SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended
OR
[X] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from October 1, 2001 to December 30, 2001
Commission File Number 33-82114
SPANISH BROADCASTING SYSTEM, INC.
(Exact name of registrant as specified in its charter)
SEE TABLE OF ADDITIONAL REGISTRANTS
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)
Former fiscal year end: last Sunday in September of each calendar year
(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:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: As of February 11, 2002,
36,862,705 shares of Class A common stock, par value $.0001 per share and
27,795,500 shares of Class B common stock, par value $.0001 per share, were
outstanding.
TABLE OF ADDITIONAL REGISTRANTS
PRIMARY STANDARD
STATE OR OTHER INDUSTRIAL I.R.S. EMPLOYER
JURISDICTION OF CLASSIFICATION IDENTIFICATION
NAME INCORPORATION NUMBER NUMBER
- ---- --------------- ---------------- ---------------
Spanish Broadcasting System of California, Inc....... California 4832 92-3952357
Spanish Broadcasting System Network, Inc............. New York 4899 13-3511101
SBS Promotions, Inc.................................. New York 7999 13-3456128
SBS Funding, Inc..................................... Delaware 4832 52-2176317
Alarcon Holdings, Inc................................ New York 6512 13-3475833
SBS of Greater New York, Inc......................... New York 4832 13-3888732
Spanish Broadcasting System of Florida, Inc.......... Florida 4832 58-1700848
Spanish Broadcasting System of Greater Miami, Inc.... Delaware 4832 65-0774450
Spanish Broadcasting System of Puerto Rico, Inc...... Delaware 4832 52-2139546
Spanish Broadcasting System, Inc..................... New Jersey 4832 13-3181941
Spanish Broadcasting System of Illinois, Inc......... Delaware 4832 36-4174296
Spanish Broadcasting System of San Antonio, Inc...... Delaware 4832 65-0820776
Spanish Broadcasting System Finance Corporation...... Delaware 4832 65-1081341
Spanish Broadcasting System SouthWest, Inc........... Delaware 4832 75-2130336
Spanish Broadcasting System - San Francisco, Inc..... Delaware 4832 94-3405231
Spanish Broadcasting System of Puerto Rico, Inc...... Puerto Rico 4832 66-0564244
2
SPANISH BROADCASTING SYSTEM, INC.
INDEX
PART I. FINANCIAL INFORMATION............................................................. 4
ITEM 1. FINANCIAL STATEMENTS - UNAUDITED.................................................. 4
CONDENSED CONSOLIDATED BALANCE SHEETS AS OF SEPTEMBER 30, 2001
AND DECEMBER 30, 2001............................................................. 4
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE-
MONTHS ENDED DECEMBER 31, 2000 AND DECEMBER 30, 2001.............................. 5
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE-MONTHS
ENDED DECEMBER 31, 2000 AND DECEMBER 30, 2001..................................... 6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.............................. 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS........................................................................ 11
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK........................ 16
PART II. OTHER INFORMATION................................................................. 17
ITEM 1. LEGAL PROCEEDINGS................................................................. 17
ITEM 5. OTHER INFORMATION................................................................. 17
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.................................................. 17
3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS--UNAUDITED
SPANISH BROADCASTING SYSTEM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(in thousands, except share information)
September 30, 2001 December 30, 2001
------------------ -----------------
ASSETS
Current assets:
Cash and cash equivalents $ 59,900 51,640
Net receivables 23,274 23,388
Other current assets 1,515 1,706
--------- --------
Total current assets 84,689 76,734
Property and equipment, net 24,972 24,938
Intangible assets, net 579,907 575,931
Deferred financing costs, net 10,361 10,040
Other assets 249 256
--------- --------
Total assets $ 700,178 687,899
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
12 1/2% senior unsecured notes $ 100 100
Current portion of long-term debt 187 191
Accounts payable and accrued expenses 15,543 13,765
Accrued interest 13,618 5,316
Deferred commitment fee 1,457 1,282
--------- --------
Total current liabilities 30,905 20,654
9 5/8% senior subordinated notes, net 322,959 323,184
Other long-term debt, less current portion 4,206 4,156
Deferred income taxes 32,682 31,706
Stockholders' equity:
Class A common stock, $.0001 par value. Authorized 100,000,000 shares;
36,862,705 shares issued and outstanding at September 30, 2001
and December 30, 2001 3 3
