SPANISH BROADCASTING SYSTEM INC - Quarter Report: 2008 March (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)

 

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 whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

(Do not check if a smaller reporting company)

 

Indicate by a 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 May 7, 2008, 41,401,805 shares of Class A common stock, par value $0.0001 per share, 23,403,500 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, 2007, 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
		March 31,
		2008				2007
		(In thousands, except per share data)
Net revenue		$	36,433				38,937
Operating expenses:
Engineering and programming			14,654				12,294
Selling, general and administrative			19,589				15,907
Corporate expenses			3,593				3,603
Depreciation and amortization			1,362				1,137
Total operating expenses			39,198				32,941
Gain on the disposal of assets, net			(3	)			—
Operating (loss) income			(2,762	)			5,996
Other (expense) income:
Interest expense, net			(5,084	)			(4,689	)
Other, net			1,928				1,960
(Loss) income before income taxes			(5,918	)			3,267
Income tax expense			—				2,253
Net (loss) income			(5,918	)			1,014
Dividends on Series B preferred stock			(2,417	)			(2,417	)
Net loss applicable to common stockholders		$	(8,335	)			(1,403	)
Basic and diluted net loss per common share		$	(0.12	)			(0.02	)
Weighted average common shares outstanding:
Basic and Diluted			72,405				72,381

 

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 March 31, 2008 and December 31, 2007 and for the three-month periods ended March 31, 2008 and 2007 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, 2007, included in our fiscal year end 2007 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-month period ended March 31, 2008 are not necessarily indicative of the results for a full year.

 

 

 

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, $0.01 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, $0.0001 par value per share (the “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 the Series C preferred stock has the right to convert each share 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, 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, $0.0001 par value per share (the “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

 

SPANISH BROADCASTING SYSTEM, INC. AND SUBSIDIARIES

 

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

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.

 

 

In connection with the merger agreement with Infinity, as discussed in Note 2(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” and together with the 1999 ISO Plan, the “1999 Stock Option Plans”). 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.

 

SPANISH BROADCASTING SYSTEM, INC. AND SUBSIDIARIES

 

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

 

The impact on our results of operations of recognizing stock-based compensation for the three-month periods ended March 31, 2008 and 2007 was as follows (in thousands):

 

 

During the three-month periods ended March 31, 2008 and 2007, 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.

 

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, 2007 and March 31, 2008, and changes during the three-months ended March 31, 2008, is presented below (in thousands, except per share data):

 

 

SPANISH BROADCASTING SYSTEM, INC. AND SUBSIDIARIES

 

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

The following table summarizes information about stock options outstanding and exercisable at March 31, 2008 (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 us. 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.

 

A summary of the status of our nonvested shares, as of December 31, 2007 and March 31, 2008, and changes during the three-months ended March 31, 2008, is presented below (in thousands, except per share data):

 

 

 

Basic net loss per common share was computed by dividing net loss 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 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-month period ended March 31, 2008 and 2007, since their effect would be anti-dilutive. If included, the common stock equivalents for these periods would have amounted to zero for both periods.

 

 

Statement of Financial Accounting Standards (“SFAS”) No. 131, “Disclosures about Segments of an Enterprise and Related Information,” establishes standards for the way public business enterprises report information about operating segments in annual financial statements and requires those enterprises to report selected information about operating segments in interim financial reports. We have two reportable segments:

 

SPANISH BROADCASTING SYSTEM, INC. AND SUBSIDIARIES

 

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

radio and television. The following summary table presents separate financial data for each of our operating segments (in thousands):

 

