ITEM 1. BUSINESS
All references to "we", "us", "our", "SBS" or "our company" in this report mean Spanish Broadcasting System, Inc., a Delaware corporation, and all entities owned or controlled by Spanish Broadcasting System, Inc. and, if prior to 1994, refer to our predecessor parent company Spanish Broadcasting System, Inc., a New Jersey corporation. Our executive offices are located at 2601 South Bayshore Drive, Coconut Grove, Florida 33133, and our telephone number is (305) 441-6901.
SBS, founded in 1983 and incorporated in the State of Delaware in 1994, is the second largest Spanish-language radio broadcasting company in the United States. We currently own and operate 23 FM radio stations and one AM radio station. We operate an additional AM radio station under a time brokerage agreement. All 25 of our stations are located in eight of the largest Hispanic markets in the United States, including Los Angeles, Puerto Rico, New York, Miami, San Francisco, Chicago, San Antonio and Dallas. Our radio stations reach over 61% of the U.S. Hispanic population. Our WSKQ-FM station in New York is ranked in the Summer 2000 Arbitron(R) ratings as the number one station in its target demographic group (Hispanic men and women ages 18-49).
Our strategy is to maximize the profitability of our radio station portfolio and to expand in our existing markets and into additional markets that have a significant Hispanic population. We believe that the favorable demographics of the U.S. Hispanic population and the rapid increase in advertising targeting Hispanics provide us with significant opportunities for growth. We also believe that we have competitive advantages in the radio industry due to our focus on formats targeting U.S. Hispanic audiences and our skill in programming and marketing to these audiences.
Our Internet strategy is designed to complement our existing business and to enable us to capitalize on our U.S. Hispanic market expertise. In 1999 we purchased 80% of the issued and outstanding capital stock of JuJu Media, Inc., the owner of LaMusica.com, a bilingual Spanish-English Internet Web site and on-line community that focuses on the U.S. Hispanic market. LaMusica.com is a provider of original information and interactive content related to Latin music, entertainment, news and culture. LaMusica.com provides our advertisers with an additional means of reaching the U.S. Hispanic consumer markets and is a growing revenue source for us.
SBS is led by Mr. Raul Alarcon, Jr., who became our Chairman of the Board of Directors when we completed our initial public offering on November 2, 1999 and has been Chief Executive Officer since June 1994, and President and a director since October 1985. The Alarcon family has been involved in Spanish-language radio broadcasting since the 1950's, when Mr. Raul Alarcon, Sr., our Chairman Emeritus and a member of our board of directors, established his first radio station in Camaguey, Cuba. Members of our senior management team, on average, have over 15 years of experience in Spanish-language media and radio broadcasting.
BUSINESS STRATEGY
We focus on maximizing the profitability of our radio station portfolio by strengthening the performance of our existing radio stations and making additional strategic station acquisitions in both our existing markets and in new markets that have a significant Hispanic population. In addition, we have implemented an Internet strategy in order to develop new revenue sources.
OPERATING STRATEGY
Our operating strategy focuses on maximizing our radio stations' appeal to our audience and our advertisers while minimizing operating expenses in order to increase revenue and cash flow. To achieve these goals, we focus on:
Providing High-Quality Spanish-Language Programming. We format the programming of each of our stations to capture a significant share of the Spanish-language audience. We use market research, including
third party consultants and periodic music testing, to assess listener preferences in each station's target demographic audience. We then refine our programming to reflect the results of this research and testing. Because the U.S. Hispanic population is so diverse, consisting of numerous identifiable groups from many different countries of origin each with its own cultural and musical heritage, we strive to make ourselves intimately familiar with the musical tastes and the preferences of each of the various Hispanic ethnic groups and we customize our programming accordingly.
Retaining Strong Local Management Teams. We employ local management teams in each of our markets who are responsible for the day-to-day operations of our radio stations. Our key local managers generally consist of a general station manager, general sales manager and programming director. Stations are staffed with managers who have experience and knowledge of the local radio market and the local Hispanic market. Because of the cultural diversity of the Hispanic population from region to region in the United States, most decisions regarding day-to-day programming, sales and promotional efforts are made by local managers. We believe this approach improves our flexibility and responsiveness to changing conditions in each of the markets we serve.
Utilizing Aggressive Sales Efforts. Our sales force focuses on converting audience share into advertising revenue. In order to encourage an aggressive and focused sales force, we have developed compensation structures tied to advertising revenue. We seek to maximize our sales to national advertisers because national advertising generally commands a higher rate per advertising spot than does local advertising. We have attracted key sales executives from general market radio who have applied their expertise and relationships with the advertising community to increase our share of advertising from leading general market advertisers. We believe that our focused sales efforts are working to increase media spending targeted at the U.S. Hispanic consumer market and will enable us to continue to achieve significant revenue growth, and to narrow the gap between the level of advertising currently targeted at U.S. Hispanics and the potential buying power of the U.S. Hispanic population.
Controlling Operating Costs. By employing a disciplined approach to operating our radio stations, we have been able to achieve operating margins which we believe are among the highest in the radio broadcast industry. We emphasize control of each station's operating costs through detailed budgeting, tight control over staffing levels and frequent expense analysis. While local management is responsible for the day-to-day operation of each station, corporate management is responsible for long-range and strategic planning, establishing policies and procedures, maximizing cost savings where centralized activity is appropriate, allocating resources and maintaining overall control of the stations.
Making Effective Use of Promotions and Special Events. We believe that effective promotional efforts play a significant role in both adding new listeners and increasing listener loyalty. Our promotional and marketing campaigns focus on increasing Hispanic consumer awareness of advertisers' products and services. Our goal is to use our expertise at marketing to the Hispanic consumer in each of the markets in which we own and operate stations, thereby attracting a large share of advertising revenue. We have organized special promotional appearances, such as station van appearances at client events, concerts and tie-ins to major events which form an important part of our marketing strategy. Many of these events build advertiser loyalty because they enable us to offer advertisers an additional means of reaching the Hispanic consumer. In many instances, these events are co-sponsored by local television and newspapers, allowing our advertisers to reach a larger combined audience.
Maintaining Strong Community Involvement. We have historically been, and will continue to be, actively involved within the local communities that we serve. Our radio stations participate in numerous community programs, fund-raisers and activities benefitting the local community and Hispanics abroad. Other examples of our community involvement include free public service announcements, free equal-opportunity employment announcements, tours and discussions held by radio station personalities with school and community groups designed to limit drug and gang involvement, free concerts and events designed to promote family values within the local Hispanic communities, and extended coverage, when necessary, of significant events which have an impact on the U.S. Hispanic population. Our stations and members of our management have received numerous community service awards and acknowledgments from government entities and
community and philanthropic organizations for their service to the community. We believe that this involvement helps to build and maintain station awareness and listener loyalty.
ACQUISITION STRATEGY
Our acquisition strategy is to acquire radio stations in the largest U.S. Hispanic markets. We consider acquisitions of stations in our existing markets, as well as acquisitions of stations in other markets with a large Hispanic population, where we can maximize our revenues through aggressive sales to U.S. Hispanic and general market advertisers. These acquisitions may include stations which do not currently target the U.S. Hispanic market, but which we believe can be successfully reformatted.
In analyzing potential radio station acquisition candidates, we consider many factors including:
- the size of the Hispanic market;
- anticipated growth, demographics, and other characteristics of the market;
- the nature and number of competitive stations in the market;
- the nature of other media competition in the station's market;
- the probability of achieving operating synergies through multiple station ownership within the target market;
- the existing or potential quality of the broadcast signal and transmission facility;
- the station's ratings, revenue and operating cash flow; and
- the price and terms of the purchase.
We cannot, however, be assured that our acquisition strategy will be successful. Our acquisition strategy is subject to a number of risks, including, but not limited to: stations acquired by us may not increase our broadcast cash flow or yield other anticipated benefits; required regulatory approvals may result in unanticipated delays in completing acquisitions; we may have difficulty managing our rapid growth; and we may be required to raise additional financing in order to finance such acquisitions while our ability to do so is limited by the terms of our debt instruments.
INTERNET STRATEGY
Our Internet strategy is designed to complement our existing business and to enable us to capitalize on our U.S. Hispanic market expertise. The core of our strategy is LaMusica.com, an Internet Web site and on-line community focused on the U.S. Hispanic market. This Web site offers some of our radio stations' broadcasts through the use of audio streaming technology and provides our advertisers with a complementary means of reaching their target audience.
TOP 10 HISPANIC RADIO MARKETS IN THE UNITED STATES
The table below indicates the top 10 Hispanic radio markets in the United States, including Puerto Rico. We currently own and operate radio stations in Los Angeles, Puerto Rico, New York, Miami, San Francisco, Chicago, San Antonio and Dallas. Population estimates are for 2000 and are based upon statistics provided by the Strategy Research Corporation -- 2000 U.S. Hispanic Market Report and the Strategy Research Corporation -- 2000 U.S. Latin America Market Report.
PROGRAMMING
We format the programming of each of our stations to capture a substantial share of the U.S. Hispanic audience. The U.S. Hispanic population is diverse, consisting of numerous identifiable groups from many different countries of origin, each with its own musical and cultural heritage. The music, culture, customs and Spanish dialects vary from one radio market to another. We strive to be very familiar with the musical tastes and preferences of each of the various Hispanic ethnic groups and customize our programming to match the local preferences of our target demographic audience in each market we serve. We have an in-house research department in Miami of 14 employees who conduct extensive radio market research on a daily, weekly, monthly and annual basis. By employing listener study groups and telephone surveys modeled after Arbitron(R) written survey methodology, but with even larger sample sizes than Arbitron(R), we are able to assess listener preferences, track trends and gauge our success on a daily basis, well before Arbitron(R) quarterly results are published. In this manner, we can respond immediately to changing listener preferences and trends by refining our programming to reflect the results of our research and testing. Each of our programming formats is described below.
- Spanish Tropical. The Spanish Tropical format primarily consists of salsa, merengue and cumbia music. Salsa is dance music combining Latin Caribbean rhythms with jazz originating from Puerto Rico, Cuba and the Dominican Republic, which is popular with Hispanics living in New York and Miami. Merengue music is up-tempo dance music originating from the Dominican Republic. Cumbia is a festive, folkloric music which originated in Colombia.
- Regional Mexican. The Regional Mexican format consists of various types of music played in different regions of Mexico such as ranchera, nortena, banda and cumbia. Ranchera music, originating from Jalisco, Mexico, is a traditional folkloric sound commonly referred to as mariachi music. Mariachi music features acoustical instruments and is considered the music indigenous to Mexicans who live in country towns. Nortena means northern, and is representative of Northern Mexico. Featuring an accordion, nortena has a polka sound with a distinct Mexican flavor. Banda is a regional format from the state of Sinaloa, Mexico and is popular in California. Banda resembles up-tempo marching band music with synthesizers.
- Tejano. The Tejano format consists of music based on Mexican themes but which originated in Texas. Tejano music is a combination of contemporary rock, ranchera and country music, the lyrics of which are primarily sung in Spanish.
- Spanish Adult Contemporary. The Spanish Adult Contemporary format includes pop, Latin rock, and ballads. This format is similar to English Adult Contemporary featured on contemporary hit radio stations.
- American Contemporary Hits. American Contemporary Hit Records format consists of popular music released within the last year. This format also tends to play a variety of music styles including Rock/Pop/Dance or R&B/Rap/Dance and is mostly rhythmic in nature.
- American 80's Hits. The American 80's Hits format consists of the top American chart hits from the 1980's charts.
- Spanish Adult Top 40. The Spanish Adult Top 40 format consists of a variety of Latin hit songs from the 1980's and 1990's.
- Spanish Oldies. The Spanish Oldies format includes a variety of Latin music mainly from the 1950's, 1960's and 1970's.
- Dance. The Dance format consists of upbeat dance and house rhythms, mainly from the 1980's and 1990's, that are played in dance clubs, including English-language music.
The programming formats of our radio stations and the target demographic of each station are as follows:
RADIO STATION PORTFOLIO
The following is a general description of each of our markets.
LOS ANGELES
The Los Angeles market is the largest radio market in terms of advertising revenues which are projected to be $851.0 million in 2000. In 2000, the Los Angeles market had the largest U.S. Hispanic population, with approximately 6.9 million Hispanics, which is approximately 40.6% of the Los Angeles market's total population. Los Angeles experienced annual radio revenue growth of 8.3% between 1993 and 1998, and radio revenue in Los Angeles is expected to continue growing at an annual rate of 9.2% between 1999 and 2003.
PUERTO RICO
The Puerto Rico market is the twenty-seventh largest radio market in terms of advertising revenues which are projected to be $115.8 million in 1999. In 2000, the Puerto Rico market had the second largest U.S. Hispanic population, with approximately 3.9 million Hispanics, which we believe is approximately 99.6% of the Puerto Rico market's total population. Puerto Rico experienced annual radio revenue growth of 5.4% between 1992 and 1998, and radio revenue in Puerto Rico is expected to continue growing at an annual rate of 5.7% between 1999 and 2002.
NEW YORK
The New York market is the second largest radio market in terms of advertising revenues, which are projected to be $816.4 million in 2000. In 2000, the New York market had the third largest U.S. Hispanic population, with approximately 3.8 million Hispanics, which is approximately 18.5% of the New York market's total population. We believe that we own the strongest franchise in terms of audience share and number of Spanish-language radio stations in the New York market, with two of the three FM Spanish-language radio stations. New York experienced annual radio revenue growth of 10.8% between 1993 and 1998, and radio revenue in New York is expected to continue growing at an annual rate of 10.0% between 1999 and 2003.
MIAMI
The Miami market is the eleventh largest radio market in terms of advertising revenues which are projected to be $277.6 million in 2000. In 2000, the Miami market had the fourth largest U.S. Hispanic population, with approximately 1.5 million Hispanics, which is approximately 38.8% of the Miami market's total population. Miami experienced annual radio revenue growth of 12.4% between 1993 and 1998, and radio revenue in Miami is expected to continue growing at an annual rate of 9.5% between 1999 and 2003.
SAN FRANCISCO
The San Francisco market is the fourth largest radio market in terms of advertising revenues which are projected to be $547 million in 2000. In 2000, the San Francisco market had the fifth largest U.S. Hispanic population, with approximately 1.4 million Hispanics, which is approximately 20.1% of the San Francisco market's total population. San Francisco experienced annual radio revenue growth of 12.0% between 1993 and 1998, and radio revenue in San Francisco is expected to continue growing at an annual rate of 19.8% between 1999 and 2003.
CHICAGO
The Chicago market is the third largest radio market in terms of advertising revenues which are projected to be $633.2 million in 2000. In 2000, the Chicago market had the sixth largest U.S. Hispanic population, with approximately 1.4 million Hispanics, which is approximately 14.2% of the Chicago market's total population. We believe that we own the strongest franchise in the Chicago market with the number one ranked FM Spanish-language radio station. Chicago experienced annual radio revenue growth of 9.3% between 1993 and 1998, and radio revenue in Chicago is expected to continue growing at an annual rate of 11.7% between 1999 and 2003.
SAN ANTONIO
The San Antonio market is the thirty-third largest radio market in terms of advertising revenues which are projected to be $83.4 million in 2000. In 2000, San Antonio had the eighth largest U.S. Hispanic population, with approximately 1.2 million Hispanics, which is approximately 55% of the San Antonio market's total population. San Antonio experienced annual radio revenue growth of 8.3% between 1993 and 1998, and radio revenue in San Antonio is expected to continue growing at an annual rate of 4.5% between 1999 and 2003.
DALLAS
The Dallas market is the fifth largest radio market in terms of advertising revenues which are projected to be $381.8 million in 2000. In 2000, the Dallas market had the ninth largest U.S. Hispanic population, with approximately 927,000 Hispanics, which is approximately 15.7% of the Dallas market's total population. Dallas experienced annual radio revenue growth of 11.3% between 1993 and 1998, and radio revenue in Dallas is expected to continue growing at an annual rate of 10.7% between 1999 and 2003.
LATIN MUSIC ON-LINE ("LAMUSICA.COM")
LaMusica.com is a bilingual Spanish-English Internet Web site and on-line community that focuses on the U.S. Hispanic market. LaMusica.com is a provider of original information and interactive content related to Latin music, entertainment, news and culture. We believe that LaMusica.com, together with our radio station portfolio, enables our audience to enjoy additional targeted and culturally-specific entertainment options, such as concert listings, CD reviews, local entertainment calendars, and interactive content on popular Latin recording artists and musicians. Similarly, LaMusica.com enables our advertisers to cost-effectively reach their targeted Hispanic consumer through an additional, dynamic and rapidly growing medium.
LaMusica.com has links to the Web sites for some of our radio stations. This network of Web sites permits our target audiences to listen to streaming audio of live radio broadcasts from our radio stations from anywhere in the United States and the world. In addition to our network of station Web sites and our production of original interactive content relating to Latin music and entertainment, we offer enhanced community features on LaMusica.com such as branded e-mail, bulletin boards, fan clubs, chat rooms, personals and horoscopes.
LaMusica.com and our network of station Web sites generate revenues primarily from two distinct sources: (1) advertising and sponsorship and (2) electronic commerce opportunities, such as on-line music sales. We use our stations' on-air marketing power to draw visitors to LaMusica.com. We continue to conduct a nationwide advertising campaign on our radio stations in order to increase audience awareness of LaMusica.com. We utilize our strong relationships with advertisers and the music industry to develop banner advertising and sponsorships. In May 2000, we signed a two-year three-way agreement with LaMusica.com and America Online (AOL), whereby AOL provides LaMusica.com with a co-branded Web site, with a guaranteed minimum number of impressions over a two year period. We believe we can use these impressions to increase revenues. Under the agreement, AOL also provides a programming plan enabling LaMusica.com to create rich content for several AOL brands.
MANAGEMENT AND PERSONNEL
As of December 20, 2000, we had 568 full-time employees, 14 of whom were primarily involved in senior management, 249 in programming, 177 in sales, 112 in general administration and 16 in technical activities.
To facilitate efficient management from our Coconut Grove, Florida headquarters, we access and utilize computerized accounting systems, including our recently purchased Oracle software, from our stations to provide timely information to management on station operations and to assist in cost control and the preparation of monthly financial statements. Corporate executives regularly visit each station to monitor its operations and ensure that our policies are properly followed.
Our business depends upon the efforts, abilities and expertise of our executive officers and other key employees, including Raul Alarcon, Jr., our Chairman of the Board of Directors, President and Chief Executive Officer. The loss of any of these officers and key employees could have a material adverse effect on our business. We do not maintain key man life insurance on any of our personnel.
SEASONALITY
Seasonal net broadcasting revenue fluctuations are common in the radio broadcasting industry and are due primarily to fluctuations in advertising expenditures by local and national advertisers. Our second fiscal quarter (January through March) generally produces the lowest net broadcasting revenue for the year because of normal post-holiday decreases in advertising expenditures.
ADVERTISING
Virtually all radio station revenue is derived from advertising. This revenue is usually classified in one of two categories -- "national" or "local." "National" generally refers to advertising that is solicited by a national representative firm that represents the station and is paid commissions based on collected net revenues. Our national sales representative is Caballero Spanish Media, LLC, a division of Interep National Radio Sales, Inc. "Local" refers to advertising purchased by advertisers and agencies in the local community served by a particular station.
We believe that radio is one of the most efficient and cost-effective means for advertisers to reach targeted demographic groups. Advertising rates charged by a radio station are based primarily on the station's ability to attract listeners in a given market and on the attractiveness to advertisers of the station's listener demographics. Rates vary depending upon a program's popularity among the listeners an advertiser is seeking to attract, the number of advertisers vying for available air time and the availability of alternative media in the market. Radio advertising rates generally are highest during the morning and afternoon drive-time hours which are the peak hours for radio audience listening. We believe that having multiple stations in a market is attractive to national advertisers, enabling the broadcaster to command higher advertising rates. We believe that we will be able to increase our rates as new and existing advertisers recognize the increasing desirability of targeting the growing Hispanic population in the United States.
Each station broadcasts a predetermined number of advertisements each hour with the actual number depending upon the format of a particular station. We determine the number of advertisements broadcast hourly that can maximize the station's available revenue dollars without jeopardizing its audience listener levels. While there may be shifts from time to time in the number of advertisements broadcast during a particular time of the day, the total number of advertisements broadcast on a particular station generally does not vary significantly from year to year.
As is customary in the radio industry, the majority of our advertising contracts are short-term, generally running for less than three months. We have long-term relationships with some of our advertisers. In each of our broadcasting markets, we employ salespeople to obtain local advertising revenues. We believe that our local sales force is crucial to maintaining relationships with key local advertisers and agencies and identifying new advertisers. We generally pay sales commissions to our local sales staff upon the receipt from advertisers of the payments related to these sales. We offer assistance to local advertisers by providing them with studio facilities to produce commercials free of charge.