Class B common stock, $.0001 par value. Authorized 50,000,000 shares;
27,795,500 shares issued and outstanding at September 30, 2001
and December 30, 2001 3 3
Additional paid-in capital 435,522 435,522
Accumulated deficit (126,102) (127,329)
--------- --------
Total stockholders' equity 309,426 308,199
--------- --------
Total liabilities and stockholders' equity $ 700,178 687,899
========= ========
SEE ACCOMPANYING NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
4
SPANISH BROADCASTING SYSTEM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(in thousands, except share data)
Three months ended
-----------------------------------------
December 31, 2000 December 30, 2001
----------------- -----------------
Gross revenue $ 42,735 38,484
Less agency commissions 5,421 4,570
-------- -------
Net revenue 37,314 33,914
-------- -------
Operating expenses:
Engineering 747 751
Programming 5,713 4,246
Selling 10,659 11,781
General and administrative 5,092 4,281
Corporate expenses 2,511 2,387
Depreciation and amortization 4,364 4,847
-------- -------
29,086 28,293
-------- -------
Operating income 8,228 5,621
Other (income) expenses:
Interest expense, net 7,437 8,191
Other, net (237) (650)
-------- -------
Income (loss) before income taxes 1,028 (1,920)
Income tax expense (benefit) 432 (693)
-------- -------
Net income (loss) $ 596 (1,227)
======== =======
Net income (loss) per common share:
Basic $ 0.01 (0.02)
Diluted $ 0.01 (0.02)
Weighted-average common shares outstanding:
Basic 62,528 64,658
Diluted 62,539 64,658
SEE ACCOMPANYING NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
5
SPANISH BROADCASTING SYSTEM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)
Three months ended Three months ended
December 31, 2000 December 30, 2001
------------------ ------------------
Cash flows from operating activities:
Net income (loss) $ 596 (1,227)
-------- -------
Adjustments to reconcile net income (loss) to net cash used in
operating activities:
Depreciation and amortization 4,364 4,847
Provision for doubtful accounts 2,316 1,725
Amortization of debt discount -- 225
Amortization of deferred financing costs 346 321
Deferred income taxes 401 (976)
Decrease in deferred commitment fee (175) (175)
Changes in operating assets and liabilities, net of acquisitions:
Increase in receivables (2,766) (1,839)
Decrease (increase) in other current assets 482 (191)
Increase in other assets (149) (7)
Increase (decrease) in accounts payable and accrued expenses 286 (1,778)
Decrease in accrued interest (7,203) (8,302)
-------- -------
Total adjustments (2,098) (6,150)
-------- -------
Net cash used in operating activities (1,502) (7,377)
-------- -------
Cash flows from investing activities:
Acquisition of radio stations, net of cash acquired (3,412) --
Advances on purchase price of radio stations (5,097) (7)
Additions to property and equipment (1,770) (830)
-------- -------
Net cash used in investing activities (10,279) (837)
-------- -------
Cash flows from financing activities:
Increase in deferred financing costs (4) --
Repayment of other long-term debt (41) (46)
-------- -------
Net cash used in financing activities (45) (46)
-------- -------
Net decrease in cash and cash equivalents (11,826) (8,260)
Cash and cash equivalents at beginning of period 59,559 59,900
-------- -------
Cash and cash equivalents at end of period $ 47,733 51,640
======== =======
Supplemental cash flow information:
Interest paid $ 15,190 16,230
======== =======
Income taxes paid $ 10 283
======== =======
SEE ACCOMPANYING NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
6
SPANISH BROADCASTING SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 30, 2001
(UNAUDITED)
(1) BASIS OF PRESENTATION
The condensed consolidated financial statements include the accounts of
Spanish Broadcasting System, Inc. and subsidiaries (the "Company"). All
significant intercompany balances and transactions have been eliminated in
consolidation. The accompanying unaudited condensed consolidated financial
statements as of September 30, 2001 and December 30, 2001, and for the three-
month periods ended December 31, 2000 and December 30, 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 30, 2001 included in the Company's fiscal year 2001 Annual
Report on Form 10-K.
The Company reports revenue and expenses on a broadcast calendar basis.
"Broadcast calendar basis," means a period ending on the last Sunday of each
reporting period. The Company has changed its fiscal year end from the last
Sunday in September to the last Sunday in December. As a result, the quarter
ended December 30, 2001 represents a transitional reporting period.
In the opinion of the Company's management, 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- month
period ended December 30, 2001 are not necessarily indicative of the results for
a full year.
