viewer or listener support.
From time to time, we engage in discussions with third parties concerning the possible acquisition of additional radio or television stations or related assets. Any such discussions may or may not lead to our acquisition of additional broadcasting assets.
Sale and Issuance of Liberman Broadcasting’s Class A Common Stock
In March 2007, our parent, Liberman Broadcasting, sold shares of its Class A common stock to affiliates of Oaktree Capital Management LLC and Tinicum Capital Partners II, L.P. The sale resulted in net proceeds to Liberman Broadcasting at closing of approximately $117.3 million, after deducting approximately $7.7 million in closing and transaction costs. A portion of these net proceeds were used to repay Liberman Broadcasting’s 9% subordinated notes due 2014 and to redeem related warrants to purchase shares of common stock of the predecessor of Liberman Broadcasting. Liberman Broadcasting contributed approximately $47.9 million of the net proceeds to us, and we, in turn, contributed $47.9 million to LBI Media. LBI Media used the proceeds contributed to it to repay outstanding amounts borrowed under its senior revolving credit facility.
In connection with the sale of Liberman Broadcasting’s Class A common stock, Liberman Broadcasting and its stockholders entered into an investor rights agreement that defines certain rights and obligations of Liberman Broadcasting and the stockholders of Liberman Broadcasting. Pursuant to this investor rights agreement, the investors have the right to consent to certain transactions involving us, Liberman Broadcasting, and our subsidiaries, including:
• | certain acquisitions or dispositions of assets by us, Liberman Broadcasting and our subsidiaries that are consummated on or after September 30, 2009; |
• | certain transactions between us, Liberman Broadcasting and our subsidiaries, on the one hand, and Jose Liberman, our chairman and president and LBI Media’s chairman and president, Lenard Liberman, our executive vice president and secretary and LBI Media’s executive vice president and secretary, or certain of their respective family members, on the other hand; |
• | certain issuances of equity securities to employees or consultants of ours, Liberman Broadcasting, and our subsidiaries; |
• | certain changes in the compensation arrangements with Jose Liberman, Lenard Liberman or certain of their respective family members; |
• | material modifications in our business strategy and the business strategy of Liberman Broadcasting and our subsidiaries; |
• | commencement of a bankruptcy proceeding related to us, Liberman Broadcasting, and our subsidiaries; |
• | certain issuances of new equity securities to the public prior to March 30, 2010; |
• | certain changes in Liberman Broadcasting’s corporate form of to an entity other than a Delaware corporation; |
• | any change in Liberman Broadcasting’s auditors to a firm that is not a big four accounting firm; and |
• | certain change of control transactions. |
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Refinancing of LBI Media Senior Subordinated Notes
In July 2007, LBI Media issued approximately $228.8 million aggregate principal amount of 8 1/2% Senior Subordinated Notes that mature in 2017, resulting in gross proceeds of approximately $225.0 million and net proceeds of approximately $221.6 million after certain transaction costs. The net proceeds of the 8 1/2% senior subordinated notes were used to redeem LBI Media’s 10 1/8% senior subordinated notes due 2012, to repay a portion of the borrowings under LBI Media’s senior revolving credit facility and for general corporate purposes. The 10 1/8% senior subordinated notes were redeemed in full in August 2007. See “—Liquidity and Capital Resources” for more information on the 8 1/2% senior subordinated notes.
Results of Operations
Separate financial data for each of our operating segments is provided below. We evaluate the performance of our operating segments based on the following:
Year Ended December 31, | |||||||||||
2008 | 2007 | 2006 | |||||||||
(in thousands) | |||||||||||
Net revenues: | |||||||||||
Radio | $ | 66,694 | $ | 61,239 | $ | 51,394 | |||||
Television | 51,011 | 54,428 | 56,572 | ||||||||
Total | $ | 117,705 | $ | 115,667 | $ | 107,966 | |||||
Total operating expenses before depreciation and amortization, loss on sale and disposal of property and equipment, impairment of broadcast licenses and deferred (benefit) compensation: | |||||||||||
Radio | $ | 34,617 | $ | 30,766 | $ | 24,494 | |||||
Television | 38,522 | 36,070 | 34,358 | ||||||||
Total | $ | 73,139 | $ | 66,836 | $ | 58,852 | |||||
Depreciation and amortization: | |||||||||||
Radio | $ | 5,099 | $ | 4,057 | $ | 2,862 | |||||
Television | 4,914 | 4,949 | 4,217 | ||||||||
Total | $ | 10,013 | $ | 9,006 | $ | 7,079 | |||||
Loss on sale and disposal of property and equipment: | |||||||||||
Radio | $ | 1,361 | $ | — | $ | — | |||||
Television | 2,151 | — | — | ||||||||
Total | $ | 3,512 | $ | — | $ | — | |||||
Impairment of broadcast licenses: | |||||||||||
Radio | $ | 60,340 | $ | 8,143 | $ | 1,244 | |||||
Television | 31,400 | — | 1,600 | ||||||||
Total | $ | 91,740 | $ | 8,143 | $ | 2,844 | |||||
Deferred (benefit) compensation: | |||||||||||
Radio | $ | — | $ | (3,952 | ) | $ | 948 | ||||
Television | — | — | — | ||||||||
Total | $ | — | $ | (3,952 | ) | $ | 948 | ||||
Operating (loss) income: | |||||||||||
Radio | $ | (34,723 | ) | $ | 22,225 | $ | 21,845 | ||||
Television | (25,976 | ) | 13,409 | 16,398 | |||||||
Total | $ | (60,699 | ) | $ | 35,634 | $ | 38,243 | ||||
Adjusted EBITDA (1): | |||||||||||
Radio | $ | 32,077 | $ | 34,425 | $ | 25,951 | |||||
Television | 12,489 | 18,358 | 22,215 | ||||||||
Corporate | — | (7,594 | ) | — | |||||||
Total | $ | 44,566 | $ | 45,189 | $ | 48,166 | |||||
Total assets: | |||||||||||
Radio | $ | 266,040 | $ | 318,554 | $ | 295,338 | |||||
Television | 134,771 | 172,542 | 162,803 | ||||||||
Corporate | 27,242 | 25,460 | 23,922 | ||||||||
Total | $ | 428,053 | $ | 516,556 | $ | 482,063 | |||||
(1) | We define Adjusted EBITDA as net income or loss plus income tax expense or benefit, gain or loss on sale and disposal of property and equipment, gain or loss on sale of investments, net interest expense, interest rate swap expense or income, impairment of broadcast licenses, depreciation and amortization and other non-cash gains and losses. For the year ended December 31, 2007, other non-cash losses includes a $1.2 million charge related to the write off of unamortized deferred financing costs associated with LBI Media’s former 10 1/8% senior subordinated notes, which were redeemed in August 2007. See footnote (2) under “Item 6. Selected Financial Data” for a reconciliation of Adjusted EBITDA to net cash provided by operating activities. We discuss Adjusted EBITDA and the limitations of this financial measure in more detail under “—Non-GAAP Financial Measures.” |
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Year Ended December 31, 2008 Compared to Year Ended December 31, 2007
Net Revenues. Net revenues increased by $2.0 million, or 1.8%, to $117.7 million for the year ended December 31, 2008, from $115.7 million in 2007. This increase was primarily attributable to increased advertising revenue in all of our radio markets and incremental revenue from our Salt Lake City television station, which we acquired in November 2007. These gains were partially offset by declines in our California and Texas television markets, primarily resulting from lower infomercial advertising, cancellations in Texas resulting from the impact of Hurricane Ike and the general decline in the advertising industry due to the downturn in the U.S. economy.
Net revenues for our radio segment increased by $5.5 million, or 8.9%, to $66.7 million for the year ended December 31, 2008, from $61.2 million for the same period in 2007. This increase was attributable to growth in all of our radio markets—Los Angeles, Dallas and Houston—reflecting improved station ratings and increased national advertiser acceptance of our station formats.
Net revenues for our television segment decreased by $3.5 million, or 6.3%, to $51.0 million for the year ended December 31, 2008, from $54.5 million in 2007. This decrease was attributable to lower advertising revenue in our California and Texas markets, due to the downturn in the local and U.S. economies, partially offset by incremental advertising revenue in our Utah market.
We currently anticipate full year net revenue to decline in 2009, as compared to 2008 in both our radio and television segments as a result of the downturn in the U.S. economy, which has negatively impacted the advertising market.
Total operating expenses. Total operating expenses increased by $98.4 million, or 122.9%, to $178.4 million for the year ended December 31, 2008 from $80.0 million for the same period in 2007. This increase was primarily attributable to:
(1) | an $83.6 million increase in non-cash broadcast license impairment charges, primarily due to (a) lower net revenue growth projections for the broadcast industry, (b) an increase in discount rates and (c) a decline in cash flow multiples for recent station sales; |
(2) | a $4.0 million decrease in deferred compensation benefit, reflecting the impact of an accrual reduction that we recorded in 2007; |
(3) | a $3.5 million increase in loss on sale and disposal of property and equipment of which (a) $2.8 million related to the write-off of obsolete property and equipment primarily in our Texas market and (b) $0.6 million reflects the damage caused by Hurricane Ike in September 2008; |
(4) | a $3.2 million increase in selling, general and administrative expenses primarily reflecting (a) higher corporate expenses, including increases in salaries, professional fees and pre-acquisition costs, (b) additional expenses related to our radio station in the Riverside and San Bernardino region of our Los Angeles market and our television station in Salt Lake City, each acquired in the second half of 2007 and (c) higher selling expenses associated with the overall increase in net revenues; |
(5) | a $2.7 million increase in programming and technical expenses primarily related to (a) increased production of new in-house television programs, (b) higher music license fees, including charges associated with the settlement of a royalty dispute with ASCAP, and (c) incremental expenses related to our Salt Lake City television station that we acquired in November 2007; |
(6) | a $1.0 million increase in depreciation and amortization primarily due to incremental depreciation relating to our 2007 asset acquisitions and two radio tower sites in Texas that we completed construction on in the fourth quarter of 2007; and |
(7) | a $0.4 million increase in promotional expenses, primarily reflecting new events that our radio stations conducted in 2008. |
As noted in (2) above, the increase in total operating expenses was partially attributable to a $4.0 million decrease in deferred compensation benefit because the amounts that were ultimately paid to two employees in 2007 were less than the amounts that had been accrued at December 31, 2006. Our deferred compensation liability can increase in future periods based on changes in an employee’s vesting percentage, which is based on time and performance measures, and can increase or decrease in future periods based on changes in the net value of our parent, Liberman Broadcasting, Inc. See “—Critical Accounting Policies—Deferred Compensation”.
We expect that our total operating expenses, before consideration of any impairment charges and adjustments to deferred compensation expense or benefit, will be relatively flat in 2009 as compared to 2008. Although we anticipate higher programming costs for our television segment reflecting increased production of new in-house television programs, we expect that the increase in these costs will be offset by lower sales commissions and administrative expenses resulting from lower advertising revenues and operating cost reductions. However, this expectation could be negatively impacted by the number and size of additional radio and television assets that we acquire, if any, during 2009.
Total operating expenses for our radio segment increased by $62.4 million, or 160.0%, to $101.4 million for the year ended December 31, 2008, from $39.0 million in 2007. This increase was primarily attributable to:
(1) | a $52.2 million increase in non-cash broadcast license impairment charges, primarily due to (a) lower net revenue growth projections for the broadcast industry, (b) an increase in discount rates and (c) a decline in cash flow multiples for recent station sales; |
(2) | a $4.0 million decrease in deferred compensation benefit, reflecting the impact of the accrual reduction that we recorded in 2007; |
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(3) | a $2.5 million increase in selling, general and administrative expenses, primarily due to (a) higher corporate expenses, including increases in salaries, professional fees and pre-acquisition costs, (b) additional expenses related to our radio station in the Riverside and San Bernardino region of our Los Angeles market, that we acquired in the second half of 2007 and (c) additional selling expenses incurred for our Texas radio stations, reflecting the overall growth in net revenue in that market; |
(4) | a $1.3 million increase in loss on sale and disposal of property and equipment of which (a) $0.7 million relates to the write-off of obsolete transmission equipment and (b) $0.6 million reflects the damage caused by Hurricane Ike in September 2008; |
(5) | a $1.1 million increase in programming and technical expenses primarily related to (a) higher music license fees, including charges associated with the settlement of a royalty dispute with ASCAP, (b) additional expenses related to our radio station in the Riverside and San Bernardino region of our Los Angeles market acquired in September 2007, and (c) an increase in market research costs; |
(6) | a $1.0 million increase in depreciation and amortization primarily due to incremental expenses relating to our 2007 asset acquisitions and two radio tower sites in Texas that we completed construction on in the fourth quarter of 2007; and |
(7) | a $0.3 million increase in promotional expenses, primarily reflecting new events that our radio stations conducted in 2008. |
Total operating expenses for our television segment increased by $36.0 million, or 87.7%, to $77.0 million for the year ended December 31, 2008, from $41.0 million for the same period in 2007. This increase was primarily due to:
(1) | a $31.4 million increase in non-cash broadcast license impairment charges, primarily due to (a) lower net revenue growth projections for the broadcast industry, (b) an increase in discount rates and (c) a decline in cash flow multiples for recent station sales; |
(2) | a $2.2 million loss on disposal of property and equipment, primarily related to the write-off of obsolete transmission equipment in our Texas market; |
(3) | a $1.6 million increase in programming and technical expenses primarily related to (a) an increase in the production of new in-house television programs, (b) higher music license fees, including charges associated with the settlement of a royalty dispute with ASCAP, and (c) incremental expenses for our Salt Lake City television station acquired in November 2007; |
(4) | a $0.7 million increase in selling, general and administrative expenses, primarily reflecting higher corporate expenses, including increases in salaries, professional fees and pre-acquisition costs; and |
(5) | a $0.1 million increase in promotional expenses. |
Gain (loss) on note purchases and redemptions.In the fourth quarter of 2008, we purchased in various open market transactions, approximately $22.0 million aggregate principal amount of our outstanding 11% senior discount notes at a weighted average redemption price of 43.321% of face value. As such, the purchase resulted in a pre-tax gain of approximately $12.5 million (see “Liquidity and Capital Resources—Senior Discount Notes”). No such purchases occurred in 2007.
In July 2007, LBI Media deposited amounts in trust to redeem all of its outstanding 10 1/8% senior subordinated notes at a redemption price of 105.0625% of the outstanding principal amount, plus accrued and unpaid interest to August 22, 2007, the redemption date. In connection with the redemption of these notes, we recorded a loss of $8.8 million, which represents the early redemption premium on the notes of $7.6 million, and the write-off of the unamortized deferred financing costs related to these notes of $1.2 million (see “—Liquidity and Capital Resources—LBI Media’s 10 1/8% Senior Subordinated Notes”). No such redemptions occurred in 2008.
Interest expense and other income, net. Interest expense and other income, net, increased by $0.7 million, or 1.9%, to $37.0 million for the year ended December 31, 2008, from $36.3 million for the corresponding period in 2007. Excluding $0.6 million of interest earned on amounts deposited in escrow prior to redeeming LBI Media’s former 10 1/8% senior subordinated notes, interest expense and other income, net, increased by $0.1 million. As a result of the asset acquisitions we completed in 2007 and the $10.0 incremental borrowing under LBI Media’s term loan facility in January 2008, our average debt balance increased in 2008 as compared to 2007. Although our average interest rates in 2008 were lower than the 2007 rates, and did not offset the higher average debt balance.
Our interest expense may increase in 2009 if we borrow additional amounts under LBI Media’s senior revolving credit facility to acquire additional radio or television station assets, including the acquisition of the selected assets of radio station KDES-FM from R&R Radio Corporation and television station WASA-LP from Venture Technologies Group, LLC. See “—Acquisitions.”
Interest rate swap expense. Interest rate swap expense increased by $1.0 million, or 42.4%, to $3.4 million for the year ended December 31, 2008, from $2.4 million for the same period of 2007. This increase reflects the change in the fair market value of our interest rate swap during the year.
Equity in losses of equity method investment. In April 2008, one of our indirect, wholly owned subsidiaries purchased a 30% interest in PortalUno, Inc., or PortalUno, a development stage, online search engine for the Hispanic community. Equity in losses of equity method investment of $0.3 million for the year ended December 31, 2008 represents our share of PortalUno’s loss during the period.
Impairment of equity method investment. In the third quarter of 2008, we tested our equity investment in PortalUno for impairment. Based on this analysis, including the overall decline in market conditions facing the U.S. economy, we determined that an other-than-temporary decline in the estimated fair value of the investment had occurred. As such, during the year ended December 31, 2008, we recorded a $0.2 million impairment charge to reduce the carrying value of the investment to its estimated fair value.
Benefit from (provision for) income taxes. During the year ended December 31, 2008, we recognized an income tax benefit of $26.1 million as compared to an income tax provision of $48.7 million for the same period in 2007. As described above under “—Sale and Issuance of Liberman Broadcasting’s Class A Common Stock,” certain investors purchased shares of our parent’s Class A common stock in March 2007. As a result, our parent no longer qualified as an S corporation and we and our subsidiaries no longer qualified as qualified subchapter S corporations. Accordingly, we recorded a one-time non-cash charge of $46.8 million to adjust our deferred tax accounts during the year ended December 31, 2007. The change in our income tax benefit (provision) also resulted from the impact of the $83.6 million increase in broadcast license impairment charges, as described above.
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Net loss. We recognized a net loss of $63.0 million for the year ended December 31, 2008, as compared to a net loss of $60.5 million for the same period of 2007, a decrease of $2.5 million. The change was primarily attributable to the $83.6 million increase in broadcast license impairment charges, partially offset by (a) the $74.8 million change in income tax benefit (provision) and (b) the $21.3 million change in gain (loss) on note purchases and redemptions, as described above.
Adjusted EBITDA. Adjusted EBITDA decreased by $0.6 million, or 1.4%, to $44.6 million for the year ended December 31, 2008, as compared to $45.2 million for the same period in 2007. This change primarily reflects increases in programming and technical, selling, general and administrative expenses and a decrease in deferred compensation benefit, partially offset by increased advertising revenue. However, excluding the one-time $7.6 million charge related to the early redemption premium paid on LBI Media’s former 10 1/8% senior subordinated notes in 2007, Adjusted EBITDA decreased 15.6% to $44.6 million, as compared to $52.8 million in 2007. The following is a reconciliation of our Adjusted EBITDA, as reported, to our Adjusted EBITDA excluding this one-time redemption charge:
Twelve Months Ended December 31, | ||||||
2008 | 2007 | |||||
Adjusted EBITDA, as reported | $ | 44,566 | $ | 45,189 | ||
Early redemption premium on 10 1/8% senior subordinated notes | — | 7,594 | ||||
Adjusted EBITDA, excluding one-time redemption charge | $ | 44,566 | $ | 52,783 | ||
Adjusted EBITDA for our radio segment decreased by $2.3 million, or 6.8%, to $32.1 million for the year ended December 31, 2008, as compared to $34.4 million in 2007. The decrease was primarily the result of (a) the decrease in deferred compensation benefit and (b) the increase programming and technical and selling, general and administrative expenses, partially offset by increased advertising revenue, as discussed above.
Adjusted EBITDA for our television segment decreased by $5.9 million, or 32.0%, to $12.5 million for the year ended December 31, 2008, from $18.4 million for the same period in 2007. This decrease was primarily the result of lower advertising revenue and increased programming and technical expenses, as discussed above.
For a reconciliation of Adjusted EBITDA to net cash provided by operating activities, see footnote (2) under “Item 6. Selected Financial Data.”
Year Ended December 31, 2007 Compared to Year Ended December 31, 2006
Net Revenues. Net revenues increased by $7.7 million, or 7.1%, to $115.7 million for the year ended December 31, 2007, from $108.0 million in 2006. The increase was primarily attributable to increased advertising revenue from our Los Angeles and Dallas radio markets.
Net revenues for our radio segment increased by $9.8 million, or 19.1%, to $61.2 million for the year ended December 31, 2007, from $51.4 million for the same period in 2006. Increases in revenue at our new and existing Dallas radio stations were augmented by an increase in revenues at our Los Angeles radio stations. The increase in our advertising revenue in Dallas was partially due to increases in our audience and the acceptance by advertisers of our newly formatted stations in Dallas.
Net revenues for our television segment decreased by $2.1 million, or 3.7%, to $54.5 million for the year ended December 31, 2007, from $56.6 million in 2006. This decrease was attributable to lower advertising revenue in our California markets, which were partially offset by increased advertising revenue in our Texas markets.
Total operating expenses. Total operating expenses increased by $10.3 million, or 14.8%, to $80.0 million for the year ended December 31, 2007 from $69.7 million for the same period in 2006. This increase was primarily attributable to:
(1) | a $5.3 million increase in broadcast license impairment charges, primarily related to our Dallas radio properties; |
(2) | a $4.4 million increase in programming and technical expenses primarily related to additional production of in-house television programs and additional expenses for our new Dallas radio stations that we acquired in November 2006; |
(3) | a $3.5 million increase in selling, general and administrative expenses due to (a) higher salaries, commissions and other selling expenses, attributable to increased staffing associated with our growth in net revenues, (b) start-up costs and additional expenses related to our new Dallas stations and our newly acquired radio station in the Riverside and San Bernardino region of our Los Angeles market, including $0.4 million in local marketing agreement fees for time purchased on the station prior to its acquisition by us in September, and (c) a $0.5 million reserve recorded in connection with a settlement agreement for certain legal matters; |
(4) | a $1.9 million increase in depreciation and amortization primarily due to increased capital expenditures for existing properties and the write off of broadcast equipment associated with our San Diego television station resulting from the Southern California wildfires in October 2007; and |
(5) | a $0.1 million increase in promotional expenses. |
The increases in operating expenses were partially offset by a $4.9 million decrease in deferred compensation expense because the amounts that were ultimately paid to two employees in the first and third quarters of 2007 were less than the amounts that had been accrued at December 31, 2006.
Approximately $11.5 million of the increase in total operating expenses was attributable to our newly acquired Dallas stations, which we began operating in November 2006. Operating expenses attributable to our new Dallas radio stations included $7.5 million in impairment charges to our broadcast licenses that we recorded in the third and fourth quarters of 2007.
Total operating expenses for our radio segment increased by $9.5 million, or 32.2%, to $39.0 million for the year ended December 31, 2007, from $29.5 million in 2006. This increase was primarily attributable to:
(1) | a $6.9 million increase in impairment charges relating to our Dallas radio broadcast licenses as compared to impairment charges relating to our Dallas and Houston broadcast stations during the same period in 2006; |
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(2) | a $3.5 million increase in selling, general and administrative expenses, primarily due to increased salaries, including new personnel and start-up costs in connection with our new Dallas stations and our newly acquired radio station in the Riverside and San Bernardino region of our Los Angeles market, including $0.4 million in local marketing agreement fees for time purchased on the station prior to its acquisition by us in September; |
(3) | a $2.2 million increase in programming and technical expenses primarily attributable to the reformatting and programming of our new Dallas stations; |
(4) | a $1.2 million increase in depreciation and amortization primarily due to increased capital expenditures for existing properties; and |
(5) | a $0.6 million increase in promotional expenses partially attributable to increased activity in our Dallas market to promote our newly acquired and reformatted stations. |
These increases were partially offset by a $4.9 million decrease in deferred compensation expense because the amounts that were ultimately paid to two employees in 2007 were less than the amounts that had been accrued at December 31, 2006.
Approximately $11.5 million of the increase in operating expenses for our radio segment were attributable to our new Dallas radio stations, the assets of which were acquired in November 2006. Operating expenses attributable to our new Dallas radio stations included impairment charges to our broadcast licenses of $7.5 million that we recorded in the third and fourth quarters of 2007.
Total operating expenses for our television segment increased by $0.8 million, or 2.0%, to $41.0 million for the year ended December 31, 2007, from $40.2 million for the same period in 2006. This increase was primarily due to:
(1) | a $2.2 million increase in programming and technical expenses related to the additional production of in-house programming; and |
(2) | a $0.7 million increase in depreciation and amortization primarily due to increased capital expenditures for existing properties and the write off of broadcast equipment associated with our San Diego television station resulting from the Southern California wildfires in October 2007. |
The above increases were offset by:
(1) | a $1.6 million decrease in impairment charges for our television broadcast licenses. We did not record an impairment charge to our television broadcast licenses during the year ended 2007 (see “—Critical Accounting Policies—Intangible Assets” for a discussion of the impairment charges to our broadcast licenses); and |
(2) | a $0.5 million decrease in promotional expense. |
Selling, general and administrative expenses remained essentially unchanged for the year ended December 31, 2007 compared to the year ended December 31, 2006. However, excluding a $0.5 million reserve recorded in connection with the settlement of certain legal matters, selling, general and administrative expenses decreased by $0.5 million.
Gain (loss) on note purchases and redemptions. In July 2007, LBI Media deposited amounts in trust to redeem all of its outstanding 10 1/8% senior subordinated notes at a redemption price of 105.0625% of the outstanding principal amount, plus accrued and unpaid interest to August 22, 2007, the redemption date. In connection with the redemption of these notes, we recorded a one-time loss of $8.8 million, which represents the early redemption premium on the notes of $7.6 million, and the write off of the unamortized deferred financing costs related to these notes of $1.2 million (see “—Liquidity and Capital Resources—LBI Media’s 10 1/8% Senior Subordinated Notes”).
Interest expense and other income, net. Interest expense and other income, net, increased by $5.0 million, or 16.0%, to $36.3 million for the year ended December 31, 2007, from $31.3 million for the corresponding period in 2006. The change was primarily attributable to (i) increased borrowings under LBI Media’s senior revolving credit facility to fund the asset acquisitions of our new Riverside/San Bernardino radio station and our Salt Lake City, Utah, television station, (ii) incremental interest expense relating to the issuance of the $228.8 million senior subordinated notes by LBI Media in July 2007 and (iii) additional accretion on our senior discount notes issued in October 2003.
Interest rate swap expense. Interest rate swap expense increased by $0.6 million, or 33.3%, to $2.4 million for the year ended December 31, 2007, from $1.8 million for the same period of 2006. This increase reflects the change in the fair market value of our interest rate swap during the year.
Provision for income taxes. Our provision for income taxes increased by $48.6 million, to $48.7 million for the year ended December 31, 2007, from $0.1 million for the corresponding period in 2006. As described above under “—Sale and Issuance of Liberman Broadcasting’s Class A Common Stock,” certain investors purchased shares of our parent’s Class A common stock in March 2007. As a result, our parent no longer qualified as an S corporation and we and our subsidiaries no longer qualified as qualified subchapter S corporations. Accordingly, we recorded a one-time non-cash charge of $46.8 million to adjust our deferred tax accounts during the year ended December 31, 2007. Assuming we had been taxed at an effective 38.5% rate in 2006, our pro forma provision for income taxes was $2.0 million for the year ended December 31, 2006.
