SPANISH BROADCASTING SYSTEM INC - Annual Report: 2005 (Form 10-K)

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

 

Form 10-K

 

 

Commission file number 000-27823

 

Spanish Broadcasting System, Inc.

(Exact name of registrant as specified in its charter)

 

 

2601 South Bayshore Drive, PH II

Coconut Grove, Florida 33133

(Address of principal executive offices and zip code)

 

Registrant’s telephone number, including area code: (305) 441-6901

 

Former name, former address and former fiscal year, if changed since last report: None

 

Securities registered pursuant to Section 12(b) of the Act: None

 

 

Securities registered pursuant to Section 12(g) of the Act:

Class A common stock, par value $.0001 per share

(Title of Class)

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes o     No þ

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.  Yes o     No þ

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes þ     No o

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. Large accelerated filer  o     Accelerated filer þ  Non-accelerated filer  o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  o     No þ

 

As of June 30, 2005, the last business day of the registrant’s most recently completed second fiscal quarter, the registrant had 40,277,805 shares of Class A common stock, par value $.0001 per share, and 24,503,500 shares of Class B common stock, par value $.0001 per share, outstanding. As of June 30, 2005, the aggregate market value of the Class A common stock held by non-affiliates of the registrant was approximately $402.1 million and the aggregate market value of the Class B common stock held by non-affiliates of the registrant was approximately $10.2 million. We calculated the aggregate market value based upon the closing price of our Class A common stock reported on the Nasdaq National Market System on June 30, 2005 of $9.99 per share, and we have assumed that our shares of Class B common stock would trade at the same price per share as our shares of Class A common stock. (For purposes of this paragraph, directors and executive officers have been deemed affiliates.)

 

As of March 13, 2006, 40,277,805 shares of Class A common stock, par value $.0001 per share, 24,503,500 shares of Class B common stock, par value $.0001 per share and 380,000 shares of Series C convertible preferred stock, $.002 par value per share, which are convertible into 7,600,000 shares of Class A common stock, were outstanding.

 

Documents Incorporated by Reference: None

 

 

TABLE OF CONTENTS

 

 

Special Note Regarding Forward-Looking Statements

 

This annual report on Form 10-K contains both historical and forward-looking statements. All statements other than statements of historical fact are, or may be deemed to be, forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These forward-looking statements are not based on historical facts, but rather reflect our current expectations concerning future results and events. These forward-looking statements generally can be identified by the use of statements that include phrases such as “believe,” “expect,” “anticipate,” “intend,” “plan,” “foresee,” “likely,” “will” or other similar words or phrases. Similarly, statements that describe our objectives, plans or goals are or may be forward-looking statements. These forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements to be different from any future results, performance and achievements expressed or implied by these statements. We do not have any obligation to publicly update any forward-looking statements to reflect subsequent events or circumstances.

 

All references to “we”, “us”, “our”, “SBS”, “our company” or “the 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, mean our predecessor parent company Spanish Broadcasting System, Inc., a New Jersey corporation. Our executive offices are located at 2601 South Bayshore Drive, PH II, Coconut Grove, Florida 33133, our telephone number is (305) 441-6901, and our corporate website is www.spanishbroadcasting.com.

 

We are the largest publicly traded Hispanic-controlled media and entertainment company in the United States. We own and operate 20 radio stations in markets that reach approximately 49% of the U.S. Hispanic population, and two television stations, which are expected to reach approximately 1.5 million households in the South Florida market. Our radio stations are located in six of the top-ten Hispanic markets of Los Angeles, New York, Puerto Rico, Chicago, Miami and San Francisco. Los Angeles and New York have the largest and second largest Hispanic populations, and are also the largest and second largest radio markets in the United States in terms of advertising revenue, respectively. Our two television stations operate as one television operation, branded “Mega TV”, serving the South Florida market. We also occasionally produce live concerts and events throughout the United States and Puerto Rico. In addition, we operate LaMusica.com, a bilingual Spanish-English website providing content related to Latin music, entertainment, news and culture.

 

Mr. Raúl Alarcón, Jr. became our Chairman of the Board of Directors when we completed our initial public offering on November 2, 1999 and has been our Chief Executive Officer since June 1994 and our President and a director since October 1985. The Alarcón family has been involved in Spanish-language radio broadcasting since the 1950’s, when Mr. Pablo Raúl Alarcón, Sr., our Chairman Emeritus and a member of our Board of Directors, established his first radio station in Camagüey, Cuba. Members of our senior management team, on average, have over 20 years of experience in radio broadcasting.

 

Business Strategy

 

We focus on maximizing the revenue and profitability of our broadcast portfolio by strengthening the performance of our existing broadcast stations and making additional strategic media acquisitions in both our existing markets and in other U.S. markets that have a significant Hispanic population. We also focus on long-term growth by investing in advertising, programming research and on-air talent.

 

Our growth strategy includes evaluating strategic acquisitions and divestitures in order to achieve a significant presence with clusters of stations in the top U.S. Hispanic markets. We generally consider acquisitions of broadcast stations in markets where we can maximize our revenue through aggressive sales and programming efforts directed at U.S. Hispanic and general market advertisers. These acquisitions may include broadcast stations which do not currently target the U.S. Hispanic market, but which we believe can successfully be reformatted and programmed.

Additionally, from time to time we explore investment opportunities in related media outlets targeting the U.S. Hispanic market.

 

Market Opportunity

 

We believe that our focus on formats targeting U.S. Hispanic audiences in the largest Hispanic media markets, together with our skill in programming and marketing to these audiences, provide us with significant opportunity for the following reasons:

 

 

The above market opportunity information is based on data provided by Synovate — 2004 U.S. Hispanic Market Report, The Multicultural Economy 2005, The Selig Center for Economic Growth, University of Georgia, July 2005 and the HispanTelligence, The U.S. Hispanic Economy Transition: Facts, Figures, and Trends, 2005.

 

Operating Strategy

 

Our operating strategy focuses on maximizing our broadcast stations’ appeal to our targeted audiences and advertisers in order to increase revenue and cash flow while minimizing operating expenses. To achieve these goals, we focus on the following:

 

Format high quality programming.  We format the programming of each of our broadcast stations to capture a significant share of the Spanish-language audience. We use market research, including third-party consultants, in-house research, periodic music testing and focus groups, to assess audience preferences among the diverse groups in the Hispanic population in each broadcast 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 and each with its own cultural and heritage, we strive to become very familiar with the tastes and preferences of each of the various Hispanic ethnic groups, and we customize our broadcast programming accordingly.

 

Attract and retain strong local management teams.  We employ local management teams in each of our markets that are responsible for the day to day operations of our broadcast stations. The teams typically consist of a general manager, a general sales manager and a programming director. Broadcast stations are staffed with managers who have experience in and knowledge of the local market and/or the local Hispanic market because of the cultural diversity of the Hispanic population from market to market in the United States. We believe this approach improves our flexibility and responsiveness to changing conditions in each of the media markets we serve.

 

Utilize focused sales efforts.  To capture market share, our sales force focuses on converting audience share into rate and revenue increases. We strategically hire sales professionals who are experts at Hispanic and general market advertising. We also value knowledgeable account managers skilled at dealing directly with clients in the local market. The Spanish-language consumer market is uniquely positioned for national campaigns, regional marketing plans and local promotions in our diverse markets. We believe that our focused sales efforts are working to increase media spending targeted at the Hispanic consumer market and will enable us to continue to achieve rate

and revenue growth, and to narrow the gap between the level of advertising currently targeted towards U.S. Hispanics and the actual and potential buying power of their communities.

 

Control broadcast station operating costs.  We employ a disciplined approach to operating our broadcast stations. We emphasize the control of each radio station’s operating costs through detailed budgeting, tight control over staffing levels and constant expense analysis. While local management is responsible for the day to day operation of each broadcast station, corporate management is responsible for long-term and strategic planning, establishing policies and procedures, maximizing cost savings through centralized control where appropriate, allocating corporate resources and maintaining overall control of our broadcast stations.

 

Effective use of promotions and special events.  We rely on our expertise in marketing to the Hispanic consumer in each of the media markets in which we operate to maximize our share of advertising revenue. We believe that our on-air talent combined with effective promotional efforts play a significant role in both adding new listeners and viewers and increasing listener and viewer loyalty. We organize special promotional appearances, such as station van appearances at client events, concerts and tie-ins to special 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 method of reaching the Hispanic consumer. In some instances, these events are co-sponsored by local television stations, newspapers, promoters and advertisers, allowing our mutual advertisers to reach a larger combined Hispanic audience.

 

Maintain strong community involvement.  We have been, and will continue to be, actively involved in the local communities that we serve. Our broadcast stations participate in numerous community programs, fund-raisers and activities benefiting the local community and Hispanics abroad. Examples of our community involvement include free public service announcements, free equal-opportunity employment announcements, tours and discussions held by station personalities with school and community groups designed to deter drug and gang involvement, free concerts and events designed to promote family values within the local Hispanic communities, charitable contributions to organizations which benefit the Hispanic community, and extended coverage, when necessary, of significant events which have an impact on the U.S. Hispanic population. Our broadcast stations and members of our management have received numerous community service awards and acknowledgments from governmental entities and community and philanthropic organizations for their service. We believe that this involvement helps build and maintain broadcast station awareness and loyalty.

 

Expand branded content across multiple media platforms.  We have found that our brands and the content that we have developed are well-positioned for expansion on other media outlets. As part of our long-term strategy, it is essential that we find ways to monetize our content and investments across multiple platforms such as the Internet, television and other new media alternatives, such as personal music and video recording devices, cellular telephones and other new media technology. Since our content is unique to our brands and talent, expansion allows us to enter into other advertising and sponsorship revenue. As part of this strategy, we have taken an active role in redesigning our website, www.lamusica.com, which we re-launched on March 1, 2006 to coincide with the launch of our new television operation, Mega TV (see below). In addition, our key radio programs, on-air personalities and brands are being developed for downloadable video, ring-tone and interactive content use. We are also developing content from our production of musical events to create opportunities to sell, market and distribute through our website and other media.

 

Recent Developments

 

Acquisition of Television Stations

 

On March 1, 2006, our wholly-owned subsidiaries, Mega Media Holdings, Inc. (“Mega Media Holdings”) and WDLP Licensing, Inc. (“Mega-Sub,” and together with Mega Media Holdings, “Mega Media”), completed the acquisition of certain assets, including licenses, permits and authorizations issued by the Federal Communications Commission (the “FCC”) used in or related to the operation of television stations WSBS-TV (Channel 22, formerly known as WDLP-TV), its derivative digital television station WSBS-DT (Channel 3, formerly known as WDLP-DT) in Key West, Florida and WSBS-CA (Channel 50, formerly known as WDLP-CA) in Miami, Florida, pursuant to that certain asset purchase agreement, dated as of July 12, 2005, as previously amended on September 19, 2005,

October 19, 2005 and January 6, 2006 with WDLP Broadcasting Company, LLC, WDLP Licensed Subsidiary, LLC, Robin Broadcasting Company, LLC, and Robin Licensed Subsidiary, LLC. WSBS-TV-DT and WSBS-CA are operating as one television operation, branded as “Mega TV”, serving the South Florida market. Mega TV debuted on the air on March 1, 2006.

 

In connection with the closing, Mega Media paid an aggregate purchase price equal to $37.6 million, consisting of (i) cash in the amount of $17.0 million, (ii) a thirty-four month, non-interest-bearing secured promissory note in the principal amount of $18.5 million, which we guarantee and is secured by the assets acquired in the transaction, (iii) deposits of $0.5 million and $1.0 million made on July 13, 2005 and January 6, 2006, respectively, and (iv) two extension payments of $0.3 million made on September 1, 2005 and January 6, 2006, respectively, in consideration for the extension of the closing date.

 

Sale of Los Angeles Stations

 

On January 31, 2006, we completed the sale of the assets of our radio stations KZAB-FM and KZBA-FM, serving the Los Angeles, California market, for a cash purchase price of $120.0 million (the “LA Asset Sale”), to Styles Media Group, LLC, a Florida limited liability company (“Styles Media Group”), pursuant to that certain asset purchase agreement, dated as of August 17, 2004, by and among Styles Media Group, LLC, Spanish Broadcasting System SouthWest, Inc., one of our subsidiaries, and us.

 

In connection with the closing of the LA Asset Sale, Styles Media Group paid a cash purchase price of $120.0 million, consisting of $65.0 million paid at closing and $55.0 million previously paid to us as non-refundable deposits. As a result of the LA Asset Sale, we will recognize a gain on the sale of assets, net of disposal costs, of approximately $57.0 million during the three months ended March 31, 2006.

 

Previously, on August 17, 2004, Spanish Broadcasting System SouthWest, Inc. also entered into a time brokerage agreement with Styles Media Group, pursuant to which Styles Media Group was permitted to begin broadcasting its programming on radio stations KZAB-FM and KZBA-FM beginning on September 20, 2004. The time brokerage agreement was terminated upon the closing under, and termination of, the asset purchase agreement.