(2) FINANCIAL INFORMATION FOR GUARANTOR AND NON-GUARANTOR SUBSIDIARIES
Certain of the Company's subsidiaries (collectively, the "Subsidiary
Guarantors") have guaranteed the Company's 9 5/8% senior subordinated notes due
2009 on a joint and several basis. The Company has not included separate
financial statements of the Subsidiary Guarantors because (i) all of the
Subsidiary Guarantors are wholly owned subsidiaries of the Company, and (ii) the
guarantees issued by the Subsidiary Guarantors are full and unconditional. The
Company has not included separate parent-only financial statements since the
parent is a holding company with no independent assets or operations other than
its investments in its subsidiaries. In December 1999, the Company transferred
the FCC licenses of WRMA-FM, WXDJ-FM, WLEY-FM, WSKQ-FM, KLEY-FM, WPAT-FM,
WCMA-FM, WSMA-FM (formerly 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. In addition, all FCC licenses acquired subsequent to
December 1999 are held by special purpose subsidiaries. All of these special
purpose subsidiaries are non-guarantors of the 9 5/8% senior subordinated notes
due 2009. Condensed consolidating unaudited financial information for the
Company and its guarantor and non-guarantor subsidiaries is as follows (in
thousands):
PARENT AND
GUARANTOR NON-GUARANTOR
SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
------------ ------------- ------------ ---------
AS OF SEPTEMBER 30, 2001
------------------------------------------------------------
CONDENSED CONSOLIDATING BALANCE SHEET
Cash and cash equivalents $ 58,619 1,281 -- 59,900
Receivables, net 21,996 1,278 -- 23,274
Other current assets 1,023 492 -- 1,515
-------- -------- -------- ---------
Current assets 81,638 3,051 -- 84,689
Property and equipment, net 16,684 8,288 -- 24,972
Intangible assets, net 36,048 543,859 -- 579,907
Deferred financing costs, net 10,361 -- -- 10,361
Investment in subsidiaries and intercompany 543,105 (448,413) (94,692) --
Other assets 248 1 -- 249
-------- -------- -------- ---------
Total assets $688,084 106,786 (94,692) 700,178
======== ======== ======== =========
Current portion of long-term debt $ 157 130 -- 287
Accounts payable and accrued expenses 12,994 2,549 -- 15,543
Accrued interest 13,618 -- -- 13,618
Deferred commitment fee 1,457 -- -- 1,457
-------- -------- -------- ---------
Current liabilities 28,226 2,679 -- 30,905
Long-term debt 323,739 3,426 -- 327,165
Deferred income taxes 10,117 22,565 -- 32,682
-------- -------- -------- ---------
Total liabilities 362,082 28,670 -- 390,752
-------- -------- -------- ---------
Common stock 6 1 (1) 6
Additional paid-in capital 435,522 94,691 (94,691) 435,522
Accumulated deficit (109,526) (16,576) -- (126,102)
-------- -------- -------- ---------
Stockholders' equity 326,002 78,116 (94,692) 309,426
-------- -------- -------- ---------
Total liabilities and stockholders' equity $688,084 106,786 (94,692) 700,178
======== ======== ======== =========
7
PARENT AND
GUARANTOR NON-GUARANTOR
SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
------------ ------------- ------------ ---------
AS OF DECEMBER 30, 2001
------------------------------------------------------------
CONDENSED CONSOLIDATING BALANCE SHEET
Cash and cash equivalents $ 48,741 2,899 -- 51,640
Receivables, net 21,885 1,503 -- 23,388
Other current assets 1,186 520 -- 1,706
-------- -------- ------- --------
Current assets 71,812 4,922 -- 76,734
Property and equipment, net 17,003 7,935 -- 24,938
Intangible assets, net 35,992 539,939 -- 575,931
Deferred financing costs, net 10,040 -- -- 10,040
Investment in subsidiaries and intercompany 542,543 (447,851) (94,692) --
Other assets 255 1 -- 256
-------- -------- ------- --------
Total assets $677,645 104,946 (94,692) 687,899
======== ======== ======= ========
Current portion of long-term debt $ 159 132 -- 291
Accounts payable and accrued expenses 11,735 2,030 -- 13,765
Accrued interest 5,315 1 -- 5,316
Deferred commitment fee 1,282 -- -- 1,282
-------- -------- ------- --------
Current liabilities 18,491 2,163 -- 20,654
Long-term debt 323,949 3,391 -- 327,340
Deferred income taxes 9,086 22,620 -- 31,706
-------- -------- ------- --------
Total liabilities 351,526 28,174 -- 379,700
-------- -------- ------- --------
Common stock 6 1 (1) 6
Additional paid-in capital 435,522 94,691 (94,691) 435,522
Accumulated deficit (109,409) (17,920) -- (127,329)
-------- -------- ------- --------
Stockholders' equity 326,119 76,772 (94,692) 308,199
-------- -------- ------- --------
Total liabilities and stockholders' equity $677,645 104,946 (94,692) 687,899
======== ======== ======= ========
PARENT AND
GUARANTOR NON-GUARANTOR
SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
------------ ------------- ------------ ---------
FOR THE THREE MONTHS ENDED DECEMBER 31, 2000
------------------------------------------------------------
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
Net broadcasting revenue $ 33,811 3,503 -- 37,314
Station operating expenses 18,610 3,601 -- 22,211
Corporate expenses 2,511 120 (120) 2,511
Depreciation and amortization 987 3,377 -- 4,364
-------- -------- -------- ---------
Operating income (loss) 11,703 (3,595) 120 8,228
Interest expense, net 6,086 1,351 -- 7,437
Other expense (income), net 2,138 (2,495) 120 (237)
Income tax expense 383 49 -- 432
-------- -------- -------- ---------
Net income (loss) $ 3,096 (2,500) -- 596
======== ======== ======== =========
8
PARENT AND
GUARANTOR NON-GUARANTOR
SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
------------ ------------- ------------ ---------
FOR THE THREE MONTHS ENDED DECEMBER 30, 2001
------------------------------------------------------------
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
Net broadcasting revenue $ 30,922 2,992 -- 33,914
Station operating expenses 19,403 1,656 -- 21,059
Corporate expenses 2,387 120 (120) 2,387
Depreciation and amortization 654 4,193 -- 4,847
-------- ------ ---- -------
Operating income (loss) 8,478 (2,977) 120 5,621
Interest expense, net 6,814 1,377 -- 8,191
Other expense (income), net 2,297 (3,067) 120 (650)
Income tax (benefit) expense (750) 57 -- (693)
-------- ------ ---- -------
Net income (loss) $ 117 (1,344) -- (1,227)
======== ====== ==== =======
PARENT AND
GUARANTOR NON-GUARANTOR
SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
------------ ------------- ------------ ---------
FOR THE THREE MONTHS ENDED DECEMBER 31, 2000
------------------------------------------------------------
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
Cash flows from operating activities $ (3,604) 2,102 -- (1,502)
======== ====== ===== =======
Cash flows from investing activities $ (8,591) (1,688) -- (10,279)
======== ====== ===== =======
Cash flows from financing activities $ (1,051) 1,006 -- (45)
======== ====== ===== =======
PARENT AND
GUARANTOR NON-GUARANTOR
SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
------------ ------------- ------------ ---------
FOR THE THREE MONTHS ENDED DECEMBER 30, 2001
------------------------------------------------------------
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
Cash flows from operating activities $ (8,947) 1,570 -- (7,377)
======== ====== ===== =======
Cash flows from investing activities $ (916) 79 -- (837)
======== ====== ===== =======
Cash flows from financing activities $ (15) (31) -- (46)
======== ====== ===== =======
(3) NEW ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 141, "Business
Combinations", and 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 SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of." As discussed below, the Company adopted SFAS No. 144 effective
December 31, 2001 which supersedes SFAS No. 121.
