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 March 31,2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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 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 May 13,2002, 37,065,755
shares of Class A common stock, par value $.0001 per share and 27,606,650
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 DECEMBER 30, 2001
AND MARCH 31, 2002.......................................................................... 4
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE-
MONTHS ENDED MARCH 25, 2001 AND MARCH 31, 2002.............................................. 5
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE
THREE-MONTHS ENDED MARCH 25, 2001 AND MARCH 31, 2002........................................ 6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS........................................ 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................................................... 13
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.................................. 18
PART II. OTHER INFORMATION........................................................................... 19
ITEM 1. LEGAL PROCEEDINGS........................................................................... 19
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K............................................................ 19
3
PART I. -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS--UNAUDITED
SPANISH BROADCASTING SYSTEM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(in thousands, except per share and share information)
December 30, 2001 March 31, 2002
----------------- --------------
ASSETS
Current assets:
Cash and cash equivalents $ 51,640 48,738
Net receivables 23,388 19,120
Other current assets 1,706 1,606
--------- ---------
Total current assets 76,734 69,464
Property and equipment, net 24,938 25,246
Intangible assets, net 575,931 524,549
Deferred financing costs, net 10,040 9,720
Other assets 256 245
--------- ---------
Total assets $ 687,899 629,224
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
12 1/2% senior unsecured notes $ 100 100
Current portion of long-term debt 191 195
Accounts payable and accrued expenses 13,765 14,548
Accrued interest 5,316 13,380
Deferred commitment fee 1,282 1,107
--------- ---------
Total current liabilities 20,654 29,330
9 5/8% senior subordinated notes, net 323,184 323,415
Other long-term debt, less current portion 4,156 4,106
Deferred income taxes 31,706 55,650
Stockholders' equity:
Class A common stock, $.0001 par value. Authorized 100,000,000 shares;
36,862,705 shares issued and outstanding at December 30, 2001;
37,030,455 shares issued and outstanding at March 31, 2002 3 3
Class B common stock, $.0001 par value. Authorized 50,000,000 shares;
27,795,500 shares issued and outstanding at December 30, 2001;
27,638,750 shares issued and outstanding at March 31, 2002 3 3
Additional paid-in capital 435,522 444,521
Accumulated deficit (127,329) (227,804)
--------- ---------
Total stockholders' equity 308,199 216,723
--------- ---------
Total liabilities and stockholders' equity $ 687,899 629,224
========= =========
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
----------------------------------
March 25, 2001 March 31, 2002
-------------- --------------
Gross revenue $ 28,387 33,448
Less agency commissions 3,335 3,777
--------- ---------
Net revenue 25,052 29,671
--------- ---------
Operating expenses:
Engineering 848 982
Programming 4,086 4,324
Selling 9,153 9,854
General and administrative 4,368 3,366
Corporate expenses 2,645 2,861
Depreciation and amortization 4,433 790
--------- ---------
25,533 22,177
--------- ---------
Operating (loss) income (481) 7,494
Other (income) expenses:
Interest expense, net 6,585 8,504
Other, net (279) --
--------- ---------
Loss before income taxes (6,787) (1,010)
Income tax (benefit) expense (2,626) 54,177
--------- ---------
Loss before cumulative effect of a change in accounting principle (4,161) (55,187)
Cumulative effect of a change in accounting principle for intangible
assets, net of income tax benefit of $30,192 -- (45,288)
--------- ---------
Net loss $ (4,161) (100,475)
========= =========
Net loss per common share before cumulative effect of a change in
accounting principle:
Basic and Diluted $ (0.06) (0.85)
Net loss per common share attributed to a cumulative effect of a change in
accounting principle, net of tax:
Basic and Diluted $ -- (0.70)
Net loss per common share:
Basic and Diluted $ (0.06) (1.55)
Weighted-average common shares outstanding:
Basic and Diluted 64,658 64,661
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
March 25, 2001 March 31, 2002
------------------ ------------------
Cash flows from operating activities:
Net loss $ (4,161) (100,475)
--------- --------
Adjustments to reconcile net loss to net cash provided by operating activities:
Cumulative effect of a change in accounting principle for intangible assets -- 75,480
Depreciation and amortization 4,433 790
Provision for (reduction of) doubtful accounts 1,720 (392)
Amortization of debt discount -- 231
Amortization of deferred financing costs 350 320
Deferred income taxes (2,760) 23,944
Decrease in deferred commitment fee (176) (175)
Changes in operating assets and liabilities, net of acquisitions:
Decrease in receivables 5,476 4,660
(Increase) decrease in other current assets (24) 100
Decrease in other assets 16 11
Increase in accounts payable and accrued expenses 707 783
Increase in accrued interest 6,730 8,064
--------- --------
Total adjustments 16,472 113,816
--------- --------
Net cash provided by operating activities 12,311 13,341
--------- --------
Cash flows from investing activities:
Advances on purchase price of radio station (20,704) (15,176)
Additions to property and equipment (2,223) (1,098)
--------- --------
Net cash used in investing activities (22,927) (16,274)
--------- --------
Cash flows from financing activities:
Increase in deferred financing costs (20) --
Proceeds from Class A common stock -- 77
Repayment of other long-term debt (42) (46)
--------- --------
Net cash (used in) provided by financing activities (62) 31
--------- --------
Net decrease in cash and cash equivalents (10,678) (2,902)
Cash and cash equivalents at beginning of period 47,733 51,640
--------- --------
Cash and cash equivalents at end of period $ 37,055 48,738
========= ========
Supplemental cash flow information:
Interest paid $ 126 101
========= ========
Income taxes paid (received) $ 135 (40)
========= ========
Non-cash financing and investing activities:
Issuance of warrants towards the acquisition of a radio station $ -- 8,922
========= ========
SEE ACCOMPANYING NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
6
SPANISH BROADCASTING SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2002
(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 December 30, 2001 and March 31, 2002, and for the three- month
periods ended March 25, 2001 and March 31, 2002 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 represented 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 March 31, 2002 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 DECEMBER 30, 2001
---------------------------------------------------------------------
CONDENSED CONSOLIDATING BALANCE SHEET
Cash and cash equivalents $ 48,741 2,899 -- 51,640
Net receivables 21,885 1,503 -- 23,388
Other current assets 1,186 520 -- 1,706
--------- -------- ------- --------
Total 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 524,623 (447,851) (76,772) --
Other assets 255 1 -- 256
--------- -------- ------- --------
Total assets $ 659,725 104,946 (76,772) 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
--------- -------- ------- --------
Total 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 (127,329) (17,920) 17,920 (127,329)
--------- -------- ------- --------
Total stockholders' equity 308,199 76,772 (76,772) 308,199
--------- -------- ------- --------
Total liabilities and stockholders' equity $ 659,725 104,946 (76,772) 687,899
========= ======== ======= ========
</Table>
7
PARENT AND
GUARANTOR NON-GUARANTOR
SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
----------------------- ------------ ------------ ---------
AS OF MARCH 31, 2002
-------------------------------------------------------------------------
CONDENSED CONSOLIDATING BALANCE SHEET
Cash and cash equivalents $ 45,780 2,958 -- 48,738
Net receivables 17,951 1,169 -- 19,120
Other current assets 1,059 547 -- 1,606
--------- --------- --------- ---------
Total current assets 64,790 4,674 -- 69,464
Property and equipment, net 17,460 7,786 -- 25,246
Intangible assets, net 60,090 464,459 -- 524,549
Deferred financing costs, net 9,720 -- -- 9,720
Investment in subsidiaries and intercompany 455,482 (427,445) (28,037) --
Other assets 244 1 -- 245