COMPETITION
The success of each of our stations depends significantly upon its audience ratings and its share of the overall advertising revenue within its market. The radio broadcasting industry is a highly competitive business. Each of our radio stations competes with both Spanish-language and English-language radio stations in its market as well as with other advertising media such as newspapers, broadcast television, cable television, the Internet, magazines, outdoor advertising, transit advertising and direct mail marketing. Several of the stations with which we compete are subsidiaries of large national or regional companies that have substantially greater resources than we do. Factors which are material to competitive position include management experience, the
station's rank in its market, signal strength and frequency, and audience demographics, including the nature of the Spanish-language market targeted by a particular station.
Although the radio broadcasting industry is highly competitive, some barriers to entry exist. These barriers can be mitigated to some extent by changing existing radio station formats and upgrading power, among other actions. The operation of a radio station requires a license or other authorization from the FCC, and the number of radio stations that can operate in a given market is limited by the availability of FM and AM radio frequencies allotted by the FCC to communities in that market. In addition, the FCC's multiple ownership rules regulate the number of stations that may be owned and controlled by a single entity in a given market. However, in recent years, these rules have changed significantly. For a discussion of FCC regulation, see "Federal Regulation of Radio Broadcasting."
The radio industry is also subject to competition from new media technologies that are being developed or introduced, such as the delivery of audio programming by cable television systems, by satellite and by terrestrial delivery of digital audio broadcasting (known as "DAB"). DAB may deliver to nationwide and regional audiences, multi-channel, multi-format, digital radio services with sound quality equivalent to that of compact discs. The FCC has authorized spectrum for the use of a new technology, satellite digital audio radio services (known as "SDARS"), to deliver audio programming. SDARS may provide a medium for the delivery by satellite of multiple new audio programming formats to local and national audiences. It is not known at this time whether digital technology also may be used in the future by existing radio broadcast stations either on existing or alternate broadcasting frequencies. The FCC also has begun accepting applications for a new "low power" radio or "microbroadcasting" service which could open up opportunities for low cost neighborhood service on frequencies which would not interfere with existing stations. No FCC action has been taken on these applications to date.
The delivery of information through the presently unregulated Internet also could create a new form of competition. The radio broadcasting industry historically has grown despite the introduction of new technologies for the delivery of entertainment and information, such as television broadcasting, cable television, audio tapes and compact discs. A growing population and the greater availability of radios, particularly car and portable radios, have contributed to this growth. We cannot assure you, however, that the development or introduction in the future of any new media technology will not have an adverse effect on the radio broadcasting industry.
We cannot predict what other matters might be considered in the future by the FCC, nor can we assess in advance what impact, if any, the implementation of any of these proposals or changes might have on our business. See "Federal Regulation of Radio Broadcasting."
ANTITRUST
An important part of our growth strategy is the acquisition of additional radio stations. Since the passage of the Telecommunications Act of 1996, the Justice Department has become more aggressive in reviewing proposed acquisitions of radio stations and radio station networks. The Justice Department is particularly aggressive when the proposed buyer already owns one or more radio stations in the market of the station it is seeking to buy. Recently, the Justice Department has challenged a number of radio broadcasting transactions. Some of those challenges ultimately resulted in consent decrees requiring, among other things, divestitures of certain stations. In general, the Justice Department has more closely scrutinized radio broadcasting acquisitions that result in local market shares in excess of 40% of radio advertising revenue. Similarly, the FCC staff has announced new procedures to review proposed radio broadcasting transactions even if the proposed acquisition otherwise complies with the FCC's ownership limitations. In particular, the FCC may invite public comment on proposed radio transactions that the FCC believes, based on its initial analysis, may present ownership concentration concerns in a particular local radio market.
FEDERAL REGULATION OF RADIO BROADCASTING
The radio broadcasting industry is subject to extensive and changing regulation by the FCC of programming, technical operations, employment and other business practices. The FCC regulates radio broadcast stations pursuant to the Communications Act. The Communications Act permits the operation of radio broadcast stations only in accordance with a license issued by the FCC upon a finding that the grant of a license would serve the public interest, convenience and necessity. The Communications Act provides for the FCC to exercise its licensing authority to provide a fair, efficient and equitable distribution of broadcast service throughout the United States. Among other things, the FCC:
- assigns frequency bands for radio broadcasting;
- determines the particular frequencies, locations and operating power of radio broadcast stations;
- issues, renews, revokes and modifies radio broadcast station licenses;
- establishes technical requirements for certain transmitting equipment used by radio broadcast stations;
- adopts and implements regulations and policies that directly or indirectly affect the ownership, operation, program content and employment and business practices of radio broadcast stations; and
- has the power to impose penalties, including monetary forfeitures, for violations of its rules and the Communications Act.
The Communications Act prohibits the assignment of an FCC license, or other transfer of control of an FCC licensee, without the prior approval of the FCC. In determining whether to approve assignments or transfers, and in determining whether to grant or renew a radio broadcast license, the FCC considers a number of factors pertaining to the licensee (and any proposed licensee), including restrictions on foreign ownership, compliance with FCC media ownership limits and other FCC rules, licensee character and compliance with the Anti-Drug Abuse Act of 1988.
The following is a brief summary of certain provisions of the Communications Act and specific FCC rules and policies. This summary does not purport to be complete and is subject to the text of the Communications Act, the FCC's rules and regulations, and the rulings of the FCC. You should refer to the Communications Act and these FCC rules, regulations and rulings for further information concerning the nature and extent of federal regulation of radio broadcast stations.
A licensee's failure to observe the requirements of the Communications Act or FCC rules and policies may result in the imposition of various sanctions, including admonishment, fines, the grant of renewal terms of less than eight years, the grant of a license with conditions or, for particularly egregious violations, the denial of a license renewal application, the revocation of an FCC license or the denial of FCC consent to acquire additional broadcast properties.
Congress and the FCC have had under consideration, and may in the future consider and adopt, new laws, regulations and policies regarding a wide variety of matters that could, directly or indirectly, affect the operation, ownership and profitability of SBS's radio stations, result in the loss of audience share and advertising revenue for our radio broadcast stations or affect our ability to acquire additional radio broadcast stations or finance these acquisitions. Such matters may include:
- changes to the license authorization and renewal process;
- proposals to impose spectrum use or other fees on FCC licensees;
- auction of new broadcast licenses;
- changes to the FCC's equal employment opportunity regulations and other matters relating to involvement of minorities and women in the broadcasting industry;
- proposals to change rules relating to political broadcasting including proposals to grant free air time to candidates, and other changes regarding program content;
- proposals to restrict or prohibit the advertising of beer, wine and other alcoholic beverages;
- technical and frequency allocation matters;
- the implementation of digital audio broadcasting on both a satellite and terrestrial basis;
- changes in broadcast cross-interest, multiple ownership, foreign ownership, cross-ownership and ownership attribution policies;
- proposals to allow telephone companies to deliver audio and video programming to homes in their service areas; and
- proposals to alter provisions of the tax laws affecting broadcast operations and acquisitions.
We cannot predict what changes, if any, might be adopted, nor can we predict what other matters might be considered in the future, nor can we judge in advance what impact, if any, the implementation of any particular proposals or changes might have on our business.
FCC LICENSES
The FCC licenses for the radio stations are or will be held by direct or indirect wholly-owned subsidiaries of SBS.
The Communications Act provides that a broadcast station license may be granted to any applicant if the public interest, convenience and necessity will be served thereby, subject to certain limitations. In making licensing determinations, the FCC considers an applicant's legal, technical, financial and other qualifications. The FCC grants radio broadcast station licenses for specific periods of time and, upon application, may renew them for additional terms. Under the Communications Act, radio broadcast station licenses may be granted for a maximum term of eight years.
Generally, the FCC renews radio broadcast licenses without a hearing upon a finding that:
- the radio station has served the public interest, convenience and necessity;
- there have been no serious violations by the licensee of the Communications Act or FCC rules and regulations; and
- there have been no other violations by the licensee of the Communications Act or FCC rules and regulations which, taken together, indicate a pattern of abuse.
After considering these factors, the FCC may grant the license renewal application with or without conditions, including renewal for a term less than the maximum term otherwise permitted by law, or hold an evidentiary hearing.
In addition, the Communications Act authorizes the filing of petitions to deny a license renewal application during specific periods of time after a renewal application has been filed. Interested parties, including members of the public, may use these petitions to raise issues concerning a renewal applicant's qualifications. If a substantial and material question of fact concerning a renewal application is raised by the FCC or other interested parties, or if for any reason the FCC cannot determine that granting a renewal application would serve the public interest, convenience and necessity, the FCC will hold an evidentiary hearing on the application. If as a result of an evidentiary hearing the FCC determines that the licensee has failed to meet the requirements specified above and that no mitigating factors justify the imposition of a lesser sanction, then the FCC may deny a license renewal application. Historically, our licenses have been renewed without any conditions or sanctions being imposed, but we cannot assure you that the licenses of each of our stations will continue to be renewed or will continue to be renewed without conditions or sanctions.
The FCC classifies each AM and FM radio station. An AM radio station operates on either a clear channel, regional channel or local channel. A clear channel is one on which AM radio stations are assigned to serve wide areas, particularly at night.
The minimum and maximum facilities requirements for an FM radio station are determined by its class. Possible FM class designations depend upon the geographic zone in which the transmitter of the FM radio station is located. In general, commercial FM radio stations are classified as follows, in order of increasing power and antenna height: Class A, B1, C3, B, C2, C1 or C radio stations. The FCC recently has adopted rules to divide Class C stations into two subclasses based on antenna height. Stations not meeting the minimum height requirement within a three-year transition period would be downgraded automatically to the new Class C0 category.
Ownership Matters. The Communications Act requires prior approval of the FCC for the assignment of a broadcast license or the transfer of control of a corporation or other entity holding a license. In determining whether to approve an assignment of a radio broadcast license or a transfer of control of a broadcast licensee, the FCC considers, among other things:
- the financial and legal qualifications of the prospective assignee or transferee, including compliance with FCC restrictions on non-U.S. citizen or entity ownership and control;
- compliance with FCC rules limiting the common ownership of attributable interests in broadcast and newspaper properties;
- the history of compliance with FCC operating rules; and
- the character qualifications of the transferee or assignee and the individuals or entities holding attributable interests in them.
Applications to the FCC for assignments and transfers are subject to petitions in favor of denying the assignment or transfer by interested parties.
To obtain the FCC's prior consent to assign or transfer a broadcast license, appropriate applications must be filed with the FCC. The application must be placed on public notice for a period of 30 days during which petitions to deny the application may be filed by interested parties, including members of the public. Informal objections may be filed any time up until the FCC acts upon the application. If the FCC grants an assignment or transfer application, interested parties have 30 days from public notice of the grant to seek reconsideration of that grant. The FCC usually has an additional ten days to set aside such grant on its own motion. When ruling on an assignment or transfer application, the FCC is prohibited from considering whether the public interest might be served by an assignment or transfer to any party other than the assignee or transferee specified in the application.
Under the Communications Act, a broadcast license may not be granted to or held by any corporation that has more than 20% of its capital stock owned or voted by non-U.S. citizens or entities or their representatives, by foreign governments or their representatives, or by non-U.S. corporations. Furthermore, the Communications Act provides that no FCC broadcast license may be granted to or held by any corporation directly or indirectly controlled by any other corporation of which more than 25% of its capital stock is owned of record or voted by non-U.S. citizens or entities or their representatives, or foreign governments or their representatives or by non-U.S. corporations, if the FCC finds the public interest will be served by the refusal or revocation of such license. These restrictions apply in modified form to other forms of business organizations, including partnerships and limited liability companies. Thus, the licenses for our stations could be revoked if more than 25% of our outstanding capital stock is issued to or for the benefit of non-U.S. citizens.
The FCC generally applies its other broadcast ownership limits to "attributable" interests held by an individual, corporation, partnership or other association or entity, including limited liability companies. In the case of a corporation holding broadcast licenses, the interests of officers, directors and those who, directly or indirectly, have the right to vote five percent or more of the stock of a licensee corporation are generally deemed attributable interests, as are positions as an officer or director of a corporate parent of a broadcasting licensee. The FCC treats all partnership interests as attributable, except for those limited partnership interests that under FCC policies are considered insulated from material involvement in the management or operation of the media-related activities of the partnership. The FCC currently treats limited liability companies like
limited partnerships for purposes of attribution. Stock interests held by insurance companies, mutual funds, bank trust departments and certain other passive investors that hold stock for investment purposes only become attributable with the ownership of ten percent or more of the voting stock of the corporation holding broadcast licenses.
To assess whether a voting stock interest in a direct or an indirect parent corporation of a broadcast licensee is attributable, the FCC uses a "multiplier" analysis in which non-controlling voting stock interests are deemed proportionally reduced at each non-controlling link in a multi-corporation ownership chain. A time brokerage agreement with another radio station in the same market creates an attributable interest in the brokered radio station as well for purposes of the FCC's local radio station ownership rules, if the agreement affects more than 15% of the brokered radio station's weekly broadcast hours.
Debt instruments, non-voting stock, options and warrants for voting stock that have not yet been exercised, insulated limited partnership interests where the limited partner is not materially involved in the media-related activities of the partnership, and minority voting stock interests in corporations where there is a single holder of more than 50% of the outstanding voting stock whose vote is sufficient to affirmatively direct the affairs of the corporation, generally do not subject their holders to attribution. However, the FCC's rules also specify other exceptions to these general principles for attribution. The FCC is currently evaluating whether to:
- raise the benchmark for voting stock from five to ten percent;
- raise the benchmark for passive investors holding voting stock from ten to twenty percent;
- continue the single 50% stockholder exception; and/or
- attribute non-voting stock or perhaps only when combined with other rights such as voting shares or contractual relationships.
More recently, the FCC has solicited comment on proposed rules that would:
- treat an otherwise non-attributable ownership equity or debt interest in a licensee as an attributable interest where the interest holder is a program supplier or the owner of a broadcast station in the same market and the equity and/or debt holding is greater than a specified benchmark; and
- in some circumstances, treat the licensee of a broadcast station that sells advertising time of another station in the same market pursuant to a joint sales agreement as having an attributable interest in the station whose advertising is being sold.
Communications Act and FCC rules generally restrict ownership, operation or control of, or the common holding of attributable interests in:
- radio broadcast stations above certain limits servicing the same local market;
- a radio broadcast station and a television broadcast station servicing the same local market; and
- a radio broadcast station and a daily newspaper serving the same local market.
These rules include specific signal contour overlap standards to determine compliance, and the FCC defined market will not necessarily be the same market used by Arbitron(R) or other surveys, or for purposes of the HSR Act. Under these "cross-ownership" rules, we, absent waivers, would not be permitted to own a radio broadcast station and acquire an attributable interest in any daily newspaper or television broadcast station, other than a low-powered television station, in the same market where we then owned any radio broadcast station. Our stockholders, officers or directors, absent a waiver, may not hold an attributable interest in a daily newspaper or television broadcast station in those same markets.
The FCC is currently reviewing the ban on common ownership of a radio station and a daily newspaper in the same market. The FCC's rules provide for the liberal grant of a waiver of the rule prohibiting common ownership of radio and television stations in the same geographic market in the top 25 television markets if specific conditions are satisfied, and the FCC will consider waivers in other markets under more restrictive
standards. The FCC is reviewing its ban on the common ownership of a radio station and a television station or newspaper including extending the policy of liberal waivers of common ownership of radio and television stations to the top 50 television markets.
Although current FCC nationwide radio broadcast ownership rules allow one entity to own, control or hold attributable interests in an unlimited number of FM radio stations and AM radio stations nationwide, the Communications Act and the FCC's rules limit the number of radio broadcast stations in local markets in which a single entity may own an attributable interest as follows:
- In a radio market with 45 or more commercial radio stations, a party may own, operate or control up to eight commercial radio stations, not more than five of which are in the same service (AM or FM).
- In a radio market with between 30 and 44 (inclusive) commercial radio stations, a party may own, operate or control up to seven commercial radio stations, not more than four of which are in the same service (AM or FM).
- In a radio market with between 15 and 29 (inclusive) commercial radio stations, a party may own, operate or control up to six commercial radio stations, not more than four of which are in the same service (AM or FM).
- In a radio market with 14 or fewer commercial radio stations, a party may own, operate or control up to five commercial radio stations, not more than three of which are in the same service (AM or FM), except that a party may not own, operate, or control more than 50 percent of the radio stations in such market.
Because of these multiple and cross-ownership rules, if a stockholder, officer or director of SBS holds an attributable interest in SBS, such stockholder, officer or director may violate the FCC's rules if such person or entity also holds or acquires an attributable interest in other television stations, radio stations or daily newspapers, depending on their number and location. If an attributable stockholder, officer or director of SBS violates any of these ownership rules, we may be unable to obtain from the FCC one or more authorizations needed to conduct our radio station business and may be unable to obtain FCC consents for future acquisitions. As long as one person or entity holds more than 50% of the voting power of the common stock of SBS where the vote of such person or entity is sufficient to affirmatively direct the affairs of SBS, another stockholder, unless serving as an officer and/or director, generally would not hold an attributable interest in SBS. However, as described above, the FCC is currently evaluating whether to continue the exception for a single majority stockholder of more than 50% of a licensee's voting stock. As of December 19, 2000, Raul Alarcon, Jr. held more than 50% of the total voting power of our common stock.
Under its cross-interest policy, the FCC considers meaningful relationships among competing media outlets that serve substantially the same area, even if the ownership rules do not specifically prohibit the relationship. Under this policy, the FCC may consider whether to prohibit one party from holding an attributable interest and a substantial non-attributable interest (including non-voting stock, limited partnership and limited liability company interests) in a media outlet in the same market, or from entering into a joint venture or having common key employees with competitors. The cross-interest policy does not necessarily prohibit all of these interests, but requires that the FCC consider whether, in a particular market, the meaningful relationships between competitors could have a significant adverse effect upon economic competition and program diversity. In a rule making proceeding concerning the attribution rules, the FCC has sought comment on, among other things, (1) whether the cross-interest policy should be applied only in smaller markets, and (2) whether non-equity financial relationships, such as debt, when combined with multiple business relationships, such as local marketing agreements or joint sales arrangements, raise concerns under the cross-interest policy.
Programming and Operations. The Communications Act requires broadcasters to serve the public interest. A broadcast licensee is required to present programming in response to community problems, needs and interests and to maintain certain records demonstrating its responsiveness. The FCC will consider complaints from listeners about a broadcast station's programming when it evaluates the licensee's renewal application, but listeners' complaints also may be filed and considered at any time. Stations also must pay
regulatory and application fees, and follow various FCC rules that regulate, among other things, political advertising, the broadcast of obscene or indecent programming, sponsorship identification, the broadcast of contests and lotteries and technical operation.
The FCC requires that licensees not discriminate in hiring practices, develop and implement programs designed to promote equal employment opportunities and submit reports to the FCC on these matters annually and in connection with each license renewal application.
The FCC rules also prohibit a broadcast licensee from simulcasting more than 25% of its programming on another radio station in the same broadcast service (that is, AM/AM or FM/FM). The simulcasting restriction applies if the licensee owns both radio broadcast stations or owns one and programs the other through a local marketing agreement, provided that the contours of the radio stations overlap in a certain manner.
Local Marketing Agreements. Often radio stations enter into LMAs or time brokerage agreements. These agreements take various forms. Separately owned and licensed radio stations may agree to function cooperatively in programming, advertising sales and other matters, subject to compliance with the antitrust laws and the FCC's rules and policies, including the requirement that the licensee of each radio station maintain independent control over the programming and other operations of its own radio station.
Joint Sales Agreements. Over the past few years, a number of radio stations have entered into cooperative arrangements commonly known as joint sales agreements or JSAs. The FCC has determined that issues of joint advertising sales should be left to enforcement by antitrust authorities, and therefore does not generally regulate joint sales practices between stations. Currently, stations for which another licensee sells time under a JSA are not deemed by the FCC to be an attributable interest of that licensee. However, in connection with its ongoing rulemaking proceedings concerning the attribution rules, the FCC is considering whether JSAs should be considered attributable interests or within the scope of the FCC's cross-interest policy, particularly when JSAs contain provisions for the supply of programming services and/or other elements typically associated with local marketing agreements.
RF Radiation. In 1985, the FCC adopted rules based on a 1982 American National Standards Institute (ANSI) standard regarding human exposure to levels of radio frequency (RF) radiation. These rules require applicants for renewal of broadcast licenses or modification of existing licenses to inform the FCC at the time of filing such applications whether an existing broadcast facility would expose people to RF radiation in excess of certain limits. In 1992, ANSI adopted a new standard for RF exposure that, in some respects, was more restrictive in the amount of environmental RF exposure permitted. The FCC has since adopted more restrictive radiation limits which became effective October 15, 1997, and which are based in part on the revised ANSI standard.
