SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _____
Commission File Number 33-82114
SPANISH BROADCASTING SYSTEM, INC.
(Exact name of registrant as specified in its charter)
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)
NOT APPLICABLE
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
|X| YES [ ] NO
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: As of August 12, 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 JUNE 30, 2002.................................................................................... 4
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE-
AND SIX-MONTHS ENDED JUNE 24, 2001 AND JUNE 30, 2002................................................. 5
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE
SIX-MONTHS ENDED JUNE 24, 2001 AND JUNE 30, 2002..................................................... 6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS................................................. 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS............................................................................ 12
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK........................................... 19
PART II. OTHER INFORMATION.................................................................................... 19
ITEM 1. LEGAL PROCEEDINGS.................................................................................... 19
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.................................................. 20
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K..................................................................... 20
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 June 30, 2002
----------------- -------------
ASSETS
Current assets:
Cash and cash equivalents $ 51,640 37,427
Net receivables 23,388 25,878
Other current assets 1,706 1,203
Assets held for sale 41,113 33,032
--------- --------
Total current assets 117,847 97,540
Property and equipment, net 23,424 24,369
Intangible assets, net 535,511 497,575
Deferred financing costs, net 10,040 9,400
Other assets 256 272
--------- --------
Total assets $ 687,078 629,156
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
12 1/2% senior unsecured notes $ 100 --
Current portion of long-term debt 191 199
Accounts payable and accrued expenses 13,765 15,718
Accrued interest 5,316 5,403
Deferred commitment fee 1,282 931
--------- --------
Total current liabilities 20,654 22,251
9 5/8% senior subordinated notes, net 323,184 323,654
Other long-term debt, less current portion 4,156 4,055
Deferred income taxes 30,885 49,627
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;
37,065,755 shares issued and outstanding at June 30, 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;
27,606,650 shares issued and outstanding at June 30, 2002 3 3
Additional paid-in capital 435,522 444,543
Accumulated deficit (127,329) (214,980)
--------- --------
Total stockholders' equity 308,199 229,569
--------- --------
Total liabilities and stockholders' equity $ 687,078 629,156
========= ========
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 per share data)
Three months ended Six months ended
--------------------- --------------------
June 24, June 30, June 24, June 30,
2001 2002 2001 2002
--------------------- --------------------
Gross revenue $ 39,610 44,553 67,222 77,145
Less agency commissions 4,623 5,170 7,903 8,859
-------- ------ ------ ------
Net revenue 34,987 39,383 59,319 68,286
-------- ------ ------ ------
Operating expenses:
Engineering 781 926 1,565 1,860
Programming 4,534 5,927 8,588 10,128
Selling 11,506 13,101 20,189 22,658
General and administrative 4,528 3,764 8,464 6,978
Corporate expenses 2,335 3,089 4,980 5,950
Depreciation and amortization 4,375 720 8,465 1,452
-------- ------ ------ ------
28,059 27,527 52,251 49,026
-------- ------ ------ ------
Operating income from continuing operations 6,928 11,856 7,068 19,260
Other (income) expenses:
Interest expense, net 7,527 8,676 14,126 17,188
Other, net (1) (266) (281) (266)
-------- ------ ------ ------
(Loss) income from continuing operations before income taxes,
discontinued operations, extraordinary item and cumulative
effect of a change in accounting principle (598) 3,446 (6,777) 2,338
Income tax (benefit) expense (158) (9,407) (2,560) 44,655
-------- ------ ------ ------
(Loss) income from continuing operations before discontinued
operations, extraordinary item and cumulative effect of a
change in accounting principle (440) 12,853 (4,217) (42,317)
Discontinued operations:
(Loss) income from operations of discontinued station KTCY-FM (79) 179 (687) 277
Income tax (benefit) expense (29) 209 (253) 323
-------- ------ ------ ------
Loss on discontinued operations (50) (30) (434) (46)
-------- ------ ------ ------
Extraordinary item, net of tax (1,896) -- (1,896) --
Cumulative effect of a change in accounting principle for intangible
assets, net of tax -- -- -- (45,288)
-------- ------ ------ ------
Net (loss) income $ (2,386) 12,823 (6,547) (87,651)
======== ====== ====== =======
