SPANISH BROADCASTING SYSTEM INC - Quarter Report: 2007 June (Form 10-Q)

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

 

Commission file number 33-82114

 

 

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) (Zip Code)

 

(305) 441-6901

(Registrant’s telephone number, including area code)

 

(Former name, former address and former fiscal year,

if changed since last report)

 

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

 

Indicate by a 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

 

APPLICABLE ONLY TO CORPORATE ISSUERS:

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: As of August 7, 2007, 40,277,805 shares of Class A common stock, par value $0.0001 per share, 24,503,500 shares of Class B common stock, par value $0.0001 per share and 380,000 shares of Series C convertible preferred stock, $0.01 par value per share, which are convertible into 7,600,000 shares of Class A common stock, were outstanding.

 

 

SPANISH BROADCASTING SYSTEM, INC.

 

INDEX

 

Special Note Regarding Forward-Looking Statements

 

This Quarterly Report on Form 10-Q contains both historical and forward-looking statements. All statements other than statements of historical fact are, or may be deemed to be, forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements are not based on historical facts, but rather reflect our current expectations concerning future results and events. These forward-looking statements generally can be identified by the use of statements that include phrases such as “believe,” “expect,” “anticipate”, “intend”, “estimate”, “plan”, “project”, “foresee”, “likely”, “will” or other words or phrases with similar meanings. Similarly, statements that describe our objectives, plans or goals are, or may be, forward-looking statements. These forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be different from any future results, performance and anticipated achievements expressed or implied by these statements. We do not intend to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. In addition, forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from our Company’s historical experience and our present expectations or projections. These risks and uncertainties include, but are not limited to, those described in this report, in Part II, “Item 1A. Risk Factors” and elsewhere in our Annual Report on Form 10-K for the year ended December 31, 2006, and those described from time to time in our future reports filed with the Securities and Exchange Commission.

 

SPANISH BROADCASTING SYSTEM, INC. AND SUBSIDIARIES

 

 

See accompanying notes to the unaudited condensed consolidated financial statements.

SPANISH BROADCASTING SYSTEM, INC. AND SUBSIDIARIES

 

		Three-Months Ended								Six-Months Ended
		June 30,								June 30,
		2007				2006				2007				2006
		(In thousands, except per share data)
Net revenue		$	47,871				48,841			$	86,808				86,616
Operating expenses:
Engineering and programming			12,377				12,986				24,671				24,805
Selling, general and administrative			20,197				19,727				36,104				36,426
Corporate expenses			3,112				3,661				6,715				7,189
Depreciation and amortization			1,105				905				2,242				1,832
Total operating expenses			36,791				37,279				69,732				70,252
(Gain) loss on the sale of assets, net of disposal costs			(1	)			8				(1	)			(50,793	)
Operating income			11,081				11,554				17,077				67,157
Other (expense) income:
Interest expense, net			(4,735	)			(4,936	)			(9,424	)			(10,355	)
Loss on early extinguishment of debt			—				—				—				(2,997	)
Other, net			—				3				1,960				(23	)
Income before income taxes			6,346				6,621				9,613				53,782
Income tax expense (benefit)			3,956				4,190				6,209				(2,190	)
Net income			2,390				2,431				3,404				55,972
Dividends on Series B preferred stock			(2,417	)			(2,417	)			(4,834	)			(4,834	)
Net (loss) income applicable to common stockholders		$	(27	)			14			$	(1,430	)			51,138
Basic and diluted net (loss) income per common share		$	—				—			$	(0.02	)			0.71
Weighted average common shares outstanding:
Basic			72,381				72,381				72,381				72,381
Diluted			72,381				72,390				72,381				72,392

 

See accompanying notes to the unaudited condensed consolidated financial statements.

SPANISH BROADCASTING SYSTEM, INC. AND SUBSIDIARIES

 

 

See accompanying notes to the unaudited condensed consolidated financial statements.

SPANISH BROADCASTING SYSTEM, INC. AND SUBSIDIARIES

 

 

See accompanying notes to the unaudited condensed consolidated financial statements.