		Three-Months Ended
		March 31,								Change
		2008				2007				$				%
Net revenue:
Radio		$	33,026				36,832				(3,806	)			(10	)%
Television			3,407				2,105				1,302				62	%
Consolidated		$	36,433				38,937				(2,504	)			(6	)%
Engineering and programming expenses:
Radio		$	9,916				8,842				1,074				12	%
Television			4,738				3,452				1,286				37	%
Consolidated		$	14,654				12,294				2,360				19	%
Selling, general and administrative expenses:
Radio		$	17,222				14,223				2,999				21	%
Television			2,367				1,684				683				41	%
Consolidated		$	19,589				15,907				3,682				23	%
Corporate expenses:		$	3,593				3,603				(10	)			(0	)%
Depreciation and amortization:
Radio		$	796				726				70				10	%
Television			167				142				25				18	%
Corporate			399				269				130				48	%
Consolidated		$	1,362				1,137				225				20	%
Gain on the diposal of assets, net:
Radio		$	(3	)			—				(3	)			100	%
Television			—				—				—				0	%
Corporate			—				—				—				0	%
Consolidated		$	(3	)			—				(3	)			100	%
Operating (loss) income:
Radio		$	5,095				13,041				(7,946	)			(61	)%
Television			(3,865	)			(3,173	)			(692	)			22	%
Corporate			(3,992	)			(3,872	)			(120	)			3	%
Consolidated		$	(2,762	)			5,996				(8,758	)			(146	)%
Capital expenditures:
Radio		$	1,091				509				582				114	%
Television			3,696				1,633				2,063				126	%
Corporate			226				247				(21	)			(9	)%
Consolidated		$	5,013				2,389				2,624				110	%

 

		March 31,				December 31,
		2008				2007
Total Assets:
Radio		$	845,709				862,048
Television			67,803				62,462
Corporate			10,875				11,619
Consolidated		$	924,387				936,129

 

SPANISH BROADCASTING SYSTEM, INC. AND SUBSIDIARIES

 

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

 

Our total comprehensive loss, comprised of net (loss) income and unrealized loss on derivative instruments, for the three- months ended March 31, 2008 and 2007, respectively, was as follows (in thousands):

 

		Three-Months Ended
		March 31,
		2008				2007
Net (loss) income		$	(5,918	)			1,014
Other comprehensive loss:
Unrealized loss on derivative instruments			(9,190	)			(1,886	)
Total comprehensive loss		$	(15,108	)			(872	)

 

 

In December 2007, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 141R, Business Combinations (“SFAS No. 141R”) and SFAS No. 160, Non-controlling Interests in Consolidated Financial Statements — an amendment to ARB No. 51 (“SFAS No. 160”). SFAS No. 141R and SFAS No. 160 require most identifiable assets, liabilities, non-controlling interests, and goodwill acquired in a business combination to be recorded at “full fair value” and require noncontrolling interests (previously referred to as minority interests) to be reported as a component of equity, which changes the accounting for transactions with non-controlling interest holders. Both SFAS No. 141R and SFAS No. 160 are effective for periods beginning on or after December 15, 2008 or fiscal year 2009 for us. SFAS No. 141R will be applied to business combinations occurring after the effective date. SFAS No. 160 will be applied prospectively to all non-controlling interests, including any that arose before the effective date. We are currently evaluating the impact of adopting SFAS No. 141R and SFAS No. 160 on our results of operations and financial position.

 

In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities (“SFAS No. 161”), which amends SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities (“SFAS No. 133”). SFAS No. 161 requires companies with derivative instruments to disclose information that should enable financial statement users to understand how and why a company uses derivative instruments, how derivative instruments and related hedged items are accounted for under SFAS No. 133, and how derivative instruments and related hedged items affect a company’s financial position, financial performance, and cash flows. The required disclosures include the fair value of derivative instruments and their gains or losses in tabular format, information about credit risk related contingent features in derivative agreements, counterparty credit risk, and a company’s strategies and objectives for using derivative instruments. SFAS No. 161 expands the current disclosure framework in SFAS No. 133. SFAS No. 161 is effective prospectively for periods beginning on or after November 15, 2008 or fiscal year 2009 for us.

 

 

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

 

SPANISH BROADCASTING SYSTEM, INC. AND SUBSIDIARIES

 

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

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 2004 through 2007. The tax years that remain subject to assessment of additional liabilities by the Puerto Rico tax authority are 2003 through 2007.

 

Based on our evaluation, we have concluded that there are no significant uncertain tax positions requiring recognition in our consolidated financial statements. On implementation of FIN 48, we reviewed prior year tax filings and other corporate records for any uncertain tax positions in accordance with recognition standards established for which the statute of limitations remained open.

 

 

We are subject to certain legal proceedings and claims that have arisen in the ordinary course of business and have not been fully adjudicated. In our opinion, we do not have a potential liability related to any current legal proceedings and claims that would individually or in the aggregate have a material adverse effect on our financial condition or operating results. However, the results of legal proceedings cannot be predicted with certainty. Should we fail to prevail in any of these legal matters or should all of these legal matters be resolved against us in the same reporting period, the operating results of a particular reporting period could be materially adversely affected.