Digital Audio Radio Service. The FCC has allocated spectrum to a new technology, digital audio radio service (DARS), to deliver satellite-based audio programming to a national or regional audience and issued regulations for a DARS service in early 1997. The nationwide reach of satellite DARS could allow niche programming aimed at diverse communities that SBS is targeting. The licensees will be permitted to sell advertising and lease channels in these media. The FCC's rules require that these licensees launch and begin operating at least one space station by 2001 and be fully operational by 2003.
Low Power Radio Broadcast Service. The FCC recently adopted rules establishing two classes of a low power radio service, both of which will operate in the existing FM radio band: a primary class with a maximum operating power of 100 watts and a secondary class with a maximum power of 10 watts. These low power radio stations will have limited service areas of 3.5 miles and 1 to 2 miles, respectively. Implementation of a low power radio service or microbroadcasting will provide an additional audio programming service that could compete with SBS's radio stations for listeners, but we cannot predict the effect upon SBS.
ENVIRONMENTAL MATTERS
In connection with our sale of WXLX-AM in 1997, we assigned the lease of the transmitter for WXLX-AM in Lyndhurst, New Jersey, to the purchaser of the station. The transmitter is located on a former
landfill which ceased operations in the late 1960's. Although WXLX-AM has been sold, we retain potential exposure to possible environmental liabilities relating to the transmitter site. Because the lessee of the property is under a long-term lease, we may become liable for costs associated with remediation of the site. We are unable to assess the likelihood that any claim for remediation of this site will arise, and no amounts have been accrued in the consolidated financial statements relating to this contingent liability.
On September 28, 1999, we received notice from the purchaser of KXMG-AM, a station located in Los Angeles that we sold in December 1997, that it would make a claim against us for indemnification under the asset purchase agreement, pursuant to which it purchased the station, for the removal of an underground fuel storage tank. The notice did not specify the amount of the indemnification claim. We do not have sufficient information to assess our potential exposure to liability, and no amounts have been accrued in the consolidated financial statements relating to this contingent liability.
RECENT DEVELOPMENTS
Initial Public Offering and Related Transactions. On November 2, 1999, we closed our initial public offering of 25,055,510 shares of Class A Common Stock, raising $389.4 million in net proceeds to SBS, including proceeds from the exercise of the over-allotment option granted to the underwriters. Selling shareholders who participated in the offering raised an aggregate of $80.4 million in net proceeds. The shares of Class A Common Stock were offered at an initial offering price of $20.00 per share. Our shares began trading on the Nasdaq National Market on October 28, 1999.
On November 2, 1999, we also closed our offering of $235.0 million of 9 5/8% Senior Subordinated Notes due 2009, raising $228.0 million in net proceeds to SBS.
On September 30, 1999, we commenced tender offers and the solicitation of consents to adopt amendments to the indentures governing our then outstanding senior notes to eliminate substantially all of the restrictive covenants and default provisions contained in the indentures, other than the covenants relating to the payment of interest on the principal of the notes. On November 3, 1999, we accepted for payment consent solicitations and tender offers for two series of our then outstanding senior notes totaling $176,559,000 in aggregate principal amount. The first series, aggregate principal amount $101,559,000 of outstanding 12 1/2% Senior Notes due 2002, was redeemed at $1,142.86 per each validly tendered $1,000 12 1/2% Note. We received consents and tenders from 99.7% of our 12 1/2% Notes. As of December 20, 2000, there is an aggregate principal amount of $100,000 of our 12 1/2% Notes that remains outstanding. The second series, aggregate principal amount $75.0 million of outstanding 11% Senior Notes due 2004, Series B was purchased by us at $1,108.04 per each validly tendered $1,000 11% Note. We received consents and tenders from 100% of the holders of our 11% Notes.
On November 2, 1999, we gave notice of redemption of all of our outstanding 14 1/4% Senior Exchangeable Preferred Stock at 105% of the liquidation preference of each share at an aggregate cost to us of approximately $265.6 million. We completed the redemption on December 2, 1999.
Reclassification and Stock Split of Common Stock. On September 29, 1999, we filed a third amended and restated certificate of incorporation to reclassify all of our then outstanding shares of Class A Common Stock, par value $.01 per share, into shares of Class B Common Stock, par value $.0001 per share and effect a 50-to-1 stock split of the new shares of Class B Common Stock. Each share of Class A Common Stock entitles its holder to one vote and each share of Class B Common Stock entitles its holder to ten votes.
Purchase of Additional Puerto Rico Stations. On September 22, 1999, Spanish Broadcasting System of Puerto Rico, Inc., a Delaware corporation and wholly owned subsidiary of SBS, entered into a stock purchase agreement to purchase all of the outstanding capital stock of the following nine subsidiaries of AMFM Operating Inc., a Delaware corporation (formerly known as Chancellor Media Corporation of Los Angeles) ("AMFM"): Primedia Broadcast Group, Inc., WIO, Inc., Cadena Estereotempo, Inc., Portorican American Broadcasting, Inc., WLDI, Inc., WRPC, Inc., WOYE, Inc., WZNT, Inc., WOQI, Inc. (the "Primedia Station Group"). The Primedia Station Group owns and operates eight radio stations in Puerto Rico: WIOA-FM, WIOB-FM, WIOC-FM, WCOM-FM, WZMT-FM, WZNT-FM, WOYE-FM, and
WCTA-FM. On January 14, 2000, we completed the purchase from AMFM of all of the outstanding capital stock of the Primedia Station Group for total cash consideration of $90.8 million (net of $1.0 million cash acquired), including a $10.0 million deposit that was made on September 22, 1999 and closing costs of $0.7 million. The acquisition was financed from cash on hand.
Sale of Florida Keys Stations. On February 2, 2000, SBS completed the sale of WVMQ-FM in Key West, Florida and WZMQ-FM in Key Largo, Florida to South Broadcasting System, Inc., a company owned by Mr. Pablo Raul Alarcon, Sr., our Chairman Emeritus and a member of our board of directors, for total cash consideration of $0.7 million.
Shelf Registration. On March 13, 2000, in fulfillment of our obligation pursuant to registration rights agreements dated June 29, 1994 and March 15, 1997, respectively, we filed a registration statement on Form S-3 through which certain selling stockholders are offering for sale from time to time up to an aggregate of 7,387,750 shares of our Class A Common Stock, which shares were originally issued to the selling stockholders as shares of Class B Common Stock pursuant to 1994 and 1997 warrants. On May 8, 2000, the SEC declared the registration statement on Form S-3 effective. The selling stockholders may sell the shares of Class A Common Stock from time to time on the over-the-counter market in regular brokerage transactions or in privately negotiated transactions. We will not receive any portion of the proceeds from the sale of these shares by the selling stockholders.
Senior Credit Facility. On July 6, 2000, we entered into a credit agreement with Lehman Commercial Paper, Inc. as administrative agent and the several banks and other financial institutions or entities from time to time a party to the credit agreement. The senior credit facility includes a six year $25.0 million revolving credit facility and $125.0 million multi-draw term loan facility.
Purchase of Dallas, San Francisco, and Additional Los Angeles and San Antonio Stations. On May 8, 2000, we entered into a stock purchase agreement with Rodriguez Communications, Inc., a Delaware corporation ("RCI") and the stockholders of RCI to acquire all of the outstanding capital stock of RCI which owns and operates radio stations KMJR-FM (formerly KFOX-FM) and KNJR-FM (formerly KREA-FM) serving the Los Angeles, California market, KXJO-FM serving the San Francisco, California market and KSAH-AM serving the San Antonio, Texas market. On May 8, 2000 we also entered into an asset purchase agreement with New World Broadcasters Corp. ("New World"), a Texas corporation and an affiliate of RCI, to acquire radio station KTCY-FM serving the Dallas, Texas market, and a stock purchase agreement with New World and 910 Broadcasting Corp., a Texas corporation and wholly-owned subsidiary of New World, to acquire all of the outstanding capital stock of 910 Broadcasting Corp. which owns and operates radio station KXEB-AM serving the Dallas, Texas market.
On November 10, 2000, we completed the purchase of all the outstanding capital stock of RCI and the purchase of radio station KTCY-FM for total consideration of $164.3 million, consisting of 4,441,545 shares of SBS Class A Common Stock valued at $42.6 million and $121.7 million in cash. We financed the purchase of all the outstanding capital stock of RCI and the purchase of radio station KTCY-FM with previously unissued shares of our Class A Common Stock, cash on hand and borrowings under our credit agreement dated July 6, 2000 with Lehman Commercial Paper, Inc. as administrative agent, and the several banks and other financial institutions or entities from time to time party to the credit agreement. From May 8, 2000 to November 10, 2000, we operated radio station KTCY-FM under a time brokerage agreement with New World. From May 23, 2000 to November 10, 2000, we operated radio station KSAH-AM under a time brokerage agreement with RCI. From July 6, 2000 to November 10, 2000, we operated radio stations KMJR-FM and KNJR-FM under a time brokerage agreement with RCI. From August 23, 2000 to November 10, 2000, we operated radio station KXJO-FM under a time brokerage agreement with RCI.
We have not yet closed the purchase of all the outstanding capital stock of 910 Broadcasting Corp., the owner and operator of radio station KXEB-AM because FCC approval is still pending for this transaction. We cannot assure you that this acquisition will occur. We began operating radio station KXEB-AM on May 8, 2000 under a time brokerage agreement with New World and 910 Broadcasting Corp., which will continue until the closing of the purchase of all the outstanding capital stock of 910 Broadcasting Corp.
Purchase of Additional Los Angeles Station. On November 2, 2000, we entered into an asset purchase agreement with International Church of the Four Square Gospel to purchase radio station KFSG-FM in Los Angeles, California at a purchase price of $250,000,000. In connection with this acquisition, we made an initial deposit of $5,000,000 toward the purchase price. The agreement contains customary representations and warranties, and the closing of our acquisition is subject to the satisfaction of certain customary conditions, including receipt of regulatory approval from the FCC. The agreement may be terminated by us or by the seller if the closing does not occur by December 31, 2001.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements, including statements under the captions "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Business" and elsewhere in this report, concerning our expectations of future sales; gross profits; research and development expenses; selling, general and administrative expenses; product introductions and cash requirements. Forward-looking statements often include words or phrases such as "will likely result", "expect", "will continue", "anticipate", "estimate", "intend", "plan", "project", "outlook" or similar expressions. The statements are not guarantees of future performance and are subject to certain risks, uncertainties and other factors, some of which are beyond our control, are difficult to predict and could cause actual results to differ materially from those expressed in the forward-looking statements. Factors which could cause actual results to differ from expectations include those in the "Risk Factors" section of our registration statement on Form S-1, as amended (Registration No. 333-85499) and our registration statement on Form S-3, as amended (Registration No. 333-32240). We cannot assure you that our results of operations will not be adversely affected by one or more of these factors. We caution you not to place undue reliance on these forward-looking statements, which reflect our management's view only as of the date of this report. We are not obligated to update these statements or publicly release the results of any revisions to them to reflect events or circumstances occurring after the date of this report or to reflect the occurrence of unanticipated events.
CERTAIN CONSIDERATIONS
- Our substantial level of debt could limit our ability to grow and compete.
- The terms of our debt restrict us from engaging in many activities and require us to satisfy various financial tests.
- We have experienced net losses in the past and to the extent that we experience losses in the future, our ability to raise capital and the market prices of our securities could be adversely affected.
- A large portion of our net broadcast revenue and broadcast cash flow comes from the New York and Miami markets.
- Loss of key personnel could adversely affect our business, including Raul Alarcon, Jr., our Chairman of the Board of Directors, President and Chief Executive Officer.
- We 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. 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.
- We must be able to respond to rapidly changing technology, services and standards which characterize our industry in order to remain competitive.
- Our business depends on maintaining our FCC licenses. We cannot assure you that we will be able to maintain these licenses.
- We may face regulatory review for additional acquisitions in our existing markets and, potentially, new markets.
- A national or regional recession could impair our revenues.
- Future sales by existing stockholders could depress the market price of our Class A Common Stock.
ITEM 2.
ITEM 2. PROPERTIES
As of December 1, 2000, we relocated our corporate headquarters to Coconut Grove, Florida to a building owned by Mr. Alarcon, Jr. We entered into a ten year lease with Irradio Holding Limited, a Florida partnership. See "Item 13. Certain Relationships and Related Transactions." The types of properties required to support each of our radio stations include offices, broadcasting studios and antenna towers where broadcasting transmitters and antenna equipment are located. We own the building housing the office and studios in New York for WSKQ-FM and WPAT-FM, and in Los Angeles for KLAX-FM. Additionally, we own a separate building in Los Angeles that we previously used as the office for our Los Angeles operations. We own the auxiliary transmitter site for KSAH-AM in Universal City, Texas and we lease all of our other transmitter sites, with lease terms that expire between 2000 and 2035, assuming all renewal options are exercised. We also own a tower site in Signal Hill, California where we lease space to a public broadcast station and other members of the telecommunications industry. The studios and offices of our Miami and South Florida stations are currently located in leased facilities with lease terms that expire in 2012. See "Item 13. Certain Relationships and Related Transactions." We lease the office and studio facilities for our stations in Chicago, Dallas, Oakland, San Antonio and Puerto Rico.
The transmitter sites for our stations are material to our overall operations. Management believes that our properties are in good condition and are suitable for our operations; however, we continually seek opportunities to upgrade our properties. We own substantially all of the equipment used in our radio broadcasting business. See "Item 1. Business -- Environmental Matters."
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
From time to time we are involved in litigation incidental to the conduct of our business, such as contract matters and employee-related matters. We are not currently a party to litigation which, in the opinion of management, is likely to have a material adverse effect on our business. See "Item 1. Business -- Environmental Matters."
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth quarter of fiscal year 2000.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our shares of Class A Common Stock were not registered under the Securities Act of 1933 or the Securities Exchange Act of 1934, as amended, until October 27, 1999. The principal market upon which our Class A Common Stock is traded is the Nasdaq National Market. Our shares of Class A Common Stock began trading on the Nasdaq National Market on October 28, 1999. For the period from October 28, 1999 to December 26, 1999, the high and low bids for our Class A Common Stock were $39.88 and $25.25, respectively. For the period from December 27, 1999 to March 26, 2000, the high and low bids for our Class A Common Stock were $42.00 and $17.25, respectively. For the period from March 27, 2000 to June 25, 2000, the high and low bids for our Class A Common Stock were $25.50 and $13.94, respectively. For the period from June 26, 2000 to September 24, 2000, the high and low bids for our Class A Common Stock were $22.50
and $8.63, respectively. As of December 20, 2000, there were approximately 6,500 holders of our Class A Common Stock, par value $.0001 per share.
There is no established trading market for our Class B Common Stock, par value $.0001 per share. As of December 20, 2000, there were seven record holders of our Class B Common Stock. This figure does not include an estimate of the indeterminate number of beneficial holders whose shares may be held of record by brokerage firms and clearing agencies.
DIVIDEND POLICY
We intend to retain future earnings for use in our business and do not anticipate declaring or paying any cash or stock dividends on shares of our common stock in the foreseeable future. In addition, any determination to declare and pay dividends will be made by our board of directors in light of our earnings, financial position, capital requirements and other factors that our board of directors deems relevant. Furthermore, the indenture governing our 9 5/8% senior subordinated notes offering contains restrictions on our ability to pay dividends. We previously declared and paid an extraordinary dividend in March 1998, pursuant to which some of our warrantholders elected to increase the conversion rates of their warrants instead of receiving cash. We do not expect to make payments of any similar dividends in the near future.
RECENT SALES OF UNREGISTERED SECURITIES
On November 10, 2000, we issued an aggregate of 4,441,545 shares of our Class A Common Stock to New World Broadcasters Corp., the shareholders of Rodriguez Communications, Inc. ("RCI"), and to certain individuals as part of the purchase price for radio station KTCY-FM and all the outstanding capital stock of RCI (which owns and operates radio stations KFOX-FM, KREA-FM, KXJO-FM and KSAH-FM). We relied on Section 4(2) of the Securities Act of 1933, as amended, to claim exemption from registration for this issuance, as a transaction not involving any public offering.
Prior to June 30, 1999, we issued 182,303 shares to qualified institutional buyers and accredited institutional investors who exercised warrants to purchase shares of our Class A Common Stock. Our warrants were initially issued in 1994 as part of units that included our senior notes and in 1997 as part of units that included our senior exchangeable preferred stock. The exercise price for the warrants was $.01 per warrant. Holders exercising the 1997 warrants received .428 shares per warrant and holders exercising the 1994 warrants received one share per warrant. On September 29, 1999, we filed our third amended and restated certificate of incorporation to reclassify all of our then outstanding shares of Class A Common Stock, par value $.01 per share, into shares of Class B Common Stock, par value $.0001 per share and to effect a 50-to-1 stock split of the new shares of Class B Common Stock. We relied on Sections 3(a)(9) and 4(2) of the Securities Act of 1933, as amended, to claim exemption from registration for this issuance, as a transaction not involving any public offering.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION (IN THOUSANDS EXCEPT RATIOS, SHARES OUTSTANDING AND PER SHARE DATA)
The following table sets forth the historical financial information of our business. The selected historical consolidated financial information presented below under the caption "Statement of Operations Data" and "Balance Sheet Data," as of and for each of the fiscal years in the five-year period ended September 24, 2000 are derived from our historical consolidated financial statements, which have been audited by KPMG LLP, independent certified public accountants. Our selected historical consolidated financial data should be read in conjunction with our historical consolidated financial statements as of September 26, 1999 and September 24, 2000, and for each of the fiscal years in the three-year period ended September 24, 2000, the related notes and independent auditors' report included elsewhere in this report. For additional information see the financials section of this report and "Management's Discussion and Analysis of Financial Condition and Results of Operations."
NOTES TO SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION
(1) Station operating expenses include engineering, programming, selling and general and administrative expenses.
(2) Interest expense includes non-cash interest, such as the accretion of principal, the amortization of discounts on debt and the amortization of deferred financing costs.
(3) During the 1996, 1997 and 1999 fiscal years, we wrote down the value of our land and building located on Sunset Boulevard in Los Angeles by $697,741, $487,973 and $451,048, respectively. The write-downs were based on current market values of real estate in the Los Angeles area. Financing costs are also included in other income (expenses).
(4) On June 29, 1994, we sold 107,059 units, each consisting of $1,000 principal amount, of our 12 1/2% notes and warrants to purchase one share of common stock per unit. The 12 1/2% notes were issued at a substantial discount from their principal amount. The sale of the 12 1/2% notes and warrants generated gross proceeds of $94,000,000 and proceeds to us of $87,774,002, net of financing costs of $6,225,998. Of the $94,000,000 of gross proceeds from the sale of the 12 1/2% notes and warrants, $88,603,000 was allocated to the 12 1/2% notes and $5,397,000 was determined to be the value of the warrants. Of the net proceeds from the sale of the 12 1/2% notes and warrants, $83,000,000 was used to satisfy in full our obligations to our two former principal lenders and the balance was used to settle litigation with a former stockholder and for general corporate purposes.
For the fiscal year ended September 28, 1997, we recorded an extraordinary loss resulting from the redemption of our 12 1/4% senior secured notes due 2001 at par which was approximately $1.5 million in excess of their carrying value and from the write-off of the related unamortized deferred financing costs of approximately $1.3 million, net of the related tax benefit of approximately $1.1 million.
For the fiscal year ended September 27, 1998, we recorded an extraordinary loss resulting from the repurchase of $13.2 million par value of 12 1/2% notes, at a premium of approximately $2.2 million in excess of their carrying value and from the write-off of the related unamortized deferred financing costs of approximately $0.5 million, net of the related tax benefit of approximately $1.1 million.
For the fiscal year ended September 24, 2000, we recorded an extraordinary loss of $17.2 million related to the early retirement of our 11% and 12 1/2% notes at a premium of approximately $23.1 million in excess of their carrying value and from the write-off of the related unamortized deferred financing costs of approximately $5.5 million, net of the related tax benefit of approximately $11.4 million.
(5) The term "broadcast cash flow" means operating income before depreciation, amortization and corporate expenses. Broadcast cash flow should not be considered in isolation from, or as a substitute for, net income or cash flow and other consolidated income or cash flow statement data or as a measure of our profitability or liquidity. Although broadcast cash flow is not a measure of performance calculated in accordance with generally accepted accounting principles, broadcast cash flow is widely used in the broadcasting industry as a measure of a broadcasting company's operating performance. Broadcast cash flow may not be comparable to a similarly entitled item reported by other entities that do not define the term exactly as the Company defines it. The Company believes that broadcast cash flow is a useful indicator to investors of the cash flow generated by the operations of the Company's stations and permits investors to compare the Company's performance with respect to station operations with those of other radio broadcast companies. The Company believes that broadcast cash flow is particularly useful in analyzing acquisition opportunities.