 

 

The unaudited condensed consolidated financial statements include the accounts of Spanish Broadcasting System, Inc. and its subsidiaries (the “Company”, “we”, “us”, “our” or “SBS”). All intercompany balances and transactions have been eliminated in consolidation. The accompanying unaudited condensed consolidated financial statements as of June 30, 2007 and December 31, 2006 and for the three- and six-month periods ended June 30, 2007 and 2006 have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. They do not include all information and notes required by GAAP for complete financial statements. These unaudited condensed consolidated financial statements should be read in conjunction with our consolidated financial statements as of, and for, the fiscal year ended December 31, 2006, included in our fiscal year end 2006 Annual Report on Form 10-K.

 

In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments, which are all of a normal and recurring nature, necessary for a fair presentation of the results of the interim periods. The results of operations for the three- and six-month periods ended June 30, 2007 are not necessarily indicative of the results for a full year.

 

 

On January 4, 2007, SBS, through its wholly owned subsidiary, SBS Miami Broadcast Center, Inc. (“SBS Miami Broadcast Center”), completed the acquisition of certain real property located in Miami-Dade County, Florida pursuant to the purchase and sale agreement, dated August 24, 2006, as amended on September 25, 2006, as further amended on October 25, 2006 (the “Purchase Agreement”). The real property consists of 5.47 acres (234,208 square feet) and approximately 62,000 square feet of office space (the “Property”). The Property was acquired from 7007 Palmetto Investments, LLC (“Seller”), an unrelated third party, for a total purchase price of approximately $8.9 million, excluding closing costs and broker’s fees. During 2006, pursuant to the terms of the Purchase Agreement, we made deposits totaling approximately $1.0 million in escrow that were released at the closing and were applied to the purchase price. At December 31, 2006, these deposits were included in other assets in the accompanying condensed consolidated balance sheet. We funded the purchase price using cash on hand and borrowings and we expect to incur significant construction costs for the new broadcasting facility. Upon the completion of construction at the building, we will consolidate our Miami radio and television operations at the new broadcasting facility.

 

In connection with the acquisition of the Property, on January 4, 2007, SBS Miami Broadcast Center entered into a loan agreement (the “Loan Agreement”), a ten-year promissory note in the original principal amount of $7.7 million (the “Promissory Note”), and a Mortgage, Assignment of Rents and Security Agreement (the “Mortgage”) in favor of Wachovia Bank, National Association (“Wachovia”). The Promissory Note bears an interest rate equal to one-month LIBOR plus 125 basis points and requires monthly principal payments of $0.03 million with any unpaid balance due on its maturity date of January 4, 2017. The Promissory Note is secured by the Property and any related collateral.

 

The terms of the loan include certain restrictions and covenants for SBS Miami Broadcast Center, which limit, among other things, the incurrence of additional indebtedness and liens. The Loan Agreement specifies a number of events of default (some of which are subject to applicable cure periods), including, among others, the failure to make payments when due, non-compliance with covenants and defaults under other agreements or instruments of indebtedness. Upon the occurrence of an event of default and expiration of any applicable cure periods, Wachovia may accelerate the loan and declare all amounts outstanding to be immediately due and payable.

 

Additionally, on January 4, 2007, SBS Miami Broadcast Center entered into an interest rate swap arrangement (the “Swap Agreement”) for the original notional principal amount of $7.7 million whereby it will pay a fixed interest rate of 6.31% as compared to interest at a floating rate equal to one-month LIBOR plus 125 basis points on the Promissory Note. The interest rate swap amortization schedule is identical to the

 

SPANISH BROADCASTING SYSTEM, INC. AND SUBSIDIARIES

 

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Promissory Note amortization schedule, which has an effective date of January 4, 2007, monthly notional reductions and an expiration date of January 4, 2017.

 

In connection with the acquisition of the Property, we agreed to unconditionally guaranty all obligations of SBS Miami Broadcast Center pursuant to the Promissory Note, the Loan Agreement, the Mortgage, the loan documents thereto, and the Swap Agreement, for the benefit of Wachovia and its affiliates (the “Guaranty”). In addition, the terms of the Guaranty contain certain financial covenants, which require us to maintain available liquidity of not less than 1.2 times the then outstanding principal balance of the loan made to SBS Miami Broadcast Center by Wachovia.