Net loss. We recognized a net loss of $60.5 million for the year ended December 31, 2007, as compared to net income of $5.1 for the same period of 2006, a decrease of $65.6 million. This change was primarily attributable to the one-time non cash charge of $46.8 million to our deferred tax accounts, the $8.8 million loss on the redemption of LBI Media’s 10 1/8% senior subordinated notes (including the write off of unamortized deferred financing costs), a $5.3 million increase in broadcast license impairment charges primarily related to our Dallas radio properties and a $5.6 million increase in net interest and swap rate expense, as described above.
Adjusted EBITDA. Adjusted EBITDA decreased by $3.0 million, or 6.2%, to $45.2 million for the year ended December 31, 2007 as compared to $48.2 million for the same period in 2006 primarily as a result of a $7.6 million early redemption premium on LBI Media’s 10 1/8% senior subordinated notes. This charge was partially offset by increased revenues from our radio stations and charges to our deferred compensation expense because the amount ultimately paid to employees in 2007 was less than the amount that was accrued at December 31, 2006. See “—Non-GAAP Financial Measures.”
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Excluding the one-time charge of $7.6 million related to the early redemption premium paid on LBI Media’s former 10 1/8% senior subordinated notes, Adjusted EBITDA increased 9.5% to $52.8 million. The following is a reconciliation of our Adjusted EBITDA, as reported, to our Adjusted EBITDA excluding this one-time redemption charge:
Twelve Months Ended December 31, | ||||||
2007 | 2006 | |||||
Adjusted EBITDA, as reported | $ | 45,189 | $ | 48,166 | ||
Early redemption premium on 10 1/8% senior subordinated notes | 7,594 | — | ||||
Adjusted EBITDA, excluding one-time redemption charge | $ | 52,783 | $ | 48,166 | ||
Adjusted EBITDA for our radio segment increased by $8.4 million, or 32.3%, to $34.4 million for the year ended December 31, 2007, as compared to $26.0 million in 2006. The increase was primarily the result of increased advertising revenue in our Los Angeles and Dallas markets and the deferred compensation benefit we realized as discussed above.
Adjusted EBITDA for our television segment decreased by $3.8 million, or 17.1%, to $18.4 million for the year ended December 31, 2007, from $22.2 million for the same period in 2006. This decrease was primarily the result of lower advertising revenue and increased programming and technical expenses as discussed above.
Liquidity and Capital Resources
LBI Media’s Senior Credit Facilities. Our primary sources of liquidity are cash provided by operations and available borrowings under LBI Media’s $150.0 million senior revolving credit facility. In May 2006, LBI Media refinanced its prior $220.0 million senior revolving credit facility with a $150.0 million senior revolving credit facility and a $110.0 million senior term loan facility. In January 2008, LBI Media entered into a commitment increase agreement pursuant to which its senior term loan facility increased by $10.0 million from $108.4 million (net of principal repayments from May 2006 through January 2008) to $118.4 million. LBI Media borrowed the full amount of the increase in the commitment.
LBI Media has the option to request its existing or new lenders under its senior secured term loan facility and under its $150.0 million senior secured revolving credit facility to increase the aggregate amount of its senior credit facilities by an additional $40.0 million; however, its existing and new lenders are not obligated to do so. The increases under the senior secured revolving credit facility and the senior secured term loan credit facility, taken together, cannot exceed $50.0 million in the aggregate (including the $10.0 million increase in January 2008).
Under the senior revolving credit facility, LBI Media has a swing line sub-facility equal to an amount of not more than $5.0 million. Letters of credit are also available to LBI Media under the senior revolving credit facility and may not exceed the lesser of $5.0 million or the available revolving commitment amount. There are no scheduled reductions of commitments under the senior revolving credit facility. Under the senior term loan facility, each quarter, LBI Media must pay 0.25% of the original principal amount of the term loans (repayment of $275,000 per quarter as of December 31, 2008), plus 0.25% of the additional amount borrowed in January 2008 (repayment of $25,000 per quarter as of December 31, 2008) and 0.25% of any additional principal amount incurred in the future under the senior term loan facility. The senior credit facilities mature on March 31, 2012.
As of December 31, 2008, LBI Media had $26.7 million aggregate principal amount outstanding under the senior revolving credit facility and $116.9 million aggregate principal amount of outstanding senior term loans. Since December 31, 2008, LBI Media has borrowed, net of repayments, $8.1 million under its senior secured revolving credit facility.
Borrowings under the senior credit facilities bear interest based on either, at LBI Media’s option, the base rate for base rate loans or the LIBOR rate for LIBOR loans, in each case plus the applicable margin stipulated in the senior credit agreements. The base rate is the higher of (i) Credit Suisse’s prime rate and (ii) the Federal Funds Effective Rate (as published by the Federal Reserve Bank of New York) plus 0.50%. The applicable margin for revolving loans, which is based on LBI Media’s total leverage ratio, ranges from 0% to 1.00% per annum for base rate loans and from 1.00% to 2.00% per annum for LIBOR loans. Including the $10.0 million increase to LBI Media’s senior secured term loan facility in January 2008, the applicable margin for term loans ranges from 0.50% to 0.75% for base rate loans and from 1.50% to 1.75% for LIBOR loans. The applicable margin for any future term loans will be agreed upon at the time those loans are incurred. Interest on base rate loans is payable quarterly in arrears, and interest on LIBOR loans is payable either monthly, bimonthly or quarterly depending on the interest period elected by LBI Media. All amounts that are not paid when due under either the senior revolving credit facility or the senior term loan facility will accrue interest at the rate otherwise applicable plus 2.00% until such amounts are paid in full. In addition, LBI Media pays a quarterly unused commitment fee ranging from 0.25% to 0.50% depending on the level of facility usage. At December 31, 2008, borrowings under LBI Media’s senior credit facilities bore interest at rates between 1.96% and 4.25%, including the applicable margin.
Under the indentures governing LBI Media’s 8 1/2% senior subordinated notes and our senior discount notes (described below), LBI Media is limited in its ability to borrow under the senior revolving credit facility and to borrow additional amounts under the senior term loan facility. LBI Media may borrow up to an aggregate of $260.0 million under the senior credit facilities (subject to certain reductions under certain circumstances) without having to comply with specified leverage ratios under the indentures governing its 8 1/2% senior subordinated notes and our senior discount notes, but any amount over such $260.0 million that LBI Media may borrow under the senior credit facilities (subject to certain reductions under certain circumstances) will be subject to LBI Media’s and our compliance with specified leverage ratios (as defined in the indentures governing LBI Media’s 8 1/2% senior subordinated notes and our senior discount notes). Also, the indenture governing LBI Media’s 8 1/2% senior subordinated notes prohibits borrowings under LBI Media’s senior credit facilities, the proceeds of which would be used to repay, redeem, repurchase or refinance any of our senior discount notes earlier than one year prior to their stated maturity.
LBI Media’s senior credit facilities contain customary restrictive covenants that, among other things, limit its ability to incur additional indebtedness and liens in connection therewith and pay dividends. Under the senior revolving credit facility, LBI Media must also maintain a maximum senior secured leverage ratio (as defined in the senior credit agreement) on and after the fiscal quarter ended June 30, 2009.
LBI Media’s 8 1/2% Senior Subordinated Notes. In July 2007, LBI Media issued approximately $228.8 million aggregate principal amount of 8 1/2% Senior Subordinated Notes that mature in 2017, resulting in gross proceeds of approximately $225.0 million and net proceeds of approximately $221.6 million after deducting certain transaction costs. Under the terms of LBI Media’s 8 1/2% senior subordinated notes, it must pay semi-annual interest payments of approximately $9.7 million each February 1 and August 1, commencing February 1, 2008. LBI Media may redeem the 8 1/2% senior subordinated notes at any time on or after August 1, 2012 at redemption prices specified in the indenture governing its 8 1/2% senior subordinated notes, plus accrued and unpaid interest. At any time prior to August 1, 2012, LBI Media may redeem some or all of its 8 1/2% senior subordinated notes at a redemption price equal to a “make whole” amount as set forth in the indenture governing such senior subordinated notes. Also, LBI Media may redeem up to 35% of the aggregate principal amount of the notes with the net proceeds of certain equity offerings completed on or prior to August 1, 2010 at a redemption price of 108.5% of the principal amount of the notes, plus accrued and unpaid interest, if any, thereon to the applicable redemption date.
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The indenture governing these notes contains restrictive covenants that limit, among other things, LBI Media’s and its subsidiaries’ ability to incur additional indebtedness, issue certain kinds of equity, and make particular kinds of investments. The indenture governing LBI Media’s 8 1/2% senior subordinated notes also prohibits the incurrence of indebtedness, the proceeds of which would be used to repay, redeem, repurchase or refinance any of our senior discount notes earlier than one year prior to the stated maturity of the senior discount notes unless such indebtedness is (i) unsecured, (ii) pari passu or junior in right of payment to the 8 1/2% senior subordinated notes of LBI Media, and (iii) otherwise permitted to be incurred under the indenture governing LBI Media’s 8 1/2% senior subordinated notes.
The indenture governing these notes also provides for customary events of default, which include (subject in certain instances to cure periods and dollar thresholds): nonpayment of principal, interest and premium, if any, on the notes, breach of covenants specified in the indenture, payment defaults or acceleration of other indebtedness, a failure to pay certain judgments and certain events of bankruptcy, insolvency and reorganization. The notes will become due and payable immediately without further action or notice upon an event of default arising from certain events of bankruptcy or insolvency with respect to us and certain of its subsidiaries. If any other event of default occurs and is continuing, the trustee or the holders of at least 25% in principal amount of the then outstanding notes may declare all the notes to be due and payable immediately.
Senior Discount Notes. In October 2003, we issued $68.4 million aggregate principal amount at maturity of senior discount notes that mature in 2013. Under the terms of the senior discount notes, cash interest did not accrue and was not payable on the senior discount notes prior to October 15, 2008, and instead the accreted value of the senior discount notes increased until such date. Beginning October 15, 2008, cash interest began to accrue on the senior discount notes at a rate of 11% per year payable semi-annually on each April 15 and October 15, with the first payment due on April 15, 2009. We may redeem the senior discount notes at any time at redemption prices specified in the indenture governing our senior discount notes, plus accrued and unpaid interest.
During the fourth quarter of 2008, we purchased approximately $22.0 million aggregate principal of our senior discount notes at a weighted average price of 43.321% of principal. The purchases were made in three separate open market transactions which settled on the following dates: November 24, December 8 and December 9, 2008. The total consideration paid was $9.9 million, which included $0.3 million of accrued interest for the period from October 15, 2008 through the respective redemption date.
The indenture governing the senior discount notes contains certain restrictive covenants that, among other things, limit our ability to incur additional indebtedness and pay dividends to Liberman Broadcasting. Our senior discount notes are structurally subordinated to LBI Media’s senior credit facilities and LBI Media’s 8 1/2% senior subordinated notes.
Empire Burbank Studios’ Mortgage Note. In July 2004, one of our indirect, wholly owned subsidiaries, Empire Burbank Studios, issued an installment note for approximately $2.6 million. The loan is secured by Empire Burbank Studios’ real property and bears interest at 5.52% per annum. The loan is payable in monthly principal and interest payments of approximately $21,000 through maturity in July 2019.
The following table summarizes our various levels of indebtedness at December 31, 2008:
Issuer | Form of Debt | Principal Amount | Scheduled Maturity Date | Interest Rate | ||||
LBI Media, Inc. | $150.0 million senior secured revolving credit facility | $26.7 million(1) | March 31, 2012 | LIBOR or base rate, plus an applicable margin dependent on LBI Media’s leverage ratio (3.7% weighted average at December 31, 2008) | ||||
LBI Media, Inc. | Senior secured term loan facility | $116.9 million | March 31, 2012 | LIBOR or base rate, plus an applicable margin dependent on LBI Media’s leverage ratio (2.0% weighted average at December 31, 2008) | ||||
LBI Media, Inc. | 8 1/2% senior subordinated notes | $228.8 million aggregate principal amount at maturity | August 1, 2017 | 8.5% | ||||
LBI Media Holdings, Inc. | Senior discount notes | $68.4 million(2) | October 15, 2013 | 11% | ||||
Empire Burbank Studios, Inc. | Mortgage note | $2.1 million | July 1, 2019 | 5.52% |
(1) | LBI Media has borrowed, net of repayments, approximately $8.1 million under its senior secured revolving credit facility since December 31, 2008. |
(2) | In the fourth quarter of 2008, we purchased approximately $22.0 million aggregate principal amount of our senior discount notes in various open market transactions. As such, the total principal amount outstanding and due to noteholders other than the company was $46.4 million as of December 31, 2008. |
Cash Flows. Cash and cash equivalents were $0.5 million, $1.7 million and $1.5 million at December 31, 2008, 2007 and 2006, respectively.
Net cash flow provided by operating activities was $15.8 million, $7.1 million and $25.4 million for the years ended December 31, 2008, 2007 and 2006, respectively.
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The increase in our net cash flow provided by operating activities during the year ended December 31, 2008 as compared to 2007 was primarily the result of (a) a decrease in deferred compensation payments because no payments were due under our outstanding employment agreements in 2008 and (b) increases in accrued liabilities (including accrued interest) and other assets and liabilities due to the timing of payments.
The decrease in our net cash flow provided by operating activities during the year ended December 31, 2007 as compared to 2006 was primarily the result of:
(a) increased interest costs, including the $7.6 million early redemption premium paid to redeem LBI Media’s 10 1/8% senior subordinated notes in August 2007, operating expenses resulting from the Dallas stations we acquired in November 2006, and local marketing agreement fees and other start-up costs of our recently acquired station in the Riverside/San Bernardino region of our Los Angeles market;
(b) decreases in our accrued liabilities and increases in our accounts receivable as a result of the timing of payments and cash receipts; and
(c) an increase in deferred compensation payments.
Net cash flow used in investing activities was $17.5 million, $50.3 million and $109.6 million for the years ended December 31, 2008, 2007 and 2006, respectively. Net cash flow used in investing activities in 2008 primarily included $12.8 million in capital expenditures for property and equipment, of which $4.7 million related to the construction of our new corporate offices in Dallas, Texas, $1.6 million in costs incurred (including amounts deposited into escrow) for the pending acquisitions of selected assets of KVIB-FM in Phoenix and WASA-LP in New York, $1.5 million (including acquisition costs) paid for the acquisition of selected assets of television station KVPA-LP in the Phoenix, Arizona market, and $1.5 million deposit made in connection with the pending purchase of a tower site in Victoria, Texas.
Net cash flow used in investing activities in 2007 included $35.4 million (including acquisition costs) paid for the acquisitions of selected assets of KRQB-FM (formerly KWIE-FM) in the Riverside/San Bernardino area of our Los Angeles market and KPNZ-TV in the Salt Lake City, Utah market and $13.7 million in capital expenditures for property and equipment, which was primarily related to the construction of new towers and transmitter sites for our Dallas-Fort Worth and Houston, Texas radio stations and additional studio equipment for our Los Angeles television station.
Net cash flow used in investing activities in 2006 included $93.0 million (including acquisition costs) paid for the acquisitions of selected radio and television station assets in the Dallas-Fort Worth market and $9.5 million for the construction of new tower sites for our Texas radio stations.
Net cash flow provided by financing activities was $0.5 million, $43.4 million and $83.9 million for the years ended December 31, 2008, 2007 and 2006, respectively. Net cash flow provided by financing activities in 2008 resulted primarily from net bank borrowings of $10.8 million, offset by the purchase of our senior discount notes for $9.6 million in various open market transactions in the fourth quarter of 2008, and payment of deferred financing costs of $0.5 million.
Net cash flow provided by financing activities in 2007 primarily reflects a capital contribution from our parent of $47.9 million, and, in turn, from us to LBI Media, which LBI Media used to repay outstanding borrowings under its senior credit facilities. See “—Sale and Issuance of Liberman Broadcasting’s Class A Common Stock”. Net cash flow provided by financing activities in 2007 also reflected the issuance of LBI Media’s 8 1/2% senior subordinated notes, partially offset by the redemption of LBI Media’s 10 1/8% notes. See “—Refinancing of LBI Media Senior Subordinated Notes.”
Net cash flow provided by financing activities in 2006 was primarily attributable to the additional funds borrowed under LBI Media’s senior revolving credit facility in November 2006 to acquire the selected assets of five radio stations in the Dallas-Fort Worth, Texas Market, partially offset by principal reductions on outstanding borrowings under LBI Media’s senior credit facilities.
Contractual Obligations. We have certain cash obligations and other commercial commitments, which will impact our short- and long-term liquidity. At December 31, 2008, such obligations and commitments were LBI Media’s senior revolving credit facility, senior term loan facility and 8 1/2% senior subordinated notes, our senior discount notes, certain non-recourse debt of one of our indirect, wholly owned subsidiaries and our operating leases as follows:
Payments Due by Period from December 31, 2008 (in millions) | |||||||||||||||
Contractual Obligations | Total | Less than 1 Year | 1-3 Years | 3-5 Years | More than 5 Years | ||||||||||
Long-term debt | $ | 631.1 | $ | 28.9 | $ | 57.6 | $ | 236.6 | $ | 308.0 | |||||
Operating leases | 18.2 | 2.0 | 3.3 | 2.4 | 10.4 | ||||||||||
Total contractual cash obligations | $ | 649.3 | $ | 30.9 | $ | 60.9 | $ | 239.0 | $ | 318.4 | |||||
The above table includes principal and interest payments under our debt agreements based on our interest rates and principal balances as of December 31, 2008 and assumes no additional borrowings or principal payments on LBI Media’s senior secured revolving credit facility or senior secured term loan facility until the facilities mature in March 2012. It also does not reflect any deferred compensation or other amounts owed under certain employment agreements that we may ultimately pay or approximately $0.4 million (including accrued interest) in unrecognized tax benefit reserves.
Expected Use of Cash Flows. We believe that our cash on hand, cash provided by operating activities and borrowings under LBI Media’s senior revolving credit facility will be sufficient to permit us to fund our contractual obligations and operations for at least the next twelve months. For both our radio and television segments, we have historically funded, and will continue to fund, expenditures for operations, administrative expenses, capital expenditures and debt service from our operating cash flow and borrowings under LBI Media’s senior revolving credit facility. For our television segment, our planned uses of liquidity during the next twelve months will include the addition of digital television transmission equipment primarily for our Houston, Dallas, Salt Lake City and Los Angeles television stations at an estimated cost of $2.0 million. In connection with the purchase of the selected assets of five radio stations in Dallas, we also purchased a building in Dallas, Texas to accommodate our growth in stations owned and operated in the Dallas-Fort Worth market. We estimate we will spend approximately $4.0 million on improvements and equipment for our new Dallas building. In addition, our senior discount notes began accruing cash interest at a rate of 11% per year on October 15, 2008, with the first payment due on April 15, 2009. Prior to October 15, 2008, our senior discount notes had not been accruing cash interest and instead the accreted value of the notes had been increasing. The interest payments will be payable on April 15 and October 15 of each year until the notes mature on October 15, 2013. We also expect to use cash to fund the purchase prices for the selected assets of television station WASA-LP and radio station KDES-FM within the next twelve months, primarily through borrowings under LBI Media’s senior revolving credit facility.
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We have used, and expect to continue to use, a significant portion of our capital resources to fund acquisitions. Future acquisitions will be funded from amounts available under LBI Media’s senior revolving credit facility, the proceeds of future equity or debt offerings and our internally generated cash flows. However, our ability to pursue future acquisitions may be impaired if we or our parent are unable to obtain funding from other capital sources. As a result, we may not be able to increase our revenues at the same rate as we have in recent years.
Inflation
We believe that inflation has not had a material impact on our results of operations for each of our fiscal years in the three-year period ended December 31, 2008. However, there can be no assurance that future inflation would not have an adverse impact on our operating results and financial condition.
Seasonality
Seasonal net revenue fluctuations are common in the television and radio broadcasting industry and result primarily from fluctuations in advertising expenditures by local and national advertisers. Our first fiscal quarter generally produces the lowest net broadcast revenue for the year.
Non-GAAP Financial Measures
We use the term “Adjusted EBITDA” throughout this report. Adjusted EBITDA consists of net income or loss plus income tax expense or benefit, gain or loss on sale and disposal of property and equipment, gain or loss on the sale of investments, net interest expense, interest rate swap expense or income, impairment of broadcast licenses, depreciation and amortization and other non-cash gains and losses.
This term, as we define it, may not be comparable to a similarly titled measure employed by other companies and is not a measure of performance calculated in accordance with U.S. generally accepted accounting principles, or GAAP.
Management considers this measure an important indicator of our liquidity relating to our operations, as it eliminates the effects of certain non-cash items and our capital structure. Management believes liquidity is an important measure for our company because it reflects our ability to meet our interest payments under our substantial indebtedness and is a measure of the amount of cash available to grow our company through our acquisition strategy. This measure should be considered in addition to, but not as a substitute for or superior to, other measures of liquidity and financial performance prepared in accordance with GAAP, such as cash flows from operating activities, operating income and net income.
We believe Adjusted EBITDA is useful to an investor in evaluating our liquidity and cash flow because:
• | it is widely used in the broadcasting industry to measure a company’s liquidity and cash flow without regard to items such as depreciation and amortization, loss on disposal of property and equipment and impairment of broadcast licenses. The broadcast industry uses liquidity to determine whether a company will be able to cover its capital expenditures and whether a company will be able to acquire additional assets and broadcast licenses if the company has an acquisition strategy. We believe that by eliminating the effect of certain non-cash items, Adjusted EBITDA provides a meaningful measure of liquidity; |
• | it gives investors another measure to evaluate and compare the results of our operations from period to period by removing the impact of non-cash expense items, such as impairment of broadcast licenses. By removing the non-cash items, it allows our investors to better determine whether we will be able to meet our debt obligations as they become due; and |
• | it provides a liquidity measure before the impact of a company’s capital structure by removing net interest expense items and interest rate swap expenses. |
Our management uses Adjusted EBITDA:
• | as a measure to assist us in planning our acquisition strategy; |
• | in presentations to our board of directors to enable them to have the same consistent measurement basis of liquidity and cash flow used by management; |
• | as a measure for determining our operating budget and our ability to fund working capital; and |
• | as a measure for planning and forecasting capital expenditures. |
The Securities and Exchange Commission, or SEC, has adopted rules regulating the use of non-GAAP financial measures, such as Adjusted EBITDA, in filings with the SEC and in disclosures and press releases. These rules require non-GAAP financial measures to be presented with and reconciled to the most nearly comparable financial measure calculated and presented in accordance with GAAP. We have included a presentation of net cash provided by operating activities and a reconciliation to Adjusted EBITDA on a consolidated basis under “Item 6. Selected Financial Data.”
Critical Accounting Policies
The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to allowance for doubtful accounts, acquisitions of radio station and television station assets, intangible assets, deferred compensation and commitments and contingencies. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
We believe the following accounting policies and the related judgments and estimates affect the preparation of our consolidated financial statements.
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Acquisitions of radio station and television assets
Our radio and television station acquisitions have consisted primarily of FCC licenses to broadcast in a particular market (broadcast licenses). We generally acquire the existing format and change it upon acquisition. As a result, a substantial portion of the purchase price for the assets of a radio or television station is allocated to its broadcast license. The allocations assigned to acquired broadcast licenses and other assets are subjective by their nature and require our careful consideration and judgment. We believe the allocations represent appropriate estimates of the fair value of the assets acquired.
Allowance for doubtful accounts
We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. A considerable amount of judgment is required in assessing the likelihood of ultimate realization of these receivables including our history of write offs, relationships with our customers and the current creditworthiness of each advertiser. Our historical estimates have been a reliable method to estimate future allowances, with historical reserves averaging approximately 8.0% of our outstanding receivables. If the financial condition of our advertisers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. The effect of an increase in our allowance of 3.0% of our outstanding receivables as of December 31, 2008, from 14.4% to 17.4% or $3.1 million to $3.7 million, would result in a decrease in pre-tax income of $0.6 million for the year ended December 31, 2008.
Intangible assets
Our indefinite-lived assets consist of our FCC broadcast licenses. We believe that our broadcast licenses have indefinite useful lives given that they are expected to indefinitely contribute to our future cash flows and that they may be continually renewed without substantial cost to us. In certain prior years, the licenses were considered to have finite lives and were subject to amortization.
In accordance with Statement of Financial Accounting Standards, or SFAS, No. 142 “Goodwill and Other Intangible Assets” (“FAS 142”), we do not amortize our broadcast licenses. We test our broadcast licenses for impairment at least annually or when indicators of impairment are identified. Our valuations principally use the discounted cash flow methodology, an income approach based on market revenue projections and not company-specific projections, which assumes broadcast licenses are acquired and operated by a third party. This approach incorporates variables such as types of signals, media competition, audience share, market advertising revenue projections, anticipated operating margins and discount rates, without taking into consideration the station’s format or management capabilities. This method calculates the estimated present value that would be paid by a prudent buyer for our FCC licenses as new radio or television stations as of the annual valuation date (September 30 of each year). If the discounted cash flows estimated to be generated from these assets are less than the carrying value, an adjustment to reduce the carrying value to the fair market value of the assets is recorded.
We generally test our broadcast licenses for impairment at the individual license level. However, we aggregate broadcast licenses for impairment testing if their signals are simulcast and are operating as one revenue-producing asset.
During the third quarters of 2008 and 2007, we completed our annual impairment review and concluded that several of our broadcast licenses were impaired. As a result of the downturn in the U.S. economy, which has caused a general slowdown in the advertising environment, we also recorded impairments in the fourth quarters of 2008 and 2007. The decrease in the fair value of certain individual station broadcast licenses in our California, Texas and Utah markets resulted in impairment write-downs of approximately $46.7 and $45.0 million for the third and fourth quarters of 2008, respectively, and $3.0 million and $5.1 million for the third and fourth quarters of 2007, respectively. The impairment charges were due to market changes such as lower advertising revenue growth projections for the broadcasting industry, higher discount rates and a decline in cash flow multiples for recent station sales.