 

Under the terms of the original asset purchase agreement, at signing, Styles Media Group made a non-refundable $6.0 million deposit on the purchase price. On February 18, 2005, Styles Media Group exercised its right under the agreement to extend the closing date until March 31, 2005 by releasing the $6.0 million deposit from escrow to us. On March 30, 2005, we entered into an amendment to the asset purchase agreement with Styles Media Group. In connection with this amendment, Styles Media Group made an additional $14.0 million non-refundable deposit to the purchase price and we agreed to extend the closing date from March 31, 2005, to the later date of July 31, 2005 or five days following the grant of the FCC Final Order. On July 29, 2005, we entered into a second amendment to the asset purchase agreement with Styles Media Group. In connection with this second amendment, Styles Media Group made an additional $15.0 million non-refundable deposit to the purchase price and we agreed to extend the closing date from July 31, 2005, to the date that is designated by Styles Media Group, but no later than January 31, 2006. On December 22, 2005, Styles Media Group made an additional $20.0 million non-refundable deposit towards the purchase price two days following the grant of the FCC license renewals.

 

Termination of Second Lien Credit Facility

 

On February 17, 2006, we repaid and terminated our second lien credit facility, dated as of June 10, 2005, among us, Merrill Lynch Pierce Fenner & Smith, Incorporated, Wachovia Bank, National Association, Lehman Commercial Paper Inc., and certain other lenders (the “Second Lien Credit Facility”). We used approximately $101.0 million of the net cash proceeds from the LA Asset Sale to pay the full amount owed under the Second Lien Credit Facility. Accordingly, we have no further obligations remaining under the Second Lien Credit Facility. As a result of the prepayment of the Second Lien Credit Facility, we will recognize a loss on early extinguishment of debt related to the prepayment premium and the write-off of unamortized deferred financing costs of approximately $3.0 million during the three-months ended March 31, 2006.

Operating Segments

 

Due to the recent commencement of our television operation, we are now reporting two operating segments, radio and television.

 

Radio Overview

 

We operate stations in some of the top Hispanic radio markets in the United States, including Puerto Rico. We own radio stations in Los Angeles, New York, Puerto Rico, Chicago, Miami and San Francisco.

 

The following table sets forth certain statistical and demographic information relating to our radio markets:

 

 

 

 

Radio Station Portfolio

 

The following is a general description of each of our markets. The market revenue information is based on data provided by BIA Financial Network, Inc.’s Investing in Radio, 2006 Market Report, Synovate — 2004 U.S. Hispanic Market Report, the U.S. Census Bureau Population Estimates for Puerto Rico — 2005 and the U.S. Census Bureau, Census 2000.

 

Los Angeles

 

The Los Angeles market is the largest radio market in terms of advertising revenue which was projected to be approximately $1.1 billion in 2005. In 2004, the Los Angeles market had the largest U.S. Hispanic population with approximately 7.8 million Hispanics, which is approximately 44.5% of the Los Angeles market’s total population. The Los Angeles market experienced an annual radio revenue growth of 5.9% between 1999 and 2004. Radio revenue in the Los Angeles market is expected to grow at an annual rate of 4.2% between 2004 and 2009.

 

New York

 

The New York market is the second largest radio market in terms of advertising revenue which was projected to be approximately $840.1 million in 2005. In 2004, the New York market had the second largest U.S. Hispanic population, with approximately 4.3 million Hispanics, which is approximately 20.5% of the New York market’s total population. We believe that we own the strongest franchise in our target demographic group, with two of the four FM Spanish-language radio stations in the New York market, WSKQ-FM and WPAT-FM. The New York market experienced an annual radio revenue growth of 2.7% between 1999 and 2004. Radio revenue in the New York market is expected to grow at an annual rate of 3.1% between 2004 and 2009.

Puerto Rico

 

The Puerto Rico market is the thirty-first largest radio market in terms of advertising revenue which was projected to be approximately $111.2 million in 2005. In 2004, the Puerto Rico market had the third largest U.S. Hispanic population, with approximately 3.9 million Hispanics, which is estimated to be approximately 98.0% of the Puerto Rico market’s total population. The Puerto Rico market experienced an annual radio revenue growth of 6.1% between 1999 and 2004. Radio revenue in the Puerto Rico market is expected to grow at an annual rate of 4.5% between 2004 and 2009.

 

Chicago

 

The Chicago market is the third largest radio market in terms of advertising revenue which was projected to be approximately $587.3 million in 2005. In 2004, the Chicago market had the fourth largest U.S. Hispanic population, with approximately 1.8 million Hispanics, which is approximately 19.0% of the Chicago market’s total population. The Chicago market experienced an annual radio revenue growth of 1.7% between 1999 and 2004. Radio revenue in the Chicago market is expected to grow at an annual rate of 3.2% between 2004 and 2009.

 

Miami

 

The Miami market is the eleventh largest radio market in terms of advertising revenue which was projected to be approximately $286.3 million in 2005. In 2004, the Miami market had the fifth largest U.S. Hispanic population, with approximately 1.8 million Hispanics, which is approximately 43.1% of the Miami market’s total population. The Miami market experienced an annual radio revenue growth of 3.3% between 1999 and 2004. Radio revenue in the Miami market is expected to grow at an annual rate of 3.3% between 2004 and 2009.

 

San Francisco

 

The San Francisco market is the fourth largest radio market in terms of advertising revenue which was projected to be approximately $442.4 million in 2005. In 2004, the San Francisco market had the eighth largest U.S. Hispanic population, with approximately 1.5 million Hispanics, which is approximately 21.3% of the San Francisco market’s total population. The San Francisco market experienced an annual radio revenue decrease of 2.0% between 1999 and 2004. Radio revenue in the San Francisco market is expected to grow at an annual rate of 4.0% between 2004 and 2009.

 

Radio Station Programming

 

We format the programming of each of our radio stations to capture a substantial share of the U.S. Hispanic audience in its respective market. The U.S. Hispanic population is diverse, consisting of numerous identifiable groups from many different countries of origin and 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 become 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 in-house research departments located in Miami and Los Angeles, which conduct extensive radio market research on a daily, weekly, monthly and annual basis. By employing listener study groups and telephone surveys modeled after Arbitron^® written survey methodology, we are able to assess listener preferences, track trends and gauge our success on a daily basis, well before Arbitron^® quarterly results are published. In this manner, we can respond immediately, if necessary, to any changing preferences of listeners and/or trends by refining our programming to reflect the results of our research and testing. Each of our programming formats is described below.

 

 

 

The following table lists the programming formats of our stations and the target demographic group of each station.

 

Latin Music On-Line (“LaMusica.com”)

 

LaMusica.com is our bilingual Spanish-English Internet website and on-line community that focuses on the Hispanic market. LaMusica.com, which links to the websites of some of our broadcast stations, provides original information and interactive content related to Latin music, entertainment, news and culture. LaMusica.com and our network of station websites generate revenue primarily from advertising and sponsorship. In addition, we hope to generate revenue from our key radio programs, on-air personalities and brands, which are being developed for downloadable video, ring-tone and interactive content use through LaMusica.com. We are also developing content from our production of musical events to create opportunities to sell, market and distribute through our website and other media. We believe that LaMusica.com, together with our broadcast portfolio, enables our audience to enjoy targeted and culturally-specific entertainment options, such as concert listings, music reviews, local entertainment calendars, and interactive content on popular Latin artists and entertainers. At the same time, LaMusica.com enables our advertisers to reach their targeted Hispanic consumers through an additional and dynamic medium. We re-launched LaMusica.com on March 1, 2006 to coincide with the launch of Mega TV. Mega TV produces and airs a new Internet-based music and entertainment news show that is using the LaMusica.com brand, which is creating a new platform for the brand and a new opportunity for advertiser participation.

 

Television Overview and Programming

 

On March 1, 2006, we launched Mega TV, our general entertainment Spanish-language television operation serving the South Florida market. We intend to format our television programming to capture a substantial share of the market’s U.S. Hispanic audience by focusing on our core strengths as an “entertainment” company, which will offer a new alternative compared to the traditional Latino channels. Mega TV’s programming is based on a strategy designed to showcase a combination of programs, ranging from televised radio-branded shows to general entertainment programs, such as music, dance and celebrity shows. As part of our strategy, we intend to incorporate on-air personalities into our programming, including some of our radio personalities. We plan to develop approximately 60% of our programming and expect to commission other content from capable Spanish-language production partners. The channel will initially feature televised versions of our Miami top-rated radio shows, debate shows, dance and music contests, reality and entertainment shows and game shows. We anticipate that television revenue will be generated primarily from the sale of local and national advertising. Advertising rates will depend primarily on our ability to attract an audience in the demographic groups targeted by our advertisers, the number of stations in the market we compete with for the same audience, the supply of and demand for television advertising time, as well as other qualitative factors. We also expect to generate revenue from the sale of integrated sponsorships and program syndication.

 

Advertising

 

The vast majority of our revenue is derived from advertising sales. Advertising revenue is usually classified by two categories — “national” and “local.” “National” generally refers to advertising that is solicited by a representative firm for national advertisers. Our national sales representative for our radio stations is SBS/Interep LLC, a division of Interep National Radio Sales, Inc. “Network” advertising revenue is a subset category of national advertising revenue and it refers to advertising purchased by our other strategic alliance agreements. “Local” refers to advertising purchased by advertisers and agencies in the local market served by a particular station.

 

Current trends in the media advertising market have changed the long-established model for categorizing advertising revenue. In the past, media advertising was usually classified into two categories — “national” or “local” spot sales. We have expanded the conventional model by offering “integrated sponsorship” opportunities, which are highly sought after and command a higher investment from agencies, in order to maximize our advertisers’ opportunities. We expect that our primary source of revenue from our broadcast stations will be generated from the sale of national, local and integrated sponsorship advertising. In addition, we are anticipating that the television, radio and internet offerings will generate more advertising opportunities by offering multi-media packages.

The broadcasting industry is one of the most efficient and cost-effective means for advertisers to reach targeted demographic groups. Advertising rates charged by a station are based primarily on the station’s ability to attract an audience in a given market and on the attractiveness to advertisers of the station’s audience demographics as well as the demand on available advertising inventory. Rates also vary depending upon a program’s popularity among the listeners/viewers an advertiser is seeking to attract and the availability of alternative media in the market. Radio advertising rates generally are highest during the morning drive-time hours which are the peak hours for radio audience listening. We anticipate that television advertising rates will generally be higher during prime time evening viewing periods. A broadcaster that has multiple stations in a market appeals to national advertisers because these advertisers can reach more listeners and viewers, thus enabling the broadcaster to attract a greater share of the advertising revenue in a given market. We believe that we will be able to continue increasing our rates as new and existing advertisers recognize the increasing desirability of targeting the growing U.S. Hispanic population.

 

Each station broadcasts a predetermined number of advertisements per hour with the actual number depending upon the format of a particular station and any programming strategy we are utilizing to attract an audience. We also determine the number of advertisements broadcast hourly that can maximize the station’s revenue without negatively impacting its audience listener/viewer 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.

 

We have short and long-term contracts with our advertisers, although it is customary in the radio and television industry that the majority of advertising contracts are short-term and generally run for less than three months. This will afford broadcasters the opportunity to modify advertising rates as dictated by changes in station ownership within a market, changes in viewer ratings and changes in the business climate within a particular market. In each of our broadcasting markets, we employ sales personnel to obtain local advertising revenue. Our local sales force is important to maintaining relationships with key local advertisers and agencies and identifying new advertisers. We pay commissions to our local sales staff upon receipt of payment for their respective billings which assists in our collection efforts.

 

Competition

 

The success of each of our broadcast stations depends significantly upon its audience ratings and its share of the overall advertising revenue within its market. The radio and television broadcasting industries are highly competitive businesses. Each of our radio stations competes with both Spanish-language and English-language radio stations in its market, as well as other media, such as newspapers, broadcast television, cable television, the Internet, magazines, outdoor advertising, satellite radio, transit advertising and direct mail marketing. We anticipate that our television operations will compete for viewers and revenue with both Spanish-language and English-language television stations in the South Florida market, as well as nationally-broadcast television operations, cable television, the Internet and other video media.

 

Several of the broadcast stations with which we compete are subsidiaries of larger national or regional companies that may have substantially greater financial resources than we do. Factors which are material to our competitive position include:

 

 

Although the broadcast industry is highly competitive, some barriers to entry do exist. These barriers can be mitigated to some extent by changing existing broadcast station formats and programming and upgrading power, among other actions. The operation of a broadcast station requires a license or other authorization from the FCC. The number of AM radio stations that can operate in a given market is limited by the availability of AM radio frequencies spectrum in a given market. The number of FM radio frequencies and television stations that can operate in a given market is limited by the availability of those allotted by the FCC to communities in such 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 and Television Broadcasting” below.