(Loss) income per common share before discontinued operations,
extraordinary item and cumulative effect of a change in accounting
principle:
Basic and Diluted $ (0.01) 0.20 (0.07) (0.65)
Loss per common share for discontinued operations
Basic and Diluted $ -- -- -- --
Loss per common share for extraordinary item, net of tax
Basic and Diluted $ (0.03) -- (0.03) --
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) income per common share:
Basic and Diluted $ (0.04) 0.20 (0.10) (1.35)
Weighted-average common shares outstanding:
Basic 64,658 64,672 64,658 64,666
Diluted 64,658 65,606 64,658 64,666
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)
Six months ended Six months ended
June 24, 2001 June 30, 2002
---------------- ----------------
Cash flows from operating activities:
Net loss $ (6,547) (87,651)
Adjustments to reconcile net loss to net cash provided by operating
activities:
Loss from discontinued operations 434 46
Loss on early extinguishment of debt 3,063 --
Cumulative effect of a change in accounting principle for intangible assets -- 75,480
Loss on disposal of assets -- 21
Depreciation and amortization 8,465 1,452
Provision for (reduction of) doubtful accounts 2,876 (273)
Amortization of debt discount 71 470
Amortization of deferred financing costs 704 640
Deferred income taxes (4,019) 13,972
Decrease in deferred commitment fee (351) (351)
Changes in operating assets and liabilities:
Increase in receivables (850) (2,336)
(Increase) decrease in other current assets (302) 503
Decrease (increase) in other assets 52 (16)
Increase in accounts payable and accrued expenses 1,322 1,025
Increase in accrued interest 1,006 87
-------- -------
Net cash provided by continuing operations 5,924 3,069
Net cash provided by discontinued operations 381 440
-------- -------
Net cash provided by operating activities 6,305 3,509
-------- -------
Cash flows from investing activities:
Advances on purchase price of radio stations (20,973) (15,206)
Additions to property and equipment (1,956) (2,419)
Additions to property and equipment from discontinued operations (1,003) (3)
-------- -------
Net cash used in investing activities (23,932) (17,628)
-------- -------
Cash flows from financing activities:
Retirement of senior credit facilities (65,000) --
Proceeds from senior subordinated notes 87,669 --
Increase in deferred financing costs (3,995) --
Proceeds from Class A stock option exercised -- 99
Repayment of other long-term debt (86) (193)
-------- -------
Net cash provided by (used in) financing activities 18,588 (94)
-------- -------
Net increase (decrease) in cash and cash equivalents 961 (14,213)
Cash and cash equivalents at beginning of period 47,733 51,640
-------- -------
Cash and cash equivalents at end of period $ 48,694 37,427
======== ======
Supplemental cash flow information:
Interest paid $ 14,456 16,330
======== ======
Income taxes paid (received) $ 292 (39)
======== ======
Non-cash financing and investing activities:
Issuance of warrants towards the acquisition of a radio station $ -- 8,922
======== ======
Accrued commission on purchase of radio station $ -- 1,000
======== ======
SEE ACCOMPANYING NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
6
SPANISH BROADCASTING SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2002
(UNAUDITED)
(1) BASIS OF PRESENTATION
The unaudited 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 June 30, 2002, and for the three- and
six-month periods ended June 24, 2001 and June 30, 2002 do not contain all
disclosures required by generally accepted accounting principles. These
unaudited 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 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- and
six-month periods ended June 30, 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 Federal Communications Commission ("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 and/or non-guarantor subsidiaries. All of the 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
Assets held for sale 693 40,420 -- 41,113
--------- ------- -------- --------
Total current assets 72,505 45,342 -- 117,847
Property and equipment, net 15,489 7,935 -- 23,424
Intangible assets, net 35,992 499,519 -- 535,511
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 $ 658,904 104,946 (76,772) 687,078
========= ======= ======= =======
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 8,265 22,620 -- 30,885
--------- ------- -------- --------
Total liabilities 350,705 28,174 -- 378,879
--------- ------- -------- --------
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 $ 658,904 104,946 (76,772) 687,078
========= ======= ======= =======
7
PARENT AND
GUARANTOR NON-GUARANTOR
SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
------------ ------------- ------------ -------
AS OF JUNE 30, 2002
----------------------------------------------------------
CONDENSED CONSOLIDATING BALANCE SHEET
Cash and cash equivalents $ 35,177 2,250 -- 37,427
Net receivables 24,402 1,476 -- 25,878
Other current assets 1,163 40 -- 1,203
Assets held for sale 5,028 28,004 -- 33,032