The Company adopted the provisions of SFAS No. 141 upon its issuance
and adopted the provisions of SFAS No. 142 effective December 31, 2001. Any
goodwill or any intangible asset determined to have an indefinite useful life
that is acquired in a purchase 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.
9
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 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 is required to
reassess the useful lives and residual values of all intangible assets acquired
in purchase 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 is 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 of
goodwill. 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 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 operations.
As of the Company's adoption of SFAS No. 142 effective December 31,
2001, the Company had unamortized goodwill in the amount of $32.7 million, and
unamortized identifiable intangible assets in the amount of $543.2 million, all
of which will be subject to the transition provision of SFAS No. 142.
Amortization expense related to goodwill and identifiable intangible assets was
$3.6 million and $4.0 million for the three months ended December 31, 2000 and
December 30, 2001, respectively. At this time, management is assessing the
impact of the adoption of SFAS No. 142 on the Company's results of operations
and financial position.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," which addresses financial
accounting and reporting for the impairment and disposal of long-lived assets.
SFAS No. 144 requires that long-lived assets be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. Recoverability of assets to be held and used is measured
by a comparison of the carrying amount of an asset to future net cash flows
expected to be generated by the asset. If the carrying amount of an asset
exceeds its estimated future cash flows, an impairment charge is recognized by
the amount by which the carrying amount of the asset exceeds the fair value of
the asset. SFAS No. 144 requires companies to separately report discontinued
operations and extends that reporting to a component of an entity that either
has been disposed of (by sale, abandonment, or in a distribution to owners) or
is classified as held for sale. Assets to be disposed of are reported at the
lower of the carrying amount or fair value less costs to sell. The Company
adopted SFAS No. 144 on December 31, 2001. At this time, management is
assessing the impact of the adoption of SFAS No. 144 on the Company's results of
operations and financial position.
(4) ACQUISITIONS
On November 2, 2000, we entered into an asset purchase agreement (the
"Asset Purchase Agreement") with the International Church of the FourSquare
Gospel ("ICFG") to purchase radio station KXOL-FM (formerly KFSG-FM) in Los
Angeles, California at a purchase price of $250.0 million and made a
non-refundable deposit of $5.0 million to be credited towards the purchase price
at closing. The Asset Purchase 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 and expiration of the waiting period under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended. On March 13,
2001, we entered into an Addendum to the Asset Purchase Agreement and two Time
Brokerage Agreements with ICFG pursuant to which we are permitted to broadcast
our programming over radio station KXOL-FM (the "TBA"), and ICFG is permitted to
broadcast its programming over radio stations KFSG-FM (formerly KMJR-FM) and
KFSB-FM (formerly KNJR-FM) (the "93.5 TBA"). In connection with the Addendum to
the Asset Purchase Agreement and TBA, we made an additional non-refundable
10
deposit of $20 million, which will be credited towards the purchase price at
closing. On April 30, 2001, we commenced broadcasting our programming under the
TBA and ICFG commenced broadcasting its programming under the 93.5 TBA.
On February 8, 2002, we entered into an additional amendment to the
Asset Purchase Agreement and an amendment to the TBA and the 93.5 TBA
(collectively, the "Second Amendment"). The Second Amendment extends the
deadline for closing under the amended Asset Purchase Agreement (the "KXOL
Closing") to December 31, 2003. The KXOL Closing is subject to acceleration if
we sell five specified stations during the term of the TBA. We are required to
make additional payments to ICFG of $15 million on March 12, 2002, $5 million on
September 30, 2002 and $15 million on March 12, 2003, if the KXOL Closing has
not occurred or the amended Asset Purchase Agreement has not terminated by such
respective dates. All such payments are non-refundable (except in case of breach
by ICFG) and will be credited towards the purchase price at closing.