 

 

 

On December 23, 2004, in connection with the closing of the merger agreement, dated October 5, 2004, with Infinity Media Corporation (“Infinity”), Infinity Broadcasting Corporation of San Francisco (“Infinity SF”) and SBS Bay Area, LLC, a wholly-owned subsidiary of SBS (“SBS Bay Area”), we issued to Infinity (i) an aggregate of 380,000 shares of Series C convertible preferred stock, $0.002 par value per share (the “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 Series C preferred stock, exercisable at any time from December 23, 2004 until December 23, 2008, at an exercise price of $300.00 per share (the “Warrant”).

 

Under the terms of the certificate of designation governing the Series C preferred stock, the holder of Series C preferred stock has the right to convert each share of Series C preferred stock into twenty fully paid and non-assessable shares of our Class A common stock. The shares of 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 is convertible into an additional 3,800,000 shares of our Class A common stock, subject to adjustment. To date, the Warrant has not been exercised.

 

In connection with the closing of the merger transaction, we also entered into a registration rights agreement with Infinity, pursuant to which, following a period of one year (or earlier if we take certain actions), Infinity may instruct us to file up to three registration statements, on a best efforts basis, with the Securities and Exchange Commission (“SEC”) providing for the registration for resale of the Class A common stock issuable upon conversion of the Series C preferred stock.

 

We are required to pay holders of Series C preferred stock dividends on parity with our Class A common stock and Class B common stock, and each other class or series of our capital stock, if created, after December 23, 2004.

 

 

The rights of the holders of shares of Class A common stock and Class B common stock are identical, except for voting rights and conversion provisions. The Class A common stock is entitled to one vote per share and the Class B common stock is entitled to ten votes per share. The Class B common stock is convertible to Class A common stock on a share-for-share basis at the option of the holder at any time, or automatically upon the transfer to a person or entity which is not a permitted transferee. Holders of each class of common stock are entitled to receive dividends and, upon liquidation or dissolution, are entitled to receive all assets available for distribution to stockholders. The holders of each class have no preemptive or other subscription rights and there are no redemption or sinking fund provisions with respect to such shares. Each class of common stock is subordinate to our 103/4% Series B cumulative exchangeable redeemable preferred stock, par value $0.01 per share and liquidation preference of $1,000 per share (the “Series B preferred stock”) and on parity with the Series C preferred stock with respect to dividend rights and rights upon liquidation, winding up and dissolution of SBS.

 

SPANISH BROADCASTING SYSTEM, INC. AND SUBSIDIARIES

 

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

In connection with the merger agreement with Infinity, as discussed in Note 3(a), we have a Warrant outstanding to ultimately purchase an aggregate of 3,800,000 shares of our Class A common stock, which expires on December 23, 2008.

 

 

2006 Omnibus Equity Compensation Plan

 

On July 16, 2006, we adopted an omnibus equity compensation plan (the “Omnibus Plan”) in which grants can be made to participants in any of the following forms: (i) incentive stock options, (ii) non-qualified stock options, (iii) stock appreciation rights, (iv) stock units, (v) stock awards, (vi) dividend equivalents, and (vii) other stock-based awards. The Omnibus Plan authorizes up to 3,500,000 shares of our Class A common stock for issuance, subject to adjustment in certain circumstances. The Omnibus Plan provides that the maximum aggregate number of shares of Class A common stock that may be granted, other than dividend equivalents, to any individual during any calendar year is 1,000,000 shares, subject to adjustments. In addition, the maximum aggregate number of shares of Class A common stock with respect to grants of stock units, stock awards and other stock-based awards that may be granted to any individual during a calendar year is also 1,000,000 shares, subject to adjustments.

 

1999 Stock Option Plans

 

In September 1999, we adopted an employee incentive stock option plan (the “1999 ISO Plan”) and a non-employee director stock option plan (the “1999 NQ Plan”). Options granted under the 1999 ISO Plan will vest according to terms to be determined by the compensation committee of our board of directors, and will have a contractual life of up to 10 years from the date of grant. Options granted under the 1999 NQ Plan will vest 20% upon grant and 20% each year for the first four years from the date of grant. All options granted under the 1999 ISO Plan and the 1999 NQ Plan vest immediately upon a change in control of SBS, as defined therein. A total of 3,000,000 shares and 300,000 shares of Class A common stock were reserved for issuance under the 1999 ISO Plan and the 1999 NQ Plan, respectively. Additionally, on November 2, 1999, we granted a stock option to purchase 250,000 shares of Class A common stock to a former director. This option vested immediately, and expires 10 years from the date of grant.