--------- ------- -------- -------
Total current assets 65,770 31,770 -- 97,540
Property and equipment, net 16,738 7,631 -- 24,369
Intangible assets, net 61,120 436,455 -- 497,575
Deferred financing costs, net 9,400 -- -- 9,400
Investment in subsidiaries and intercompany 457,562 (397,295) (60,267) --
Other assets 271 1 -- 272
--------- ------- -------- -------
Total assets $ 610,861 78,562 (60,267) 629,156
========= ====== ======= =======
Current portion of long-term debt $ 60 139 -- 199
Accounts payable and accrued expenses 13,559 2,159 -- 15,718
Accrued interest 5,403 -- -- 5,403
Deferred commitment fee 931 -- -- 931
--------- ------- -------- -------
Total current liabilities 19,953 2,298 -- 22,251
Long-term debt 324,389 3,320 -- 327,709
Deferred income taxes 36,950 12,677 -- 49,627
--------- ------- -------- -------
Total liabilities 381,292 18,295 -- 399,587
Common stock 6 1 (1) 6
Additional paid-in capital 444,543 94,691 (94,691) 444,543
Accumulated deficit (214,980) (34,425) 34,425 (214,980)
--------- ------- -------- -------
Total stockholders' equity 229,569 60,267 (60,267) 229,569
--------- ------- -------- -------
Total liabilities and stockholders' equity $ 610,861 78,562 (60,267) 629,156
========= ====== ======= =======
PARENT AND
GUARANTOR NON-GUARANTOR
SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
------------ ------------- ------------ --------
FOR THE THREE MONTHS ENDED JUNE 24, 2001
--------------------------------------------------------
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
Net revenue $ 31,249 3,738 -- 34,987
Station operating expenses 18,611 2,738 -- 21,349
Corporate expenses 2,335 183 (183) 2,335
Depreciation and amortization 3,306 1,069 -- 4,375
-------- ------ ------- ------
Operating income (loss) from continuing operations 6,997 (252) 183 6,928
Interest expense, net 6,140 1,387 -- 7,527
Other (income) expense, net (184) -- 183 (1)
Equity in net loss of subsidiaries 1,709 -- (1,709) --
Income tax (benefit) expense (228) 70 -- (158)
Discontinued operations, net of tax (50) -- -- (50)
Extraordinary item, net of tax (1,896) -- -- (1,896)
-------- ------ ------- ------
Net loss $ (2,386) (1,709) 1,709 (2,386)
======== ====== ======= ======
PARENT AND
GUARANTOR NON-GUARANTOR
SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
------------ ------------- ------------ --------
FOR THE THREE MONTHS ENDED JUNE 30, 2002
--------------------------------------------------------
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
Net revenue $ 36,398 2,985 -- 39,383
Station operating expenses 21,508 2,210 -- 23,718
Corporate expenses 3,089 120 (120) 3,089
Depreciation and amortization 564 156 -- 720
-------- ----- ----- ------
Operating income from continuing operations 11,237 499 120 11,856
Interest expense, net 7,307 1,369 -- 8,676
Other (income) expense, net (385) (1) 120 (266)
Equity in net loss of subsidiaries 869 -- (869) --
Income tax benefit (9,407) -- -- (9,407)
Discontinued operations, net of tax (30) -- -- (30)
-------- ----- ----- ------
Net income (loss) $ 12,823 (869) 869 12,823
======== ===== ===== ======
8
PARENT AND
GUARANTOR NON-GUARANTOR
SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
------------ ------------- ------------ -------
FOR THE SIX MONTHS ENDED JUNE 24, 2001
------------------------------------------------------
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
Net revenue $ 53,252 6,067 -- 59,319
Station operating expenses 33,390 5,416 -- 38,806
Corporate expenses 4,980 365 (365) 4,980
Depreciation and amortization 6,361 2,104 -- 8,465
-------- ------ ------ ------
Operating income (loss) from continuing operations 8,521 (1,818) 365 7,068
Interest expense, net 11,357 2,769 -- 14,126
Other (income) expense, net (646) -- 365 (281)
Equity in net loss of subsidiaries 4,705 -- (4,705) --
Income tax (benefit) expense (2,678) 118 -- (2,560)
Discontinued operations, net of tax (434) -- (434)
Extraordinary item, net of tax (1,896) -- (1,896)
-------- ------ ------ ------
Net loss $ (6,547) (4,705) 4,705 (6,547)
======== ====== ====== ======
PARENT AND
GUARANTOR NON-GUARANTOR
SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
------------ ------------- ------------ -------
FOR THE SIX MONTHS ENDED JUNE 30, 2002
------------------------------------------------------
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
Net revenue $ 62,353 5,933 -- 68,286
Station operating expenses 37,364 4,260 -- 41,624
Corporate expenses 5,950 240 (240) 5,950
Depreciation and amortization 1,106 346 -- 1,452
-------- ----- ------- -------
Operating income from continuing operations 17,933 1,087 240 19,260
Interest expense, net 14,510 2,678 -- 17,188
Other (income) expense, net (504) (2) 240 (266)
Equity in net loss of subsidiaries 16,505 -- (16,505) --
Income tax expense 44,655 -- -- 44,655
Discontinued operations, net of tax (46) -- -- (46)
Cumulative effect of a change in accounting principle,
net of tax (30,372) (14,916) -- (45,288)
-------- ------- ------- -------
Net loss $(87,651) (16,505) 16,505 (87,651)
======== ======= ======= =======
