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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
| x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2010
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 | 05-05849018 | |
(State or other Jurisdiction of Incorporation or Organization) | (IRS Employer Identification No.) |
1845 West Empire Avenue
Burbank, California 91504
(Address of principal executive offices, excluding zip code) (Zip code)
Registrant’s Telephone Number, Including Area Code: (818) 563-5722
Not Applicable
(Former name, former address and former fiscal year, if changed since last report).
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ¨ No ¨ (Note: As a voluntary filer, the registrant has filed all reports under Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months, but the registrant is not subject to such filing requirements.)
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer ¨ | Accelerated filer ¨ | |
Non-accelerated filer x | Smaller reporting company ¨ | |
(Do not check if a 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 May 14, 2010, there were 100 shares of common stock, $0.01 par value per share, of LBI Media Holdings, Inc. issued and outstanding.
Table of Contents
FORM 10-Q QUARTERLY REPORT
TABLE OF CONTENTS
| Page | ||||||
| PART I. FINANCIAL INFORMATION | 1 | |||||
| Item 1. | Financial Statements (Unaudited) | 1 | ||||
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 22 | ||||
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 36 | ||||
| Item 4. | Controls and Procedures | 36 | ||||
| PART II. OTHER INFORMATION | 38 | |||||
| Item 1. | Legal Proceedings | 38 | ||||
| Item 1A. | Risk Factors | 38 | ||||
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 38 | ||||
| Item 3. | Defaults upon Senior Securities | 38 | ||||
| Item 4. | (Removed and Reserved) | 38 | ||||
| Item 5. | Other Information | 38 | ||||
| Item 6. | Exhibits | 39 | ||||
Table of Contents
| Item 1. | Financial Statements |
LBI MEDIA HOLDINGS, INC.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
| March 31, 2010 | December 31, 2009 | |||||||
Assets | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 497 | $ | 178 | ||||
Accounts receivable (less allowances for doubtful accounts of $3,316 as of March 31, 2010 and $3,168 as of December 31, 2009) | 16,701 | 18,745 | ||||||
Current portion of program rights, net | 578 | 507 | ||||||
Amounts due from related parties | 449 | 387 | ||||||
Current portion of employee advances | 252 | 241 | ||||||
Prepaid expenses and other current assets | 1,334 | 1,262 | ||||||
Assets held for sale | 1,403 | 1,403 | ||||||
Total current assets | 21,214 | 22,723 | ||||||
Property and equipment, net | 90,389 | 91,989 | ||||||
Broadcast licenses, net | 167,659 | 161,660 | ||||||
Deferred financing costs, net | 6,057 | 6,413 | ||||||
Notes receivable from related parties | 3,034 | 3,024 | ||||||
Employee advances, excluding current portion | 1,530 | 1,529 | ||||||
Program rights, excluding current portion | 8,278 | 6,734 | ||||||
Other assets | 4,529 | 4,772 | ||||||
Total assets | $ | 302,690 | $ | 298,844 | ||||
Liabilities and stockholder’s deficiency | ||||||||
Current liabilities: | ||||||||
Cash overdraft | $ | 234 | $ | 494 | ||||
Accounts payable | 2,845 | 2,874 | ||||||
Accrued liabilities | 7,646 | 5,535 | ||||||
Accrued interest | 6,046 | 9,664 | ||||||
Current portion of long-term debt | 1,358 | 1,355 | ||||||
Total current liabilities | 18,129 | 19,922 | ||||||
Long-term debt, excluding current portion | 430,302 | 420,869 | ||||||
Fair value of interest rate swap | 4,989 | 5,234 | ||||||
Deferred income taxes | 18,875 | 18,482 | ||||||
Other liabilities | 1,644 | 1,579 | ||||||
Total liabilities | 473,939 | 466,086 | ||||||
Commitments and contingencies | ||||||||
Stockholder’s deficiency: | ||||||||
Common stock, $0.01 par value: | ||||||||
Authorized shares — 1,000 | — | — | ||||||
Issued and outstanding shares — 100 | ||||||||
Additional paid-in capital | 62,983 | 62,977 | ||||||
Accumulated deficit | (234,232 | ) | (230,219 | ) | ||||
Total stockholder’s deficiency | (171,249 | ) | (167,242 | ) | ||||
Total liabilities and stockholder’s deficiency | $ | 302,690 | $ | 298,844 | ||||
See accompanying notes.
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LBI MEDIA HOLDINGS, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands)
| Three Months Ended March 31, | ||||||||
| 2010 | 2009 | |||||||
(As Restated – See Note 1) | ||||||||
Net revenues | $ | 23,584 | $ | 21,457 | ||||
Operating expenses: | ||||||||
Program and technical, exclusive of depreciation shown below | 7,390 | 4,874 | ||||||
Promotional, exclusive of depreciation shown below | 374 | 455 | ||||||
Selling, general and administrative, exclusive of depreciation shown below | 10,377 | 10,713 | ||||||
Depreciation | 2,450 | 2,456 | ||||||
Loss on disposal of property and equipment | 3 | — | ||||||
Impairment of broadcast licenses | — | 51,466 | ||||||
Gain on assignment of asset purchase agreement | (1,599 | ) | — | |||||
Total operating expenses | 18,995 | 69,964 | ||||||
Operating income (loss) | 4,589 | (48,507 | ) | |||||
Interest expense, net of amounts capitalized | (8,247 | ) | (8,278 | ) | ||||
Interest rate swap income | 245 | 336 | ||||||
Equity in losses of equity method investment | — | (38 | ) | |||||
Interest and other income | 14 | 27 | ||||||
Loss from continuing operations before (provision for) benefit from income taxes | (3,399 | ) | (56,460 | ) | ||||
(Provision for) benefit from income taxes | (614 | ) | 17,036 | |||||
Loss from continuing operations | (4,013 | ) | (39,424 | ) | ||||
Discontinued operations, net of income taxes | — | 297 | ||||||
Net loss | $ | (4,013 | ) | $ | (39,127 | ) | ||
See accompanying notes.
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LBI MEDIA HOLDINGS, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
| Three Months Ended March 31, | ||||||||
| 2010 | 2009 | |||||||
(As Restated –see Note 1) | ||||||||
Operating activities | ||||||||
Net loss | $ | (4,013 | ) | $ | (39,127 | ) | ||
Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
Depreciation | 2,450 | 2,473 | ||||||
Impairment of broadcast licenses | — | 51,466 | ||||||
Loss on disposal of property and equipment | 3 | — | ||||||
Equity in losses of equity method investment | — | 38 | ||||||
Stock-based compensation | 6 | 8 | ||||||
Gain on assignment of asset purchase agreement | (1,599 | ) | — | |||||
Amortization of deferred financing costs | 356 | 364 | ||||||
Amortization of discount on subordinated notes | 74 | 67 | ||||||
Amortization of program rights | 1,958 | 143 | ||||||
Interest rate swap income | (245 | ) | (336 | ) | ||||
Provision for doubtful accounts | 533 | 297 | ||||||
Changes in operating assets and liabilities: | ||||||||
Cash overdraft | (260 | ) | 1,201 | |||||
Accounts receivable | 1,593 | 2,024 | ||||||
Program rights | (3,573 | ) | (2,321 | ) | ||||
Amounts due from related parties | (2 | ) | (5 | ) | ||||
Prepaid expenses and other current assets | (72 | ) | 222 | |||||
Employee advances | (12 | ) | (37 | ) | ||||
Accounts payable | (133 | ) | (868 | ) | ||||
Accrued liabilities | 2,102 | 415 | ||||||
Accrued interest | (3,618 | ) | (3,462 | ) | ||||
Deferred income taxes | 393 | (17,098 | ) | |||||
Other assets and liabilities | (433 | ) | 400 | |||||
Net cash used in operating activities | (4,492 | ) | (4,136 | ) | ||||
Investing activities | ||||||||
Purchases of property and equipment | (848 | ) | (3,572 | ) | ||||
Deposits on purchases of property and equipment | (229 | ) | (125 | ) | ||||
Insurance proceeds related to previously disposed property and equipment | 215 | — | ||||||
Acquisition of broadcast licenses | (5,399 | ) | (3 | ) | ||||
Deposits on acquisition of television station assets | (388 | ) | — | |||||
Return of previously deposited escrow funds | 375 | — | ||||||
Gross proceeds from the assignment of asset purchase agreement (see Note 9) | 5,900 | — | ||||||
Payment pursuant to relocation and purchase agreement relating to assignment of asset purchase agreement (see Note 9) | (4,150 | ) | — | |||||
Notes receivable issued to related parties | (60 | ) | — | |||||
Repayments on notes receivable | 33 | — | ||||||
Net cash used in investing activities | (4,551 | ) | (3,700 | ) | ||||
Financing activities | ||||||||
Proceeds from bank borrowings | 18,450 | 15,700 | ||||||
Payments on bank borrowings | (9,088 | ) | (7,986 | ) | ||||
Net cash provided by financing activities | 9,362 | 7,714 | ||||||
Net increase (decrease) in cash and cash equivalents | 319 | (122 | ) | |||||
Cash and cash equivalents at beginning of period | 178 | 450 | ||||||
Cash and cash equivalents at end of period | $ | 497 | $ | 328 | ||||
Supplemental disclosure of cash flow information: | ||||||||
Non-cash amounts included in accounts payable and accrued liabilities: | ||||||||
Purchases of property and equipment | $ | (950 | ) | $ | (1,010 | ) | ||
Cash paid during the period for: | ||||||||
Interest (net of amounts capitalized of $0 and $28, respectively) | $ | 11,417 | $ | 11,316 | ||||
Income taxes | $ | 39 | $ | 1 | ||||
See accompanying notes.
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LBI MEDIA HOLDINGS, INC.
NOTES TO INTERIM UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2010
1. 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 and purchase of a portion of its senior discount notes (see Note 8) and the operations of its subsidiaries. Accordingly, its only material source of cash is dividends and distributions from its subsidiaries, which are subject to restrictions by LBI Media’s senior credit facilities and the indenture governing the senior subordinated notes issued by LBI Media (see Note 8). Parent-only condensed financial information of LBI Media Holdings on a stand-alone basis has been presented in Note 15.
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, Utah and New York. In addition, the Company owns television production facilities that are used to produce programming for the Company’s owned and affiliated 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 four 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, KEYH-AM, KJOJ-FM, KTJM-FM, KQQK-FM, KTNE-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, KPNZ and WASA serve the Los Angeles, California, San Diego, California, Phoenix, Arizona, Houston, Texas, Dallas-Fort Worth, Texas, Salt Lake City, Utah and New York, New York 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.
In 2009, the Company began entering into affiliation agreements with certain television stations to broadcast its EstrellaTV network programming on their digital multicast channels. Currently, this affiliate network consists of twenty-three television stations in various states serving specific market areas, including seven in Texas, four in Florida, five in California, and one each in Arizona, Nebraska, Nevada, New Mexico, New York, North Carolina and Oregon.
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and with the instructions for Rule 10-01 of Regulation S-X promulgated by the Securities and Exchange Commission (the “SEC”). Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. The results of operations for interim periods are not necessarily indicative of the results that may be expected for the fiscal year. The condensed consolidated financial statements should be read in conjunction with the Company’s December 31, 2009 consolidated financial statements and accompanying notes included in the Company’s annual report on Form 10-K (the “Annual Report”). All terms used but not defined elsewhere herein have the meanings ascribed to them in the Annual Report.
The condensed consolidated balance sheet at December 31, 2009 has been derived from the audited financial statements at that date but does not include all the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. The condensed consolidated financial statements include the accounts of LBI Media Holdings and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated.