--------- --------- --------- ---------
Total assets $ 607,786 49,475 (28,037) 629,224
========= ========= ========= =========
Current portion of long-term debt $ 159 136 -- 295
Accounts payable and accrued expenses 12,005 2,543 -- 14,548
Accrued interest 13,380 -- -- 13,380
Deferred commitment fee 1,107 -- -- 1,107
--------- --------- --------- ---------
Total current liabilities 26,651 2,679 -- 29,330
Long-term debt 324,165 3,356 -- 327,521
Deferred income taxes 40,247 15,403 -- 55,650
--------- --------- --------- ---------
Total liabilities 391,063 21,438 -- 412,501
--------- --------- --------- ---------
Common stock 6 1 (1) 6
Additional paid-in capital 444,521 94,691 (94,691) 444,521
Accumulated deficit (227,804) (66,655) 66,655 (227,804)
--------- --------- --------- ---------
Total stockholders' equity 216,723 28,037 (28,037) 216,723
--------- --------- --------- ---------
Total liabilities and stockholders' equity $ 607,786 49,475 (28,037) 629,224
========= ========= ========= =========
PARENT AND
GUARANTOR NON-GUARANTOR
SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
----------------------- ------------ ------------ ---------
FOR THE THREE MONTHS ENDED MARCH 25, 2001
-------------------------------------------------------------------------
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
Net broadcasting revenues $ 22,723 2,329 -- 25,052
Station operating expenses 15,777 2,678 -- 18,455
Corporate expenses 2,645 120 (120) 2,645
Depreciation and amortization 275 4,158 -- 4,433
--------- --------- --------- ---------
Operating income (loss) 4,026 (4,627) 120 (481)
Interest expense, net 5,204 1,381 -- 6,585
Other expense (income), net 2,724 (3,123) 120 (279)
Equity in net loss (income) of subsidiaries 2,934 -- (2,934) --
Income tax (benefit) expense (2,675) 49 -- (2,626)
--------- --------- --------- ---------
Net (loss) income $ (4,161) (2,934) 2,934 (4,161)
========= ========= ========= =========
8
PARENT AND
GUARANTOR NON-GUARANTOR
SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
-------------------------------------------------------------------
FOR THE THREE MONTHS ENDED MARCH 31, 2002
-------------------------------------------------------------------
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
Net broadcasting revenues $ 26,723 2,948 -- 29,671
Station operating expenses 16,476 2,050 -- 18,526
Corporate expenses 2,861 120 (120) 2,861
Depreciation and amortization 600 190 -- 790
--------- ------- ------ --------
Operating income 6,786 588 120 7,494
Interest expense, net 7,195 1,309 -- 8,504
Other expense (income), net (119) (1) 120 --
Equity in net loss (income) of subsidiaries 48,735 -- (48,735) --
Income tax expense 51,450 2,727 -- 54,177
Cumulative effect of a change in accounting
principle, net of tax -- (45,288) -- (45,288)
--------- ------- ------ --------
Net (loss) income $(100,475) (48,735) 48,735 (100,475)
========= ======= ====== ========
PARENT AND
GUARANTOR NON-GUARANTOR
SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
-------------------------------------------------------------------
FOR THE THREE MONTHS ENDED MARCH 25, 2001
-------------------------------------------------------------------
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
Cash flows from operating activities $ 12,957 (646) -- 12,311
========= ======= ====== ========
Cash flows from investing activities $ (23,500) 573 -- (22,927)
========= ======= ====== ========
Cash flows from financing activities $ 998 (1,060) -- (62)
========= ======= ====== ========
PARENT AND
GUARANTOR NON-GUARANTOR
SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
-------------------------------------------------------------------
FOR THE THREE MONTHS ENDED MARCH 31, 2002
-------------------------------------------------------------------
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
Cash flows from operating activities $ 13,208 133 -- 13,341
========= ======= ====== ========
Cash flows from investing activities $ (16,232) (42) -- (16,274)
========= ======= ====== ========
Cash flows from financing activities $ 63 (32) -- 31
========= ======= ====== ========
9
(3) NEW ACCOUNTING PRONOUNCEMENTS AND CUMULATIVE EFFECT OF ACCOUNTING
CHANGE
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. The Company has concluded that its intangible
assets, comprised primarily of Federal Communications Commission (FCC)
licenses, qualify as indefinite-life intangible assets under SFAS 142.