In assessing the recoverability of our indefinite-lived intangible assets, we must make assumptions about the estimated future cash flows and other factors to determine the fair value of these assets. Assumptions about future revenue and cash flows require significant judgment because of the current state of the economy and the fluctuation of actual revenue and the timing of expenses. We develop future revenue estimates based on projected ratings increases, planned timing of signal strength upgrades, planned timing of promotional events, customer commitments and available advertising time. Estimates of future cash flows assume that expenses will grow at rates consistent with historical rates. Alternatively, some stations under evaluation have had limited relevant cash flow history due to planned conversion of format or upgrade of station signal. The assumptions about cash flows after conversion reflect estimates of how these stations are expected to perform based on similar stations and markets and possible proceeds from the sale of the assets. If the expected cash flows are not realized, impairment losses may be recorded in the future.
Deferred compensation
One of our indirect, wholly owned subsidiaries and our parent, Liberman Broadcasting, have entered into employment agreements with certain current and former employees. In addition to annual compensation and other benefits, these agreements provide certain employees with the ability to participate in the increase of the “net value” of Liberman Broadcasting, on a consolidated basis, over certain base amounts.
Our deferred compensation liability can increase based on changes in the applicable employee’s vesting percentage and can increase or decrease based on changes in the “net value” of Liberman Broadcasting. We have two deferred compensation components that comprise the employee’s vesting percentage: (i) a component that vests in varying amounts over time; and (ii) a component that vests upon the attainment of certain performance measures (each unique to the individual agreements). We account for the time vesting component over the vesting periods specified in the employment agreements and account for the performance-based component when we consider it probable that the performance measures will be attained.
As part of the calculation of the deferred compensation liability, we use the income and market valuation approaches to determine the “net value” of Liberman Broadcasting. The income approach analyzes future cash flows and discounts them to arrive at a current estimated fair value. The market approach uses recent sales and offering prices of similar properties to determine estimated fair value. Based on the “net value” of Liberman Broadcasting as determined in these analyses, and based on the percentage of incentive compensation that has vested (as specified in the employment agreements), we record deferred compensation expense or benefit (and a corresponding credit or charge to deferred compensation liability). As such, estimation of the “net value” of Liberman Broadcasting requires considerable management judgment and the amounts recorded as periodic deferred compensation expense or benefit are dependent on that judgment.
During the year ended December 31, 2007, we satisfied our obligations under certain employment agreements that had December 31, 2006 “net value” determination dates with an aggregate cash payment of approximately $4.4 million, which was approximately $4.0 million less than the amount accrued as of December 31, 2006. During the year ended December 31, 2006, we satisfied our obligations under an employment agreement that had a December 31, 2005 “net value” determination date with an aggregate cash payment of approximately $1.6 million. The remaining employment agreement has a “net value” determination date of December 31, 2009, and as of December 31, 2008, we estimated that this employee had not vested in any unpaid deferred compensation.
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If we assumed no change in the “net value” of Liberman Broadcasting from that at December 31, 2008, we would not expect to record any deferred compensation expense in 2009 relating solely to the time vesting portion of the deferred compensation. The remaining agreement requires us to pay the deferred compensation amount in cash until Liberman Broadcasting’s common stock becomes publicly traded, at which time we may pay such amount in cash or Liberman Broadcasting’s common stock, at our option.
Deferred compensation expense for the year ended December 31, 2007 was reduced by approximately $4.0 million because the amounts ultimately paid to the employees, whose net values were determined as of December 31, 2006, was less than the amounts accrued at that determination date. Similarly, deferred compensation expense for the year ended December 31, 2006 was reduced by approximately $1.3 million because the amount ultimately paid to the employee, whose net value was determined as of December 31, 2005, was less than the amount accrued at that determination date.
Commitments and contingencies
We periodically record the estimated impacts of various conditions, situations or circumstances involving uncertain outcomes. These events are called “contingencies,” and our accounting for these events is prescribed by SFAS No. 5, “Accounting for Contingencies.”
The accrual of a contingency involves considerable judgment on the part of our management. We use our internal expertise and outside experts (such as lawyers), as necessary, to help estimate the probability that a loss has been incurred and the amount (or range) of the loss. We currently do not have any material contingencies that we believe require loss accruals; however we refer you to Note 5 “Commitments and Contingencies” of our consolidated financial statements for a discussion of other known contingencies.
Recent Accounting Pronouncements
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurement” (“FAS 157”). FAS 157 provides a single definition of fair value, together with a framework for measuring it, and requires additional disclosure about the use of fair value to measure assets and liabilities. In February 2008, the FASB issued FSP FAS 157-2, “Effective Date of FASB Statement No. 157” which defers the implementation for certain non-recurring, nonfinancial assets and liabilities from fiscal years beginning after November 15, 2007 to fiscal years beginning after November 15, 2008, which will be our fiscal year 2009. In October 2008, the FASB issued FSP FAS 157-3, “Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active” which clarifies the application of FAS 157 in a market that is not active. FSP FAS 157-3 is effective upon issuance, including prior periods for which financial statements have not been issued. The statement provisions effective as of January 1, 2008 did not have a material effect on our results of operations, financial position or cash flows. We are currently evaluating the impact, if any, the adoption of the remaining provisions will have on our results of operations, financial position or cash flows.
In addition, in February 2007, the FASB issued FAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities-including an amendment of FASB Statement No. 115” (“FAS 159”). FAS 159 expands the use of fair value accounting but does not affect existing standards that require assets or liabilities to be carried at fair value. Under FAS 159, a company may elect to use fair value to measure certain financial assets and liabilities and any changes in fair value are recognized in earnings. This statement was effective on January 1, 2008. We did not elect the fair value option upon adoption of FAS 159.
In December 2007, the FASB issued SFAS No. 141R, “Business Combinations” (“FAS 141R”), which requires an acquirer to measure the identifiable assets acquired, the liabilities assumed and any noncontrolling interest in the acquiree at their fair values on the acquisition date, with goodwill being the excess value over the net identifiable assets acquired. FAS 141R also changes the accounting for the treatment of acquisition related transaction costs. FAS 141R is effective beginning January 1, 2009. We have evaluated the provisions of FAS 141R and determined that the impact to our results of operations, financial position and cash flows will be a charge of approximately $0.4 million, which relates to the write-off of pre-acquisition costs (exclusive of escrow deposits) for certain asset purchases that did not close prior to December 31, 2008.
In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements” (“FAS 160”), which clarifies that a noncontrolling interest in a subsidiary should be reported as equity in the consolidated financial statements. FAS 160 is effective beginning January 1, 2009. We are currently evaluating what impact, if any, the adoption of FAS 160 will have on our financial position, results of operations and cash flows.
In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133” (“FAS 161”), which requires enhanced disclosures for derivative and hedging activities. FAS 161 is effective beginning January 1, 2009. We are currently evaluating what impact, if any, the adoption of FAS 161 will have on our financial statements.
In April 2008, the FASB issued FASB Staff Position (“FSP”) No. FAS 142-3, “Determination of Useful Life of Intangible Assets” (“FSP 142-3”). FSP 142-3 amends the factors that should be considered in developing the renewal or extension assumptions used to determine the useful life of a recognized intangible asset under FAS 142. The intent of this FSP is to improve the consistency between the useful life of an intangible asset determined under FAS 142 and the period of expected cash flows used to measure the fair value of the asset under FAS 141R. FSP 142-3 is effective for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. We are currently evaluating what impact, if any, the adoption of FSP 142-3 will have on our financial statements.
ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Our exposure to market risk is currently confined to our cash and cash equivalents, changes in interest rates related to borrowings under LBI Media’s senior credit facilities and changes in the fair value of LBI Media’s 8 1/2% senior subordinated notes and our senior discount notes. Because of the short-term maturities of our cash and cash equivalents, we do not believe that an increase in market rates would have any significant impact on the realized value of our investments.
In July 2006, we entered into a fixed-for-floating interest rate swap to hedge the underlying interest rate risk on the expected outstanding balance of our term loan facility over time. Pursuant to the terms of this interest rate swap, we pay a fixed rate of 5.56% on the $80.0 million notional amount and receive payments based on LIBOR. This swap fixes the interest rate at 7.56% (including the applicable margin) and terminates in November 2011.
We account for our interest rate swap in accordance with SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities”, and its related interpretations. This interest rate swap essentially fixes the interest rate at the percentage noted above. However, changes in the fair value of the interest rate swap for each reporting period have been recorded in interest rate swap expense in our consolidated statements of operations, because the interest rate swap does not qualify for hedge accounting.
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We measure the fair value of our interest rate swap on a recurring basis pursuant to FAS 157. FAS 157 establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. The three tiers are: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions. The Company categorizes this swap contract as Level 2.
The fair value of our interest rate swap was a liability of $7.6 million and $4.2 million at December 31, 2008 and 2007, respectively. The fair value of the interest rate swap represents the present value of the expected future cash flows estimated to be received from or paid to a marketplace participant of the instrument. It is valued using inputs including broker dealer quotes, adjusted for non-performance risk, based on valuation models that incorporate observable market information and are classified within Level 2 of the fair value hierarchy. We are not exposed to the impact of foreign currency or commodity price fluctuations.
We are exposed to changes in interest rates on the portion of LBI Media’s variable rate senior credit facilities that is not hedged with the interest rate swap. A hypothetical 10% increase in the interest rates applicable to the year ended December 31, 2008 would have increased interest expense by approximately $0.6 million. Conversely, a hypothetical 10% decrease in the interest rates applicable to the year ended December 31, 2008 would have decreased interest expense by approximately $0.6 million. At December 31, 2008, we believe that the carrying value of amounts payable under LBI Media’s senior credit facilities that are not hedged by our interest rate swap approximates the fair value based upon current yields for debt issues of similar quality and terms.
The fair value of our fixed rate long-term debt is sensitive to changes in interest rates. Based upon a hypothetical 10% increase in the interest rate, assuming all other conditions affecting market risk remain constant, the market value of our fixed rate debt would have decreased by approximately $13.5 million at December 31, 2008. Conversely, a hypothetical 10% decrease in the interest rate, assuming all other conditions affecting market risk remain constant, would have resulted in an increase in market value of approximately $14.5 million at December 31, 2008. Management does not foresee nor expect any significant change in our exposure to interest rate fluctuations or in how such exposure is managed in the future.
ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
The financial statements and related financial information, as listed under Item 15, appear in a separate section of this annual report beginning on page F-1.
ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
In connection with our dismissal of Ernst & Young LLP and our appointment of Deloitte & Touche LLP as our principal accountant, there were no disagreements or reportable events, as used in Item 304(b) of Regulation S-K, during the fiscal year ended December 31, 2008 that were material and were accounted for or disclosed in a manner different from that which Ernst & Young LLP would have concluded or required.
ITEM 9A(T). | CONTROLS AND PROCEDURES |
Evaluation of Disclosure Controls and Procedures
The term “disclosure controls and procedures” is defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). We maintain disclosure controls and procedures that are designed to ensure that: (i) information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms; and (ii) such information is accumulated and communicated to our management, including our President, our Executive Vice President and our Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, our management, including our President, our Executive Vice President and our Chief Financial Officer, recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and our management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
As required by SEC Rule 15d-15(b), we carried out an evaluation, under the supervision and with the participation of our management, including our President, our Executive Vice President and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 2008. Based on the foregoing, our President, our Executive Vice President and our Chief Financial Officer have concluded that, as of the end of the annual period covered by this report, our disclosure controls and procedures were effective at the reasonable assurance level.
Report of Management on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is a process to provide reasonable assurance regarding the reliability of our financial reporting for external purposes in accordance with accounting principles generally accepted in the United States. Internal control over financial reporting includes (i) maintaining records that in reasonable detail accurately and fairly reflect our transactions; (ii) providing reasonable assurance that transactions are recorded as necessary for preparation of our financial statements; (iii) providing reasonable assurance that receipts and expenditures are made in accordance with management authorization; and (iv) providing reasonable assurance that unauthorized acquisition, use or disposition of company assets that could have a material effect on our financial statements would be prevented or detected on a timely basis. Because of its inherent limitations, internal control over financial reporting is not intended to provide absolute assurance that a misstatement of our financial statements would be prevented or detected.
Management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework and criteria established in Internal Control—Integrated Framework , issued by the Committee of Sponsoring Organizations of the Treadway Commission. This evaluation included review of the documentation of controls, evaluation of the design effectiveness of controls, testing of the operating effectiveness of controls and a conclusion on this evaluation. Based on this evaluation, management concluded that the Company’s internal control over financial reporting was effective as of December 31, 2008 at a reasonable assurance level.
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This annual report does not include an attestation report of the company’s registered independent public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the company’s independent registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the company to provide only management’s report in this annual report.
Changes in Internal Controls
Based on our evaluation carried out in accordance with SEC Rule 15d-15(b) under the supervision and with the participation of our management, including our President, Executive Vice President and Chief Financial Officer, we concluded that there were no changes during the fourth fiscal quarter of 2008 in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B. | OTHER INFORMATION |
None.
ITEM 10. | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE |
The following sets forth information about our current directors and executive officers:
Name | Position(s) | Age* | ||
Jose Liberman | Co-Founder, Chairman, President and Director | 83 | ||
Lenard D. Liberman | Co-Founder, Executive Vice President, Secretary and Director | 47 | ||
Wisdom Lu | Chief Financial Officer | 42 | ||
Winter Horton | Corporate Vice President and Director | 43 | ||
William G. Adams | Director | 69 | ||
Bruce A. Karsh | Director | 53 | ||
Terence M. O’Toole | Director | 50 |
* | All ages are as of December 31, 2008 |
Jose Liberman co-founded our company in 1987 together with his son, Lenard, and has served as our President and as a member on our board of directors since our formation. Mr. Liberman has been our chairman since March 2007. Mr. Liberman started his career in radio broadcasting in 1957 with the purchase of XERZ in Mexico and the establishment of a radio advertising representative firm in Mexico. In 1976, Mr. Liberman acquired KLVE-FM, the first Los Angeles FM station to utilize a Hispanic format. In 1979, he purchased KTNQ-AM and combined it with KLVE to create the first Hispanic AM/FM combination in Los Angeles. Mr. Liberman is the father of our Executive Vice President, Secretary and Director, Lenard Liberman. Mr. Liberman also serves on the boards of directors of Liberman Broadcasting, Inc. and LBI Media, Inc.
Lenard D. Liberman has served as our Executive Vice President and Secretary and has been a member of our board of directors since our formation in 1987. Mr. Liberman has previously served as our Chief Financial Officer from April 1999 to April 2000, April 2002 to April 2003, April 2005 to May 2006 and January 2007 to March 2008. Mr. Liberman manages all day-to-day operations, including acquisitions and financings. He received his juris doctorate degree and masters of business administration degree from Stanford University in 1987. Mr. Liberman is the son of our Chairman, President and Director, Jose Liberman. Mr. Liberman also serves on the boards of directors of Liberman Broadcasting, Inc. and LBI Media, Inc.
Wisdom Lu joined us as our Chief Financial Officer in March 2008. Prior to joining us, Ms. Lu served as Treasurer and Chief Investment Officer of Health Net, Inc., one of the nation’s largest publicly traded managed health care companies, from 1996 until her departure in 2008. While at Health Net, Ms. Lu was responsible for, among other things, capital structure planning and management of cash, investment, debt and equity. Ms. Lu has also served as Treasury Officer, Fixed Income Sales & Trading with National Westminster Bank, USA from 1995 to 1996 and as Management Associate, Fixed Income Sales & Trading with Citicorp Securities, Inc. from 1993 to 1995. Ms. Lu received her Bachelor of Science degree in Civil Engineering, with a minor in Economics, from Rensselear Polytechnic Institute and her Master of Business Administration (Finance & International Business) from the Leonard N. Stern School of Business at New York University. Ms. Lu holds professional designations of Chartered Financial Analyst and Professional Engineer (New York).
Winter Horton has served as our Corporate Vice President since 2001 and has been a member of our board of directors since March 2007. Mr. Horton joined us in 1997 as Vice President of Programming for KRCA. In 2001, as Corporate Vice President, Mr. Horton launched our four radio stations and one television station in Houston. He was also responsible for the launch of our Dallas stations, including KMPX, KNOR, KTCY, KZMP-AM, KZZA and KBOC. He is currently responsible for all of our Texas radio and television operations. Mr. Horton also oversees our production facilities in Burbank, Houston and Dallas. Mr. Horton also serves on the boards of directors of Liberman Broadcasting, Inc. and LBI Media, Inc.
William G. Adams was designated as a member of our board of directors in March 2007. Mr. Adams served as Of Counsel to O’Melveny & Myers LLP from February 2000 to February 2004 and had been a partner of O’Melveny & Myers LLP since October 1979. Mr. Adams also serves on the boards of directors of Valentine Enterprises, Inc., Liberman Broadcasting, Inc. and LBI Media, Inc.
Bruce A. Karsh was designated as a member of our board of directors in March 2007. Mr. Karsh is President and co-founder of Oaktree Capital Management, LP. Mr. Karsh serves as portfolio manager for Oaktree’s distressed debt and is actively involved in managing the firm. Prior to co-founding Oaktree, Mr. Karsh was a managing director of Trust Company of the West and its affiliate, TCW Asset Management Company (together, “TCW”), and the portfolio manager of the Special
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Credits Funds for seven years. Before joining TCW, Mr. Karsh was an attorney with the law firm of O’Melveny & Myers LLP. Mr. Karsh currently serves as a Trustee on the Duke University Board of Trustees and is the Chairman of the Board of Directors of Duke’s investment management company. Mr. Karsh also serves on the boards of directors of Liberman Broadcasting, Inc. and LBI Media, Inc.
Terence M. O’Toole was designated as a member of our board of directors in March 2007. Mr. O’Toole was a partner and managing director of Goldman, Sachs & Co. from 1992 until 2005. In 2006, Mr. O’Toole joined Tinicum as a co-managing member. Mr. O’Toole is also a member of the Board of Managers of Skyway Towers Holding LLC, Enesco LLC and EGI Holdings LLC, a member of the Board of Trustees of Villanova University and the Pingry School, and a member of the boards of directors of Liberman Broadcasting, Inc. and LBI Media, Inc.
Board Composition
Our board of directors is currently composed of six directors. We have one vacant board member seat that may be filled solely by the holders of Class B common stock of Liberman Broadcasting as described below. Prior to March 30, 2007, our board of directors was comprised of two directors, Jose Liberman and Lenard Liberman.
In connection with the sale of Liberman Broadcasting’s Class A common stock on March 30, 2007, Liberman Broadcasting and the stockholders of Liberman Broadcasting entered into an investor rights agreement. Pursuant to that investor rights agreement, Liberman Broadcasting, our sole shareholder, must elect the directors that have been designated as board members of Liberman Broadcasting to our board of directors. Affiliates of Oaktree Capital Management LLC that hold Class A common stock of Liberman Broadcasting have the right to designate one director to Liberman Broadcasting’s board of directors. Tinicum Capital Partners II, L.P. and its affiliates that hold Class A common stock of Liberman Broadcasting have the right to designate one director to Liberman Broadcasting’s board of directors. The holders of Class B common stock of Liberman Broadcasting have the right to designate up to five directors to Liberman Broadcasting’s board of directors. As a result, Liberman Broadcasting must elect these seven designees as members of our board of directors. On March 30, 2007, Bruce A. Karsh and Terence M. O’Toole were designated by affiliates of Oaktree Capital Management and Tinicum Capital Partners II, respectively. The holders of our parent’s Class B common stock designated Jose Liberman, Lenard Liberman, Winter Horton and William G. Adams.
Director Independence
Our board of directors has analyzed the independence of each director under Nasdaq listing standards and determined that each of our non-employee directors, Mr. Adams, Mr. Karsh and Mr. O’Toole, are independent directors. Because our common stock is not listed on a national securities exchange, we are not required to maintain a board consisting of a majority of independent directors or to maintain an audit committee, nominating committee or compensation committee consisting solely of independent directors.
Board Committees
Nominating Committee and Compensation Committee. We are not a “listed issuer” as defined under Section 10A-3 of the Exchange Act. We are therefore not required to have a nominating or compensation committee comprised of independent directors. We currently do not have a standing nominating or compensation committee and accordingly, there are no charters for such committees. We believe that standing committees are not necessary and the directors collectively have the requisite background, experience, and knowledge to fulfill any limited duties and obligations that a nominating committee and a compensation committee may have.
Audit Committee and Audit Committee Financial Expert. We are not a “listed issuer” as defined under Section 10A-3 of the Exchange Act. We are therefore not required to have an audit committee comprised of independent directors. We currently do not have an audit committee and accordingly, there is no charter for such committee. The board of directors performs the functions of an audit committee. We believe that the directors collectively have the requisite financial background, experience, and knowledge to fulfill the duties and obligations that an audit committee would have, including overseeing our accounting and financial reporting practices. Therefore we do not believe that it is necessary at this time to search for a person who would qualify as an audit committee financial expert.
Section 16(a) Beneficial Ownership Reporting Compliance
We do not have a class of equity securities registered pursuant to Section 12 of the Securities Exchange Act of 1934, as amended.
Code of Ethics
We are not required to have a code of ethics because we do not have a class of equity securities listed on a national securities exchange.
ITEM 11. | EXECUTIVE COMPENSATION |
COMPENSATION DISCUSSION AND ANALYSIS
Overview of Compensation Philosophy and Program
Our board of directors, with the assistance of management, determines our compensation objectives, philosophy and forms of compensation and benefits for our executive officers.
Our compensation philosophy centers on the principle of aligning pay and performance. We attempt to design a total compensation package for our named executive officers that help to recruit, retain and motivate qualified executives that are critical to our current and future success.
We use various elements of compensation to reward performance. Our named executive officers are provided with a basic level of compensation for assuming and performing their responsibilities. We consider long-term and equity incentives on a case by case basis. As discussed below, we have employment agreements, but not with all of our named executive officers. We have not offered employment agreements to Jose Liberman or Lenard Liberman because each of them has a substantial equity stake in our parent company; thus their short- and long-term interests are aligned with those of our company.
Because we do not have equity securities listed on a national securities exchange, we are not required to have a compensation committee and our board of directors has the responsibility for establishing, implementing and monitoring adherence with our compensation philosophy.
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Role of Named Executive Officers in Compensation Decisions
At December 31, 2008, our four named executive officers were Jose Liberman, Lenard Liberman, Wisdom Lu and Winter Horton. Except for Wisdom Lu, all of our named executive officers also serve as members of our board of directors.
Our board of directors is responsible for determining the compensation of our executive officers. Because Jose Liberman, Lenard Liberman and Winter Horton are also members of our board of directors, each of them participated in the decisions concerning their own compensation for the year ended December 31, 2008.
Goals of the Compensation Program and Setting Executive Compensation
We attempt to align compensation paid to our named executive officers with the value that they achieve for our stockholders. While we offer all five elements of our compensation program described below under “Elements of our Compensation Program”, we focus primarily on the base salary and long-term incentives because we believe these elements are the most critical and influential to attract, retain, and motivate executives with the skill sets necessary to maximize stockholder value.
When making compensation decisions, our board of directors informally considers competitive market practices with respect to the salaries and total compensation of our named executive officers. In doing so, the board reviews the overall compensation of executive officers of companies that are in the Hispanic radio and television industry and are located within our general geographic market areas. Specifically, the board considers the following companies our peers for executive compensation purposes: Beasley Broadcast Group Inc., Citadel Broadcasting Corp., Cox Radio Inc., Crown Media Holdings Inc., Cumulus Media Inc., Emmis Communications Corp., Entercom Communications Corp., Entravision Communications Corp., and Saga Communications Inc. However, while the board reviews the compensation practices of our peers, it is only one factor they consider in establishing compensation, and they have not made use of any formula incorporating such data.
In setting compensation for 2008, the board used a strategy that employed both a subjective and a formulaic approach. In determining whether to increase or decrease compensation for our named executive officers, the board of directors generally considers the performance of the named executive officer, any increases or decreases in responsibilities, roles of the named executive officer, and our business needs for the named executive officer.
Neither we have, nor the board of directors has, hired a compensation consultant, and neither we have, nor the board of directors has, made a decision to do so.
Elements of our Compensation Program
For the year ended December 31, 2008, our total compensation package for our named executive officers consisted of the following components:
• | base salary; |
• | bonus; |
• | long-term incentive compensation for Wisdom Lu and Winter Horton; |
• | perquisites and other personal benefits; and |
• | retirement benefits. |
Each element of compensation is considered separately and we do not generally take into account amounts realized from prior periods. Our goal is to provide a total compensation package that we believe our named executive officers and our stockholders will view as fair and equitable. The form and amount for each element of compensation is determined on a case-by-case basis. Accordingly, our determination of compensation for each named executive officer is not a mechanical process, and our board of directors has used its judgment and experience to determine the appropriate mix of compensation for each individual named executive officer.
Base Salary — We provide each named executive officers and other employees with a base salary that we believe is both competitive for their role and compensates them for services rendered during the fiscal year. Subject to the terms of any employment agreement, the board of directors reviews the base salary for the named executive officers on an annual basis and at the time of a change in responsibilities. Increases in salary, if any, are based on a subjective evaluation of such factors as the level of responsibility, individual performance during the prior year, relevant peer data, the salaries of our other named executive officers, and the named executive officer’s experience and expertise.
Jose Liberman and Lenard Liberman. We do not have employment agreements with Jose Liberman, our Chairman and President, or Lenard Liberman, our Executive Vice President and Secretary. Prior to March 30, 2007, both were beneficial owners to all of the common stock of our parent. In connection with the sale of our parent’s Class A common stock to third party investors, the annual base salary for each of Jose Liberman and Lenard Liberman was increased to $750,000 to better reflect compensation levels paid to similarly positioned executives of our peers. The base salaries for 2008 remained at the same levels as 2007.
Wisdom Lu. In March 2008, Wisdom Lu joined us as our Chief Financial Officer. Pursuant to her employment agreement, Ms. Lu receives an annual base salary of $400,000 per year. Assuming her continued employment, Wisdom Lu’s salary will increase by 5% on April 1, 2009 and on each April 1 thereafter until March 31, 2013, the termination of her employment agreement.
Winter Horton. Pursuant to Winter Horton’s employment agreement, Mr. Horton was to receive a base salary of $350,977 for 2008, representing his base salary of $275,000 on May 1, 2003, with an increase in salary of 5% on each first day of May beginning in 2004. However, in connection with Winter Horton’s increased management duties to, among other things, supervise the reformatting of our new radio and television stations, the board of directors, at the recommendation of Lenard Liberman, increased Mr. Horton’s base salary to $400,000 effective January 1, 2007. Mr. Horton’s salary remained at the same level for 2008.