 

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, and multi-format digital radio services with sound quality equivalent to that of compact discs. The FCC has licensed companies for the use of a new technology, satellite digital audio radio services (known as “SDARS”), to deliver audio programming. SDARS provides a medium for the delivery by satellite of multiple new audio programming formats to local and national audiences. Some radio broadcast stations, including ours, are presently utilizing digital technology on their existing frequencies to deliver audio programming. The FCC also has begun granting licenses for a new “low power” radio or “microbroadcasting” service to provide low cost neighborhood service on frequencies which would not interfere with existing stations.

 

The FCC has selected In-Band On-Channel^tm, or IBOC, as the exclusive technology for introduction of terrestrial digital operations by AM and FM radio stations. The FCC has authorized the commencement of “hybrid” IBOC transmissions, that is, simultaneous broadcast in both digital and analog format, after receipt of individual grant of special temporary authority by the FCC pending the adoption of formal licensing and service rules. The advantages of digital audio broadcasting over traditional analog broadcasting technology include improved sound quality and the ability to offer a greater variety of auxiliary services. IBOC technology permits a station to transmit radio programming in both analog and digital formats, and eventually in digital only formats, using the bandwidth that the radio station is currently licensed to use. It is unclear what impact the introduction of digital broadcasting will have on the radio markets in which we compete. The FCC also has a pending proceeding which contemplates the use of digital technology by existing AM and FM radio broadcast stations to both improve sound quality and provide spectrum for enhanced data services to complement the existing programming service and provide new business opportunities for radio broadcasters. Under Special Temporary Authority, the FCC has authorized use of IBOC digital technology developed by iBiquity Digital Corporation, or iBiquity, on FM stations full-time and on AM stations day-time only. The final digital radio rules remain under consideration by the FCC.

 

We currently utilize IBOC digital technology on one of our stations and are considering installing it on other of our stations over the next few years. This digital technology, which is not required by the FCC, offers the possibility of multiple audio channels in our assigned frequency.

 

The delivery of information through the presently unregulated Internet also could create a new form of competition for both radio and television. Internet radio broadcasts have no geographic limitations and can provide listeners with radio programming from around the country and the world. Although we believe that the current sound quality of Internet radio is below standard and may vary depending on factors that can distort or interrupt the broadcast, such as network traffic, we expect that improvements from higher bandwidths, faster modems and wider programming selection may make Internet radio a more significant competitor in the future. 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, portable digital music players and compact discs. Similarly, the television broadcasting industry has developed notwithstanding the increasing popularity of portable compact disc players, digital video recorders and entertainment and media content delivered through cell phones and other wireless devices. A growing population and the greater availability of televisions and radios, particularly car and portable radios, have contributed to the growth of the radio and television industries. We cannot assure you, however, that the development or introduction of any new media technology will not have an adverse effect on the radio and television broadcasting industries.

We cannot predict what other matters may 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 may have on our business. See “Federal Regulation of Radio and Television Broadcasting” below.

 

Management and Personnel

 

As of March 13, 2006, we had approximately 656 full-time employees, 13 of whom were primarily involved in corporate management and/or station management, 241 of whom were primarily involved in the programming of our stations, 140 of whom were primarily involved in sales, 121 of whom were primarily involved in general administration and 29 of whom were primarily involved in technical or engineering capacities.

 

Our business depends upon the efforts, abilities and expertise of our executive officers and other key employees, including on-air talent, and our ability to hire and retain qualified personnel. The loss of any of these executive officers and key employees, particularly Raúl Alarcón, Jr., our Chairman of the Board of Directors, Chief Executive Officer and President, could have a material adverse effect on our business.

 

Seasonality

 

Seasonal broadcasting revenue fluctuations are common in the broadcasting industry and are primarily due to fluctuations in advertising expenditures by local and national advertisers. Our net broadcasting revenues vary throughout the year. Historically, our first calendar quarter (January through March) has generally produced the lowest net broadcasting revenue for the year because of routine post-holiday decreases in advertising expenditures.

 

Patents, Trademarks, Licenses and Franchises

 

In the course of our business, we use various trademarks, trade names, domain names and service marks, including logos, with our products and services and in our advertising and promotions. We believe our trademarks, trade names, domain names and service marks are important to our business and we intend to continue to protect and promote them where appropriate and to protect the registration of new trademarks, including through legal action, each of which expires at various times between 2006 and 2015. We do not hold or depend upon any material patent, government license, franchise or concession, except the broadcast licenses granted by the FCC and the trademarks granted by the United States Patent and Trademark Office.

 

Antitrust

 

We have completed, and in the future may complete, strategic acquisitions and divestitures in order to achieve a significant presence with clusters of stations in the top U.S. Hispanic markets. Since the passage of the Telecommunications Act of 1996, the Justice Department has become more aggressive in reviewing proposed acquisitions of broadcast stations and station networks. The Justice Department is particularly aggressive when the proposed buyer already owns one or more broadcast stations in the market of the station it is seeking to buy. Recently, the Justice Department has challenged a number of broadcasting transactions. Some of those challenges ultimately resulted in consent decrees requiring, among other things, divestitures of certain stations. Specifically, the Justice Department has more closely scrutinized broadcasting acquisitions that result in local market shares in excess of 40% of advertising revenue. Similarly, the FCC staff has announced new procedures to review proposed broadcasting transactions even if the proposed acquisitions otherwise comply with the FCC’s ownership limitations. In particular, the FCC may invite public comment on proposed transactions that the FCC believes, based on its initial analysis, may present ownership concentration concerns in a particular local market.

 

Federal Regulation of Radio and Television Broadcasting

 

The radio and television broadcasting industry is subject to extensive and changing regulation by the FCC of programming, technical operations, employment and other business practices. The FCC regulates broadcast

stations pursuant to the Communications Act of 1934, as amended (the “Communications Act”). The Communications Act permits the operation of 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:

 

 

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 or television 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 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, all of which could have a material adverse impact on our operations.

 

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 our broadcast stations, result in the loss of audience share and advertising revenue for our broadcast stations or affect our ability to acquire additional broadcast stations or finance these acquisitions. Such matters may include:

 

 

 

We cannot predict what changes, if any, might be adopted, or 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 Communications Act provides that a broadcast station license may be granted to any applicant if the granting of the application would serve the public interest, convenience and necessity, subject to certain limitations. In making licensing determinations, the FCC considers an applicant’s legal, technical, financial and other qualifications. The FCC grants radio and television broadcast station licenses for specific periods of time and, upon application, may renew them for additional terms. Under the Communications Act, radio and television broadcast station licenses may be granted for a maximum term of eight years.

 

The following table sets forth the license expiration dates of each of our media stations after giving effect to the sale of our radio stations KZAB-FM and KZBA-FM, serving the Los Angeles, California market and the acquisition of our television stations WSBS-TV-DT and WSBS-CA, serving the South Florida market.

 

 

Generally, the FCC renews broadcast licenses without a hearing upon a finding that:

 

 

 

After considering these factors, the FCC may grant the license renewal application without or with conditions, including renewal for a term less than the maximum term otherwise permitted by law, or hold an evidentiary hearing.

 

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. Generally, our licenses have been renewed without any material conditions or sanctions being imposed, but we cannot assure 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 has created a subclass of Class C stations based on antenna height. Stations not meeting the minimum height requirement within a three-year transition period may be downgraded to a new Class C0 category.

 

Ownership Matters.  The Communications Act requires prior approval by 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:

 

 

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 the capital stock of record is 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, 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 5% or more of the stock of a licensee corporation are generally deemed attributable interests, as are officer positions and directors 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 20% 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 as 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 or other non-voting interests with rights of conversion to voting interests that have not yet been exercised and insulated limited partnership interests where the limited partner is not materially involved in the media-related activities of the partnership generally do not subject their holders to attribution. However, the holder of an equity or debt instrument or interest in a broadcast licensee, cable television system, daily newspaper or other media outlet shall have that interest attributed if the equity (including all stock holdings whether voting or non-voting, common or preferred) and debt interest or interests in the aggregate exceed 33% of the total asset value, defined as the aggregate of all equity plus all debt of that media outlet and the interest holder also holds an interest in a broadcast licensee, cable television system, newspaper or other media outlet operating in the same market that is subject to the broadcast multiple ownership or cross-ownership rules and is otherwise attributable or if the interest holder supplies over 15% of the total weekly broadcast programming hours of the station in which the interest is held.

 

The Communications Act and FCC rules generally restrict ownership, operation or control of, or the common holding of attributable interests in:

 

 

We are uncertain as to which “cross-ownership” or “cross-media” rules will be used by the FCC in the future. The FCC previously adopted new ownership rules which were appealed. While a federal court granted the Commission authority to implement the radio ownership rules, the court denied the proposed rules regarding newspapers/broadcast and radio/television cross-ownership. Therefore, absent waivers, we would not be permitted to own broadcast station and acquire an attributable interest in any daily newspaper in the same market where we then owned any broadcast station.However, the ownership limits are extremely fluid at this time and the court’s

decision is being appealed. In addition, the FCC or Congress may impose new ownership regulations upon broadcast licensees in the near future.

 

Although current FCC nationwide radio broadcast ownership rules allow one entity to own, control or hold attributable interest 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 (defined as those counties in the Arbitron^® defined market) in which a single entity may own an attributable interest as follows:

 

 

Under the ownership rules currently in place, the FCC generally permits an owner to have only one television station per market. A single owner is permitted to have two stations with overlapping signals so long as they are assigned to different markets. The FCC’s rules regarding ownership permit, however, an owner to operate two television stations assigned to the same market so long as either:

 

 

The FCC will consider waiving these ownership restrictions in certain cases involving failing or failed stations or stations which are not yet built.

 

The FCC permits a television station owner to own one radio station in the same market as its television station. In addition, a television station owner is permitted to own additional radio stations, not to exceed the local radio ownership limits for the market, as follows:

 

 

A “media voice” includes each independently-owned and operated full-power television and radio station and each daily newspaper that has a circulation exceeding 5% of the households in the market, plus one voice for all cable television systems operating in the market.

 

The FCC rules impose a limit on the number of television stations a single individual or entity may own nationwide.

 

On June 2, 2003, the FCC concluded a nearly two-year review of its media ownership rules. The FCC revised its national ownership policy, modified television and cross-ownership restrictions in a given market, and changed its methodology for defining radio markets. A number of parties appealed the FCC’s June 2, 2003 decision. The United States Court of Appeals for the Third Circuit, in a decision reached on June 24, 2004, upheld certain of the

Commission’s actions while remanding others for further review by the FCC. In taking that action, the Court stayed the effectiveness of all of the FCC’s actions but, in a subsequent decision, the Court permitted the FCC to implement the local radio multiple ownership rule changes that the Court had upheld. Certain of the petitioners in the case, but not the FCC or the U.S. Department of Justice, have requested that the Supreme Court review the action of the Court. Accordingly, the ultimate impact of changes in the FCC’s restrictions on how many stations a party may own, operate and/or control and on our future acquisitions and competition from other companies is difficult to predict at this time.

 

The new rules that have gone into effect amend the FCC’s methodology for defining a radio market for the purpose of ownership caps. The FCC replaced its signal contour method of defining local radio markets in favor of a geographic market assigned by Arbitron^®, the private audience measurement service for radio broadcasters. For non-Arbitron^® markets, the FCC is conducting a rulemaking in order to define markets in a manner comparable to Arbitron^®’s method. In the interim, the FCC will apply a “modified contour approach,” to non-Arbitron^® markets. This modified approach will exclude any radio station whose transmitter site is more than 58 miles from the perimeter of the mutual overlap area.

 

With regard to television service, the FCC’s proposed rules, which remain stayed, state:

 

 

With regard to the national television ownership limit, the FCC increased the national television ownership limit to 45% from 35%. Congress subsequently enacted legislation that reduced the nationwide cap to 39%. Accordingly, a company can now own television stations collectively reaching up to a 39% share of U.S. television households. Limits on ownership of multiple local television stations still apply, even if the 39% limit is not reached on a national level.

 

In establishing a national cap by statute, Congress did not make mention of the FCC’s ultra high frequency, or UHF, discount policy, whereby UHF stations are deemed to serve only one-half of the population in their television markets. The FCC has commenced a proceeding to determine if Congress intended to alter this UHF discount policy. As the licensee of UHF television stations, the elimination or modification of the UHF discount policy could impact our ability to acquire television stations in additional markets.

 

With regard to cross-ownership caps, radio-television cross-ownership rules would have been significantly relaxed if the June 2003 rules were permitted to go into effect. Under that decision, no cross-ownership is permitted in markets with three or fewer television stations. A waiver may be available if it can be shown that the television station does not serve the area served by the cross-owned radio station. In markets with between four and eight television stations, combinations are limited to one of the following:

 

 

For markets with nine or more television stations, the radio-television cross-ownership ban would be completely rescinded.