(6) The term "EBITDA" means earnings before extraordinary items, gain on sale of AM stations, net interest expense, income taxes, depreciation, amortization and other income or expense. Although EBITDA is not a measure of performance calculated in accordance with generally accepted accounting principles, EBITDA is widely used in the broadcasting industry as a measure of a broadcasting company's operating performance. EBITDA may not be comparable to a similarly entitled item reported by other entities that do not define the term exactly as the Company defines it. The Company believes that
EBITDA is a useful indicator to investors of the Company's capacity to incur and service debt. Many debt instruments, including the indenture governing the Company's 9 5/8% Senior Subordinated Notes, contain covenants which use formulas based on EBITDA calculations.
(7) The term "after-tax cash flow" means income before income tax benefit (expense) and extraordinary items, minus net gain on sale of AM stations (net of tax) and the current income tax provision, plus depreciation and amortization expense. Although after-tax cash flow is not a measure of performance calculated in accordance with generally accepted accounting principles, after-tax cash flow is widely used in the broadcasting industry as a measure of a broadcasting company's operating performance.
(8) On September 29, 1999, we filed a third amended and restated certificate of incorporation which resulted in (1) the redesignation of our previously outstanding shares of Class A Common Stock into shares of Class B Common Stock, (2) a 50-to-1 stock split of our Class B Common Stock and (3) a reduction in the par value of our Class A Common Stock and Class B Common Stock from $0.01 per share to $0.0001 per share. The financial information has been restated to reflect this redesignation, stock split and change in par value.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
BACKGROUND
We commenced operations with the purchase of our first radio station, WXLX-AM (formerly WSKQ-AM) serving the New York metropolitan area in 1983. Since 1983 we have purchased 28 stations, including three additional AM stations, in eight U.S. markets. Today, we are the second largest Spanish-language radio broadcasting company in the United States, currently owning and operating a total of 23 FM radio stations and one AM radio station. We operate an additional AM radio station under a time brokerage agreement. Twenty-five of our stations are located in eight of the largest Hispanic markets in the United States, including Los Angeles, New York, Puerto Rico, Miami, San Francisco, Chicago, San Antonio and Dallas. In total, our radio stations reach over 61% of the U.S. Hispanic population.
Our financial results depend on a number of factors, including the strength of the national economy and the local economies served by our stations, total advertising dollars dedicated to the markets served by our stations, advertising dollars targeted to the Hispanic consumers in the markets served by our stations, our stations' audience ratings, our ability to provide popular programming, local market competition from other radio stations and other advertising media, and government regulations and policies.
We report our revenues and expenses on a broadcast month basis. "Broadcast month basis" means a four or five week period ending on the last Sunday of each calendar month. For fiscal years 1998, 1999 and 2000 we reported 52 weeks of revenues and expenses.
As is true of other radio groups, our performance is customarily measured by our ability to generate broadcast cash flow, EBITDA and after-tax cash flow. Broadcast cash flow consists of operating income before depreciation, amortization and corporate expenses. EBITDA consists of earnings before extraordinary items, gain on sale of AM stations, net interest expense, income taxes, depreciation, amortization and other income or expenses. After-tax cash flow consists of income before income tax benefit (expense) and extraordinary items, minus net gain on sale of AM stations (net of tax) and the current income tax provision, plus depreciation and amortization expense. Although broadcast cash flow, EBITDA and after-tax cash flow are not measures of performance calculated in accordance with generally accepted accounting principles, we believe that broadcast cash flow, EBITDA and after-tax cash flow are useful in evaluating us because these measures are accepted by the broadcasting industry as generally recognized measures of performance and are used by securities industry analysts who publish reports on the performance of broadcasting companies. In addition, we have included information concerning broadcast cash flow, EBITDA and after-tax cash flow in this report because it is used by some investors as a measure of a company's ability to service its debt obligations and it is also the basis for determining compliance with certain covenants contained in the indentures governing our debt securities and in the certificate of designation governing our preferred stock. Broadcast cash flow, EBITDA and after-tax cash flow are not intended to be substitutes for operating income
as determined in accordance with generally accepted accounting principles, or alternatives to cash flow from operating activities (as a measure of liquidity) or net income.
REVENUES
Our primary source of revenue is the sale of advertising time on our radio stations to local and national advertisers. Our revenues are 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. Advertising rates are based primarily on (1) a radio station's audience share in the demographic groups targeted by advertisers, as measured principally by periodic reports developed by Arbitron(C), (2) the number of radio stations in the market competing for the same demographic groups, and (3) the supply of and demand for radio advertising time. Advertising rates fluctuate daily and are generally highest during the morning and afternoon commuting hours. Seasonal net broadcasting revenue fluctuations are common in the radio broadcasting industry and are due primarily to fluctuations in advertising expenditures by local and national advertisers. Our second fiscal quarter (January through March) generally produces the lowest net broadcasting revenue for the year because of normal post-holiday decreases in advertising expenditures.
FISCAL YEAR 2000 COMPARED TO FISCAL YEAR 1999
Net Revenues. Our net revenues were $122.7 million for fiscal year 2000, compared to $97.4 million for fiscal year 1999, an increase of $25.3 million or 26.0%. The increase was primarily attributable to the inclusion of operating results of certain of our Puerto Rico stations, which we purchased from AMFM in January, that had not yet been acquired during the same period in fiscal year 1999. Additionally, our net revenues increased due to higher advertising rates, as advertisers continue to be attracted to the Spanish-language market.
Station Operating Expenses. Total station operating expenses were $57.6 million for fiscal year 2000, compared to $44.6 million for fiscal year 1999, an increase of $13.0 million or 29.1%. The increase was primarily attributable to the inclusion of operating results of certain of our Puerto Rico stations, which we purchased from AMFM in January, that had not yet been acquired during the same period in fiscal year 1999 as well as the stations operated under time brokerage agreements in connection with the Rodriguez Communications, Inc. and related transactions. In addition, on a same station basis, we experienced higher music license fees and commissions associated with increased sales.
Broadcast Cash Flow. Broadcast cash flow was $65.1 million for fiscal year 2000, compared to $52.7 million for fiscal year 1999, an increase of $12.4 million or 23.5%. Our broadcast cash flow margin decreased slightly to 53.1% for fiscal year 2000 compared to 54.2% for fiscal year 1999. Excluding net Internet broadcast cash flow of ($2.1) million for fiscal year 2000 and ($0.5) million for fiscal year 1999, broadcast cash flow would have increased by $14.0 million to $67.2 million, a 26.3% increase, and our broadcast cash flow margin would have reached 54.9% for the fiscal year 2000.
Corporate Expenses. Total corporate expenses were $20.7 million for fiscal year 2000, compared to $10.6 million for fiscal year 1999, an increase of $10.1 million or 95.3%. The increase in corporate expenses resulted mainly from a non-recurring severance payment of $10.2 million related to the purchase of an annuity for two of our retired executives.
EBITDA. EBITDA was $44.4 million for fiscal year 2000, compared to $42.1 million for fiscal year 1999, an increase of $2.3 million or 5.5%. The increase in EBITDA was mostly attributable to the increase in broadcast cash flow, partially offset by the non-recurring severance payment of $10.2 million. Excluding the non-recurring severance payment, EBITDA was $54.6 million for the fiscal year 2000, an increase of $12.5 million or 29.7%, and our EBITDA margin was 44.5%.
Depreciation and Amortization. Depreciation and amortization expense was $13.1 million for fiscal year 2000, compared to $9.9 million for fiscal year 1999, an increase of $3.2 million or 32.3%. The increase was related primarily to an increase in amortization costs resulting from the purchase of the Puerto Rico stations from AMFM.
Operating Income. Operating income was $31.3 million for fiscal year 2000, compared to $32.2 million for fiscal year 1999, a decrease of $0.9 million or 2.8%. The decrease was due primarily to the non-recurring severance payment of $10.2 million.
Interest Expense, Net. Interest expense was $19.5 million for fiscal year 2000, compared to $21.2 million for fiscal year 1999, a decrease of $1.7 million or 8.0%. This decrease was due primarily to interest income earned on the unused proceeds from the initial public offering, partially offset by interest on additional debt related to the refinancing of the 12 1/2% and 11% notes.
Other Expense, Net. We had other expenses of $0.3 million for fiscal year 2000, compared to $0.7 million for fiscal year 1999, a decrease of $0.4 million or 57.1%. The other expenses during fiscal year 2000 included a $0.3 million write-off of costs related to a financing transaction that we abandoned.
Extraordinary Loss. The Company incurred an extraordinary loss of $17.2 million, net of an income tax benefit of $11.4 million, in fiscal year 2000 related to the early retirement of our 11% and 12 1/2% notes for an amount in excess of our carrying value and the write-off of the related unamortized debt issuance costs.
Net Income (Loss). Our net loss was $10.6 million for fiscal year 2000, compared to net income of $5.8 million for fiscal year 1999. The loss was caused primarily by the extraordinary loss and the non-recurring severance payment.
After-Tax Cash Flow. After-tax cash flow was $19.7 million for fiscal year 2000, compared to $15.7 million for fiscal year 1999, an increase of $4.0 million or 25.5%. This increase was primarily attributable to the increase in broadcast cash flow that exceeded the non-recurring severance payment, net of tax benefit. Excluding the net non-recurring severance payment, after-tax cash flow was $25.5 million for fiscal year 2000, an increase of $9.8 million or 62.4% compared to fiscal year 1999.
FISCAL YEAR 1999 COMPARED TO FISCAL YEAR 1998
Net Revenues. Our net revenues were $97.4 million for fiscal year 1999, compared to $76.1 million for fiscal year 1998, an increase of $21.3 million or 28.0%. The increase in net revenues, from a percentage standpoint, was mostly attributable to the Chicago and New York market stations where our net revenues increased 30.7% and 27.2%, respectively, due to high ratings, robust local economies and increased advertising rates. All of the markets in which we operate stations experienced strong increases in net revenues, including our Los Angeles FM station where net revenue increased by 24.0%.
Station Operating Expenses. Total station operating expenses were $44.6 million for fiscal year 1999, compared to $39.5 million for fiscal year 1998, an increase of $5.1 million or 12.9%. The higher station operating expenses were caused mainly by the inclusion of the results of the recent acquisitions in San Antonio and Puerto Rico as well as JuJu Media, Inc. accounting for $4.2 million or 82.4% of the increase in station operating expenses. To a lesser extent, all of our other radio stations experienced higher commissions and higher music license fees associated with increased sales. Additionally, the New York market had an increase in performance bonuses due to increased sales and broadcast cash flow, and the Los Angeles market had an increase in salaries related to on-air talent. This increase in operating expenses was offset by lower general and administrative expenses due to improved collections.
Broadcast Cash Flow. Broadcast cash flow was $52.7 million for fiscal year 1999, compared to $36.6 million for fiscal year 1998, an increase of $16.1 million or 44.0%. This increase was attributable to strong revenue growth and effective management of operating expenses. Our broadcast cash flow margin increased to 54.2% for fiscal year 1999 compared to 48.1% for fiscal year 1998.
Corporate Expenses. Total corporate expenses were $10.6 million for fiscal year 1999, compared to $6.9 million for fiscal year 1998, an increase of $3.7 million or 53.6%. The increase in corporate expenses resulted mainly from performance bonuses paid to our executives, increases in the number of our employees and increased travel and other corporate overhead expenses relating to our expansion into new markets.
EBITDA. EBITDA was $42.1 million for fiscal year 1999, compared to $29.7 million for fiscal year 1998, an increase of $12.4 million or 41.8%. Our EBITDA margin was 43.2% for fiscal year 1999, compared to
39.0% for fiscal year 1998. The increase in EBITDA and EBITDA margin was caused by the increase in net revenues which was partially offset by the increase in station operating expenses and corporate expenses.
Depreciation and Amortization. Depreciation and amortization expense was $9.9 million for fiscal year 1999, compared to $8.9 million for fiscal year 1998, an increase of $1.0 million or 11.2%. The increase was related to an increase in amortization costs as a result of the stations purchased in Puerto Rico, WCMA-FM, WMEG-FM and WEGM-FM and the purchase of 80% of the stock of JuJu Media, Inc.
Operating Income. Operating income was $32.2 million for fiscal year 1999, compared to $20.9 million for fiscal year 1998, an increase of $11.3 million or 54.1%. The increase was due to the increase in net revenues, partially offset by the increase in operating expenses.
Interest Expense, Net. Interest expense was $21.2 million for fiscal year 1999, compared to $20.9 million for fiscal year 1998, an increase of $0.3 million or 1.4%. This increase was caused by lower interest income in fiscal year 1999 related to lower cash balances in fiscal year 1999.
Other Income (Expense). We had other expenses of $0.7 million for fiscal year 1999, compared to other income of $36.0 million for fiscal year 1998. The other expenses in 1999 resulted primarily from an additional write-down of owned vacant real estate in the Los Angeles area and the Nuestra Telefonica receivable. The other income in 1998 was the result of a gain on the sale of our AM stations during fiscal year 1998.
Net Income. Our net income was $5.8 million for fiscal year 1999, compared to $18.8 million for fiscal year 1998, a decrease of $13.0 million or 69.1%. The decrease was caused by the absence of the gain on the sale of our AM stations.
After-Tax Cash Flow. After-tax cash flow was $15.7 million for fiscal year 1999, compared to $7.5 million for fiscal year 1998, an increase of $8.2 million or 109.3%. This increase was primarily attributable to an increase in EBITDA, offset by higher income taxes.
LIQUIDITY AND CAPITAL RESOURCES
Our primary source of liquidity is cash on hand, cash provided by operations and, to the extent necessary, undrawn commitments that are available under the $150.0 million senior credit facility arranged by Lehman Brothers Inc. in July 2000. The senior credit facility includes a six-year $25.0 million revolving credit facility and $125.0 million multi-draw term loan facility.
Our ability to increase our indebtedness is limited by the terms of the credit agreement governing our senior credit facilities and the indenture governing our senior subordinated notes. Additionally, the credit agreement and indenture place restrictions on us with respect to the sale of assets, liens, investments, dividends, debt repayments, capital expenditures, transactions with affiliates and consolidations and mergers, among other things.
Net cash flows provided by operating activities were $28.7 million, 20.8 million and $10.9 million for fiscal years 2000, 1999, and 1998, respectively. Changes in our net cash flows from operating activities are primarily a result of changes in advertising revenues and station operating expenses which are affected by the acquisition and disposition of stations during those periods, as well as changes in corporate expenses which included a non-recurring severance payment of $10.2 million for the benefit of certain retiring executives in fiscal year 2000.
Net cash flows used in investing activities were $205.1 million and $38.4 million for fiscal years 2000 and 1999, respectively. Net cash flows provided by investing activities was $41.5 million for fiscal year 1998. Changes in our net cash flow from investing activities are primarily a result of the acquisition and disposition of stations during those periods.
Net cash flows provided by financing activities were $219.0 million, for fiscal year 2000. Net cash flows used in financing activities were $3.1 million and $17.8 million for fiscal years 1999 and 1998, respectively.
Changes in our net cash flows from financing are primarily a result of redemption of and proceeds from notes and preferred stock and proceeds from our initial public offering of Class A Common Stock and from senior credit facilities.
For fiscal year 2000, total capital expenditures were $3.8 million. These expenditures were financed by funds from operations.
Management believes that cash from operating activities, together with cash on hand, should be sufficient to permit us to meet our obligations in the foreseeable future, including: (1) required significant cash interest payments pursuant to the terms of the senior subordinated notes due 2009, (2) operating obligations and (3) capital expenditures. Assumptions (none of which can be assured) that underlie management's belief, include:
- the economic conditions within the radio broadcasting market and economic conditions in general will not deteriorate in any material respect;
- we will continue to successfully implement our business strategy;
- we will not incur any material unforeseen liabilities, including environmental liabilities; and
- no future acquisitions will adversely affect our liquidity.
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 10, 2000, we completed the purchase of all the outstanding capital stock of Rodriguez Communications, Inc. and the purchase of radio station KTCY-FM, serving the Dallas, Texas market, from New World Broadcasters Corp. ("New World") for total consideration of $164.3 million, consisting of $42.6 million of SBS Class A Common Stock and $121.7 million in cash.
The purchase of RCI includes the acquisition of the following radio stations: KMJR-FM (formerly KFOX-FM) and KNJR-FM (formerly KREA-FM) broadcasting, on a co-channeled basis, at 93.5 MHz serving the Los Angeles, California market; KXJO-FM broadcasting at 92.7 MHz serving the San Francisco, California market; and KSAH-AM broadcasting at 720 kHz serving the San Antonio, Texas market.
On May 8, 2000 we entered into a stock purchase agreement with New World and 910 Broadcasting Corp., a wholly-owned subsidiary of New World, to acquire all of the outstanding capital stock of 910 Broadcasting Corp. which owns and operates radio station KXEB-AM serving the Dallas, Texas market. We have not yet closed the purchase of all the outstanding capital stock of 910 Broadcasting Corp. FCC approval is pending for this transaction, and we cannot assure you that the acquisition will occur. We began operating radio station KXEB-AM on May 8, 2000 under a time brokerage agreement with New World and 910 Broadcasting Corp., which will continue until the closing of the purchase of all the outstanding capital stock of 910 Broadcasting Corp.
On November 2, 2000 we entered into an asset purchase agreement with International Church of the Four Square Gospel to purchase radio station KFSG-FM in Los Angeles, California at a purchase price of $250.0 million. In connection with this acquisition, we made an initial deposit of $5.0 million toward the purchase price. The agreement contains customary representations and warranties, and the closing of our acquisition is subject to the satisfaction of certain customary conditions, including receipt of regulatory approval from the FCC. The agreement may be terminated by us or by the seller if the closing does not occur by December 31, 2001.
We have no other written understandings, letters of intent or contracts to acquire radio stations or other companies. We expect to fund the acquisition of radio station KFSG-FM by increasing our senior credit facility, accessing the high yield capital market and undertaking certain potential dispositions. However, there can be no assurance that financing from any of these sources, if available, can be obtained on favorable terms.
YEAR 2000 ISSUE
To date, no material interruptions to our operations have occurred as a result of the year 2000 issue. The greatest threat to our ability to continue broadcasting due to year 2000 issues comes from the utilities which we depend on. To date, we are not aware of any external utility vendor with a year 2000 issue that has materially impacted our results of operations, liquidity, or capital resources. While we believe our efforts provide reasonable assurance that material disruptions will not occur due to internal or vendor failure, the possibility of interruption still exists.
In 1999 we performed various analysis of potential problems related to the year 2000 issue. Internally, we bear some risks in the following areas: computer hardware and software for our accounting and administrative functions, computer-controlled programming of music and the transmission of our signals. Externally, we are at risk, like most companies, of losing power and phone lines. As of December 20, 2000 we spent $0.1 million to upgrade/replace non-compliant systems and equipment.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 133 "Accounting for Derivative Instruments and Hedging Activities" (SFAS No. 133). SFAS No. 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities. It requires an entity to recognize all derivatives as either assets or liabilities in the balance sheet and measure those instruments at fair value. SFAS No. 133, as amended by SFAS No. 137, is expected to be effective for our fiscal year ending September 30, 2001. Management does not believe that the adoption of SFAS No. 133 will have a significant impact on our consolidated financial statements.
In November 1999, the Emerging Issues Task Force ("EITF") of the FASB issued EITF 99-17, "Accounting for Advertising Barter Transactions", which provides guidance on barter transactions that involve nonmonetary exchanges of advertising. EITF 99-17 requires an entity to account for barter advertising revenues and expenses at the determinable fair value of the advertising surrendered or received in the exchange, or at book value if the fair value can not be determined within reasonable limits. The adoption of EITF 99-17 did not have a significant impact on our consolidated financial statements.
In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101 (SAB 101), "Revenue Recognition", which provides guidance on the recognition, presentation and disclosure of revenue in financial statements filed with the SEC. SAB 101 outlines the basic criteria that must be met in order to recognize revenue and provides guidance for disclosures related to revenue recognition policies. In June 2000, the SEC issued SAB 101B, "Second Amendment: Revenue Recognition in Financial Statements" which extends the effective date of SAB 101 to the fourth fiscal quarter of fiscal years commencing after December 15, 1999. At this time, management is still assessing the impact of SAB 101 on our financial position and results of operations.