The Company adopted the provisions of SFAS No. 141 upon its issuance
and adopted the provisions of SFAS No. 142 effective December 31, 2001. After
performing the transitional impairment evaluation of its indefinite-lived
intangible assets, the Company determined that the carrying value of certain
indefinite-life intangible assets acquired from AMFM Operating, Inc. in January
2000, and certain indefinite-life intangible assets acquired from Rodriguez
Communications, Inc. and New World Broadcasters Corp., in November 2000,
exceeded their respective fair market values. Fair market values of the
Company's FCC licenses were determined through the use of a third-party
valuation. These valuations were performed on the FCC licenses, which exclude
the franchise values of the stations (i.e. going concern value). These
valuations were based on a discounted cash flow model incorporating various
market assumptions, type of signal, and assumed the FCC licenses were acquired
and operated by a third-party. As a result, the Company recorded a non-cash
charge for the cumulative effect of a change in accounting principle of $45.3
million, net of income tax benefit of $30.2 million. Under SFAS 142, goodwill is
deemed to be impaired if the net book value of the reporting unit exceeds its
estimated fair value. The Company has determined that it has one reporting unit
under SFAS 142 and that there was no impairment of goodwill as a result of
adopting SFAS 142.
The Company will perform an annual impairment review of its
indefinite-life intangible assets and goodwill during the fourth quarter of
each fiscal year, commencing in the fourth quarter of 2002. Additionally, since
amortization of its indefinite-life intangible assets ceased for financial
statement purposes under SFAS 142, it could not be assured that the reversals
of the deferred tax liabilities relating to those indefinite-life intangible
assets would occur within the Company's net operating loss carry-forward
period. Therefore, the Company recognized a non-cash charge totaling $55.4
million to income tax expense to establish a valuation allowance against the
Company's deferred tax assets, primarily consisting of net operating loss
carry-forwards.
10
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 was subjected to the transition provision of SFAS No. 142.
Amortization expense related to goodwill and identifiable intangible assets was
$3.7 million for the three months ended March 25, 2001. The following table
presents adjusted financial results for the quarters ended March 25, 2001 and
March 31, 2002, respectively, on a basis consistent with the new accounting
principle.
(in thousands, except per share data) March 25, 2001 March 31, 2002
-------------- --------------
Reported net loss: $(4,161) $(100,475)
Add back: cumulative effect of accounting principle, net of tax (1)- -- 45,288
Add back: income tax valuation allowance (2)- -- 55,358
Add back: amortization of goodwill and intangible assets (3)- 3,655 --
Income tax adjustment (3): (2,877) --
------- ---------
Adjusted net (loss) income $(3,383) $ 171
======= =========
Basic and diluted (loss) income per share:
Net loss per share: $ (0.06) $ (1.55)
Cumulative effect per share of a change in
accounting principle, net of tax (1): -- 0.70
Income tax valuation allowance per share (2): -- 0.85
Amortization of goodwill and intangible
assets per share (3): 0.05 --
Income tax adjustment per share (3): (0.04) --
------- ---------
Adjusted net (loss) income per share: $ (0.05) $ --
======= =========
(1) As a result of the adoption of SFAS 142, the Company incurred a
non-cash transitional charge of $45.3 million, net of income tax
benefit of $30.2 million, due to the cumulative effect of the change
in accounting principle during the quarter ended March 31, 2002.
(2) As a result of adopting SFAS 142, the Company incurred a non-cash
income tax expense of $55.4 million to establish a valuation allowance
against deferred tax assets during the quarter ended March 31, 2002.