The future of the FCC’s new rules is made uncertain not only by the Third Circuit’s decision but also by the response of Congress to the FCC’s relaxation of existing ownership limits. As discussed above, Congress has already modified the nationwide television ownership cap and has considered legislation that would roll back the FCC’s proposed changes. In the future, Congress is expected to engage in a review of the communications laws and could decide to make further substantive changes to the broadcast ownership rules.

 

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, equal employment opportunity, 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 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.

 

Time Brokerage Agreements.  Occasionally, stations enter into time brokerage agreements or local marketing agreements. These agreements take various forms. Separately owned and licensed 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 station maintain independent control over the programming and other operations of its own station.

 

Joint Sales Agreements.  Over the past few years, a number of stations have entered into cooperative arrangements commonly known as joint sales agreements or JSAs. The FCC has determined that where two radio stations are both located in the same market and a party with a cognizable interest in one such station sells more than 15% of the advertising per week of the other station, that party shall be treated as if it has an attributable interest in that brokered station.

 

RF Radiation.  In 1985, the FCC adopted rules based on a 1982 American National Standards Institute, or ANSI standard regarding human exposure to levels of radio frequency, or 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 radiation exposure that, in some respects, was more restrictive in the amount of environmental RF radiation 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 Satellite Service.  The FCC has adopted rules for the Digital Audio Radio Satellite Service, also known as DARS, in the 2310-2360 MHz frequency band. In adopting the rules, the FCC stated, “although healthy satellite DARS systems are likely to have some adverse impact on terrestrial radio audience size, revenues and profits, the record does not demonstrate that licensing satellite DARS would have such a strong adverse impact that it threatens the provision of local service.” The FCC has granted two nationwide licenses, one to XM Satellite Radio, which began broadcasting in May 2001, and a second to Sirius Satellite Radio, which began broadcasting in February 2002 in three markets, and has now expanded nationwide. The satellite radio systems provide multiple channels of audio programming in exchange for the payment of a subscription fee. Because the DARS service is in its beginning stages, we cannot predict whether, or the extent to which, it will have an adverse impact on our business. However, the two nationwide licenses are presently competing with terrestrial radio for talent and, to a lesser extent, licenses.

Low Power Radio Broadcast Service.  The FCC has 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 our radio stations for listeners, but we cannot predict the effect upon us.

 

“Must Carry” Rules.  FCC regulations implementing the Cable Television Consumer Protection and Competition Act of 1992 require each full-service television broadcaster to elect, at three-year intervals beginning October 1, 1993, to either:

 

 

We have elected “must carry” with respect to our full-power television station.

 

Under the FCC’s rules currently in effect, cable systems are only required to carry one signal from each local broadcast television station. As our stations begin broadcasting digital signals, the cable systems that carry our stations’ analog signals will not be required to carry such digital signal until we discontinue our analog broadcasting. The FCC has considered rules to govern the obligations of cable systems to carry local stations’ signals during and following the transition from analog to digital television broadcasting. It has decided that there will be no “dual carriage” requirement obligating cable systems to carry a broadcaster’s paired analog and digital channels. It has also decided that cable systems will be required to carry only one channel of digital signal from our station, despite the fact that operating in the digital mode will allow us to be able to broadcast multiple digital services. While adoption of a multicast must-carry requirement might have enabled us to take advantage of this new technology with the guarantee that our multiple programming efforts would be entitled to cable carriage, such a requirement might also have subjected us to increased competition from other stations seeking to add programming that competes with our programming as one or more of their additional program streams. It also could have subjected the “must carry” regime to further judicial review that could have resulted in the elimination of “must carry” treatment which could have had detrimental consequences for us.

 

Digital Television Services.  The FCC has adopted rules for implementing digital television service in the United States. Implementation of digital television will improve the technical quality of television signals and provide broadcasters the flexibility to offer new services, including high-definition television and broadband data transmission.

 

The FCC has established service rules and adopted a table of allotments for digital television. Under the table, certain eligible broadcasters with a full-service television station have been allocated a separate channel for digital television operation. Stations are permitted to phase in their digital television operations over a period of years after which they will be required to surrender their licenses to broadcast the analog, or non-digital, television signal to the government by the end of 2006, except that this deadline may be extended until digital television receivers reach an 85% market penetration.

 

Other Proceedings.  The Satellite Home Viewer Improvement Act of 1999, or SHVIA, allows satellite carriers to deliver broadcast programming to subscribers who are unable to obtain television network programming over the air from local television stations. Congress in 1999 enacted legislation to amend the SHVIA to facilitate the ability of satellite carriers to provide subscribers with programming from local television stations. Any satellite company that has chosen to provide local-into-local service must provide subscribers with all of the local broadcast television signals that are assigned to the market and where television licensees ask to be carried on the satellite system. We plan to take advantage of this law to secure carriage of our full-service stations in our markets where the satellite operators have implemented local-into-local service. The SHVIA expired in 2004 and Congress adopted the Satellite Home Viewer Extension and Reauthorization Act of 2004 (SHVERA). SHVERA extended the ability of satellite operators to implement local-into-local service and, among its other provisions, required that the use of second dishes by satellite operators be ended on or before June 8, 2006.

Proposed Changes.  The United States Congress and the FCC continually consider new laws, regulations and policies regarding a wide variety of matters that could, directly or indirectly, affect our operations, ownership and profitability; result in the loss of audience share and advertising revenue; or affect our ability to acquire additional radio broadcast stations or to finance such acquisitions. We can neither predict what matters might be considered nor judge in advance what impact, if any, the implementation of any of these proposals or changes might have on our business.

 

Environmental Matters

 

As the owner, lessee or operator of various real properties and facilities, we are subject to various federal, state and local environmental laws and regulations. Historically, compliance with these laws and regulations has not had a material adverse effect on our business. We cannot assure you, however, that compliance with existing or new environmental laws and regulations will not require us to make significant expenditures of funds.

 

On March 19, 2002, the Environmental Quality Board, Mayagüez, Puerto Rico Regional Office, or EQB, inspected our transmitter site in Maricao, Puerto Rico. Based on the inspection, EQB issued a letter to us on March 26, 2002 noting the following potential violations: (1) alleged violation of EQB’s Regulation for the Control of Underground Injection through construction and operation of a septic tank (for sanitary use only) at each of the two antenna towers without the required permits, (2) alleged violation of EQB’s Regulation for the Control of Atmospheric Pollution through construction and operation of an emergency generator of more than 10hp at each transmitter tower without the required permits and (3) alleged failure to show upon request an EQB approved emergency plan detailing preventative measures and post-event steps that we will take in the event of an oil spill. We received the emergency plan approval and the emergency generator permit approval on April 30, 2003 and August 14, 2003, respectively. To date, no penalties or other sanctions have been imposed against us relating to these matters. We do not have sufficient information to assess our potential exposure to liability, if any, and no amounts have been accrued in the consolidated financial statements related to this contingency.

 

Available Information

 

We are subject to the reporting and other information requirements of the Exchange Act. We file reports and other information with the SEC. Such reports and other information filed by us pursuant to the Exchange Act may be inspected and copied at the public reference facility maintained by the SEC at 450 Fifth Street, N.W., Washington D.C. 20549. If interested, please call 1-800-SEC-0330 for further information on the public reference room. The SEC maintains a website on the Internet containing reports, proxy materials, information statements and other items. The Internet website address is http://www.sec.gov. Our reports, proxy materials, information statements and other information can also be inspected and copied at the offices of The Nasdaq Stock Market, on which our common stock is listed (symbol: SBSA). You can find more information about us at our Internet website located at www.spanishbroadcasting.com and our investor relations section of our website is located at www.spanishbroadcasting.com/investorinfo.shtml. Our annual report on Form 10-K, our quarterly reports on Form 10-Q, our current reports on Form 8-K and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act are available free of charge on our Internet website as soon as reasonably practicable after we electronically file such material with, or furnish such material to, the SEC.

 

You should carefully consider the risks and uncertainties described below and the other information in this report. These are not the only risks we face. Additional risks and uncertainties that we are not aware of or that we currently deem immaterial also may impair our business. If any of the following risks actually occur, our business, financial condition and operating results could be materially adversely affected and the trading price of our common stock could decline.

 

Our substantial amount of debt could adversely affect our financial health.

 

Our consolidated debt is substantial and we are highly leveraged, which could adversely affect our financial condition, limit our ability to grow and compete and prevent us from fulfilling our obligations relating to our

registered 103/4% Series B cumulative exchangeable redeemable preferred stock, par value $.01 per share and liquidation preference of $1,000 per share, or the Series B preferred stock, and, if issued, our registered 103/4% subordinated exchange notes due 2013, or the Exchange Notes. As of December 31, 2005, our ratio of total debt to last twelve months Consolidated EBITDA, as defined in our credit agreement governing our first lien credit facility term loan due 2012, or the First Lien Credit Facility, was 8.1 to 1.0. Our substantial level of debt could have several important consequences to the holders of our securities, including the following:

 

 

Our ability to satisfy all of our debt obligations depends upon our future operating performance. Our operating performance will be affected by prevailing economic conditions and financial, business and other factors, some of which are beyond our control. We believe that our operating cash flow will be sufficient to meet our operating expenses and to service our debt requirements as they become due. However, if we are unable to pay our debts, whether upon acceleration of our debt or in the ordinary course of business, we will be forced to pursue alternative strategies such as selling assets, restructuring our debt, or seeking additional equity capital. We cannot assure you that we can successfully complete any of these alternative strategies on satisfactory terms or that the approval of the FCC could be obtained on a timely basis, or at all, for the transfer of any of the stations’ licenses in connection with a proposed sale of assets.

 

We will require a significant amount of cash to service our debt and to make cash dividend payments under our Series B Preferred Stock. Our ability to generate cash depends on many factors, some of which are beyond our control.

 

For the year ended December 31, 2005, we had net cash interest expense of $33.2 million. Our net cash interest expense will increase when and if we exchange our Series B preferred stock for the Exchange Notes. If we acquire additional stations in the future, depending on the financing used to fund these acquisitions, our interest expense may increase as well. In addition, we have recently paid and will be required to pay dividends in cash on our Series B preferred stock after October 15, 2008.

 

During 2005, we paid dividends in cash to holders of the Series B preferred stock in an amount equal to $2.4 million. Our ability to make payments on and to refinance our debt, pay dividends in cash on our Series B preferred stock, repurchase our Series B preferred stock when, and if, we are required to do so and to fund necessary or desired capital expenditures and any future acquisitions, will depend on our ability to generate and maintain cash in the future. Our ability to satisfy our obligations, including making the payments described above, and to reduce our total indebtedness will depend upon our future operating performance and on economic, financial, competitive, legislative, regulatory and other factors, many of which may be beyond our control.

 

Based on our current level of operations, we believe that our cash flow from operations, cash on hand and available borrowings under our First Lien Credit Facility will be adequate to meet our liquidity needs for the near future barring any unforeseen circumstances. We cannot assure you, however, that our business will generate sufficient cash flow from operations or that future borrowings will be available to us under our First Lien Credit Facility or otherwise in an amount sufficient to enable us to pay our debt or to fund our other liquidity needs. We may need to refinance all or a portion of our debt on or before maturity. We cannot assure you that we will be able to

refinance any of our debt, including our First Lien Credit Facility and the Exchange Notes, if issued, on commercially reasonable terms or at all.

 

Any acceleration of our debt or event of default would harm our business and financial condition.

 

If there were an event of default under our or our subsidiaries’ indebtedness, including the First Lien Credit Facility and our existing debt instruments, the holders of the affected indebtedness could elect to declare all of that indebtedness to be due and payable immediately, which in turn could cause some or all of our or our subsidiaries’ other indebtedness to become due and payable. We cannot assure you that we or our subsidiaries would have sufficient funds available, or that we or our subsidiaries would have access to sufficient capital from other sources, to repay the accelerated debt. Even if we or our subsidiaries could obtain additional financing, we cannot assure you that the terms would be favorable to us. Under the terms of our First Lien Credit Facility and our existing debt instruments, if the amounts outstanding under our indebtedness were accelerated, our lenders would have the right to foreclose on their liens on substantially all of our and our subsidiaries’ assets (with the exception of our FCC licenses held by certain of our subsidiaries, because a grant of a security interest therein would be prohibited by law, and certain general intangibles and fixed assets under particular limited circumstances) and on the stock of our subsidiaries. As a result, any event of default under our material debt instruments could have a material adverse effect on our business and financial condition.

 

Despite our current significant level of debt, we and our subsidiaries may still be able to incur substantially more debt, which, if increased, could further intensify the risks associated with our substantial leverage.