In addition, pursuant to the Second Amendment, we have agreed to grant
to ICFG, as of February 8, 2002, warrants exercisable for an aggregate of
2,000,000 shares of our Class A common stock at an exercise price of $10.50 per
share. These warrants will be exercisable for a period of thirty-six months
after the date of issuance after which they will expire if not exercised. If
ICFG ceases to broadcast its programming under the 93.5 TBA at any time after
September 1, 2002, commencing the last day of such calendar month, we will issue
to ICFG each month thereafter warrants exercisable for 100,000 shares of our
Class A common stock at an exercise price equal to the closing price of our
shares on the last trading day of such month, until the earlier to occur of (i)
the KXOL Closing or (ii) the termination of the amended Asset Purchase
Agreement. These warrants will also be exercisable for a period of thirty-six
months after the date of issuance after which they will expire if not exercised.
Pursuant to the Second Amendment, the term of the TBA will continue
until the earlier to occur of (i) the KXOL Closing or (ii) the termination of
the amended Asset Purchase Agreement. If we do not make the March 12, 2002,
September 30, 2002 or March 12, 2003 payments discussed above, the TBA and the
amended Asset Purchase Agreement will both terminate on such respective date.
The term of the 93.5 TBA will continue until the earlier to occur of (i) the
KXOL Closing or (ii) September 1, 2002, unless extended by ICFG for an
additional six month period. ICFG has the right to cancel the 93.5 TBA at
anytime upon thirty days prior written notice.
We intend to fund the acquisition of radio station KXOL-FM from a
combination of cash on hand, internally generated cash flow, potential equity
and debt financing and/or asset sales. Although we intend to complete this
transaction, there can be no assurance that the acquisition of radio station
KXOL-FM will be completed.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The performance of a radio station group is customarily measured by its
ability to generate broadcast cash flow and EBITDA. Broadcast cash flow consists
of operating income excluding corporate expenses and depreciation and
amortization. EBITDA consists of operating income excluding depreciation and
amortization. Broadcast cash flow and EBITDA are not measures of performance
calculated in accordance with generally accepted accounting principles. These
measures are not intended to be substitutes for operating income (loss), cash
flow from operating activities, net income (loss), or any other measure for
determining operating performance or liquidity that is calculated in accordance
with generally accepted accounting principles. Broadcast cash flow and EBITDA do
not take into account our debt service requirements and any other commitments.
Our primary source of revenue is the sale of advertising time on our
radio stations to local and national advertisers. Our revenue is affected
primarily by the advertising rates that our radio stations are able to charge as
well as the overall demand for radio advertising time in a market. Seasonal net
broadcasting revenue fluctuations are common in the radio broadcasting industry
and are due to fluctuations in advertising expenditures by local and national
advertisers. Typically for the radio broadcasting industry, the first calendar
quarter generally produces the lowest revenue. Our most significant operating
expenses for purposes of the computation of broadcast cash flow and EBITDA are
personnel compensation expenses, programming expenses, and advertising and
promotion expenses. Our management strives to control these expenses by working
closely with local station management and others.
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RESULTS OF OPERATIONS
THREE MONTHS ENDED DECEMBER 30, 2001 COMPARED TO THE THREE MONTHS ENDED DECEMBER
31, 2000.
NET REVENUE. Net revenue was $33.9 million for the three months ended
December 30, 2001 compared to $37.3 million for the three months ended December
31, 2000, a decrease of $3.4 million or 9.1%. Net revenue decreased primarily
due to the overall weak advertising sector, the economic recession and the
tragic events of September 11, 2001. The main revenue decrease was in local
revenue, which caused same station net revenue to decline. Our most affected
markets were New York, Miami and Puerto Rico where the local economies are
significantly influenced by tourism.
STATION OPERATING EXPENSES. Station operating expenses were $21.1
million for the three months ended December 30, 2001 compared to $22.2 million
for the three months ended December 31, 2000, a decrease of $1.1 million or
5.0%. The decrease in station operating expenses was primarily attributed to
management's efforts in (a) administering cost cutting approaches and improving
economies of scale in our Puerto Rico and Texas markets which experienced
decreased facility expenses and personnel compensation expenses and (b)
improving collections processes in our Puerto Rico market which decreased the
provision for bad debts. These decreases were partially offset by an increase in
advertising and promotions expenditures in our key markets.
BROADCAST CASH FLOW. Broadcast cash flow was $12.9 million for the
three months ended December 30, 2001 compared to $15.1 million for the three
months ended December 31, 2000, a decrease of $2.2 million or 14.6%. Our
broadcast cash flow margin decreased to 38.1% for the three months ended
December 30, 2001 compared to 40.5% for the three months ended December 31,
2000. Our broadcast cash flow margin decreased mainly due to lower same station
net revenue. In addition, our broadcast cash flow margin decreased due to the
negative margin contributed by our start-up station KXOL-FM, serving the Los
Angeles market.
CORPORATE EXPENSES. Corporate expenses were $2.4 million for the three
months ended December 30, 2001 compared to $2.5 million for the three months
ended December 31, 2000, a decrease of $0.1 million or 4.0%. The decrease in
corporate expenses resulted mainly from a decrease in corporate personnel
compensation expenses.