(3) The adjusted financial results in the three months ended March 25,
2001 adds back non-cash goodwill and intangible assets amortization of
$3.7 million and reflects adjusted income tax expense assuming that
SFAS 142 was effective as of January 1, 2001.
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 and it had no impact on the
Company's consolidated financial statements.
11
(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
deposit of $20.0 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. Pursuant to the
Second Amendment, we made an additional non-refundable deposit of $15.0 million
on March 12, 2002, which will be credited towards the purchase price at closing.
Additionally, we are required to make payments to ICFG of $5.0 million on
September 30, 2002 and $15.0 million on March 12, 2003, if the KXOL Closing has
not occurred or the amended Asset Purchase Agreement has not terminated by these
respective dates. All future payments are non-refundable (except in case of
breach by ICFG) and will be credited towards the purchase price at the KXOL
Closing.
In addition, pursuant to the Second Amendment, on February 8,2002 we
granted ICFG a warrant exercisable for an aggregate of 2,000,000 shares of our
Class A common stock at an exercise price of $10.50 per share. This warrant
will be exercisable for a period of thirty-six months from the date of issuance
after which it will expire if not exercised. To date, this warrant has not been
exercised. We assigned the warrant a fair value of approximately $8.9 million
based on the Black-Scholes option pricing model in accordance with SFAS No. 123
"Accounting for Stock based Compensation". The fair market value of this
warrant was recorded as an increase to intangible assets and additional paid-in
capital on the date of grant. Additionally, 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 from the date of
issuance after which they will expire if not exercised. If these warrants are
ever issued, the fair value of these warrants would be recorded as a
programming expense.
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 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.
12
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.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2002 COMPARED TO THE THREE MONTHS ENDED MARCH 25,
2001.
NET REVENUE. Net revenue was $29.7 million for the three months ended
March 31, 2002 compared to $25.1 million for the three months ended March 25,
2001, an increase of $4.6 million or 18.3%. The increase was generated
partially by the inclusion of the operating results of the Los Angeles FM
station, KXOL, which began airing commercials in August 2001. On a same station
basis, net revenue increased primarily due to ratings gains in the majority of
our markets combined with vigorous sales efforts.
STATION OPERATING EXPENSES. Station operating expenses were $18.5
million for the three months ended March 31, 2002 and March 25, 2001. Station
operating expenses remained flat, despite an increase in the scale of operations
with the introduction of KXOL-FM in April 2001. Additionally, station operating
expenses remained flat due to management's continued efforts in administering a
cost savings plan previously implemented in Puerto Rico, Dallas and San Antonio,
as well as improved operating efficiencies.
BROADCAST CASH FLOW. Broadcast cash flow was $11.1 million for the
three months ended March 31, 2002 compared to $6.6 million for the three months
ended March 25, 2001, an increase of $4.5 million or 68.2%. Our broadcast cash
flow margin increased to 37.4% for the three months ended March 31, 2002
compared to 26.3% for the three months ended March 25, 2001. Our broadcast cash
flow margin increased mainly due to the increase in net revenues coupled with
the positive results of cost savings initiatives.
CORPORATE EXPENSES. Corporate expenses were $2.9 million for the three
months ended March 31, 2002 compared to $2.6 million for the three months ended
March 25, 2001, an increase of $0.3 million or 11.5%. The increase in corporate
expenses resulted mainly from an increase in professional fees.
EBITDA. EBITDA was $8.3 million for the three months ended March 31,
2002 compared to $4.0 million for the three months ended March 25, 2001, an
increase of $4.3 million or 107.5%. The increase in EBITDA was attributed to
the increase in broadcast cash flow, partially offset by the increase in
corporate expenses.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense
was $0.8 million for the three months ended March 31, 2002 compared to $4.4
million for the three months ended March 25, 2001, a decrease of $3.6 million
or 81.8%. The decrease was related to the adoption of SFAS 142, which ceased
the amortization of all our intangible assets and goodwill effective December
31, 2001.