Bonus — Generally, bonus compensation to our named executive officers has been entirely discretionary. By providing discretionary bonuses, we believe that we align our executive compensation with individual performance on a short-term basis.
Jose Liberman and Lenard Liberman. Historically, Jose and Lenard Liberman have received minimal or no bonuses because each has a substantial equity stake in our parent. Jose Liberman and Lenard Liberman did not receive bonuses in 2008.
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Winter Horton. Our employment agreement with Winter Horton provides for discretionary bonuses that are based on the performance of his duties and responsibilities. The amount and timing of the bonus are within our sole discretion. In 2008, the board of directors, upon Lenard Liberman’s recommendation, determined that Winter Horton satisfactorily performed his duties as our Corporate Vice President, including his supervision of the integration of the assets of stations that we acquired in 2007 and 2008. Accordingly, Mr. Horton was awarded a discretionary bonus of $50,000.
Wisdom Lu. In accordance with her employment agreement, Wisdom Lu will receive a bonus of $100,000 if she remains Chief Financial Officer until March 31, 2009 and fully performs all material obligations under the employment agreement. For each twelve month period starting April 1, 2009 and ending March 31, 2013, Ms. Lu will be eligible to receive a bonus of up to 25% of her then-current annual salary if she remains Chief Financial Officer during the applicable twelve month period and fully performs all material obligations under the employment agreement. The amount of any bonus for periods commencing on or after April 1, 2009 will be determined by our parent’s board of directors in its sole discretion according to Ms. Lu’s achievement of annual objectives set by the board for that year. If, however, during the term of the employment agreement, our parent consummates an initial public offering of its Class A common stock, Ms. Lu’s bonus will be determined by a compensation committee or in such other manner as our parent determines satisfies applicable stock exchange rules or laws. Because of the prerequisite that Ms. Lu remain employed by us until March 31, 2009 to receive a bonus, this condition could not be achieved as of December 31, 2008.
Long-Term Incentive Compensation — We may offer long-term incentive compensation to align executive compensation with our stockholder interests by placing a significant amount of total direct compensation “at risk”. “At risk” means the named executive officer will not realize value unless performance goals directly tied to our performance and that of our consolidated parent are achieved. During our fiscal year ending December 31, 2008, we offered two types of long-term incentive compensation arrangements: (1) a long-term incentive plan in which Winter Horton participates in the increase in the net value of our parent over a threshold amount on a single determination date (see “Winter Horton—Participation in Net Value Increase in Our Parent” below for a description of the plan) and (2) the Liberman Broadcasting, Inc.’s Stock Incentive Plan, or Stock Incentive Plan, through which equity compensation may be granted by our parent’s board of directors.
On December 12, 2008, the stockholders of our parent approved Stock Incentive Plan, which reserves an aggregate of 14.568461 shares of our parent’s Class A common stock for issuance under this plan. The Stock Incentive Plan provides that our parent may grant any of the following: (i) incentive stock options, (ii) nonqualified stock options, (iii) restricted stock awards, and (iv) stock awards. All employees, members of our board of directors, members of the board of directors of our parent and subsidiaries, and certain consultants and advisors are eligible to participate. The board of directors of our parent will approve those individuals who will participate in the Stock Incentive Plan. In 2008, Ms. Lu was the only person who was granted any incentive award under the Stock Incentive Plan.
Jose Liberman and Lenard Liberman. Because Jose Liberman and Lenard Liberman, together, beneficially own 61.1% of the aggregate common stock of our parent, their compensation package does not contain additional long-term incentive compensation as we believe their motivation and financial interests are well aligned with that of our own.
Wisdom Lu—Stock Options in Our Parent. In accordance with Ms. Lu’s employment agreement, in December 2008, we granted her an option to purchase 2.18527 shares of Liberman Broadcasting’s Class A common stock at an exercise price of $1,368,082.63 per share under the Stock Incentive Plan. The options represent, on a fully diluted basis as of the date of grant, 0.75% of the outstanding shares of our parent and vest and become exercisable in five equal annual installments on March 31 of each year, commencing on March 31, 2009. The options expire ten years from the date of grant.
The option and any other rights of Ms. Lu under the Stock Incentive Plan are generally nontransferable and exercisable only by Ms. Lu. Any shares of common stock issued on exercise of the option are subject to substantial restrictions on transfer and are subject to certain rights in favor of our parent.
Also, the number and amount of our parent’s shares underlying Ms. Lu’s options will be proportionally adjusted for any recapitalization, reclassification, stock split, merger, consolidation or unusual or extraordinary corporate transactions in respect of our parent’s common stock.
Winter Horton—Participation in Net Value Increase in Our Parent. Mr. Horton’s employment agreement provides for incentive compensation that allows him to participate in the increase of the “net value” of our parent, Liberman Broadcasting, over a specified threshold amount on December 31, 2009, the determination date, unless a change in control occurs prior to that date. If a change in control occurs prior to December 31, 2009, the determination date will be the date of such change in control. See “Employment, Change in Control and Termination Arrangements — Change in Control”.
In general, the “net value” will be determined by an independent appraiser based on our parent’s consolidated cash flow as a going concern, reducing such amount for our parent’s consolidated liabilities (in each case, as determined under generally accepted accounting principles) on December 31, 2009. If the “net value” is determined as a result of a change in control, however, the appraiser must use the actual sales price as of the sales date in valuing the portion of our parent that was sold. Also, if at the time the “net value” is determined, the common stock of our parent is traded on an established securities market, the “net value” will be the product of the fully diluted outstanding common stock of our parent multiplied by the volume-weighted average price per share of our parent in the five days of trading immediately before December 31, 2009.
If certain conditions are met, Winter Horton will be entitled to receive up to a maximum percentage of the amount the “net value” of our parent exceeds a specified threshold amount, which may be reduced if the ownership of our parent by certain persons or entities related to Jose Liberman and/or Lenard Liberman is also reduced. The maximum possible payment comprises two portions: a time vesting portion and a performance vesting portion. For the time vesting portion, half of the maximum possible payment vests in seven equal annual installments as long as Mr. Horton remains employed with us. The other half of the maximum possible payment, the performance vesting portion, also vests in seven equal annual installments if our parent determines, in its sole discretion, that the annual performance goals have been met for the relevant year.
This incentive compensation is payable to Mr. Horton in cash within 30 days after the determination date (December 31, 2009 or earlier, if a change in control occurs), unless such payment would violate the terms of any loan agreement that is in effect at the time. If our parent’s common stock is traded on an established stock market at the time a payment, if any, is due to Mr. Horton, we may choose to pay the amount in our parent’s common stock in lieu of cash. As of December 31, 2008, our parent’s “net value” has not reached the threshold amount.
Perquisites and Other Benefits — We provide named executive officers with perquisites and other personal benefits that we believe are reasonable. We do not view perquisites as a significant element of our comprehensive compensation structure, but we do believe they can be useful in attracting, motivating and retaining executive talent.
The named executive officers may be provided with cellular phone service plans, personal travel, tickets to sporting events, personal use of company automobiles, and estate and financial planning and tax assistance. See “Summary Executive Compensation Table for 2008” for the aggregate amount of such perquisites. We also pay the medical and dental insurance plan premiums on behalf of our named executive employees and their legal dependents. In addition, we have provided whole life insurance and term life insurance policies for Lenard Liberman to provide for a death benefit of an aggregate of $2.5 million to beneficiaries designated by Mr. Liberman.
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In addition, we provide the same or comparable health and welfare benefits to our named executive officers as are available for all other full-time employees. We believe that the perquisites and other personal benefits that we offer are typical employee benefits for high-level executives working in our industry and in our geographic area. We believe that these benefits enhance employee morale and performance, and are not excessively costly to the company. We provide these benefits in our discretion. Our perquisite and personal benefit programs may change over time as the board of directors determines is appropriate.
Attributed costs of the perquisites and personal benefits described above for the named executive officers for the fiscal year ended December 31, 2008, are included in the column “All Other Compensation” of the “Summary Executive Compensation Table for 2008” below.
Retirement Benefits — Our named executive officers are permitted to contribute to a 401(k) plan up to the maximum amount allowed under the Internal Revenue Code. We do not provide any matching contributions. The 401(k) plan is available to all full-time employees. Our named executive officers do not participate in any deferred benefit retirement plans such as a pension plan. We also do not have any deferred compensation programs for any named executive officer.
Employment, Change in Control and Termination Arrangements
Employment Agreements — As stated above, we do not have employment agreements with Jose Liberman, our Chairman and President, or Lenard Liberman, our Executive Vice President and Secretary. During the year ended December 31, 2008, our only named executive officers with employment agreements were Wisdom Lu, our Chief Financial Officer, and Winter Horton, our Corporate Vice President.
Change in Control — Of our named executive officers, only Wisdom Lu and Winter Horton are entitled to an accelerated benefit in connection with a change in control of our company. The occurrence, or potential occurrence, of a change in control of our company may create uncertainty regarding the continued employment of Ms. Lu and Mr. Horton because many change in control transactions result in significant organizational changes, particularly at the executive officer level. In order to encourage Ms. Lu and Mr. Horton to remain employed with us during a critical time, we provide Ms. Lu and Mr. Horton with certain benefits in the event, or potential occurrence, of a change in control.
Wisdom Lu. Ms. Lu’s employment agreement provides that if, after a change in control event has occurred, (a) she is demoted or (b) we (or our successor) change her primary employment location more than 50 miles from Burbank, California, Ms. Lu will have 90 days to notify us (or our successor) that she intends to resign for “good reason.” If Ms. Lu resigns for “good reason” following a change in control event before March 31, 2013, the expiration of her employment agreement, Ms. Lu will be entitled to salary and bonuses earned at the time of such termination plus her base salary for a period of twelve months following termination. She will also be entitled to exercise the then vested portion of her options, as provided under the Stock Incentive Plan. Under the terms of the Stock Incentive Plan and Ms. Lu’s option award agreement, in the event of a change of control, the administrator may provide for a cash payment in settlement of, or for the assumption, substitution or exchange of, any or all of the outstanding options. Further, and unless the administrator provides otherwise prior to the change of control event, any outstanding and unvested portion of the option award will accelerate upon the change in control event such that 100% of each unvested and outstanding vesting installment of the option award will become immediately exercisable.
A “change in control” under Ms. Lu’s employment agreement and the Stock Incentive Plan would occur if:
(1) | our parent’s stockholders or board of directors approve of a dissolution or liquidation of our parent, other the events described in paragraph (3) below; |
(2) | except in certain circumstances, any individual or group acquires 50% or more of either (i) our parent’s outstanding common stock or (ii) the combined voting power of our parent’s outstanding common stock entitled to vote for the board of directors; or |
(3) | our parent consummates a merger, a sale of all or substantially all of its assets, or our parent acquires the assets or stock of another individual or group, in each case unless, following such transaction, (i) all or substantially all of the owners of our parent’s outstanding common stock will own more than 50% of the same securities after the transaction and (ii) no person (other than certain persons specified in the employment agreement) owns, directly or indirectly, more than 50% of the outstanding common stock or the combined voting power after the transaction. |
Winter Horton. Pursuant to Mr. Horton’s employment agreement, upon a change in control, Mr. Horton’s next installment of his time vesting portion (that is, 1/7 of his maximum payment relating to the time vesting portion) would vest immediately. Further, as described under “Elements of Our Compensation Program — Long-Term Incentive Compensation”, if a change in control occurs prior to December 31, 2009, the determination date used to calculate Winter Horton’s incentive compensation will be the date of such change in control and any long-term incentive payment that has vested will be due within 30 days after such date. Under his employment agreement, a “change in control” would occur if:
(1) | our parent is acquired by merger or consolidation in which more than 50% of our parent’s outstanding voting securities is transferred to an entity (other than to Jose Liberman, Lenard Liberman or any of their spouses, lineal descendants or heirs and devisees or an entity (including a trust) that is owned or controlled by our parent or by Jose Liberman, Lenard Liberman or any of their spouses, lineal descendants or heirs and devisees), |
(2) | 80% or more of the assets of our parent are sold (other than to Jose Liberman, Lenard Liberman or any of their spouses, lineal descendants or heirs and devisees or an entity (including a trust) that is owned or controlled by our parent or by Jose Liberman, Lenard Liberman or any of their spouses, lineal descendants or heirs and devisees), |
(3) | Jose Liberman, Lenard Liberman or any of their spouses, lineal descendants or heirs and devisees directly sells more than 50% of our parent’s outstanding voting securities, |
(4) | our parent issues equity to new investors representing more than 50% of the voting power immediately after such issuance, other than through a public offering, or |
(5) | our parent issues equity through a public offering representing more than 33% of the voting power after such issuance. |
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Termination Arrangements— We believe that severance and other post-termination benefits can play a valuable role in attracting and retaining key executive officers. Accordingly, we provide certain of these protections to Wisdom Lu and Winter Horton pursuant to their respective employment agreements. Other than pursuant to those employment agreements, we are not obligated to make any severance or other payments upon termination to our named executive officers.
Wisdom Lu. If Ms. Lu resigns (for “good reason” or otherwise), dies, becomes disabled, or is terminated (for cause or without cause) before her employment agreement terminates on March 31, 2013, we would be required to pay her earned and accrued salary and bonus. In addition, Ms. Lu would be entitled to payments equal to 12 months of base salary and to exercise the then-vested portion of her options to purchase shares in Liberman Broadcasting’s Class A common stock if we terminate Ms. Lu’s employment for a reason other than for cause or disability. See “Change in Control—Wisdom Lu” for termination benefits if Ms. Lu resigns for “good reason” following a change in control event.
Further, if Ms. Lu is terminated for cause, any outstanding portion of her option under the Stock Incentive Plan will be immediately forfeited, regardless of whether it was then exercisable. “Cause,” which will be determined by our parent’s board of directors, generally means any of the following:
(1) | Ms. Lu’s willful refusal to comply with reasonable requests made by our Chief Executive Officer, President or Executive Vice President, |
(2) | personal dishonesty involving our business, or breach of fiduciary duty to us or our parent involving personal profit, |
(3) | use of any illegal drug, narcotic, or excessive amounts of alcohol (as determined by the company in its discretion) on our property or at a function where she is working on our behalf, |
(3) | commission of a felony, which has, or in the reasonable judgment of our parent’s board of directors, may have a material adverse effect on our business or reputation, |
(4) | a breach by Ms. Lu of any material provision of the employment agreement, or |
(5) | any breach by Ms. Lu of the public morals provision of the employment agreement. |
Winter Horton. If Winter Horton is terminated without “cause,” or if he terminates his employment with us because of a material breach of his employment agreement by us, in either case before the termination of his employment agreement on December 31, 2009, we would be required to pay (1) accrued salary or bonus for services rendered, (2) any amounts previously vested under the long-term incentive plan, and (3) severance payments equal to 180 days of base salary.
If Winter Horton is terminated for death, disability or “cause” before December 31, 2009, we will not be obligated to make any payments under the employment agreement except for any accrued salary or bonuses for services rendered and/ or amounts vested under the long-term incentive plan at the time of termination. “Cause,” which will be determined by our parent’s board of directors, means any of the following:
(1) | consistent failure of the employee to perform his duties pursuant to the employment agreement after having been warned at least once in writing by the board of directors of our parent, |
(2) | personal dishonesty involving our business, or breach of fiduciary duty to us or our parent involving personal profit, |
(3) | commission of a felony, which has, or in the reasonable judgment of our parent’s board of directors, may have a material adverse effect on our business or reputation, |
(4) | Mr. Horton’s intentional breach of any material provision of the employment agreement, which is either not reasonably curable or, if reasonably curable, is not cured within 10 days notice from our parent, or |
(5) | any breach by Mr. Horton of certain confidentiality provisions of the employment agreement. |
See “Potential Payments Upon Termination or Change of Control” for amounts we would have been required to pay had a change of control event occurred at December 31, 2008.
Internal Revenue Code Section 162(m)
We do not have any common equity securities required to be registered under the Securities Exchange Act of 1934. Therefore, the limitation on tax deductibility of executive compensation under Section 162(m) of the Internal Revenue Code does not apply to us.
Compensation Committee Report
As we do not have a compensation committee, our board of directors reviews and determines the compensation of our named executive officers. The board of directors has reviewed and discussed with management the information under the Compensation Discussion and Analysis above. Based on such review and discussion, the board of directors has approved the inclusion of the Compensation Discussion and Analysis in this report.
The Board of Directors: | ||||
Jose Liberman | ||||
William G. Adams | ||||
Winter Horton | ||||
Bruce A. Karsh | ||||
Lenard D. Liberman | ||||
Terence M. O’Toole |
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Summary Executive Compensation Table for 2008
The following table describes the compensation we paid to our named executive officers during the fiscal years ended December 31, 2008, 2007 and 2006.
Name and Principal Position(s) | Year | Salary | Bonus | Option Awards(5) | All Other Compensation | Total | |||||||||||
Jose Liberman (1) | 2008 | $ | 750,000 | $ | — | $ | — | $ | 108,174 | $ | 858,174 | ||||||
2007 | $ | 687,500 | $ | — | $ | — | $ | 55,835 | $ | 743,335 | |||||||
2006 | $ | 500,000 | $ | — | $ | — | $ | 45,435 | $ | 545,435 | |||||||
Lenard Liberman (2) | 2008 | $ | 750,000 | $ | — | $ | — | $ | 91,615 | $ | 841,615 | ||||||
2007 | $ | 687,500 | $ | — | $ | — | $ | 85,946 | $ | 773,446 | |||||||
2006 | $ | 500,000 | $ | — | $ | — | $ | 94,096 | $ | 594,096 | |||||||
Wisdom Lu (3) | 2008 | $ | 309,231 | $ | — | $ | 1,377 | $ | — | $ | 310,608 | ||||||
Winter Horton (4) | 2008 | $ | 400,000 | $ | 50,000 | $ | — | $ | — | $ | 450,000 | ||||||
2007 | $ | 400,000 | $ | 35,000 | $ | — | $ | — | $ | 435,000 | |||||||
2006 | $ | 363,978 | $ | — | $ | — | $ | — | $ | 363,978 |
(1) | Jose Liberman’s annual base salary was increased from $500,000 to $750,000 on March 30, 2007. All other compensation includes aggregate payments by us for Mr. Liberman’s estate and financial planning expenses of $46,553, personal travel of $29,397, and other personal expenses. |
(2) | Lenard Liberman’s annual base salary was increased from $500,000 to $750,000 on March 30, 2007. All other compensation includes payments by us for Mr. Liberman’s leasing of personal vehicles of $30,272, personal travel of $29,397, other personal expenses, and whole and term life insurance premiums. |
(3) | Wisdom Lu was appointed our Chief Financial Officer in March 2008. Her annual base salary in 2008 was $400,000. We granted Ms. Lu an option to purchase 2.18527 shares of our parent’s Class A common stock at an exercise price of $1,368,082.63 per share, pursuant to the Stock Incentive Plan. See “Compensation Discussion and Analysis—Long-Term Incentive Compensation”. |
(4) | Winter Horton has not yet accrued any non-equity incentive plan compensation under his employment agreement. See “Compensation Discussion and Analysis—Long-Term Incentive Compensation”. The discretionary bonus paid to Mr. Horton in 2008 amounts to 12.5% of his base salary and 11.1% of his total compensation for 2008. |
(5) | Represents stock-based compensation expense recognized during the fiscal year ended December 31, 2008 under SFAS No. 123R stock based compensation (disregarding any estimate of forfeitures related to service-based vesting conditions). For a discussion of valuation assumptions used in SFAS No. 123R stock-based compensation calculations, see Notes 1 and 8 of the Notes to Consolidated Financial Statements, included in this Annual Report on Form 10-K. There were no forfeitures during the year. |
The following table presents information regarding the plan-based awards granted to our named executive officers during fiscal year 2008.
Grants of Plan-Based Awards in 2008
Name | Grant Date | All Other Option Awards: Number of Securities Underlying Options (#) | Exercise of Base Price of Option Awards ($/Sh) | Grant Date Fair Value of Stock and Option Award(1) | ||||
Jose Liberman | — | — | — | — | ||||
Lenard Liberman | — | — | — | — | ||||
Wisdom Lu(2) | 12/12/2008 | 2.18527 | 1,368,082.63 | 252,693.05 | ||||
Winter Horton | — | — | — | — |
(1) | We provide information regarding the assumptions used to calculate the value of all awards made to executive officers pursuant to the Stock Incentive Plan described in Note 8 to our Consolidated Financial Statements. The values included in this table are for the full grant date fair value of the awards made in 2008 without regard to any estimate of forfeitures relating to the five year vesting conditions described below. |
(2) | As described under “Compensation Discussion and Analysis—Long-Term Incentive Compensation”, pursuant to Wisdom Lu’s employment agreement, Ms. Lu has been granted an option to purchase 2.18527 shares of Liberman Broadcasting’s Class A common stock at an exercise price of $1,368,082.63 per share. The shares vest and become exercisable in five equal annual installments on March 31 of each year, commencing on March 31, 2009. The valuation assumptions and other material terms of the option grant are provided in Note 8 to the Consolidated Financial Statements. |
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Outstanding Equity Awards at December 31, 2008
Name | Number of Securities Underlying Unexercised Options (#) Exercisable | Number of Securities Underlying Unexercised Options (#) Unexercisable | Equity Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned Options (#) | Option Exercise Price ($) | Option Expiration Date | |||||
Jose Liberman | — | — | — | — | — | |||||
Lenard Liberman | �� | — | — | — | — | |||||
Wisdom Lu(1) | — | — | 2.18527 | 1,368,082.63 | 12/2018 | |||||
Winter Horton | — | — | — | — | — |
(1) | Wisdom Lu was granted options to purchase the Class A common stock of our parent, Liberman Broadcasting, Inc., on December 12, 2008 pursuant to the Stock Incentive Plan. The option expires ten years from the date of the grant and vests over five years. The option grant to Wisdom Lu represents, on a fully diluted basis as of the date of grant, 0.75% of the outstanding shares of our parent’s common stock and vests and become exercisable in five equal annual installments on March 31 of each year, commencing on March 31, 2009. |
Potential Payments Upon Termination or Change of Control
As described above under “Compensation Discussion and Analysis—Employment, Change in Control and Termination Arrangements”, Wisdom Lu’s and Winter Horton’s employment agreements would require us to make termination and/or severance payments and change in control benefits.
Wisdom Lu. If Ms. Lu resigns (for “good reason” or otherwise), dies, becomes disabled, or is terminated (for cause or without cause) before her employment agreement terminates on March 31, 2013, we would be required to pay her accrued salary and bonus. In addition, Ms. Lu would be entitled to payments equal to 12 months of base salary and to exercise the then-vested portion of her options to purchase shares in Liberman Broadcasting’s Class A common stock if either of the following events occurred: (1) we terminate Ms. Lu’s employment for a reason other than for cause or disability or (2) Ms. Lu resigns for “good reason” following a change in control event. Under the terms of the Stock Incentive Plan and Ms. Lu’s option award agreement, in the event of a change of control, the administrator may provide for a cash payment in settlement of, or for the assumption, substitution or exchange of, any or all of the outstanding options. Further, and unless the administrator provides otherwise prior to the change of control event, any outstanding and unvested portion of the option award will accelerate upon the change in control event such that 100% of each unvested and outstanding vesting installment of the option award will become immediately exercisable.
Had we terminated Ms. Lu on December 31, 2008 for a reason other than for cause or disability, we would have been required to pay Ms. Lu’s accrued salary and severance of $400,000, an amount representing 12 months of her base salary. None of Ms. Lu’s options to purchase our parent’s Class A common shares had vested as of December 31, 2008.
If Ms. Lu resigned for good reason after a change of control event on December 31, 2008, we would have been required to pay her accrued salary and severance of $400,000. As noted above, and unless otherwise provided by the administrator of the Stock Incentive Plan, had Ms. Lu’s employment terminated under the circumstances described above in connection with a change of control event on December 31, 2008, Ms. Lu would have also been entitled to the accelerated vesting of 100% of any outstanding and unvested portion of the option award. The value of her outstanding and unvested option that would have accelerated as of December 31, 2008 was $0. This amount is determined based on the difference on December 31, 2008 between the exercise price of the option and the fair market value of an underlying share of common stock on such date.
If Wisdom Lu is terminated for death, disability or “cause,” or resigns for any reason other than a “good reason”, before March 31, 2013, we would not be obligated to make any payments under the employment agreement except for any accrued salary or bonuses for services rendered. In addition, if Ms. Lu is terminated for cause, any outstanding portion of her option under the Stock Incentive Plan will be immediately forfeited, regardless of whether it was then exercisable.
Winter Horton. If Mr. Horton is terminated or resigns for any reason prior to December 31, 2009, the termination date of Mr. Horton’s employment agreement, we would be required to pay his accrued salary and bonus and any amounts vested under the incentive plan in his employment agreement. In addition, if Mr. Horton is terminated without “cause” or if he terminates his employment with us because of a material breach of his employment agreement by us, we would also be required to make a severance payment equal to 180 days of his base salary. If we had terminated Winter Horton’s employment without “cause” on December 31, 2008, we would have been required to pay Mr. Horton’s accrued salary and severance of $197,260. No long-term incentive compensation for Mr. Horton had accrued as of December 31, 2008 because our parent’s net value had not exceeded the specified threshold as of December 31, 2008.
In the event of a change in control (see “Compensation Discussion and Analysis—Employment, Change in Control and Termination Arrangements—Termination Arrangements—Winter Horton”) before December 31, 2009, Mr. Horton will automatically vest in the next 1/7 installment of his time vesting portion of his long-term incentive compensation and the “net value” determination date used to calculate his maximum possible payment will become the date of such change in control.
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Director Compensation
We do not pay a retainer or director fees to our directors for their services, except for William G. Adams. We also did not provide any perquisites or other benefits to any non-employee director in 2008 which aggregated $10,000 or more. We do, however, reimburse each of our directors for expenses incurred in the performance of his duties as a director.