EBITDA. EBITDA was $10.5 million for the three months ended December
30, 2001 compared to $12.6 million for the three months ended December 31, 2000,
a decrease of $2.1 million or 16.7%. The decrease in EBITDA was attributed to
the decrease in broadcast cash flow.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense
was $4.8 million for the three months ended December 30, 2001 compared to $4.4
million for the three months ended December 31, 2000, an increase of $0.4
million or 9.1%. The increase was related primarily to an increase in
amortization costs resulting from stations acquired in November 2000.
OPERATING INCOME. Operating income was $5.6 million for the three
months ended December 30, 2001 compared to $8.2 million for the three months
ended December 31, 2000, a decrease of $2.6 million or 31.7%. 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 $8.2 million for the three
months ended December 30, 2001 compared to $7.4 million for the three months
ended December 31, 2000, an increase of $0.8 million or 10.8%. The increase in
interest expense, net is mainly due to a decrease in interest income resulting
from the decline in interest rates.
OTHER, NET. We recorded $0.6 million of income during the three months
ended December 30, 2001 from insurance proceeds received related to the loss of
equipment at the World Trade Center Towers resulting from the terrorist attacks.
We recorded $0.2 million of income for the three months ended December 31, 2000
due to the settlement of a legal dispute related to a back-up auxiliary
transmitter and antenna for KLAX-FM serving the Los Angeles market.
NET (LOSS) INCOME. Net loss was $1.2 million for the three months ended
December 30, 2001 compared to net income of $0.6 million for the three months
ended December 31, 2000. The net loss was caused by the decrease in operating
income and an 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 senior subordinated notes. Additionally, the
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.
12
Net cash flows used in operating activities were $7.4 million for the
three months ended December 30, 2001 compared to net cash flows used in
operating activities of $1.5 million for the three months ended December 31,
2000. Changes in our net cash flows from operating activities were primarily a
result of a decline in operating income, a reduction in accounts payable and
accrued expenses and an increase in interest paid for the three months ended
December 30, 2001.
Net cash flows used in investing activities were $0.8 million for the
three months ended December 30, 2001 compared to net cash flows used in
investing activities of $10.3 million for the three months ended December 31,
2000. Changes in our net cash flows from investing activities were primarily a
result of the absence of advances on and acquisition of stations during the
three months ended December 30, 2001 as compared to the three months ended
December 31, 2000.
Net cash flows used in financing activities were minimal for the three
months ended December 30, 2001 and December 31, 2000.
Management believes that cash from operating activities, together with
cash on hand, should be sufficient to permit us to meet our operating
obligations in the foreseeable future, including: (1) required significant cash
interest payments pursuant to the terms of the senior subordinated notes due
2009 and (2) 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 further
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.
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 November 2, 2000, we
entered into an asset purchase agreement (the "Asset Purchase Agreement") with
the International Church of the FourSquare Gospel ("ICFG") to purchase radio
station KXOL-FM (formerly KFSG-FM) in Los Angeles, California at a purchase
price of $250.0 million and made a non-refundable deposit of $5.0 million to be
credited towards the purchase price at closing. The Asset Purchase 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 and expiration of the waiting period under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended. On March 13, 2001, we entered
into an Addendum to the Asset Purchase Agreement and two Time Brokerage
Agreements with ICFG pursuant to which we are permitted to broadcast our
programming over radio station KXOL-FM (the "TBA"), and ICFG is permitted to
broadcast its programming over radio stations KFSG-FM (formerly KMJR-FM) and
KFSB-FM (formerly KNJR-FM) (the "93.5 TBA"). In connection with the Addendum to
the Asset Purchase Agreement and TBA, we made an additional non-refundable
deposit of $20 million, which will be credited towards the purchase price at
closing. On April 30, 2001, we commenced broadcasting our programming under the
TBA and ICFG commenced broadcasting its programming under the 93.5 TBA.
On February 8, 2002, we entered into an additional amendment to the
Asset Purchase Agreement and an amendment to the TBA and the 93.5 TBA
(collectively, the "Second Amendment"). The Second Amendment extends the
deadline for closing under the amended Asset Purchase Agreement (the "KXOL
Closing") to December 31, 2003. The KXOL Closing is subject to acceleration if
we sell five specified stations during the term of the TBA. We are required to
make additional payments to ICFG of $15 million on March 12, 2002, $5 million on
September 30, 2002 and $15 million on March 12, 2003, if the KXOL Closing has
not occurred or the amended Asset Purchase Agreement has not terminated by such
respective dates. All such payments are non-refundable (except in case of breach
by ICFG) and will be credited towards the purchase price at closing.
In addition, pursuant to the Second Amendment, we have agreed to grant
to ICFG, as of February 8, 2002, warrants exercisable for an aggregate of
2,000,000 shares of our Class A common stock at an exercise price of $10.50 per
share. These warrants will be exercisable for a period of thirty-six months
after the date of issuance after which they will expire if not exercised. If
ICFG ceases to broadcast its programming under the 93.5 TBA at any time after
September 1, 2002, commencing the last day of such calendar month, we will issue
to ICFG each month thereafter warrants exercisable for 100,000 shares of our
Class A common stock at an exercise price equal to the closing price of our
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shares on the last trading day of such month, until the earlier to occur of (i)
the KXOL Closing or (ii) the termination of the amended Asset Purchase
Agreement. These warrants will also be exercisable for a period of thirty-six
months after the date of issuance after which they will expire if not exercised.