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LBI MEDIA HOLDINGS, INC.
NOTES TO INTERIM UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2010
Restatement
Subsequent to the issuance of its condensed consolidated financial statements as of September 30, 2009, and for the three and nine month periods then ended, the Company identified accounting errors relating to the classification and valuation of certain deferred tax accounts relating to the Company’s indefinite-lived intangible assets.
The Company noted errors in the classification and valuation of certain deferred tax accounts relating to its Federal Communications Commission (“FCC”) broadcast licenses. Deferred income taxes arise from temporary differences between the tax basis of assets and liabilities and their “book” amounts recorded in the consolidated financial statements. Prior to September 30, 2007, for substantially all of the Company’s broadcast licenses, the book basis of those intangible assets exceeded their respective tax basis, and accordingly, was combined to reflect a net deferred tax liability in the Company’s consolidated financial statements. However, as a result of the $51.5 million, $91.7 million and $8.1 million impairment charges recognized during the three months ended March 31, 2009 and the years ended December 31, 2008 and 2007, respectively, certain of those deferred tax liabilities relating to the Company’s broadcast licenses reversed and resulted in an increase in the gross deferred tax assets relating to those intangibles. The Company did not separate the deferred tax assets relating to certain of these broadcast licenses from the deferred tax liabilities relating to other broadcast licenses. The impact of these errors on the Company’s condensed consolidated financial statements, including its condensed consolidated statements of cash flows, was a reduction in income tax benefit (and an increase in income tax expense) of $0.3 million for the three months ended March 31, 2009, as the Company recorded an offsetting increase in its valuation allowance against the deferred tax assets relating to these broadcast licenses.
The following tables set forth the financial impacts of the restatement on the Company’s condensed consolidated statement of operations and condensed consolidated statement of cash flows for the three months ended March 31, 2009. The discontinued operations reclassification relates to radio station KSEV-AM, which was sold in December 2009. The operating results of this station have been reclassified and are included in discontinued operations in the accompanying condensed consolidated financial statements for the three months ended March 31, 2009.
Condensed Consolidated Statement of Operations for the three months ended March 31, 2009
| As Previously Reported | Discontinued Operations Reclassification | Adjustment | As Restated | |||||||||||||
(Provision for) benefit from income taxes | $ | 17,349 | $ | 29 | $ | (342 | ) | $ | 17,036 | |||||||
Loss from continuing operations | (38,785 | ) | (297 | ) | (342 | ) | (39,424 | ) | ||||||||
Net loss | (38,785 | ) | — | (342 | ) | (39,127 | ) | |||||||||
Condensed Consolidated Statement of Cash Flows for the three months ended March 31, 2009
| As Previously Reported | Discontinued Operations Reclassification | Adjustment | As Restated | ||||||||||||
Operating activities: | |||||||||||||||
Net loss | $ | (38,785 | ) | $ | — | $ | (342 | ) | $ | (39,127 | ) | ||||
Adjustments to reconcile net loss to net cash used in operating activities: | |||||||||||||||
Deferred income taxes | (17,440 | ) | — | 342 | (17,098 | ) | |||||||||
2. Recent Accounting Pronouncements
In May 2009, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Codification (“ASC”) 855 “Subsequent Events” (“ASC 855”), which requires disclosure of the date through which a company evaluated the need to disclose events that occurred subsequent to the balance sheet date and whether that date represents the date the financial statements were issued or were available to be issued. The Company adopted ASC 855 for the period ended June 30, 2009. The adoption of ASC 855 did not have a material effect on the disclosures required in the Company’s consolidated financial statements. The Company considered subsequent events for disclosure in this Quarterly Report on Form 10-Q.
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LBI MEDIA HOLDINGS, INC.
NOTES TO INTERIM UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2010
In June 2009, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 167, “Amendments to FASB Interpretation No. 46 (R)” (“FAS 167”), which amended the consolidation guidance for variable-interest entities. The amendments include: (1) the elimination of the exemption for qualifying special purpose entities, (2) a new approach for determining who should consolidate a variable-interest entity, and (3) changes to when it is necessary to reassess who should consolidate a variable-interest entity. FAS 167 was incorporated into ASC 810 “Consolidation.” This amendment was effective for financial statements issued for fiscal years periods beginning after November 15, 2009, for interim periods within that first annual reporting period and for interim and annual reporting periods thereafter. Earlier application is prohibited. The Company adopted ASC 810 on January 1, 2010. This standard did not have a material impact on the Company’s consolidated results of operations, cash flows or financial condition.
In January 2010, the FASB issued ASU No. 2010-06, “Improving Disclosures about Fair Value Measurements” (“ASU 2010-06”). ASU 2010-06 requires new disclosures relating to transfers in and out of Level 1 and Level 2 fair value measurements, levels of disaggregation, and valuation techniques. These disclosures are effective for reporting periods beginning after December 15, 2009. Additional new disclosures regarding the purchases, sales, issuances and settlements in the roll forward of activity in Level 3 fair value measurements are effective for fiscal years beginning after December 15, 2010. The Company has adopted ASU 2010-06 related to the disclosures required for reporting periods beginning after December 15, 2009, which have had no material impact on the disclosures required in the Company’s consolidated financial statements. The Company will adopt the remaining disclosure provisions on January 1, 2011. However, such provisions are currently not expected to have a material impact on the disclosures required in the Company’s consolidated financial statements.
3. Fair Value Measurements
ASC 820 “Fair Value Measurements and Disclosures” (“ASC 820”) establishes a new framework for measuring fair value and expands related disclosures. The fair value framework requires the categorization of assets and liabilities into three levels based upon the assumptions (inputs) used to price the assets or liabilities. Level 1 provides the most reliable measure of fair value, whereas Level 3 generally requires significant management judgment. The three levels are defined as follows:
Level 1: | Inputs are unadjusted quoted prices in active markets for identical assets and liabilities that can be assessed at a measurement date. | |
Level 2: | Observable inputs other than those included in Level 1. For example, quoted prices for similar assets or liabilities in active markets or quoted prices for identical assets or liabilities in inactive markets. | |
Level 3: | Unobservable inputs reflecting management’s own assumptions about the inputs used in pricing the asset or liability. |
As of March 31, 2010 and December 31, 2009, respectively, the fair values of the Company’s financial liabilities are categorized as follows:
| Total | Level 1 | Level 2 | Level 3 | |||||||||
| (In thousands) | ||||||||||||
As of March 31, 2010 | ||||||||||||
Liabilities subject to fair value measurement: | ||||||||||||
Interest rate swap (a) | $ | 4,989 | $ | — | $ | 4,989 | $ | — | ||||
Total | $ | 4,989 | $ | — | $ | 4,989 | $ | — | ||||
As of December 31, 2009 | ||||||||||||
Liabilities subject to fair value measurement: | ||||||||||||
Interest rate swap (a) | $ | 5,234 | $ | — | $ | 5,234 | $ | — | ||||
Total | $ | 5,234 | $ | — | $ | 5,234 | $ | — | ||||
| (a) | Based on London Interbank Offered Rate (“LIBOR”). See “Long-Term Debt” in Note 8. |
Certain assets and liabilities are measured at fair value on a non-recurring basis. This means that certain assets are not measured at fair value on an ongoing basis but are subject to fair value adjustments only in certain circumstances. Included in this category are the Company’s radio and television FCC broadcast licenses that are written down to fair value when they are determined to be impaired.
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LBI MEDIA HOLDINGS, INC.
NOTES TO INTERIM UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2010
As no impairment indicators were noted during the three months ended March 31, 2010, the Company’s broadcast licenses were determined not to be impaired. However, during the three months ended March 31, 2009, pursuant to ASC 350-30 “General Intangibles Other Than Goodwill” (“ASC 350-30”), and in connection with an interim impairment test performed for asset values as of March 31, 2009, the carrying values for several of the Company’s radio and television broadcasting licenses were written down to their estimated fair values, resulting in a total impairment charge of approximately $51.5 million for the three months ended March 31, 2009, which utilizes Level 3 inputs. A description of the Level 3 inputs and the information used to develop the inputs is discussed below in Note 4.
The fair value of the Company’s financial instruments included in current assets and current liabilities (such as cash and cash 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 fair values of LBI Media’s senior subordinated notes and LBI Media Holdings’ senior discount notes (see Note 8) were determined using quoted market prices. |
| • | The Company’s other long-term debt has variable interest rates, or rates that the Company believes approximate current market rates, and accordingly, the fair value of those instruments approximates the carrying amounts. |
| March 31, 2010 | December 31, 2009 | |||||||||||
Description | Fair Value | Carrying Value | Fair Value | Carrying Value | ||||||||
8.5% Senior Subordinated Notes, due 2017 | $ | 196.7 | $ | 225.7 | $ | 189.9 | $ | 225.6 | ||||
11% Senior Discount Notes, due 2013 | 37.2 | 45.4 | 33.6 | 45.4 | ||||||||
Senior credit facility and mortgage notes payable | 160.6 | 160.6 | 151.2 | 151.2 | ||||||||
4. Broadcast Licenses
The Company’s indefinite-lived assets consist of its 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 $17.5 million at March 31, 2010 and December 31, 2009.
In accordance with ASC 350-30, 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 was incorporated into ASC 350-30 under the FASB codification. ASC 350-30 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.
As a result of the continued slowdown in the U.S. advertising market, that resulted in further revenue declines beyond levels assumed in the Company’s 2008 annual and year end impairment testing, the Company conducted an additional review of the fair value of some of its broadcast licenses as of March 31, 2009. Based on this evaluation, the Company determined that several of its
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LBI MEDIA HOLDINGS, INC.
NOTES TO INTERIM UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2010
radio and television broadcast licenses were impaired and recorded an impairment charge of approximately $51.5 million to reduce the net book value of these broadcast licenses to their estimated fair market values. The impairment charge resulted from market changes in estimates and assumptions that were attributable to lower advertising revenue growth projections for the broadcasting industry, increased discount rates and a decline in cash flow multiples for recent station sales. As no impairment indicators were noted during the three months ended March 31, 2010, no such impairment review was conducted during that period.
Below are key assumptions used in the income approach model for estimating asset fair values for the impairment testing performed as of March 31, 2009.
Radio Broadcasting Licenses | March 31, 2009 | |
Discount Rate | 12.1% | |
2009 Market Growth Rate Range | (10.0)% - (15.0)% | |
Out-year Market Growth Rate Range | 0.4% - 2.2% | |
Market Share Range (1) | 0.1% - 11.8% | |
Operating Profit Margin Range (1) | (8.2)% - 36.5% |
Television Broadcasting Licenses | March 31, 2009 | |
Discount Rate | 11.9% | |
2009 Market Growth Rate Range | (8.5)% - (15.0)% | |
Out-year Market Growth Rate Range | 0.6% - 1.8% | |
Market Share Range (1) | 0.2% - 2.6% | |
Operating Profit Margin Range (1) | 8.5% - 32.2% |
| (1) | Excludes first year of operations. |
5. Program Rights
Costs incurred for the production of the Company’s original television programs are expensed based on the ratio of the current period’s gross revenues to estimated remaining total gross revenues from all sources (“Ultimate Revenues”) on an individual program basis. Costs of television productions are subject to regular recovery assessments which compare the estimated fair values with the unamortized costs. The amount by which the unamortized costs of television productions exceed their estimated fair values is written off. GAAP sets forth the requirements that must be met before capitalization of program costs is appropriate, including the ability to reasonably estimate Ultimate Revenues generated from television programming and the period in which those revenues would be realized. Beginning January 1, 2009, the Company determined, based on an evaluation of historical programming data, that certain of its television programs have demonstrated the ability to generate gross revenues beyond the initial airing, and accordingly, began capitalizing television production costs for certain of their programming, and amortizing those costs to operating expense based on the ratio of the current period’s gross revenues to Ultimate Revenues as described above. Costs related to the production of all other television programs for which the Company does not believe there is a useful life beyond the initial airing or does not have revenue directly attributed to production are expensed as incurred. For episodic television series, costs are expensed for each episode as it recognizes the related revenue for the episode. Approximately $7.2 million and $5.5 million of program and technical expenses were capitalized as of March 31, 2010 and December 31, 2009, respectively.