DIRECTOR COMPENSATION FOR 2008
Name | Fees Paid or Earned in Cash ($) | Total ($) | |||||
Jose Liberman(1) | $ | — | $ | — | |||
Lenard D. Liberman(1) | — | — | |||||
Winter Horton(1) | — | — | |||||
William G. Adams | 34,500 | (2) | 34,500 | ||||
Bruce A. Karsh | — | — | |||||
Terence M. O’Toole | — | — |
(1) | In 2008, Jose Liberman, Lenard Liberman and Winter Horton served as our President, Executive Vice President and Secretary and Corporate Vice President, respectively, while also serving as our directors. Messrs J. Liberman, L. Liberman and Horton were not paid any additional compensation for their services as directors in 2008. See “Summary Executive Compensation Table for 2008.” |
(2) | The stockholders of our parent, Liberman Broadcasting, determined that Mr. Adams should be compensated for his service as a director because he is the only director not to hold, directly or indirectly, any equity in our parent or receive any other type of compensation for his service to us. In addition to serving on our board of directors, Mr. Adams also serves on the board of directors of our parent and our wholly owned subsidiary, LBI Media, Inc. Mr. Adams’ aggregate fees for his services to us, our parent, and LBI Media has been included in this table. Mr. Adams receives an aggregate quarterly fee of $7,500 plus a meeting fee of $1,500 for each board meeting (other than telephonic meetings) he attends. However, Mr. Adams is only entitled to receive one meeting fee if the meetings of our board of directors and the board of directors of our parent and LBI Media are held jointly or consecutively. Mr. Adams attended three board meetings in 2008. |
Compensation Committee Interlocks and Insider Participation
We do not have a compensation committee. Our board of directors is responsible for determining the compensation of our executive officers. Jose Liberman, our Chairman and President, Lenard Liberman, our Executive Vice President and Secretary, and Winter Horton, our Corporate Vice President, were directors for 2008 and participated with the rest of the board in determining the compensation of all executive officers for 2008. Otherwise, no executive officer of our company has served as a member of the board of directors or compensation committee (or other committee serving an equivalent function) of any other entity that has or has had one or more executive officers who served as a member of our board of directors during the year ended December 31, 2008.
ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED SHAREHOLDER MATTERS |
We are a wholly owned subsidiary of our parent, Liberman Broadcasting, Inc. The following table sets forth information as of March 30, 2009 with respect to the beneficial ownership of Class A common stock and Class B common stock of our parent by (i) our directors, (ii) our named executed officers (as described above under “Item. 11 Executive Compensation—Compensation Discussion and Analysis”) and (iii) our directors and executive officers as a group.
The amounts and percentages of our parent’s Class A and Class B common stock beneficially owned are reported on the basis of regulations of the Securities and Exchange Commission, or SEC, governing the determination of beneficial ownership of securities. Under the rules of the SEC, a person is deemed to be a “beneficial owner” of a security if that person has or shares “voting power,” which includes the power to vote or to direct the voting of such security, or “investment power,” which includes the power to dispose of or to direct the disposition of such security. A person is also deemed to be a beneficial owner of any securities of which that person has a right to acquire beneficial ownership within 60 days. Under these rules, more than one person may be deemed a beneficial owner of the same securities and a person may be deemed a beneficial owner of securities as to which he has no economic interest. Except as otherwise noted by footnote, we believe, based on the information furnished to us, that the persons named in the table below have sole voting and investment power with respect to all shares of common stock reflected as beneficially owned, subject to applicable community property laws.
The Class A common stock and Class B common stock vote together as a single class on all matters submitted to a vote of the stockholders of our parent. Each share of Class A common stock is entitled to one vote per share, and each share of Class B common stock is entitled to ten votes per share. Holders of such shares of our parent’s Class B common stock may elect at any time to convert their shares into an equal number of shares of Class A common stock, provided that any necessary consent by the FCC has been obtained. Our parent had 113.29783 shares and 178.07139 shares of Class A and Class B common stock, respectively, outstanding on March 30, 2009.
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Class A Common Stock | Class B Common Stock | % of Total Economic Interest | % of Total Voting Power | ||||||||||||||
Name and Address of Stockholder (1) | Number | % | Number | % | |||||||||||||
Jose Liberman (2) | (2 | ) | (2 | ) | 58.51258 | 32.9 | % | 20.1 | % | 30.9 | % | ||||||
Lenard Liberman (3) | (3 | ) | (3 | ) | 119.55881 | 67.1 | 41.0 | 63.1 | |||||||||
Wisdom Lu | — | — | — | — | — | — | |||||||||||
Winter Horton | — | — | — | — | — | — | |||||||||||
William G. Adams | — | — | — | — | — | — | |||||||||||
Bruce A. Karsh (4) | 75.28824 | 66.5 | % | — | — | 25.8 | 4.0 | ||||||||||
Terence M. O’Toole (5) | 37.27864 | 32.9 | % | — | — | 12.8 | 2.0 | ||||||||||
All directors and executive officers as a group (7 persons) | 112.5669 | 99.4 | % | 178.07139 | 100.0 | 99.7 | 100.0 |
(1) | The address of the persons and entities listed on the table is c/o LBI Media Holdings, Inc., 1845 West Empire Avenue, Burbank CA 91504. |
(2) | Represents shares of Class B common stock held by Mr. Jose Liberman in his capacity as trustee of the Liberman Trust dated 11/07/02. Holders of such shares of our Class B common stock may elect at any time to convert their shares into an equal number of shares of Class A common stock, provided that any necessary consent by the FCC has been obtained. Further, Class B shares will automatically be converted, whether by sale, assignment gift or otherwise, whether voluntarily or involuntarily, to Class A common shares under certain circumstances set forth in Liberman Broadcasting’s Restated Certificate of Incorporation. |
(3) | Holders of such shares of our Class B common stock may elect at any time to convert their shares into an equal number of shares of Class A common stock, provided that any necessary consent by the FCC has been obtained. Further, Class B shares will automatically be converted, whether by sale, assignment gift or otherwise, whether voluntarily or involuntarily, to Class A common shares under certain circumstances set forth in Liberman Broadcasting’s Restated Certificate of Incorporation. |
(4) | Represents an aggregate of 75.28824 shares of Class A common stock held by OCM Principal Opportunities Fund III, L.P., OCM Principal Opportunities Fund IIIA, L.P., OCM Principal Opportunities Fund IV AIF (Delaware), L.P. and OCM Opps Broadcasting, LLC (collectively, the “Oaktree Group”). Mr. Karsh has sole voting and dispositive power of the shares held by the Oaktree Group. Mr. Karsh disclaims beneficial ownership of these shares except to the extent of his pecuniary interest therein. |
(5) | Represents an aggregate of 37.27864 shares of Class A common stock held by Tinicum Capital Partners II, L.P., Tinicum Capital Partners II Parallel Fund, L.P. and Tinicum Capital Partners II Executive Fund L.L.C. (collectively, the “Tinicum Group”). Mr. O’Toole is co-managing member of Tinicum Capital Partners II, L.P. and has sole voting and dispositive power of shares held by the Tinicum Group. Mr. O’Toole disclaims beneficial ownership of these shares except to the extent of his pecuniary interest therein. |
For equity compensation plan information, refer to the information in “Item 11. Executive Compensation”
ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE |
We are not required to have, and do not have, an audit committee. Accordingly, our board of directors reviews and approves all related person transactions. Our board of directors has not adopted written procedures for review of, or standards for approval of, these transactions, but instead reviews such transactions on a case-by-case basis.
Executive Officer and Director Loans
As of December 31, 2008, we had outstanding loans, including accrued interest, aggregating $261,329 and $2,594,284 to Jose and Lenard Liberman, respectively, each of whom is an executive officer and beneficially owns shares of our stock, and $690,000 to Winter Horton, our Corporate Vice President and Director. The loans were for the personal use of Jose and Lenard Liberman and Winter Horton.
For Jose Liberman, we made loans of $146,590 and $75,000 on December 20, 2001 and July 29, 2002, respectively. During the year ended December 31, 2008 the largest aggregate amount of principal outstanding of these loans was $221,590. Jose Liberman did not pay us any principal or interest for the year ended December 31, 2008.
For Lenard Liberman, we made loans of $243,095, $32,000 and $1,916,563 on December 20, 2001, June 14, 2002 and July 9, 2002, respectively. During the year ended December 31, 2008 the largest aggregate amount of principal outstanding of these loans was $2,191,658. Lenard Liberman did not pay us any principal or interest for the year ended December 31, 2008.
Each of these loans bears interest at the alternative federal short-term rate published by the Internal Revenue Service for the month in which the advance was made, which rate was 2.48%, 2.91% and 2.84% for December 2001, June 2002 and July 2002, respectively. Each loan matures on the seventh anniversary of the date on which the loan was made, with the exception of the loans made in December 2001, which we extended for one year in 2008 to mature in December 2009.
For Winter Horton, loans of $30,000, $36,000, $349,000 and $275,000 were made to Mr. Horton on November 20, 1998, November 22, 2002, November 29, 2002 and April 8, 2006, respectively. Each of these loans were made prior to Mr. Horton’s election as our director in March 2007. During the year ended December 31, 2008, the largest aggregate principal amount outstanding of these loans was $690,000. Mr. Horton did not repay any principal or interest for the year ended December 31, 2008. The $30,000 loan does not bear interest and does not have a maturity date. Each of the other loans bears interest at 8.0% and the loans made on November 22, 2002, November 29, 2002 and April 8, 2006 mature on January 1, 2010, December 31, 2009 and December 31, 2009, respectively.
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L.D.L. Enterprises, Inc.
Lenard Liberman is the sole shareholder of L.D.L. Enterprises, Inc., a mail order business. From time to time, we allow L.D.L. Enterprises to use, free of charge, unsold advertising time on our radio and television stations.
ITEM 14. | PRINCIPAL ACCOUNTANT FEES AND SERVICES |
Fees related to services performed by Ernst & Young LLP and Deloitte & Touche LLP for the years ended December 31, 2008 and 2007 are as follows:
Year Ended December 31, | ||||||
2008 | 2007 | |||||
Audit fees | $ | 443,000 | $ | 655,000 | ||
Audit-related fees | 28,000 | 153,000 | ||||
Tax fees | 127,000 | 97,000 | ||||
All other fees | — | — | ||||
Total | $ | 598,000 | $ | 905,000 | ||
We do not have an audit committee. Our board of directors approved all services performed by Ernst & Young LLP. In December 2008, we dismissed Ernst & Young LLP as our principal accountant and appointed Deloitte & Touche LLP as our new principal accountant. Of the audit fees rendered for the year ended December 31, 2008, $300,000 were billed by Deloitte & Touche LLP.
Fees for audit services include fees associated with the annual audit, the reviews of our quarterly reports on Form 10-Q, the issuance of comfort letters, the issuance of consents, and assistance with and review of documents filed with the Securities and Exchange Commission. Tax fees include tax compliance, tax advice and tax planning services.
ITEM 15. | EXHIBITS, FINANCIAL STATEMENT SCHEDULES |
(a) | The following documents are filed as part of this report: |
1. | Financial Statements |
The following financial statements of LBI Media Holdings, Inc. and report of independent auditors are included in Item 8 of this annual report and submitted in a separate section beginning on page F-1:
Page | ||
F-1 | ||
F-3 | ||
F-4 | ||
Consolidated Statements of Stockholder’s (Deficiency) Equity | F-5 | |
F-6 | ||
F-8 |
2. | Financial Statements Schedules |
All required schedules are omitted because they are not applicable or the required information is shown in the financial statements or the accompanying notes.
3. | Exhibits |
The exhibits filed as part of this annual report are listed in Item 15(b).
(b) | Exhibits. |
The following exhibits are filed as a part of this report:
Exhibit Number | Exhibit Description | |
3.1 | Restated Certificate of Incorporation of LBI Media Holdings, Inc. (4) | |
3.2 | Certificate of Ownership of Liberman Broadcasting, Inc. (successor in interest to LBI Holdings I, Inc.), dated July 9, 2002 (1) | |
3.3 | Amended and Restated Bylaws of LBI Media Holdings, Inc. (4) | |
4.1 | Indenture governing LBI Media Holdings’ 11% Senior Discount Notes due 2013, dated October 10, 2003, by and among LBI Media Holdings, Inc. and U.S. Bank National Association, as Trustee (2) | |
4.2 | Form of Exchange Note (included as Exhibit A-1 to Exhibit 4.1) |
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4.3 | Indenture, dated as of July 23, 2007, by and among LBI Media, Inc., the subsidiary guarantors party thereto, and U.S. Bank National Association, as trustee (5) | |
4.4 | The Company agrees to furnish to the Securities and Exchange Commission upon request a copy of each instrument with respect to issues of long-term debt of LBI Media Holdings, Inc. and its subsidiaries, the authorized principal amount of which does not exceed 10% of the consolidated assets of LBI Media Holdings, Inc. and its subsidiaries. | |
10.1 | Promissory Note dated December 20, 2001 by Lenard D. Liberman in favor of LBI Media, Inc. (1) | |
10.2 | Promissory Note dated December 20, 2001 by Jose Liberman in favor of LBI Media, Inc. (1) | |
10.3 | Promissory Note dated June 14, 2002 issued by Lenard D. Liberman in favor of LBI Media, Inc. (1) | |
10.4 | Promissory Note dated July 9, 2002 issued by Lenard Liberman in favor of LBI Media, Inc. (1) | |
10.5 | Promissory Note dated July 29, 2002 issued by Jose Liberman in favor of LBI Media, Inc. (1) | |
10.6 | Authorization of Loan dated November 20, 1998 by Winter Horton in favor of Liberman Broadcasting of California LLC (successor in interest to Liberman Broadcasting, Inc.) (7) | |
10.7 | Unsecured Promissory Note dated November 22, 2002 by Winter Horton in favor of Liberman Broadcasting of California LLC (successor in interest to Liberman Broadcasting, Inc.) (7) | |
10.8 | Secured Promissory Note dated November 29, 2002 by Winter Horton in favor of Liberman Broadcasting of California LLC (successor in interest to Liberman Broadcasting, Inc.) (7) | |
10.9 | Secured Promissory Note dated April 8, 2006 by Winter Horton in favor of Liberman Broadcasting of California LLC (successor in interest to Liberman Broadcasting, Inc.) (7) | |
10.10†% | Employment Agreement, dated as of December 18, 2002, by and between Liberman Broadcasting, Inc. (successor in interest to LBI Holdings I, Inc.) and Winter Horton, as amended by the Amendment to Employment Agreement dated as of May 17, 2004 (4) | |
10.11† | Employment Agreement, dated as of February 27, 2008, by and between Liberman Broadcasting, Inc. and Wisdom Lu (7) | |
10.12 | Amended and Restated Credit Agreement, dated May 8, 2006, among LBI Media, Inc., the guarantors party thereto, the Lenders party thereto and Credit Suisse, Cayman Islands Branch, as administrative agent (3) | |
10.13 | First Amendment and Consent to Amended and Restated Credit Agreement, dated as of March 16, 2007, by and among LBI Media, Inc., the guarantors party thereto, the lenders thereto, Credit Suisse, Cayman Islands Branch, as administrative agent, and Credit Suisse, Cayman Islands Branch, as collateral agent (7) | |
10.14 | Second Amendment to Amended and Restated Credit Agreement, dated as of July 23, 2007, by and among LBI Media, Inc., the guarantors party thereto, the lenders party thereto, Credit Suisse, Cayman Islands Branch, as administrative agent, and Credit Suisse, Cayman Islands Branch, as collateral agent (5) | |
10.15 | Amended and Restated Term Loan Agreement, dated May 8, 2006, among LBI Media, Inc., the guarantors party thereto, the Lenders party thereto and Credit Suisse, Cayman Islands Branch, as administrative agent (3) | |
10.16 | First Amendment and Consent to Amended and Restated Term Loan Agreement, dated as of March 16, 2007, among LBI Media, Inc., the guarantors party thereto, the lenders party thereto, Credit Suisse, Cayman Islands Branch, as administrative agent, and Credit Suisse, Cayman Islands Branch, as collateral agent (7) | |
10.17 | Investor Rights Agreement, dated as of March 30, 2007, by and among Liberman Broadcasting, Inc. and each of the stockholders of Liberman Broadcasting, Inc. listed on the signature pages thereto (4) | |
10.18 | Amendment No. 1 to Investor Rights Agreement and Waiver, dated as of July 10, 2007, by and among Liberman Broadcasting, Inc., OCM Principal Opportunities Fund III, L.P., OCM Principal Opportunities Fund IIIA, L.P., OCM Opps Broadcasting, LLC, OCM Principal Opportunities Fund IV AIF (Delaware), L.P., Tinicum Capital Partners II, L.P., Tinicum Capital Partners II Parallel Fund, L.P., and the existing shareholders listed on the signature pages thereto (6) | |
10.19 | Asset Purchase Agreement, dated as of November 9, 2007, by and between Liberman Broadcasting of California LLC and LBI Radio License LLC, as buyers, and R&R Radio Corporation, as seller (6) | |
10.20 | Agreement Relating to Relocation and Purchase of KDES-FM, dated as of November 9, 2007, by and between Liberman Broadcasting of California LLC and Spectrum Scan-Idyllwild, LLC (6) | |
10.21 | Asset Purchase Agreement, dated August 8, 2008, by and among KRCA Television LLC, KRCA License LLC and Latin America Broadcasting of Arizona, Inc. (8) | |
10.22 | Asset Purchase Agreement, dated September 12, 2008, by and among Liberman Broadcasting of California LLC, LBI Radio License LLC, Sun City Communications, LLC and Sun City Licenses, LLC (9) | |
10.23† | Liberman Broadcasting, Inc. Stock Incentive Plan, dated December 12, 2008* | |
10.24† | Liberman Broadcasting, Inc. Stock Incentive Plan Stock Option Agreement dated December 12, 2008, by and between Liberman Broadcasting, Inc. and Wisdom Lu* | |
10.25† | Summary of Verbal Agreement for Director Compensation with William G. Adams* | |
21.1 | Subsidiaries of LBI Media Holdings, Inc. (7) | |
23.1 | Consent of Ernst & Young LLP* | |
31.1 | Certification of President pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934* | |
31.2 | Certification of Chief Financial Officer pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934* |
* | Filed herewith. |
† | Indicates compensatory plan, contract or arrangement in which directors or executive officers may participate. |
% | Certain portions of this exhibit have been omitted pursuant to a confidential treatment request filed separately with the Securities and Exchange Commission. |
(1) | Incorporated by reference to LBI Media’s Registration Statement on Form S-4, filed with the Securities and Exchange Commission on October 4, 2002, as amended (File No. 333-100330). |
(2) | Incorporated by reference to LBI Media Holdings’ Registration Statement on Form S-4, filed with the Securities and Exchange Commission October 30, 2003, as amended (File No. 333-110122). |
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(3) | Incorporated by reference to LBI Media Holdings’ Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on May 15, 2006 (File No. 333-110122). |
(4) | Incorporated by reference to LBI Media Holdings’ Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on May 15, 2007 (File No. 333-110122). |
(5) | Incorporated by reference to LBI Media Holdings, Inc.’s Current Report on Form 8-K filed with the Securities and Exchange Commission on July 23, 2007 (File No. 333-110122). |
(6) | Incorporated by reference to LBI Media Holdings’ Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on November 14, 2007 (File No. 333-110122). |
(7) | Incorporated by reference to LBI Media Holdings’ Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 31, 2008 (File No. 333-110122). |
(8) | Incorporated by reference to LBI Media Holdings’ Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on August 14, 2008 (File No. 333-110122). |
(9) | Incorporated by reference to LBI Media Holdings’ Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on November 14, 2008 (File No. 333-110122). |
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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 on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Burbank, State of California, on March 31, 2009.
LBI MEDIA HOLDINGS, INC. |
/s/ Wisdom Lu |
Wisdom Lu |
Chief Financial Officer |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature | Title | Date | ||
/s/ Jose Liberman | Chairman, President and Director | March 31, 2009 | ||
Jose Liberman | ||||
/s/ Lenard D. Liberman | Executive Vice President, Secretary and | March 31, 2009 | ||
Lenard D. Liberman | Director | |||
/s/ Wisdom Lu | Chief Financial Officer | March 31, 2009 | ||
Wisdom Lu | ||||
/s/ Winter Horton | Corporate Vice President and Director | March 31, 2009 | ||
Winter Horton | ||||
/s/ William G. Adams | Director | March 31, 2009 | ||
William G. Adams | ||||
/s/ Bruce A. Karsh | Director | March 31, 2009 | ||
Bruce A. Karsh | ||||
/s/ Terence M. O’Toole | Director | March 31, 2009 | ||
Terence M. O’Toole |
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholder of LBI Media Holdings, Inc.
Burbank, California
We have audited the accompanying consolidated balance sheet of LBI Media Holdings, Inc. (the Company, a wholly owned subsidiary of Liberman Broadcasting, Inc.,) as of December 31, 2008, and the related consolidated statements of operations, stockholder’s (deficiency) equity, and cash flows for the year ended December 31, 2008. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements 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 the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of LBI Media Holdings, Inc. as of December 31, 2008 and the results of their operations and their cash flows for the year ended December 31, 2008, in conformity with accounting principles generally accepted in the United States of America.
/s/ Deloitte & Touche LLP |
Los Angeles, California
March 31, 2009
F-1
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholder of
LBI Media Holdings, Inc.
We have audited the accompanying consolidated balance sheet of LBI Media Holdings, Inc. (the Company, a wholly owned subsidiary of Liberman Broadcasting, Inc.,) as of December 31, 2007, and the related consolidated statements of operations, stockholder’s equity, and cash flows for the years ended December 31, 2007 and 2006. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements 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 audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of LBI Media Holdings, Inc. at December 31, 2007, and the consolidated results of its operations and its cash flows for the years ended December 31, 2007 and 2006, in conformity with U.S. generally accepted accounting principles.
As discussed in Note 9 to the consolidated financial statements, as of January 1, 2007, the Company adopted the provisions of Financial Accounting Standards Board Interpretation No. 48,Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109.