 

We and our subsidiaries may be able to incur substantial additional indebtedness in the future. Although the terms of our First Lien Credit Facility and debt instruments restrict our ability to incur additional debt, these restrictions are subject to a number of qualifications and exceptions and, under certain circumstances, debt incurred in compliance with these restrictions could be substantial. If we or our subsidiaries incur additional debt, the related risks described above that we and our subsidiaries face could intensify.

 

The terms of our existing debt and our preferred stock impose or will impose restrictions on us that may adversely affect our business.

 

The terms of our Series B preferred stock, our Series C preferred stock, par value $.01 per share, (together with the Series B preferred stock, the Preferred Stock), our First Lien Credit Facility, and, if issued, the Exchange Notes, contain covenants that, among other things, limit our ability to:

 

 

The terms of the First Lien Credit Facility also require us to satisfy certain financial condition tests. These covenants could materially and adversely affect our ability to finance our future operations or capital needs and to engage in other business activities that may be in our best interest. All of these covenants may restrict our ability to expand or to pursue our business strategies. Our ability to comply with these covenants may be affected by our future operating performance and economic, financial, competitive, legislative, regulatory and other factors, many of which may be beyond our control. If one or more of these events occur, we cannot assure you that we will be able to comply with the covenants. A breach of any of these covenants could result in a default under one or more of our debt instruments.

 

If an event of default occurs under the First Lien Credit Facility, the lenders and/or the noteholders could elect to declare all amounts of debt outstanding, together with accrued interest, to be immediately due and payable. In addition, there are change of control provisions in the First Lien Credit Facility, the certificates of designations governing our Series B preferred stock and the indentures that will govern our Exchange Notes, if issued, each of which would cause an acceleration of the applicable indebtedness and/or require us to make an offer to repurchase all of the applicable notes and/or Series B preferred stock in the event that we experience a change of control.

 

We may not have the funds or the ability to raise the funds necessary to repurchase our Series B preferred stock if holders exercise their repurchase right, or to finance the change of control offer required by our Series B preferred stock and the indenture that would govern our Exchange Notes, if issued.

 

On October 15, 2013, each holder of Series B preferred stock will have the right to require us to redeem all or a portion of the Series B preferred stock at a purchase price of 100% of the liquidation preference thereof, plus all accumulated and unpaid dividends to the date of repurchase. In addition, if we experience certain kinds of changes of control as described in the certificate of designation creating the Series B preferred stock, subject to certain restrictions in our debt instruments we will be required to make an offer to purchase the Series B preferred stock for cash at a purchase price of 101% of the liquidation preference thereof, plus accumulated dividends. The source of funds for any such repurchases would be our available cash or cash generated from operations or other sources, including borrowings, sales of equity or funds provided by a new controlling person or entity. We cannot assure you that we will have sufficient funds available to us on favorable terms, or at all, to repurchase all tendered Series B preferred stock or Exchange Notes, if issued, pursuant to these requirements. Our failure to offer to repurchase or to repurchase Series B preferred stock or Exchange Notes tendered, as the case may be, will result in a voting rights triggering event under the certificate of designation governing our Series B preferred stock or a default under the indenture that would govern our Exchange Notes, if issued, as the case may be. Such events could lead to a cross-default under our First Lien Credit Facility and under the terms of our other existing debt. In addition, our First Lien Credit Facilities would either prohibit or effectively prohibit us from making any such required repurchases. Prior to repurchasing our Series B preferred stock or Exchange Notes, if issued, on a change of control event, we must either repay outstanding debt under our First Lien Credit Facility or obtain the consent of the lenders under such facility. If we do not obtain the required consents or repay our outstanding debt under our First Lien Credit Facility, we would remain effectively prohibited from offering to repurchase our Series B preferred stock or Exchange Notes, if issued.

 

We may not have the funds or the ability to obtain additional financing for working capital, capital expenditures, any business strategy or other general corporate purposes.

 

On February 17, 2006, we repaid and terminated our $100 million Second Lien Credit Facility. As a result, although we believe we have sufficient cash available to fund our operations and to support our acquisition business strategy, we may need additional financing due to future developments or changes in our business plan. We must rely on cash from operations and our $25.0 million revolving loan facility to support our capital expenditures and acquisition business strategy. In addition, our actual funding requirements could vary materially from our current estimates. If additional financing is needed, we may not be able to raise sufficient funds on favorable terms or at all. If we fail to obtain any necessary financing on a timely basis, a number of adverse effects could occur.

We have experienced net losses in the past and, to the extent that we experience net losses in the future, our ability to raise capital and the market price of our common stock may be adversely affected.

 

We may not achieve sustained profitability. Failure to achieve sustained profitability may adversely affect the market price of our common stock, which in turn may adversely affect our ability to raise additional equity capital and to incur additional debt. Our inability to obtain financing in adequate amounts and on acceptable terms necessary to operate our business, repay our debt obligations or finance our proposed acquisitions could negatively impact our financial position and results of operations. We experienced a net loss for the fiscal years ended December 31, 2005 and 2003. Net income generated in fiscal year ended 2004 was directly attributed to gains realized from the sale of assets.

 

Our interest expense will increase if we incur any additional indebtedness under our First Lien Credit Facility. If we acquire additional broadcast stations in the future, depending on the financing used to fund these acquisitions, interest expense may increase as well.

 

We compete for advertising revenue with other broadcast stations, as well as other media, many operators of which have greater resources than we do.

 

The success of our stations is primarily dependent upon their share of overall advertising revenues within their markets, especially in New York, Los Angeles and Miami. In addition, both radio and television broadcasting are highly competitive businesses. Our broadcast stations compete in their respective markets for audiences and advertising revenues with other broadcast stations of all formats, as well as with other media, such as newspapers, magazines, television, satellite radio, cable services, outdoor advertising, the Internet and direct mail. As a result of this competition, our stations’ audience ratings, market shares and advertising revenues may decline and any adverse change in a particular market could have a material adverse effect on the revenue of our broadcast stations located in that market and on the financial condition of our business as a whole.

 

Although we believe that each of our broadcast stations is able to compete effectively in its respective market, we cannot assure you that any station will be able to maintain or increase its current audience ratings and advertising revenues. Specifically, radio stations can change formats quickly. Any other radio station currently broadcasting could shift its format to duplicate the format of, or develop a format which is more popular than, any of our stations. If a station converts its programming to a format similar to that of one of our stations, or if one of our competitors strengthens its operations, the ratings and station operating income of our station in that market could be adversely affected. In addition, other radio companies which are larger and have more resources may also enter markets in which we operate.

 

Cancellations or reductions in advertising could adversely affect our net revenues.

 

We do not generally obtain long-term commitments from our advertisers. As a result, our advertisers may cancel, reduce or postpone orders without penalty. Cancellations, reductions or delays in purchases of advertising could adversely affect our net revenues, especially if we are unable to replace these purchases. Our expense levels are based, in part, on expected future net revenues and are relatively fixed once set. Therefore, unforeseen decreases in advertising sales could have a material adverse impact on our net revenues and operating income.

 

A large portion of our net revenue and operating income currently comes from our New York, Los Angeles and Miami markets.

 

Our New York, Los Angeles and Miami markets accounted for more than 70% of our revenue for the fiscal year ended December 31, 2005. Therefore, any volatility in our revenues or operating income attributable to stations in these markets could have a significant adverse effect on our consolidated net revenues or operating income. A significant decline in net revenue or operating income from our stations in any of these markets could have a material adverse effect on our financial position and results of operations.

We may be unable to effectively integrate our acquisition of our television operation.

 

The integration of our acquisition of our television operation involves numerous risks. Our television operation may prove unprofitable and may fail to generate anticipated cash flows. Additionally, we may have difficulties in the integration of its operations and systems.

 

We cannot assure you that we will be able to successfully integrate any operations, or systems that might be acquired in the future. In addition, in the event that the operations of a new business do not meet expectations, we may restructure or write off the value of some or all of the assets of the new business. Because our television operation is in its start-up stages, we cannot assure you that we will be successful in the television broadcast industry.

 

The success of our television operation depends upon our ability to attract viewers and advertisers to our broadcast television operation.

 

We cannot assure you that we will be able to attract viewers and advertisers to our broadcast television operation. If we cannot attract viewers, our television operations may suffer from a low rating, which in turn may deter potential advertisers. The inability to successfully attract viewers and advertisers may adversely affect our revenue and operating results for our television operation. Television programming is a highly competitive business. Television stations compete in their respective markets for audiences and advertising revenues with other stations and larger, more established networks. As a result of this competition, our rating share may not grow and an adverse change in the South Florida market could have a material adverse impact on the revenue of our television operation.

 

Our industry is subject to rapid technological changes and if we are unable to match or surpass such change, will result in a loss of competitive advantage and market opportunity. The success of the television operation is largely dependent on certain factors, such as the extent of distribution of the developed programming, the ability to attract viewers, advertisers and acquire programming, and the market and advertiser acceptance to our programming. We cannot assure you that we will be successful in our initiative or that such initiatives will generate revenues or ultimately be profitable.

 

Because our full-power television station relies on “must carry” rights to obtain cable carriage, new laws or regulations that eliminate or limit the scope of our cable carriage rights could have a material adverse impact on our television operation.

 

Under the Cable Act, each broadcast station is required to elect, every three years, to exercise the right either to require cable television system operators in its local market to carry its signal, or to prohibit cable carriage or condition it upon payment of a fee or other consideration. Under these “must carry” provisions of the Cable Act, a broadcaster may demand carriage on a specific channel on cable systems within its market. These “must carry” rights are not absolute, and under some circumstances, a cable system may be entitled not to carry a given station. Our television station elected “must carry” on local cable systems for the three-year election period that commenced January 1, 2006 and has obtained the carriage it requested. The required election date for the next three-year election period commencing January 1, 2009 will be October 1, 2008.

 

Under current FCC rules, once we have relinquished our analog spectrum, cable systems will be required to carry our digital signals. The FCC’s current rules require cable operators to carry only one channel of digital signal from each of our stations, despite the capability of digital broadcasters to broadcast multiple program streams within one station’s digital allotment. The FCC has not yet set any rules for how direct broadcast satellite, or DBS, operators must handle digital station carriage, but we do not expect that they will be materially different from the obligations imposed on cable television systems.

Our growth depends on successfully executing our acquisition strategy.

 

We have pursued, and will continue to pursue, the acquisition of stations, and other related media outlets, primarily in the largest U.S. Hispanic markets, as a growth strategy. We cannot assure you that our acquisition strategy will be successful. Our acquisition strategy is subject to a number of risks, including, but not limited to:

 

 

In addition, we may finance acquisitions with the issuance of, or through sales of, our common stock in the public market which could adversely affect our stock price, due to dilution, and our ability to raise funds necessary to grow our business through additional stock offerings.

 

Although we intend to pursue additional strategic acquisitions, our ability to do so is significantly restricted by the terms of the First Lien Credit Facility, the certificates of designations governing our Preferred Stock, the indenture that will govern the Exchange Notes, if issued, and our ability to raise additional funds. Additionally, our competitors who may have greater resources than we do may have an advantage over us in pursuing and completing strategic acquisitions.

 

Loss of any of our key personnel could adversely affect our business.

 

Our business depends upon the efforts, abilities and expertise of our executive officers and other key employees, including on-air talent, and our ability to hire and retain qualified personnel. The loss of any of these executive officers and key employees, particularly Raúl Alarcón, Jr., our Chairman of the Board of Directors, Chief Executive Officer and President, could have a material adverse effect on our business. We do not maintain key man life insurance on any of our personnel.

 

Raúl Alarcón, Jr., our Chairman of the Board of Directors, Chief Executive Officer and President, has majority voting control and this control may discourage or influence certain types of transactions, including an actual or potential change of control such as a merger or sale.

 

Raúl Alarcón, Jr., our Chairman of the Board of Directors, Chief Executive Officer and President, owns shares of common stock having approximately 80% of the combined voting power of our outstanding shares of common stock, as of the date of this annual report on Form 10-K. Accordingly, Mr. Alarcón, Jr. has the ability to elect all of our directors and can effectively control our policies and affairs. This control may delay, defer or discourage certain types of transactions involving an actual or potential change of control such as a merger or sale.

 

We must be able to respond to rapidly changing technology, services and standards which characterize our industry in order to remain competitive.

 

The FCC has implemented new technologies in the broadcast industry, including satellite, and is considering introducing terrestrial delivery of digital audio broadcasting, and the standardization of available technologies which significantly enhance the sound quality of AM and FM broadcasts. We cannot predict the effect new technology of this nature will have on our financial condition and results of operations. Several new media technologies are being developed, including the following:

 

 

 

Our business depends on maintaining our FCC licenses, which we may be unable to maintain.

 

The domestic broadcasting industry is subject to extensive federal regulation which, among other things, requires approval by the FCC for the issuance, renewal, transfer and assignment of broadcasting station operating licenses and limits the number of broadcasting properties we may acquire. Federal regulations may create significant new opportunities for broadcasting companies but also create uncertainties as to how these regulations will be interpreted and enforced by the courts.