In September 2000, the FASB issued SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities (A Replacement of SFAS No. 125)". SFAS No. 140 provides guidance on accounting for (1) securitization transactions involving financial assets; (2) sales of financial assets (including loan participations); (3) factoring transactions; (4) wash sales; (5) servicing assets and liabilities; (6) collateralized borrowing arrangements; (7) securities lending transactions; (8) repurchase agreements; and (9) extinguishment of liabilities. While most of the provisions of SFAS No. 140 will become effective for transactions entered into after March 31, 2001, companies with calendar fiscal year ends that hold beneficial interests from previous securitizations will be required to make additional disclosures in their December 31, 2000 financial statements. Management does not believe that the adoption of SFAS No. 140 will have a significant impact on our consolidated financial statements.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We believe that inflation has not had a material impact on the results of operations for each of our fiscal years in the three-year period ended September 24, 2000. However, there can be no assurance that future inflation would not have an adverse impact on our operating results and financial condition.
We are not subject to currency fluctuations since we do not have any international operations other than Puerto Rico where the currency is the U.S. dollar. We have limited market risk exposure since we do not have any outstanding variable rate debt or derivative financial and commodity instruments as of December 20, 2000. Our financial instruments outstanding at September 24, 2000 with market risk are our 9 5/8% Senior Subordinated Notes due 2009 and our 12 1/2% Senior Notes due 2002 of which only an aggregate principal amount of $100,000 remains outstanding.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information called for by this Item 8 is included in Item 14, under "Financial Statements" and "Financial Statement Schedule" appearing at the end of this annual report on Form 10-K.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
There have been no changes in or disagreements between us and our accountants on accounting or financial disclosure during our two most recent fiscal years or any subsequent interim period.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth the names, ages and positions of the directors, executive officers and certain key employees of SBS as of September 24, 2000. Each of our directors and officers serves until his successor is elected and qualifies.
PABLO RAUL ALARCON, SR. was our Chairman of the Board of Directors from March 1983 until November 2, 1999, when he became Chairman Emeritus. Mr. Alarcon, Sr. continues to be a member of our board of directors. Mr. Alarcon, Sr. has been involved in Spanish-language radio broadcasting for much of his life. He started his broadcasting career in Cuba in the early 1950's when he established a radio station chain in Camaguey, Cuba. Upon his arrival in the United States, Mr. Alarcon, Sr. continued his career in radio broadcasting and was an on-air personality for a New York radio station before being promoted to programming director. Mr. Pablo Raul Alarcon, Sr. subsequently owned and operated a recording studio and an advertising agency. In 1983, he purchased our first radio station. Mr. Alarcon, Sr. is Raul Alarcon, Jr.'s father.
RAUL ALARCON, JR. has been Chief Executive Officer, President and a director since October 1985. On November 2, 1999, Mr. Alarcon, Jr. became Chairman of the Board of Directors and continues as our Chief Executive Officer and President. Mr. Alarcon, Jr. joined SBS as a sales manager in 1983. Mr. Alarcon, Jr. is responsible for our long-range strategic planning and was instrumental in the acquisition and financing of each of our radio stations as well as our initial public offering. Mr. Alarcon, Jr. is the son of Mr. Alarcon, Sr. and the son-in-law of Mr. Grimalt.
JOSE GRIMALT has been a member of our board of directors since June 1994. On November 2, 1999, Mr. Grimalt became Secretary Emeritus. From 1969 to 1986, Mr. Grimalt owned and operated Spanish-language station WLVH-FM in Hartford, Connecticut. In 1984, Mr. Grimalt became a stockholder and the President of SBS's California subsidiary which operated KXMG-AM in Los Angeles. Mr. Grimalt is Mr. Alarcon, Jr.'s father-in-law.
JOSEPH A. GARCIA has been Chief Financial Officer since 1984, Executive Vice President since 1996 and Secretary since November 2, 1999. Before joining SBS in 1984, Mr. Garcia spent thirteen years in financial positions with Philip Morris and Revlon, where he was Manager of Financial Planning for Revlon -- Latin America.
JESUS SALAS has been the Vice President of Programming since April 1998. He joined SBS in March 1997 as the Programming Director for our Miami stations. Prior to joining us he worked for New Age Broadcasting, Inc., where he began his career in November 1993 as a disc jockey and was eventually promoted to programming director.
LUIS DIAZ-ALBERTINI has been the Vice President/Group Sales since September 1998. He began his employment with SBS as the General Manager of WLEY-FM in Chicago in March 1997. Prior to joining us, Mr. Diaz-Albertini's experience included being VP/General Manager of the four stations located in Miami for Hispanic Broadcasting Corporation (formerly Heftel Broadcasting Corporation). Mr. Diaz-Albertini has worked in the broadcasting industry for 27 years.
ROMAN MARTINEZ IV became one of our directors on November 2, 1999. Mr. Martinez is a Managing Director for the investment banking firm of Lehman Brothers Inc. where he has held his title since 1978. Mr. Martinez has been an investment banker advising corporations on financings, mergers and acquisitions and related financial matters since 1971. Mr. Martinez sits on the Board of Governors of New York Presbyterian Healthcare System, Inc. and on the Board of Directors of the International Rescue Committee. Lehman Brothers Inc. acts and has acted as financial advisor to us in connection with our financings and one of our acquisitions in fiscal year 2000. An affiliate of Lehman Brothers Inc., Lehman Commercial Paper Inc., acted as administrative agent in connection with the senior credit facilities. See "Item 13. Certain Relationships and Related Transactions."
JASON L. SHRINSKY became one of our directors on November 2, 1999. Mr. Shrinsky is a partner of the law firm of Kaye, Scholer, Fierman, Hays & Handler, LLP, where he has been a partner since 1986. Mr. Shrinsky has been a lawyer counseling corporations and high net worth individuals on financings, mergers and acquisitions, other related financial transactions and regulatory procedures since 1964. Kaye, Scholer, Fierman, Hays & Handler, LLP has served as our counsel for more than 16 years. The fees paid by us to Kaye, Scholer, Fierman, Hays & Handler, LLP do not exceed five percent of such law firm's consolidated gross revenues for its last full fiscal year. See "Item 13. Certain Relationships and Related Transactions."
JUAN GARCIA served as Vice President of Finance and Strategic Planning from February 1, 2000 to November 24, 2000. Prior to joining us, Mr. Garcia worked as an investment banker at Lehman Brothers, Inc. where he began as an associate in September 1995 and became Vice President in 1999.
WILLIAM TANNER has served as our Executive Vice President of Programming since September 1, 2000. Prior to joining us Mr. Tanner was the Vice President of Programming at Hispanic Broadcasting Corp. for six years.
COMMITTEES OF THE BOARD OF DIRECTORS
Our board of directors maintains an Audit Committee whose members are Roman Martinez IV and Jason L. Shrinsky.
Our board of directors also maintains a Compensation Committee, whose members consist of Mr. Alarcon, Jr., Roman Martinez IV and Jason L. Shrinsky. Mr. Alarcon, Jr. is our Chairman of the Board, Chief Executive Officer and President. The Compensation Committee did not meet during fiscal year 2000. The Compensation Committee met on November 13, 2000 to review compensation items for fiscal years 2000 and 2001. See "Certain Relationships and Related Transactions."
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires our officers and directors and persons who own more than 10% of our common stock (collectively, "Reporting Persons") to file reports of ownership and changes in ownership with the SEC. Reporting Persons are required by SEC regulations to furnish SBS with copies of all section 16(a) forms they file.
Based solely on its review of the copies of such forms received or written representations from the Reporting Persons, we believe that with respect to the fiscal year ended September 24, 2000, all the Reporting Persons complied with all applicable filing requirements, except that: 1) on November 4, 1999 Luis Diaz-Albertini filed a Form 3 due on October 27, 1999 to report his holding of options to purchase shares of the Company's common stock, and 2) on January 10, 2000, Mr. Albertini filed a Form 4 due on November 10, 1999 to report his purchase of shares of our common stock.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth all compensation awarded to, earned by or paid for services rendered to SBS and its subsidiaries, in all capacities during the fiscal years 2000, 1999 and 1998, by our Chief Executive Officer and President and our next four highest paid executive officers at September 24, 2000, whose annual salary and bonus exceeded $100,000. On November 2, 1999, Messrs. Alarcon, Sr. and Grimalt retired as salaried executives of SBS but remain as members of our board of directors.
SUMMARY COMPENSATION TABLE
- --------------- (1) Excludes amounts paid by us in connection with our lease of an apartment in Manhattan owned by Mr. Alarcon, Jr. which is used primarily by Mr. Alarcon, Jr. while on SBS business in New York. Mr. Alarcon, Jr. received personal benefits in addition to his salary and bonus, including use of automobiles. We paid an aggregate of $85,329, $96,512 and $62,691 in each of 2000, 1999 and 1998, respectively, for automobiles used, including driver's salary, by Mr. Alarcon, Jr. In fiscal year 2000 Mr. Alarcon, Jr. received personal benefits estimated at $201,829, including the use of automobiles and drivers and an apartment in Key Biscayne, Florida. The lease for his apartment in Key Biscayne has been terminated as a consequence of Mr. Alarcon, Jr.'s relocation into his newly constructed home on December 20, 2000.
(2) Excludes the payment of a dividend to our stockholders, of which Mr. Alarcon, Jr. received $3.1 million. Excludes reimbursement of Mr. Alarcon, Jr.'s relocation expenses incurred in connection with the relocation of our headquarters. See "Certain Relationships and Related Transactions."
(3) Excludes perquisites and other personal benefits, securities or property which aggregate the lesser of $50,000 or 10% of the total of annual salary and bonus.
(4) William Tanner began his employment with SBS on September 1, 2000.
(5) Juan A. Garcia served as our Vice President of Finance and Strategic Planning from February 1, 2000 to November 24, 2000.
(6) Messrs. Alarcon, Sr. and Grimalt received compensation as officers of SBS through December 31, 1999. However, they continue to be entitled to reimbursement of their out-of-pocket expenses as members of the board of directors and are provided, at our expense, with the use of automobiles and, in the case of Mr. Alarcon, Sr., a driver. We purchased annuities for the retirement of Messrs. Alarcon, Sr. and Grimalt which became effective on January 2, 2000. See "Employment Agreements and Arrangements."
(7) In addition to his salary and bonus, Mr. Alarcon, Sr. received personal benefits including the use of automobiles. We paid an aggregate of $56,955, $57,451 and $49,812 in each of 2000, 1999 and 1998, respectively, for automobiles used by Mr. Alarcon, Sr., including driver's salary.
(8) Excludes a $50,000 loan made by SBS to Mr. Albertini for which Mr. Albertini signed a promissory note payable in two years, but which is subject to forgiveness if Mr. Albertini meets certain sales targets.
STOCK OPTIONS
The following table sets forth information concerning the grant of stock options to each of the named executive officers in fiscal year 2000:
OPTION/SAR GRANTS IN LAST FISCAL YEAR
- --------------- (1) Each option was granted under our 1999 Stock Option Plan and, other than noted in footnote (2), vests 20% immediately, and 20% on the anniversary date of the grant for the following four consecutive years. The options that are not otherwise exercisable prior to a change in control of the Company shall become exercisable on the date of a change in control of the Company and shall remain exercisable for the remainder of the term of the option, as discussed in the Company's 1999 Stock Option Plan.
(2) Raul Alarcon, Jr.'s options vested immediately and were exercisable upon consummation of the Company's IPO on November 2, 1999. Of Mr. Juan A. Garcia's options, 10,000 vested on February 16, 2000, and became immediately exercisable and the remainder terminated upon the termination of his employment with the Company on November 24, 2000. One-third of William Tanner's options vested and are exercisable as of August 31, 2000, one-third will vest and become exercisable on August 30, 2001 and one-third will vest and become exercisable on August 30, 2002. Mr. Tanner's employment agreement does not specify the term of exercisability of these options, and these options have not been granted under the 1999 Stock Option Plan, but we have assumed an exercisability term of ten years based on the maximum permitted term under our 1999 Stock Option Plan.
(3) Juan A. Garcia served as our Vice President of Finance and Strategic Planning from February 1, 2000 to November 24, 2000.
DIRECTOR COMPENSATION
Directors who are officers or former officers do not receive any additional compensation for serving on our board of directors. All directors are reimbursed for their out-of-pocket expenses incurred in connection with their service as directors. All of our non-employee directors are eligible to receive options under our stock plans as described below. In connection with their election to the board of directors on November 2, 1999, we granted each of Messrs. Roman Martinez IV and Jason L. Shrinsky options for 50,000 shares of Class A Common Stock exercisable at the public offering price, of which, options for 10,000 shares vested immediately with the rest vesting ratably over a period of four years. Mr. Shrinsky holds his options for the benefit of his law firm, Kaye, Scholer, Fierman, Hays & Handler, LLP. See "Stock Plans -- Non-Employee Director Stock Option Plan."
Arnold Sheiffer, who served as a director from 1996 until August 1999, received a cash payment of $250,000, which was accrued in fiscal year 1999, and has been granted options to purchase 250,000 shares of Class A Common Stock exercisable at $20.00 per share, which vested on November 2, 1999, for his past services as a director.
EMPLOYMENT AGREEMENTS AND ARRANGEMENTS
Raul Alarcon, Jr.
We have an employment agreement with Raul Alarcon, Jr. pursuant to which Mr. Alarcon, Jr. serves as our Chairman of the Board of Directors, Chief Executive Officer and President. The agreement became effective on November 2, 1999, expires on December 31, 2004 and renews for successive one-year periods after December 31, 2004, unless notice of termination is delivered by either party 90 days prior to the termination date. The agreement provides for a base salary of not less than $1.0 million for each year of the employment term, which may be increased by the board of directors. Under the terms of the agreement, Mr. Alarcon, Jr. will be paid an annual cash performance bonus determined by the board of directors based on annual same station broadcast cash flow growth. Mr. Alarcon, Jr. will receive options to purchase 100,000 shares of Class A Common Stock each year of employment. The initial grant of options to purchase 100,000 shares was made on October 27, 1999 and vested on November 2, 1999 at an exercise price equal to $20.00 per share. The additional grants thereafter vest on each anniversary of the effective date of the agreement at an exercise price equal to the then fair market value of our Class A Common Stock. Mr. Alarcon, Jr. is also entitled to participate in our employee benefit plans and to receive other non-salary benefits, such as health insurance, life insurance, reimbursement for business related expenses and reimbursement for personal tax and accounting expenses. The agreement provides that Mr. Alarcon, Jr.'s employment may be terminated at the election of the board of directors upon his disability or for cause (as defined in the agreement). Pursuant to the agreement, Mr. Alarcon, Jr. is entitled to the use of one automobile and driver at our expense.
Joseph A. Garcia
During fiscal year 2000, we had an employment agreement with Joseph A. Garcia pursuant to which Mr. Garcia served as our Chief Financial Officer, Executive Vice President and Secretary. This employment agreement became effective on November 2, 1999, was to terminate on September 30, 2002 and was to automatically renew for successive one-year periods after September 30, 2002, unless notice of termination was delivered by either party within 90 days prior to the termination date or any succeeding September 30. Mr. Garcia received an annual base salary of $300,000 which could be increased by the board of directors. In addition, Mr. Garcia was entitled to receive (a) an annual cash bonus to be determined by the board of directors, based on performance, and (b) options to purchase 250,000 shares of Class A Common Stock for past performance. The options were granted on October 27, 1999, with options to purchase 50,000 shares vesting on November 2, 1999 at an exercise price equal to $20.00 per share and options to purchase 200,000 shares to vest ratably over a four-year period. Mr. Garcia was also entitled to receive standard employee benefits provided to all of our executives, such as health, life and long-term disability insurance and reimbursement for business related expenses.
On December 7, 2000, we entered into a new employment agreement with Mr. Garcia pursuant to which he continues to serve as our Chief Financial Officer, Executive Vice President and Secretary. This new employment agreement became effective as of December 7, 2000 and has similar terms to his employment agreement signed in fiscal year 2000 including a discretionary bonus, except that the new employment agreement has a term expiring December 7, 2005 (with a similar automatic renewal as the November 2, 1999 employment agreement) and provides for an annual base salary of $400,000. Under his new agreement he is entitled to receive options to purchase 100,000 shares of common stock at an exercise price equal to the closing price on Nasdaq on December 7, 2000. Options to purchase 20,000 shares vested on December 7, 2000 and the remaining options will vest ratably over the next four years.
Luis Diaz-Albertini
We have an employment agreement with Luis Diaz-Albertini pursuant to which Mr. Albertini serves as our Vice President/Group Sales. The employment agreement became effective on November 2, 1999, terminates on November 2, 2002 and automatically renews for successive one-year periods after November 2, 2002, unless notice of termination is delivered by either party within 90 days prior to the termination date or
any succeeding November 2. Mr. Albertini receives an annual salary of $225,000 which may be increased by the board of directors. In addition, Mr. Albertini is entitled to receive (a) an annual cash bonus to be determined by the board of directors, based on performance, and (b) options to purchase 50,000 shares of Class A Common Stock for past performance. The options were granted on October 27, 1999, with options to purchase 10,000 shares vesting on November 2, 1999 at an exercise price equal to $20.00 per share and options to purchase 40,000 shares to vest ratably over a four-year period. Mr. Albertini is also entitled to receive standard employee benefits provided to all of our executives, such as health, life and long-term disability insurance and reimbursement for business related expenses.
William Tanner
We have an employment agreement with William Tanner pursuant to which Mr. Tanner serves as our Executive Vice President of Programming. This employment agreement became effective on August 31, 2000, terminates on August 31, 2005 and can be extended by mutual agreement of SBS and Mr. Tanner. Mr. Tanner receives an annual base salary of $475,000 plus an annual 10% increase over the prior year's base salary and quarterly bonuses based on certain radio stations' Arbitron(R) rankings. Mr. Tanner is also entitled to receive options, which have not yet been granted, to purchase 75,000 shares of common stock at an exercise price equal to the market price on the business day immediately preceding the grant, with options to purchase 15,000 shares to be granted and to vest on August 31, 2001 and on each of the next four anniversaries of August 31, 2001. In addition, Mr. Tanner's employment agreement grants him options to purchase 218,552 shares of common stock at an exercise price equal to the closing stock market price on September 1, 2000, vesting one-third on August 31, 2000, one-third on August 30, 2001 and one-third on August 30, 2002. Mr. Tanner is entitled to receive standard employee benefits provided to other similarly situated SBS executives as well as business class travel, payment of power and telephone bills for the Los Angeles residence, an automobile allowance of $2,000 per month, and the professional support of a shared administrative assistant.
Juan A. Garcia
We had an employment agreement with Juan Garcia during fiscal year 2000 pursuant to which Mr. Garcia served as our Vice President of Finance and Strategic Planning. This employment agreement became effective on February 16, 2000, was to terminate on February 16, 2003 and automatically renew for successive one-year periods after February 16, 2003, unless notice of termination was delivered by either party within 90 days prior to the termination date or any succeeding February 16. Mr. Garcia received an annual base salary of $210,000 which could be increased by the board of directors. In addition, Mr. Garcia was entitled to receive (a) an annual cash bonus based on SBS meeting projected consolidated broadcast cash flow for each fiscal year, and (b) options to purchase 100,000 shares of Class A Common Stock with an exercise price of $20.8125 per share. The options were granted on February 16, 2000 with options to purchase 10,000 shares vesting on February 16, 2000, options to purchase 10,000 shares to vest on February 16, 2001 and options to purchase 20,000 shares to vest on each of the next four anniversaries of February 16, 2001. Mr. Garcia was also entitled to receive standard employee benefits provided to all of our executives. Mr. Garcia's employment terminated on November 24, 2000.
ANNUITY
Upon the completion of our initial public offering, we purchased an annuity from The Canada Life Assurance Company as a retirement vehicle for the benefit of Messrs. Alarcon, Sr. and Grimalt for $10.2 million. Messrs. Alarcon, Sr. and Grimalt will receive annual payments of approximately $700,000 and $300,000, respectively, for the rest of their lives. Mr. Alarcon's wife and Mr. Grimalt's wife are joint annuitants with their husbands. Should Mrs. Alarcon, Sr. or Mrs. Grimalt survive their husbands, they would receive annual payments of $350,000 and $150,000.
STOCK PLANS
1999 Stock Option Plan
We have adopted an option plan to incentivize our present and future executive, managerial and other employees through equity ownership. The option plan provides for the granting of stock options to individuals selected by the compensation committee of the board of directors (or by the board if such committee is not appointed). An aggregate of 3,000,000 shares of Class A Common Stock have been reserved for issuance under this option plan. The option plan allows us to tailor incentive compensation for the retention of personnel, to support corporate and business objectives, and to anticipate and respond to a changing business environment and competitive compensation practices. As of September 24, 2000, options to purchase 1,593,552 shares of Class A Common Stock have been granted under this plan at exercise prices ranging from $10.00 to $24.63 per share.