/s/ Ernst & Young LLP |
Los Angeles, California
March 31, 2008
F-2
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CONSOLIDATED BALANCE SHEETS
December 31, | ||||||||
2008 | 2007 | |||||||
(in thousands) | ||||||||
Assets | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 450 | $ | 1,697 | ||||
Accounts receivable (less allowances for doubtful accounts of $3,072 and $2,217, respectively) | 18,244 | 17,780 | ||||||
Current portion of program rights, net | 457 | 321 | ||||||
Amounts due from related parties | 175 | 14 | ||||||
Current portion of notes receivable from related parties | 457 | 449 | ||||||
Current portion of employee advances | 744 | 81 | ||||||
Prepaid expenses and other current assets | 1,862 | 1,166 | ||||||
Total current assets | 22,389 | 21,508 | ||||||
Property and equipment, net | 95,745 | 96,990 | ||||||
Broadcast licenses, net | 292,343 | 382,574 | ||||||
Deferred financing costs, net | 8,131 | 9,014 | ||||||
Notes receivable from related parties, excluding current portion | 2,399 | 2,340 | ||||||
Employee advances, excluding current portion | 888 | 1,127 | ||||||
Program rights, excluding current portion | 738 | 228 | ||||||
Other assets | 5,420 | 2,775 | ||||||
Total assets | $ | 428,053 | $ | 516,556 | ||||
Liabilities and stockholder’s (deficiency) equity | ||||||||
Current liabilities: | ||||||||
Cash overdraft | $ | 395 | $ | — | ||||
Accounts payable | 4,414 | 3,739 | ||||||
Accrued liabilities | 4,071 | 3,642 | ||||||
Accrued interest | 9,633 | 8,701 | ||||||
Current portion of long-term debt | 1,347 | 1,239 | ||||||
Total current liabilities | 19,860 | 17,321 | ||||||
Long-term debt, excluding current portion | 415,998 | 421,522 | ||||||
Fair value of interest rate swap | 7,627 | 4,194 | ||||||
Deferred income taxes | 23,691 | 49,515 | ||||||
Other liabilities | 1,683 | 1,603 | ||||||
Total liabilities | 468,859 | 494,155 | ||||||
Commitments and contingencies | ||||||||
Stockholder’s (deficiency) equity: | ||||||||
Common stock, $0.01 par value: | ||||||||
Authorized shares—1,000 | ||||||||
Issued and outstanding shares—100 | — | — | ||||||
Additional paid-in capital | 63,056 | 63,298 | ||||||
Accumulated deficit | (103,862 | ) | (40,897 | ) | ||||
Total stockholder’s (deficiency) equity | (40,806 | ) | 22,401 | |||||
Total liabilities and stockholder’s (deficiency) equity | $ | 428,053 | $ | 516,556 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
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CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31, | ||||||||||||
2008 | 2007 | 2006 | ||||||||||
(in thousands) | ||||||||||||
Net revenues | $ | 117,705 | $ | 115,667 | $ | 107,966 | ||||||
Operating expenses: | ||||||||||||
Program and technical, exclusive of deferred (benefit) compensation of $0, $0 and $707, respectively, depreciation and amortization, loss on sale and disposal of property and equipment and impairment of broadcast licenses shown below | 26,441 | 23,725 | 19,348 | |||||||||
Promotional, exclusive of deferred (benefit) compensation, depreciation and amortization, loss on sale and disposal of property and equipment and impairment of broadcast licenses shown below | 3,426 | 3,033 | 2,914 | |||||||||
Selling, general and administrative, exclusive of deferred (benefit) compensation of $0, $(3,952) and $241, respectively, depreciation and amortization, loss on sale and disposal of property and equipment and impairment of broadcast licenses shown below | 43,272 | 40,078 | 36,590 | |||||||||
Deferred (benefit) compensation | — | (3,952 | ) | 948 | ||||||||
Depreciation and amortization | 10,013 | 9,006 | 7,079 | |||||||||
Loss on sale and disposal of property and equipment | 3,512 | — | — | |||||||||
Impairment of broadcast licenses | 91,740 | 8,143 | 2,844 | |||||||||
Total operating expenses | 178,404 | 80,033 | 69,723 | |||||||||
Operating (loss) income | (60,699 | ) | 35,634 | 38,243 | ||||||||
Gain (loss) on note purchases and redemptions | 12,495 | (8,776 | ) | — | ||||||||
Interest expense, net of amounts capitalized | (36,993 | ) | (37,100 | ) | (31,487 | ) | ||||||
Interest rate swap expense | (3,433 | ) | (2,410 | ) | (1,784 | ) | ||||||
Equity in losses of equity method investment | (280 | ) | — | — | ||||||||
Impairment of equity method investment | (160 | ) | — | — | ||||||||
Interest income and other income (expense) | — | 814 | 190 | |||||||||
(Loss) income before provision for income taxes | (89,070 | ) | (11,838 | ) | 5,162 | |||||||
Benefit from (provision for) income taxes | 26,105 | (48,661 | ) | (70 | ) | |||||||
Net (loss) income | $ | (62,965 | ) | $ | (60,499 | ) | $ | 5,092 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
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CONSOLIDATED STATEMENTS OF STOCKHOLDER’S (DEFICIENCY) EQUITY
Common Stock | Additional Paid-in Capital | Retained Earnings (Accumulated Deficit) | Total Stockholder’s Equity (Deficiency) | ||||||||||||||
Number of Shares | Amount | ||||||||||||||||
(dollars in thousands) | |||||||||||||||||
Balances at December 31, 2005 | 100 | $ | — | $ | 16,865 | $ | 17,130 | $ | 33,995 | ||||||||
Net income | — | — | — | 5,092 | 5,092 | ||||||||||||
Distributions to stockholders of Parent | — | — | — | (332 | ) | (332 | ) | ||||||||||
Distributions to Parent | — | — | — | (1,501 | ) | (1,501 | ) | ||||||||||
Balances at December 31, 2006 | 100 | — | 16,865 | 20,389 | 37,254 | ||||||||||||
Net loss | — | — | — | (60,499 | ) | (60,499 | ) | ||||||||||
FIN 48 adjustment | — | — | — | (787 | ) | (787 | ) | ||||||||||
Distributions to Parent | — | — | (1,513 | ) | — | (1,513 | ) | ||||||||||
Contributions from Parent | — | — | 47,946 | — | 47,946 | ||||||||||||
Balances at December 31, 2007 | 100 | — | 63,298 | (40,897 | ) | 22,401 | |||||||||||
Net loss | — | — | — | (62,965 | ) | (62,965 | ) | ||||||||||
Distributions to Parent | — | — | (242 | ) | — | (242 | ) | ||||||||||
Balances at December 31, 2008 | 100 | $ | — | $ | 63,056 | $ | (103,862 | ) | $ | (40,806 | ) | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
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CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31, | ||||||||||||
2008 | 2007 | 2006 | ||||||||||
(in thousands) | ||||||||||||
Operating activities | ||||||||||||
Net (loss) income | $ | (62,965 | ) | $ | (60,499 | ) | $ | 5,092 | ||||
Adjustments to reconcile net (loss) income to net cash provided by operating activities: | ||||||||||||
Depreciation and amortization | 10,013 | 9,006 | 7,079 | |||||||||
Impairment of broadcast licenses | 91,740 | 8,143 | 2,844 | |||||||||
Gain on note purchases | (12,495 | ) | — | — | ||||||||
Accretion on senior discount notes | 5,542 | 6,386 | 5,738 | |||||||||
Amortization of discount on subordinated notes | 251 | 105 | — | |||||||||
Amortization of deferred financing costs | 1,413 | 1,260 | 1,091 | |||||||||
Write off of deferred financing costs | — | 1,182 | — | |||||||||
Amortization of program rights | 593 | 565 | 781 | |||||||||
Provision for doubtful accounts | 1,906 | 1,376 | 1,330 | |||||||||
Deferred (benefit) compensation | — | (3,952 | ) | 948 | ||||||||
Impairment of equity method investment | 160 | — | — | |||||||||
Equity in losses of equity method investment | 280 | — | — | |||||||||
Interest rate swap expense | 3,433 | 2,410 | 1,784 | |||||||||
Loss on sale and disposal of property and equipment | 3,512 | — | — | |||||||||
Changes in operating assets and liabilities: | ||||||||||||
Cash overdraft | 395 | — | — | |||||||||
Accounts receivable | (2,370 | ) | (1,660 | ) | (2,800 | ) | ||||||
Deferred compensation payments | — | (4,377 | ) | (1,627 | ) | |||||||
Program rights | (705 | ) | — | 13 | ||||||||
Amounts due from related parties | (61 | ) | 11 | 221 | ||||||||
Prepaid expenses and other current assets | (696 | ) | 198 | (33 | ) | |||||||
Employee advances | (424 | ) | 59 | — | ||||||||
Accounts payable | 631 | 205 | (638 | ) | ||||||||
Accrued liabilities | 455 | (1,276 | ) | 2,810 | ||||||||
Accrued interest | 932 | 195 | 537 | |||||||||
Deferred income taxes | (25,824 | ) | 48,640 | 9 | ||||||||
Other assets and liabilities | 59 | (878 | ) | 243 | ||||||||
Net cash provided by operating activities | 15,775 | 7,099 | 25,422 | |||||||||
Investing activities | ||||||||||||
Purchases of property and equipment | (12,752 | ) | (13,702 | ) | (16,582 | ) | ||||||
Deposit on purchase of property and equipment (including acquisition costs) | (1,627 | ) | — | — | ||||||||
Acquisition of television and radio station property and equipment | (65 | ) | (2,100 | ) | (10,174 | ) | ||||||
Acquisition of broadcast licenses | (1,534 | ) | (33,320 | ) | (81,916 | ) | ||||||
Acquisition of other television and radio station assets, net (including amounts deposited into escrow and pre-acquisition costs) | (1,641 | ) | (862 | ) | (945 | ) | ||||||
Notes receivable issued | (100 | ) | (304 | ) | — | |||||||
Net proceeds from sale of property and equipment | �� | 670 | — | — | ||||||||
Investment in equity method investment (including acquisition costs) | (488 | ) | — | — | ||||||||
Net cash used in investing activities | (17,537 | ) | (50,288 | ) | (109,617 | ) | ||||||
Financing activities | ||||||||||||
Proceeds from issuance of long-term debt and bank borrowings | 60,900 | 279,225 | 222,500 | |||||||||
Payments of deferred financing costs | (529 | ) | (4,791 | ) | (1,943 | ) | ||||||
Payments on long-term debt and bank borrowings | (50,064 | ) | (276,782 | ) | (133,725 | ) | ||||||
Payments of amounts due to related parties | — | — | (1,800 | ) | ||||||||
Distributions to stockholders of Parent | — | — | (332 | ) | ||||||||
Purchases of senior discount notes | (9,550 | ) | — | — | ||||||||
Contributions from Parent | — | 47,946 | — | |||||||||
Distributions to Parent | (242 | ) | (2,213 | ) | (801 | ) | ||||||
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Year Ended December 31, | ||||||||||||
2008 | 2007 | 2006 | ||||||||||
(in thousands) | ||||||||||||
Net cash provided by financing activities | 515 | 43,385 | 83,899 | |||||||||
Net (decrease) increase in cash and cash equivalents | (1,247 | ) | 196 | (296 | ) | |||||||
Cash and cash equivalents at beginning of year | 1,697 | 1,501 | 1,797 | |||||||||
Cash and cash equivalents at end of year | $ | 450 | $ | 1,697 | $ | 1,501 | ||||||
Supplemental disclosure of cash flow information: | ||||||||||||
Non-cash amounts included in accounts payable: | ||||||||||||
Purchase of property and equipment | $ | (1,331 | ) | $ | (1,172 | ) | $ | (2,620 | ) | |||
Acquisition of broadcast licenses | (27 | ) | (52 | ) | (250 | ) | ||||||
Distributions to Parent | — | — | (700 | ) | ||||||||
Cash paid for interest (net of amounts capitalized) | 28,929 | 29,075 | 24,050 | |||||||||
Cash paid for income taxes | 215 | 41 | 40 |
The accompanying notes are an integral part of these consolidated financial statements.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2008
1. Summary of Significant Accounting Policies
Description of Business and Basis of Presentation
LBI Media Holdings, Inc. (“LBI Media Holdings”) was incorporated in Delaware on June 23, 2003 and is a wholly owned subsidiary of Liberman Broadcasting, Inc., a Delaware corporation (successor in interest to LBI Holdings I, Inc.) (the “Parent” or “Liberman Broadcasting”). Pursuant to an Assignment and Exchange Agreement dated September 29, 2003 between the Parent and LBI Media Holdings, the Parent assigned to LBI Media Holdings all of its right, title and interest in 100 shares of common stock of LBI Media, Inc. (“LBI Media”) (constituting all of the outstanding shares of LBI Media) in exchange for 100 shares of common stock of LBI Media Holdings. Thus, upon consummation of the exchange, LBI Media Holdings became a wholly owned subsidiary of the Parent, and LBI Media became a wholly owned subsidiary of LBI Media Holdings.
LBI Media Holdings is not engaged in any business operations and has not acquired any assets or incurred any liabilities, other than the acquisition of stock of LBI Media, the issuance of senior discount notes (see Note 4) and the operations of its subsidiaries. Accordingly, its only material source of cash is dividends and distributions from its subsidiaries, which are subject to restriction by LBI Media’s senior credit facilities and the indenture governing the senior subordinated notes issued by LBI Media (see Note 4). Parent-only condensed financial information of LBI Media Holdings on a stand-alone basis has been presented in Note 11.
LBI Media Holdings and its wholly owned subsidiaries (collectively referred to as the “Company”) own and operate radio and television stations located in California, Texas, Arizona and Utah. In addition, the Company owns television production facilities that are used to produce programming for Company-owned television stations. The Company sells commercial airtime on its radio and television stations to local, regional and national advertisers. In addition, the Company has entered into time brokerage agreements with third parties for three of its radio stations.
The Company’s KHJ-AM, KVNR-AM, KWIZ-FM, KBUE-FM, KBUA-FM, KEBN-FM and KRQB-FM radio stations serve the greater Los Angeles, California market (including Riverside/San Bernardino), its KQUE-AM, KJOJ-AM, KSEV-AM, KEYH-AM, KJOJ-FM, KTJM-FM, KQQK-FM, KTNE-FM (formerly KIOX-FM) and KXGJ-FM radio stations serve the Houston, Texas market and its KNOR-FM, KZMP-AM, KTCY-FM, KZZA-FM, KZMP-FM and KBOC-FM radio stations serve the Dallas-Fort Worth, Texas market.
The Company’s television stations, KRCA, KSDX, KVPA, KZJL, KMPX, and KPNZ serve the Los Angeles, California, San Diego, California, Phoenix, Arizona, Houston, Texas, Dallas-Fort Worth, Texas and Salt Lake City, Utah markets, respectively.
The Company’s television studio facilities in Burbank, California, Houston, Texas, and Dallas, Texas, are owned and operated by its wholly owned subsidiaries, Empire Burbank Studios LLC (“Empire”), Liberman Television of Houston LLC and Liberman Television of Dallas LLC, respectively.
Principles of Consolidation
The consolidated financial statements include the accounts of LBI Media Holdings and its subsidiaries. All significant intercompany accounts and transactions have been eliminated.
Cash and Cash Equivalents
The Company considers all highly liquid debt instruments purchased with an original maturity of three months or less and investments in money market accounts to be cash equivalents.
Fair Value of Financial Instruments
The carrying value of the Company’s financial instruments included in current assets and current liabilities (such as cash and equivalents, accounts receivable, accounts payable and accrued liabilities, and other similar items) approximate fair value due to the short-term nature of such instruments. The estimated fair value of LBI Media’s 2007 Senior Subordinated Notes (see Note 4), based on quoted market prices, was approximately $80.1 million and $220.2 million at December 31, 2008 and 2007, respectively, (carrying value of $225.4 million and $225.1 million as of December 31, 2008 and 2007, respectively). The estimated fair value of LBI Media Holdings’ Senior Discount Notes (see Note 4) was approximately $18.6 million and $62.3 million at December 31, 2008 and 2007, respectively (carrying values of $46.4 million and $62.9 million, respectively). The Company’s other long-term debt has variable interest rates or rates that the Company believes approximate current market rates and, accordingly, the carrying value is a reasonable estimate of its fair value.
Program Rights
Program rights are stated at the lower of unamortized cost or estimated net realizable value. Program rights, together with the related liabilities, are recorded when the license period begins and the program becomes available for broadcast. Program rights are amortized using the straight-line method over the license term. Program rights expected to be amortized in the succeeding year and program rights payable due within one year are classified as current assets and current liabilities, respectively.
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LBI MEDIA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Property and Equipment
Property and equipment are recorded at cost less accumulated depreciation. Maintenance and repairs are charged to expense as incurred. Depreciation is computed using the straight-line method over estimated useful lives as follows:
Buildings and building improvements | 20 years | |
Antennae, towers and transmitting equipment | 12 years | |
Studio and production equipment | 10 years | |
Record and tape libraries | 10 years | |
Computer equipment and software | 3 years | |
Office furnishings and equipment | 5 years | |
Automobiles | 5 years |
The carrying value of property and equipment is evaluated periodically in relation to the operating performance and anticipated future cash flows of the underlying radio and television stations for indicators of impairment. When indicators of impairment are present and the undiscounted cash flows estimated to be generated from these assets are less than the carrying value of these assets, an adjustment to reduce the carrying value to the fair market value of the assets is recorded, if necessary. The fair market value of the assets is determined by using current broadcasting industry equipment prices, solicited current market data from dealers of used broadcast equipment and used equipment price lists, catalogs and listings in trade magazines and publications.
As a result of the October 2007 Southern California wildfires, which burned down the Company’s broadcast facility for television station KSDX in San Diego, California, the carrying value of all assets associated with this broadcasting facility were written off (approximately $552,000). As such, the write off of these assets (net of insurance proceeds received) of approximately $302,000 is included in depreciation and amortization expense in the accompanying consolidated statements of operations. For the year ended December 31, 2007, the Company incurred approximately $321,000 in costs related to the restoration of this facility, which is included in property and equipment in the accompanying consolidated balance sheets. During the year ended December 31, 2008, the Company received an additional $159,000 in insurance proceeds relating to the damaged broadcast facility, which was recorded as a reduction in depreciation and amortization expense in the accompanying consolidated statements of operations. The Company resumed service for KSDX in January 2008.
In September 2008, Hurricane Ike caused substantial damage across the state of Texas. As a result of this hurricane, the Company sustained damage to its corporate office and broadcast facility in Houston and several of its tower and transmitter sites and recorded a charge of approximately $585,000 to write off the carrying value of all assets damaged by the hurricane. As such, the write-off of these assets is included in loss on sale and disposal of property and equipment in the accompanying consolidated statements of operations.
Interest cost is capitalized on individually significant projects during construction and approximated $34,000, $578,000 and $515,000 during the years ended December 31, 2008, 2007 and 2006, respectively. Capitalized interest in 2008 related to the construction of a new corporate office building and studio facility in Dallas. Capitalized interest in 2007 and 2006 related to the construction of several new radio tower and transmitter sites in Texas.
Broadcast Licenses
The Company’s indefinite-lived assets consist of its Federal Communications Commission (“FCC”) broadcast licenses. The Company believes its broadcast licenses have indefinite useful lives given that they are expected to indefinitely contribute to the future cash flows of the Company and that they may be continually renewed without substantial cost to the Company. In certain prior years, the licenses were considered to have finite lives and were subject to amortization. Accumulated amortization of broadcast licenses totaled approximately $17.7 million at December 31, 2008 and 2007.
In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 142 “Goodwill and Other Intangible Assets” (“FAS 142”), the Company no longer amortizes its broadcast licenses. The Company tests its broadcast licenses for impairment at least annually or when indicators of impairment are identified. The Company’s valuations principally use the discounted cash flow methodology, an income approach based on market revenue projections, and not company-specific projections, which assumes broadcast licenses are acquired and operated by a third party. This approach incorporates variables such as types of signals, media competition, audience share, market advertising revenue projections, anticipated operating margins and discount rates, without taking into consideration the station’s format or management capabilities. This method calculates the estimated present value that would be paid by a prudent buyer for the Company’s FCC licenses as new radio or television stations. If the discounted cash flows estimated to be generated from these assets are less than the carrying value, an adjustment to reduce the carrying value to the fair market value of the assets is recorded.
The Company generally tests its broadcast licenses for impairment at the individual license level. However, the Company has applied the guidance of Emerging Issues Task Force Issue No. 02-07, “Unit of Accounting for Testing Impairment of Indefinite-Lived Intangible Assets” (“EITF 02-07”), to certain of its broadcast licenses. 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. The Company aggregates broadcast licenses for impairment testing if their signals are simulcast and are operating as one revenue-producing asset.
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LBI MEDIA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company completed its annual impairment review of its broadcast licenses in the third quarters of 2008, 2007 and 2006 and conducted additional impairment reviews of the fair value of some of its broadcast licenses in the fourth quarters of 2008 and 2007, and the second quarter of 2006. The impairment charges in 2008 and 2007 resulted from market changes in estimates and assumptions which resulted in lower advertising revenue growth projections for the broadcasting industry, increased discount rates and a decline in cash flow multiples for recent station sales. The following table sets forth the non-cash impairment charges recorded by the Company for the years ended December 31, 2008, 2007 and 2006:
Three months ended | Amount | ||
(in millions) | |||
March 31, 2006 | $ | — | |
June 30, 2006 | 1.6 | ||
September 30, 2006 | 1.2 | ||
December 31, 2006 | — | ||
March 31, 2007 | — | ||
June 30, 2007 | — | ||
September 30, 2007 | 3.0 | ||
December 31, 2007 | 5.1 | ||
March 31, 2008 | — | ||
June 30, 2008 | — | ||
September 30, 2008 | 46.7 | ||
December 31, 2008 | 45.0 |
Barter Transactions
Included in the accompanying consolidated statements of operations are non-monetary transactions arising from the trading of advertising time for merchandise and services. Barter revenues and expenses are recorded at the fair market value of the goods or services received when the commercial is broadcast. The Company recognizes barter revenues when the commercial is broadcast. Barter expenses are recorded at the same time as barter revenue, which approximates the date the expenses were incurred. Barter revenue and expense, net, totaled $0.9 million, $1.1 million, and $1.1 million for the years ended December 31, 2008, 2007 and 2006, respectively.
Deferred Financing Costs
Financing costs are amortized using the effective interest rate method over the terms of the related credit facilities. Amortization of such costs is included in interest expense in the accompanying consolidated statements of operations.
In August 2007, LBI Media redeemed its 2002 Senior Subordinated Notes (see Note 4) and wrote off approximately $1.2 million in unamortized deferred financing costs, which is included in interest expense in the accompanying consolidated statements of operations.
Revenue Recognition
Broadcasting revenues from local, regional and national commercial advertising are recognized when the advertisements are broadcast. Revenues from renting airtime are recognized when such time is made available to the customer.
Income Taxes
Third party investors purchased shares of the Parent’s Class A common stock on March 30, 2007. As a result, the Parent no longer qualified as an “S Corporation.” Because LBI Media Holdings was deemed for tax purposes to be part of the Parent, LBI Media Holdings was no longer a “qualified Subchapter S subsidiary.” Therefore, the Company is included with the Parent in the filing of a consolidated federal income tax return and various state income tax returns as a C Corporation, and commencing March 31, 2007, the Company’s taxable income became subject to a combined federal and state income tax rate of approximately 39% for periods after March 30, 2007.
As a result of the loss of S Corporation status, the Company recorded a one-time non-cash charge of $46.8 million to adjust its deferred tax accounts. This charge is included in provision for income taxes for the year ended December 31, 2007 in the accompanying consolidated statements of operations. Deferred income taxes are computed by multiplying the enacted tax rate by the temporary differences between the tax basis of assets and liabilities and their reported amounts in the consolidated financial statements. Accordingly, as a result of the loss of S Corporation status, deferred taxes have become substantially more material than in prior periods.
Prior to March 31, 2007 the Company was a “qualified Subchapter S subsidiary” for federal and California income tax purposes. As such, the Company was deemed to be part of its Parent, an “S Corporation,” for tax purposes, and the taxable income or loss of the Company arising prior to that date was required to be reported by the stockholders of the Parent on their respective federal and state income tax returns. California assesses a 1.5% tax on all “S Corporations” subject to certain minimum taxes. Texas does not recognize Subchapter S status and, prior to January 1, 2007, assessed a tax on individual legal entities in an amount equal to the greater of either (i) 4.5% of earned surplus or (ii) 0.25% of taxable capital. In May 2006, the State of Texas enacted a new business tax that is imposed on the Company’s Texas gross margin to replace the State’s prior tax regime described above. The new legislation became effective date on January 1, 2008, and therefore the Company’s first Texas Margins Tax (“TMT”) return was based on its 2007 operations. The TMT is approximately 1.0% of the gross margin apportioned to Texas. Additionally, as a result of certain asset acquisitions in 2007 and 2008, the Company became subject to Utah and Arizona state taxes subsequent to the respective acquisition dates.
The Company may be audited by the Internal Revenue service and various state tax authorities. Disputes may arise with these tax authorities involving issues of the timing and amount of deductions and allocations of income and expenses among various tax jurisdictions because of differing interpretations of tax laws and regulations. The Company periodically evaluates its exposures associated with tax filing positions and, while it believes its positions comply with applicable laws, may record liabilities based upon estimates of the ultimate outcome of these matters and the guidance provided by the Financial Accounting Standards Board (“FASB”) in SFAS No. 109 (“FAS 109”), “Accounting for Income Taxes” and Financial Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”).
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LBI MEDIA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Advertising Costs
Advertising costs are expensed as incurred. The accompanying consolidated statements of operations include advertising costs (included in promotional expenses) of approximately $0.0 million for the years ended December 31, 2008 and 2007, respectively, and $0.5 million for the year ended December 31, 2006.
Stock-Based Compensation
The Company accounts for stock-based compensation according to the provisions of SFAS No. 123 (revised 2004), “Share-Based Payment,” (“FAS 123R”) which requires the measurement and recognition of compensation expense for all stock-based awards made to employees and directors including employee stock options under the Parent’s, Liberman Broadcasting, Inc.’s, Stock Incentive Plan based on estimated fair values. Services required under a certain employment agreement pursuant to which the options were granted are rendered to the Company. Accordingly, the Company reflects compensation expense related to the options in its financial statements.
FAS 123R requires companies to estimate the fair value of stock-based awards on the date of grant using an option pricing model. The value of the portion of the award that is ultimately expected to vest is reduced for estimated forfeitures and is recognized as expense over the requisite service periods in the consolidated statements of operations. FAS 123R requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.
The Company selected the Black-Scholes option pricing model as the most appropriate method for determining the estimated fair value for stock-based awards. The Black-Scholes option pricing model requires the use of highly subjective and complex assumptions which determine the fair value of stock-based awards, including the option’s expected term, expected volatility of the underlying stock, risk-free rate, and expected dividends.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the U.S. requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
Concentration of Credit Risk
The Company sells broadcast time to a diverse customer base including advertising agencies and other direct customers. The Company performs credit evaluations of its customers and generally does not require collateral. The Company maintains allowances for potential losses and such losses have been within management’s expectations.
Derivative Instruments
Since November 2006, the Company has utilized a derivative instrument to hedge its exposure to interest rate risks. The Company records derivative instruments on the balance sheet as either assets or liabilities that are measured at their fair value under the provisions of SFAS No. 133 (“FAS 133”), “Accounting for Derivative Instruments and Hedging Activities”, as amended. FAS 133 requires that changes in the fair value of derivative instruments be recognized currently in earnings unless specific hedge accounting criteria are met, in which case, changes in fair value are deferred to accumulated other comprehensive income and reclassified into earnings when the underlying transaction affects earnings. The interest rate swap effective at December 31, 2008 did not meet the requirements for hedge accounting treatment at its inception and, accordingly, changes in its fair value are included in current period earnings as interest rate swap income or expense in the accompanying consolidated statement of operations.
Comprehensive Income
The Company reports comprehensive operations in accordance with the provisions of SFAS No. 130, “Reporting Comprehensive Income.” SFAS No. 130 established standards for the reporting and display of comprehensive income.
Components of comprehensive (loss) income include net (loss) income, foreign currency translation adjustments and gains or losses associated with investments available for sale (if any). As the Company did not have any foreign currency translation adjustments or gains or losses associated with investments in available for sale securities, there were no differences between net (loss) income and comprehensive (loss) income for any of the periods presented.
Recent Accounting Pronouncements
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“FAS 157”). FAS 157 provides a single definition of fair value, together with a framework for measuring it, and requires additional disclosure about the use of fair value to measure assets and liabilities. In February 2008, the FASB issued FSP FAS 157-2, “Effective Date of FASB Statement No. 157” which defers the implementation for certain non-recurring, nonfinancial assets and liabilities from fiscal years beginning after November 15, 2007 to fiscal years beginning after November 15, 2008, which will be the Company’s fiscal year 2009. In October 2008, the FASB issued FSP FAS 157-3, “Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active” which clarifies the application of FAS 157 in a market that is not active. FSP FAS 157-3 is effective upon issuance, including prior periods for which financial statements have not been issued. The statement provisions effective as of January 1, 2008 did not have a material effect on the Company’s results of operations, financial position or cash flows. The Company is currently evaluating what impact, if any, the adoption of the remaining provisions will have on its results of operations, financial position or cash flows.
In addition, in February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities-including an amendment of FASB Statement No. 115” (“FAS 159”). FAS 159 expands the use of fair value accounting but does not affect existing standards that require assets or liabilities to be carried at fair value. Under FAS 159, a company may elect to use fair value to measure certain financial assets and liabilities and any changes in fair value are recognized in earnings. This statement was effective on January 1, 2008. The Company did not elect the fair value option upon adoption of FAS 159.
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LBI MEDIA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In December 2007, the FASB issued SFAS No. 141R, “Business Combinations” (“FAS 141R”), which requires an acquirer to measure the identifiable assets acquired, the liabilities assumed and any noncontrolling interest in the acquiree at their fair values on the acquisition date, with goodwill being the excess value over the net identifiable assets acquired. FAS 141R also changes the accounting for the treatment of acquisition related transaction costs. FAS 141R is effective beginning January 1, 2009. The Company has evaluated the provisions of FAS 141R and determined that the impact to its results of operations, financial position and cash flows will be a charge of approximately $0.4 million, which relates to the write-off of pre-acquisition costs for certain asset purchases that did not close prior to December 31, 2008 (see Note 2).
In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements” (“FAS 160”), which clarifies that a noncontrolling interest in a subsidiary should be reported as equity in the consolidated financial statements. FAS 160 is effective beginning January 1, 2009. The Company is currently evaluating what impact, if any, the adoption of FAS 160 will have on its financial position, results of operations and cash flows.
In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133” (“FAS 161”), which requires enhanced disclosures for derivative and hedging activities. FAS 161 is effective beginning January 1, 2009. The Company is currently evaluating what impact, if any, the adoption of FAS 161 will have on its financial statements.
In April 2008, the FASB issued FASB Staff Position (“FSP”) No. FAS 142-3, “Determination of Useful Life of Intangible Assets” (“FSP 142-3). FSP 142-3 amends the factors that should be considered in developing the renewal or extension assumptions used to determine the useful life of a recognized intangible asset under FAS 142. The intent of this FSP is to improve the consistency between the useful life of an intangible asset determined under FAS 142 and the period of expected cash flows used to measure the fair value of the asset under FAS 141R. FSP 142-3 is effective for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. The Company is currently evaluating what impact, if any, the adoption of FSP 142-3 will have on its financial statements.