OPERATING INCOME (LOSS). Operating income was $7.5 million for the
three months ended March 31, 2002 compared to an operating loss of $0.5 million
for the three months ended March 25, 2001, an increase of $8.0 million. The
increase in operating income was caused by the increase in EBITDA and a decrease
in amortization expense due to the adoption of SFAS 142 on December 31, 2001.
13
INTEREST EXPENSE, NET. Interest expense, net, was $8.5 million for the
three months ended March 31, 2002 compared to $6.6 million for the three months
ended March 25, 2001, an increase of $1.9 million or 28.8%. The increase in
interest expense, net, was primarily due to interest expense incurred on the
additional $100.0 million 9 5/8% senior subordinated notes that were issued in
June 2001. In addition, interest expense, net, increased due to a decrease in
interest income resulting from a general decline in interest rates on our cash
balances.
OTHER, NET. We had no meaningful other income during the three months
ended March 31, 2002. Other income was $0.3 million for the three months ended
March 25, 2001 due to an insurance recovery claim related to an office building
in Los Angeles.
INCOME TAX EXPENSE (BENEFIT). Income tax expense was $54.2 million for
the three months ended March 31, 2002 compared to an income tax benefit of $2.6
million for the three months ended March 25, 2001. Income tax expense for the
three months ended March 31, 2002 consisted primarily of a $55.4 million
non-cash charge to income tax expense to establish a valuation allowance
against our deferred tax assets effective December 31, 2001. As a result of
adopting SFAS 142, amortization of indefinite-life intangible assets ceased and
we could not be assured that the reversals of our deferred tax liabilities
related to those indefinite-life intangible assets would occur within our net
operating loss carry-forward period. The non-cash charge to income tax expense
was offset by an income tax benefit of $1.2 million based on the estimated
effective tax rate for the fiscal year.
CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE, NET OF TAXES.
Cumulative effect of a change in accounting principle, net of taxes, was a
non-cash transitional charge of $45.3 million for the three months ended March
31, 2002. The Company adopted SFAS 142, effective December 31, 2001, which
eliminates the amortization of goodwill and intangible assets with indefinite
useful lives, and changes the method of determining whether there is a goodwill
and intangible assets impairment from an undiscounted cash flow method to a fair
value method. As a result of the adoption of this standard, the Company incurred
a non-cash transitional charge of $45.3 million, net of income tax benefit.
NET LOSS. Net loss was $100.5 million for the three months ended March
31, 2002 compared to $4.2 million for the three months ended March 25, 2001. The
net loss was due to the adoption of SFAS 142, which resulted in the $55.4
million non-cash charge to establish a valuation allowance on our deferred tax
assets and the non-cash charge of $45.3 million related to the cumulative effect
of a change in accounting principle, net of income tax benefit.
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 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 $13.3 million for
the three months ended March 31, 2002 compared to net cash flows provided by
operating activities of $12.3 million for the three months ended March 25,
2001. Changes in our net cash flows from operating activities were primarily a
result of an increase in operating income for the three months ended March 31,
2002 as compared to the three months ended March 25, 2001.
Net cash flows used in investing activities were $16.3 million for the
three months ended March 31, 2002 compared to net cash flows used in investing
activities of $22.9 million for the three months ended March 25, 2001. Changes
in our net cash flows from investing activities were primarily a result of the
decrease in the advances on acquisition of stations and additions to property
and equipment during the three months ended March 31, 2002 as compared to the
three months ended March 25, 2001.
Net cash flows provided by and used in financing activities were
minimal for the three months ended March 31, 2002 and March 25, 2001,
respectively.
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: required significant cash
14
interest payments pursuant to the terms of the senior subordinated notes due
2009 and 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 $20.0 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. Pursuant to the
Second Amendment, we made an additional non-refundable deposit of $15.0 million
on March 12, 2002, which will be credited towards the purchase price at closing.