The following table sets forth the components of the Company’s unamortized programming costs as of March 31, 2010 and December 31, 2009:
| March 31, 2010 | December 31, 2009 | |||||
| (In thousands) | ||||||
Original program costs – released | $ | 7,134 | $ | 5,077 | ||
Original program costs – in production | 21 | 424 | ||||
Acquired programming rights | 1,701 | 1,740 | ||||
| �� | $ | 8,856 | $ | 7,241 | ||
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LBI MEDIA HOLDINGS, INC.
NOTES TO INTERIM UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2010
Based on current estimates, the Company expects to amortize approximately 55% of the net original programming costs in 2010 and approximately 95% by the end of 2012. The acquired programming rights will be amortized through 2014.
Television program rights acquired by the Company from third-party vendors are stated at the lower of unamortized cost or estimated net realizable value. These 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.
6. Discontinued Operations
In December 2009, two of LBI Media Holdings’ indirect, wholly owned subsidiaries consummated the sale of radio station KSEV-AM, in the Houston, Texas market, to Patrick Broadcasting, LP, for a total aggregate cash purchase price of $6.5 million (excluding adjustments). Accordingly, the accompanying condensed consolidated financial statements reflect the operating results of radio station KSEV-AM as discontinued operations for the three months ended March 31, 2009.
Summarized financial information in the accompanying condensed consolidated statements of operations for the discontinued KSEV-AM radio operations is as follows (in thousands):
| Three Months Ended March 31, | ||||
| 2009 | ||||
Net revenues | $ | 352 | ||
Expenses | (26 | ) | ||
Income before income tax expense | 326 | |||
Income tax expense | (29 | ) | ||
Discontinued operations, net of income taxes | $ | 297 | ||
7. Assets Held for Sale
In November 2009, the Company completed construction of its new corporate office building and studio facility in Dallas, Texas. At the same time, the Company moved its entire Dallas operations from its former location to the new building. As of December 31, 2009, the Company had engaged a real estate agent to sell the former operating facility and as of March 31, 2010, the Company had entered into a purchase and sale agreement with a buyer. As such, the former Dallas facility has been classified as held for sale as of March 31, 2010 and December 31, 2009, and is included in assets held for sale in the accompanying condensed consolidated balance sheets.
Assets classified as assets held for sale are measured at the lower of their carrying amount or fair value less cost to sell and are not depreciated and amortized while classified as held for sale. The fair value of assets held for sale is based on expected proceeds pursuant to the purchase and sale agreement with the buyer, which exceed the carrying value of the respective assets held for sale as of March 31, 2010 and December 31, 2009. Costs to sell are the direct incremental costs estimated to transact a sale. A loss is recognized for any initial or subsequent write-down to fair value less costs to sell. A gain is recognized for any subsequent increase in fair value less cost to sell, but not in excess of the cumulative loss previously recognized.
8. Long-Term Debt
Long-term debt consists of the following:
| March 31, 2010 | December 31, 2009 | |||||||
| (In thousands) | ||||||||
2006 Revolver due 2012 | $ | 43,300 | $ | 33,600 | ||||
2006 Term Loan due 2012 | 115,400 | 115,700 | ||||||
2007 Senior Subordinated Notes due 2017 | 225,706 | 225,633 | ||||||
Senior Discount Notes due 2013 | 45,383 | 45,383 | ||||||
2004 Empire Note due 2019 | 1,871 | 1,908 | ||||||
| 431,660 | 422,224 | |||||||
Less current portion | (1,358 | ) | (1,355 | ) | ||||
| $ | 430,302 | $ | 420,869 | |||||
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LBI MEDIA HOLDINGS, INC.
NOTES TO INTERIM UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2010
LBI Media’s 2006 Revolver and 2006 Term Loan
In May 2006, LBI Media refinanced its then existing senior secured revolving 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 sub-facility 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 credit facility by $10.0 million. LBI Media has the option to request its existing or new lenders under the 2006 Term Loan and 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 original 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, ranges 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 original principal amount of 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 principal amount of the 2006 Term Loan 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 1.75% and 4.25%, including the applicable margin, as of March 31, 2010.
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. Under the 2006 Revolver, LBI Media must also maintain a maximum senior secured leverage ratio (as defined in the senior credit agreement). LBI Media was in violation of certain reporting covenants under its senior credit facilities as of April 5, 2010. However, these violations were cured on April 9, 2010 by LBI Media upon the issuance of its consolidated financial statements for the year ended December 31, 2009 and the delivery of certain certificates and other items related to such consolidated financial statements to the administrative agent.
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 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.
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LBI MEDIA HOLDINGS, INC.
NOTES TO INTERIM UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2010
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.
LBI Media may redeem the 2007 Senior Subordinated Notes at any time on or after August 1, 2012 at redemption prices specified in the indenture governing its 2007 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 2007 Senior Subordinated Notes at a redemption price equal to a “make whole” amount as set forth in the indenture governing the 2007 Senior Subordinated Notes. Also, LBI Media may redeem up to 35% of the aggregate principal amount of the 2007 Senior Subordinated 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.
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, (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. LBI Media was in violation of certain of its reporting covenants under its indenture governing its senior subordinated notes as of March 31, 2010. However, these violations were cured on April 9, 2010 upon the issuance of its consolidated financial statements for the year ended December 31, 2009 to the trustee.
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 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. In 2009, LBI Media Holdings purchased an additional $1.0 million aggregate principal of its Senior Discount Notes on the open market at a purchase price of 48.0% of the principal amount. The indenture governing the Senior Discount Notes contains certain restrictive covenants that, among other things, limit LBI Media Holdings’ ability to incur additional indebtedness and pay dividends. As of March 31, 2010, 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.
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LBI MEDIA HOLDINGS, INC.
NOTES TO INTERIM UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2010
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 March 31, 2010, the Company’s long-term debt had scheduled repayments for each of the next five fiscal years as follows:
| (in thousands) | |||
Remainder of 2010 | $ | 1,317 | |
2011 | 1,364 | ||
2012 | 156,473 | ||
2013 | 45,566 | ||
2014 | 194 | ||
Thereafter | 226,746 | ||
| $ | 431,660 | ||
The above table does not include projected interest payments and does not include any repayment premium the Company may ultimately pay.
Interest Rate Swap
The Company uses an interest rate swap to manage interest rate risk associated with its variable rate borrowings. 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 notional amount and receives payments based on LIBOR. This swap fixes the interest rate at 7.56% (including the applicable margin) and terminates in November 2011. In November 2009, the notional amount was reduced to $60.0 million (from $80.0 million) and remains at this level through termination of the swap contract in November 2011.
The Company accounts for its interest rate swap in accordance with ASC 815, “Derivatives and Hedging” (“ASC 815”). As noted above, the effect of the interest rate swap is to fix the interest rate at 7.56% on the Company’s variable rate borrowings (including the applicable margin). However, changes in the fair value of the interest rate swap for each reporting period have been recorded in interest rate swap income in the accompanying condensed consolidated statements of operations because the interest rate swap does not qualify for hedge accounting.
The fair value of the interest rate swap agreement at each balance sheet date was as follows (in millions):
Derivatives Not Designated As Hedging Instruments | Balance Sheet Location | March 31, 2010 | December 31, 2009 | |||||
Interest rate swap agreement | Other long-term liabilities | $ | 5.0 | $ | 5.2 | |||
The following table presents the effect of the interest rate swap agreement on the Company’s condensed consolidated statements of operations for the three months ended March 31, 2010 and 2009 (in millions):
Derivatives Not Designated As Hedging Instruments | Location of Gain (Loss) | Three Months Ended March 31, 2010 | Three Months Ended March 31, 2009 | |||||
Interest rate swap agreement | Interest rate swap income | $ | 0.2 | $ | 0.3 | |||
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LBI MEDIA HOLDINGS, INC.
NOTES TO INTERIM UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2010
The Company measures the fair value of its interest rate swap on a recurring basis pursuant to ASC 820. As described in Note 3, ASC 820 establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. The three tiers are: Level 1, defined as 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.
As a result of the adoption of ASC 820, the Company modified the assumptions used in measuring the fair value of its interest rate swap. Specifically, the Company now includes the impact of its own credit risk on the interest rate swap measured at fair value under ASC 820. Counterparty credit risk adjustments are applied to the valuation of the interest rate swap, if necessary. Not all counterparties have the same credit risk, so the counterparty’s credit risk is considered in order to estimate the fair value of such an item. Bilateral or “own” credit risk adjustments are applied to the Company’s own credit risk when valuing derivatives measured at fair value. Credit adjustments consider the estimated future cash flows between the Company and its counterparty under the terms of the instruments and affect the credit risk on the valuation of those cash flows.
The fair value of the Company’s interest rate swap was a liability of $5.0 million and $5.2 million at March 31, 2010 and December 31, 2009, respectively. The fair value of the interest rate swap represents the present value of the expected future cash flows that are estimated to be received from or paid to a marketplace participant of the instrument. It is valued using inputs such as broker dealer quotes and adjusted for non-performance risk, which are based on valuation models that incorporate observable market information and are classified within Level 2 of the fair value hierarchy.
Interest Paid and Capitalized
The total amount of interest paid (net of amounts capitalized) was approximately $11.4 million and $11.3 million for the three months ended March 31, 2010 and 2009, respectively. Interest is capitalized on individually significant construction projects during the construction period and was approximately $28,000 during the three months ended March 31, 2009. No interest was capitalized during the three months ended March 31, 2010. Capitalized interest in 2009 related to the construction of a new corporate office building and broadcast facility in Dallas, which was completed in November 2009.
9. Acquisitions
In February 2010, two of LBI Media Holdings’ indirect, wholly owned subsidiaries, KRCA Television LLC (“KRCA TV”) and KRCA License LLC (“KRCA License”), consummated the acquisition of selected assets of low-power television station WASA-LP, licensed to Port Jervis, New York, from Venture Technologies, Group, LLC, pursuant to an asset purchase agreement entered into by the parties in November 2008. The total purchase price of approximately $6.0 million was paid primarily through borrowings under LBI Media’s senior revolving credit facility. The selected assets primarily included licenses and permits authorized by the FCC for or in connection with the operation of the station. The Company allocated the entire purchase price to broadcast licenses.
In February 2010, KRCA TV and KRCA License, as buyers, entered into an asset purchase agreement with Trinity Broadcasting Network, as seller, pursuant to which the buyers have agreed to acquire selected assets of low-power television station W40BY, licensed to Palatine, Illinois, from the seller. 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) broadcast and other equipment used to operate the station. The total purchase price will be approximately $1.3 million in cash, subject to certain adjustments, of which $0.1 million has been deposited into escrow. Such amount is included in other assets in the accompanying condensed consolidated balance sheet as of March 31, 2010. Consummation of the acquisition is currently subject to customary closing conditions, including regulatory approval from the FCC. The Company expects to close this acquisition in the second quarter of 2010.
