1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 24, 2001
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 33-82114
SPANISH BROADCASTING SYSTEM, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 13-3827791
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2601 SOUTH BAYSHORE DRIVE, PH II
COCONUT GROVE, FLORIDA 33133
(Address of principal executive offices) (Zip Code)
(305) 441-6901
(Registrant's telephone number, including area code)
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.
[X] YES [ ] NO
APPLICABLE ONLY TO CORPORATE ISSUERS:
Number of shares of registrant's common stock outstanding as of August 7, 2001:
36,856,305 shares of Class A Common Stock, par value $.0001 per share and
27,801,900 shares of Class B Common Stock, par value $.0001 per share.
2
SPANISH BROADCASTING SYSTEM, INC.
INDEX
PART I. FINANCIAL INFORMATION................................................................ 3
ITEM 1. FINANCIAL STATEMENTS - UNAUDITED..................................................... 3
CONDENSED CONSOLIDATED BALANCE SHEETS AS OF SEPTEMBER 24, 2000
AND JUNE 24, 2001.................................................................... 3
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE- AND NINE-
MONTHS ENDED JUNE 25, 2000 AND JUNE 24, 2001......................................... 4
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE-MONTHS
ENDED JUNE 25, 2000 AND JUNE 24, 2001................................................ 5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS................................. 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS........................................................................... 12
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK........................... 18
PART II. OTHER INFORMATION.................................................................... 18
ITEM 1. LEGAL PROCEEDINGS.................................................................... 18
ITEM 5. OTHER INFORMATION.................................................................... 18
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K..................................................... 19
2
3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS--UNAUDITED
SPANISH BROADCASTING SYSTEM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
SEPTEMBER 24, 2000 JUNE 24, 2001
------------------ -------------
ASSETS
CURRENT ASSETS:
CASH AND CASH EQUIVALENTS $ 59,558,929 48,696,017
NET RECEIVABLES 25,264,019 23,550,099
OTHER CURRENT ASSETS 3,862,182 2,950,182
------------- -------------
TOTAL CURRENT ASSETS 88,685,130 75,196,298
PROPERTY AND EQUIPMENT, NET 21,675,239 24,934,099
INTANGIBLE ASSETS, NET 513,357,655 584,264,166
DEFERRED FINANCING COSTS, NET 10,794,733 10,681,407
OTHER ASSETS 178,066 284,664
------------- -------------
TOTAL ASSETS $ 634,690,823 695,360,634
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
CURRENT PORTION OF LONG-TERM DEBT $ 171,262 282,735
ACCOUNTS PAYABLE AND ACCRUED EXPENSES 13,984,267 15,934,659
ACCRUED INTEREST 11,032,889 4,836,875
DEFERRED COMMITMENT FEE 2,158,850 1,632,809
------------- -------------
TOTAL CURRENT LIABILITIES 27,347,268 22,687,078
12.5% SENIOR UNSECURED NOTES 100,000 --
9.625% SENIOR SUBORDINATED NOTES, NET 235,000,000 322,740,356
SENIOR CREDIT FACILITIES 65,000,000 --
OTHER LONG-TERM DEBT, LESS CURRENT PORTION 4,392,302 4,253,762
DEFERRED INCOME TAXES 28,386,169 34,615,419
STOCKHOLDERS' EQUITY:
CLASS A COMMON STOCK, $.0001 PAR VALUE. AUTHORIZED
100,000,000 SHARES; 32,399,760 SHARES ISSUED AND
OUTSTANDING AT SEPT. 24, 2000; 36,856,305 SHARES
ISSUED AND OUTSTANDING AT JUNE 24, 2001 3,240 3,686
CLASS B COMMON STOCK, $.0001 PAR VALUE. AUTHORIZED
50,000,000 SHARES; 27,816,900 SHARES ISSUED AND
OUTSTANDING AT SEPT. 24, 2000; 27,801,900 SHARES
ISSUED AND OUTSTANDING AT JUNE 24, 2001 2,782 2,780
ADDITIONAL PAID IN CAPITAL 392,972,851 435,522,410
ACCUMULATED DEFICIT (118,513,789) (124,464,857)
------------- -------------
TOTAL STOCKHOLDERS' EQUITY 274,465,084 311,064,019
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 634,690,823 695,360,634
============= =============
SEE ACCOMPANYING NOTES TO UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS.
3
4
SPANISH BROADCASTING SYSTEM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
----------------------------------- ------------------------------
JUNE 25, 2000 JUNE 24, 2001 JUNE 25, 2000 JUNE 24, 2001
---------------- ---------------- -------------- --------------
GROSS BROADCASTING REVENUES $40,450,167 40,827,463 102,382,066 112,298,772
LESS: AGENCY COMMISSIONS 5,639,303 4,904,878 13,709,657 14,010,570
----------- ----------- ------------ ------------
NET BROADCASTING REVENUES 34,810,864 35,922,585 88,672,409 98,288,202
----------- ----------- ------------ ------------
OPERATING EXPENSES:
ENGINEERING 649,206 849,099 1,861,309 2,444,721
PROGRAMMING 4,158,356 4,638,250 10,362,769 14,437,526
SELLING 7,145,083 11,786,063 18,599,679 31,597,845
GENERAL AND ADMINISTRATIVE 3,932,247 4,800,202 9,817,334 14,259,821
CORPORATE EXPENSES 2,646,058 2,334,346 18,100,572 7,490,508
DEPRECIATION AND AMORTIZATION 3,507,284 4,690,150 9,354,917 13,486,751
----------- ----------- ------------ ------------
22,038,234 29,098,110 68,096,580 83,717,172
----------- ----------- ------------ ------------
OPERATING INCOME 12,772,630 6,824,475 20,575,829 14,571,030
OTHER (INCOME) EXPENSES:
INTEREST EXPENSE, NET 4,875,179 7,502,678 12,369,852 21,525,485
OTHER, NET -- (500) 356,215 (517,712)
----------- ----------- ------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES AND EXTRAORDINARY ITEM 7,897,451 (677,703) 7,849,762 (6,436,743)
INCOME TAX EXPENSE (BENEFIT) 3,458,369 (187,400) 3,438,196 (2,381,595)
----------- ----------- ------------ ------------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM 4,439,082 (490,303) 4,411,566 (4,055,148)
EXTRAORDINARY ITEM, NET OF INCOME TAX -- (1,895,920) (16,865,069) (1,895,920)
----------- ----------- ------------ ------------
NET INCOME (LOSS) $ 4,439,082 (2,386,223) (12,453,503) (5,951,068)
DIVIDENDS ON PREFERRED STOCK -- -- (28,372,393) --
----------- ----------- ------------ ------------
NET INCOME (LOSS) APPLICABLE TO COMMON STOCKHOLDERS $ 4,439,082 (2,386,223) (40,825,896) (5,951,068)
----------- ----------- ------------ ------------
NET INCOME (LOSS) PER COMMON SHARE BEFORE
EXTRAORDINARY ITEM:
BASIC $ 0.07 (0.01) (0.42) (0.06)
DILUTED $ 0.07 (0.01) (0.42) (0.06)
NET LOSS PER COMMON SHARE FOR EXTRAORDINARY ITEM:
BASIC $ -- (0.03) (0.29) (0.03)
DILUTED $ -- (0.03) (0.29) (0.03)
NET INCOME (LOSS) PER COMMON SHARE:
BASIC $ 0.07 (0.04) (0.71) (0.09)
DILUTED $ 0.07 (0.04) (0.71) (0.09)
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
BASIC 60,216,660 64,658,205 57,478,008 63,893,543
DILUTED 60,216,660 64,658,205 57,478,008 63,893,543
SEE ACCOMPANYING NOTES TO UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS.