PARENT AND
GUARANTOR NON-GUARANTOR
SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
------------ ------------- ------------ -------
FOR THE SIX MONTHS ENDED JUNE 24, 2001
------------------------------------------------------
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
Cash flows from operating activities $ 4,574 1,731 -- 6,305
======== ===== ====== =======
Cash flows from investing activities $(23,256) (676) -- (23,932)
======== ===== ====== =======
Cash flows from financing activities $ 18,644 (56) -- 18,588
======== ===== ====== =======
PARENT AND
GUARANTOR NON-GUARANTOR
SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
------------ ------------- ------------ -------
FOR THE SIX MONTHS ENDED JUNE 30, 2002
------------------------------------------------------
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
Cash flows from operating activities $ 4,051 (542) -- 3,509
========= ===== ====== ========
Cash flows from investing activities $ (17,586) (42) -- (17,628)
========= ===== ====== ========
Cash flows from financing activities $ (29) (65) -- (94)
========= ===== ====== ========
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 FCC
licenses, qualify as indefinite-life intangible assets under SFAS No. 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 No. 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 No. 142 and that there was no impairment of goodwill
as a result of adopting SFAS No. 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 No. 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, on
December 31, 2001, 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 $3.9 million
and $7.6 million for the three- and six-month periods ended June 24, 2001,
respectively. The following table presents adjusted financial results for the
three- and six-month periods ended June 24, 2001 and June 30, 2002,
respectively, on a basis consistent with the new accounting principle.
Three months ended Six months ended
----------------------------- ------------------------------
(in thousands, except per share data) June 24, 2001 June 30, 2002 June 24, 2001 June 30, 2002
------------- ------------- ------------- -------------
Reported net (loss) income: $ (2,386) $ 12,823 $ (6,547) $ (87,651)
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)- 3,907 -- 7,562 --
Income tax adjustment (3): (170) -- (3,047) --
-------- ---------- -------- ----------
Adjusted net income (loss): $ 1,351 $ 12,823 $ (2,032) $ 12,995
======== ========== ======== ==========
Basic and diluted (loss) income per share:
Reported net (loss) income per share: $ (0.04) $ 0.20 $ (0.10) $ (1.35)
Cumulative effect per share of a change in
accounting principle, net of tax (1): -- -- -- 0.70
Income tax valuation allowance per share (2): -- -- -- 0.86
Amortization of goodwill and intangible
assets per share (3): 0.06 -- 0.12 --
Income tax adjustment per share (3): -- -- (0.05) --
-------- ---------- -------- ----------
Adjusted net income (loss) per share: $ 0.02 $ 0.20 $ (0.03) $ 0.21
======== ========== ======== ==========
(1) As a result of the adoption of SFAS No. 142 on December 31, 2001, 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.
(2) As a result of adopting SFAS No. 142 on December 31, 2001, the Company
incurred a non-cash income tax expense of $55.4 million to establish a
valuation allowance against deferred tax assets.
10
(3) The adjusted financial results in the three- and six-month periods
ended June 24, 2001 adds back non-cash goodwill and intangible assets
amortization of $3.9 million and $7.6 million, respectively, and reflects
adjusted income tax expense assuming that SFAS No. 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 in 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. Please see Note (5) "SALE OF STATION".
(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 all of five
specified stations, including KTCY-FM, 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 dates. The term of the
11
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.
(5) SALE OF STATION
On June 4, 2002, the Company and one of its subsidiaries, KTCY Licensing,
Inc., entered into an asset purchase agreement (the "Entravision Agreement")
with Entravision- Texas Limited Partnership, a Texas limited partnership
("Entravision") for the sale of certain assets and the FCC license of KTCY-FM
serving Dallas, Texas for a purchase price of $35.0 million. In connection with
this agreement, Entravision made a $1.75 million deposit on the purchase price,
which is being held in escrow. The Entravision Agreement contains customary
representations, warranties and conditions, including receipt of FCC approval
for the transfer of the FCC license. The FCC has granted such approval.
Additionally, on June 4, 2002, KTCY Licensing, Inc. entered into a time
brokerage agreement with Entravision Communications Corporation, a Delaware
corpoation, ("Entravision Communications"), whereby Entravision Communications
is permitted to broadcast its programming over radio station KTCY-FM until the
closing of the asset sale.