Additionally, we are required to make payments to ICFG of $5.0 million on
September 30, 2002 and $15.0 million on March 12, 2003, if the KXOL Closing has
not occurred or the amended Asset Purchase Agreement has not terminated by these
respective dates. All future payments are non-refundable (except in case of
breach by ICFG) and will be credited towards the purchase price at the KXOL
Closing.
In addition, pursuant to the Second Amendment, on February 8,2002 we
granted ICFG a warrant exercisable for an aggregate of 2,000,000 shares of our
Class A common stock at an exercise price of $10.50 per share. This warrant
will be exercisable for a period of thirty-six months from the date of issuance
after which it will expire if not exercised. To date, this warrant has not been
exercised. We assigned the warrant a fair value of approximately $8.9 million
based on the Black-Scholes option pricing model in accordance with SFAS No. 123
"Accounting for Stock based Compensation". The fair market value of this
warrant was recorded as an increase to intangible assets and additional paid-in
capital on the date of grant. Additionally, 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 from the date of
issuance after which they will expire if not exercised. If these warrants are
ever issued, the fair value of these warrants would be recorded as a
programming expense.
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 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.
15
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, asset sales 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 AND CUMULATIVE EFFECT OF ACCOUNTING CHANGE
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. The Company has concluded that its intangible
assets, comprised primarily of Federal Communications Commission (FCC)
licenses, qualify as indefinite-life intangible assets under SFAS 142.
The Company adopted the provisions of SFAS No. 141 upon its issuance
and adopted the provisions of SFAS No. 142 effective December 31, 2001. After
performing the transitional impairment evaluation of its indefinite-lived
intangible assets, the Company determined that the carrying value of certain
indefinite-life intangible assets acquired from AMFM Operating, Inc. in January
2000, and certain indefinite-life intangible assets acquired from Rodriguez
Communications, Inc. and New World Broadcasters Corp., in November 2000,
exceeded their respective fair market values. Fair market values of the
Company's FCC licenses were determined through the use of a third-party
valuation. These valuations were performed on the FCC licenses, which exclude
the franchise values of the stations (i.e. going concern value). These
valuations were based on a discounted cash flow model incorporating various
market assumptions, type of signal, and assumed the FCC licenses were acquired
and operated by a third-party. As a result, the Company recorded a non-cash
charge for the cumulative effect of a change in accounting principle of $45.3
million, net of income tax benefit of $30.2 million. Under SFAS 142, goodwill
is deemed to be impaired if the net book value of the reporting unit exceeds
its estimated fair value. The Company has determined that it has one reporting
unit under SFAS 142 and that there was no impairment of goodwill as a result of
adopting SFAS 142.
The Company will perform an annual impairment review of its
indefinite-life intangible assets and goodwill during the fourth quarter of
each fiscal year, commencing in the fourth quarter of 2002. Additionally, since
amortization of its indefinite-life intangible assets ceased for financial
statement purposes under SFAS 142, it could not be assured that the reversals
of the deferred tax liabilities relating to those indefinite-life intangible
assets would occur within the Company's net operating loss carry-forward
period. Therefore, the Company recognized a non-cash charge totaling $55.4
million to income tax expense to establish a valuation allowance against the
Company's deferred tax assets, primarily consisting of net operating loss
carry-forwards.
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 was subjected to the transition provision of SFAS No. 142.
Amortization expense related to goodwill and identifiable intangible assets was
$3.7 million for the three months ended March 25, 2001. The following table
presents adjusted financial results for the quarters ended March 25, 2001 and
March 31, 2002, respectively, on a basis consistent with the new accounting
principle.