4
5
SPANISH BROADCASTING SYSTEM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED NINE MONTHS ENDED
JUNE 25, 2000 JUNE 24, 2001
---------------------- --------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
NET LOSS $ (12,453,503) (5,951,068)
------------- -----------
ADJUSTMENTS TO RECONCILE NET LOSS TO NET
CASH PROVIDED BY OPERATING ACTIVITIES:
LOSS ON EARLY ENTINGUISHMENT OF DEBT 28,584,862 3,062,876
DEPRECIATION AND AMORTIZATION 9,354,917 13,486,751
GAIN ON SALE OF RADIO STATION (54,963) --
PROVISION FOR DOUBTFUL ACCOUNTS 2,483,253 5,394,071
AMORTIZATION OF DEBT DISCOUNT 61,295 71,356
AMORTIZATION OF DEFERRED FINANCING COSTS 726,078 1,049,947
ACCRETION OF INTEREST TO PRINCIPAL ON OTHER LONG-TERM DEBT 151,441 --
DEFERRED INCOME TAXES (7,275,540) (3,870,750)
CHANGES IN OPERATING ASSETS AND LIABILITIES:
INCREASE IN RECEIVABLES (5,249,705) (3,680,151)
(INCREASE) DECREASE IN OTHER CURRENT ASSETS (3,002,658) 206,387
INCREASE IN OTHER ASSETS (6,742) (106,598)
INCREASE (DECREASE) IN ACCOUNTS PAYABLE AND ACCRUED EXPENSES (744,853) 1,864,032
DECREASE IN ACCRUED INTEREST (359,717) (6,196,014)
DECREASE IN DEFERRED COMMITMENT FEE (14,734) (526,041)
------------- -----------
TOTAL ADJUSTMENTS 24,652,934 10,755,866
------------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 12,199,431 4,804,798
------------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
ACQUISITIONS OF RADIO STATIONS, NET OF CASH ACQUIRED (112,375,202) (3,412,344)
PROCEED FROM SALE OF STATIONS 690,304 --
ADVANCES ON PURCHASE PRICE OF RADIO STATIONS -- (26,069,573)
ADDITIONS TO PROPERTY AND EQUIPMENT (2,560,604) (4,728,229)
------------- -----------
NET CASH USED IN INVESTING ACTIVITIES (114,245,502) (34,210,146)
------------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
RETIREMENT OF 14.25% SENIOR EXCHANGABLE PREFERRED STOCK (265,613,466) --
RETIREMENT OF SENIOR NOTES (190,295,268) --
RETIREMENT OF SENIOR CREDIT FACILITIES -- (65,000,000)
DECREASE IN LOANS RECEIVABLE FROM STOCKHOLDERS 2,459,408 --
PROCEEDS FROM SENIOR SUBORDINATED NOTES 226,994,961 87,669,000
PROCEEDS FROM CLASS A COMMON STOCK 388,072,240 --
INCREASE IN DEFERRED FINANCING COSTS -- (3,999,497)
REPAYMENT OF OTHER LONG-TERM DEBT (3,470,862) (127,067)
------------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 158,147,013 18,542,436
------------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 56,100,942 (10,862,912)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 16,974,650 59,558,929
------------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 73,075,592 48,696,017
============= ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
INTEREST PAID $ 17,209,497 29,646,191
============= ===========
INCOME TAXES PAID $ 2,170,597 302,199
============= ===========
SEE ACCOMPANYING NOTES TO UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS.
5
6
SPANISH BROADCASTING SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 24, 2001
(UNAUDITED)
(1) BASIS OF PRESENTATION
The condensed consolidated financial statements include the accounts of the
Company and its subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation. The accompanying unaudited
condensed consolidated financial statements as of September 24, 2000 and June
24, 2001, and for the three- and nine-month periods ended June 25, 2000 and June
24, 2001 do not contain all disclosures required by generally accepted
accounting principles. These condensed consolidated financial statements should
be read in conjunction with the consolidated financial statements of the Company
as of and for the fiscal year ended September 24, 2000 included in the Company's
fiscal year 2000 Annual Report on Form 10-K.
In the opinion of management of the Company, the accompanying unaudited
condensed consolidated financial statements contain all adjustments, which are
all of a normal, recurring nature, necessary for a fair presentation of the
results of the interim periods. The results of operations for the three- and
nine-month periods ended June 24, 2001 are not necessarily indicative of the
results for a full year.
The Company and certain of its subsidiaries have guaranteed the Company's
9 5/8% senior subordinated notes due 2009 that were issued in 1999 on a full,
unconditional, and joint and several basis. In December 1999, the Company
transferred the FCC licenses of WRMA-FM, WXDJ-FM, WLEY-FM, WSKQ-FM, KLEY-FM,
WPAT-FM, WCMA-FM, WEGM-FM, WMEG-FM, WCMQ-FM, and KLAX-FM, to special purpose
subsidiaries that were formed solely for the purpose of holding each respective
FCC license. These special purpose subsidiaries are non-guarantors of the senior
subordinated notes issued in 1999 as first disclosed in the prospectus relating
to our senior subordinated notes filed in October 1999. Condensed consolidating
unaudited financial information for the Company and its guarantor and
non-guarantor subsidiaries is as follows:
PARENT AND
GUARANTOR NON-GUARANTOR
SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
------------- ------------ ------------- ------------
AS OF SEPTEMBER 24, 2000
---------------------------------------------------------------------
CONDENSED CONSOLIDATING BALANCE SHEET
Cash and cash equivalents $ 59,237,041 321,888 -- 59,558,929
Receivables, net 23,718,499 1,545,520 -- 25,264,019
Other current assets 3,315,263 546,919 -- 3,862,182
------------- ------------ ----------- ------------
Current assets 86,270,803 2,414,327 -- 88,685,130
Property and equipment, net 14,183,896 7,491,343 -- 21,675,239
Intangible assets, net 121,115,260 392,242,395 -- 513,357,655
Deferred financing costs, net 10,792,176 2,557 -- 10,794,733
Investment in subsidiaries and intercompany 377,830,574 (283,138,307) (94,692,267) --
Other assets 178,683 (617) -- 178,066
------------- ------------ ----------- ------------
Total assets $ 610,371,392 119,011,698 (94,692,267) 634,690,823
============= ============ =========== ============
Current portion of long-term debt $ 53,805 117,457 -- 171,262
Accounts payable and accrued expenses 11,624,801 2,359,466 -- 13,984,267
Accrued interest 11,032,889 -- -- 11,032,889
Deferred commitment fee 2,158,850 -- -- 2,158,850
------------- ------------ ----------- ------------
Current liabilities 24,870,345 2,476,923 -- 27,347,268
Long-term debt 300,937,384 3,554,918 -- 304,492,302
Deferred income taxes 6,186,169 22,200,000 -- 28,386,169
------------- ------------ ----------- ------------
Total liabilities 331,993,898 28,231,841 -- 360,225,739
------------- ------------ ----------- ------------
Common stock 6,022 1,000 (1,000) 6,022
Additional paid-in capital 392,972,851 94,691,267 (94,691,267) 392,972,851
Accumulated deficit (114,601,379) (3,912,410) -- (118,513,789)
------------- ------------ ----------- ------------
Stockholders' equity 278,377,494 90,779,857 (94,692,267) 274,465,084
------------- ------------ ----------- ------------
Total liabilities and stockholders'
equity $ 610,371,392 119,011,698 (94,692,267) 634,690,823
============= ============ =========== ============
6
7
PARENT AND
GUARANTOR NON-GUARANTOR
SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
------------ ------------ ------------ ------------
AS OF JUNE 24, 2001
--------------------------------------------------------------------
CONDENSED CONSOLIDATING BALANCE SHEET
Cash and cash equivalents 46,884,418 1,811,599 -- 48,696,017
Receivables, net 22,014,590 1,535,509 -- 23,550,099
Other current assets 2,439,841 510,341 -- 2,950,182
------------ ------------ ----------- ------------
Current Assets 71,338,849 3,857,449 -- 75,196,298
Property and equipment, net 16,684,166 8,249,933 -- 24,934,099
Intangible assets, net 36,007,553 548,256,613 -- 584,264,166
Deferred financing costs, net 10,681,407 -- -- 10,681,407
Investment in subsidiaries and intercompany 562,212,088 (467,519,821) (94,692,267) --
Other assets 283,664 1,000 -- 284,664
------------ ------------ ----------- ------------
Total Assets 697,207,727 92,845,174 (94,692,267) 695,360,634
============ ============ =========== ============
Current portion of long-term debt 156,404 126,331 -- 282,735
Accounts payable and accrued expenses 13,595,673 2,338,986 -- 15,934,659
Accrued interest 4,836,875 -- -- 4,836,875
Deferred commitment fee 1,632,809 -- -- 1,632,809
------------ ------------ ----------- ------------
Current Liabilities 20,221,761 2,465,317 -- 22,687,078
Long-term debt, net 323,535,089 3,459,029 -- 326,994,118
Deferred income taxes 12,415,419 22,200,000 -- 34,615,419
------------ ------------ ----------- ------------
Total Liabilities 356,172,269 28,124,346 -- 384,296,615