The Company determined that the pending sale of KTCY-FM met the criteria in
accordance with SFAS No. 144 to classify KTCY-FM's assets as held for sale and
its operations as discontinued operations. The results of operations in the
current year and prior year periods of KTCY-FM have been classified as
discontinued operations in the unaudited condensed consolidated statements of
operations. On June 30, 2002, KTCY-FM assets held for sale consisted of $31.6
million of intangible assets and $1.4 million of property and equipment. The
Company anticipates closing the asset sale of KTCY-FM during the three-months
ending September 29, 2002 and expects to recognize a gain of approximately $1.7
million, net of closing costs and taxes. There can be no assurance that the sale
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 from continuing operations excluding corporate expenses and
depreciation and amortization. EBITDA consists of operating income from
continuing operations 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/or 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 promotional
expenses. Our senior management strives to control these expenses by working
closely with local station management and others.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2002 COMPARED TO THE THREE MONTHS ENDED JUNE 24,
2001.
NET REVENUE. Net revenue was $39.4 million for the three months ended June
30, 2002 compared to $35.0 million for the three months ended June 24, 2001, an
increase of $4.4 million or 12.6%. The increase was generated primarily by the
operating results of the Los Angeles FM station, KXOL, which began airing
commercials in August 2001. On a same station basis, the net revenue increase
was attributed to the conversion of ratings gains into revenue growth in the
majority of the Company's markets, as well as increased promotional events,
partially offset by a decrease in barter revenue related to the barter AOL
agreement.
12
STATION OPERATING EXPENSES. Station operating expenses were $23.7 million
for the three months ended June 30, 2002 compared to $21.3 million for the three
months ended June 24, 2001, an increase of $2.4 million or 11.3%. The increase
was primarily attributed to national commissions, advertising and promotional
expenditures in our core markets. These increases were offset by decreases in
legal fees and related expenses and the allowance for doubtful accounts.
BROADCAST CASH FLOW. Broadcast cash flow was $15.7 million for the three
months ended June 30, 2002 compared to $13.6 million for the three months ended
June 24, 2001, an increase of $2.1 million or 15.4%. Our broadcast cash flow
margin increased to 39.8% for the three months ended June 30, 2002 compared to
38.9% for the three months ended June 24, 2001. Our broadcast cash flow margin
increased due to the increase in net revenue coupled with our efforts to control
operating expenses.
CORPORATE EXPENSES. Corporate expenses were $3.1 million for the three
months ended June 30, 2002 compared to $2.3 million for the three months ended
June 24, 2001, an increase of $0.8 million or 34.8%. The increase in corporate
expenses resulted mainly from an increase in legal expenses.
EBITDA. EBITDA was $12.6 million for the three months ended June 30, 2002
compared to $11.3 million for the three months ended June 24, 2001, an increase
of $1.3 million or 11.5%. 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
$0.7 million for the three months ended June 30, 2002 compared to $4.4 million
for the three months ended June 24, 2001, a decrease of $3.7 million or 84.1%.
The decrease was related to the adoption of SFAS No. 142, which ceased the
amortization of all our intangible assets and goodwill, effective December 31,
2001.
OPERATING INCOME FROM CONTINUING OPERATIONS. Operating income from
continuing operations was $11.9 million for the three months ended June 30, 2002
compared to $6.9 million for the three months ended June 24, 2001, an increase
of $5.0 million or 72.5%. The increase in operating income from continuing
operations was caused by the increase in EBITDA and a decrease in amortization
expense due to the adoption of SFAS No. 142.
INTEREST EXPENSE, NET. Interest expense, net, was $8.7 million for the three
months ended June 30, 2002 compared to $7.5 million for the three months ended
June 24, 2001, an increase of $1.2 million or 16.0%. 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. Other income, net, was $0.3 million for the three months ended
June 30, 2002 due mainly to an insurance recovery for a claim related to the New
York facilities. We had no meaningful other income during the three months ended
June 24, 2001.
INCOME TAX BENEFIT. Income tax benefit was $9.4 million for the three months
ended June 30, 2002 compared to $0.2 million for the three months ended June 24,
2001. Based on SFAS No. 109 "Accounting for Income Taxes" and available
information, the Company determined that some of its valuation allowance on its
deferred taxes was no longer necessary resulting in a non-cash income tax
benefit of $13.9 million. The non-cash income tax benefit was offset by income
tax expense of $4.5 million based on the estimated effective tax rate for the
2002 fiscal year.