 

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 “IPO”). 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 IPO, 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.

 

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. On September 21, 2007, Kaye Scholer, on behalf of the individual defendants, executed a tolling agreement with plaintiffs providing for the dismissal without prejudice of all claims against the individual defendants upon the provision to plaintiffs of documentation showing that SBS has entity coverage for the period in question. Documentation of such coverage was subsequently provided to plaintiffs on December 19, 2007.

 

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

 

SPANISH BROADCASTING SYSTEM, INC. AND SUBSIDIARIES

 

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

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.

 

On December 5, 2006, the United States Court of Appeals for the Second Circuit (the “Second Circuit”) reversed the Southern District Of New York’s October 13, 2004 order granting a motion for class certification in six “focus cases” out of the more than 300 consolidated class actions, holding that Plaintiffs could not satisfy the predominance requirement for a Federal Rule of Civil Procedure 23(b)(3) class action. On December 14, 2006, the court held a conference with all counsel in the IPO cases to consider the impact of the Second Circuit’s reversal of class certification on these cases, including whether a class can be certified for settlement purposes when it cannot otherwise be certified for litigation purposes. The court determined to defer deciding the motion for final approval of the Issuers’ Settlement until further word from the Second Circuit about whether or not it will want to consider rehearing. On January 5, 2007, Plaintiffs filed a petition with the Second Circuit for a rehearing or rehearing en banc.

 

On May 30, 2007, the Southern District of New York 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 with respect to all of the consolidated actions, based on newly proposed class definitions.

 

On August 14, 2007, plaintiffs filed amended complaints in the six “focus cases” and amended master allegations in the consolidated actions. On November 13, 2007, the issuer defendants moved to dismiss the amended complaints in the six “focus cases.” On March 26, 2008, the court granted in part the motion as to a subset of plaintiffs’ Section 11 claims, but denied the motion as to plaintiffs’ other claims. We are not named in any of the six “focus cases.”

 

On December 21, 2007, the underwriter defendants and issuer defendants filed oppositions to plaintiffs’ motion for class certification in the six “focus cases.” Plaintiffs’ reply brief was filed on March 28, 2008 and the underwriter defendants’ and issuer defendants’ surreply briefs are due on April 22, 2008. The court has not indicated that it will hold oral argument.

 

On January 7, 2008, the underwriter defendants filed a motion (in which the issuer defendants joined) to strike class allegations in 26 of the consolidated cases, including the case against us, on the ground that plaintiffs lacked a putative class representative in those cases at the time of their May 30, 2007 oral motion.

 

Plaintiffs filed an opposition to the motion on February 8, 2008, and the underwriter defendants’ filed a reply brief on February 29, 2008.

 

SPANISH BROADCASTING SYSTEM, INC. AND SUBSIDIARIES

 

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

 

In September 2006, the 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 expands disclosures about fair value measurements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. We adopted SFAS No. 157 effective January 1, 2008. The adoption of SFAS No. 157 did not impact our consolidated financial position and results of operations. In accordance with SFAS No. 157, the following table represents our liabilities that are measured at fair value on a recurring basis at March 31, 2008 and the level within the fair value hierarchy in which the fair value measurements are included.

 

 

In February 2008, the FASB issued Staff Position FAS 157-2, Effective Date of FASB Statement No. 157 (“FSP No. 157-2”), which defers the effective date of SFAS No. 157 for non-financial assets and liabilities, except for items that are recognized or disclosed at fair value on a recurring basis, to fiscal years beginning after November 15, 2008 and interim periods within those fiscal years. The Company has elected the deferral option permitted by FSP No. 157-2 for its non-financial assets and liabilities initially measured at fair value in prior business combinations including intangible assets and goodwill.

 

Overview

 

We are the largest publicly traded Hispanic-controlled media and entertainment company in the United States. We own and/or operate 21 radio stations in markets that reach approximately 48% of the U.S. Hispanic population, and two television stations, which reach approximately 3.0 million households throughout the U.S. and Puerto Rico.

 

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 and television, 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.

 

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. We format the programming of each of our radio stations to capture a substantial share of the U.S. Hispanic audience in their respective markets. 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 maintain familiarity 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. Our radio revenue is generated primarily from the sale of local and national advertising.