Pursuant to the Second Amendment, the term of the TBA will continue
until the earlier to occur of (i) the KXOL Closing or (ii) the termination of
the amended Asset Purchase Agreement. If we do not make the March 12, 2002,
September 30, 2002 or March 12, 2003 payments discussed above, the TBA and the
amended Asset Purchase Agreement will both terminate on such respective date.
The term of the 93.5 TBA will continue until the earlier to occur of (i) the
KXOL Closing or (ii) September 1, 2002, unless extended by ICFG for an
additional six month period. ICFG has the right to cancel the 93.5 TBA at
anytime upon thirty days prior written notice.
We intend to fund the acquisition of radio station KXOL-FM from a
combination of cash on hand, internally generated cash flow, potential equity
and debt financing and/or asset sales. Although we intend to complete this
transaction, there can be no assurance that the acquisition of radio station
KXOL-FM will be completed.
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.
NEW ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 141, "Business
Combinations", and 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 SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of." As discussed below, the Company adopted SFAS No. 144 effective
December 31, 2001 which supersedes SFAS No. 121.
The Company adopted the provisions of SFAS No. 141 upon its issuance
and adopted the provisions of SFAS No. 142 effective December 31, 2001. Any
goodwill or any intangible asset determined to have an indefinite useful life
that is acquired in a purchase 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 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 is required to
reassess the useful lives and residual values of all intangible assets acquired
in purchase 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 is 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 of
goodwill. To the extent a reporting unit's carrying amount exceeds its fair
14
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 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 operations.
As of the Company's adoption of SFAS No. 142 effective December 31,
2001, the Company had unamortized goodwill in the amount of $32.7 million, and
unamortized identifiable intangible assets in the amount of $543.2 million, all
of which will be subject to the transition provision of SFAS No. 142.
Amortization expense related to goodwill and identifiable intangible assets was
$3.6 million and $4.0 million for the three months ended December 31, 2000 and
December 30, 2001, respectively. At this time, management is assessing the
impact of the adoption of SFAS No. 142 on the Company's results of operations
and financial position.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," which addresses financial
accounting and reporting for the impairment and disposal of long-lived assets.
SFAS No. 144 requires that long-lived assets be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. Recoverability of assets to be held and used is measured
by a comparison of the carrying amount of an asset to future net cash flows
expected to be generated by the asset. If the carrying amount of an asset
exceeds its estimated future cash flows, an impairment charge is recognized by
the amount by which the carrying amount of the asset exceeds the fair value of
the asset. SFAS No. 144 requires companies to separately report discontinued
operations and extends that reporting to a component of an entity that either
has been disposed of (by sale, abandonment, or in a distribution to owners) or
is classified as held for sale. Assets to be disposed of are reported at the
lower of the carrying amount or fair value less costs to sell. The Company
adopted SFAS No. 144 on December 31, 2001. At this time, management is assessing
the impact of the adoption of SFAS No. 144 on the Company's results of
operations and financial position.
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This transition report on Form 10-Q contains both historical and
forward-looking statements. All statements other than statements of historical
fact are, or may be deemed to be, forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934, as amended. These forward-looking statements are not based
on historical facts, but rather reflect our current expectations concerning
future results and events. These forward-looking statements generally can be
identified by the use of statements that include phrases such as "believe,"
"expect," "anticipate," "intend," "plan," "foresee," "likely," "will" or other
similar words or phrases. Similarly, statements that describe our objectives,
plans or goals are or may be forward-looking statements. These forward-looking
statements involve known and unknown risks, uncertainties and other factors
which may cause our actual results, performance or achievements to be different
from any future results, performance and achievements expressed or implied by
these statements. Factors that could cause actual results to differ from those
expressed in forward-looking statements include, but are not limited to:
- Our ability to finance the acquisition of KXOL-FM may be
limited. In the event that we are unable to complete the
acquisition under its current terms, we will lose the
non-refundable deposits that we have made;
- We may continue to incur start-up costs in connection with our
time brokerage agreement for KXOL-FM;
- If we complete our acquisition of KXOL-FM and/or acquire
additional stations in the future, depending on the financing
used to fund these acquisitions, interest expense may
increase.
- Our most important operating assets are our intangible assets,
principally consisting of our FCC licenses. Impairment to the
carrying value of these assets could have a material effect on
our results of operations and financial position. Our ability
to maintain the carrying value of these assets is dependent on
the operating performance of the underlying radio stations, as
discussed more fully under "New Accounting Pronouncements";
- Our broadcast revenue and operating results could be adversely
affected by the current recession or by another national or
regional recession;
- Our substantial level of debt could limit our ability to grow
and compete;
15
- Despite current indebtedness levels and limits imposed by our
indentures on additional indebtedness, 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 instrument 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 price 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, including Raul Alarcon, Jr., our
Chairman of the Board of Directors, President and Chief
Executive Officer, could adversely affect our business;
- 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;
- Raul Alarcon, Jr., Chairman of the Board of Directors, Chief
Executive Officer and President, has majority voting control
and this control may discourage or influence certain types of
transactions, including an actual or potential change of
control 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;
- 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 our current plans, estimates and beliefs. We do not undertake any obligation
to update any forward-looking statements to reflect subsequent events or
circumstances.