 

 

The impact on our results of operations of recognizing stock-based compensation for the three- and six-month periods ended June 30, 2007 and 2006 were as follows (in thousands):

 

		Three-Months Ended								Six-Months Ended
		June 30,								June 30,
		2007				2006				2007				2006
Engineering and programming expenses		$	189				176			$	377				356
Selling, general and administrative expenses			33				87				69				174
Corporate expenses			197				250				415				550
Total stock-based compensation expense		$	419				513			$	861				1,080

 

During the six-month periods ended June 30, 2007 and 2006, no stock options were exercised; therefore, no cash payments were received. In addition, we did not recognize a tax benefit on our stock-based compensation expense due to our valuation allowance on substantially all of our deferred tax assets.

 

SPANISH BROADCASTING SYSTEM, INC. AND SUBSIDIARIES

 

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Stock Options

 

Stock options have only been granted to employees or directors under our 1999 Stock Option Plans. Our stock options have various vesting schedules and are subject to the employees continuing service to SBS. We recognize compensation expense based on the estimated grant date fair value using the Black-Scholes option pricing model and recognize the compensation expense using a straight-line amortization method. When estimating forfeitures, we consider voluntary termination behaviors, as well as trends of actual option forfeitures. Ultimately, our stock-based compensation expense is based on awards that vest. Our stock-based compensation has been reduced for estimated forfeitures.

 

A summary of the status of our stock options, as of December 31, 2006 and June 30, 2007, and changes during the six-months ended June 30, 2007, is presented below (in thousands, except per share data):

 

 

The following table summarizes information about stock options outstanding and exercisable at June 30, 2007 (in thousands, except per share data):

 

 

Nonvested Shares

 

Nonvested shares (restricted stock) are awarded to employees under our Omnibus Plan. In general, nonvested shares vest over three to five years and are subject to the employees continuing service to SBS. The cost of nonvested shares is determined using the fair value of our common stock on the date of grant. The compensation expense is recognized over the vesting period.

 

SPANISH BROADCASTING SYSTEM, INC. AND SUBSIDIARIES

 

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

A summary of the status of our nonvested shares, as of December 31, 2006 and June 30, 2007, and changes during the six-months ended June 30, 2007, is presented below (in thousands, except per share data):

 

 

 

Basic net (loss) income per common share was computed by dividing net (loss) income applicable to common stockholders by the weighted average number of shares of common stock and convertible preferred stock outstanding for each period presented, using the if converted method. Diluted net (loss) income per common share is computed by giving effect to common stock equivalents as if they were outstanding for the entire period.

 

Common stock equivalents were not considered in the calculation for the three- and six- month periods ended June 30, 2007, since its effect would be anti-dilutive. If included, the common stock equivalents for the three- and six-month periods ended June 30, 2007 would have amounted to 3 and 0, respectively. During the three- and six- month periods ended June 30, 2006, common stock equivalents included in the calculation amounted to 9 and 11, respectively.

 

 

Statement of Financial Accounting Standards No. 131, “Disclosures about Segments of an Enterprise and Related Information,” establishes standards for the way public business enterprises report information about operating segments in annual financial statements and requires those enterprises to report selected information about operating segments in interim financial reports. We have two reportable segments: radio and television. The following summary table presents separate financial data for each of our operating segments (in thousands):

 

		Three-Months Ended																Six-Months Ended
		June 30,								Change								June 30,								Change
		2007				2006				$				%				2007				2006				$				%
Net revenue:
Radio		$	45,256				47,443				(2,187	)			(5	)%		$	82,088				84,787				(2,699	)			(3	)%
Television			2,615				1,398				1,217				87	%			4,720				1,829				2,891				158	%
Consolidated		$	47,871				48,841				(970	)			(2	)%		$	86,808				86,616				192				0	%
Engineering and programming expenses:
Radio		$	9,068				8,320				748				9	%		$	17,910				16,756				1,154				7	%
Television			3,309				4,666				(1,357	)			(29	)%			6,761				8,049				(1,288	)			(16	)%
Consolidated		$	12,377				12,986				(609	)			(5	)%		$	24,671				24,805				(134	)			(1	)%