 

Our success depends in part on acquiring and maintaining broadcast licenses issued by the FCC, which are typically issued for a maximum term of eight years and are subject to renewal. Our FCC licenses are subject to renewal at various times. While we believe that the FCC will approve applications for renewal of our existing broadcasting licenses when made, we cannot guarantee that pending or future renewal applications submitted by us will be approved, or that renewals will not include conditions or qualifications that could adversely affect our operations. Although we may apply to renew our FCC licenses, interested third parties may challenge our renewal applications. In addition, if we or any of our significant stockholders, officers, or directors violate the FCC’s rules and regulations or the Communications Act, or are convicted of a felony or anti-trust violations, the FCC may commence a proceeding to impose sanctions upon us. Examples of possible sanctions include the imposition of fines, the revocation of our broadcasting licenses, or the renewal of one or more of our broadcasting licenses for a term of fewer than eight years. If the FCC were to issue an order denying a license renewal application or revoking a license, we would be required to cease operating the broadcast station covered by the license only after we had exhausted administrative and judicial review without success. Such an event would materially affect the carrying value of our intangible assets and would negatively impact our operating results. We currently account for our FCC licenses as an indefinite life asset, per SFAS No. 142, “Goodwill and Other Intangible Assets” (SFAS No. 142). In the event we are no longer able to conclude that our FCC license have indefinite lives, as defined in SFAS No. 142, we may be required to amortize such licenses. The amortization of our FCC licenses would affect our earnings (losses) and earnings (losses) per share.

 

The broadcasting industry is subject to extensive and changing federal regulation. Among other things, the Communications Act and FCC rules and policies limit the number of broadcasting properties that any person or entity may own (directly or by attribution) in any market and require FCC approval for transfers of control and assignments. The filing of petitions or complaints against us or any FCC licensee from which we acquire a station could result in the FCC delaying the grant of, or refusing to grant or imposing conditions on its consent to the assignment or transfer of licenses. The Communications Act and FCC rules also impose limitations on non-U.S. ownership and voting of our capital stock. Moreover, governmental regulations and policies may change over time and we cannot assure you that those changes would not have a material impact upon our business, financial position or results of operations.

 

The FCC has begun more vigorous enforcement of its indecency rules against the broadcast industry, which could have a material adverse effect on our business.

 

The FCC’s rules and regulations prohibit the broadcast of obscene material at any time and indecent material between the hours of 6:00 a.m. and 10:00 p.m. The FCC in the last few years has stepped up its enforcement activities as they apply to indecency and has recently indicated that it is enhancing its enforcement efforts relating to the regulation of indecency. The FCC has threatened on more than one occasion to initiate license revocation or

license renewal proceedings against a broadcast licensee who commits a “serious” indecency violation. Broadcasters risk violating the prohibition on the broadcast of indecent material because of the vagueness of the FCC’s definition of indecent material, coupled with the spontaneity of live programming. The FCC has also expanded the breadth of indecency regulation to include material that could be considered “blasphemy” “personally reviling epithets”, “profanity” and vulgar or coarse words amounting to a nuisance. Legislation has been introduced in Congress that would significantly increase the penalties for broadcasting indecent programming and depending on the number of violations engaged in, would potentially subject us to license revocation, renewal or qualifications proceedings in the event that we broadcast indecent material. In addition, the FCC’s heightened focus on the indecency regulatory scheme, against the broadcast industry generally, may encourage third parties to oppose our license renewal applications or applications for consent to acquire broadcast stations.

 

We may in the future become subject to additional inquiries or proceedings related to our stations’ broadcast of indecent or obscene material. To the extent that these pending inquiries or other proceedings result in the imposition of fines, revocation of any of our station licenses or denials of license renewal applications, our results of operations and business could be materially adversely affected.

 

We may face regulatory review for additional acquisitions and divestitures in our existing markets and, potentially, acquisitions in new markets.

 

An important part of our growth strategy is the acquisition of additional broadcast stations. Acquisitions and divestitures of broadcast stations by us are subject not only to obtaining FCC consent, but also to possible review by the U.S. Department of Justice, or the Justice Department, which has become more aggressive in reviewing proposed acquisitions of radio and television stations and station networks. In general, the Justice Department has more closely scrutinized radio broadcasting acquisitions that result in market shares in excess of 40% of local radio advertising revenue. Similarly, the FCC reviews proposed 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 broadcast transactions that the FCC believes, based on its initial analysis, may present ownership concentration concerns in a particular local broadcast market.

 

The market price of our shares of Class A common stock may fluctuate significantly.

 

Our Class A common stock has been publicly traded since November 1999. The market price for our Class A common stock has been subject to fluctuations since the date of our initial public offering. The stock market has from time to time experienced price and volume fluctuations, which have often been unrelated to the operating performance of the affected companies. We believe that the principal factors that may cause price fluctuations in our shares of Class A common stock are:

 

 

We cannot assure you that the market price of our Class A common stock will not experience significant fluctuations in the future, including fluctuations that are adverse and unrelated to our operating performance.

Current or future sales by existing stockholders could depress the market price of our Class A common stock.

 

The market price of our Class A common stock could drop as a result of sales of a large number of shares of Class A common stock or Class B common stock (convertible into Class A common stock) by our existing stockholders or the perception that these sales may occur. These factors could make it more difficult for us to raise funds through future offerings of our Class A common stock.

 

Pursuant to our amended asset purchase agreement for the purchase of the assets of radio station KXOL-FM, we granted warrants to the International Church of the FourSquare Gospel, or ICFG, effective from the date that ICFG ceased to broadcast its programming over KZAB-FM and KZBA-FM until the closing of the acquisition of KXOL-FM. On each of March 31, 2003, April 30, 2003, May 31, 2003, June 30, 2003, July 31, 2003, August 31, 2003 and September 30, 2003, we granted ICFG a warrant exercisable for 100,000 shares (an aggregate of 700,000 shares) of our Class A common stock at an exercise price of $6.14, $7.67, $7.55, $8.08, $8.17, $7.74 and $8.49 per share, respectively. The warrant issued on September 30, 2003 was the final warrant required to be issued due to the closing of the acquisition of KXOL-FM. These warrants are exercisable for a period of thirty-six months after the date of issuance after which they will expire if not exercised. To date, none of the warrants issued to ICFG have been exercised. If these warrants are exercised, we cannot assure you that the market price of our Class A common stock would not be depressed.

 

On December 23, 2004, in connection with the closing of the merger agreement, dated October 5, 2004, with Infinity, Infinity SF and SBS Bay Area, we issued to Infinity (i) an aggregate of 380,000 shares of our Series C preferred stock, each of which is convertible at the option of the holder into twenty fully paid and non-assessable shares of our Class A common stock; and (ii) a warrant to purchase an additional 190,000 shares of our Series C preferred stock, at an exercise price of $300.00 per share, or the Warrant. Upon conversion, each share of our Series C preferred stock held by a holder will convert into twenty fully paid and non-assessable shares of our Class A common stock, which shares will be exempt from registration requirements of the Securities Act, as a transaction not involving a public offering. The shares of our Series C preferred stock issued at the closing of the merger are convertible into 7,600,000 shares of our Class A common stock, subject to adjustment, and the Series C preferred stock issuable upon exercise of the Warrant are convertible into an additional 3,800,000 shares of our Class A common stock, subject to adjustment. This Warrant is exercisable for a period of forty-eight months from the date of issuance, after which it will expire if not exercised. To date, Infinity has not exercised the Warrant. If the shares of Series C preferred stock are converted or if the Warrant is exercised, we cannot assure you that this would not depress the market price of our Class A common stock.

 

Our failure to comply with the Sarbanes-Oxley Act of 2002 could cause a loss of confidence in the reliability of our financial statements and could have a material adverse effect on our business and the price of our Class A common stock.

 

We have undergone a comprehensive effort to comply with Section 404 of the Sarbanes-Oxley Act of 2002. Pursuant to Section 404, and the rules and regulations promulgated by the SEC to implement Section 404, we are required to furnish a report by our management to include in our annual report on Form 10-K regarding the effectiveness of our internal controls over financial reporting and a report by our independent registered public accounting firm addressing these assessments. This effort included documenting and testing our internal controls. As of December 31, 2005, we did not identify any material weaknesses in our internal controls over financial reporting as defined by the Public Company Accounting Oversight Board. In future years, there can be no assurance that we will not have material weaknesses that would be required to be reported. If we are unable to assert that our internal controls over financial reporting are effective in any future period (or if our independent registered public accounting firm was unable to express an opinion on the effectiveness of our internal controls), we could lose investor confidence in the accuracy and completeness of our financial reports, which would have a material adverse impact on our business and the price of our Class A common stock.

Our operating results could be adversely affected by a national or regional recession.

 

Our operating results could be adversely affected by a recession and/or downturn in the United States economy since advertising expenditures generally decrease as the economy slows down. In addition, our operating results in individual geographic markets could be adversely affected by local or regional economic downturns. Our operating results have been adversely affected by past recessions.

 

None.

 

Each of our media segments requires offices, such as broadcasting studios and transmission facilities where broadcasting transmitters and antenna equipment are located to support our operations. Our corporate headquarters and television operations are located at 2601 South Bayshore Drive, Coconut Grove, Florida, where we rent executive offices in a building indirectly owned by Raúl Alarcón, Jr. The lease expires in 2015, with the right to renew for two consecutive five-year terms thereafter. The studios and offices of our Miami radio stations are currently located in leased facilities, which are indirectly owned by Raúl Alarcón, Jr. and Pablo Raúl Alarcón, Sr., with lease terms that expire in 2012.

 

We own (i) the buildings housing the offices and studios in New York for WSKQ-FM and WPAT-FM, and in Los Angeles for KLAX-FM and KXOL-FM, (ii) the buildings housing our Puerto Rico offices and studios in Guaynabo, Puerto Rico and Mayagüez, Puerto Rico and (iii) the transmitter sites for five of our eleven radio stations in Puerto Rico. 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. In addition, we lease (i) all of our other transmitter sites, with lease terms that expire between 2006 and 2082, assuming all renewal options are exercised, (ii) the office and studio facilities for our radio stations in Chicago and San Francisco and (iii) additional office space for our radio stations in New York. We moved our main transmitter site for KXOL-FM in Los Angeles to a new site which provides excellent full-market coverage and better coverage to the San Fernando Valley.

 

We lease backup transmitter facilities for our New York stations WSKQ-FM and WPAT-FM in midtown Manhattan on the Four Times Square Building. We also lease backup transmitter sites for KLAX-FM and KXOL-FM in Los Angeles, WLEY-FM in Chicago, WRMA-FM in Miami, and KRZZ-FM in San Francisco. We own the back-up transmitter site in San Juan, Puerto Rico for the five radio stations covering the San Juan metropolitan area. We are in the process of constructing a backup transmitter site for Miami radio stations WCMQ-FM and WXDJ-FM.

 

We lease all of the properties used for the operations of our television stations. These properties include offices, studios, master control, transmitter sites and production facilities. We lease a combination studio and tower site in Key West, Florida for WSBS-TV-DT and WSBS-CA, which operate as one television operation. We lease tower space in Hallandale, Florida for WSBS-CA, Channel 50.

 

These backup transmitter facilities are a significant part of our disaster recovery plan to continue broadcasting to the public and to maintain our stations’ revenue streams in the event of an emergency. We have implemented a backup studio site for KRZZ serving the San Francisco market in San Jose. After the Miami studio move is complete, we anticipate using the existing Miami site as a backup to the new studios for disaster recovery. We are planning to implement backup studio and alternate origination points to maintain operations in the event of a studio-site outage or emergency.

 

The studio and transmitter sites of our media stations are vital to our overall operation. Management believes that our properties are in good condition and are suitable for our operations; however, we continually assess the need to upgrade our properties.

 

See “Item 1. Business — Environmental Matters” and “Item 13. Certain Relationships and Related Transactions.”

 

From time to time we are involved in litigation incidental to the conduct of our business, such as contractual matters and employee-related matters. In the opinion of management, such litigation is not likely to have a material adverse effect on our business, operating results or financial position.

 

Hurtado Litigation

 

On June 14, 2000, an action was filed in the Eleventh Judicial Circuit (the “Court”) in and for Miami-Dade County, Florida by Jose Antonio Hurtado against us, alleging that he was entitled to a commission related to an acquisition made by us (the “Hurtado Case”). The Hurtado Case was tried before a jury during the week of December 1, 2003 and Mr. Hurtado was awarded the sum of $1.8 million, plus interest, which we accrued for during the quarter ended December 31, 2003.