In January 2010, KRCA TV and KRCA License, as buyers, entered into an asset purchase agreement with LeSEA Broadcasting Corporation, as seller, pursuant to which the buyers have agreed to acquire selected assets of television station KWHD-TV, licensed to Castle Rock, Colorado, from the seller. 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 (ii) antenna and transmitter facilities and (iii) broadcast and other studio equipment used to operate the station. The total purchase price will be approximately $6.5 million in cash, subject to certain adjustments, of which $0.3 million has been deposited into escrow. Such amount is included in other assets in the accompanying condensed consolidated balance sheet as of March 31, 2010. Consummation of the acquisition is currently subject to customary closing conditions, including regulatory approval from the FCC. The Company expects to close this acquisition in the second quarter of 2010.
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LBI MEDIA HOLDINGS, INC.
NOTES TO INTERIM UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2010
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 had been deposited into escrow as of December 31, 2009. 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 that the Company believes had occurred since entering into the asset purchase agreement. In January 2010, the Company entered into a settlement agreement and release with Sun City, whereby the Company agreed to allow Sun City to retain 50% of the escrow funds, and therefore received $0.4 million of the $0.8 million of the escrow amount initially deposited.
In November 2007, LBI California and LBI Radio, as buyers, entered into an asset purchase agreement with R&R Radio Corporation (“R&R Radio”), as seller, pursuant to which the buyers had agreed to acquire selected assets of radio station KDES-FM, located in Palm Springs, California, from the seller. As discussed below, the Company did not complete the purchase of selected assets of KDES-FM and instead assigned the rights to the agreement to a third party who subsequently purchased the selected assets of such radio station in February 2010. In accordance with certain provisions of ASC 805 “Business Combinations” (“ASC 805”), which became effective on January 1, 2009, the Company wrote-off approximately $0.2 million in pre-acquisition costs related to this proposed acquisition. Such amount is included in selling, general and administrative expenses in the accompanying condensed consolidated statements of operations for the three months ended March 31, 2009.
The aggregate purchase price was to be approximately $17.5 million in cash, subject to certain adjustments, of which $0.5 million had been deposited in escrow. The Company would have paid $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 then pending purchase of the assets from the seller, LBI California had entered into an agreement relating to the relocation and purchase of KDES-FM with Spectrum Scan whereby it would have paid $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 was conditioned on the completion of the purchase of the assets from the seller.
In July 2009, LBI California and LBI Radio entered into an assignment and assumption agreement with LC Media LP (“LC Media”) and R&R Radio, pursuant to which LBI California and LBI Radio assigned all of their rights, benefits, obligations and duties in and to a certain asset purchase agreement to purchase the selected assets of radio station KDES-FM to LC Media and LC Media assumed all of the rights, benefits, obligations and duties under such asset purchase agreement, including payment of the purchase price to R&R Radio and the entry into a substitute escrow agreement with R&R Radio. As a result, the $0.5 million escrow deposit that had been previously paid by the Company’s indirect, wholly-owned subsidiaries was returned to the Company in August 2009.
In connection with the assignment and assumption agreement, LBI California and Spectrum Scan entered into an amendment to the agreement relating to the relocation and purchase of KDES-FM, pursuant to which LBI California agreed to pay, subject to certain exceptions, approximately $4.2 million to Spectrum Scan (instead of the $7.0 million previously agreed upon) 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 when LC Media and R&R Radio consummated the acquisition of the selected assets.
As consideration for the assignment and assumption agreement and the amendment to the agreement with Spectrum Scan, LC Media agreed to pay, subject to and upon consummation of the purchase of KDES-FM from R&R Radio by LC Media, $5.9 million to the Company. Upon receipt of this payment, the Company agreed to then pay $4.2 million to Spectrum Scan pursuant to the amendment to the agreement relating to the relocation and purchase of KDES-FM, as described above.
In February 2010, the purchase of KDES-FM was consummated and the Company received $5.9 million from LC Media, pursuant to the assignment and assumption agreement entered into in July 2009. The Company, in turn, paid $4.2 million to Spectrum Scan pursuant to the amendment to the amendment to the agreement relating to the relocation and purchase of KDES-FM. As such, in February 2010, the Company realized a pre-tax gain on this transaction of approximately $1.6 million, which represents the net effect
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LBI MEDIA HOLDINGS, INC.
NOTES TO INTERIM UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2010
of the cash payments described above, reduced by the book value of certain transmission equipment that was sold to LC Media in connection with the assumption and assignment agreement. Such gain is included in gain on assignment of asset purchase agreement in the accompanying condensed consolidated statement of operations for the three months ended March 31, 2010.
10. Commitments and Contingencies
Ratings Services
In September 2009, the Company entered into a four-year contract with Nielsen Media Research (“Nielsen”), to provide local market television programming ratings services for the Company’s EstrellaTV network. The aggregate payments remaining under the agreement, at March 31, 2010, is approximately $16.1 million (which includes approximately $0.4 million of fees incurred but not paid), and will be paid through August 2013. However, the Company may terminate the agreement at the end of any calendar month on or prior to August 31, 2011, provided that such notice is submitted 90 days in advance and is accompanied by an early termination fee of $1.0 million.
Affiliation Agreements
In June 2009, the Company entered into a network affiliation agreement with a certain television station whereby the Company is obligated to make cash payments to the affiliate station upon the occurrence of certain events, as outlined below:
| (1) | If the affiliate station does not achieve at least $600,000 in annual net national sales in calendar years 2010 and 2011, during the time periods specified in the affiliation agreement (during which time the Company is supplying the station with its EstrellaTV network programming), the Company will be required to pay the difference to the affiliate station. This guarantee is reduced by $12,500 for each month in which the television channel is not carried by certain cable providers. |
| (2) | The Company will pay a success fee to the affiliate station in the amount of $125,000 per year for 2010 and/or 2011 if the station’s average rating is ranked by Nielsen as number three or better in the applicable Hispanic demographic during the November sweeps period for that particular year, as specified in the affiliation agreement. |
Based on the affiliate station’s current sales trends and projections (in addition to the Company’s assertion that the station will not obtain cable carriage in 2010), the Company does not believe any accrual is necessary as of March 31, 2010, with respect to the guarantee outlined in (1) above. Additionally, no reserve was recorded as of March 31, 2010 related to the potential cash obligation specified in (2) above, based on the affiliate station’s current ratings position and the Company’s ratings estimates for the duration of the year.
Litigation
In 2008, the Company began negotiations with Broadcast Music, Inc. (“BMI”) related to disputes over royalties owed to BMI. In October 2009, the Company settled all royalty disputes relating to its television stations as well as royalties owed for the period ended December 31, 2006 for the Company’s radio stations. The remaining outstanding dispute relates to the Company’s radio stations for the period commencing January 1, 2007, for which the Company has filed an application for a reasonable license under BMI’s antitrust consent decree (the “post-court period”). As of March 31, 2010, the Company had reserved a total of approximately $1.0 million relating to the BMI dispute, of which $0.5 million represents check disbursements it has made to BMI, but remain outstanding as of March 31, 2010. Such reserve is included in accrued liabilities in the accompanying condensed consolidated financial statements. The Company believes this reserve, all of which relates to the post-court period, is adequate as of March 31, 2010.
The Company is also subject to other 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.
11. Related Party Transactions
The Company had approximately $3.5 million and $3.4 million due from stockholders of the Parent and from affiliated companies at March 31, 2010 and December 31, 2009, respectively. These amounts include a $1.9 million loan the Company made to one of the stockholders of the Parent in July 2002. The loans due from the stockholders of the Parent bear interest at the applicable federal rate and currently mature through December 2010. Although no specific determination has been made, the Company plans to extend these loans to such stockholders beyond their current December 2010 maturity date; therefore, such loans have been classified in notes receivable from related parties in the accompanying condensed consolidated balance sheets.
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LBI MEDIA HOLDINGS, INC.
NOTES TO INTERIM UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2010
The Company also had approximately $0.7 million due from one if its executive officers and directors at March 31, 2010 and December 31, 2009, which is included in employee advances, excluding current portion, in the accompanying condensed consolidated balance sheets. The Company made these loans in various transactions in 1998, 2002 and 2006. Except for an advance of $30,000, which does not bear interest and does not have a maturity date, the remaining loans bear interest at 8.0% and currently mature through January 2011.
The Company accounts for its 30% investment in PortalUno, Inc. (“PortalUno”), a development stage, online search engine for the Hispanic community, using the equity method. As such, the Company’s share of PortalUno’s net loss is included in equity in losses of equity method investment in the accompanying condensed consolidated statements of operations. An employee of one of LBI Media Holdings’ subsidiaries is an owner of Reivax Technology, Inc., the holder of 70% of the ownership interest in PortalUno.
Condensed financial information has not been provided because the operations are not considered to be significant.
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. The Company had approximately $0.1 million due from LDL as of March 31, 2010 and December 31, 2009, which is included in amounts due from related parties in the accompanying condensed consolidated balance sheets. Such amounts are payable upon demand.
12. 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 March 31, 2010, the only option grant under the Plan has been to one of the Company’s executive officers, which was made in December 2008, pursuant to such employee’s employment agreement. The options have a contractual term of ten years from the date of the grant and vest over five years. No new options were granted during the three months ended March 31, 2010 or 2009.
In December 2009 and January 2010, the Parent entered into certain employment agreements whereby it agreed to grant an aggregate of 10.19792 shares of the Parent’s Class A common stock to certain employees and an executive officer. The options, when granted, will have contractual term of ten years from the date of the grant and vest in equal installments over five years.
The Company accounts for stock-based compensation according to the provisions of ASC 718 “Compensation – Stock Compensation” (“ASC 718”) 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 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.
The fair value of each stock option is estimated on the date of grant using the Black-Scholes option pricing model that uses assumptions for expected term, dividends, risk-free interest rate and expected volatility. 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”. 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 interest 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.
The Company calculated the fair value of its December 2008 option award on the date of grant using the Black-Scholes option pricing model. The weighted average grant date fair value using the Black-Scholes option pricing model was approximately $90,000 per share. Unamortized compensation as of March 31, 2010 was approximately $162,000 and is being amortized over the expected term of 7.5 years.
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LBI MEDIA HOLDINGS, INC.
NOTES TO INTERIM UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2010
Stock-based compensation expense was approximately $6,000 and $8,000 for the three months ended March 31, 2010 and 2009, respectively.
The following is a summary of the Company’s stock options as of March 31, 2010:
| Shares | Weighted Average Exercise Price Per Share | Aggregate Intrinsic Value | Weighted Average Remaining Contractual Life (Years) | |||||||
Outstanding at March 31, 2010 | 2.19 | $ | 1,368,083 | $ | — | 8.75 | ||||
Vested and exercisable at March 31, 2010 | 0.87 | $ | 1,368,083 | $ | — | 8.75 | ||||
Vested and expected to vest at March 31, 2010 | 2.19 | $ | 1,368,083 | $ | — | 8.75 | ||||
During the three months ended March 31, 2010, options to purchase an additional 0.437054 shares of the Parent’s Class A common stock had vested. However, none of these stock options had been exercised and no stock options expired during the three months ended March 31, 2010. Additionally, there was no intrinsic value for the stock options exercisable at March 31, 2010.