DISCONTINUED OPERATIONS, NET OF TAXES. Loss on discontinued operations, net
of taxes, was minimal for the three months ended June 30, 2002 and June 24,
2001, respectively. The Company determined that the anticipated sale of its
KTCY-FM station serving Dallas, Texas met the criteria in accordance with SFAS
No. 144 to classify KTCY-FM's operations as discontinued operations. KTCY-FM's
results from operations for the three months ended June 30, 2002 and June 24,
2001 have been classified as discontinued operations.
NET INCOME (LOSS). Net income was $12.8 million for the three months ended
June 30, 2002 compared to a net loss of $2.4 million for the three months ended
June 24, 2001. The net income for the three-months ended June 30, 2002 was due
to operating income and the income tax benefit, offset by interest expense, net
and discontinued operations.
SIX MONTHS ENDED JUNE 30, 2002 COMPARED TO THE SIX MONTHS ENDED JUNE 24, 2001.
NET REVENUE. Net revenue was $68.3 million for the six months ended June 30,
2002 compared to $59.3 million for the six months ended June 24, 2001, an
increase of $9.0 million or 15.2%. The increase was generated primarily by the
13
operating results of the Los Angeles FM station, KXOL, which began airing
commercials in August 2001. On a same station basis, the net revenue increase
was attributed to the conversion of ratings gains into revenue growth in the
majority of the Company's markets, as well as increased promotional events,
partially offset by a decrease in barter revenue related to the barter AOL
agreement.
STATION OPERATING EXPENSES. Station operating expenses were $41.6 million
for the six months ended June 30, 2002 compared to $38.8 million for the six
months ended June 24, 2001, an increase of $2.8 million or 7.2%. The increase
was primarily attributed to national commissions, advertising and promotional
expenditures in our core markets. These increases were offset by decreases in
professional fees and the allowance for doubtful accounts.
BROADCAST CASH FLOW. Broadcast cash flow was $26.7 million for the six
months ended June 30, 2002 compared to $20.5 million for the six months ended
June 24, 2001, an increase of $6.2 million or 30.2%. Our broadcast cash flow
margin increased to 39.1% for the six months ended June 30, 2002 compared to
34.6% for the six months ended June 24, 2001. Our broadcast cash flow margin
increased due to the increase in net revenue and the decrease in allowance for
doubtful accounts.
CORPORATE EXPENSES. Corporate expenses were $6.0 million for the six months
ended June 30, 2002 compared to $5.0 million for the six months ended June 24,
2001, an increase of $1.0 million or 20.0%. The increase in corporate expenses
resulted mainly from an increase in legal expenses.
EBITDA. EBITDA was $20.7 million for the six months ended June 30, 2002
compared to $15.5 million for the six months ended June 24, 2001, an increase of
$5.2 million or 33.5%. 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
$1.5 million for the six months ended June 30, 2002 compared to $8.5 million for
the six months ended June 24, 2001, a decrease of $7.0 million or 82.4%. The
decrease was related to the adoption of SFAS No. 142, which ceased the
amortization of all our intangible assets and goodwill, effective December 31,
2001.
OPERATING INCOME FROM CONTINUING OPERATIONS. Operating income from
continuing operations was $19.3 million for the six months ended June 30, 2002
compared to $7.1 million for the six months ended June 24, 2001, an increase of
$12.2 million or 171.8%. The increase in operating income from continuing
operations was caused by the increase in EBITDA and a decrease in amortization
expense due to the adoption of SFAS No. 142.
INTEREST EXPENSE, NET. Interest expense, net, was $17.2 million for the six
months ended June 30, 2002 compared to $14.1 million for the six months ended
June 24, 2001, an increase of $3.1 million or 22.0%. 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. Other income, net, was $0.3 million for the six months
ended June 30, 2002 due mainly to an insurance recovery for a claim related to
the New York facilities. Other income, net, was $0.3 million for the six months
ended June 24, 2001 due to an insurance recovery for a claim related to an
office building in Los Angeles.
INCOME TAX EXPENSE (BENEFIT). Income tax expense was $44.7 million for the
six months ended June 30, 2002 compared to an income tax benefit of $2.6 million
for the six months ended June 24, 2001. Income tax expense for the six months
ended June 30, 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 No. 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. Additionally, the Company recorded an income tax expense
of $3.2 million based on the estimated effective tax rate for the 2002 fiscal
year, offset by a $13.9 million non-cash income tax benefit due to a reduction
of some of the Company's valuation allowance on its deferred taxes, determined
in accordance with SFAS No. 109 and currently available information.