 

Mr. Hurtado also filed an application for attorneys’ fees, which we opposed on grounds that there was no contractual or statutory basis for such an award. We filed a motion for judgment notwithstanding the verdict, which was heard on February 6, 2004. On March 12, 2004, the Court denied our motion for judgment notwithstanding the verdict and, upon its own motion, the Court granted a new trial. On April 7, 2004, Mr. Hurtado filed a notice of appeal with the Third Circuit Court of Appeals, challenging the order granting a new trial, and on April 8, 2004, we filed a notice of cross-appeal, challenging the denial of our motion for judgment notwithstanding the verdict. On August 27, 2004, Mr. Hurtado filed his initial brief, and on January 10, 2005, we filed a combined response brief and initial brief on our cross-appeal. On March 7, 2005, Mr. Hurtado filed his reply brief and our reply brief was due 20 days thereafter. The Third Circuit Court of Appeals set the matter for oral argument on April 13, 2005. Subsequently, on May 5, 2005, the Third Circuit Court of Appeals ruled that judgment should be entered in our favor. On May 19, 2005, Mr. Hurtado filed a motion for rehearing which was denied, and the mandate upon the denial of Mr. Hurtado’s motion was issued on July 29, 2005. During the year ended December 31, 2005, we reversed the legal contingency accrual of $1.8 million, plus interest of approximately $0.6 million related to this contingency based on the denial of Mr. Hurtado’s motion. We filed a motion with the trial court requesting judgment in our favor. On November 29, 2005, the court entered a final judgment in our favor.

 

Wolf, et al., Litigation

 

On November 28, 2001, a complaint was filed against us in the United States District Court for the Southern District of New York (the “Southern District of New York”) and was amended on April 19, 2002. The amended complaint alleges that the named plaintiff, Mitchell Wolf, purchased shares of our Class A common stock pursuant to the October 27, 1999, prospectus and registration statement relating to our initial public offering which closed on November 2, 1999. The complaint was brought on behalf of Mr. Wolf and an alleged class of similarly situated purchasers against us, eight underwriters and/or their successors-in-interest who led or otherwise participated in our initial public offering, two members of our senior management team, one of whom is our Chairman of the Board, and an additional director, referred to collectively as the individual defendants. To date, the complaint, while served upon us, has not been served upon the individual defendants, and no counsel has appeared for them.

 

This case is one of more than 300 similar cases brought by similar counsel against more than 300 issuers, 40 underwriter defendants, and 1,000 individuals alleging, in general, violations of federal securities laws in connection with initial public offerings, in particular, failing to disclose that the underwriter defendants allegedly solicited and received additional, excessive and undisclosed commissions from certain investors in exchange for which they allocated to those investors material portions of the restricted shares issued in connection with each offering. All of these cases, including the one involving us, have been assigned for consolidated pretrial purposes to one judge of the Southern District of New York. One of the claims against the individual defendants, specifically the Section 10b-5 claim, has been dismissed.

 

In June of 2003, after lengthy negotiations, a settlement proposal was embodied in a memorandum of understanding among the investors in the plaintiff class, the issuer defendants and the issuer defendants’ insurance carriers. On July 23, 2003, our Board of Directors approved both the memorandum of understanding and an agreement between the issuer defendants and the insurers. The principal components of the settlement include: (1) a release of all claims against the issuer defendants and their directors, officers and certain other related parties arising

out of the alleged wrongful conduct in the amended complaint; (2) the assignment to the plaintiffs of certain of the issuer defendants’ potential claims against the underwriter defendants; and (3) a guarantee by the insurers to the plaintiffs of the difference between $1.0 billion and any lesser amount recovered by the plaintiffs against the underwriter defendants. The payments will be charged to each issuer defendant’s insurance policy on a pro rata basis.

 

On February 15, 2005, the Southern District of New York granted preliminary approval to the proposed settlement agreement, subject to a narrowing of the proposed bar on underwriter and non-settling defendant claims against the issuer defendants to cover only contribution claims. The Court directed the parties to submit revised settlement documents consistent with its opinion and scheduled a conference for March 18, 2005 in order to (a) make final determinations as to the form, substance and program of notice and (b) schedule a Rule 23 fairness hearing. Pursuant to the Court’s request, on May 2, 2005 the parties submitted an Amendment to Stipulation and Agreement of Settlement with Defendant Issuers and Individuals (the “Amendment”). Our Board of Directors approved the Amendment on May 4, 2005 and it has since received unanimous approval from all the non-bankrupt issuers. On August 31, 2005, the Court issued an order of preliminary approval, reciting that the Amendment had been entered into by the parties to the Issuers’ Settlement Stipulation.

 

Amigo Broadcasting Litigation

 

On December 5, 2003, Amigo Broadcasting, L.P. (“Amigo”) filed an original petition and application for temporary injunction in the District Court of Travis County, Texas (the “Court”), against us, Raul Bernal (“Bernal”) and Joaquin Garza (“Garza”), two of our former employees. Amigo filed a first and second amended petition and application for temporary injunction on June 25, 2004 and February 18, 2005, respectively. The second amended petition alleged that we (1) misappropriated Amigo’s proprietary interests by broadcasting the characters and concepts portrayed by the Bernal and Garza radio show (the “Property”), (2) wrongfully converted the Property to our own use and benefit, (3) induced Bernal and Garza to breach their employment agreements with Amigo, (4) used and continued to use Amigo’s confidential information and property with the intention of diverting profits from Amigo and of inducing Amigo’s potential customers to do business with us and our syndicators, (5) invaded Amigo’s privacy by misappropriating the names and likenesses of Bernal and Garza, and (6) committed violations of the Lanham Act by diluting and infringing on Amigo’s trademarks. Based on these claims, Amigo seeks damages in excess of $3.0 million.

 

On December 5, 2003, the Court issued a temporary injunction against all of the defendants and scheduled a hearing before the Court on December 17, 2003. The temporary injunction dissolved by its terms on December 1, 2004. On December 17, 2003, the parties entered into a settlement agreement, whereby the Court entered an Order on Consent of the settling parties, permitting Bernal and Garza’s radio show to be broadcast on our radio stations. In addition, we agreed that we would not broadcast the Bernal and Garza radio show in certain prohibited markets and that we would not distribute certain promotional materials that were developed by Amigo. On January 5, 2004, we answered the remaining claims asserted by Amigo for damages. The parties have exchanged written discovery and are in the process of conducting depositions. On March 18, 2005, the case was removed to the United States District Court for the Western District of Texas (the “District Court”) and a trial date was scheduled for May 2006. On January 17, 2006, we filed a motion for summary judgment with the District Court. On March 2, 2006, the parties conducted a mediation but were unable to reach a settlement. Thus, the extent of any adverse impact on us with respect to this matter cannot be reasonably estimated at this time.

 

See “Item 1. Business — Environmental Matters.”

 

No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year ended December 31, 2005.

 

Our Class A common stock is traded on the Nasdaq Stock Market’s National Market under the symbol “SBSA.” The tables below show, for the quarters indicated, the reported high and low bid quotes for our Class A common stock on the Nasdaq Stock Market’s National Market.

 

 

 

Holders

 

As of March 13, 2006, there were approximately 58 record 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 March 13, 2006, there were three record holders of our Class B common stock. These figures do 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 have not declared or paid any cash or stock dividends on any class of our common stock in the last two fiscal years. We intend to retain future earnings for use in our business indefinitely and do not anticipate declaring or paying any cash or stock dividends on shares of our Class A or Class B common stock in the near future. In addition, any determination to declare and pay dividends will be made by our Board of Directors based upon our earnings, financial position, capital requirements and other factors that our Board of Directors deems relevant. Furthermore, the indentures governing our First Lien Credit Facility contain some restrictions on our ability to pay dividends.

 

Under the terms of our Series B preferred stock, we are required to pay dividends at a rate of 103/4% per year of the $1,000 liquidation preference per share of Series B preferred stock. From October 30, 2003 to October 15, 2008, we may pay these dividends in either cash or additional shares of Series B preferred stock. After October 15, 2008, we will be required to pay the dividends on our Series B preferred stock only in cash. From October 30, 2003 to July 15, 2005, the dividends on the Series B preferred stock have been paid in additional shares of Series B preferred stock. On October 17, 2005 and January 17, 2006, we declared dividends on our Series B preferred stock, par value $.01 per share, payable in cash, to the holders of the Series B preferred stock in an amount equal to $2.4 million, respectively.

 

Under the terms of our Series C preferred stock, we are required to pay dividends on parity with our Class A common stock and Class B common stock and any other class or series of capital stock we create after December 23, 2004.

 

Recent Sales of Unregistered Securities

 

We have not made any sales of unregistered securities for the period covered by this annual report on Form 10-K.

 

Equity Compensation Plan Information

 

See “Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholders Matters — Equity Compensation Plan Information.”

 

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,” “Other Financial Data” and “Consolidated Balance Sheet Data,” as of and for the fiscal year ended December 29, 2002, the three-month transitional period ended December 30, 2001 and the fiscal year ended September 30, 2001 are derived from our historical audited consolidated financial statements but not included in this annual report on Form 10-K.

 

Effective November 6, 2001, we changed our fiscal year end from the last Sunday in September of each calendar year to the last Sunday in December of each calendar year; therefore, we filed a transitional report on Form 10-Q covering the transitional period from October 1, 2001 through December 30, 2001. Effective December 30, 2002, we again changed our fiscal year end from a broadcast calendar 52-53-week fiscal year ending on the last Sunday in December to a calendar year ending on December 31. Financial results for December 30 and 31, 2002 are included in our financial results for the fiscal year ended December 31, 2003.

 

Our selected historical consolidated financial data should be read in conjunction with our historical consolidated financial statements as of December 31, 2005 and 2004, and for the fiscal years ended December 31, 2005, 2004 and 2003, the related notes included in Item 15 of this report. For additional information see the financial section of this report and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

 

 

 

 

For the fiscal year ended September 30, 2001, we repaid $66.2 million of the outstanding indebtedness and accrued interest under a senior credit facility, which we then terminated. We recorded an extraordinary loss of approximately $3.1 million, which relates to the write-off of the related unamortized deferred financing costs. This extraordinary loss was reclassified to a loss on extinguishment of debt due to the adoption of SFAS No. 145.

 

 

On September 24, 2004, we sold for $30.0 million KPTI-FM’s assets held for sale consisting of $13.0 million of intangible assets, net, and $0.3 million of property and equipment. We recognized a gain of approximately $16.8 million, net of closing costs and taxes on the sale.

 

On January 30, 2004, we sold for $24.4 million KLEY-FM’s and KSAH-AM’s assets held for sale consisting of $11.3 million of intangible assets, net, and $0.6 million of property and equipment. We recognized a gain of approximately $11.6 million, net of closing costs and taxes on the sale.

 

On August 23, 2002, we sold for $35.0 million KTCY-FM’s assets held for sale consisting of intangible assets and property and equipment. We recognized a gain of approximately $1.8 million, net of closing costs and taxes.

 

 

After performing the transitional impairment evaluation of our indefinite-life intangible assets on December 31, 2001, we determined that the carrying value of certain indefinite-life intangible assets exceeded their respective fair market values. As a result of adopting SFAS No. 142 in the fiscal year ended December 29, 2002, we recorded a non-cash charge for the cumulative effect of a change in accounting principle of $45.3 million, net of an income tax benefit of $30.2 million.

 

Overview

 

We are the largest publicly traded Hispanic-controlled media and entertainment company in the United States. We own and operate 20 radio stations in markets that reach approximately 49% of the U.S. Hispanic population, and two television stations, which are expected to reach approximately 1.5 million households in the South Florida market. Our radio stations are located in six of the top-ten Hispanic markets of Los Angeles, New York, Puerto Rico, Chicago, Miami and San Francisco. Los Angeles and New York have the largest and second largest Hispanic populations, and are also the largest and second largest radio markets in the United States in terms of advertising revenue, respectively. Our two television stations operate as one television operation, branded “Mega TV”, serving the South Florida market. We also occasionally produce live concerts and events throughout the United States and Puerto Rico. In addition, we operate LaMusica.com, a bilingual Spanish-English website providing content related to Latin music, entertainment, news and culture.

 

On March 1, 2006, we acquired television stations WSBS-TV (Channel 22, formerly known as WDLP-TV) and its derivative digital television station WSBS-DT (Channel 3, formerly known as WDLP-DT) in Key West, Florida and WSBS-CA (Channel 50, formerly known as WDLP-CA) in Miami, Florida, serving the South Florida market. On March 1, 2006, we also launched Mega TV, our general interest Spanish-language television operation. We intend to design our television programming to meet a broad range of preferences of the U.S. Hispanic market,

directed primarily at the 18 to 49 year old age bracket. We plan to develop approximately 60% of our programming and expect to commission other content from Spanish-language production partners. The channel will initially feature televised versions of our Miami top-rated radio shows, debate shows, dance and music contests, reality and entertainment shows and game shows. We are currently broadcasting in the South Florida market. We anticipate that television revenue will be generated primarily from the sale of local and national market advertising.