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 30, 2001 and in the three-month period ended December 30, 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
operations other than where the currency is the U.S. dollar. We do not have any
variable rate debt or derivative financial or commodity instruments.
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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 contractual 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
On February 8, 2002, we entered into an additional amendment to the
Asset Purchase Agreement for the purchase of KXOL-FM and an amendment to the TBA
and the 93.5 TBA (collectively, the "Second Amendment"). The Second Amendment
extends the deadline for closing under the amended Asset Purchase Agreement (the
"KXOL Closing") to December 31, 2003. The KXOL Closing is subject to
acceleration if we sell five specified stations during the term of the TBA. We
are required to make additional payments to ICFG of $15 million on March 12,
2002, $5 million on September 30, 2002 and $15 million on March 12, 2003, if the
KXOL Closing has not occurred or the amended Asset Purchase Agreement has not
terminated by such respective dates. All such payments are non-refundable
(except in case of breach by ICFG) and will be credited towards the purchase
price at closing.
In addition, pursuant to the Second Amendment, we have agreed to grant
to ICFG, as of February 8, 2002, warrants exercisable for an aggregate of
2,000,000 shares of our Class A common stock at an exercise price of $10.50 per
share. These warrants will be exercisable for a period of thirty-six months
after the date of issuance after which they will expire if not exercised. If
ICFG ceases to broadcast its programming under the 93.5 TBA at any time after
September 1, 2002, commencing the last day of such calendar month, we will issue
to ICFG each month thereafter warrants exercisable for 100,000 shares of our
Class A common stock at an exercise price equal to the closing price of our
shares on the last trading day of such month, until the earlier to occur of (i)
the KXOL Closing or (ii) the termination of the amended Asset Purchase
Agreement. These warrants will also be exercisable for a period of thirty-six
months after the date of issuance after which they will expire if not exercised.
Pursuant to the Second Amendment, the term of the TBA will continue
until the earlier to occur of (i) the KXOL Closing or (ii) the termination of
the amended Asset Purchase Agreement. If we do not make the March 12, 2002,
September 30, 2002 or March 12, 2003 payments discussed above, the TBA and the
amended Asset Purchase Agreement will both terminate on such respective date.
The term of the 93.5 TBA will continue until the earlier to occur of (i) the
KXOL Closing or (ii) September 1, 2002, unless extended by ICFG for an
additional six month period. ICFG has the right to cancel the 93.5 TBA at
anytime upon thirty days prior written notice.
We intend to fund the acquisition of radio station KXOL-FM from a
combination of cash on hand, internally generated cash flow, potential equity
and debt financing and/or asset sales. Although we intend to complete this
transaction, there can be no assurance that the acquisition of radio station
KXOL-FM will be completed.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits -
10.1 Amendment dated as of February 8, 2002 to Asset
Purchase Agreement dated as of November 2, 2000 by
and between International Church of the FourSquare
Gospel and Spanish Broadcasting System, Inc., as
amended by an Addendum dated March 13, 2001.
10.2 Amendment No. 1 dated as of February 8, 2002 to Time
Brokerage Agreement dated as of March 13, 2001 by and
between International Church of the FourSquare
Gospel, as Licensee and Spanish Broadcasting System,
Inc., as Time Broker.
10.3 Amendment No. 1 dated as of February 8, 2002 to the
93.5 Time Brokerage Agreement dated as of March 13,
2001 by and between Spanish Broadcasting System
SouthWest, Inc., as Licensee and International Church
of the FourSquare Gospel, as Time Broker.
10.4 Stock Option Agreement dated as of October 29, 2001
between Spanish Broadcasting System, Inc. and Castor
Fernandez (incorporated by reference to Exhibit 10.50
to the Company's Annual Report on Form 10-K filed
December 31, 2001).
10.5 Form of Stock Option Agreement dated as of October
29, 2001 between Spanish Broadcasting System, Inc.
and Carl Parmer (incorporated by reference to Exhibit
10.51 to the Company's Annual Report on Form 10-K
filed December 31, 2001).
(b) Reports on Form 8-K
The Company filed a current report on Form 8-K on
November 21, 2001 to report that on November 6, 2001
the Company's Board of Directors approved a
resolution to change the Company's fiscal year end
from the last Sunday in September of each calendar
year to the last Sunday in December of each calendar
year effective immediately.
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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 and on behalf
of the additional registrants by the undersigned thereunto duly authorized.
Spanish Broadcasting System, Inc. and each of the
additional registrants listed in the Table of
Additional Registrants
By: /s/ JOSEPH A. GARCIA
---------------------------------------------
Joseph A. Garcia, Executive Vice President,
Date: February 13, 2002 Chief Financial Officer and Secretary
(principal financial and accounting officer
and duly authorized officer of the registrant)
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