13. Segment Data
ASC 280 “Segment Reporting” 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 or loss before stock-based compensation expense, depreciation, loss on disposal of property and equipment and impairment of broadcast licenses as its measure of profitability for purposes of assessing performance and allocating resources.
| Three Months Ended March 31, | ||||||
| 2010 | 2009 | |||||
| (in thousands) | ||||||
Net revenues: | ||||||
Radio operations | $ | 11,826 | $ | 11,782 | ||
Television operations | 11,758 | 9,675 | ||||
Consolidated net revenues | 23,584 | 21,457 | ||||
Operating expenses, excluding stock-based compensation expense, depreciation, loss on disposal of property and equipment and impairment of broadcast licenses: | ||||||
Radio operations | 6,567 | 8,419 | ||||
Television operations | 9,969 | 7,615 | ||||
Consolidated operating expenses, excluding stock-based compensation expense, depreciation, loss on disposal of property and equipment and impairment of broadcast licenses | 16,536 | 16,034 | ||||
Operating income before stock-based compensation expense, depreciation, loss on disposal of property and equipment and impairment of broadcast licenses: | ||||||
Radio operations | 5,259 | 3,363 | ||||
Television operations | 1,789 | 2,060 | ||||
Consolidated operating income before stock-based compensation expense, depreciation, loss on disposal of property and equipment and impairment of broadcast licenses | 7,048 | 5,423 | ||||
Stock-based compensation expense: | ||||||
Corporate | 6 | 8 | ||||
Consolidated stock-based compensation expense | 6 | 8 | ||||
Depreciation expense: | ||||||
Radio operations | 1,332 | 1,241 | ||||
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LBI MEDIA HOLDINGS, INC.
NOTES TO INTERIM UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2010
| Three Months Ended March 31, | ||||||||
| 2010 | 2009 | |||||||
| (in thousands) | ||||||||
Television operations | 1,118 | 1,215 | ||||||
Consolidated depreciation expense | 2,450 | 2,456 | ||||||
Loss on disposal of property and equipment: | ||||||||
Radio operations | — | — | ||||||
Television operations | 3 | — | ||||||
Consolidated loss on disposal of property and equipment | 3 | — | ||||||
Impairment of broadcast licenses: | ||||||||
Radio operations | — | 31,886 | ||||||
Television operations | — | 19,580 | ||||||
Consolidated impairment of broadcast licenses | — | 51,466 | ||||||
Operating income (loss): | ||||||||
Radio operations | 3,927 | (29,764 | ) | |||||
Television operations | 668 | (18,735 | ) | |||||
Corporate | (6 | ) | (8 | ) | ||||
Consolidated operating income (loss) | $ | 4,589 | $ | (48,507 | ) | |||
Reconciliation of operating income before stock-based compensation expense, depreciation, loss on disposal of property and equipment and impairment of broadcast licenses to loss from continuing operations before (provision for) benefit from income taxes: | ||||||||
Operating income before stock-based compensation expense, depreciation, loss on disposal of property and equipment and impairment of broadcast licenses | $ | 7,048 | $ | 5,423 | ||||
Stock-based compensation expense | (6 | ) | (8 | ) | ||||
Depreciation | (2,450 | ) | (2,456 | ) | ||||
Loss on disposal of property and equipment | (3 | ) | — | |||||
Impairment of broadcast licenses | — | (51,466 | ) | |||||
Interest expense, net of amounts capitalized | (8,247 | ) | (8,278 | ) | ||||
Interest rate swap income | 245 | 336 | ||||||
Equity in losses of equity method investment | — | (38 | ) | |||||
Interest and other income | 14 | 27 | ||||||
Loss from continuing operations before (provision for) benefit from income taxes | $ | (3,399 | ) | $ | (56,460 | ) | ||
14. Income Taxes
In assessing the realizability of deferred tax assets, the Company considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. The Company considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. If the realization of deferred tax assets in the future is considered more likely than not, an adjustment to the deferred tax assets would increase net income in the period such determination is made.
Based upon the level of historical taxable income and projections for future taxable income over the periods which the deferred tax assets are deductible, at this time, the Company believes it is more likely than not that it will not realize the benefits of the majority of these deductible differences. As a result, the Company has established and maintained a valuation allowance for that portion of the deferred tax assets it believes will not be realized.
There was no activity in the Company’s unrecognized tax benefits (“UTB”) during the three months ended March 31, 2010. During the three months ended March 31, 2009, the Company recognized approximately $342,000 of UTB due to the expiration of the statute of limitations and, accordingly, the effective tax rate was reduced. 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
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LBI MEDIA HOLDINGS, INC.
NOTES TO INTERIM UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2010
prior to 2005 and 2004, respectively. 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.
15. 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 condensed consolidated financial statements and notes thereto.
Condensed Balance Sheet Information:
(in thousands)
| As of | ||||||||
| March 31, 2010 | December 31, 2009 | |||||||
Assets | ||||||||
Deferred financing costs, net | $ | 468 | $ | 500 | ||||
Amounts due from subsidiary | 1,958 | 1,956 | ||||||
Other assets | 29 | 25 | ||||||
Total assets | $ | 2,455 | $ | 2,481 | ||||
Liabilities and stockholder’s deficiency | ||||||||
Accrued interest | $ | 2,302 | $ | 1,054 | ||||
Interest due to subsidiary | 614 | 412 | ||||||
Long term debt | 45,383 | 45,383 | ||||||
Notes payable to subsidiary | 17,427 | 17,427 | ||||||
Losses in excess of investment in subsidiary | 107,978 | 105,447 | ||||||
Total liabilities | 173,704 | 169,723 | ||||||
Stockholder’s deficiency: | ||||||||
Common stock | — | — | ||||||
Additional paid-in capital | 62,983 | 62,977 | ||||||
Accumulated deficit | (234,232 | ) | (230,219 | ) | ||||
Total stockholder’s deficiency | (171,249 | ) | (167,242 | ) | ||||
Total liabilities and stockholder’s deficiency | $ | 2,455 | $ | 2,481 | ||||
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LBI MEDIA HOLDINGS, INC.
NOTES TO INTERIM UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2010
Condensed Statement of Operations Information:
(Unaudited, in thousands)
| Three Months Ended March 31, | ||||||||
| 2010 | 2009 | |||||||
| (As Restated) | ||||||||
Loss: | ||||||||
Equity in losses of subsidiary | $ | (2,531 | ) | $ | (37,709 | ) | ||
Expenses: | ||||||||
Interest expense | (1,482 | ) | (1,418 | ) | ||||
Loss before provision for income taxes | (4,013 | ) | (39,127 | ) | ||||
Provision for income taxes | — | — | ||||||
Net loss | $ | (4,013 | ) | $ | (39,127 | ) | ||
Condensed Statement of Flows Information:
(Unaudited, in thousands)
| Three Months Ended March 31, | ||||||||
| 2010 | 2009 | |||||||
| (As Restated) | ||||||||
Cash flows provided by operating activities: | ||||||||
Net loss | $ | (4,013 | ) | $ | (39,127 | ) | ||
Adjustments to reconcile net loss to net cash provided by operating activities: | ||||||||
Equity in losses of subsidiary | 2,531 | 37,709 | ||||||
Amortization of deferred financing costs | 32 | 51 | ||||||
Other assets and liabilities, net | 1,450 | 1,365 | ||||||
Distributions from subsidiary | — | 2 | ||||||
Net cash provided by operating activities | — | — | ||||||
Net change in cash and cash equivalents | — | — | ||||||
Cash and cash equivalents at beginning of period | — | — | ||||||
Cash and cash equivalents at end of period | $ | — | $ | — | ||||
As more fully described in Note 1, the Company has restated its condensed consolidated statement of operations and condensed consolidated statement of cash flows for the three months ended March 31, 2009, to correct accounting errors relating to the classification and valuation of certain deferred tax accounts relating to the Company’s indefinite-lived intangible assets.
The following tables set forth the financial impacts of the restatement on the parent-only statements of operations and cash flows for the three months ended March 31, 2009 (in thousands):
Condensed Consolidated Statement of Operations for the three months ended March 31, 2009
| As Previously Reported | Adjustment | As Restated | ||||||||||
Losses in earnings of subsidiary | $ | (37,367 | ) | $ | (342 | ) | $ | (37,709 | ) | |||
Loss before income taxes | (38,785 | ) | (342 | ) | (39,127 | ) | ||||||
Net loss | (38,785 | ) | (342 | ) | (39,127 | ) | ||||||
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LBI MEDIA HOLDINGS, INC.
NOTES TO INTERIM UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2010
Condensed Consolidated Statement of Cash Flows for the three months ended March 31, 2009
| As Previously Reported | Adjustment | As Restated | ||||||||||
Net loss | $ | (38,785 | ) | $ | (342 | ) | $ | (39,127 | ) | |||
Adjustments to reconcile net loss to net cash provided by operating activities: | ||||||||||||
Losses in earnings of subsidiary | 37,367 | 342 | 37,709 | |||||||||
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| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the financial statements included elsewhere in this Quarterly Report on Form 10-Q and the audited financial statements for the year ended December 31, 2009, included in our Annual Report on Form 10-K (File No. 333-110122). This Quarterly Report contains, in addition to historical information, forward-looking statements, which involve risk and uncertainties. The words “believe”, “expect”, “estimate”, “may”, “will”, “could”, “plan”, or “continue”, and similar expressions are intended to identify forward-looking statements. Our actual results could differ significantly from the results discussed in such forward-looking statements. The forward-looking statements in this Quarterly Report on Form 10-Q, 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 Quarterly Report on Form 10-Q, the risk factors included in our Annual Report on Form 10-K for the year ended December 31, 2009 and other documents that we file from time to time with the Securities and Exchange Commission, particularly any Current Reports on Form 8-K.
As discussed in Note 1 to the accompanying condensed consolidated financial statements, we are restating our condensed consolidated statement of operations and condensed consolidated statement of cash flows for the three months ended March 31, 2009. The following discussion and analysis of our financial condition and results of operations incorporates the restated amounts. For this reason the data set forth in this section may not be comparable to discussions and data in our previously filed Quarterly Reports on Form 10-Q.
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, Phoenix, Arizona and New York, New York. Our radio stations consist of five FM and two AM stations serving Los Angeles, California and its surrounding areas, five FM and three 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 seven 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 own three low-power television stations serving the San Diego, California, Phoenix, Arizona and New York, New York 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, Texas, that allow us to produce programming in those markets as well. We have entered into time brokerage agreements with third parties for four of our radio stations.
We are also affiliated with twenty-three television stations in various states serving specific market areas, including seven in Texas, four in Florida, five in California, and one each in Arizona, Nebraska, Nevada, New Mexico, New York, North Carolina and Oregon.
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 began generating advertising sales on our affiliated stations that broadcast our “EstrellaTV” network programming. Upon consummation of our two pending television asset acquisitions (as described below under “—Acquisitions”), our EstrellaTV network will broadcast in 18 of the top 20 Hispanic designated market areas, covering approximately 75% of U.S. Hispanic television households.
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, providing cost-effective 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 (including network) 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 amortization of capitalized costs related to the production of original programming content, production of local newscasts and, to a lesser extent, the amortization of programming content acquired 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.
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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.
Dispositions
In December 2009, two of our indirect, wholly owned subsidiaries, Liberman Broadcasting of Houston LLC and Liberman Broadcasting of Houston License LLC, completed the sale of selected assets of radio station KSEV-AM, 700AM, licensed to Tomball, Texas, to Patrick Broadcasting, LP, pursuant to an asset purchase agreement entered into by the parties in October 2009. Those assets included, among other things, (i) licenses and permits authorized by the Federal Communications Commission, or FCC, for or in connection with the operation of the station, (ii) the antenna and transmission facility, and (iii) broadcast and other studio equipment used to operate the station. The total aggregate sale price of approximately $6.5 million (excluding adjustments) was paid in cash. We used the net proceeds from the sale to repay outstanding borrowings under LBI Media’s senior revolving credit facility. The accompanying condensed consolidated financial statements reflect the operating results of radio station KSEV-AM as discontinued operations for the three months ended March 31, 2009.