 

The success of each of our stations depends significantly upon its audience ratings and share of the overall advertising revenue within its market. The broadcasting industry is a highly competitive business, but some barriers to entry do exist. Each of our stations competes with both Spanish-language and English-language stations in its market, as well as with other advertising media such as newspapers, cable television, the Internet, magazines, outdoor advertising, satellite radio, transit advertising and direct mail marketing. Factors which are material to our competitive position include management experience, our stations’ rank in their markets, signal strength and frequency and audience demographics, including the nature of the Spanish-language market targeted by a particular station.

 

Our primary source of revenue is the sale of advertising time on our stations to local and national advertisers. Our revenue is affected primarily by the advertising rates that our stations are able to charge, as well as the overall demand for advertising time in each respective market. Seasonal net broadcasting revenue fluctuations are common in the broadcasting industry and are primarily due to fluctuations in advertising demand from local and national advertisers. Typically for the broadcasting industry, the first calendar quarter generally produces the lowest revenue. Our most significant operating expenses are compensation expenses, programming expenses, professional fees and advertising and promotional expenses. Our senior management strives to control these expenses, as well as other expenses, by working closely with local station management and others, including vendors.

Fiscal Year Ended 2005 Compared to Fiscal Year Ended 2004

 

Due to the recent commencement of our television operation, we are now reporting two operating segments, radio and television. The following summary table presents separate financial data for each of our operating segments.

 

 

The following summary table presents a comparison of our operating results of operations for the fiscal years ended December 31, 2005 and 2004. Various fluctuations illustrated in the table are discussed below. This section should be read in conjunction with our consolidated financial statements and notes.

 

 

Net Revenue.  The increase in net revenue was due to our radio segment. Our New York radio market had double-digit growth, primarily from local revenues. In addition, our new radio station in San Francisco, KRZZ-FM, had year-over-year net revenue growth of approximately $4.8 million. Also, contributing to the increase in net revenue was our Los Angeles radio market, which had high single-digit net revenue growth primarily from local and promotional events. Our new television segment had no net revenue for 2005 or 2004, as it debuted on March 1, 2006.

 

Engineering and Programming Expenses.  The increase in engineering and programming expenses was mainly due to our new television segment, which totaled $1.9 million in expenses, primarily related to start-up programming costs. Our radio segment’s engineering and programming expenses increased as a result of our new radio station in San Francisco, KRZZ-FM, totaling an increase of approximately $1.0 million. These expenses were offset by a decrease in compensation and benefits.

 

Selling, General and Administrative Expenses.  The increase in selling, general and administrative expenses was mainly due to our radio segment. Radio’s selling, general and administrative expenses increased as a result of (a) expenses associated with our new station in San Francisco, KRZZ-FM, totaling approximately $4.6 million; (b) barter expense due to related marketing costs; (c) professional fees mainly related to our compliance with the Sarbanes-Oxley Act of 2002; (d) promotional events expenses; (e) rent expense related to a new lease for our Miami radio stations’ facilities; and, (f) local commissions due to the increase in net revenue. These expenses were offset by a decrease in the provision for doubtful accounts receivable and national sales commissions. Our new television segment’s selling, general and administrative expenses totaled $1.2 million related mainly to compensation and professional fees.

 

Corporate Expenses.  The increase in corporate expenses was mainly a result of an increase in employee compensation and benefits and legal and professional fees, offset by a decrease in directors and officers insurance and travel and entertainment expenses.

 

Loss (gain) on sales of assets, net.  The year ended 2005 loss on the sales of assets is related mainly to disposal transaction costs incurred related to the sale of our radio stations KZAB-FM and KZBA-FM, serving the Los Angeles, California market, which was completed on January 31, 2006. The year ended 2004 gain on the sales of assets is related to the sale of the assets of radio stations WDEK-FM, WKIE-FM and WKIF-FM serving the

Chicago, Illinois market, for a cash purchase price of $28.0 million. We recognized a gain of approximately $5.5 million, net of closing costs.

 

Operating Income from Continuing Operations.  The decrease in operating income from continuing operations was primarily attributed to the decrease in the (loss) gain on the sales of assets and our new television segment’s start-up station operating expenses prior to it debut on March 1, 2006, offset by increases in net revenue.

 

Interest Expense, Net.  The decrease in interest expense, net, was due primarily to lower interest expense incurred with respect to the senior secured credit facilities we entered into on June 10, 2005 versus interest expense incurred on our prior debt structure. In addition, interest expense, net, decreased due to an increase in interest income resulting from a general increase in interest rates on our cash balances.

 

Loss on early extinguishment of debt.  The loss on early extinguishment of debt was due to (a) call premiums paid and the write-off of unamortized discount and deferred financing costs related to the redemption of our 95/8% senior subordinated notes, due 2009, on July 12, 2005 and (b) the write-off of deferred financing costs related to the pay-down of the $135.0 million senior secured credit facility term loan due 2009, on June 10, 2005.

 

Other Income, net.  The increase in other income, net, was due to the reversal of the legal judgment upon appeal, in the Hurtado Case, which was expensed in a prior period.

 

Income Taxes.  The increase in income tax expense was due primarily to an increase in our statutory income tax rate from 40.0% to 40.7% related to the change in state apportionment caused by an increase in California sales, which is a higher state tax jurisdiction. Our effective book tax rate has been impacted by the adoption of SFAS No. 142, which resulted in us no longer being assured that the reversal of our deferred tax liabilities related to our intangible assets would take place during our net operating loss carryforward period. Therefore, our effective book tax rate is impacted by a valuation allowance on substantially all of our deferred tax assets.

 

Discontinued Operations, Net of Taxes.  The decrease in discontinued operations, net of taxes, was primarily attributable to (a) the $11.6 million gain recognized in the prior year on the sale of our San Antonio stations, KLEY-FM and KSAH-AM, net of closing costs and taxes, and (b) the $16.6 million gain we recognized in the prior year on the sale of our San Francisco station, KPTI-FM, net of closing costs and taxes.

 

Net (Loss) Income.  The decrease in net income (loss) was primarily due to the loss on early extinguishment of the debt, decreases in income from discontinued operations and operating income of continuing operations, offset by a decrease in interest expense, net.

 

Fiscal Year Ended 2004 Compared to Fiscal Year Ended 2003

 

The following summary table presents a comparison of our results of operations for the fiscal years ended December 31, 2004 and 2003. Various fluctuations illustrated in the table are discussed below. This section should be read in conjunction with our consolidated financial statements and notes.

 

 

Net Revenue.  The increase in net revenue was due to the double-digit growth in our Miami, Los Angeles and New York markets primarily due to network, local and national revenue. Additionally, the Chicago market had upper-single digit growth mainly from an increase in network and local revenue. We entered into two network revenue agreements in the fourth quarter of 2003, which have generated significant increases in network revenue.

 

Engineering and Programming Expenses.  The increase was mainly caused by the investments made in our Los Angeles and New York programming departments, compensation, transmitter rent and music license fees.

 

Stock-Based Programming Expenses.  In the fiscal year 2003, we granted ICFG seven warrants, each exercisable for 100,000 shares (an aggregate of 700,000 shares) of our Class A common stock with an aggregate fair market value of approximately $2.9 million. These warrants were issued under the terms of our amended time brokerage agreement with ICFG for KXOL-FM in exchange for broadcasting our programming on the station. The fair market value was based on the Black-Scholes option pricing model in accordance with SFAS No. 123, “Accounting for Stock-Based Compensation” (SFAS No. 123) and was recorded as a non-cash programming expense in the fiscal year ended 2003.

 

Selling, General and Administrative Expenses.  The increase was mainly caused by the increases in (a) compensation and benefits due to additional personnel in various markets, (b) expenses for promotional events due to the increase in such events in New York, (c) provision for doubtful accounts due to the increase in revenue, (d) barter expense due to the increase in barter sales, and (e) professional fees related to our compliance with the Sarbanes-Oxley Act of 2002. These increases were offset by decreases in (a) local and national commissions due to lower commission structures and (b) cash advertising and promotions due to the use of barter.

 

Corporate Expenses.  The decrease in corporate expenses resulted mainly from a significant decrease in legal and professional fees related to the absence of various lawsuits and other legal matters of the prior year, offset by an increase in compensation due to additional personnel.

 

Gain on sales of assets, net.  On July 26, 2004, we entered into an asset purchase agreement with Newsweb Corporation to sell the assets of radio stations WDEK-FM, WKIE-FM and WKIF-FM serving the Chicago, Illinois market, for a cash purchase price of $28.0 million. On November 30, 2004, we completed the sale of the assets of the radio stations, which consisted of $21.3 million of intangible assets and $1.0 million of property and equipment. We recognized a gain of approximately $5.5 million, net of closing costs. We determined that the sale of these stations did not meet the criteria under SFAS No. 144, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of” (SFAS No. 144), to be classified as discontinued operations.

 

Operating Income from Continuing Operations.  The increase in operating income from continuing operations was primarily attributed to the increase in net revenues and decrease in stock-based programming expenses and corporate expenses and the gain on sale of stations.

 

Interest Expense, Net.  The increase in interest expense, net, was due to interest incurred on our $125.0 million senior secured credit facility term loan due 2009 that was entered into on October 30, 2003.

 

Income Taxes.  The increase in income tax expense was due primarily to an increase in tax amortization of our FCC licenses related to the acquisition of KXOL-FM on October 30, 2003, which resulted in a corresponding increase in our valuation allowance for deferred tax assets related to continuing operations. Our effective book tax rate was impacted by the adoption of SFAS No. 142, “Goodwill and Other Intangible Assets” (SFAS No. 142), on

December 31, 2001. As a result of adopting SFAS No. 142, the reversal of our deferred tax liabilities related to our intangible assets could no longer be assured over our net operating loss carryforward period. Therefore, our effective book tax rate is impacted by a full valuation allowance on our deferred tax assets.

 

Discontinued Operations, Net of Taxes.  We determined that the sale of our KLEY-FM and KSAH-AM stations serving the San Antonio, Texas market, and the sale of our KPTI-FM station serving the San Francisco, California market, respectively, each met the criteria, in accordance with SFAS No. 144, to classify their respective operations as discontinued operations. Consequently, these stations’ results from operations for the fiscal years 2003 and 2004 have been classified as discontinued operations. The increase in discontinued operations, net of taxes, was primarily attributable to the $11.6 million gain recognized on the sale of our San Antonio KLEY-FM and KSAH-AM stations and the $16.6 million gain recognized on the sale of our San Francisco KPTI-FM station, net of closing costs and taxes, respectively.

 

Net Income (Loss).  The increase in net income was primarily due to the gain on the sales of radio stations and income from discontinued operations, and an increase in operating income from continuing operations, offset by increases in interest expense, net and income tax expense.

 

Liquidity and Capital Resources

 

Our primary sources of liquidity are cash on hand, cash provided by operations and, to the extent necessary, undrawn commitments that are available under our $25.0 million revolving credit facility. Our ability to raise funds by increasing our indebtedness is limited by the terms of the certificates of designations governing our preferred stock and the credit agreements governing our First Lien Credit Facility. Additionally, our certificates of designations and credit agreements each 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. We had cash and cash equivalents of $125.2 million and $132.0 million as of December 31, 2005 and 2004, respectively.

 

The following summary table presents a comparison of our capital resources for the fiscal years ended December 31, 2005 and 2004, with respect to certain of our key measures affecting our liquidity. The changes set forth in the table are discussed below. This section should be read in conjunction with the consolidated financial statements and notes.

 

 

Net Cash Flows Provided by Operating Activities.  Changes in our net cash flows from operating activities were primarily a result of the decrease in cash we paid to vendors and for interest, offset mainly by a decrease in cash we received from customers.

 

Net Cash Flows Provided by Investing Activities.  Changes in our net cash flows from investing activities were primarily a result of (a) deposits totaling $55.0 million received for the sale of our Los Angeles stations KZAB-FM and KZBA-FM, offset by our capital expenditures for 2005 and (b) proceeds of $79.7 million received in 2004 for the sale of San Antonio stations KLEY-FM and KSAH-AM, San Francisco station KPTI-FM, and Chicago stations WDEK-FM, WKIE-FM and WKIF-FM, offset by capital expenditures.

 

Net Cash Flows Used In Financing Activities.  Changes in our net cash flows from financing activities were primarily a result of our 2005 refinancing, which caused us to (a) pay down the $135.0 million senior secured credit facility term loan due 2009, (b) redeem the 95/8% senior subordinated notes due 2009 and (c) incur additional financing costs. Offsetting these outflows were the inflows from the new Credit Facilities.

The following summary table presents a comparison of our capital resources for the fiscal years ended December 31, 2004 and 2003, with respect to certain of our key measures affecting our liquidity. The changes set forth in the table are discussed below. This section should be read in conjunction with the unaudited condensed consolidated financial statements and notes.