------------ ------------ ----------- ------------
Common stock 6,466 1,000 (1,000) 6,466
Additional paid-in capital 435,522,410 94,691,267 (94,691,267) 435,522,410
Accumulated deficit (94,493,418) (29,971,439) -- (124,464,857)
------------ ------------ ----------- ------------
Stockholders' equity 341,035,458 64,720,828 (94,692,267) 311,064,019
------------ ------------ ----------- ------------
Total liabilities and stockholders' equity 697,207,727 92,845,174 (94,692,267) 695,360,634
============ ============ =========== ============
PARENT AND
GUARANTOR NON-GUARANTOR
SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
------------ ------------ --------------- ----------
FOR THE THREE MONTHS ENDED JUNE 25, 2000
-------------------------------------------------------------------------
CONDENSED CONSOLIDATING INCOME STATEMENT
Net broadcasting revenues 31,464,184 3,346,680 -- 34,810,864
Station operating expenses 13,095,770 2,789,122 -- 15,884,892
Corporate expenses 2,646,058 -- -- 2,646,058
Depreciation and amortization 480,458 3,026,826 -- 3,507,284
---------- ---------- --------------- ----------
Operating income (loss) 15,241,898 (2,469,268) -- 12,772,630
Interest expense (income), net 4,889,937 (14,758) -- 4,875,179
Other expense (income), net 2,017,366 (2,017,366) -- --
Income tax expense (benefit) 3,649,799 (191,430) -- 3,458,369
Extraordinary item, net of income taxes -- -- -- --
---------- ---------- --------------- ----------
Net income (loss) 4,684,796 (245,714) -- 4,439,082
========== ========== =============== ==========
7
8
PARENT AND
GUARANTOR NON-GUARANTOR
SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
----------- ------------- --------------- -----------
FOR THE THREE MONTHS ENDED JUNE 24, 2001
-------------------------------------------------------------------------
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
Net broadcasting revenues 32,184,529 3,738,056 -- 35,922,585
Station operating expenses 16,902,062 5,171,552 -- 22,073,614
Corporate expenses 2,334,346 -- -- 2,334,346
Depreciation and amortization 609,807 4,080,343 -- 4,690,150
----------- ---------- --------------- -----------
Operating income (loss) 12,338,314 (5,513,839) -- 6,824,475
Interest expense, net 6,115,850 1,386,828 -- 7,502,678
Other expense (income), net 3,010,234 (3,010,734) -- (500)
Income tax expense (benefit) (257,259) 69,859 -- (187,400)
Extraordinary item, net of taxes (1,895,920) -- -- (1,895,920)
----------- ---------- --------------- -----------
Net income (loss) 1,573,569 (3,959,792) -- (2,386,223)
=========== ========== =============== ===========
PARENT AND
GUARANTOR NON-GUARANTOR
SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
------------ ------------ ------------- -----------
FOR THE NINE MONTHS ENDED JUNE 25, 2000
----------------------------------------------------------------------
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
Net broadcasting revenues 83,181,494 5,490,915 -- 88,672,409
Station operating expenses 35,534,427 5,106,664 -- 40,641,091
Corporate expenses 18,100,572 -- -- 18,100,572
Depreciation and amortization 1,324,567 8,030,350 -- 9,354,917
----------- ---------- ----------- -----------
Operating income (loss) 28,221,928 (7,646,099) -- 20,575,829
Interest expense (income), net 12,390,419 (20,567) -- 12,369,852
Other expense (income), net 6,310,247 (5,954,032) -- 356,215
Income tax expense (benefit) 4,170,313 (732,117) -- 3,438,196
Extraordinary item, net of income tax (16,865,069) -- -- (16,865,069)
----------- ---------- ----------- -----------
Net loss (11,514,120) (939,383) -- (12,453,503)
=========== ========== =========== ===========
PARENT AND
GUARANTOR NON-GUARANTOR
SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
------------ -------------- --------------- -----------
FOR THE NINE MONTHS ENDED JUNE 24, 2001
--------------------------------------------------------------------------
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
Net broadcasting revenues 88,718,269 9,569,933 -- 98,288,202
Station operating expenses 46,110,236 16,629,677 -- 62,739,913
Corporate expenses 7,490,508 -- -- 7,490,508
Depreciation and amortization 1,870,846 11,615,905 -- 13,486,751
----------- ----------- --------------- -----------
Operating income (loss) 33,246,679 (18,675,649) -- 14,571,030
Interest expense, net 17,406,362 4,119,123 -- 21,525,485
Other expense (income), net 7,991,804 (8,509,516) -- (517,712)
Income tax expense (benefit) (2,451,454) 69,859 -- (2,381,595)
Extraordinary item, net of taxes (1,895,920) -- -- (1,895,920)
----------- ----------- --------------- -----------
Net income (loss) 8,404,047 (14,355,115) -- (5,951,068)
=========== =========== =============== ===========
PARENT AND
GUARANTOR NON-GUARANTOR
SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
------------------ ------------------- ----------------- ---------
FOR THE NINE MONTHS ENDED JUNE 25, 2000
------------------------------------------------------------------------
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
Cash flows from operating activities 10,097,378 2,102,053 -- 12,199,431
============ ============ ========== ============
Cash flows from investing activities 211,129,355 (325,374,857) -- (114,245,502)
============ ============ ========== ============
Cash flows from financing activities (166,546,105) 324,693,118 -- 158,147,013
============ ============ ========== ============
8
9
PARENT AND
GUARANTOR NON-GUARANTOR
SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
-------------- -------------- ------------- -------------
FOR THE NINE MONTHS ENDED JUNE 24, 2001
--------------------------------------------------------------------
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
Cash flows from operating activities 1,868,141 2,936,657 -- 4,804,798
============ ============ ========== ===========
Cash flows from investing activities 134,178,567 (168,388,713) -- (34,210,146)
============ ============ ========== ===========
Cash flows from financing activities (148,399,331) 166,941,767 -- 18,542,436
============ ============ ========== ===========
Certain prior year amounts have been reclassified to reflect the transfer of FCC
licenses from guarantor subsidiaries to non-guarantor subsidiaries. Parent-only
financial information has not been provided since the parent has no operations
or assets separate from its investments in its subsidiaries.
(2) NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133 ("SFAS No. 133"),
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts and for
hedging activities. It requires an entity to recognize all derivatives as either
assets or liabilities in the balance sheet and measure those instruments at fair
value. SFAS No. 133, as amended by SFAS No. 137, is effective for the Company's
fiscal year ending September 30, 2001. The adoption of SFAS No. 133 had no
impact on the Company's consolidated financial statements since the Company had
no derivative instruments outstanding or hedging activities during the nine
month period ended June 24, 2001.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition", which
provides guidance on the recognition, presentation and disclosure of revenue in
financial statements filed with the SEC. SAB 101 outlines the basic criteria
that must be met in order to recognize revenue and provides guidance for
disclosures related to revenue recognition policies. In June 2000, the SEC
issued SAB 101B, "Second Amendment: Revenue Recognition in Financial Statements"
which extends the effective date of SAB 101 to the fourth fiscal quarter of
fiscal years commencing after December 15, 1999. At this time, management is
still assessing the impact of SAB 101 on the Company's financial position and
results of operations.
In September 2000, the FASB issued Statement of Financial Accounting
Standards No. 140 ("SFAS No. 140"), "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities (A Replacement of SFAS No.
125)". SFAS No. 140 provides guidance on accounting for (1) securitization
transactions involving financial assets; (2) sales of financial assets
(including loan participations); (3) factoring transactions; (4) wash sales; (5)
servicing assets and liabilities; (6) collateralized borrowing arrangements; (7)
securities lending transactions; (8) repurchase agreements; and (9)
extinguishment of liabilities. Most of the provisions of SFAS No. 140 became
effective for transactions entered into after March 31, 2001. The adoption of
SFAS No. 140 had no significant impact on the Company's consolidated financial
statements.