SPANISH BROADCASTING SYSTEM, INC. AND SUBSIDIARIES

 

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

 

SPANISH BROADCASTING SYSTEM, INC. AND SUBSIDIARIES

 

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

Our total comprehensive income, comprised of net income and unrealized gain on derivative instruments, for the three-and six-months ended June 30, 2007 and 2006, respectively, was as follows (in thousands):

 

		Three-Months Ended								Six-Months Ended
		June 30,								June 30,
		2007				2006				2007				2006
Net income		$	2,390				2,431			$	3,404				55,972
Other comprehensive income:
Unrealized gain on derivative instruments			3,555				3,174				1,669				7,707
Total comprehensive income		$	5,945				5,605			$	5,073				63,679

 

 

In September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”), which defines fair value, establishes a framework for measuring fair value in GAAP, and enhances disclosures about fair value measurements. SFAS No. 157 applies when other accounting pronouncements require fair value measurements; it does not require new fair value measurements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007 or fiscal year 2008 for us. We are currently evaluating the impact that SFAS No. 157 may have on our consolidated financial statements.

 

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Liabilities — Including an Amendment of FASB Statement No. 115” (“SFAS No. 159”). SFAS No. 159 permits entities to choose to measure certain financial assets and liabilities at fair value. Unrealized gains and losses, arising subsequent to adoption, are reported in earnings. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007 or fiscal year 2008 for us. We are currently evaluating the impact that SFAS No. 159, if elected, may have on our consolidated financial statements.

 

 

Our income tax expense differs from the statutory federal tax rate of 35% and related statutory state tax rates, primarily as a result of the application of SFAS No. 142, “Goodwill and Other Intangible Assets” (“SFAS No. 142”). Under 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 carry forward period. Therefore, our effective book tax rate is impacted by establishing a valuation allowance on substantially all of our deferred tax assets.

 

On January 1, 2007, we adopted the provisions of FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes-an interpretation of FASB Statement No. 109” (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement 109, “Accounting for Income Taxes”, and prescribes a recognition threshold and measurement process for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.

 

We file federal, state and local income tax returns in the United States and Puerto Rico. The tax years that remain subject to assessment of additional liabilities by the United States federal, state, and local tax authorities are 2003 through 2006. The tax years that remain subject to assessment of additional liabilities by the Puerto Rico tax authority are 2002 through 2006. The Puerto Rico Treasury Department has recently commenced an examination of the Puerto Rico income tax returns for 2002.

 

Based on our evaluation, we have concluded that there are no significant uncertain tax positions requiring recognition in our consolidated financial statements. Our evaluation was performed for the tax years ended

 

SPANISH BROADCASTING SYSTEM, INC. AND SUBSIDIARIES

 

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

December 31, 2002, 2003, 2004, 2005 and 2006, the tax years which remain subject to examination by tax jurisdictions as of June 30, 2007.

 

 

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, financial position or liquidity.

 

Amigo Broadcasting Litigation

 

On December 5, 2003, Amigo Broadcasting, L.P. (“Amigo”) brought suit against Spanish Broadcasting System, Inc. (“SBS”), Raul Bernal, Joaquin Garza and Latin Entertainment Network, Inc. (“LEN”). Messrs. Bernal and Garza had been on-air radio personalities for Amigo’s Spanish language radio station in Austin, Texas. They left the Amigo station and were employed by SBS’s Los Angeles radio station. Amigo contended that Messrs. Garza and Bernal breached their contract by quitting Amigo and joining SBS. Amigo further contended that SBS and LEN committed various wrongful acts in luring Messrs. Garza and Bernal away from the Amigo station. Amigo sought both injunctive relief to prevent Garza and Bernal from working for SBS, as well as damages in excess of $3.0 million.