DISCONTINUED OPERATIONS, NET OF TAXES. Loss on discontinued operations, net
of taxes, was minimal for the six months ended June 30, 2002 compared to $0.4
million for the six months ended June 24, 2001. The Company determined that the
anticipated sale of its KTCY-FM station serving Dallas, Texas met the criteria
in accordance with SFAS No. 144 to classify KTCY-FM's operations as discontinued
operations. KTCY-FM's results from operations for the six months ended June 30,
2002 and June 24, 2001 have been classified as discontinued operations.
14
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 six months ended June 30,
2002. The Company adopted SFAS No. 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
or 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 $87.7 million for the six months ended June 30, 2002
compared to $6.5 million for the six months ended June 24, 2001. The net loss
for the six-months ended June 30, 2002 was due to income tax expense and the
cumulative effect of a change in accounting principle, net of income tax
benefit, related to the adoption of SFAS No. 142.
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 $3.5 million for the
six months ended June 30, 2002 compared to net cash flows provided by operating
activities of $6.3 million for the six months ended June 24, 2001. Changes in
our net cash flows from operating activities were primarily a result of changes
in working capital balances, which were affected by the operation of KXOL-FM
during these periods.
Net cash flows used in investing activities were $17.6 million for the six
months ended June 30, 2002 compared to net cash flows used in investing
activities of $23.9 million for the six months ended June 24, 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 six months ended June 30, 2002 as compared to the six
months ended June 24, 2001.
Net cash flows used in financing activities were minimal for the six months
ended June 30, 2002 compared to net cash flows provided by financing activities
of $18.6 for the six months ended June 24, 2001. Changes in our net cash flows
from financing activities during the six months ended June 24, 2001 were
primarily a result of our Rule 144A offering of $100 million of 9 5/8% senior
subordinated notes due 2009 and our repayment of the outstanding indebtedness
under our senior credit facility which we then terminated.
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 cash interest payments pursuant to
the terms of the senior subordinated notes due 2009 and capital expenditures.
Assumptions (none of which can be assured) which underlie management's belief,
include:
o the economic conditions within the radio broadcasting market and
economic conditions in general will not further deteriorate in any
material respect;
o we will continue to successfully implement our business strategy;
o we will not incur any material unforeseen liabilities, including
environmental liabilities; and
o 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
15
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 all of five
specified stations, including KTCY-FM, 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, and proceeds from
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 for future
acquisitions.
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.
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The Company has concluded that its intangible assets, comprised primarily of FCC
licenses, qualify as indefinite-life intangible assets under SFAS No. 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 No. 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 No. 142 and that there was no impairment of goodwill
as a result of adopting SFAS No. 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 No. 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, on
December 31, 2001, 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 $3.9 million
and $7.6 million for the three- and six-month periods ended June 24, 2001,
respectively. The following table presents adjusted financial results for the
three- and six-month periods ended June 24, 2001 and June 30, 2002,
respectively, on a basis consistent with the new accounting principle.
Three months ended Six months ended
------------------ ----------------
(in thousands, except per share data) June 24, 2001 June 30, 2002 June 24, 2001 June 30, 2002
------------- ------------- ------------- -------------
Reported net (loss) income: $ (2,386) $ 12,823 $ (6,547) $ (87,651)
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)- 3,907 -- 7,562 --
Income tax adjustment (3): (170) -- (3,047) --
-------- ---------- -------- ----------
Adjusted net income (loss) $ 1,351 $ 12,823 $ (2,032) $ 12,995
======== ========== ======== ==========
Basic and diluted (loss) income per share:
Reported net (loss) income per share: $ (0.04) $ 0.20 $ (0.10) $ (1.35)
Cumulative effect per share of a change in
accounting principle, net of tax (1): -- -- -- 0.70
Income tax valuation allowance per share (2): -- -- -- 0.86
Amortization of goodwill and intangible
assets per share (3): 0.06 -- 0.12 --
Income tax adjustment per share (3): -- -- (0.05) --
-------- ---------- -------- ----------
Adjusted net income (loss) per share: $ 0.02 $ 0.20 $ (0.03) $ 0.21
======== ========== ======== ==========
(1) As a result of the adoption of SFAS No. 142 on December 31, 2001, 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.
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(2) As a result of adopting SFAS No. 142 on December 31, 2001, the Company
incurred a non-cash income tax expense of $55.4 million to establish a
valuation allowance against deferred tax assets.