In July 2001, the FASB issued Statement of Financial Accounting Standards
No. 141 ("SFAS No. 141"), "Business Combinations", and Statement of Financial
Accounting Standards No. 142 ("SFAS No. 142"), "Goodwill and Other Intangible
Assets". SFAS No. 141 requires that the purchase method of accounting be used
for all business combinations initiated after June 30, 2001 as well as all
purchase method business combinations completed after June 30, 2001. SFAS No.
141 also specifies the criteria that intangible assets acquired in a purchase
method business combination must meet to be recognized and reported apart from
goodwill, noting that any purchase price allocable to an assembled workforce may
not be accounted for separately. SFAS No. 142 requires that goodwill and
intangible assets with indefinite useful lives no longer be amortized, but
instead tested for impairment at least annually in accordance with the
provisions of SFAS No. 142. SFAS No. 142 also requires that intangible assets
with definite useful lives be amortized over their respective estimated useful
lives to their estimated residual values, and reviewed for impairment in
accordance with Statement of Financial Accounting Standards No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of".
The Company is required to adopt the provisions of SFAS No. 141 immediately,
and SFAS No. 142 effective October 1, 2002. Furthermore, any goodwill or
intangible asset determined to have an indefinite useful life that is acquired
in a purchase method business combination completed after June 30, 2001 will not
be amortized, but will continue to be evaluated for impairment in accordance
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with the appropriate pre-SFAS No. 142 accounting literature. Goodwill and
intangible assets acquired in business combinations completed before July 1,
2001 will continue to be amortized prior to the adoption of SFAS No. 142.
SFAS No. 141 requires that upon adoption of SFAS No. 142, the Company
evaluate its existing intangible assets and goodwill that were acquired in a
prior purchase method business combination, and make any necessary
reclassifications in order to conform with the new criteria in SFAS No. 141 for
recognition apart from goodwill. Upon adoption of SFAS No. 142, the Company will
be required to reassess the useful lives and residual values of all intangible
assets acquired in purchase method business combinations, and make any necessary
amortization period adjustments by the end of the first interim period after
adoption of SFAS No. 142. In addition, to the extent an intangible asset is
identified as having an indefinite useful life, the Company will be required to
test the intangible asset for impairment in accordance with the provisions of
SFAS No. 142 within the first interim period after adoption of SFAS No. 142. Any
impairment loss will be measured as of the date of adoption and recognized as
the cumulative effect of a change in accounting principle in the first interim
period after adoption.
In connection with the transitional goodwill impairment evaluation, SFAS No.
142 requires the Company to perform an assessment of whether there is an
indication that goodwill is impaired as of the date of adoption of SFAS No. 142.
To accomplish this the Company must identify its reporting units and determine
the carrying value of each reporting unit by assigning the assets and
liabilities, including the existing goodwill and intangible assets, to those
reporting units as of the date of adoption of SFAS No. 142. The Company will
then have up to six months from the date of adoption to determine the fair value
of each reporting unit and compare it to the reporting unit's carrying amount.
To the extent a reporting unit's carrying amount exceeds its fair value, an
indication exists that the reporting unit's goodwill may be impaired and the
Company must perform the second step of the transitional impairment test. In the
second step, the Company must compare the implied fair value of the reporting
unit's goodwill, determined by allocating the reporting unit's fair value to all
of its assets (recognized and unrecognized) and liabilities in a manner similar
to a purchase price allocation in accordance with SFAS No. 141, to its carrying
amount, both of which would be measured as of the date of adoption of SFAS No.
142. This second step is required to be completed as soon as possible, but no
later than the end of the fiscal year of adoption. Any transitional impairment
loss will be recognized as the cumulative effect of a change in accounting
principle in the Company's statement of earnings.
Finally, any unamortized negative goodwill existing at the date SFAS No. 142
is adopted must be written off as the cumulative effect of a change in
accounting principle.
As of the date of adoption of SFAS No. 142, the Company expects to have
unamortized goodwill in the amount of approximately $31.6 million, and
unamortized identifiable intangible assets in the amount of approximately $567.7
million, all of which will be subject to the transition provisions of SFAS No.
141 and SFAS No. 142. Amortization expense related to goodwill was approximately
$0.4 million and $1.0 million for the three and nine months ended June 24, 2001,
respectively. Because of the extensive effort needed to comply with adopting
SFAS No. 141 and SFAS No. 142, it is not practicable to reasonably estimate the
impact of adopting these FASB statements on the Company's financial statements
at this time, including whether any transitional impairment losses will be
required to be recognized as the cumulative effect of a change in accounting
principle.
(3) ACQUISITIONS
On May 8, 2000, we entered into a stock purchase agreement with Rodriguez
Communications, Inc., a Delaware corporation ("RCI"), and the stockholders of
RCI to acquire all of the outstanding capital stock of RCI, the owner of radio
stations KMJR-FM (formerly KFOX-FM) and KNJR-FM (formerly KREA-FM) serving the
Los Angeles, California market, KXJO-FM serving the San Francisco, California
market and KSAH-AM serving the San Antonio, Texas market. On May 8, 2000, we
also entered into (1) an asset purchase agreement with New World Broadcasters
Corp., a Texas corporation and an affiliate of RCI ("New World"), to acquire
radio station KTCY-FM serving the Dallas, Texas market, and (2) a stock purchase
agreement with New World and 910 Broadcasting Corp., a Texas corporation and a
wholly owned subsidiary of New World ("910 Broadcasting"), to acquire all the
outstanding capital stock of 910 Broadcasting, the owner and operator of radio
station KXEB-AM serving the Dallas, Texas market (the "KXEB-AM Stock Purchase
Agreement").
On November 10, 2000, we completed the purchase of all the outstanding
capital stock of RCI and the purchase of radio station KTCY-FM for total
consideration of $167.8 million, consisting of $42.6 million of our Class A
common stock and $125.2 million in cash, including closing costs of $2.8
million. The consideration paid by us for these acquisitions was determined
through arms-length negotiations between us, RCI, the shareholders of RCI and
New World. We financed these acquisitions with previously unissued shares of our
Class A common stock, cash on hand and borrowings under our then effective
credit agreement, among us, the several banks and other financial institutions
or entities from time to time party to the credit agreement and Lehman
Commercial Paper, Inc., as administrative agent, dated as of July 6, 2000.
Substantially all of the purchase price for these acquisitions has been
allocated to FCC licenses and goodwill (included in intangible assets) and a
related deferred tax liability in the accompanying condensed consolidated
balance sheet.
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Due to the lack of continuity in the operations of the radio stations
acquired in the purchase of all the capital stock of RCI (the "RCI Stations"),
prior to and after RCI's acquisition of the RCI Stations, at which time we began
operating the RCI Stations under time brokerage agreements until closing on
November 10, 2000, we have not included separate historical financial statements
or pro forma financial information relating to the acquisition of the RCI
Stations.
On July 3, 2001, New World and 910 Broadcasting sent a notice to the Company
in which they purported to terminate the KXEB-AM Stock Purchase Agreement. The
Company is disputing the right of New World and 910 Broadcasting to terminate
the agreement and is seeking to specifically enforce the KXEB-AM Stock Purchase
Agreement. There can be no assurance that we will be successful in our efforts.
On November 2, 2000, we entered into an asset purchase agreement with the
International Church of the FourSquare Gospel ("ICFG") to purchase radio station
KFSG-FM in Los Angeles, California at a purchase price of $250.0 million. In
connection with this acquisition, we made a non-refundable deposit of $5.0
million to be credited towards the purchase price at closing. The agreement
contains customary representations and warranties, and the closing of our
acquisition is subject to the satisfaction of certain customary conditions,
including receipt of regulatory approval from the Federal Communications
Commission. On March 13, 2001, we entered into two time brokerage agreements
with ICFG pursuant to which we are permitted to broadcast our programming over
radio station KFSG-FM (the "TBA"), and ICFG is permitted to broadcast its
programming over radio stations KMJR-FM and KNJR-FM (the "93.5 TBA") and an
addendum to the asset purchase agreement. On April 30, 2001, we commenced
broadcasting our programming over radio station KFSG-FM (operating under the
call letters KXOL-FM) under the TBA, and ICFG commenced broadcasting its
programming under the 93.5 TBA.