Acquisitions
In February 2010, 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 WASA-LP, Channel 25, licensed to Port Jervis, New York, from Venture Technologies, Group, LLC, the seller, pursuant to an asset purchase agreement entered into by the parties in November 2008. The total purchase price of approximately $6.0 million was paid primarily through borrowings under LBI Media’s senior revolving credit facility. The selected assets primarily include licenses and permits authorized by the FCC for or in connection with the operation of the station. The purchase of these assets represents the first television station we have owned in the New York market.
In February 2010, KRCA Television LLC and KRCA License LLC entered into an asset purchase agreement with Trinity Broadcasting Network, as seller, pursuant to which we have agreed to acquire selected assets of low-power television station W40BY, licensed to Palatine, Illiniois, from the seller. 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) broadcast and other equipment used to operate the station. The total purchase price will be approximately $1.3 million in cash, subject to certain adjustments, of which $0.1 million has been deposited into escrow. Such amount is included in other assets in the accompanying condensed consolidated balance sheet as of March 31, 2010. Consummation of the acquisition is currently subject to customary closing conditions, including regulatory approval from the FCC. We expect to close this acquisition in the second quarter of 2010.
In January 2010, KRCA Television LLC and KRCA License LLC entered into an asset purchase agreement with LeSEA Broadcasting Corporation, as seller, pursuant to which we have agreed to acquire selected assets of television station KWHD-TV, licensed to Castle Rock, Colorado, from the seller. 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 (ii) antenna and transmitter facilities and (ii) broadcast and other studio equipment used to operate the station. The total purchase price will be approximately $6.5 million in cash, subject to certain adjustments, of which $0.3 million has been deposited into escrow. Such amount is included in other assets in the accompanying condensed consolidated balance sheet as of March 31, 2010. Consummation of the acquisition is currently subject to customary closing conditions, including regulatory approval from the FCC. We expect to close this acquisition in the second quarter of 2010.
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 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 had been deposited into escrow as of December 31, 2009. 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 that we believe occurred since entering into the agreement. However, in order to avoid significant legal fees, other expenses and
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management time that would have been devoted to the litigation matter, in January 2010, we entered into a settlement agreement and release with Sun City, whereby we agreed to allow Sun City to retain 50 percent of the escrow funds. As such, in January 2010, we received approximately $0.4 million of the $0.8 million escrow amount initially deposited. The charge related to the write-off of the remaining $0.4 million that we did not recoup is included in selling, general and administrative expenses in the consolidated financial statements for three months ended December 31, 2009.
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 had agreed to acquire selected assets of radio station KDES-FM, located in Palm Springs, California, from the seller. As discussed below, we did not complete the purchase of selected assets of KDES-FM and instead assigned the rights to the agreement to a third party who subsequently purchased the selected assets of such radio station in February 2010. The aggregate purchase price was to be approximately $17.5 million in cash, subject to certain adjustments, of which $0.5 million had been deposited in escrow. We would have paid $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 then pending purchase of the assets from the seller, Liberman Broadcasting of California had entered into an agreement relating to the relocation and purchase of KDES-FM with Spectrum Scan whereby it would have paid $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 was conditioned on the completion of the purchase of the assets from the seller.
In July 2009, Liberman Broadcasting of California LLC and LBI Radio License LLC entered into an assignment and assumption agreement with LC Media LP and R&R Radio Corporation, pursuant to which Liberman Broadcasting of California LLC and LBI Radio License LLC assigned all of their rights, benefits, obligations and duties in and to such asset purchase agreement to purchase the selected assets of radio station KDES-FM to LC Media and LC Media assumed all of the rights, benefits, obligations and duties under such asset purchase agreement, including payment of the purchase price to R&R Radio Corporation and the entry into a substitute escrow agreement with R&R Radio Corporation. As a result, the $0.5 million escrow deposit that had been previously paid by our subsidiaries was returned to us in August 2009.
In connection with the assignment and assumption agreement, Liberman Broadcasting of California LLC and Spectrum Scan entered into an amendment to the agreement relating to the relocation and purchase of KDES-FM pursuant to which Liberman Broadcasting of California LLC agreed to pay, subject to certain exceptions, approximately $4.2 million to Spectrum Scan (instead of the $7.0 million that had been previously agreed upon) 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 when LC Media and R&R Radio Corporation consummated the acquisition of the selected assets.
As consideration for the assignment and assumption agreement and the amendment to the agreement with Spectrum Scan, LC Media agreed to pay, subject to and upon consummation of the purchase of KDES-FM from R&R Radio by LC Media, $5.9 million to us. We, in turn, agreed to pay $4.2 million to Spectrum Scan as described above. In February 2010, the purchase of KDES-FM was consummated by LC Media, and we received $5.9 million from LC Media, and we, in turn, paid $4.2 million to Spectrum Scan in accordance with the amendment described above. As such, in February 2010, we realized a pre-tax gain on this transaction of approximately $1.6 million, which represents the net effect of the cash payments described above, reduced by the book value of certain transmission equipment that we sold to LC Media in connection with the assumption and assignment agreement. Such gain is included in gain on assignment of asset purchase agreement in the accompanying condensed consolidated statement of operations for the three months ended March 31, 2010.
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 and their 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, or Oaktree, and Tinicum Capital Partners II, L.P., or Tinicum. 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.
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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, certain 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; |
| • | certain transactions between us, Liberman Broadcasting and our subsidiaries, on the one hand, and Jose Liberman, our chairman and LBI Media’s chairman, Lenard Liberman, our chief executive officer, president and secretary and LBI Media’s chief executive officer, 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 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. |
Under the investor rights agreement, our parent has granted the investors and other holders of Liberman Broadcasting’s common stock the right to require Liberman Broadcasting in certain circumstances to use its best efforts to register the resale of their shares of Liberman Broadcasting’s common stock under the Securities Act of 1933, as amended, or Securities Act. Among other registration rights, Liberman Broadcasting has granted the investors the right to require the registration of the resale of their shares and the listing of our parent’s common stock on an exchange, so long as the holders of a majority of Liberman Broadcasting’s common stock that are held by either Oaktree or Tinicum or their permitted transferees request such registration and listing.
Liberman Broadcasting is responsible for paying all registration expenses in connection with any demand registration pursuant to the investor rights agreement, including the reasonable fees of one counsel chosen by the investors participating in such demand registration, but excluding any underwriters’ discounts and commissions. If after the termination of two best efforts attempts to consummate a demand registration, the investors request another demand registration, the investors that elect to participate in the demand registration will be responsible for paying all above referenced registration expenses in connection with any additional attempt to consummate such demand registration.
Liberman Broadcasting has agreed to indemnify each of the investors party to the investor rights agreement against certain liabilities under the Securities Act in connection with any registration of their registrable shares.
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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:
| Three Months Ended March 31, | ||||||||
| 2010 | 2009 | |||||||
| (in thousands) | ||||||||
Net revenues: | ||||||||
Radio | $ | 11,826 | $ | 11,782 | ||||
Television | 11,758 | 9,675 | ||||||
Total | 23,584 | 21,457 | ||||||
Total operating expenses before stock-based compensation expense, depreciation, loss on disposal of property and equipment and impairment of broadcast licenses: | ||||||||
Radio | 6,567 | 8,419 | ||||||
Television | 9,969 | 7,615 | ||||||
Total | 16,536 | 16,034 | ||||||
Stock-based compensation expense: | ||||||||
Corporate | 6 | 8 | ||||||
Total | 6 | 8 | ||||||
Depreciation: | ||||||||
Radio | 1,332 | 1,241 | ||||||
Television | 1,118 | 1,215 | ||||||
Total | 2,450 | 2,456 | ||||||
Loss on disposal of property and equipment: | ||||||||
Radio | — | — | ||||||
Television | 3 | — | ||||||
Total | 3 | — | ||||||
Impairment of broadcast licenses: | ||||||||
Radio | — | 31,886 | ||||||
Television | — | 19,580 | ||||||
Total | — | 51,466 | ||||||
Total operating expenses: | ||||||||
Radio | 7,899 | 41,546 | ||||||
Television | 11,090 | 28,410 | ||||||
Corporate | 6 | 8 | ||||||
Total | 18,995 | 69,964 | ||||||
Operating income (loss): | ||||||||
Radio | 3,927 | (29,764 | ) | |||||
Television | 668 | (18,735 | ) | |||||
Corporate | (6 | ) | (8 | ) | ||||
Total | $ | 4,589 | $ | (48,507 | ) | |||
Adjusted EBITDA (1): | ||||||||
Radio | $ | 5,259 | $ | 3,363 | ||||
Television | 1,789 | 2,060 | ||||||
Total | $ | 7,048 | $ | 5,423 | ||||
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| (1) | We define Adjusted EBITDA as net income or loss less discontinued operations, net of income taxes, plus income tax expense or benefit, gain or loss on sale and/or disposal of property and equipment, net interest expense, interest rate swap expense or income, impairment of broadcast licenses, depreciation, stock-based compensation expense 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 discontinued operations, 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. |
We discuss Adjusted EBITDA and the limitations of this financial measure in more detail under “—Non-GAAP Financial Measures.”
The table set forth below reconciles net cash used in operating activities, calculated and presented in accordance with U.S. generally accepted accounting principles, to Adjusted EBITDA:
| Three Months Ended March 31, | ||||||||
| 2010 | 2009 | |||||||
| (In thousands) | ||||||||
Net cash used in operating activities | $ | (4,492 | ) | $ | (4,136 | ) | ||
Add: | ||||||||
Income tax expense (benefit) | 614 | (17,036 | ) | |||||
Interest expense and interest and other income, net | 8,233 | 8,251 | ||||||
Less: | ||||||||
Effect of discontinued operations | — | (314 | ) | |||||
Gain on assignment of asset purchase agreement | 1,599 | — | ||||||
Amortization of deferred financing costs | (356 | ) | (364 | ) | ||||
Amortization of discount on subordinated notes | (74 | ) | (67 | ) | ||||
Amortization of program rights | (1,958 | ) | (143 | ) | ||||
Provision for doubtful accounts | (533 | ) | (297 | ) | ||||
Changes in operating assets and liabilities: | ||||||||
Cash overdraft | 260 | (1,201 | ) | |||||
Accounts receivable | (1,593 | ) | (2,024 | ) | ||||
Program rights | 3,573 | 2,321 | ||||||
Amounts due from related parties | 2 | 5 | ||||||
Prepaid expenses and other current assets | 72 | (222 | ) | |||||
Employee advances | 12 | 37 | ||||||
Accounts payable | 133 | 868 | ||||||
Accrued liabilities | (2,102 | ) | (415 | ) | ||||
Accrued interest | 3,618 | 3,462 | ||||||
Deferred income taxes | (393 | ) | 17,098 | |||||
Other assets and liabilities | 433 | (400 | ) | |||||
Adjusted EBITDA | $ | 7,048 | $ | 5,423 | ||||
Three Months Ended March 31, 2010 Compared to the Three Months Ended March 31, 2009
Net Revenues. Net revenues increased by $2.1 million, or 9.9%, to $23.6 million for the three months ended March 31, 2010, from $21.5 million for the same period in 2009. The change was primarily attributable to increased advertising revenue in our television segment, reflecting incremental revenue from our EstrellaTV television network, as well as growth in our California and Texas markets.