2. Acquisitions
In December 2008, two of LBI Media Holdings’ indirect, wholly owned subsidiaries, KRCA Television LLC and KRCA License LLC, as buyers, consummated the acquisition of selected assets of television station KVPA-LP, licensed to Phoenix, Arizona, from Latin America Broadcasting of Arizona, Inc., as seller, pursuant to an asset purchase agreement entered into in August 2008. The aggregate purchase price was approximately $1.4 million, including acquisition costs of approximately $0.1 million, and was paid primarily in cash. The assets acquired included, among other things, (i) licenses and permits authorized by the FCC for or in connection with the operation of the television station, and (ii) transmission and other broadcast equipment used to operate the television station. The Company allocated the purchase price as follows:
(in thousands) | |||
Broadcast licenses | $ | 1,326 | |
Property and equipment | 65 | ||
$ | 1,391 | ||
In November 2008, KRCA Television LLC and KRCA License LLC, as buyers, entered into an asset purchase agreement with Venture Technologies Group, LLC, as seller, pursuant to which the buyers agreed to acquire selected assets of low-power television station WASA-LP, licensed to Port Jervis, New York, from the seller. The selected assets include, among other things, licenses and permits authorized by the FCC for or in connection with the operation of the station. The total purchase price will be $6.0 million in cash, subject to certain adjustments, of which $0.6 million has been deposited into escrow. As of December 31, 2008, the Company had incurred approximately $0.2 million in acquisition costs related to this proposed acquisition. Such amount is included in other assets in the accompanying consolidated balance sheets. Consummation of the acquisition is subject to regulatory approval from the FCC and to other customary closing conditions.
In September 2008, two of LBI Media Holdings’ indirect, wholly owned subsidiaries, Liberman Broadcasting of California LLC (“LBI California”) and LBI Radio License LLC (“LBI Radio”), as buyers, entered into an asset purchase agreement with Sun City Communications, LLC and Sun City Licenses, LLC, as sellers (collectively, “Sun City”), pursuant to which the buyers had agreed to acquire certain assets of radio station KVIB-FM, 95.1 FM, licensed to Phoenix, Arizona, from the sellers. Those assets were to include, among other things, (i) licenses and permits authorized by the FCC for or in connection with the operation of the station, (ii) antenna and transmitter facilities, (iii) broadcast and other studio equipment used to operate the station, and (iv) contract rights and other intangible assets. The total purchase price was to be approximately $15.0 million in cash, subject to certain adjustments, of which $0.8 million has been deposited into escrow as of December 31, 2008. Such amount is included in other assets in the accompanying consolidated balance sheets.
In December 2008, the Company submitted a formal notice to Sun City to terminate the asset purchase agreement, as a result of a material adverse event which the Company believes has occurred since the parties entered into the agreement. As such, the company wrote-off approximately $0.3 million in pre-acquisition costs related to this proposed acquisition. Such charge is included in selling, general and administrative expenses in the accompanying consolidated statements of operations. The Company expects to recoup the $0.8 million escrow deposit once the agreement has been formally terminated.
In November 2007, KRCA Television LLC and KRCA License LLC, as buyers, consummated the acquisition of selected assets of television station KPNZ-TV, licensed to Ogden, Utah, from Utah Communications, LLC, as seller, pursuant to an asset purchase agreement entered into in May 2007. The aggregate purchase price was approximately $10.5 million, including acquisition costs of approximately $0.5 million, and was paid in cash primarily through borrowings under the 2006 Revolver (see Note 4). The assets acquired included, among other things, (i) licenses and permits authorized by the FCC for or in connection with the operation of the television station, (ii) broadcast and other television studio equipment used to operate the station, and (iii) other related assets. The Company allocated the purchase price as follows:
(in thousands) | |||
Broadcast licenses | $ | 7,979 | |
Property and equipment | 1,765 | ||
Other assets | 779 | ||
$ | 10,523 | ||
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LBI MEDIA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Also in November 2007, LBI California and LBI Radio, as buyers, entered into an asset purchase agreement with R&R Radio Corporation, as seller, pursuant to which the buyers have agreed to acquire the selected assets of radio station KDES-FM, located in Palm Springs, California, from the seller. As of December 31, 2008 and 2007, respectively, the Company had incurred approximately $0.2 million and $0.1 million in acquisition costs, respectively, related to this proposed acquisition. Such costs are included in other assets in the accompanying consolidated balance sheets. The selected assets will include, among other things, (i) licenses and permits authorized by the FCC for or in connection with the operation of the station and (ii) transmitter and other broadcast equipment used to operate the station. The Company intends to change the location of KDES-FM from Palm Springs, California to Redlands, California.
The aggregate purchase price will be approximately $17.5 million in cash, subject to certain adjustments, of which $0.5 million has been deposited in escrow as of December 31, 2008 and 2007. The Company will pay $10.5 million of the aggregate purchase price to the seller and $7.0 million to Spectrum Scan-Idyllwild, LLC (“Spectrum Scan”). As a condition to the Company’s purchase of the assets from the seller, LBI California has entered into an agreement with Spectrum Scan whereby it will pay $7.0 million to Spectrum Scan in exchange for Spectrum Scan’s agreement to terminate its option to purchase KWXY-FM, located in Cathedral City, California, and Spectrum Scan’s assistance in the relocation of KDES-FM from Palm Springs, California to Redlands, California. Payment to Spectrum Scan is conditioned on the completion of the purchase of the assets from the seller. If we receive final FCC approval and the purchase of KDES-FM is not completed, the Company must pay a $0.5 million fee to Spectrum Scan. Consummation of the acquisition is subject to regulatory approval from the FCC, including consent to the relocation of KDES-FM from Palm Springs, California to Redlands, California, and to other customary closing conditions.
In September 2007, LBI California and LBI Radio, as buyers, consummated the acquisition of the selected assets of radio station KWIE-FM (currently known as KRQB-FM), 96.1 FM, licensed to San Jacinto, California, from KWIE, LLC, KWIE Licensing LLC and Magic Broadcasting, Inc., as sellers, pursuant to an asset purchase agreement dated in July 2007. The aggregate purchase price was approximately $25.2 million, including acquisition costs of approximately $0.2 million, and was paid in cash primarily through borrowings under the 2006 Revolver. The assets acquired included, among other things, (i) licenses and permits authorized by the FCC for or in connection with the operation of the radio station and (ii) broadcast and other studio equipment used to operate the station. The Company allocated the purchase price as follows:
(in thousands) | |||
Broadcast licenses | $ | 24,830 | |
Property and equipment | 335 | ||
$ | 25,165 | ||
In November 2006, the Company completed its acquisition of the selected assets of five radio stations: KTCY-FM, licensed to Azle, TX, KZZA-FM, licensed to Muenster, TX, KZMP-FM, licensed to Pilot Point, TX, KZMP-AM, licensed to University Park, TX, and KBOC-FM, licensed to Bridgeport, TX, pursuant to an asset purchase agreement dated in August 2006, as amended in November 2006. The aggregate purchase price was approximately $93.3 million, including acquisition costs of approximately $0.8 million, and was paid in cash primarily through borrowings under the 2006 Revolver (see Note 4). The Company has changed the format and customer base of most of the acquired stations. The Company allocated the purchase price as follows:
(in thousands) | |||
Broadcast licenses | $ | 82,216 | |
Property and equipment | 10,174 | ||
Intangible assets and other, net | 945 | ||
$ | 93,335 | ||
3. Property and Equipment
Property and equipment consist of the following:
December 31, | ||||||||
2008 | 2007 | |||||||
(in thousands) | ||||||||
Land | $ | 15,558 | $ | 15,677 | ||||
Buildings and building improvements | 30,235 | 31,130 | ||||||
Antennae, towers and transmitting equipment | 55,630 | 58,453 | ||||||
Studio and production equipment | 24,558 | 22,690 | ||||||
Record and tape libraries | 1,198 | 1,099 | ||||||
Computer equipment and software | 3,476 | 3,243 | ||||||
Office furnishings and equipment | 3,527 | 2,994 | ||||||
Automobiles | 1,977 | 1,859 | ||||||
Leasehold improvements | — | 40 | ||||||
Construction in progress | 5,819 | — | ||||||
Total | 141,978 | 137,185 | ||||||
Less accumulated depreciation | (46,233 | ) | (40,195 | ) | ||||
Total property and equipment | $ | 95,745 | $ | 96,990 | ||||
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LBI MEDIA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. Long-Term Debt
Long-term debt consists of the following:
December 31, | ||||||||
2008 | 2007 | |||||||
(in thousands) | ||||||||
2006 Revolver due 2012 | $ | 26,650 | $ | 24,500 | ||||
2006 Term Loan due 2012 | 116,900 | 108,075 | ||||||
Senior Subordinated Notes due 2017 | 225,356 | 225,106 | ||||||
Senior Discount Notes due 2013 | 46,383 | 62,885 | ||||||
2004 Empire Note | 2,056 | 2,195 | ||||||
417,345 | 422,761 | |||||||
Less current portion | (1,347 | ) | (1,239 | ) | ||||
$ | 415,998 | $ | 421,522 | |||||
LBI Media’s 2006 Revolver and 2006 Term Loan
In May 2006, LBI Media refinanced its then existing senior secured credit facility with a $110.0 million senior term loan credit facility (as amended by the term loan commitment increase in January 2008, the “2006 Term Loan”) and a $150.0 million senior revolving credit facility (the “2006 Revolver”, and together with the 2006 Term Loan, the “2006 Senior Credit Facilities”). The 2006 Revolver includes a $5.0 million swing line subfacility and allows for letters of credit up to the lesser of $5.0 million and the available remaining revolving commitment amount. In January 2008, LBI Media increased its senior term loan facility by $10.0 million. LBI Media has the option to request its existing or new lenders under the 2006 Term Loan and under the 2006 Revolver to increase the aggregate amount of the 2006 Senior Credit Facilities, by an additional $40.0 million; however, its existing and new lenders are not obligated to do so. The increases under the 2006 Senior Credit Facilities, taken together, cannot exceed $50.0 million in the aggregate (including the $10.0 million increase in January 2008).
LBI Media must pay 0.25% of the principal amount of the 2006 Term Loan each quarter (or $275,000 per quarter) plus 0.25% of amounts borrowed in connection with the term loan increase (or $25,000 per quarter), and 0.25% of any additional principal amount incurred in the future under the 2006 Term Loan. There are no scheduled reductions of commitments under the 2006 Revolver.
Borrowings under the 2006 Senior Credit Facilities bear interest based on either, at the option of LBI Media, the base rate for base rate loans or the LIBOR rate for LIBOR loans, in each case plus the applicable margin stipulated in the senior credit agreements. The base rate is the higher of (i) Credit Suisse’s prime rate and (ii) the Federal Funds Effective Rate (as published by the Federal Reserve Bank of New York) plus 0.50%. The applicable margin for loans under the 2006 Revolver, which is based on LBI Media’s total leverage ratio, will range from 0% to 1.00% per annum for base rate loans and from 1.00% to 2.00% per annum for LIBOR loans. The applicable margin for the 2006 Term Loan is 0.50% for base rate loans and 1.50% for LIBOR loans. The applicable margin for the $10.0 million increase in the Term Loan that occurred in January 2008 ranges from 0.50% to 0.75% for base rate loans and from 1.50% to 1.75% for LIBOR loans. The applicable margin for any future term loans will be agreed upon at the time those term loans are incurred. Interest on base rate loans is payable quarterly in arrears and interest on LIBOR loans is payable either monthly, bimonthly or quarterly depending on the interest period elected by LBI Media. All amounts that are not paid when due under either the 2006 Revolver or 2006 Term Loan will accrue interest at the rate otherwise applicable plus 2.00% until such amounts are paid in full. Borrowings under the 2006 Revolver and 2006 Term Loan bore interest at rates between 1.96% and 4.25%, including the applicable margin, at December 31, 2008.
Borrowings under the 2006 Senior Credit Facilities are secured by substantially all of the tangible and intangible assets of LBI Media and its wholly owned subsidiaries, including a first priority pledge of all capital stock of each of LBI Media’s subsidiaries. The 2006 Senior Credit Facilities also contain customary representations, affirmative and negative covenants and defaults for a senior credit facility, including restrictions on LBI Media’s ability to pay dividends. At December 31, 2008, LBI Media was in compliance with all such covenants.
LBI Media pays quarterly commitment fees on the unused portion of the 2006 Revolver based on its utilization rate of the total borrowing capacity. Under certain circumstances, if LBI Media borrows less than 50% of the revolving credit commitment, it must pay a quarterly commitment fee of 0.50% times the unused portion. If LBI Media borrows 50% or more of the total revolving credit commitment, it must pay a quarterly commitment fee of 0.25% times the unused portion.
LBI Media’s 2002 Senior Subordinated Notes
In July 2002, LBI Media issued $150.0 million of senior subordinated notes due 2012 (the “2002 Senior Subordinated Notes”). The 2002 Senior Subordinated Notes bore interest at the rate of 10.125% per annum, and interest payments were made on a semi-annual basis each January 15 and July 15. All of LBI Media’s subsidiaries are wholly owned and provided full and unconditional joint and several guarantees of the 2002 Senior Subordinated Notes.
LBI Media redeemed all of the outstanding 2002 Senior Subordinated Notes in August 2007 (the “Redemption Date”) at a redemption price of 105.0625% of the outstanding principal amount, plus accrued and unpaid interest to the Redemption Date (the “Redemption”). The Redemption resulted in a loss in the third quarter of 2007 of approximately $8.8 million (including the write off of $1.2 million in unamortized deferred financing costs).
LBI Media’s Senior Subordinated Notes due 2017
In July 2007, LBI Media issued approximately $228.8 million aggregate principal amount of 8 1/2% Senior Subordinated Notes due 2017 (the “2007 Senior Subordinated Notes”). The 2007 Senior Subordinated Notes were sold at 98.350% of the principal amount, resulting in gross proceeds of approximately $225.0 million. All of LBI Media’s subsidiaries provide full and unconditional joint and several guarantees of the 2007 Senior Subordinated Notes.
The 2007 Senior Subordinated Notes bear interest at a rate of 8.5% per annum. Interest payments are made on a semi-annual basis each February 1 and August 1, and commenced on February 1, 2008. The 2007 Senior Subordinated Notes will mature in August 2017.
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LBI MEDIA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The indenture governing the 2007 Senior Subordinated Notes limits, among other things, LBI Media’s ability to borrow under the 2006 Senior Credit Facilities and pay dividends. LBI Media could borrow up to an aggregate of $260.0 million under the 2006 Senior Credit Facilities (subject to certain reductions under certain circumstances) without having to comply with specified leverage ratios contained in the indenture, but any amount over $260.0 million (subject to certain reductions under certain circumstances) would be subject to LBI Media’s compliance with a specified leverage ratio (as defined in the indenture governing the 2007 Senior Subordinated Notes).
The indenture governing the 2007 Senior Subordinated Notes also prohibits the incurrence of indebtedness, the proceeds of which would be used to repay, redeem, repurchase or refinance any of LBI Media Holdings’ Senior Discount Notes (defined below) earlier than one year prior to the stated maturity of the Senior Discount Notes unless such indebtedness is (i) unsecured, and (ii) pari passu or junior in right of payment to the 2007 Senior Subordinated Notes, and (iii) otherwise permitted to be incurred under the indenture governing the 2007 Senior Subordinated Notes. At December 31, 2008, LBI Media was in compliance with all such covenants.
The indenture governing the 2007 Senior Subordinated Notes provides for customary events of default, which include (subject in certain instances to cure periods and dollar thresholds): nonpayment of principal, interest and premium, if any, on the 2007 Senior Subordinated Notes, breach of covenants specified in the indenture, payment defaults or acceleration of other indebtedness, a failure to pay certain judgments and certain events of bankruptcy, insolvency and reorganization. The 2007 Senior Subordinated Notes will become due and payable immediately without further action or notice upon an event of default arising from certain events of bankruptcy or insolvency with respect to LBI Media and certain of its subsidiaries. If any other event of default occurs and is continuing, the trustee or the holders of at least 25% in principal amount of the then outstanding 2007 Senior Subordinated Notes may declare all the 2007 Senior Subordinated Notes to be due and payable immediately.
Senior Discount Notes due 2013
In October 2003, LBI Media Holdings issued $68.4 million aggregate principal amount at maturity of senior discount notes that mature in 2013 (the “Senior Discount Notes”). The notes were sold at 58.456% of principal amount at maturity, resulting in gross proceeds of approximately $40.0 million and net proceeds of approximately $38.8 million after certain transaction costs. Under the terms of the notes, cash interest did not accrue and was not payable on the notes prior to October 15, 2008 and instead the value of the notes had been increased each period until it equaled $68.4 million on October 15, 2008; such accretion (approximately $5.5 million, $6.4 million and $5.7 million for the years ended December 31, 2008, 2007 and 2006, respectively) is recorded as additional interest expense by LBI Media Holdings. After October 15, 2008, cash interest began to accrue at a rate of 11% per year payable semi-annually on each April 15 and October 15.
In the fourth quarter of 2008, LBI Media Holdings purchased approximately $22.0 million aggregate principal amount of its Senior Discount Notes in various open market transactions at a weighted average purchase price of 43.321% of the principal amount. The total consideration paid (including accrued interest) was approximately $9.9 million. As a result of these transactions, the Company recorded a noncash gain of approximately $12.5 million, which is included in gain (loss) on note purchases and redemptions in the accompanying consolidated financial statements.
The indenture governing the Senior Discount Notes contains certain restrictive covenants that, among other things, limits LBI Media Holdings’ ability to incur additional indebtedness and pay dividends. As of December 31, 2008, LBI Media Holdings was in compliance with all such covenants. The Senior Discount Notes are structurally subordinated to the 2006 Senior Credit Facilities and the 2007 Senior Subordinated Notes.
LBI Media’s 2004 Empire Note
In July 2004, Empire issued an installment note for approximately $2.6 million (the “2004 Empire Note”) and used the proceeds to repay its former mortgage note. The 2004 Empire Note bears interest at the rate of 5.52% per annum and is payable in monthly principal and interest payments of approximately $21,000 through maturity in July 2019. The borrowings under the 2004 Empire Note are secured primarily by all of Empire’s real property.
Scheduled Debt Repayments
As of December 31, 2008, the Company’s long-term debt had scheduled repayments for each of the next five years as follows
(in thousands) | |||
2009 | $ | 1,347 | |
2010 | 1,355 | ||
2011 | 1,364 | ||
2012 | 140,124 | ||
2013 | 46,566 | ||
Thereafter | 226,589 | ||
$ | 417,345 | ||
The above table does not include projected interest payments the Company may ultimately pay. Prior to the termination and payoff of the debt of the Parent (including redemption of the warrants) in March 2007, interest payments and scheduled repayments relating to the debt of the Parent (including redemption of the warrants) were not included in the Company’s financial statements pursuant to SEC guidelines. The debt of the Parent, which was repaid in full in March 2007, is described in more detail below.
Parent Subordinated Notes
In March 2001, the Parent entered into an agreement whereby in exchange for $30.0 million, it issued junior subordinated notes (the “Parent Subordinated Notes”) and warrants to the holders of the Parent Subordinated Notes to initially acquire 14.02 shares (approximately 6.55%) of the Parent’s common stock at an initial exercise price of $0.01 per share. Based on the relative fair values at the date of issuance, the Parent allocated $13.6 million to the Parent Subordinated Notes and $16.4 million to the warrants. The Parent Subordinated Notes bore interest at 9% per year and interest was not payable until maturity.
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LBI MEDIA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In March 2007, third party investors purchased shares of the Parent’s Class A common stock from the Parent and the stockholders of the Parent. A portion of the net proceeds received by the Parent were used to repay in full the Parent Subordinated Notes and to redeem all of the related warrants to purchase shares of LBI Holdings I’s (predecessor in interest to the Parent) common stock.
The Parent Subordinated Notes were to be accreted through January 31, 2014, up to their $30.0 million redemption value; such accretion (approximately $0.3 million and $1.0 million for the years ended December 31, 2007 and 2006, respectively) was recorded as additional interest expense by the Parent. In the financial statements of the Parent, the warrants were stated at fair value each reporting period with subsequent changes in fair value being recorded as interest expense.
Interest Rate Swap
In connection with the issuance of the 2006 Senior Credit Facilities, in July 2006, the Company entered into a fixed-for-floating interest rate swap to hedge the underlying interest rate risk on the expected outstanding balance of the 2006 Term Loan over time. Pursuant to the terms of this interest rate swap, the Company pays a fixed rate of 5.56% on the $80.0 million notional amount and receives payments based on LIBOR. This swap fixes the interest rate at 7.31% (including the applicable margin) and terminates in November 2011.
The Company accounts for its interest rate swap in accordance with FAS 133 and its related interpretations. This interest rate swap essentially fixes the interest rate at the percentage noted above. However, changes in the fair value of the interest rate swap for each reporting period have been recorded in interest rate swap expense in the accompanying consolidated statements of operations, because the interest rate swap does not qualify for hedge accounting.
The Company measures the fair value of its interest rate swap on a recurring basis pursuant to FAS 157. FAS 157 establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. The three tiers are: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions. The Company categorizes this swap contract as Level 2.
The fair value of the Company’s interest rate swap was a liability of $7.6 million and $4.2 million at December 31, 2008 and 2007, respectively. The fair value of the interest rate swap represents the present value of the expected future cash flows estimated to be received from or paid to a marketplace participant of the instrument. It is valued using inputs including broker dealer quotes, adjusted for non-performance risk, based on valuation models that incorporate observable market information and are classified within Level 2 of the fair value hierarchy.
5. Commitments and Contingencies
Leases
The Company leases the land, tower and/or studio space for certain stations under noncancelable operating leases that expire at various times through 2029, with some having renewal options, generally for one to five years. Rental expenses under these agreements totaled approximately $2.3 million, $2.0 million and $1.9 million during the years ended December 31, 2008, 2007 and 2006, respectively.
Future minimum lease payments by year and in the aggregate, under noncancelable operating leases, consist of the following at December 31, 2008:
(in thousands) | |||
2009 | $ | 1,974 | |
2010 | 1,703 | ||
2011 | 1,617 | ||
2012 | 1,322 | ||
2013 | 1,097 | ||
Thereafter | 10,438 | ||
$ | 18,151 | ||
Deferred Compensation
LBI California and the Parent have entered into employment agreements with certain employees. Services required under the employment agreements are rendered to the Company. Accordingly, the Company has reflected amounts due under the employment agreements in its financial statements. In addition to annual compensation and other benefits, these agreements provide the employees with the ability to participate in the increase of the “net value” (as defined in the applicable employment agreement) of the Parent over certain base amounts (“Incentive Compensation”). There are two components of Incentive Compensation: (i) a component that vests in varying amounts over time; and (ii) a component that vests upon the attainment of certain performance measures. The time vesting component is accounted for over the vesting periods specified in the employment agreements. Performance based amounts are accounted for at the time it is considered probable that the performance measures will be attained. Any Incentive Compensation amounts due are required to be paid within thirty days after the date the “net value” of the Parent is determined.
The employment agreements contain provisions, however, that allow for limited accelerated vesting in the event of a change in control of the Parent (as defined in the applicable employment agreement). Unless there is a change in control of the Parent (as defined in the applicable employment agreement), the “net value” (as defined in the applicable employment agreement) of the Parent was determined as of December 31, 2005 and December 31, 2006 and will be determined as of December 31, 2009 (depending upon the particular employment agreement).
Until the “net value” of the Parent has been determined by appraisal as of each valuation date, the Company evaluates and estimates the deferred compensation liability under these employment agreements. As a part of the calculation of this Incentive Compensation, the Company uses the income and market valuation approaches to estimate the “net value” of the Parent. The income approach analyzes future cash flows and discounts them to arrive at a current estimated fair value. The market approach uses recent sales and offering prices of similar properties to determine estimated fair value. Each employee negotiated the base amount at the time the employment agreement was entered into. The estimated vested and unpaid amounts are shown as deferred compensation in the accompanying consolidated balance sheets; the related expense (benefit) is shown as deferred compensation in the accompanying consolidated statements of operations; and related cash payments are shown as deferred compensation payments in the accompanying consolidated statements of cash flows.
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LBI MEDIA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 2008 and 2007, there was only one employment agreement which contained an Incentive Compensation component. During year ended December 31, 2007, the company satisfied its obligations under certain employment agreements that had December 31, 2006 “net value” determination dates with an aggregate cash payment of approximately $4.4 million, which was approximately $4.0 million less than the amounts accrued as of December 31, 2006. During the year ended December 31, 2006, the Company satisfied its obligations under an employment agreement that had a December 31, 2005 “net value” determination date with an aggregate cash payment of approximately $1.6 million. The remaining employment agreement has a “net value” determination date of December 31, 2009, and as of December 31, 2008, the Company estimated that this employee had not vested in any unpaid Incentive Compensation.
Litigation
In June 2005, eight former employees of LBI California filed suit in Los Angeles County Superior Court alleging claims on their own behalf and also on behalf of a purported class of former and current employees of LBI California. The complaint alleged, among other things, wage and hour violations relating to overtime pay, and wrongful termination and unfair competition under the California Business and Professions Code. Plaintiffs sought to recover, among other relief, unspecified general, treble and punitive damages, as well as profit disgorgement, restitution and their attorneys’ fees. In June 2007, two former employees of LBI California filed another suit in Los Angeles County Superior Court, alleging claims on their own behalf and also on behalf of a purported class of former and current employees of LBI California. The complaint alleged, among other things, violations of California labor laws with respect to providing meal and rest breaks. Plaintiffs sought, among other relief, unspecified liquidated and general damages, declaratory, equitable and injunctive relief, and attorneys’ fees.
In July 2007, LBI California entered into a settlement agreement with class action representatives to settle these lawsuits. While LBI California denied the allegations in both lawsuits, it agreed to the final settlement of both actions to avoid significant legal fees, other expenses and management time that would have to be devoted to the two litigation matters. The final settlement provided for a payment of $469,000 (including attorneys’ fees and costs and administrative fees) and was approved by the court in January 2008. During the first nine months of 2007, the Company recorded a litigation reserve of approximately $825,000 related to this matter, which is included in selling, general and administrative expenses in the accompanying consolidated statements of operations. The Company reduced the total litigation reserve by $356,000 in the fourth quarter of 2007, reflecting the final settlement.