Payments totaling $25.0 million made pursuant to the TBA, consisting of the
original $5.0 million deposit and an additional payment of $20.0 million made in
March 2001, give us the right to broadcast our programming on radio station
KFSG-FM under the TBA through March 13, 2002. We have the option to extend the
term of the TBA to December 31, 2002 by making payment to ICFG of an additional
$35.0 million no later than March 13, 2002. Under the amended asset purchase
agreement, if we elect to extend the term of the TBA, the termination date for
closing on the purchase of radio station KFSG-FM will be extended from March 13,
2002 until December 31, 2002. The full amounts of the payments for the TBA will
be applied to the purchase price of radio station KFSG-FM if we close under the
amended asset purchase agreement on or before August 1, 2002. Thereafter, there
will be a charge against such credit equal to $1.2 million for each month we
delay the closing past August 1, 2002. ICFG has extended the 93.5 TBA until
October 26, 2001 and has requested a further extension until December 23, 2001
with the option to extend until February 23, 2002. If the 93.5 TBA is not
further extended and we have not either closed under the amended asset purchase
agreement or terminated such agreement, we will issue to ICFG warrants,
exercisable for five years, to purchase 234,375 shares of our Class A common
stock for each month from the termination of the 93.5 TBA through March 13,
2002, with an exercise price of $6 per share. If we extend the TBA to December
31, 2002, the number of shares granted to ICFG will be reduced to 197,917 shares
of Class A common stock for each month starting from March 14, 2002 through
December 31, 2002, with the same exercise price. Such obligation shall terminate
immediately if we either close under the amended asset purchase agreement for
radio station KFSG-FM or we terminate such agreement. The acquisition of radio
station KFSG-FM will be funded primarily from cash on hand and internally
generated cash flow, as well as potential equity and debt financing and asset
sales. There can be no assurance that the acquisition of radio station KFSG-FM
will occur.
(4) DEBT OFFERING
On June 8, 2001, we sold $100 million of 9 5/8% senior subordinated notes
due 2009 through a Rule 144A offering from which we received proceeds of
approximately $85.0 million, after payment of underwriting commissions and a
delayed draw special fee payment and discount given in connection with the
issuance. We used approximately $66.2 million of the proceeds from this offering
to repay the outstanding indebtedness and accrued interest under our senior
credit facility, which we then terminated. We realized a loss on the
extinguishment of this debt of approximately $1.9 million, net of an income tax
benefit of approximately $1.2 million. This loss relates to the write-off of
related unamortized debt issuance costs. We also capitalized financing costs of
approximately $3.6 million related to this offering. The terms of these notes
are substantially similar to the $235.0 million of 9 5/8% senior subordinated
notes due 2009 that we issued in November 1999.
In connection with the issuance and sale of the notes in our Rule 144A
offering, we entered into a registration rights agreement with the initial
purchaser in the offering pursuant to which we have undertaken to file a
registration statement to permit holders of the notes to exchange such notes for
notes registered under the Securities Act.
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As of June 24, 2001, our ratio of debt to last twelve months EBITDA exceeded
7.0 to 1.0. As long as the ratio exceeds 7.0 to 1.0, under the terms of the
indenture governing these notes, we will be unable to incur additional debt
other than for specifically identified occurrences, including senior debt not to
exceed $175 million.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 24, 2001 COMPARED TO THE THREE MONTHS ENDED JUNE 25,
2000.
NET REVENUES. Net revenues were $35.9 million for the three months ended
June 24, 2001 compared to $34.8 million for the three months ended June 25,
2000, an increase of $1.1 million or 3.2%. Most of the increase was generated by
the inclusion of the operating results of the stations acquired during the year
2000 in Dallas, San Antonio, San Francisco and Los Angeles, as well as our
barter agreement with AOL Time Warner, Inc. (the "AOL Agreement"), which
commenced in September 2000. The increase was partially offset by a decline in
same station net revenues, generally related to weak demand in the advertising
sector mostly affecting our stations in New York and Los Angeles.
STATION OPERATING EXPENSES. Total station operating expenses were $22.1
million for the three months ended June 24, 2001 compared to $15.9 million for
the three months ended June 25, 2000, an increase of $6.2 million or 38.9%. The
increase was primarily attributed to the inclusion of the operating results of
the stations acquired in the year 2000, as well as the expenses related to the
AOL Agreement. Operating expenses also increased due to advertising expenditures
related to the introduction of the Company's new full-power FM station in Los
Angeles, KXOL-FM, which we have operated under a time-brokerage agreement since
April 30, 2001. In addition, higher compensation expenses related to
improvements in our programming department, the hiring of additional programming
personnel, and higher marketing and promotions costs in our key markets also
increased operating expenses.
BROADCAST CASH FLOW. Broadcast cash flow was $13.8 million for the three
months ended June 24, 2001 compared to $18.9 million for the three months ended
June 25, 2000, a decrease of $5.1 million or 26.9%. Our broadcast cash flow
margin decreased to 38.4% for the three months ended June 24, 2001 compared to
54.3% for the three months ended June 25, 2000. Our broadcast cash flow margin
decreased mainly due to lower same station net revenues. In addition, our
broadcast cash flow margin decreased due to lower margins contributed by newly
acquired stations and the AOL Agreement.
CORPORATE EXPENSES. Corporate expenses were $2.3 million for the three
months ended June 24, 2001 compared to $2.6 million for the three months ended
June 25, 2000, a decrease of $0.3 million or 11.5%. The decrease in corporate
expenses resulted mainly from a decrease in compensation.
EBITDA. EBITDA was $11.5 million for the three months ended June 24, 2001
compared to $16.3 million for the three months ended June 25, 2000, a decrease
of $4.8 million or 29.5%. The decrease in EBITDA was attributed to decreased
broadcast cash flow.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense was
$4.7 million for the three months ended June 24, 2001 compared to $3.5 million
for the three months ended June 25, 2000, an increase of $1.2 million or 34.3%.
The increase in depreciation and amortization was related to the stations
acquired during the year 2000.
OPERATING INCOME. Operating income was $6.8 million for the three months
ended June 24, 2001 compared to $12.8 million for the three months ended June
25, 2000, a decrease of $6.0 million or 46.9%. The decrease in operating income
was caused by the decrease in EBITDA and an increase in depreciation and
amortization expense.
INTEREST EXPENSE, NET. Interest expense was $7.5 million for the three
months ended June 24, 2001 compared to $4.9 million for the three months ended
June 25, 2000, an increase of $2.6 million or 53.1%. This increase was due
primarily to interest expense incurred on our senior credit facility, which was
entered into in July 2000 and repaid and extinguished in June 2001, and the $100
million of 9 5/8% senior subordinated notes that were issued in June 2001.
OTHER, NET. We had no meaningful other income during the three months ended
June 24, 2001 and June 25, 2000.
EXTRAORDINARY LOSS. During the three months ended June 24, 2001, we incurred
an extraordinary loss of $1.9 million, net of an income tax benefit of $1.2
million, which was related to the write off of unamortized debt issuance costs
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due to the early extinguishment of our senior credit facility in June 2001.
During the three months ended June 25, 2000, we did not record any extraordinary
items.
NET (LOSS) INCOME. Net loss was $2.4 million for the three months ended June
24, 2001 compared to net income of $4.4 million for the three months ended June
25, 2000. The net loss was caused by the decrease in operating income and an
increase in interest expense, net.
NINE MONTHS ENDED JUNE 24, 2001 COMPARED TO THE NINE MONTHS ENDED JUNE 25, 2000.
NET REVENUES. Our net revenues were $98.3 million for the nine months ended
June 24, 2001 compared to $88.7 million for the nine months ended June 25, 2000,
an increase of $9.6 million or 10.8%. Most of the increase was generated by the
inclusion of the operating results of the stations acquired during the year 2000
in Puerto Rico, Dallas, San Antonio, San Francisco and Los Angeles, as well as
the barter AOL Agreement. The increase was partially offset by a decline in same
station net revenues, generally related to weak demand in the advertising sector
mostly affecting our stations in New York and Los Angeles.