(in thousands, except per share data) March 25, 2001 March 31, 2002
-------------- --------------
Reported net loss: $(4,161) $(100,475)
Add back: cumulative effect of accounting principle, net of tax (1)- -- 45,288
Add back: income tax valuation allowance (2)- -- 55,358
Add back: amortization of goodwill and intangible assets (3)- 3,655 --
Income tax adjustment (3): (2,877) --
------- ---------
Adjusted net (loss) income $(3,383) $ 171
======= =========
16
Basic and diluted (loss) income per share:
Net loss per share: $ (0.06) $ (1.55)
Cumulative effect per share of a change in
accounting principle, net of tax (1): -- 0.70
Income tax valuation allowance per share (2): -- 0.85
Amortization of goodwill and intangible
assets per share (3): 0.05 --
Income tax adjustment per share (3): (0.04) --
------- ---------
Adjusted net (loss) income per share: $ (0.05) $ --
======= =========
(1) As a result of the adoption of SFAS 142, the Company incurred a
non-cash transitional charge of $45.3 million, net of income tax
benefit of $30.2 million, due to the cumulative effect of the change
in accounting principle during the quarter ended March 31, 2002.
(2) As a result of adopting SFAS 142, the Company incurred a non-cash
income tax expense of $55.4 million to establish a valuation allowance
against deferred tax assets during the quarter ended March 31, 2002.
(3) The adjusted financial results in the three months ended March 25,
2001 adds back non-cash goodwill and intangible assets amortization of
$3.7 million and reflects adjusted income tax expense assuming that
SFAS 142 was effective as of January 1, 2001.
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 and it had no impact on the Company's
consolidated financial statements.
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This 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 (except in case of
breach by ICFG);
- We will continue to incur promotional costs in connection
with our TBA 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 broadcast revenue and operating results could be
adversely affected by the current recession or by another
national or regional recession;
17
- Our substantial level of debt could limit our ability to grow
and compete;
- 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 for
us 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, the transitional period ended December 30, 2001, and in the
three-month period ended March 31, 2002. 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.
18
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,
operating results or financial position.
On November 28, 2001, a class action lawsuit was filed in the United
States District Court for the Southern District of New York on behalf of
purchasers who acquired shares of our Class A common stock pursuant to the
registration statement and prospectus (collectively, the "Prospectus") relating
to our initial public offering which closed on November 2, 1999 (the "IPO").
The lawsuit was filed against SBS, eight underwriters of the IPO (collectively,
the "Underwriters"), two members of our senior management team, one of which is
our Chairman of the Board of Directors, and an additional director. The claims
being made under the complaint are similar to claims currently being made under
hundreds of class action suits filed against companies with recent initial
public offerings and their underwriters.
The class action complaint alleges violations of the federal
securities laws, specifically that the Prospectus contained materially false
and misleading statements based on alleged misstatements and/or omissions of
material facts relating to underwriting commissions. The complaint also alleges
Rule 10b-5 fraud violations by the Underwriters, but not by SBS or the
individually named defendants. We believe that we would have a valid claim
against the Underwriters for indemnification in the event that the plaintiffs
were to be awarded damages as a result of such lawsuit. Discovery in the
lawsuit has been stayed while motions to dismiss the complaint are being
prepared.
On June 14, 2001, an action was filed in the Circuit Court of the
Eleventh Judicial Circuit in and for Miami-Dade County, Florida, by Julio
Rumbaut against SBS, alleging that he is entitled to compensation for work
performed for SBS and a commission for the purchase of a radio station by SBS.
Mr. Rumbaut has amended his theory of damages and now is claiming approximately
$8.0 million in damages plus attorney's fees and pre-judgment interest. SBS is
vigorously contesting Mr. Rumbaut's claim. Trial has commenced on the action and
is scheduled to conclude at the end of May 2002.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits -
10.1 Warrant dated February 8, 2002 by the Company in favor of
International Church of the FourSquare Gospel.
10.2 Stock Option Agreement dated as of January 16, 2002 between the
Company and Joseph A. Garcia.
(b) Reports on Form 8-K
There were no reports on Form 8-K filed for the three months ended
March 31, 2002.
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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
-----------------------------------------------
Date: May 15, 2002 Joseph A. Garcia, Executive Vice President,
Chief Financial Officer and Secretary
(principal financial and accounting officer
and duly authorized officer of the registrant)
20