 

The case was tried in the United States District Court for the Western District of Texas from May 2 through May 5, 2006, before the Honorable James Nowlin. At the conclusion of Plaintiff’s case in chief, Judge Nowlin granted all Defendants’ Motions for Judgment as a matter of law. Judge Nowlin ruled that Plaintiffs had failed to introduce sufficient evidence on one or more elements of each of their causes of action against each of the Defendants.

 

Amigo has appealed the trial court ruling, arguing that the Court should have allowed the jury to decide the case. The appeal is currently pending before the United States Court of Appeals for the Fifth Circuit in New Orleans. We do not believe the outcome of the litigation will result in any material liability for the Company.

 

Wolf, et al., Litigation

 

On November 28, 2001, a complaint was filed against Spanish Broadcasting System, Inc. (“SBS”) in the United States District Court for 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 SBS Class A common stock pursuant to the October 27, 1999 prospectus and registration statement relating to SBS’s initial public offering which closed on November 2, 1999 (“the IPO”). The complaint was brought on behalf of Mr. Wolf and an alleged class of similarly situated purchasers, against SBS, eight underwriters and/or their successors-in-interest who led or otherwise participated in the IPO (collectively, the “Underwriters”), two members of SBS’s senior management team, one of whom is SBS’s Chairman of the Board of Directors, and an additional director (collectively, the “Individuals”). To date, the complaint, while served upon SBS, has not been served upon the Individuals, 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 underwriters and 1000 individual defendants 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 SBS, have been assigned for consolidated pretrial purposes to one judge of the United States District Court for the Southern District of New York. The issuer defendants in the consolidated cases (the “Issuer Defendants”) filed motions to dismiss the consolidated cases. These motions to dismiss covered issues common among all Issuer Defendants and

 

SPANISH BROADCASTING SYSTEM, INC. AND SUBSIDIARIES

 

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

issues common among all underwriter defendants in the consolidated cases. As a result of these motions, the Individuals were dismissed from one of the claims against them, specifically the Section 10b-5 claim.

 

On October 13, 2004, the District Court granted plaintiffs motion for class certification in six “focus cases” out of the more than 300 consolidated class actions. On August 31, 2005, the District Court issued an order of preliminary approval of a settlement between plaintiffs and the Issuer Defendants (the “Issuers Settlement”). On December 5, 2006, the United States Court of Appeals for the Second Circuit reversed the District Court’s October 13, 2004 class certification order, holding that plaintiffs could not satisfy the predominance requirement for a Federal Rule of Civil Procedure 23(b)(3) class action.

 

On May 30, 2007, the District Court held a status conference to discuss the impact of the Second Circuit’s December 5, 2006 decision and Plaintiffs made an oral motion for class certification, based on newly proposed class definitions. Plaintiffs also indicated that they intend to file amended complaints and amended master allegations in the consolidated actions. On June 25, 2007, the District Court entered a stipulation between plaintiffs and the Issuer Defendants, terminating the proposed Issuers Settlement in light of the Second Circuit’s reversal of the District Court’s class certification order and subsequent denial of plaintiffs petition for a rehearing or rehearing en banc. Also on June 25, 2007, plaintiffs served document requests on the Issuer Defendants. The Issuer Defendants are in negotiations with plaintiffs to limit the document requests to the six “focus cases.” We do not believe the outcome of the litigation will result in any material liability for the Company.

 

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 51% of the U.S. Hispanic population, and two television stations, which 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”. As part of our operating business, we also operate LaMusica.com, Mega.tv, and our radio station websites which are bilingual (Spanish — English) websites providing content related to Latin music, entertainment, news and culture. We also occasionally produce live concerts and events throughout the United States and Puerto Rico.

 

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. 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, celebrity, debate, interviews and personality based shows. As part of our strategy, we have incorporated certain of our on-air personalities into our programming, as well as including interactive elements to complement our Internet websites. We have developed approximately 70% of our programming and have commissioned other content from capable Spanish-language production partners. Our television revenue is generated primarily from the sale of local advertising and paid programming.

 

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.

Comparison Analysis of the Operating Results for the Three-Months Ended June 30, 2007 and 2006

 

The following summary table presents separate financial data for each of our operating segments.