STATION OPERATING EXPENSES. Total station operating expenses were $62.7
million for the nine months ended June 24, 2001 compared to $40.6 million for
the nine months ended June 25, 2000, an increase of $22.1 million or 54.4%. The
increase was primarily attributed to the inclusion of the operating results of
the stations acquired in the year 2000, as well as the expenses related to the
AOL Agreement. Operating expenses also increased due to advertising expenditures
related to the introduction of the Company's new full-power FM station in Los
Angeles, KXOL-FM, which we have operated under a time-brokerage agreement since
April 30, 2001. In addition, higher compensation expenses related to
improvements in our programming department, the hiring of additional programming
personnel, and higher marketing and promotions costs in our key markets also
increased operating expenses.
BROADCAST CASH FLOW. Broadcast cash flow was $35.5 million for the nine
months ended June 24, 2001 compared to $48.0 million for the nine months ended
June 25, 2000, a decrease of $12.5 million or 26.0%. Our broadcast cash flow
margin decreased to 36.1% for the nine months ended June 24, 2001 compared to
54.1% for the nine months ended June 25, 2000. Our broadcast cash flow margin
decreased mainly due to lower same station net revenues. In addition, our
broadcast cash flow margin decreased due to lower margins contributed by newly
acquired stations and the AOL Agreement.
CORPORATE EXPENSES. Corporate expenses were $7.5 million for the nine months
ended June 24, 2001 compared to $18.1 million for the nine months ended June 25,
2000, a decrease of $10.6 million or 58.6%. The decrease in corporate expenses
resulted mainly from the absence in fiscal year 2001 of a non-recurring
severance payment, which was recorded in the first quarter of fiscal year 2000.
EBITDA. EBITDA was $28.1 million for the nine months ended June 24, 2001
compared to $29.9 million for the nine months ended June 25, 2000, a decrease of
$1.8 million or 6.0%. The decrease in EBITDA was attributed to decreased
broadcast cash flow, offset by decreased corporate expenses.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense was
$13.5 million for the nine months ended June 24, 2001 compared to $9.4 million
for the nine months ended June 25, 2000, an increase of $4.1 million or 43.6%.
The increase in depreciation and amortization was related mostly to the stations
acquired during the year 2000.
OPERATING INCOME. Operating income was $14.6 million for the nine months
ended June 24, 2001 compared to $20.6 million for the nine months ended June 25,
2000, a decrease of $6.0 million or 29.1%. The decrease in operating income was
caused by a decrease in EBITDA and an increase in depreciation and amortization
expense.
INTEREST EXPENSE, NET. Interest expense was $21.5 million for the nine
months ended June 24, 2001 compared to $12.4 million for the nine months ended
June 25, 2000, an increase of $9.1 million or 73.4%. This increase was due
primarily to interest expense incurred on our senior credit facility, which was
entered into in July 2000 and repaid and extinguished in June 2001, and the $100
million of 9 5/8% senior subordinated notes that were issued in June 2001.
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OTHER, NET. Other income was $0.5 million for the nine months ended June 24,
2001 due to the settlement of a legal dispute related to a back-up auxiliary
transmitter and antenna for KLAX-FM and an insurance recovery claim related to
an office building in Los Angeles. We had other expenses of $0.4 million for the
nine months ended June 25, 2000, which resulted primarily from the write-off of
financing costs.
EXTRAORDINARY LOSS. During the nine months ended June 24, 2001, we incurred
an extraordinary loss of $1.9 million, net of an income tax benefit of $1.2
million, which was related to the write off of unamortized debt issuance costs
due to the early extinguishment of our senior credit facility in June 2001.
During the nine months ended June 25, 2000, we incurred an extraordinary loss of
$16.9 million, net of an income tax benefit of $11.7 million, which was related
to the early extinguishment of our 11% and 12 1/2% notes for an amount in excess
of our carrying value and the write off of the related unamortized debt issuance
costs.
NET LOSS. Net loss was $6.0 million for the nine months ended June 24, 2001
compared to a net loss of $12.5 million for the nine months ended June 25, 2000,
a decrease of $6.5 million or 52.0%. The decrease in net loss was caused by the
decrease in extraordinary losses, partially offset by a decrease in operating
income and increase in interest expense, net.
LIQUIDITY AND CAPITAL RESOURCES
Our primary source of liquidity is cash on hand and cash provided by
operations. Our ability to increase our indebtedness is limited by the terms of
the indentures governing our outstanding public and private 9 5/8% senior
subordinated notes due 2009. Additionally, such indentures place restrictions on
us with respect to the sale of assets, liens, investments, dividends, debt
repayments, capital expenditures, transactions with affiliates and
consolidations and mergers, among other things.
Net cash flows provided by operating activities were $4.8 million for the
nine months ended June 24, 2001 compared to net cash flows provided by operating
activities of $12.2 million for the nine months ended June 25, 2000. Changes in
our net cash flow from operating activities were primarily a result of changes
in advertising revenues and station operating expenses, which were affected by
the acquisition of stations during these periods.
Net cash flows used in investing activities were $34.2 million for the nine
months ended June 24, 2001 compared to net cash flows used in investing
activities of $114.2 million for the nine months ended June 25, 2000. Changes in
our net cash flow from investing activities were primarily a result of the
acquisition and disposition of stations during these periods.
Net cash flows provided by financing activities were $18.5 million for the
nine months ended June 24, 2001 compared to net cash flows provided by financing
activities of $158.1 million for the nine months ended June 25, 2000. Changes in
our net cash flow from financing activities during the nine months ended June
24, 2001 were primarily a result of our Rule 144A offering of $100 million of 9
5/8% senior subordinated notes due 2009 and our repayment of the outstanding
indebtedness under our senior credit facility which we then terminated. Changes
in our net cash flow from financing activities during the nine months ended June
25, 2000 were primarily a result of the initial public offering and related
refinancing transactions that were completed during the first quarter of fiscal
year 2000.
Management believes that cash from operating activities, together with cash
on hand, should be sufficient to permit us to meet our obligations in the
foreseeable future, including: (1) required significant cash interest payments
pursuant to the terms of the senior subordinated notes due 2009, (2) operating
obligations and (3) capital expenditures. Assumptions (none of which can be
assured) that underlie management's belief, include:
- the economic conditions within the radio broadcasting market and
economic conditions in general will not deteriorate in any material
respect;
- we will continue to successfully implement our business strategy;
- we will not incur any material unforeseen liabilities, including
environmental liabilities; and
- no future acquisitions will adversely affect our liquidity.
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We continuously review, and are currently reviewing, opportunities to
acquire additional radio stations, primarily in the largest Hispanic markets in
the United States. We engage in discussions regarding potential acquisitions
from time to time in the ordinary course of business. On May 8, 2000, we entered
into a stock purchase agreement with Rodriguez Communications, Inc. ("RCI") and
the stockholders of RCI to acquire all of the outstanding capital stock of RCI,
the owner of radio stations KMJR-FM (formerly KFOX-FM) and KNJR-FM (formerly
KREA-FM) serving the Los Angeles, California market, KXJO-FM serving the
San Francisco, California market and KSAH-AM serving the San Antonio, Texas
market. On May 8, 2000, we also entered into (1) an asset purchase agreement
with New World Broadcasters Corp. ("New World") to acquire radio station KTCY-FM
serving the Dallas, Texas market and (2) a stock purchase agreement with New
World and 910 Broadcasting Corp., a wholly owned subsidiary of New World ("910
Broadcasting"), to acquire all the outstanding capital stock of 910
Broadcasting, the owner and operator of radio station KXEB-AM serving the
Dallas, Texas market (the "KXEB-AM Stock Purchase Agreement").
On November 10, 2000, we completed the purchase of all the outstanding
capital stock of RCI and the purchase of radio station KTCY-FM for total
consideration of $167.8 million, consisting of $42.6 million of our Class A
common stock and $125.2 million in cash, including closing costs of $2.8
million. The consideration paid by us for these acquisitions was determined
through arms-length negotiations between us, RCI, the shareholders of RCI and
New World. We financed these acquisitions with previously unissued shares of our
Class A common stock, cash on hand and borrowings under our then effective
credit agreement, among us, the several banks and other financial institutions
or entities from time to time party to the credit agreement and Lehman
Commercial Paper, Inc., as administrative agent, dated as of July 6, 2000. On
July 3, 2001, New World and 910 Broadcasting sent a notice to the Company in
which they purported to terminate the KXEB-AM Stock Purchase Agreement. The
Company is disputing the right of New World and 910 Broadcasting to terminate
the agreement and is seeking to specifically enforce the KXEB-AM Stock Purchase
Agreement. There can be no assurance that we will be successful in our efforts.