The compensation committee, or such other committees as the board of directors shall determine, has discretion to select the participants, to determine the type, size and terms of each award, to modify the terms of awards, to determine when awards will be granted and paid, and to make all other determinations which it deems necessary or desirable in the interpretation and administration of the option plan. The option plan terminates ten years from the date that it was approved and adopted by the stockholders of SBS. Generally, a participant's rights and interest under the option plan are not transferable except by will or by the laws of descent and distribution.
Options, which include non-qualified stock options and incentive stock options, are rights to purchase a specified number of shares of Class A Common Stock at a price fixed by the compensation committee. The option price may be less than, equal to or greater than the fair market value of the underlying shares of Class A Common Stock, but in no event will the exercise price of an incentive stock option be less than the fair market value on the date of grant.
Options will expire no later than ten years after the date on which they are granted (five years in the case of incentive stock options granted to 10% stockholders). Options will become exercisable at such times and in such installments as the compensation committee or other designated committee shall determine. Notwithstanding this, any nonexercisable options shall immediately vest and become exercisable upon a change in control of SBS. Upon termination of a participant's employment with SBS, options that are not exercisable will be forfeited immediately and options that are exercisable will remain exercisable for twelve months following any termination by reason of an optionholder's death, disability or retirement. If termination is for any other reason other than cause, exercisable options will remain exercisable for three months following such termination. Payment of the option price must be made in full at the time of exercise in such form (including, but not limited to, cash or common stock of SBS) as the compensation committee may determine.
In the event of a reorganization, recapitalization, stock split, stock dividend, combination of shares, merger, consolidation, distribution of assets, or any other change in the corporate structure of shares of SBS, the compensation committee will have the discretion to make any adjustments it deems appropriate in the number and kind of shares reserved for issuance upon the exercise of options and vesting of grants under the option plan and in the exercise price of outstanding options.
NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN
We have also adopted a separate option plan for our non-employee directors. The terms of the plan provide that the board of directors has the discretion to grant stock options to any non-employee director. An aggregate of 300,000 shares of Class A Common Stock have been reserved for issuance under this option plan. The plan is administered by the board of directors. In connection with their election as directors, on November 2, 1999, we granted each of Messrs. Shrinsky and Martinez an option under this plan to purchase 50,000 shares of Class A Common Stock exercisable at $20.00 per share. Of these options to purchase 50,000 shares, options to purchase 10,000 shares vested immediately and options to purchase 10,000 shares vested on November 2, 2000. Options to purchase 10,000 shares vest each year over the next three years on the anniversary of the grant so long as Messrs. Shrinsky and Martinez remain directors. Mr. Shrinsky holds his
options for the benefit of his law firm, Kaye, Scholer, Fierman, Hays & Handler, LLP. Any non-exercisable options shall immediately vest and become exercisable upon a change in control of SBS. If a non-employee director's service as a director is terminated for any reason, all options held by the non-employee director which have not then vested shall terminate automatically.
401(k) PLAN
We offer a tax-qualified employee savings and retirement plan (the "401(k) Plan") covering our employees. Pursuant to the 401(k) Plan, an employee may elect to reduce his annual salary by 1%-15%, not to exceed the statutorily prescribed annual limit which is $10,500 for 2000, and have the amount of such reduction contributed to the 401(k) Plan. We may, at our option and in our sole discretion, make matching and/or profit sharing contributions to the 401(k) Plan on behalf of all participants. The 401(k) Plan is intended to qualify under Section 401(a) of the Internal Revenue Code so that contributions by employees or by us to the 401(k) Plan and income earned on plan contributions are not taxable to employees until distributed to them and contributions by us will be deductible by us when, and if, made. The trustees under the 401(k) Plan, at the direction of each participant, invest such participant's assets in the 401(k) Plan in selected investment options.
LIMITATIONS ON DIRECTORS' AND OFFICERS' LIABILITY
Our third amended and restated certificate of incorporation has a provision which limits the liability of directors to us to the maximum extent permitted by Delaware law. The third amended and restated certificate of incorporation specifies that our directors will not be personally liable for monetary damages for breach of fiduciary duty as a director. This limitation does not apply to actions by a director or officer that do not meet the standards of conduct which make it permissible under the Delaware General Corporation Law for SBS to indemnify directors or officers.
Our amended and restated by-laws provide for indemnification of directors and officers (and others) in the manner, under the circumstances and to the fullest extent permitted by the Delaware General Corporation Law, which generally authorizes indemnification as to all expenses incurred or imposed as a result of actions, suits or proceedings if the indemnified parties act in good faith and in a manner they reasonably believe to be in or not opposed to the best interests of SBS. Each director has entered into an indemnification agreement with us that provides for indemnification to the fullest extent provided by law. We believe that these provisions are necessary or useful to attract and retain qualified persons as directors and officers.
We have obtained insurance for the benefit of our directors and officers that provides for coverage of up to $100.0 million.
There is no pending litigation or proceeding involving a director or officer as to which indemnification is being sought.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Our board of directors maintains a Compensation Committee, whose members consist of Mr. Alarcon, Jr., Roman Martinez IV and Jason L. Shrinsky. Mr. Alarcon, Jr. is our Chairman of the Board, Chief Executive Officer and President. Roman Martinez IV and Jason L. Shrinsky are directors. The Compensation Committee did not meet in fiscal year 2000. The Compensation Committee met on November 13, 2000 to review compensation items for fiscal years 2000 and 2001. See "Item 13. Certain Relationships and Related Transactions."
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information concerning the beneficial ownership of our Class A Common Stock and our Class B Common Stock as of December 20, 2000, by:
- each person known by us to beneficially own more than 5% of any class of common stock; and
- each director and each named executive officer.
Unless indicated below, each stockholder listed had sole voting and sole investment power with respect to all shares beneficially owned, subject to community property laws, if applicable.
- --------------- * Indicates less than 1%.
(1) The address of all directors and executive officers in this table, unless otherwise specified, is c/o Spanish Broadcasting System, Inc., 2601 South Bayshore Drive, Coconut Grove, Florida 33133.
(2) As used in this table, "beneficial ownership" means the sole or shared power to vote or direct the voting of a security, or the sole or shared power to dispose, or direct the disposition, of a security. A person is deemed as of any date to have beneficial ownership of any security that the person has the right to acquire within 60 days after that date. For purposes of computing the percentage of outstanding shares held by each person named above, any security that the person has the right to acquire within 60 days of the date of calculation is deemed to be outstanding, but is not deemed to be outstanding for purposes of computing the percentage ownership of any other person.
(3) Includes Class A Common Stock issuable upon the exercise of options that the holder has the right to exercise within sixty days of the date of this report and does not include shares issuable upon exercise of options that have not yet vested.
(4) Includes 4,500 shares owned indirectly through Fraga Incorporated Profit Sharing Plan (Mr. Garcia shares voting and investment power relating to such shares with his brother) and 750 shares owned indirectly through Mr. Juan Garcia's spouse (Mr. Garcia shares voting and investment power relating to such shares with his spouse).
(5) Mr. Shrinsky holds his options for the benefit of his law firm, Kaye, Scholer, Fierman, Hays & Handler, LLP.
(6) James L. Anderson has sole voting power with respect to 2,961,494 shares, shared voting power with respect to 484,092 shares and sole dispositive power with respect to 2,961,494 shares.
The Marcos and Sonya Rodriguez Family Trust has the right to receive dividends relating to and the proceeds from the sale of 2,958,844 shares of the Company's Class A Common Stock for which Mr. Anderson has sole voting and dispositive power resulting from his serving as Trustee of such trust.
A company of which Mr. Anderson is president has the right to receive dividends relating to and the proceeds from the sale of 484,092 shares of the Company's Class A Common Stock for which Mr. Anderson has shared voting power.
(7) The address of The Marcos and Sonya Rodriguez Family Trust is 8828 North Stemmons Freeway, Suite 106, Dallas, Texas 75247.
(8) The address of James L. Anderson is 8828 North Stemmons Freeway, Suite 106, Dallas, Texas 75247.
(9) The address of the Massachusetts Financial Services Company is 500 Boylston Street, Boston, MA 02116.
(10) The address of the Janus Capital Corporation is 100 Fillmore Street, Denver, CO 80206-4923.
(11) The address of Putnam Investments, Inc. is One Post Office Square, Boston, MA 02109.
(12) The address of the TCW Group Inc. is 865 South Figueroa Street, Los Angeles, CA 90017.
(13) Putnam Investments, Inc. ("Putnam") is a wholly-owned subsidiary of Marsh & McLennan Companies, Inc. Putnam wholly owns two registered investment advisers: Putnam Investment Management, Inc., which is the investment adviser to the Putnam family of mutual funds and The Putnam Advisory Company, Inc., ("PAC"), which is the investment adviser to Putnam's institutional clients. Both subsidiaries have dispository power over the shares as investment managers, but each of the mutual fund's trustees have voting power over the shares held by each fund, and The Putnam Advisory Company, Inc. has shared voting power over the shares held by the institutional clients.
Putnam and PAC have shared voting power with respect to 192,273 shares.
(14) The Massachusetts Financial Services Company has sole voting power with respect to 1,946,545 shares.
(15) We obtained this information from Form 13F Filed November 1, 2000.
(16) Mr. Pablo Raul Alarcon, Sr.'s shares are held in a Flint Trust with Mr. Alarcan, Sr. as sole beneficiary.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Upon the completion of our initial public offering, we purchased an annuity for $10.2 million from The Canada Life Assurance Company as a retirement vehicle for the benefit of Mr. Alarcon, Sr., our Chairman Emeritus and a member of our board of directors, and Mr. Grimalt, our Secretary Emeritus and a member of our board of directors. Messrs. Alarcon, Sr. and Grimalt will receive annual payments of approximately $700,000 and $300,000, respectively.
On February 2, 2000, SBS completed the sale of WVMQ-FM in Key West, Florida and WZMQ-FM in Key Largo, Florida to South Broadcasting System, Inc., a company owned by Mr. Pablo Raul Alarcon, Sr., our Chairman Emeritus and a member of our board of directors, for total cash consideration of $0.7 million.
We lease a two-bedroom furnished condominium apartment in midtown Manhattan from Mr. Alarcon, Jr., our Chief Executive Officer, President and Chairman of the Board of Directors, for a monthly rent of $9,000. The lease commenced in August 1987 and will expire in August 2007. During fiscal years 1999 and 1998, we renovated the apartment and incurred approximately $0.2 million in renovation expenses. We made no renovations in fiscal year 2000. Generally, the apartment is used by Mr. Alarcon, Jr. while on SBS business in New York. We believe that the lease for this apartment is at the market rate.
For the year ended September 26, 1999, SBS paid operating expenses aggregating $0.1 million for a boat owned by CMQ Radio, an entity owned equally by Messrs. Alarcon, Sr. and Alarcon, Jr. The boat was used by SBS for business entertainment. For the year ended September 26, 1999, the amount paid by SBS for our use of the boat owned by CMQ Radio was comparable to amounts we would have paid had we leased the boat from an unaffiliated party. In November 1999, we discontinued our arrangement with respect to this boat. We have not made any further payments to CMQ Radio, Inc.
Effective July 1993, Messrs. Alarcon, Sr. and Alarcon, Jr. executed promissory notes to SBS for the principal amounts of $0.5 million and $1.6 million, respectively. These promissory notes evidenced loans made by SBS to Messrs. Alarcon, Sr. and Alarcon, Jr. over several prior years. The notes were to mature in 2001 and bore interest at the rate of 6% percent per annum until July 19, 1994 and after that at the lesser of 9% percent per annum or the prime rate charged by the Chase Manhattan Bank, N.A. Interest on the unpaid principal amount of the notes was payable annually. In December 1995, SBS exchanged these promissory notes for amended and restated notes in the principal amounts of $0.6 million and $1.9 million due from Messrs. Alarcon, Sr. and Alarcon, Jr., respectively. The amended and restated notes bore interest at the rate of 6.36% per annum, and mature on December 30, 2025, and the interest was payable in 30 equal annual installments of $43,570 and $143,158, respectively, on December 30th of each year starting December 30, 1996. As of September 26, 1999, $0.6 million and $1.9 million, plus accrued and unpaid interest of $0.1 million and $0.4 million to date, was outstanding, respectively, on these promissory notes. Upon completion of our initial public offering, Messrs. Alarcon, Sr. and Alarcon, Jr. paid all remaining amounts outstanding under these notes using their portion of the proceeds they received as selling stockholders in our initial public offering.
In 1992, Messrs. Alarcon, Sr. and Alarcon, Jr. acquired a building in Coral Gables, Florida, for the purpose of housing the studios of WCMQ-AM and WCMQ-FM. In June 1992, Spanish Broadcasting System of Florida, Inc., a subsidiary of SBS, entered into a 20-year net lease with Messrs. Alarcon, Sr. and Alarcon, Jr. for the Coral Gables building which provides for a base monthly rent of $9,000. Effective June 1, 1998, the lease on this building was assigned to SBS Realty Corp., a realty management company owned by Messrs. Alarcon, Sr. and Alarcon, Jr. This building currently houses the offices and studios of all of our Miami stations. The lease on the stations' previous studios expired in October 1993, was for less than half the space of the stations' present studios and had a monthly rental of approximately $7,500. Based upon our prior lease for studio space, we believe that the lease for the current studio is at market rates.
In 1992, Mr. Alarcon, Jr. and other investors organized Nuestra Telefonica, Inc., a New York corporation, to operate long distance telephone service in Spanish aimed at the Hispanic population in the markets served by our radio stations. In February 1993, Nuestra Telefonica entered into an access agreement with a common carrier and commenced operations. Nuestra Telefonica advertised its Spanish-language long distance telephone service on our radio stations in Los Angeles and New York and purchased this air time at standard station rates. Since early 1994, Nuestra Telefonica has not utilized any air time on our radio stations. As of September 26, 1999 Nuestra Telefonica owed SBS $0.4 million related to unpaid air time and $0.3 million related to certain expenses paid by SBS on Nuestra Telefonica's behalf. The amounts due were recorded on our books as a receivable and due from related party asset, respectively. Mr. Alarcon, Jr. personally guaranteed the payment of $0.5 million of Nuestra Telefonica's obligations to SBS. Mr. Alarcon, Jr. is Nuestra Telefonica's Chairman and majority shareholder. Joseph A. Garcia, our Executive Vice President and Chief Financial Officer and Secretary, is Nuestra Telefonica's President and a minority shareholder. Nuestra Telefonica is no longer an operating entity and, therefore, upon the completion of our initial public offering on November 2, 1999, we forgave the loans and canceled the guarantees described above. The unreserved portion of these receivables was written-off by SBS at September 26, 1999 and is included in our financial statements under the line item "Other income (expense), net".
Mr. Grimalt's son is employed by SBS as an operations manager. He was paid $129,419 and a bonus of $5,000 for the fiscal year ended September 24, 2000. As part of his compensation we also paid the leasing costs for an automobile in the amount of $8,028. Mr. Alarcon, Jr.'s uncle is currently employed by us as an operations manager and his salary is $76,500.
Roman Martinez IV, one of our directors, is a Managing Director for Lehman Brothers Inc. which acts and acted as financial advisor to us in connection with our financings and one of our acquisitions in fiscal year 2000. Jason L. Shrinsky, one of our directors, is a partner of Kaye, Scholer, Fierman, Hays & Handler, LLP, which firm has regularly represented us as our legal counsel and will continue to do so. See "Item 10. Directors and Executive Officers of the Registrant -- Committees of the Board of Directors." and "Item 12. Security Ownership of Certain Beneficial Owners and Management."
On November 30, 2000, we loaned Luiz Diaz-Albertini, our Vice President/Group Sales, $50,000 for which he signed a promissory note payable in two years, but which is subject to forgiveness if Mr. Albertini meets certain sales targets.
Our new corporate headquarters is located on the top floor of a 26-story office building owned by Irradio Limited Partnership, a Florida partnership, for which the general partner is Irradio Investment, Inc., a company wholly-owned by Mr. Alarcon, Jr. As of December 1, 2000, we are leasing our office space under a 10-year lease, with the right to renew for two consecutive five-year terms. We believe the monthly rent we pay for our new office space is below market value.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a)1. Financial Statements
The following financial statements have been filed as required by Item 8 of this report:
Independent Auditors' Report
Consolidated Balance Sheets as of September 26, 1999 and September 24,
Consolidated Statements of Operations for each of the fiscal years in the three-year period ended September 24, 2000
Consolidated Statements of Changes in Stockholders' Equity (Deficiency) for each of the fiscal years in the three-year period ended September 24, 2000
Consolidated Statements of Cash Flows for each of the fiscal years in the three-year period ended September 24, 2000
Notes to Consolidated Financial Statements
2. Financial Statement Schedule
The following financial statement schedule has been filed as required by Item 8 of this report:
Financial Statement Schedule -- Valuation and Qualifying Accounts
SPANISH BROADCASTING SYSTEM, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders Spanish Broadcasting System, Inc.:
We have audited the consolidated financial statements of Spanish Broadcasting System, Inc. and subsidiaries as listed in the accompanying index. In connection with our audits of the consolidated financial statements, we have also audited the financial statement schedule as listed in the accompanying index. These consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Spanish Broadcasting System, Inc. and subsidiaries as of September 26, 1999 and September 24, 2000, and the results of their operations and their cash flows for each of the fiscal years in the three-year period ended September 24, 2000, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
/s/ KPMG LLP
Miami, Florida December 8, 2000
SPANISH BROADCASTING SYSTEM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS SEPTEMBER 26, 1999 AND SEPTEMBER 24, 2000
See accompanying notes to consolidated financial statements.
SPANISH BROADCASTING SYSTEM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS FISCAL YEARS ENDED SEPTEMBER 27, 1998, SEPTEMBER 26, 1999 AND SEPTEMBER 24, 2000
See accompanying notes to consolidated financial statements.
SPANISH BROADCASTING SYSTEM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' (DEFICIENCY) EQUITY FISCAL YEARS ENDED SEPTEMBER 27, 1998, SEPTEMBER 26, 1999 AND SEPTEMBER 24, 2000
See accompanying notes to consolidated financial statements.
SPANISH BROADCASTING SYSTEM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS FISCAL YEARS ENDED SEPTEMBER 27, 1998, SEPTEMBER 26, 1999 AND SEPTEMBER 24, 2000
See accompanying notes to consolidated financial statements.
SPANISH BROADCASTING SYSTEM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS FISCAL YEARS ENDED SEPTEMBER 27, 1998, SEPTEMBER 26, 1999 AND SEPTEMBER 24, 2000
See accompanying notes to consolidated financial statements.
SPANISH BROADCASTING SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 26, 1999 AND SEPTEMBER 24, 2000
(1) ORGANIZATION AND NATURE OF BUSINESS
Spanish Broadcasting System, Inc., a Delaware corporation, and subsidiaries (the "Company") owns and operates nineteen Spanish-language radio stations serving the New York, Puerto Rico, Miami, Chicago, San Antonio and Los Angeles markets through its subsidiaries, SBS of Greater New York, Inc., Spanish Broadcasting System of Florida, Inc., Spanish Broadcasting System of California, Inc., Spanish Broadcasting System of Greater Miami, Inc., Spanish Broadcasting System of San Antonio, Inc., Spanish Broadcasting System of Illinois, Inc. and Spanish Broadcasting System of Puerto Rico, Inc., a Puerto Rico corporation. Additionally, the Company's other subsidiaries include Spanish Broadcasting System, Inc., a New Jersey corporation, Spanish Broadcasting System of Puerto Rico, Inc., a Delaware corporation, SBS Funding, Inc., a Delaware corporation, JuJu Media, Inc., a New York corporation, Alarcon Holdings, Inc. ("Alarcon"), Spanish Broadcasting System Network, Inc. ("SBS Network") and SBS Promotions, Inc. ("SBS Promotions"). Alarcon owns and operates the building where the Company's New York offices are located. SBS Network and SBS Promotions are currently dormant. SBS Network was formerly the Company's exclusive agency representative for national advertising sales. SBS Promotions formerly performed promotional services for the Company's radio stations.
Additionally, the Company operates six Spanish-language radio stations serving the Dallas, San Antonio, Los Angeles, and San Francisco markets under various time brokerage agreements (see note 3).
The domestic broadcasting industry is subject to extensive federal regulation which, among other things, requires approval by the Federal Communications Commission ("FCC") for the issuance, renewal, transfer and assignment of broadcasting station operating licenses and limits the number of broadcasting properties the Company may acquire. The Company operates in the domestic radio broadcasting industry which is subject to extensive and changing regulation by the FCC.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND RELATED MATTERS
(a) Basis of Presentation
The consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.