In consideration of the settlement payment, the plaintiffs in both cases agreed to dismiss the two class actions with prejudice and to release all known and unknown claims arising out of or relating to such claims. Because the settlement has received court approval, the settlement has become effective and binding on the parties.
In 2008, the Company began negotiations with Broadcast Music, Inc. (“BMI”) related to royalties due to BMI in the amount of approximately $1.1 million. As of December 31, 2008, the Company had reserved approximately $0.6 million related to this dispute. In February 2009, the Company submitted its third formal offer to settle all amounts due related to all disputed matters with BMI totaling approximately $0.6 million. It is the Company’s position that the remaining portion of the total disputed amounts is attributable primarily to billings related to the Company’s time-brokered and simulcast stations, as well as other differences, for which the Company was improperly billed. BMI has yet to respond to the Company’s third offer, and therefore, the parties are continuing their discussions.
In 2008, the Company also began negotiations with the American Society of Composers, Authors and Publishers (“ASCAP”) related to royalties owed to ASCAP. In September 2008, the Company submitted a formal offer and paid $0.8 million to ASCAP which represented settlement of all music license fees owed to date. Although no formal settlement agreement was obtained from ASCAP, the Company believes that the matter had been satisfactorily resolved. The settlement resulted in a charge of $0.1 million, which is included in programming and technical expenses in the accompanying consolidated statement of operations for the year ended December 31, 2008.
The Company is subject to pending litigation arising in the normal course of its business. While it is not possible to predict the results of such litigation, management does not believe the ultimate outcome of these matters will have a materially adverse effect on the Company’s financial position or results of operations.
6. Related Party Transactions
The Company had approximately $3.0 million and $2.8 million due from stockholders of the Parent and from affiliated companies at December 31, 2008 and 2007, respectively. These amounts include a $1.9 million loan the Company made to one of the stockholders of the Parent in July 2002. The loan due from the stockholders of the Parent bear interest at the applicable federal rate and mature through December 2009. Additionally, at the direction of the stockholders of the Parent, the Company made loans and advances to certain religious and charitable organizations totaling approximately $0.4 million, including accrued interest through the year ended December 31, 2006. In 2006, the stockholders of the Parent determined that the Company would not collect on these loans and advances. As a result, $0.4 million, was charged as a charitable contribution, and is included in selling, general and administrative expense in the accompanying consolidated statements of operations for the year ended December 31, 2006. In 2008, the Company made an additional loan of approximately $0.1 million to a certain religious organization, which is payable upon demand. Such loan is included in amounts due from related parties in the accompanying consolidated balance sheets.
The Company also had approximately $690,000 due from one if its executive officers and directors at December 31, 2008 and 2007, respectively, which is included in employee advances in the accompanying consolidated balance sheets. The Company made these loans in various transactions in 1998, 2002 and 2006. Except for $30,000, which does not bear interest and does not have a maturity date, the remaining loans bear interest at 8.0% and mature through December 2010.
In April 2008, LBI California entered into a Purchase Agreement and an Investor’s Rights Agreement with PortalUno, Inc. (“PortalUno”) and Reivax Technology, Inc. (“Reivax”). Under these agreements, LBI California purchased shares of the Series A Preferred Stock of PortalUno representing 30% of the fully diluted capital stock of PortalUno. LBI California purchased the shares for $450,000, of which $425,000 was paid in cash and $25,000 of consideration was the cancellation of a $25,000 note in favor of LBI California. An employee of one of LBI Media Holdings’ indirect, wholly owned subsidiaries is an owner of Reivax, which holds the remaining ownership interest in PortalUno.
The Company accounts for its investment in PortalUno using the equity method under Accounting Principles Board Opinion No. 18, “The Equity Method of Accounting for Investments in Common Stock” (“APB 18”). In accordance with APB 18, during the third quarter of 2008, the Company recorded a charge of $160,000 due to an other-than-temporary decline in the estimated fair value of PortalUno. The decline in fair value was due to the overall decline in market conditions facing the U.S. economy. Such charge is included in impairment of equity method investment in the accompanying consolidated statements of operations.
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LBI MEDIA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Condensed financial information has not been provided because the operations are not considered to be significant.
In December 2008, stockholders of the Parent and one of the Company’s executive officers purchased approximately $1.2 million aggregate principal of the Senior Discount Notes in various open market transactions. The weighted average price of the notes purchased was 41.250% of principal.
One of the Parent’s stockholders is the sole shareholder of L.D.L. Enterprises, Inc. (“LDL”), a mail order business. From time to time, the Company allows LDL to use, free of charge, unsold advertising time on its radio and television stations.
7. Defined Contribution Plan
In 1999, the Company established a 401(k) defined contribution plan (the “401(k) Plan”), which covers all eligible employees (as defined in the 401(k) Plan). Participants are allowed to make nonforfeitable contributions of up to 60% of their annual salary, including commissions, up to the maximum IRS allowable amount. The Company is allowed to contribute a discretionary amount to the 401(k) Plan. For the years ended December 31, 2008, 2007 and 2006, the Company made no discretionary contributions to the 401(k) Plan.
8. Equity Incentive Plan
In December 2008, the stockholders of the Parent adopted the Liberman Broadcasting, Inc. Stock Incentive Plan (the “Plan”). Grants of equity under the Plan are made to employees who render services to the Company. Accordingly, the Company reflects compensation expense related to the options in its financial statements. The Plan allows for the award of up to 14.568461 shares of the Parent’s Class A common stock and awards under the Plan may be in the form of incentive stock options, nonqualified stock options, restricted stock awards or stock awards. The Plan is administered by the Board of Directors. The Board of Directors determines the type, number, vesting requirements and other features and conditions of such awards.
As of December 31, 2008, the only option grant has been to one of the Company’s executive officers, pursuant to an employment agreement entered into in February 2008. The options have a contractual term of ten years from the date of the grant and vest over 5 years. Given the late adoption of the Plan in the Company’s fiscal year (December 12, 2008), stock compensation expense for the year then ended was insignificant and therefore was not recorded in the accompanying consolidated statements of operations.
The fair value of each stock option is estimated on the date of grant using the Black-Scholes option pricing model that uses the assumptions noted in the table below. For the awards, the Company recognizes compensation expense using a straight-line amortization method. Expected volatilities are based on historical volatility of the Company’s publicly-traded competitors. The Company uses historical data to estimate option exercise and employee termination within the valuation model. The expected term of the option is estimated using the “simplified” method as provided in SEC Staff Accounting Bulletin No. 107 “Share-Based Payment” (“SAB No. 107”). Under this method, the expected life equals the arithmetic average of the vesting term and the original contractual term of the options. The risk-free rate for periods within the contractual life of the stock option is based on the U.S. Treasury yield curve in effect at the time of grant. When estimating forfeitures, the Company considers voluntary termination behavior.
Valuation Assumptions
The Company calculated the fair value of each option award on the date of grant using the Black-Scholes option pricing model. The following weighted average assumptions were used for each respective period:
2008 | |||
Expected term | 7.5 years | ||
Dividends to common stockholders | None | ||
Risk-free interest rate | 2.60 | % | |
Expected volatility | 67 | % |
The weighted average grant date fair value using the Black-Scholes option pricing model was approximately $90,000 per share. Unamortized compensation as of December 31, 2008 was approximately $195,000, which will be amortized over the expected term of 7.5 years.
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LBI MEDIA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Stock Options Activity
A summary of the status of the Company’s stock options, as of December 31, 2008 and changes during the fiscal year ended December 31, 2008 is presented below:
Shares | Weighted Average Exercise Price | Aggregate Intrinsic Value | Weighted Average Remaining Contractual Life (Years) | |||||||
Outstanding at December 31, 2007 | — | $ | — | |||||||
Granted | 2 | 1,368,083 | ||||||||
Exercised | — | — | ||||||||
Forfeited | — | — | ||||||||
Outstanding at December 31, 2008 | 2 | $ | 1,368,083 | $ | — | 10.0 | ||||
Exercisable at December 31, 2008 | — | $ | — | $ | — | — | ||||
Expected to vest at December 31, 2008 | 2 | $ | 1,368,083 | $ | — | 10.0 |
During fiscal year 2008, no stock options had vested nor did any expire.
9. Segment Data
SFAS No. 131, “Disclosures About Segments of an Enterprise and Related Information,” requires companies to provide certain information about their operating segments. The Company has two reportable segments—radio operations and television operations. Management uses operating income before deferred (benefit) compensation, depreciation and amortization, loss on sale and disposal of property and equipment and impairment of broadcast licenses as its measure of profitability for purposes of assessing performance and allocating resources.
Year Ended December 31, | |||||||||||
2008 | 2007 | 2006 | |||||||||
(in thousands) | |||||||||||
Net revenues: | |||||||||||
Radio operations | $ | 66,694 | $ | 61,239 | $ | 51,394 | |||||
Television operations | 51,011 | 54,428 | 56,572 | ||||||||
Consolidated net revenues | $ | 117,705 | $ | 115,667 | $ | 107,966 | |||||
Operating expenses, excluding deferred (benefit) compensation, depreciation and amortization, loss on sale and disposal of property and equipment and impairment of broadcast licenses: | |||||||||||
Radio operations | $ | 34,617 | $ | 30,766 | $ | 24,494 | |||||
Television operations | 38,522 | 36,070 | 34,358 | ||||||||
Consolidated operating expenses, excluding deferred (benefit) compensation, depreciation and amortization, loss on sale and disposal of property and equipment and impairment of broadcast licenses | $ | 73,139 | $ | 66,836 | $ | 58,852 | |||||
Operating income before deferred (benefit) compensation, depreciation and amortization, loss on sale and disposal of property and equipment and impairment of broadcast licenses: | |||||||||||
Radio operations | $ | 32,077 | $ | 30,473 | $ | 26,899 | |||||
Television operations | 12,489 | 18,358 | 22,215 | ||||||||
Consolidated operating income before deferred (benefit) compensation, depreciation and amortization, loss on sale and disposal of property and equipment and impairment of broadcast licenses | $ | 44,566 | $ | 48,831 | $ | 49,114 | |||||
Deferred (benefit) compensation: | |||||||||||
Radio operations | $ | — | $ | (3,952 | ) | $ | 948 | ||||
Television operations | — | — | — | ||||||||
Consolidated deferred (benefit) compensation | $ | — | $ | (3,952 | ) | $ | 948 | ||||
Depreciation and amortization expense: | |||||||||||
Radio operations | $ | 5,099 | $ | 4,057 | $ | 2,862 | |||||
Television operations | 4,914 | 4,949 | 4,217 | ||||||||
Consolidated depreciation and amortization expense | $ | 10,013 | $ | 9,006 | $ | 7,079 | |||||
Loss on sale and disposal of property and equipment: | |||||||||||
Radio operations | $ | 1,361 | $ | — | $ | — | |||||
Television operations | 2,151 | — | — | ||||||||
Consolidated loss on sale and disposal of property and equipment | $ | 3,512 | $ | — | $ | — | |||||
Impairment of broadcast licenses: | |||||||||||
Radio operations | $ | 60,340 | $ | 8,143 | $ | 1,244 | |||||
Television operations | 31,400 | — | 1,600 | ||||||||
Consolidated impairment of broadcast licenses | $ | 91,740 | $ | 8,143 | $ | 2,844 | |||||
Operating (loss) income: | |||||||||||
Radio operations | $ | (34,723 | ) | $ | 22,225 | $ | 21,845 | ||||
Television operations | (25,976 | ) | 13,409 | 16,398 | |||||||
Consolidated operating (loss) income | $ | (60,699 | ) | $ | 35,634 | $ | 38,243 | ||||
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LBI MEDIA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Year Ended December 31, | ||||||||||||
2008 | 2007 | 2006 | ||||||||||
(in thousands) | ||||||||||||
Total assets: | ||||||||||||
Radio operations | $ | 266,040 | $ | 318,554 | $ | 295,338 | ||||||
Television operations | 134,771 | 172,542 | 162,803 | |||||||||
Corporate | 27,242 | 25,460 | 23,922 | |||||||||
Consolidated total assets | $ | 428,053 | $ | 516,556 | $ | 482,063 | ||||||
Reconciliation of operating (loss) income before deferred (benefit) compensation, depreciation and amortization, loss on sale and disposal of property and equipment and impairment of broadcast licenses to (loss) income before income taxes: | ||||||||||||
Operating income before deferred (benefit) compensation, depreciation and amortization, loss on sale and disposal of property and equipment and impairment of broadcast licenses: | $ | 44,566 | $ | 48,831 | $ | 49,114 | ||||||
Deferred benefit (compensation) | — | 3,952 | (948 | ) | ||||||||
Depreciation and amortization | (10,013 | ) | (9,006 | ) | (7,079 | ) | ||||||
Loss on sale and disposal of property and equipment | (3,512 | ) | — | — | ||||||||
Impairment of broadcast licenses | (91,740 | ) | (8,143 | ) | (2,844 | ) | ||||||
Interest expense | (36,993 | ) | (37,100 | ) | (31,487 | ) | ||||||
Interest rate swap expense | (3,433 | ) | (2,410 | ) | (1,784 | ) | ||||||
Gain (loss) on note purchases and redemptions | 12,495 | (8,776 | ) | — | ||||||||
Equity in losses of equity method investment | (280 | ) | — | — | ||||||||
Impairment of equity method investment | (160 | ) | — | — | ||||||||
Interest and other (loss) income | — | 814 | 190 | |||||||||
(Loss) income before income taxes | $ | (89,070 | ) | $ | (11,838 | ) | $ | 5,162 | ||||
10. Income Taxes
Third party investors purchased shares of the Parent’s Class A common stock from the Parent and the stockholders of the Parent on March 30, 2007. As a result, the Parent no longer qualified as an “S corporation.” Because LBI Media Holdings was deemed for income tax purposes to be part of the Parent, LBI Media Holdings was no longer a “qualified subchapter S subsidiary.” Therefore, the Company files income tax returns as a C Corporation. Accordingly, the Company’s taxable income is subject to a combined federal and state income tax rate of approximately 39% for periods after March 30, 2007.
Commencing March 31, 2007, the Company is included with its Parent in the filing of a consolidated federal income tax return and various state income tax returns. With regard to the consolidated filings, the members of the consolidated group presently allocate tax expenses among the members, as if they were not included in the consolidated return (i.e., “stand alone” basis), to the entity responsible for generating the corresponding tax liability. Accordingly, the amount of federal and state income taxes currently payable is calculated and paid on a “stand alone” basis. Therefore, the Company remits to its Parent only those taxes that would be due if the Parent were the taxing authority (e.g. Internal Revenue Service). Any deferred income taxes are accounted for in the financial statements of the Company.
Deferred income taxes arise from temporary differences between the tax basis of assets and liabilities and their reported amounts in the consolidated financial statements. As a result of the loss of its S corporation status, the Company recorded a one-time non-cash charge of approximately $46.8 million in 2007 to adjust its deferred tax accounts. The charge is included in the benefit from (provision for) income taxes in the accompanying consolidated statements of operations. The Company’s deferred tax liabilities as of December 31, 2008 and 2007 were approximately $23.7 million and $49.5 million, respectively, and result primarily from book and tax basis differences of the Company’s indefinite-lived intangible assets that, for tax purposes, are amortized over fifteen years.
At December 31 of each respective year, the (benefit from) provision for income taxes consisted of the following:
As of December 31, | |||||||||||
2008 | 2007 | 2006 | |||||||||
(in thousands) | |||||||||||
Current federal | $ | — | $ | — | $ | — | |||||
Current state | (281 | ) | 21 | (142 | ) | ||||||
Total current income taxes | (281 | ) | 21 | (142 | ) | ||||||
Deferred federal | (23,470 | ) | 42,570 | — | |||||||
Deferred state | (2,354 | ) | 6,070 | 212 | |||||||
Total deferred income taxes | (25,824 | ) | 48,640 | 212 | |||||||
Total income tax (benefit) expense | $ | (26,105 | ) | $ | 48,661 | $ | 70 | ||||
The following is a reconciliation of total income tax (benefit) expense to income taxes computed by applying the statutory federal income tax rate of 35% to (loss) income before income tax (benefit) expense for the years ended December 31, 2008 and 2007. No reconciliation is provided for the year ended December 31, 2006 as the Company was an S Corporation and not subject to federal taxes at the entity level.
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LBI MEDIA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Year Ended December 31, | ||||||||
2008 | 2007 | |||||||
(in thousands) | ||||||||
Income tax benefit computed at the federal statutory rate | $ | (31,167 | ) | $ | (4,143 | ) | ||
Federal deferred taxes upon conversion to a C corporation | — | 41,136 | ||||||
Change in valuation allowance for amortization of intangible assets | 9,755 | 3,688 | ||||||
Post S corporation valuation allowance | — | 3,721 | ||||||
State income taxes | (3,077 | ) | 3,958 | |||||
Pretax loss as an S Corporation | — | 380 | ||||||
Other | (1,616 | ) | (79 | ) | ||||
Total income tax (benefit) expense | (26,105 | ) | 48,661 | |||||
As of December 31, 2008, the Company had approximately $35.0 million and $21.1 million, respectively, of accumulated federal and state net operating losses. The federal net operating losses can be carried forward and applied to offset taxable income for 20 years and any unused portion of these net operating losses will expire from 2027 through 2028. With the exception of California, the state net operating losses can be carried forward and applied to offset taxable income for 10 years and any unused portion of these net operating losses will expire in 2018. In 2008, California changed its carryforward period from 10 to 20 years for any net operating losses generated on or after January 1, 2008. As such, unused portion of the accumulated net operating loss as of December 31, 2007 will expire in 2017 and the unused portion of the 2008 net operating loss will expire in 2028.
The following table outlines the principal components of deferred tax assets and liabilities at December 31 of each respective year:
As of December 31, | ||||||||
2008 | 2007 | |||||||
(in thousands) | ||||||||
Deferred tax assets: | ||||||||
Net operating loss carryforwards | $ | 13,467 | $ | 8,332 | ||||
Interest rate swap expense | 2,924 | — | ||||||
Accretion on Senior Discount Notes | 2,705 | 1,865 | ||||||
Other | 1,618 | 979 | ||||||
Total deferred tax assets | 20,714 | 11,176 | ||||||
Deferred tax liabilities: | ||||||||
Amortization of intangible assets | (23,691 | ) | (49,515 | ) | ||||
Depreciation | (840 | ) | (1,057 | ) | ||||
Total deferred tax liabilities | (24,531 | ) | (50,572 | ) | ||||
(3,817 | ) | (39,396 | ) | |||||
Valuation allowance | (19,874 | ) | (10,119 | ) | ||||
Net deferred tax liabilities | $ | (23,691 | ) | $ | (49,515 | ) |
A valuation allowance is provided when it is believed to be more likely than not that some portion, or all, of the deferred tax assets will not be realized. Accordingly, the Company has recorded a valuation allowance to reserve for 100% of the net deferred tax assets and a net deferred tax liability for its indefinite-lived intangible assets. The total change in the valuation allowance was $9.8 million, $9.6 million, and $0.1 million for the years ended December 31, 2008, 2007 and 2006, respectively.
The Company adopted the provisions of FIN 48 on January 1, 2007. The cumulative effect adjustment, as a result of a change in accounting principle, reduced beginning retained earnings by approximately $787,000 ($654,000 to record unrecognized tax benefits and $133,000 of the related accrued interest). The Company’s policy is to recognize interest related to unrecognized tax benefits (“UTB”) and penalties as additional income tax expense.
A reconciliation of the beginning and ending amounts of UTB for the year ended December 31, 2008 is as follows:
Balance at January 1, 2007 | $ | 996,000 | ||
Additions based on tax positions related to the current year | — | |||
Additions for tax positions of prior years | — | |||
Reductions for tax positions of prior years | — | |||
Lapse of statute of limitations | (303,000 | ) | ||
Settlements | — | |||
Balance at December 31, 2007 | 693,000 | |||
Additions based on tax positions related to the current year | — | |||
Additions for tax positions of prior years | — | |||
Reductions for tax positions of prior years | — | |||
Lapse of statute of limitations | (351,000 | ) | ||
Settlements | — | |||
Balance at December 31, 2008 | $ | 342,000 | ||
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LBI MEDIA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During 2008 and 2007, respectively, the Company recognized approximately $351,000 and $303,000 of these UTB due to the expiration of the statute of limitations and, accordingly, the effective tax rate was reduced. Accrued interest at December 31, 2008 and 2007, related to UTB was approximately $101,000 and $182,000, respectively. Approximately $28,000 and $38,000 of accrued interest related to unlapsed UTB is included in benefit from (provision for) income taxes for the years ended December 31, 2008 and 2007, respectively. The Company files income tax returns in the U.S. federal jurisdiction and various state jurisdictions. The Company is no longer subject to federal or state income tax examinations for years prior to 2005 and 2004, respectively. As a result of the expiration of the statute of limitations in certain jurisdictions, it is reasonably possible that the accrual for the above discussed UTB for tax positions taken in previously filed tax returns will be decreased by approximately $342,000 over the next twelve months. Notwithstanding the adjustments discussed above, the Company believes that it has appropriate support for the income tax positions taken and presently expected to be taken on its tax returns. Additionally, the Company believes that its accruals for tax liabilities are adequate for all years open to income tax examinations based on an assessment of many factors including past experience, past examinations by taxing authorities and interpretations of tax law applied to the facts of each matter. However, if recognized, the $443,000 in UTB (including accrued interest) will increase the Company’s effective tax rate.
11. LBI Media Holdings, Inc. (Parent Company Only)
The terms of LBI Media’s 2006 Senior Credit Facilities and the indenture governing LBI Media’s 2007 Senior Subordinated Notes restrict LBI Media’s ability to transfer net assets to LBI Media Holdings in the form of loans, advances, or cash dividends. The following parent-only condensed financial information presents balance sheets and related statements of operations and cash flows of LBI Media Holdings by accounting for the investments in the owned subsidiaries on the equity method of accounting. The accompanying condensed financial information should be read in conjunction with the accompanying consolidated financial statements and notes thereto.
As of December 31, | ||||||||
2008 | 2007 | |||||||
(in thousands) | ||||||||
Condensed Balance Sheet Information: | ||||||||
Assets | ||||||||
Deferred financing costs | $ | 947 | $ | 1,142 | ||||
Investment in subsidiaries | 15,645 | 84,141 | ||||||
Other assets | 3 | 3 | ||||||
Total assets | $ | 16,595 | $ | 85,286 | ||||
Liabilities and stockholder’s (deficiency) equity | ||||||||
Accrued interest | $ | 1,093 | $ | — | ||||
Interest due to subsidiary | 26 | — | ||||||
Long term debt | 46,383 | 62,885 | ||||||
Notes payable to subsidiary | 9,899 | |||||||
Total liabilities | 57,401 | 62,885 | ||||||
Stockholder’s (deficiency) equity: | ||||||||
Common stock | — | — | ||||||
Additional paid-in capital | 63,056 | 63,298 | ||||||
Accumulated deficit | (103,862 | ) | (40,897 | ) | ||||
Total stockholder’s (deficiency) equity | (40,806 | ) | 22,401 | |||||
Total liabilities and stockholder’s (deficiency) equity | $ | 16,595 | $ | 85,286 | ||||
Year Ended December 31, | ||||||||||||
2008 | 2007 | 2006 | ||||||||||
(in thousands) | ||||||||||||
Condensed Statement of Operations Information: | ||||||||||||
Income: | ||||||||||||
(Loss) equity in earnings of subsidiaries | $ | (68,251 | ) | $ | (53,912 | ) | $ | 11,034 | ||||
Gain on note purchases | 12,495 | — | — | |||||||||
Expenses: | ||||||||||||
Interest expense | (7,209 | ) | (6,587 | ) | (5,938 | ) | ||||||
(Loss) income before income taxes | (62,965 | ) | (60,499 | ) | 5,096 | |||||||
Provision for income taxes | — | — | (4 | ) | ||||||||
Net (loss) income | $ | (62,965 | ) | $ | (60,499 | ) | $ | 5,092 | ||||
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LBI MEDIA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Year Ended December 31, | ||||||||||||
2008 | 2007 | 2006 | ||||||||||
(in thousands) | ||||||||||||
Condensed Statement of Cash Flows Information: | ||||||||||||
Cash flows (used in) provided by operating activities: | ||||||||||||
Net (loss) income | $ | (62,965 | ) | $ | (60,499 | ) | $ | 5,092 | ||||
Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities: | ||||||||||||
Equity in losses (earnings) of subsidiaries | 68,251 | 53,912 | (11,034 | ) | ||||||||
Amortization of deferred financing costs | 197 | 197 | 201 | |||||||||
Accretion on discount notes | 5,542 | 6,386 | 5,737 | |||||||||
Gain on note purchases | (12,495 | ) | ||||||||||
Other assets and liabilities, net | 1,118 | 4 | 4 | |||||||||
Distributions from subsidiaries | 245 | 2,167 | 801 | |||||||||
Net cash (used in) provided by operating activities | (107 | ) | 2,167 | 801 | ||||||||
Cash flows provided by (used in) financing activities: | ||||||||||||
Contribution to subsidiaries | — | (47,900 | ) | — | ||||||||
Contribution from Parent | — | 47,946 | — | |||||||||
Purchase of senior discount notes | (9,550 | ) | — | — | ||||||||
Loan from subsidiary | 9,899 | — | — | |||||||||
Distributions to Parent | (242 | ) | (2,213 | ) | (801 | ) | ||||||
Net cash provided by (used in) financing activities | 107 | (2,167 | ) | (801 | ) | |||||||
Net change in cash and cash equivalents | — | — | — | |||||||||
Cash and cash equivalents, beginning of year | — | — | — | |||||||||
Cash and cash equivalents, end of year | $ | — | $ | — | $ | — | ||||||
12. Valuation and Qualifying Accounts and Reserves
The following is a summary of the valuation and qualifying accounts and reserves for the years ended December 31, 2008, 2007 and 2006:
Balance at beginning of year | Charged to costs and expenses | Charged to other accounts | Deductions | Balance at end of year | ||||||||||||
(in thousands) | ||||||||||||||||
2008: | ||||||||||||||||
Allowance for doubtful accounts | $ | 2,217 | $ | 1,906 | $ | — | $ | (1,051 | ) | $ | 3,072 | |||||
2007: | ||||||||||||||||
Allowance for doubtful accounts | $ | 1,954 | $ | 1,376 | $ | — | $ | (1,113 | ) | $ | 2,217 | |||||
2006: | ||||||||||||||||
Allowance for doubtful accounts | $ | 1,393 | $ | 1,330 | $ | 373 | $ | (1,142 | ) | $ | 1,954 |
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