On November 2, 2000, we entered into an asset purchase agreement with the
International Church of the FourSquare Gospel ("ICFG") to purchase radio station
KFSG-FM in Los Angeles, California at a purchase price of $250.0 million. In
connection with this acquisition, we made a non-refundable deposit of $5.0
million to be credited towards the purchase price at closing. The agreement
contains customary representations and warranties, and the closing of our
acquisition is subject to the satisfaction of certain customary conditions,
including receipt of regulatory approval from the Federal Communications
Commission. On March 13, 2001, we entered into two time brokerage agreements
with ICFG pursuant to which we are permitted to broadcast our programming over
radio station KFSG-FM (the "TBA"), and ICFG is permitted to broadcast its
programming over radio stations KMJR-FM and KNJR-FM (the "93.5 TBA") and an
addendum to the asset purchase agreement. On April 30, 2001, we commenced
broadcasting our programming over radio station KFSG-FM (operating under the
call letters KXOL-FM) under the TBA, and ICFG commenced broadcasting its
programming under the 93.5 TBA.
Payments totaling $25.0 million made pursuant to the TBA, consisting of the
original $5.0 million deposit and an additional payment of $20.0 million made in
March 2001, give us the right to broadcast our programming on radio station
KFSG-FM under the TBA through March 13, 2002. We have the option to extend the
term of the TBA to December 31, 2002 by making payment to ICFG of an additional
$35.0 million no later than March 13, 2002. Under the amended asset purchase
agreement, if we elect to extend the term of the TBA, the termination date for
closing on the purchase of radio station KFSG-FM will be extended from March 13,
2002 until December 31, 2002. The full amounts of the payments for the TBA will
be applied to the purchase price of radio station KFSG-FM if we close under the
amended asset purchase agreement on or before August 1, 2002. Thereafter, there
will be a charge against such credit equal to $1.2 million for each month we
delay the closing past August 1, 2002. ICFG has extended the 93.5 TBA until
October 26, 2001 and has requested a further extension until December 23, 2001
with the option to extend until February 23, 2002. If the 93.5 TBA is not
further extended and we have not either closed under the amended asset purchase
agreement or terminated such agreement, we will issue to ICFG warrants,
exercisable for five years, to purchase 234,375 shares of our Class A common
stock for each month from the termination of the 93.5 TBA through March 13,
2002, with an exercise price of $6 per share. If we extend the TBA to December
31, 2002, the number of shares granted to ICFG will be reduced to 197,917 shares
of Class A common stock for each month starting from March 14, 2002 through
December 31, 2002, with the same exercise price. Such obligation shall terminate
immediately if we either close under the amended asset purchase agreement for
radio station KFSG-FM or we terminate such agreement. The acquisition of radio
station KFSG-FM will be funded primarily from cash on hand and internally
generated cash flow, as well as potential equity and debt financing and asset
sales. There can be no assurance that the acquisition of radio station KFSG-FM
will occur.
We have no other written understandings, letters of intent or contracts to
acquire radio stations or other companies. We anticipate that any future
acquisitions would be financed through funds generated from permitted debt
financing, equity financing, operations or a combination of these sources.
However, there can be no assurance that financing from any of these sources, if
available, can be obtained on favorable terms.
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NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133 ("SFAS No. 133"),
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts and for
hedging activities. It requires an entity to recognize all derivatives as either
assets or liabilities in the balance sheet and measure those instruments at fair
value. SFAS No. 133, as amended by SFAS No. 137, is effective for the Company's
fiscal year ending September 30, 2001. The adoption of SFAS No. 133 had no
impact on the Company's consolidated financial statements since the Company had
no derivative instruments outstanding or hedging activities during the nine
month period ended June 24, 2001.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition", which
provides guidance on the recognition, presentation and disclosure of revenue in
financial statements filed with the SEC. SAB 101 outlines the basic criteria
that must be met in order to recognize revenue and provides guidance for
disclosures related to revenue recognition policies. In June 2000, the SEC
issued SAB 101B, "Second Amendment: Revenue Recognition in Financial Statements"
which extends the effective date of SAB 101 to the fourth fiscal quarter of
fiscal years commencing after December 15, 1999. At this time, management is
still assessing the impact of SAB 101 on the Company's financial position and
results of operations.
In September 2000, the FASB issued Statement of Financial Accounting
Standards No. 140 ("SFAS No. 140"), "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities (A Replacement of SFAS No.
125)". SFAS No. 140 provides guidance on accounting for (1) securitization
transactions involving financial assets; (2) sales of financial assets
(including loan participations); (3) factoring transactions; (4) wash sales; (5)
servicing assets and liabilities; (6) collateralized borrowing arrangements; (7)
securities lending transactions; (8) repurchase agreements; and (9)
extinguishment of liabilities. Most of the provisions of SFAS No. 140 became
effective for transactions entered into after March 31, 2001. The adoption of
SFAS No. 140 had no significant impact on the Company's consolidated financial
statements.
In July 2001, the FASB issued Statement of Financial Accounting Standards
No. 141 ("SFAS No. 141"), "Business Combinations", and Statement of Financial
Accounting Standards No. 142 ("SFAS No. 142"), "Goodwill and Other Intangible
Assets". SFAS No. 141 requires that the purchase method of accounting be used
for all business combinations initiated after June 30, 2001 as well as all
purchase method business combinations completed after June 30, 2001. SFAS No.
141 also specifies the criteria that intangible assets acquired in a purchase
method business combination must meet to be recognized and reported apart from
goodwill, noting that any purchase price allocable to an assembled workforce may
not be accounted for separately. SFAS No. 142 requires that goodwill and
intangible assets with indefinite useful lives no longer be amortized, but
instead tested for impairment at least annually in accordance with the
provisions of SFAS No. 142. SFAS No. 142 also requires that intangible assets
with definite useful lives be amortized over their respective estimated useful
lives to their estimated residual values, and reviewed for impairment in
accordance with Statement of Financial Accounting Standards No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of".
The Company is required to adopt the provisions of SFAS No. 141 immediately,
and SFAS No. 142 effective October 1, 2002. Furthermore, any goodwill or
intangible asset determined to have an indefinite useful life that is acquired
in a purchase method business combination completed after June 30, 2001 will not
be amortized, but will continue to be evaluated for impairment in accordance
with the appropriate pre-SFAS No. 142 accounting literature. Goodwill and
intangible assets acquired in business combinations completed before July 1,
2001 will continue to be amortized prior to the adoption of SFAS No. 142.
SFAS No. 141 requires that upon adoption of SFAS No. 142, the Company
evaluate its existing intangible assets and goodwill that were acquired in a
prior purchase method business combination, and make any necessary
reclassifications in order to conform with the new criteria in SFAS No. 141 for
recognition apart from goodwill. Upon adoption of SFAS No. 142, the Company will
be required to reassess the useful lives and residual values of all intangible
assets acquired in purchase method business combinations, and make any necessary
amortization period adjustments by the end of the first interim period after
adoption of SFAS No. 142. In addition, to the extent an intangible asset is
identified as having an indefinite useful life, the Company will be required to
test the intangible asset for impairment in accordance with the provisions of
SFAS No. 142 within the first interim period after adoption of SFAS No. 142. Any
impairment loss will be measured as of the date of adoption and recognized as
the cumulative effect of a change in accounting principle in the first interim
period after adoption.
In connection with the transitional goodwill impairment evaluation, SFAS No.
142 requires the Company to perform an assessment of whether there is an
indication that goodwill is impaired as of the date of adoption of SFAS No. 142.
To accomplish this the Company must identify its reporting units and determine
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the carrying value of each reporting unit by assigning the assets and
liabilities, including the existing goodwill and intangible assets, to those
reporting units as of the date of adoption of SFAS No. 142. The Company will
then have up to six months from the date of adoption to determine the fair value
of each reporting unit and compare it to the reporting unit's carrying amount.