 

Our two television stations operate as one television operation, branded “MegaTV”. We have created a unique television format which focuses on entertainment, events and variety with high-quality production. Our programming is formatted to capture shares of the U.S. Hispanic audience by focusing on our core strengths as an “entertainment” company, thus offering a new alternative compared to the traditional Latino channels. MegaTV’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 obtained other content from Spanish-language production partners. Our television revenue is generated primarily from the sale of local advertising and paid programming.

 

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. LaMusica.com and our network of station websites generate revenue primarily from advertising and sponsorship. In addition, the majority of our station websites simultaneously stream our stations’ content, which has broadened the audience reach of our radio stations. We also occasionally produce live concerts and events throughout the United States, including Puerto Rico.

Comparison Analysis of the Operating Results for the Three-Months Ended March 31, 2008 and 2007

 

The following summary table presents financial data for each of our operating segments (in thousands):

 

The following summary table presents a comparison of our results of operations for the three-month periods ended March 31, 2008 and 2007. Various fluctuations illustrated in the table are discussed below. This section should be read in conjunction with our unaudited condensed consolidated financial statements and notes.

 

 

Net Revenue.  The decrease in our consolidated net revenue of $2.5 million or 6% was due to the decrease in net revenue from our radio segment of $3.8 million or 10%, offset by an increase in our television segment net revenue of $1.3 million or 62%. Our radio segment had a decrease in net revenue primarily due to lower local and national sales. The decrease in local sales occurred primarily in our Miami, Los Angeles, New York, and Chicago markets, offset by an increase in our Puerto Rico market. The decrease in national sales occurred in our Miami, Chicago, and New York markets, offset by an increase in our Los Angeles market. Our television segment net revenue growth was primarily due to increases in subscriber revenue related to the DirecTV affiliation agreements, local spot sales, and local integrated sales.

 

Engineering and Programming Expenses.  The increase in our consolidated engineering and programming expenses of $2.4 million or 19% was due to increases in both our television and radio segments. Our television segment expenses increased $1.3 million or 37%, primarily due to an increase in original produced programming, acquired programming licenses and on-air promotions related to newly produced or acquired shows. Our radio segment expenses increased $1.1 million or 12%, primarily related to an increase in compensation and benefits for our radio programming personnel related to new morning shows in our Puerto Rico, Chicago and Miami markets.

 

Selling, General and Administrative Expenses.  The increase in our consolidated selling, general and administrative expenses of $3.7 million or 23% was due to increases in both our radio and television segments. Our radio segment expenses increased $3.0 million or 21%, primarily due to an increase in advertising, promotional and marketing costs related to the branding of our morning shows in New York and Puerto Rico. Our television segment expenses increased $0.7 million or 41%, primarily due to the increase in advertising, promotional and marketing costs related to new shows and professional fees.

 

Depreciation and Amortization.  The increase in our consolidated depreciation and amortization expenses is directly related to the increase in capital expenditures throughout our company.

 

Operating (Loss) Income.  The decrease in operating (loss) income of $8.8 million or 146% was primarily related to our radio segment’s operating income decrease of $7.9 million or 61%, which was related to a decrease in net revenues and an increase in operating expenses. Also, our television segment’s operating loss increased by $0.7 million or 22%, which was mainly related to an increase in operating expenses.

 

Interest Expense, net.  The increase in interest expense, net, was due to a decrease in interest income, resulting from a general decline in interest rates on our lower cash balances.

Income Taxes.  The decrease in income taxes was related to the loss before income taxes. We are estimating our 2008 fiscal year income tax expense to be approximately $17.0 million, which is comprised primarily of deferred income tax expense. Since we are expecting income tax expense for the full year, we did not record an income tax benefit for the period.

 

Net (Loss) Income.  The decrease in net (loss) income was primarily due to the decrease in operating (loss) income.

 

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 agreement governing our first lien credit facility. Additionally, our certificates of designations and credit agreement 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.