Certain of the Company's subsidiaries (hereinafter referred to in this paragraph collectively as "Subsidiary Guarantors") have guaranteed the Company's senior notes referred to in note 8 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
SPANISH BROADCASTING SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
operations other than its investments in its subsidiaries. Condensed consolidating unaudited financial information for the Company and its guarantor and non-guarantor subsidiaries is as follows:
SPANISH BROADCASTING SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company's fiscal year is the 52-week or 53-week period which ends on the last Sunday of September.
(b) Revenue Recognition
Revenues are recognized when advertisements are aired.
(c) Property and Equipment
Property and equipment are stated at cost. The Company depreciates the cost of its property and equipment using the straight-line method over the respective estimated useful lives. Leasehold improvements are amortized on a straight-line basis over the shorter of the remaining life of the lease or the useful life of the improvements.
(d) Long-Lived Assets
The Company follows the provisions of Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of." SFAS No. 121 requires that long-lived assets and certain identifiable intangibles to be held and used or disposed of by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. See note 6 for impairment losses related to fixed assets.
SPANISH BROADCASTING SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(e) Intangible Assets
Intangible assets primarily represent the portion of the purchase price of station acquisitions allocated to FCC licenses of those stations and are amortized on a straight-line basis over 40 years, based on the industry practice of renewing FCC licenses periodically, and other intangible assets, including goodwill, which are being amortized on a straight-line basis over the respective estimated useful lives. The Company periodically assesses the recoverability of the carrying amount of intangible assets, including goodwill, as well as the amortization period to determine whether current events or circumstances warrant adjustments to the carrying value and/or revised estimates of useful lives. This evaluation consists of the projection of undiscounted cash flows for each of the Company's radio stations over the remaining amortization periods of the related intangible assets. If such projections indicate that undiscounted cash flows are not expected to be adequate to recover the carrying amounts of the related intangible assets, a loss is recognized to the extent the carrying amount of the asset exceeds its fair value. At this time, the Company believes that no significant impairment of its intangible assets, including goodwill, has occurred and that no reduction of the estimated useful lives is warranted. This assessment will be impacted if such projections are not achieved.
(f) Deferred Financing Costs
Deferred financing costs relate to the refinancing of the Company's debt in October 1999 (see note 8) and additional debt financing obtained in July 2000 (see note 10).
Deferred financing costs are being amortized using a method which approximates the effective-interest method over the respective lives of the related indebtedness.
(g) Barter Transactions
Barter transactions represent advertising time exchanged for promotional items, advertising, supplies, equipment and services. Revenues from barter transactions are recognized as income when advertisements are broadcast. Expenses are recognized when goods or services are received or used. The Company records barter transactions at the fair value of goods or services received or advertising surrendered, whichever is more readily determinable.
During fiscal 2000, the Company entered into a barter transaction with an Internet Service Provider ("ISP") whereby the ISP will provide a guaranteed minimum of impressions to the Company on the ISP's networks over a two-year period in exchange for advertising time on certain of the Company's stations, with an aggregate fair value of $19.7 million at the date of the transaction.
Unearned revenue related to this transaction consists of the excess of the aggregate fair value of impressions delivered by the ISP, over the aggregate fair value of advertising time delivered by the Company. The total amount of unearned revenue related to this transaction at September 24, 2000 is $0.2 million, and is included in accounts payable and accrued expenses in the accompanying consolidated balance sheets.
(h) Cash Equivalents
Cash equivalents, consisting primarily of interest-bearing money market accounts and certificates of deposits which have an original maturity date of less than three months, totaled approximately $17.0 million and $59.6 million at September 26, 1999 and September 24, 2000, respectively.
(i) Income Taxes
The Company files a consolidated federal income tax return with its subsidiaries. The Company accounts for income taxes under the asset and liability method. Deferred tax assets and liabilities are recognized for the
SPANISH BROADCASTING SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
(j) Advertising Costs
The Company incurs various marketing and promotional costs to add and maintain listenership. These costs are charged to expense in the period incurred.
(k) Deferred Commitment Fee
On December 30, 1996, the Company entered into an agreement with a national advertising agency (the "Agency") whereby the Agency would serve as the Company's exclusive sales representative for all national sales for a seven-year period. Pursuant to this agreement, the Agency agreed to pay a commitment fee of $5.1 million to the Company, of which $1.0 million was paid upon execution of the agreement and $4.1 million was to be remitted on a monthly basis over a three-year period, through January 2000. During fiscal year 2000, the Agency revised its agreement with the Company to reduce the total commitment fee to $5.0 million. The commitment fee is recognized on a straight-line basis over the seven-year contractual term of the arrangement as a reduction of Agency commissions. Deferred commitment fee represents the excess of payments received from the Agency over the amount recognized.
(l) Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
(m) Concentration of Risk
All of the Company's business is conducted in the New York, Florida, California, Illinois, Texas, and Puerto Rico markets. Net revenue earned from radio stations in these markets as a percentage of total revenue for the fiscal years ended September 27, 1998, September 26, 1999 and September 24, 2000 is as follows:
The increase in market concentration risk in Puerto Rico in fiscal 2000 results from the acquisitions of WCMA, WMEG, and WEGM in fiscal 1999 and WIOA-FM, WIOB-FM, WIOC-FM, WCOM-FM, WZMT-FM, WZNT-FM, WOYE-FM, and WCTA-FM in fiscal 2000 as discussed in note 3.
SPANISH BROADCASTING SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(n) Basic and Diluted Net Loss Per Common Share
The Company has presented net loss per common share pursuant to SFAS No. 128, "Earnings Per Share," and the Securities and Exchange Commission Staff Accounting Bulletin No. 98.
In accordance with Securities and Exchange Commission ("SEC") Staff Accounting Bulletin No. 98, certain common stock and common stock equivalents issued for nominal consideration prior to the initial filing of a registration statement relating to an initial public offering are treated as outstanding for the entire period. The Company had no nominal issuances during this period.
Basic net loss per common share was computed by dividing net loss by the weighted average number of shares of common stock outstanding for each period presented. Diluted net loss per common share is computed by giving effect to common stock equivalents as if they were outstanding for the entire period. Common stock equivalents were not considered for the years presented since their effect would be antidilutive. Common stock equivalents of 8,798,612 and 220,123 in fiscal 1998 and 2000, respectively, related to warrants outstanding (see note 9) and outstanding stock options (see note 13), respectively. There were no common stock equivalents outstanding at September 26, 1999.
(o) Fair Value of Financial Instruments
SFAS No. 107, "Disclosures About Fair Value of Financial Instruments," requires disclosure of fair value of certain financial instruments. Cash and cash equivalents, receivables, other current assets and due from related party, as well as accounts payable, accrued expenses and other current liabilities, as reflected in the consolidated financial statements, approximate fair value because of the short-term maturity of these instruments. The estimated fair value of the Company's other long-term debt instruments approximate the carrying amount as the interest rates approximate the Company's current borrowing rate for similar debt instruments of comparable maturity.
Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.
SPANISH BROADCASTING SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The estimated fair value of the Company's senior notes and preferred stock is as follows (in millions):
The fair value estimates of the senior notes and preferred stock were based upon quotes from major financial institutions taking into consideration current rates offered to the Company for debt instruments of the same remaining maturities.
(p) Redeemable Preferred Stock
Redeemable preferred stock is stated at redemption value less the unamortized discount. The discount is accreted into the carrying value of the preferred stock through the date at which the preferred stock is mandatorily redeemable with a charge to accumulated deficit using the effective-interest method. During fiscal year 2000, the Company redeemed its redeemable preferred stock and accreted the remaining original issue discount with a charge to accumulated deficit (see note 8).
(q) Stock Option Plans
The Company accounts for its stock option plans in accordance with the provisions of Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations. As such, compensation expense would be recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. SFAS No. 123, "Accounting for Stock-based Compensation," permits entities to recognize as expense over the vesting period the fair value of all stock-based awards on the date of grant. Alternatively, SFAS No. 123 also allows entities to continue to apply the provisions of APB Opinion No. 25 and provide pro forma net loss and pro forma net loss per share disclosures for employee stock option grants made as if the fair-value-based method defined in SFAS No. 123 had been applied. The Company has elected to apply the provisions of APB Opinion No. 25 and provide the pro forma disclosures of SFAS No. 123.
(r) Reclassification
Certain prior year amounts have been reclassified to conform with the current year presentation.
(s) Segment Reporting
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," establishes standards for the way public business enterprises report information about operating segments in annual financial statements and requires those enterprises to report selected information about operating segments in interim financial reports issued to shareholders. SFAS No. 131 is effective for financial statements for periods beginning after December 15, 1997. The adoption of SFAS No. 131 did not have a significant impact on the Company's financial reporting as of and for each of the fiscal years in the three-year period ended September 24, 2000, since the Company believes it has only one reportable segment.
SPANISH BROADCASTING SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(3) ACQUISITIONS
On May 13, 1998, the Company acquired the FCC broadcast license and substantially all of the assets used or useful in the operation of radio station KRIO-FM serving the San Antonio area for $9.2 million, plus closing costs of $0.1 million. The Company financed this purchase from cash on hand and from operations. The Company subsequently changed the call letters to KLEY-FM. The aforementioned acquisition was not deemed material in fiscal 1998 for financial pro forma presentation purposes.
On December 1, 1998, the Company acquired from Pan Caribbean Broadcasting Corporation the FCC broadcast license and substantially all of the assets of WCMA-FM (formerly WDOY-FM) in Puerto Rico for $8.3 million. The acquisition of WCMA-FM was financed from cash on hand and cash from operations.
On April 26, 1999, the Company acquired 80 percent of the issued and outstanding capital stock of JuJu Media, Inc., the owner and operator of LaMusica.com, an Internet web site and "portal" targeting the U.S. hispanic market, for $2.0 million in cash and the issuance of a promissory note for $1.0 million.
On April 30, 1999, the Company acquired the FCC broadcast licenses and substantially all of the assets used or useful in the operation of WMEG-FM and WEGM-FM, in Puerto Rico for $16.0 million. The Company financed this purchase from cash on hand and cash from operations.
On September 22, 1999, Spanish Broadcasting System of Puerto Rico, Inc., a Delaware corporation, a wholly owned subsidiary of the Company, entered into a stock purchase agreement to purchase all of the outstanding capital stock of the following nine subsidiaries of AMFM Operating Inc., a Delaware corporation (formerly known as Chancellor Media Corporation of Los Angeles) ("AMFM"): Primedia Broadcast Group, Inc., WIO, Inc., Cadena Estereotempo, Inc., Portorican American Broadcasting, Inc., WLDI, Inc., WRPC, Inc., WOYE, Inc., WZNT, Inc., WOQI, Inc. (the "Primedia Station Group"). The Primedia Station Group owns and operates eight radio stations in Puerto Rico: WIOA-FM, WIOB-FM, WIOC-FM, WCOM-FM, WZMT-FM, WZNT-FM, WOYE-FM, and WCTA-FM. On January 14, 2000, the Company completed the purchase from AMFM of all of the outstanding capital stock of the Primedia Station Group for total cash consideration of $90.8 million (net of $1.0 million cash acquired), including a $10.0 million deposit that was made on September 22, 1999 and closing costs of $0.7 million. This acquisition was financed from cash on hand.
The allocation of the purchase price for the Primedia Station Group was based on the relative fair values of the assets and liabilities acquired on January 14, 2000, as follows:
The following unaudited pro forma summary presents the consolidated results of operations as if the acquisition of the Primedia Station Group had occurred as of the beginning of fiscal 1999 and 2000, respectively after giving effect to certain adjustments, including amortization of intangible assets. These pro forma results have been prepared for comparative purposes only and do not purport to be indicative of what
SPANISH BROADCASTING SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
would have occurred had the acquisitions been made as of those dates or of results which may occur in the future.
On May 8, 2000, the Company entered into agreements to acquire all of the outstanding capital stock of Rodriguez Communications, Inc. ("RCI") and certain holdings of its affiliate, New World Broadcasters Corp. ("New World"), for total consideration of $165.2 million, consisting of $43.5 million of the Company's Class A common stock and $121.7 million in cash, subject to certain conditions and adjustments. The Company has made advances of approximately $121.1 million (including closing costs of $2.1 million) on the purchase price of these acquisitions as of September 24, 2000, which is included in intangible assets in the accompanying consolidated balance sheets.
The purchase of RCI includes the rights to acquire the following radio stations -- KFOX-FM and KREA-FM serving the Los Angeles market; KXJO-FM serving the San Francisco market; and KSAH-AM serving the San Antonio market. The Company intends to acquire from New World the Dallas radio stations KTCY-FM and KXEB-AM. Until closing, the Company is broadcasting programming on these stations under various time brokerage agreements that commenced in May through September, 2000. Each of these transactions were subject to numerous conditions and approvals, including receipt of regulatory approvals under the federal communications laws and review by federal antitrust authorities. The acquisitions of KFOX-FM, KREA-FM, KXJO-FM, KSAH-AM, and KTCY-FM closed on November 10, 2000. The Company expects the acquisition of KXEB-AM to close by the second quarter of fiscal 2001. However, there can be no assurances that this acquisition can be completed during the expected time frame or at all.
The Company's consolidated results of operations include the results of KLEY-FM, WCMA-FM, WMEG-FM, WEGM-FM, WIOA-FM, WIOB-FM, WIOC-FM, WCOM-FM, WZMT-FM, WZNT-FM, WOYE-FM, and WCTA-FM and JuJu Media, Inc. from the respective dates of acquisition. These acquisitions have been accounted for under the purchase method of accounting. The purchase price has been allocated to the assets acquired, principally FCC licenses.
(4) SALE OF STATIONS
On July 2, 1997, the Company entered into an agreement for the sale of the assets and FCC licenses of radio stations WXLX-AM, serving the New York metropolitan area, KXMG-AM, serving the Los Angeles metropolitan area, and WCMQ-AM, serving the Miami metropolitan area. Pursuant to this agreement, on September 29, 1997, the Company sold the assets and FCC licenses of WXLX-AM and WCMQ-AM for a sales price of $26.0 million and recorded a gain of $18.6 million. On December 2, 1997, the Company consummated the sale of the assets and FCC license of KXMG-AM for a sales price of $18.0 million and recorded a gain of $17.6 million. These transactions are classified under other income as gain on sale of stations in the accompanying consolidated statements of operations.
On February 2, 2000, the Company completed the sale of WVMQ-FM in Key West and WZMQ-FM in Key Largo to South Broadcasting System, Inc., a company owned by the Chairman Emeritus of the Company, for total cash consideration of $0.7 million and recorded a gain of $0.1 million. This amount has
SPANISH BROADCASTING SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
been classified under other income as gain on sale of stations in the accompanying consolidated statements of operations.
(5) INTANGIBLE ASSETS
Intangible assets consist of the following at September 26, 1999 and September 24, 2000:
(6) PROPERTY AND EQUIPMENT
Property and equipment consist of the following at September 26, 1999 and September 24, 2000:
During fiscal 1999, the Company wrote down the value of one of its properties in Los Angeles (which was part of the assets acquired in the purchase of the Los Angeles AM radio station) by $0.5 million. The write-down was based on current market values of real estate in the Los Angeles area. This amount is included in other, net in the accompanying consolidated statements of operations.
During fiscal 2000, the Company acquired a building and land in Puerto Rico for $5.3 million. The Company funded the acquisition using cash on hand and proceeds from a bank loan of $3.7 million (see note 11).
SPANISH BROADCASTING SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(7) ACCOUNT PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses at September 26, 1999 and September 24, 2000 consists of the following:
(8) SENIOR NOTES AND PREFERRED STOCK
12 1/2% Senior Unsecured Notes
On June 29, 1994, the Company, through a private placement offering (the "Offering") completed the sale of 107,059 units (the "Units"), each consisting of $1,000 principal amount of 12 1/2% Senior Notes (the "12 1/2% Notes") due 2002 and warrants to purchase 5,352,950 shares of Class B common stock. The 12 1/2% Notes and warrants are separately transferable. The 12 1/2% Notes were issued at a discount and generated proceeds to the Company of $87.8 million, net of financing costs of $6.2 million. Of the $94.0 million of gross proceeds, $88.6 million was allocated to the 12 1/2% Notes and $5.4 million was determined to be the value of the warrants.
Pursuant to the 12 1/2% Notes, the Company was required to use the greater of $25.0 million or 50 percent of the net proceeds from any disposition of certain asset sales (including the FCC broadcast licenses of the AM stations referred to in note 4) to make offers to purchase the 12 1/2% Notes at 110 percent of the principal value thereof.
On October 17, 1997, the Company made a tender offer to purchase for cash any and all of the 12 1/2% Notes up to $22.7 million plus accrued interest up to, but not including the payment date. The amount payable by the Company was 110 percent of the principal amount of the 12 1/2% Notes. The Company paid $6.3 million to the noteholders who responded to the tender offer and purchased $5.5 million in principal amount of 12 1/2% Notes for $6.0 million plus accrued interest of $0.3 million in November 1997. The Company also repurchased $7.7 million in principal amount of 12 1/2% Notes for $9.0 million plus accrued interest of $0.4 million in November 1997. The Company recognized a loss on the tender offer and repurchased notes of $1.6 million, net of income tax benefit of $1.1 million, due to the premium paid for the 12 1/2% Notes and the subsequent write-off of the deferred financing costs and original issue discounts related to the 12 1/2% Notes purchased. This amount has been classified as an extraordinary item in the accompanying consolidated statements of operations.
On November 2, 1999, the Company repurchased $101.5 million in principal amount of 12 1/2% Notes. In connection with this repurchase, the Company realized a loss on the early extinguishment of debt of approximately $9.5 million, net of income taxes of approximately $7.4 million. This loss relates to the premium paid on the repurchase of the 12 1/2% Notes, the write-off of related deferred financing costs, and the amortization of the remaining original issue discount on the 12 1/2% Notes, and is classified as an extraordinary item in the accompanying consolidated statements of operations.
SPANISH BROADCASTING SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
14 1/4% Series A Senior Exchangeable Preferred Stock and 11% Senior Unsecured Notes
On March 27, 1997, the Company financed the purchase of radio stations WYSY-FM (renamed WLEY-FM by the Company), WRMA-FM and WXDJ-FM with proceeds from the sale through a private placement of 175,000 shares of the Company's 14 1/4% Series A Senior Exchangeable Preferred Stock ("Series A Preferred Stock") and warrants to purchase 3,745,000 shares of the Company's Class B common stock. The Series A Preferred Stock and the warrants are separately transferable. The gross proceeds from the issuance of the Series A Preferred Stock and warrants, amounted to $175.0 million. The value of the warrants was determined to be $16.6 million. The Company also issued $75.0 million aggregate principal amount of the Company's 11% Senior Unsecured Notes (the "11% Senior Notes") due 2004. In connection with this transaction, the Company capitalized financing costs of $5.7 million related to the 11% Senior Notes and charged issuance costs of $9.0 million related to the Series A Preferred Stock and warrants to paid-in capital.
On November 2, 1999, the Company repurchased $75.0 million in principal amount of 11% Senior Notes. In connection with this repurchase, the Company realized a loss on the early extinguishment of debt of approximately $6.6 million, net of income taxes of approximately $5.1 million. This loss relates to the premium paid on the repurchase of the 11% Senior Notes and the write-off of related deferred financing costs, and is classified as an extraordinary item in the accompanying consolidated statements of operations.
On December 2, 1999, the Company redeemed in full the Series A Preferred Stock. In connection with this redemption, the Company recorded total additional dividends of approximately $28.4 million, on the Series A Preferred Stock, which reduced the income available to common stockholders in the accompanying fiscal 2000 consolidated statement of operations. These additional dividends relate to the premium on the redemption, and the accretion of the remaining original issue discount on the Series A Preferred Stock.
9 5/8% Senior Subordinated Notes
On October 28, 1999, concurrently with the Company's initial public offering ("IPO") of Class A common stock (see note 13), the Company sold $235.0 million aggregate principal amount of 9 5/8% senior subordinated notes due 2009 (the "1999 Notes"), from which the Company received proceeds of $228.0 million after payment of underwriter commissions. In connection with this transaction, the Company capitalized financing costs of $8.5 million related to the 1999 Notes.
(9) WARRANTS
Warrants consist of the following:
(a) In 1994, in conjunction with the issuance of 12 1/2% Senior Notes, the Company issued warrants exercisable for 5,352,950 shares of Class B common stock at an exercise price of $.01 per warrant share which are subject to adjustment upon the occurrence of certain events, as defined in the warrant agreement. In connection with the declaration of a cash dividend on common stock, in March 1998, holders of these warrants were given the option to participate in such dividends in lieu of maintaining
SPANISH BROADCASTING SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
their antidilution rights with respect to such dividends. Holders of warrants representing 2,910,450 shares of Class B common stock exercised this option and received cash dividends of $0.326 million and replacement warrants representing 2,910,450 shares of Class B common stock which have an exercise price of $.01 per share. The remaining warrant holders had their underlying shares adjusted upward resulting in an increase to additional paid-in capital and a charge to accumulated deficit of $0.274 million. The remaining warrant holders exercised the warrants during the nine-month period ended June 27, 1999. During the fiscal year ended September 26, 1999, replacement warrants were exercised for 2,900,950 shares of Class B common stock. The remaining replacement warrants expired on June 30, 1999, representing 9,500 shares of common stock.