To the extent a reporting unit's carrying amount exceeds its fair value, an
indication exists that the reporting unit's goodwill may be impaired and the
Company must perform the second step of the transitional impairment test. In the
second step, the Company must compare the implied fair value of the reporting
unit's goodwill, determined by allocating the reporting unit's fair value to all
of its assets (recognized and unrecognized) and liabilities in a manner similar
to a purchase price allocation in accordance with SFAS No. 141, to its carrying
amount, both of which would be measured as of the date of adoption of SFAS No.
142. This second step is required to be completed as soon as possible, but no
later than the end of the fiscal year of adoption. Any transitional impairment
loss will be recognized as the cumulative effect of a change in accounting
principle in the Company's statement of earnings.
Finally, any unamortized negative goodwill existing at the date SFAS No. 142
is adopted must be written off as the cumulative effect of a change in
accounting principle.
As of the date of adoption of SFAS No. 142, the Company expects to have
unamortized goodwill in the amount of approximately $31.6 million, and
unamortized identifiable intangible assets in the amount of approximately $567.7
million, all of which will be subject to the transition provisions of SFAS No.
141 and SFAS No. 142. Amortization expense related to goodwill was approximately
$0.4 million and $1.0 million for the three and nine months ended June 24, 2001,
respectively. Because of the extensive effort needed to comply with adopting
SFAS No. 141 and SFAS No. 142, it is not practicable to reasonably estimate the
impact of adopting these FASB statements on the Company's financial statements
at this time, including whether any transitional impairment losses will be
required to be recognized as the cumulative effect of a change in accounting
principle.
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This report on Form 10-Q contains forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1999. When used in
this report, the words "believes," "anticipates," "expects," "estimates,"
"plans," "intends," and similar expressions are intended to identify
forward-looking statements. All forward-looking statements are subject to a
number of risks and uncertainties that could cause actual results to differ
materially from projected results. Factors that may cause these differences
include, but are not limited to:
- our substantial level of debt could limit our ability to grow and
compete;
- despite current indebtedness levels, we and our subsidiaries may still
be able to incur substantially more debt which could further limit our
ability to grow and compete;
- if any lender to us or our subsidiaries accelerates any debt in the
event of a default under our or our subsidiaries' indebtedness, we and
our subsidiaries may not have the resources to repay that debt, and an
event of default under any material debt instruments would harm our
business and financial condition;
- the terms of our debt restrict us from engaging in many activities,
require us to satisfy various financial tests and may adversely affect
our business by limiting our flexibility;
- we have experienced net losses in the past and to the extent that we
experience losses in the future, the market prices of our securities and
our ability to raise capital could be adversely affected;
- a large portion of our net broadcast revenue and broadcast cash flow
comes from the New York and Miami markets and a significant decline in
net broadcast revenue or broadcast cash flow from our stations in either
of these markets could have a material adverse effect on our financial
position and results of operations;
- loss of key personnel could adversely affect our business, including
Raul Alarcon, Jr., our Chairman of the Board of Directors, President and
Chief Executive Officer;
- we currently have only one independent director; although the Company
expects to appoint two additional independent directors to serve on our
board of directors and audit committee in the very near future, there
can be no assurance as to when we will do so;
- we compete for advertising revenue with other radio groups as well as
television and other media, many operators of which have greater
resources than we do;
- our growth depends on successfully executing our acquisition strategy;
we intend to grow by acquiring radio stations primarily in the largest
U.S. Hispanic markets, but we cannot assure you that our acquisition
strategy will be successful;
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- we will incur start-up costs in connection with our time brokerage
agreement for KFSG-FM (operating under the call letters KXOL-FM) and our
ability to finance the acquisition of the station may be limited;
- Raul Alarcon, Jr., Chairman of the Board of Directors, Chief Executive
Officer and President, has majority voting control and this control may
discourage certain types of transactions involving an actual or
potential change of control of SBS such as a merger or sale of SBS;
- we must be able to respond to rapidly changing technology, services and
standards which characterize our industry in order to remain
competitive;
- our business depends on maintaining our FCC licenses; we cannot assure
you that we will be able to maintain these licenses;
- we may face regulatory review for additional acquisitions in our
existing markets and, potentially, new markets;
- a national or regional recession could impair our revenues;
- the market price of our shares of Class A common stock may fluctuate
significantly; and
- current or future sales by existing stockholders could depress the
market price of our Class A common stock.
Consequently, such forward-looking statements should be regarded solely as
the Company's current plans, estimates and beliefs. The Company does not
undertake any obligation to update any forward-looking statements to reflect
future events or circumstances after the date of such statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We believe that inflation has not had a material impact on our results of
operations for each of our fiscal years in the three-year period ended September
24, 2000 and in the three- and nine-month periods ended June 24, 2001. However,
there can be no assurance that future inflation will not have an adverse impact
on our operating results and financial condition.
We are not subject to currency fluctuations since we do not have any
international operations other than Puerto Rico where the currency is the U.S.
dollar. We do not have any variable rate debt or derivative financial or
commodity instruments.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time we are involved in litigation incidental to the conduct of
our business, such as contract matters and employee-related matters. We are not
currently a party to litigation, which in the opinion of management, is likely
to have a material adverse effect on our business.
ITEM 5. OTHER INFORMATION
RULE 144A DEBT OFFERING
On June 8, 2001, we sold $100 million of 9 5/8% senior subordinated notes
due 2009 through a Rule 144A offering from which we received proceeds of
approximately $85.0 million, after payment of underwriting commissions and the
delayed draw special fee payment and discount given in connection with the
issuance. We used most of the proceeds from the offering to repay the
outstanding indebtedness and accrued interest under our senior credit
facility, which we then terminated. We plan to use the remainder of the proceeds
for general corporate purposes. We capitalized financing costs of approximately
$3.6 million related to the offering. The terms of these notes are substantially
similar to the $235.0 million of 9 5/8% senior subordinated notes due 2009 that
we issued in November 1999.
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In connection with the issuance and sale of the notes in our Rule 144A
offering, we entered into a registration rights agreement with the initial
purchaser in the offering pursuant to which we have undertaken to file a
registration statement to permit holders of the notes to exchange such notes for
notes registered under the Securities Act.
As of June 24, 2001, our ratio of debt to last twelve months EBITDA exceeded
7.0 to 1.0. As long as the ratio exceeds 7.0 to 1.0, under the terms of the
indenture governing these notes, we will be unable to incur additional debt
other than for specifically identified occurrences, including senior debt not to
exceed $175 million.
EXTINGUISHMENT OF SENIOR CREDIT FACILITY
We used approximately $66.2 million of the proceeds from our Rule 144A
offering of $100 million of 9 5/8% senior subordinated notes due 2009, which
closed on June 8, 2001, to repay the outstanding indebtedness and accrued
interest under our senior credit facility, which we then terminated. We realized
a loss on the extinguishment of this debt of approximately $1.9 million, net of
an income tax benefit of approximately $1.2 million. This loss relates to the
write-off of related unamortized debt issuance costs.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
4.1 Indenture dated as of June 8, 2001 among the Company, each of
the entities named therein and the Bank of New York as Trustee
with respect to 9 5/8% Senior Subordinated Notes due 2009.
(Incorporated by reference to the Company's Registration
Statement on Form S-3, filed on June 25, 2001).
10.1 Purchase Agreement dated May 24, 2001 between the Company and
Lehman Brothers Inc. with respect to 9 5/8% Senior
Subordinated Notes due 2009. (Incorporated by reference to the
Company's Registration Statement on Form S-3, filed on June
25, 2001).
10.2 Registration Rights Agreement dated June 8, 2001 between the
Company and Lehman Brothers Inc. with respect to 9 5/8% Senior
Subordinated Notes due 2009. (Incorporated by reference to the
Company's Registration Statement on Form S-3, filed on June
25, 2001).
(b) Reports on Form 8-K
No Current Report on Form 8-K has been filed by the Company
since February 9, 2001.
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SIGNATURES
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.
Spanish Broadcasting System, Inc., a
Delaware corporation
By: /s/ JOSEPH A. GARCIA
---------------------------------------------
Joseph A. Garcia, Executive Vice President,
Date: August 8, 2001 Chief Financial Officer and Secretary
(principal financial and accounting officer
and duly authorized officer of the registrant)
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