 

Management believes that cash from operating activities, together with cash on hand, should be sufficient to permit us to meet our operating obligations in the foreseeable future, including, among other things, required quarterly interest and principal payments pursuant to the credit agreements governing our senior secured credit facility due 2012 and capital expenditures, excluding the acquisitions of FCC licenses. Assumptions (none of which can be assured) which underlie management’s beliefs, include the following:

 

 

Our strategy is to primarily utilize cash flows from operations to meet our capital needs and contractual obligations. However, we also have bank borrowings available to meet our capital needs and contractual obligations and, when appropriate and if available, will obtain financing by issuing debt or equity.

 

We continuously evaluate opportunities to make strategic acquisitions, primarily in the largest Hispanic markets in the United States. We engage in discussions regarding potential acquisitions from time to time in the ordinary course of business. We anticipate that any future acquisitions would be financed through funds generated from permitted debt financing, equity financing, operations, asset sales or a combination of these or other available sources. However, there can be no assurance that financing from any of these sources, if necessary and available, can be obtained on favorable terms for future acquisitions.

 

We had cash and cash equivalents of $51.2 million as of March 31, 2008.

The following summary table presents a comparison of our capital resources for the three-month periods ended March 31, 2008 and 2007, 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.

 

 

Capital Expenditures.  The increase in our capital expenditures is a result of various capital projects, including but not limited to the SBS Miami Broadcast Center. Due to these capital projects, we will continue to make significant capital expenditures throughout 2008, which will primarily be funded with cash on hand. We are estimating our capital expenditures for the fiscal year 2008 to be in the range of $16.0 million to $18.0 million.

 

Net Cash Flows (Used In) Provided by Operating Activities.  Changes in our net cash flows from operating activities were primarily a result of the decrease in cash sales and an increase in cash paid to vendors.

 

Net Cash Flows Used in Investing Activities.  Changes in our net cash flows from investing activities were primarily a result of the following: (a) in 2008, we continue to make improvements to the SBS Miami Broadcast Center which was purchased in 2007; these improvements totaled $2.8 million and other capital expenditures totaled $2.2 million, and (b) in 2007, we acquired the SBS Miami Broadcast Center and began making improvements to that building totaling $1.6 million and other capital expenditures of $0.8 million.

 

Net Cash Flows Used In Financing Activities.  There were no significant changes in our net cash flows from financing activities.

 

Off-Balance Sheet Arrangements

 

We do not have any off-balance sheet arrangements that have, or are reasonably likely to have, a current or future material effect on our financial condition, changes in financial condition, revenue or expenses, results of operations, liquidity, capital expenditures or capital resources.

 

Impact on Inflation

 

We believe that inflation has not had a material impact on our results of operations for each of our first quarter of 2008. However, there can be no assurance that inflation will not have an adverse impact on our future operating results and financial condition.

 

 

We have no material changes to the disclosure on this matter made in our Annual Report on Form 10-K for the year ended December 31, 2007.

 

 

Evaluation Of Disclosure Controls And Procedures.  Our principal executive and financial officers have conducted an evaluation of the effectiveness of the design and operation of our “disclosure controls and procedures,” as such term is defined under Rule 13a-15(e) of the Exchange Act, to ensure that information we

are required to disclose in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and include controls and procedures designed to ensure that information we are required to disclose in such reports is accumulated and communicated to management, including our principal executive and financial officers, as appropriate, to allow timely decisions regarding required disclosure. Based on that evaluation, our principal executive and financial officers concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.

 

Changes In Internal Control Over Financial Reporting.  There has been no change in our internal control over financial reporting during the fiscal quarter ended March 31, 2008 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

 

 

The information set forth under Note 8 contained in the “Notes to Unaudited Condensed Consolidated Financial Statements” of this Quarterly Report on Form 10-Q is incorporated by reference in answer to this Item.

 

 

In addition to the other information set forth in this Quarterly Report on Form 10-Q, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2007, which could materially affect our business, financial condition or future results. There have been no material changes from the risk factors described in our Annual Report on Form 10-K for the year ended December 31, 2007, but they are not the only risks facing us. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

 

 

The following exhibits, which are numbered in accordance with Item 601 of Regulation S-K, are filed herewith or, as noted, incorporated by reference herein:

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

SPANISH BROADCASTING SYSTEM, INC.

 

JOSEPH A. GARCÍA

Executive Vice President, Chief
Financial Officer and Secretary (principal
financial and accounting officer and duly
authorized officer of the registrant)

 

Date: May 9, 2008

EXHIBIT INDEX