(b) In 1997, in conjunction with the issuance of the 14 1/4% Series A Senior Exchangeable Preferred Stock, the Company issued warrants that entitle the holder to acquire 21.4 shares of Class B common stock or 3,745,000 shares at a price equal to $0.01 per 21.4 shares, subject to adjustment from time to time upon the occurrence of certain changes of common stock, certain common stock distributions, certain issuances of options or convertible securities, certain dividends and distributions and certain other increases in the number of shares or common stock. During the fiscal year ended September 26, 1999, warrants were exercised for 3,744,250 shares of Class B common stock. The remaining warrants expired on June 30, 1999, representing 750 shares of common stock.
(10) SENIOR CREDIT FACILITY
On July 6, 2000, the Company entered into a $150.0 million senior secured credit facility (the "Senior Facility"). The Senior Facility includes a six-year $25.0 million revolving credit line and $125.0 million of term loans. At September 24, 2000, the Company had term loans outstanding of $65.0 million. In connection with this transaction, the Company capitalized financing costs of $3.2 million related to the Senior Facility.
(11) OTHER LONG-TERM DEBT
Other long-term debt consists of the following at September 26, 1999 and September 24, 2000:
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The scheduled maturities of other long-term debt are as follows at September 24, 2000:
On December 2, 1999, the Company repaid in full the note payable to the seller of WLEY-FM (formerly WYSY-FM) of approximately $3.3 million, plus accrued interest of approximately $0.1 million. Additionally, on August 9, 2000, the Company repaid in full the note payable to the sellers of JuJu Media, Inc. of approximately $1.0 million, plus accrued interest of approximately $0.1 million.
(12) LOANS RECEIVABLE FROM STOCKHOLDERS AND RELATED-PARTY TRANSACTIONS
Loans receivable from stockholders were comprised of loans receivable from the Company's Chief Executive Officer ("CEO") and Chairman of the Board of Directors ("Chairman"). Loans receivable have been classified as an increase in stockholders' deficiency in the accompanying consolidated balance sheets as of September 26, 1999. Interest receivable of $0.4 million at September 26, 1999, is included in other current assets. On November 2, 1999, the loans receivable from stockholders plus interest were repaid with the shareholders' proceeds from the IPO.
At September 26, 1999, the Company had advances totaling $0.3 million due from a party related through common ownership. During fiscal 1999, the Company agreed to forgive these advances and wrote off the amount due from the related party. Additionally, at September 26, 1999, the Company had trade receivables totaling $0.4 million due from this related party which were fully reserved as being uncollectible.
During each of fiscal years 1998 and 1999, the Company paid operating expenses of approximately $0.1 million for a boat owned by a related party through common ownership which was used by the Company for business entertainment purposes.
The Company leases an apartment from its CEO for annual rentals of $0.1 million through August 2007. Certain renovation expenses were paid for by the Company totaling $0.2 million during 1998 and 1999. In addition, the Company occupies a building under a capital lease agreement with certain stockholders (see note 14). The building lease expires in 2012 and calls for an annual base rent of approximately $0.1 million.
In connection with the relocation of offices from the New York metropolitan area to the Miami metropolitan area, the Company advanced the CEO an aggregate of $1.1 million to pay for various expenses. On July 16, 1997, the CEO executed a promissory note to the Company for the principal amount of $1.1 million to evidence these advances. The note was payable on demand and bore interest at a rate of 7 percent per annum. The Company declared and paid a dividend in 1998 and applied a portion of the proceeds of such dividend which were otherwise payable to the CEO to the repayment in full of this promissory note.
On September 24, 1999, the Company entered into letters of understanding with its then Chairman and Secretary. These letters outlined the mutual intentions of the Company and these individuals in connection
SPANISH BROADCASTING SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
with the Company's IPO, and were contingent upon the completion of the IPO (see note 13). These letters provided for the following:
- The sale by these individuals of $14.0 million of their Class B common stock in the IPO (see note 13);
- The purchase by the Company of annuities providing aggregate annual retirement compensation of $1.0 million to these individuals. These annuities were purchased by the Company for $10.2 million in November 1999;
- The retention of these individuals as members of the Company's Board of Directors, with titles of "Chairman Emeritus" and "Secretary Emeritus", respectively;
- An agreement to sell, to the Chairman, the Company's two radio stations located in the Florida Keys for $0.7 million (see note 4).
- The repayment by the Chairman of a stockholder loan for approximately $0.6 million, plus accrued interest of approximately $0.1 million. This stockholder loan and the related accrued interest was repaid in full by the Chairman in November 1999;
- An agreement by the Chairman to assume responsibility for a boat leased by the Company during fiscal 1998 and 1999. Responsibility for this boat was assumed by the Chairman in November 1999; and
- The use by the Chairman of a car and driver, and by the Secretary of a car, to be provided by the Company.
(13) STOCKHOLDERS' (DEFICIENCY) EQUITY
(a) Stock Split
On September 29, 1999, the Company amended and restated its Certificate of Incorporation, resulting in a conversion of all existing shares of Class A common stock into shares of Class B common stock equal to the number of shares representing a 50 to 1 stock split for each share. The number of authorized shares of capital stock was increased to 151 million comprised of 100 million shares of Class A common stock, 50 million shares of Class B common stock and 1 million shares of Preferred Stock, and the par values of both the Class A common stock and Class B common stock were changed from $.01 per share to $.0001 per share. In addition, Class B common stockholders are entitled to ten votes per share and Class A common stockholders are entitled to one vote per share. Upon transfer or sale of stock by Class B common stockholders to non-affiliate parties, such shares automatically convert to shares of Class A common stock.
The accompanying consolidated financial statements have been retroactively restated to reflect these actions.
The rights of the holders of shares of Class A common stock and Class B common stock are identical except for voting rights and conversion provisions. Holders of each class of common stock are entitled to receive dividends and upon liquidation or dissolution are entitled to receive all assets available for distribution to stockholders. The holders of each class have no preemptive or other subscription rights and there are no redemption or sinking fund provisions with respect to such shares. Each class of common stock is subordinate to the Series A Preferred Stock with respect to dividend rights and rights on liquidation, winding up and dissolution of the Company.
(b) Initial Public Offering
On October 27, 1999, the Company and selling shareholders sold 25,055,510 shares of Class A common stock in an IPO, from which the Company received proceeds of $389.4 million after payment of underwriter
SPANISH BROADCASTING SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
commissions. Concurrently with this IPO, on October 28, 1999, the Company sold $235.0 million aggregate principal amount of 1999 Notes (see note 8).
In connection with these offerings, in October 1999 the Company amended its employment agreement with its CEO and entered into employment agreements with two other executive officers of the Company. In addition, the CEO repaid a shareholder loan for approximately $1.9 million, plus accrued interest of approximately $0.4 million, in November 1999.
In connection with the IPO, the Company also granted an aggregate of 100,000 options to non-employee directors, 250,000 options to a former director, and an aggregate of 300,000 options to executives of the Company, in November 1999. These options were granted at an exercise price per share equal to the IPO price per share, with vesting periods ranging from zero to four years.
(c) Stock Option Plans
The Company maintains a stock option plan pursuant to which the Company has reserved up to 1,337,500 shares of Class A common stock for issuance upon the exercise of options granted under the plan. The plan covers all regular salaried employees of the Company and its subsidiaries. As of September 24, 2000, no options have been granted under this plan.
In September 1999, the Company adopted an employee incentive stock option plan ("the 1999 ISO Plan") and a nonemployee director stock option plan ("the 1999 NQ Plan"). Options granted under the 1999 ISO Plan will vest according to terms to be determined by the Compensation Committee of the Company's Board of Directors, and will have a contractual life of five to ten years from date of grant. Options granted under the 1999 NQ Plan will vest 20 percent upon grant, and 20 percent each year for the first four years from grant. All options granted under the 1999 ISO Plan and the 1999 NQ Plan vest immediately upon a change in control of the Company, as defined. A total of 3,000,000 shares and 300,000 shares of Class A common stock have been reserved for issuance under the 1999 ISO Plan and the 1999 NQ Plan, respectively.
A summary of the status of the Company's stock option plans, as of September 24, 2000, and changes during the year then ended, is presented below:
SPANISH BROADCASTING SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes information about stock options outstanding and exercisable at September 24, 2000:
The Company applies APB Opinion No. 25 and related interpretations in accounting for its stock option plans. The fair value of each option granted to employees is estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions:
Had compensation expense for the Company's plans been determined consistent with FASB Statement No. 123, the Company's net loss applicable to common stockholders and net loss per common share would have been increased to pro forma amounts indicated below:
(14) COMMITMENTS
(a) Leases
The Company occupies a building under a capital lease agreement with certain stockholders of the Company expiring in June 2012. The amount capitalized under this lease agreement and included in property and equipment at September 26, 1999 and September 24, 2000 is as follows:
The Company leases office space and facilities and certain equipment under operating leases, one of which is with a related party (see note 12), that expire at various dates through 2035. Certain leases provide for base rental payments plus escalation charges for real estate taxes and operating expenses.
SPANISH BROADCASTING SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At September 24, 2000, future minimum lease payments under such leases are as follows:
Total rent expense for the fiscal years ended September 27, 1998, September 26, 1999 and September 24, 2000 amounted to $1.1 million, $1.4 million and $1.5 million, respectively.
The Company has agreements to sublease its radio frequencies and portions of its tower sites. Such agreements provide for payments through 2004. The future minimum rental income to be received under these agreements as of September 24, 2000 is as follows:
(b) Employment Agreements
At September 24, 2000, the Company is committed to employment contracts for certain executives, on-air talent and general managers expiring through 2005. Future payments under such contracts are as follows:
Included in the future payments schedule above is a five-year employment agreement with the CEO. The agreement provides for an annual base salary of not less than $1.0 million, and a cash bonus equal to 7.5 percent of the dollar increase in same station broadcast cash flow for any fiscal year, including acquired
SPANISH BROADCASTING SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
stations on a pro forma basis. Under the terms of the agreement, the CEO's annual base salary and cash bonus may be increased by the board of directors in its sole discretion. The total cash bonus earned by the CEO for fiscal 2000 was $1.0 million, of which $0.8 million was paid in fiscal 2000 and $0.2 million is included in accounts payable and accrued expenses in the accompanying consolidated balance sheets.
Certain employees' contracts provide for additional amounts to be paid if station ratings or cash flow targets are met.
(c) 401(k) Profit Sharing
In September 1999, the Company adopted a tax-qualified employee savings and retirement plan ("the 401(k) Plan"). The 401(k) Plan provides for Company contributions to match 25 percent of an eligible employee's contributions, up to 5 percent of the employee's base monthly earnings. All employees over the age of 21 that have completed at least 500 hours of service are eligible to participate in the 401(k) Plan. There were no contributions associated with this plan to date.
(15) CONTINGENCIES
In connection with the sale of WXLX-AM (see note 4), the Company assigned a lease for a transmitter site which is located on a former landfill which ceased operations in the late 1960s. As part of the sales agreement, the Company retained potential exposure relating to possible environmental liabilities relating to this site. Management is unable to assess the likelihood that any claim for remediation of this site will arise and no amounts have been accrued in the consolidated financial statements relating to this contingent liability.
On September 28, 1999, the Company received notice from the purchaser of KXMG-AM (see note 4) that it would make a claim against the Company for indemnification under the agreement pursuant to which KXMG-AM was sold, for the removal of an underground fuel storage tank located on the site of KXMG-AM's transmitter. The notice did not specify the amount involved in the indemnification claim. The Company does not have sufficient information to assess the potential exposure related to this matter, and no amounts have been accrued in the consolidated financial statements relating to this contingent liability.
(16) NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities. It requires an entity to recognize all derivatives as either assets or liabilities in the balance sheet and measure those instruments at fair value. SFAS No. 133, as amended by SFAS No. 137, is expected to be effective for the Company's fiscal year ending September 30, 2001. Management does not believe that the adoption of SFAS No. 133 will have a significant impact on the Company's consolidated financial statements.
In November 1999, the Emerging Issues Task Force ("EITF") of the FASB issued EITF 99-17, "Accounting for Advertising Barter Transactions", which provides guidance on barter transactions that involve nonmonetary exchanges of advertising. EITF 99-17 requires an entity to account for barter advertising revenues and expenses at the determinable fair value of the advertising surrendered or received in the exchange, or at book value if the fair value can not be determined within reasonable limits. The adoption of EITF 99-17 did not have a significant impact on the Company's consolidated financial statements.
In December 1999, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin No. 101 (SAB 101), "Revenue Recognition", which provides guidance on the recognition, presentation and disclosure of revenue in financial statements filed with the SEC. SAB 101 outlines the basic criteria that must be met in order to recognize revenue and provides guidance for disclosures related to revenue recognition
SPANISH BROADCASTING SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
policies. In June 2000, the SEC issued SAB 101B, "Second Amendment: Revenue Recognition in Financial Statements" which extends the effective date of SAB 101 to the fourth fiscal quarter of fiscal years commencing after December 15, 1999. At this time, management is still assessing the impact of SAB 101 on the Company's financial position and results of operations.
In September 2000, the FASB issued SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities (A Replacement of SFAS No. 125)". SFAS No. 140 provides guidance on accounting for (1) securitization transactions involving financial assets; (2) sales of financial assets (including loan participations); (3) factoring transactions; (4) wash sales; (5) servicing assets and liabilities; (6) collateralized borrowing arrangements; (7) securities lending transactions; (8) repurchase agreements; and (9) extinguishment of liabilities. While most of the provisions of SFAS No. 140 will become effective for transactions entered into after March 31, 2001, companies with calendar fiscal year ends that hold beneficial interests from previous securitizations will be required to make additional disclosures in their December 31, 2000 financial statements. Management does not believe that the adoption of SFAS No. 140 will have a significant impact on the Company's consolidated financial statements.
(17) INCOME TAXES
Income tax expense (benefit) for the fiscal years ended September 27, 1998, September 26, 1999 and September 24, 2000 consists of the following and was allocated as follows:
During fiscal 1998 and 1999, the Company utilized net operating loss carryforwards of approximately $38.8 million and $0.2 million, respectively. For fiscal 2000, no net operating losses were utilized.
SPANISH BROADCASTING SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The tax effect of temporary differences and carryforwards that give rise to deferred tax assets and deferred tax liabilities at September 27, 1998, September 26, 1999 and September 24, 2000 is as follows:
Total income tax expense (benefit) differed from the amounts computed by applying the U.S. Federal income tax rate of 35 percent for fiscal years 1998, 1999 and 2000 as a result of the following:
The valuation allowance for deferred tax assets as of September 27, 1998, September 26, 1999 and September 24, 2000 was $17,396,470. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment.
Based upon the level of historical taxable income and projections for future taxable income over the periods which the deferred tax assets are deductible, management believes it is more likely than not the Company will realize the benefits of these deductible differences, net of the existing valuation allowances. The amount of the deferred tax asset considered realizable, however, could be reduced in the near term if estimates of future taxable income during the carryforward period are reduced.
SPANISH BROADCASTING SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At September 24, 2000, the Company has domestic net operating loss carryforwards available to offset future taxable income expiring as follows:
Additionally at September 24, 2000, the Company has foreign net operating loss carryforwards of $2,050,000 available to offset future taxable income expiring in September 2007.
(18) LITIGATION
The Company is the defendant in a number of lawsuits and claims incidental in its ordinary course of business, certain of which have been brought by former employees. The litigation which is probable to result in an unfavorable outcome and can be reasonably estimated amounts to $0.3 million which the Company has accrued. The Company does not believe the outcome of any litigation, current or pending, would have a material adverse impact on the financial position or the results of operations of the Company.
Additionally, the Company is the defendant in a lawsuit where on October 12, 2000, the plaintiff obtained a $1.9 million final default judgment. The Company believes that the default judgment was improperly entered because, among other reasons, (1) plaintiff's counsel failed to contact the Company counsel prior to seeking the default judgment, (2) the Company can demonstrate excusable neglect and a bona fide defense to the complaint, and (3) the plaintiff did not name a proper corporate entity. The Company does not have sufficient information to assess the outcome of this litigation, and no amounts have been accrued in the consolidated financial statements relating to this contingent liability.
(19) SUBSEQUENT EVENTS
(a) Acquisition of Stations
On November 3, 2000, the Company entered into an agreement to acquire the assets of KFSG-FM broadcasting, serving the Los Angeles, California market, from International Church of the Foursquare Gospel, for total cash consideration of $250.0 million. In connection with this acquisition, the Company made a $5.0 million nonrefundable deposit on the purchase price into escrow. The closing of this acquisition is subject to numerous conditions and approvals, including receipt of regulatory approvals under the Federal communications laws and review by Federal antitrust authorities. The Company expects to fund this transaction by increasing its senior credit facility, accessing the high yield capital markets and undertaking certain potential asset dispositions. The Company expects to close the acquisition by December 31, 2001. However, there can be no assurances that this acquisition can be completed during the expected time frame or at all, or that the Company will be able to obtain additional financing or dispose of certain assets at terms favorable to the Company or at all.
SPANISH BROADCASTING SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
On November 10, 2000, the Company closed on all stations acquired from RCI and New World (see note 3), except for KXEB-AM, for total consideration of $164.3 million, consisting of $42.6 million of the Company's Class A common stock and $121.7 million in cash. The Company expects to complete the acquisition of KXEB-AM in the second quarter of fiscal 2001. However, there can be no assurances that the acquisition of KXEB-AM can be completed during the expected time frame or at all.
(b) Commitment
On December 1, 2000, the Company entered into a lease for its new corporate headquarters with a Florida limited partnership for which the general partner is a company wholly-owned by the Company's CEO. The Company is leasing the office space under a 10-year operating lease with rental payments of approximately $0.4 million per year, with the right to renew for two consecutive five-year terms.
SPANISH BROADCASTING SYSTEM, INC. AND SUBSIDIARIES
FINANCIAL STATEMENT SCHEDULE -- VALUATION AND QUALIFYING ACCOUNTS FISCAL YEARS ENDED SEPTEMBER 27, 1998, SEPTEMBER 26, 1999 AND SEPTEMBER 24, 2000
- --------------- (1) Write-offs, net of recoveries.
(a) 2. Financial Statement Schedules
See end of financial statements above for Schedule of Valuation and Qualifying Accounts.
(a) 3. Exhibits
(b) Reports on Form 8-K.
The Company filed a report on Form 8-K dated November 27, 2000, which reported that:
(1) On May 8, 2000, the Company entered into a stock purchase agreement, by and among Rodriguez Communications, Inc. ("RCI"), each of the stockholders of RCI identified on Annex I thereto, and the Company, to purchase all of the outstanding capital stock of RCI; and an Asset Purchase Agreement, by and between New World Broadcasters Corp. ("New World"), to purchase radio station KTCY-FM in Texas (the "KTCY").
(2) On November 10, 2000, the Company completed the purchase of KTCY and all of the outstanding capital stock of RCI; in consideration for which SBS paid to RCI, the shareholders of RCI and New World, total consideration of $165.2 million, consisting of $43.5 million of SBS's Class A common stock and $121.7 million in cash.
The Company filed a report on Form 8-K dated December 8, 2000, which reported that:
(1) The annual meeting of the shareholders (the "Meeting") of the Company, is to be held on February 9, 2001. Shareholder proposals to be presented at the Meeting are required to be received by the Company no later than December 29, 2000 to be included in the Company's Proxy Statement for the Meeting.
(2) If the Company is not notified of a stockholder proposal by December 29, 2000, then the management proxies may have discretion to vote against such stockholder proposal, even though such proposal is not discussed in the proxy statement.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 26th day of December, 2000.
SPANISH BROADCASTING SYSTEM, INC.
By: /s/ RAUL ALARCON, JR. ------------------------------------ Name: Raul Alarcon, Jr. Title: Chairman of the Board of Directors, Chief Executive Officer and President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of SBS in the capacities indicated on the 26th day of December, 2000.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, each of the additional registrants has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 26th day of December, 2000.
EACH OF THE ADDITIONAL REGISTRANTS LISTED ON THE TABLE OF ADDITIONAL REGISTRANTS
By: /s/ RAUL ALARCON, JR. ------------------------------------ Name: Raul Alarcon, Jr. Title: Chief Executive Officer and President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of SBS in the capacities indicated on the 26th day of December, 2000.
EXHIBIT INDEX