Net revenues for our radio segment remained relatively flat, at $11.8 million for the three months ended March 31, 2010 and 2009.
Net revenues for our television segment increased by $2.1 million, or 21.5%, to $11.8 million for the three months ended March 31, 2010, from $9.7 million for the same period in 2009. This increase was primarily attributable to increased advertising revenue in our television segment, reflecting incremental revenue from our EstrellaTV television network, as well as growth in our California and Texas markets.
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We currently anticipate full year net revenue to increase in 2010 as compared to 2009 in both our radio and television segments, primarily due to projected improvements in the U.S. national and local economies, which we expect will result in increased advertising time sold and higher advertising rates. We also expect our net revenues to benefit incrementally from the first full year of operations of our EstrellaTV national television network, and to a lesser extent, the expansion of our Don Cheto radio network.
Total operating expenses. Total operating expenses decreased by $51.0 million, or 72.9%, to $19.0 million for the three months ended March 31, 2010, as compared to $70.0 million for the same period in 2009. This decrease was primarily the result of a $51.5 million reduction in broadcast license impairment charges. Excluding the impact of the impairment charges, total operating expenses increased by $0.5 million, or 2.7%, to $19.0 million for the three months ended March 31, 2010. This increase was primarily attributable to a $2.5 million increase in program and technical expenses, and resulted from (1) an increase in amortization of capitalized costs related to the production of original programming content and (2) incremental ratings service fees and satellite costs related to our EstrellaTV network.
The increase in program and technical expenses was partially offset by a $1.6 million gain on our assignment of the asset purchase agreement to acquire radio station KDES-FM as discussed above (see “—Acquisitions”) and a $0.4 million decline in selling, general and administrative and promotional expenses.
We expect that our total operating expenses, before consideration of any impairment charges, will increase in 2010 as compared to 2009. We anticipate higher programming costs for our television segment and increased satellite, ratings service, personnel and promotional expenses relating to the expansion of our EstrellaTV network. This expectation could be impacted by the number and size of additional radio and television assets that we acquire, if any, during 2010.
Total operating expenses for our radio segment decreased by $33.7 million, or 81.0%, to $7.9 million for the three months ended March 31, 2010, from $41.6 million in the three months ended March 31, 2009. This decrease was primarily attributable to:
| (1) | a $31.9 million decrease in broadcast license impairment charges; |
| (2) | a $1.6 million gain on assignment of the asset purchase agreement to purchase radio station KDES-FM; |
| (3) | a $0.2 million decrease in selling, general and administrative expenses, primarily due to lower professional fees and acquisition costs; and |
| (4) | a $0.1 million decrease in program and technical and promotional expenses. |
These decreases were partially offset by a $0.1 million increase in depreciation expense.
Total operating expenses for our television segment decreased by $17.3 million, or 61.0%, to $11.1 million for the three months ended March 31, 2010, from $28.4 million for the same period in 2009. This decrease was primarily the result of a $19.6 million decrease in broadcast license impairment charges incurred during the three months ended March 31, 2009. However, excluding the impairment charges, total operating expenses increased by $2.3 million, or 25.6%, to $11.1 million for the three months ended March 31, 2010. This increase was primarily due to a $2.5 million increase in programming and technical expenses, as previously discussed, and incremental ratings service and satellite costs related to our EstrellaTV network. This increase was partially offset by a $0.2 million decrease in selling, general and administrative expenses.
Interest expense and interest and other income. Interest expense and interest and other income decreased slightly to $8.2 million for the three months ended March 31, 2010, as compared to $8.3 million for the same period of 2009.
Our interest expense may increase in 2010 if we borrow additional amounts under LBI Media’s senior revolving credit facility to fund operations or acquire additional radio or television station assets, including the pending acquisitions of television stations KWHD-TV from LeSEA Broadcasting Corporation and W40BY from Trinity Broadcasting Network. See “—Acquisitions.”
Interest rate swap income. Interest rate swap income decreased slightly to $0.2 million for the three months ended March 31, 2010, as compared to $0.3 million for the same period of 2009, a change of $0.1 million. Interest rate swap income or expense reflects changes in the fair market value of our interest rate swap during the respective period.
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 $38,000 for the three months ended March 31, 2009 represents our share of PortalUno’s loss during the period. As of January 1, 2010, our share of PortalUno’s cumulative losses had exceeded the respective cost basis, and accordingly, no losses related to this equity method investment were recorded during the three months ended March 31, 2010.
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(Provision for) benefit from income taxes.During the three months ended March 31, 2010, we recognized an income tax provision of $0.6 million, as compared to an income tax benefit of $17.0 million for the same period in 2009. The change in our income tax benefit (provision) primarily resulted from the impact of the $51.5 million broadcast license impairment charge we recorded in the first quarter of 2009, as described above.
Net loss. We recognized a net loss of $4.0 million for the three months ended March 31, 2010, as compared to a net loss of $39.1 million for the same period of 2009, a decrease in net loss of $35.1 million. This change was primarily attributable to the $51.5 million decrease in broadcast license impairment charges, partially offset by the $17.6 million change in income tax (provision) benefit and the other changes noted above.
Adjusted EBITDA. Adjusted EBITDA increased by $1.7 million, or 30.0%, to $7.1 million for the three months ended March 31, 2010, as compared to $5.4 million for the same period in 2009. The increase was primarily the result of the $1.6 million cash gain realized on the assignment of the asset purchase agreement related to radio station KDES-FM, and increased advertising revenues in our television segment, partially offset by an increase in programming and technical expenses, as described above.
Adjusted EBITDA for our radio segment increased by $1.9 million, or 56.4%, to $5.3 million for the three months ended March 31, 2010, as compared to $3.4 million for the same period in 2009. The increase was primarily the result of the $1.6 million cash gain realized on the assignment of the asset purchase agreement relating to KDES-FM, and a decline in selling, general and administrative expenses, as described above.
Adjusted EBITDA for our television segment decreased by $0.2 million, or 13.2%, to $1.8 million for the three months ended March 31, 2010, from $2.0 million for the same period in 2009. This decrease was primarily the result of the increase in programming and technical expenses, partially offset by higher advertising revenues.
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 March 31, 2010), plus 0.25% of the additional amount borrowed in January 2008 (repayment of $25,000 per quarter as of March 31, 2010) 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 March 31, 2010, LBI Media had approximately $43.3 million aggregate principal amount outstanding under the senior revolving credit facility and $115.4 million aggregate principal amount of outstanding senior term loans. Since March 31, 2010, LBI Media has borrowed, net of repayments, approximately $1.5 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
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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 March 31, 2010, borrowings under LBI Media’s senior credit facilities bore interest at rates between 1.75% and 4.75%, 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). LBI Media was in violation of certain reporting covenants under its senior credit facilities as of April 5, 2010. However, these violations were cured on April 9, 2010 by LBI Media upon the issuance of its consolidated financial statements for the year ended December 31, 2009 and the delivery of certain certificates and other items related to such consolidated financial statements to the administrative agent.
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 pays semi-annual interest payments of approximately $9.7 million each February 1 and August 1, which commenced on 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.
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. LBI Media was in violation of certain of its reporting covenants under its indenture governing its 8 1/2% senior subordinated notes as of March 31, 2010. However, these violations were cured on April 9, 2010 upon the issuance of its consolidated financial statements for the year ended December 31, 2009 to the trustee.
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. Since 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 cash payment made 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.
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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. As of March 31, 2010, we were in compliance with all such covenants. 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 March 31, 2010.
Issuer | Form of Debt | Principal Amount | Scheduled Maturity Date | Interest rate (per annum) | ||||
LBI Media, Inc. | $150.0 million senior secured revolving credit facility | $43.3 million (1) | March 31, 2012 | LIBOR or base rate, plus an applicable margin dependent on LBI Media’s leverage ratio (2.3% weighted average rate at March 31, 2010) | ||||
LBI Media, Inc. | Senior secured term loan credit facility | $115.4 million | March 31, 2012 | LIBOR or base rate, plus an applicable margin dependent on LBI Media’s leverage ratio (1.8% weighted average rate at March 31, 2010) | ||||
LBI Media, Inc. | 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 LLC | Mortgage note | $1.9 million | July 1, 2019 | 5.52% | ||||
| (1) | Since March 31, 2010, LBI Media has borrowed, net of repayments, approximately $1.5 million under its senior secured revolving credit facility. |
| (2) | In the fourth quarter of 2008 and the second quarter of 2009, we purchased approximately $22.0 million and $1.0 million, respectively, aggregate principal amount of our senior discount notes in various open market transactions. As such, the total principal amount outstanding and due to third party noteholders was $45.4 million as of March 31, 2010. |
Cash Flows. Cash and cash equivalents were $0.5 million and $0.2 million at March 31, 2010 and December 31, 2009, respectively.
Net cash used in operating activities was $4.5 million and $4.1 million for the three months ended March 31, 2010 and 2009, respectively.
Net cash used in investing activities was $4.6 million and $3.7 million for the three months ended March 31, 2010 and 2009, respectively. The increase was primarily attributable to the acquisition of the broadcast license for television station WASA-LP in New York, and escrow deposits made toward the purchase of selected assets of television stations KWHD-TV and W40BY, serving the Denver, Colorado and Chicago, Illinois markets, respectively. These increases were partially offset by a $2.7 million reduction in capital expenditures, primarily reflecting completion on construction of our new corporate office and broadcast facility in Dallas, Texas in November 2009 and $1.7 million in net cash proceeds relating to the assignment of a certain radio station asset purchase agreement. (See “—Acquisitions”)
Net cash provided by financing activities was $9.4 million and $7.7 million for the three months ended March 31, 2010 and 2009, respectively. The change reflects a $1.7 million increase in net borrowings under LBI Media’s senior revolving credit facility.
Contractual Obligations. We had no material changes in commitments for long-term debt obligations or operating lease obligations as of March 31, 2010, as compared to those disclosed in our table of contractual obligations included in our Annual Report
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on Form 10-K for the year ended December 31, 2009. We anticipate that funds generated from operations and funds available under LBI Media’s senior revolving credit facility will be sufficient to meet our working capital and capital expenditure needs in the foreseeable future.
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 material planned uses of liquidity during the next twelve months will include the purchase and build out of a 25,000 square foot warehouse in Burbank, California, which we intend to convert into a television production facility, at an estimated cost of approximately $10.0 million. We believe that the purchase of this facility will further enhance our ability to produce cost-effective programming, and also allow for the expansion of our internal production capabilities. We expect to fund the purchase and build-out of this facility primarily through borrowings under LBI Media’s senior revolving credit facility. We also expect to use cash to fund the purchase prices of the selected assets of television stations KWHD-TV and W40BY, in the Denver, Colorado, and Chicago, Illinois markets, respectively, within the next twelve months, primarily through borrowings under LBI Media’s senior revolving credit facility.
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.
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 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 less discontinued operations, net of income taxes, plus income tax expense or benefit, gain or loss on sale and/or disposal of property and equipment, net interest expense, interest rate swap expense or income, impairment of broadcast licenses, depreciation, stock-based compensation expense 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 our discontinued operations, 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 or loss and net income or loss.
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 discontinued operations, depreciation, 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 discontinued operations and 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 discontinued operations and 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. |
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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 used in operating activities and a reconciliation to Adjusted EBITDA on a consolidated basis under “—Results of Operations”.