(3) The adjusted financial results in the three- and six- month periods
ended June 24, 2001 adds back non-cash goodwill and intangible assets
amortization of $3.9 million and $7.6 million, respectively, and reflects
adjusted income tax expense assuming that SFAS No. 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 in 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. Please see Note (5) "SALE OF STATION" in the
accompanying unaudited condensed 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:
o 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);
o We will continue to incur promotional costs in connection with our
time brokerage agreement for KXOL-FM;
o 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;
o 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;
o Our broadcast revenue and operating results could be adversely
affected by the current recession or by another national or regional
recession;
o Our substantial level of debt could limit our ability to grow and
compete;
o 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;
o 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;
o 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;
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o 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;
o 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;
o 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;
o 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;
o 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;
o 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;
o We must be able to respond to rapidly changing technology, services
and standards which characterize our industry for us to remain
competitive;
o Our business depends on maintaining our FCC licenses. We cannot assure
you that we will be able to maintain these licenses;
o We may face regulatory review for additional acquisitions in our
existing markets and, potentially, new markets;
o The market price of our shares of Class A common stock may fluctuate
significantly; and
o 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, for the three-month transitional period ended December 30, 2001, and
for the six-month period ended June 30, 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.
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As reported in the Company's quarterly report on Form 10-Q for the quarterly
period ended March 31, 2002, 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
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"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. Motions to dismiss the complaint have been filed
and discovery has been stayed pending decision on the motions to dismiss.
As reported in the Company's quarterly report on Form 10-Q for the quarterly
period ended March 31, 2002, 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 subsequently amended his theory of damages and
claimed approximately $8.0 million in damages plus attorney's fees and
pre-judgment interest. On July 29, 2002, a final judgment was entered in favor
of the plaintiff for a total of $1.5 million consisting of compensation for
executive services of $0.5 million and $1.0 million for the plaintiff's
contribution towards the purchase of a radio station. The Company has accrued
for this judgment in the condensed consolidated financial statements for the
three- and six-month periods ended June 30, 2002. The Company has filed
post-trial motions and is considering additional legal options.
On June 12, 2002, SBS filed a lawsuit in the United States District Court
for the Southern District of Florida against Clear Channel Communications
("Clear Channel") and Hispanic Broadcasting Corporation ("HBC"), and filed an
Amended Complaint on July 31, 2002. The lawsuit asserts federal and state
antitrust law violations and other state law claims and alleges that Clear
Channel and HBC have adversely affected SBS's ability to raise capital,
depressed SBS's share price, impugned SBS's reputation, made station
acquisitions more difficult, and interfered with SBS's business opportunities
and contractual arrangements. SBS is seeking actual damages in excess of $500
million, which are to be trebled under anti-trust law.
From time to time we are involved in litigation incidental to the conduct of
our business, such as contractual matters and employee-related matters. In the
opinion of management, such litigation is not likely to have a material adverse
effect on our business, operating results or financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The following matters were submitted to a vote of shareholders at our annual
meeting of shareholders held on June 11, 2002:
(1) Shareholders elected the following six incumbent directors with the
noted vote tabulation:
Directors Votes For Votes Withheld
--------- --------- --------------
Raul Alarcon, Jr. 280,352,589 10,843,034
Pablo Raul Alarcon, Sr. 289,606,149 1,589,474
Jose Grimalt 290,299,432 896,191
Jason L. Shrinsky 290,296,632 898,991
Castor Fernandez 290,542,482 653,141
Carl Parmer 290,541,982 653,641
There were no broker non-votes.
(2) Shareholders approved the ratification of the appointment of KPMG LLP
as independent auditors to audit our financial statements for the year
ending December 29, 2002. There were 289,651,262 votes for, and
1,540,858 votes against, the proposal. There were 3,503 abstentions and
no broker non-votes.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits -
10.1 Asset Purchase Agreement dated June 4, 2002 by and among the Company,
KTCY Licensing, Inc. and Entravision - Texas Limited Partnership.
10.2 Time Brokerage Agreement dated as of June 4, 2002 between KTCY
Licensing, Inc. as Licensee and Entravision Communications Corporation
as Programmer.
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10.3 Company's 1999 Stock Option Plan as amended on May 6, 2002.
10.4 Company's 1999 Stock Option Plan for Non-Employee Directors as
amended on May 6, 2002.
99.1 Chief Executive Officer's Certification pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
99.2 Chief Financial Officer's Certification pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
(b) Reports on Form 8-K
The Company filed a current report on Form 8-K on May 2, 2002 to report
that the Company's annual meeting of shareholders was to be held more than
thirty days after the anniversary of the previous year's annual meeting date
due to the change in the Company's fiscal year end and that, therefore, the
Company's shareholders had additional time to submit shareholder proposals
for inclusion in the proxy statement and form of proxy for the annual
meeting.
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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: August 13, 2002 Joseph A. Garcia, Executive Vice President,
Chief Financial Officer and Secretary
(principal financial and accounting officer
and duly authorized officer of the registrant)
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