Critical Accounting Policies
The discussion and analysis of our financial condition and results of operations are based upon our condensed 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, property and equipment, 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 condensed consolidated financial statements.
Acquisitions of radio station and television station 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 8.5% of our outstanding receivables. However, our allowances for doubtful accounts have increased over the past several years from this historical average due to expansion in new markets and, most recently, the current downturn in the U.S. national and local economies. 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 March 31, 2010, from 16.6% to 19.6% or $3.3 million to $3.9 million, would result in a decrease in pre-tax income of $0.6 million for the three months ended March 31, 2010.
Program Rights
Costs incurred for the production of our original television programs are expensed based on the ratio of the current period’s gross revenues to estimated remaining total gross revenues from all sources (“Ultimate Revenues”) on an individual program basis. Costs of television productions are subject to regular recovery assessments which compare the estimated fair values with the unamortized costs. The amount by which the unamortized costs of television productions exceed their estimated fair values is written off. GAAP sets forth the requirements that must be met before capitalization of program costs is appropriate, including the ability to reasonably estimate Ultimate Revenues generated from television programming and the period in which those revenues would be realized. Beginning January 1, 2009, we determined, based on an evaluation of historical programming data, that certain of its television programs have demonstrated the ability to generate gross revenues beyond the initial airing, and accordingly, began
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capitalizing television production costs for certain of their programming, and amortizing those costs to operating expense based on the ratio of the current period’s gross revenues to Ultimate Revenues as described above. Costs related to the production of all other television programs for which we do not believe have a useful life beyond the initial airing, or do not have revenue directly attributed to production, are expensed as incurred. For episodic television series, costs are expensed for each episode as it recognizes the related revenue for the episode. Approximately $7.2 million and $5.5 million of program and technical expenses were capitalized as of March 31, 2010 and December 31, 2009, respectively.
With respect to television programs intended for broadcast, the most sensitive factors affecting estimates of Ultimate Revenues is the program’s rating (which directly impacts the number of times the show is expected to air) and the strength of the advertising market. Program ratings, which are an indication of market acceptance, directly affect our ability to generate advertising revenues during the airing of the program. Poor ratings may result in the cancellation of a television program, which would require the immediate write-off of any unamortized production costs. A significant decline in the advertising market could also negatively impact our estimates.
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 accordance Accounting Standards Codification (“ASC”) 350-30 “General Intangibles Other Than Goodwill”, 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 several variables including, but not limited to, types of signals, media competition, audience share, market advertising revenue projections, anticipated operating margins, capital expenditures and discount rates that are based on the weighted average costs of capital for the broadcasting markets in which we operate, 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.
As a result of the continued slowdown in the U.S. advertising market, that resulted in further revenue declines beyond levels assumed in our 2008 annual and year end impairment testing, we conducted an additional review of the fair value of some of our broadcast licenses as of March 31, 2009. Based on this evaluation, we determined that several of our radio and television broadcast licenses were impaired and recorded an impairment charge of approximately $51.5 million to reduce the net book value of these broadcast licenses to their estimated fair market values. The impairment charge resulted from market changes in estimates and assumptions that were attributable to lower advertising revenue growth projections for the broadcasting industry, increased discount rates and a decline in cash flow multiples for recent station sales. As no impairment indicators were noted during the three months ended March 31, 2010, no such impairment review was conducted during that period.
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.
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.
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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.
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 ASC 450 “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 10 of our accompanying condensed consolidated financial statements for a discussion of other known contingencies.
Recent Accounting Pronouncements
In May 2009, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Codification (“ASC”) 855 “Subsequent Events” (“ASC 855”), which requires disclosure of the date through which a company evaluated the need to disclose events that occurred subsequent to the balance sheet date and whether that date represents the date the financial statements were issued or were available to be issued. We adopted ASC 855 for the period ended June 30, 2009. The adoption of ASC 855 did not have a material effect on the disclosures required in our consolidated financial statements. We considered subsequent events for disclosure in this Quarterly Report on Form 10-Q.
In June 2009, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 167, “Amendments to FASB Interpretation No. 46 (R)” (“FAS 167”), which amended the consolidation guidance for variable-interest entities. The amendments include: (1) the elimination of the exemption for qualifying special purpose entities, (2) a new approach for determining who should consolidate a variable-interest entity, and (3) changes to when it is necessary to reassess who should consolidate a variable-interest entity. FAS 167 was incorporated into ASC 810 “Consolidation.” This amendment was effective for financial statements issued for fiscal years periods beginning after November 15, 2009, for interim periods within that first annual reporting period and for interim and annual reporting periods thereafter. Earlier application is prohibited. We adopted ASC 810 on January 1, 2010. This standard did not have a material impact on our consolidated results of operations, cash flows or financial condition.
In January 2010, the FASB issued ASU No. 2010-06, “Improving Disclosures about Fair Value Measurements” (“ASU 2010-06”). ASU 2010-06 requires new disclosures relating to transfers in and out of Level 1 and Level 2 fair value measurements, levels of disaggregation, and valuation techniques. These disclosures are effective for reporting periods beginning after December 15, 2009. Additional new disclosures regarding the purchases, sales, issuances and settlements in the roll forward of activity in Level 3 fair value measurements are effective for fiscal years beginning after December 15, 2010. We have adopted ASU 2010-06 related to the disclosures required for reporting periods beginning after December 15, 2009, which have had no material impact on the disclosures required in our consolidated financial statements. We will adopt the remaining disclosure provisions on January 1, 2011. However, such provisions are currently not expected to have a material impact on the disclosures required in our consolidated financial statements.
Cautionary Statement Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements, as defined in the Private Securities Litigation Reform Act of 1995 (the “Act”). 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:
| • | general economic conditions in the United States and in the regions in which operate; |
| • | sufficient cash to meet our debt service obligations; |
| • | our dependence on advertising revenues; |
| • | changes in rules and regulations of the FCC; |
| • | our ability to attract, motivate and retain salespeople and other key personnel; |
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| • | 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; |
| • | strong competition in the radio and television broadcasting industries; |
| • | potential disruption from natural hazards, equipment failure, power loss and other events or occurrences; |
| • | 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; |
| • | compliance with our restrictive covenants on our debt instruments; 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 Quarterly 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 Quarterly Report, the risk factors included in our Annual Report on Form 10-K for the year ended December 31, 2009 and other documents that we file from time to time with the Securities and Exchange Commission, particularly 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 3. | Quantitative and Qualitative Disclosures About Market Risk |
In the ordinary course of business, we are exposed to various market risk factors, including fluctuations in interest rates and changes in general economic conditions. There were no significant changes to our quantitative and qualitative disclosures about market risk during the three months ended March 31, 2010. Please see “Item 7A. Quantitative and Qualitative Disclosures about Market Risk”, contained in our Annual Report on Form 10-K for the year ended December 31, 2009 for further discussion on quantitative and qualitative disclosures about market risk.
| Item 4. | 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 Chief Executive Officer, President and Secretary and our Chief Financial Officer, of the effectiveness of our disclosure controls and procedures as of March 31, 2010. Based on the foregoing, our Chief Executive Officer, President and Secretary and our Chief Financial Officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were not effective at the reasonable assurance level due to the material weakness described below.
As discussed in Part II, Item 9A(T) “Controls and Procedures” of our Annual Report on Form 10-K for the year ended December 31, 2009, we identified a material weakness in our internal control over financial reporting because we did not maintain effective controls over the accounting for income taxes, including the determination and reporting of deferred income taxes and the related income tax provision. Specifically, we did not have adequate personnel and other resources to enable us to (i) properly consider and apply U.S. generally accepted accounting principles providing guidance over accounting for income taxes, (ii) review and monitor the accuracy and completeness of the components of the income tax provision calculations and the related deferred taxes and (iii) ensure that effective oversight of the work performed by our outside tax advisors was exercised. In addition, until remediated, this material weakness could result in a misstatement in the tax-related accounts described above that would result in a material misstatement to our interim or annual consolidated financial statements and disclosures that would not be prevented or detected.
The material weakness resulted in accounting errors in the treatment of certain temporary state tax credits and the classification of certain deferred tax accounts relating to the Company’s indefinite-lived intangible assets that were not prevented or detected on a timely basis. As a result, (a) our board of director’s concluded that our previously issued consolidated financial statements for (i) the fiscal years ended December 31, 2008, 2007 and 2006 included in our annual reports on Form 10-K that include those fiscal years, and (ii) the interim periods within the fiscal years ended December 31, 2009, 2008, 2007 and 2006 included in our quarterly reports on Form 10-Q that include those fiscal periods, should not be relied upon and (b) we restated our previously issued consolidated financial statements for the fiscal year ended December 31, 2008 and the previously issued consolidated statements of operations, consolidated statements of cash flows and consolidated statements of stockholder’s equity for the fiscal year ended December 31, 2007 in our 2009 Annual Report on Form 10-K and the previously issued condensed consolidated statements of operations and condensed consolidated statements of cash flows for the three months ended March 31, 2009 in this Quarterly Report on Form 10-Q.
As a result of the material weakness described above, our management has concluded that, as of March 31, 2010, our internal control over financial reporting was not effective.
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As of March 31, 2010, we have begun, but have not completely remediated the material weakness in our internal control over financial reporting with respect to our processes to accurately report our income tax provision as discussed above. Since the material weakness has been identified, we have undertaken an evaluation of our available resources and personnel deployed for accounting for income taxes, and are in the process of identifying necessary changes to our processes and addition of personnel as required. Other than as described in this Item 4, there have been no significant changes in our internal control over financial reporting identified in connection with the evaluation of such internal control that occurred during our last fiscal quarter, which have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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| Item 1. | Legal Proceedings |
Our dispute with Broadcast Music, Inc. (“BMI”) relating to royalties is ongoing. No material developments in these proceedings occurred during the three months ended March 31, 2010. For more information on these proceedings, see “Item 1. Legal Proceedings” in our Annual Report on Form 10-K for the twelve month period ended December 31, 2009.
We are subject to pending litigation arising in the normal course of our 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 our financial position or results of operations.
| Item 1A. | Risk Factors |
There have been no material changes in our risk factors from those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2009.
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
None.
| Item 3. | Defaults upon Senior Securities |
None.
| Item 4. | (Removed and Reserved) |
Not applicable.
| Item 5. | Other Information |
None.
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| Item 6. | Exhibits |
| (a) | Exhibits |
Exhibit | Exhibit Description | |
| 3.1 | Restated Certificate of Incorporation of LBI Media Holdings, Inc. (1) | |
| 3.2 | Certificate of Ownership of Liberman Broadcasting, Inc. (successor in interest to LBI Holdings I, Inc.), dated July 9, 2002 (2) | |
| 3.3 | Amended and Restated Bylaws of LBI Media Holdings, Inc. (1) | |
| 4.1 | Indenture governing LBI Media Holdings, Inc.’s 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 (3) | |
| 4.2 | Form of Exchange Note (included as Exhibit A-1 to Exhibit 4.1) | |
| 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 (4) | |
| 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. |
| (1) | Incorporated by reference to LBI Media Holdings, Inc.’s Quarterly Report on Form 10-Q filed on May 15, 2007. |
| (2) | 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). |
| (3) | Incorporated by reference to LBI Media Holdings, Inc.’s Registration Statement on Form S-4 (Registration No. 333-110122), filed with the Securities and Exchange Commission on October 30, 2003, as amended. |
| (4) | 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). |
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| LBI MEDIA HOLDINGS, INC. | ||
| By: | /s/ Wisdom Lu | |
| Wisdom Lu | ||
| Chief Financial Officer | ||
Date: May 14, 2010
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