SPANISH BROADCASTING SYSTEM INC - Quarter Report: 2010 June (Form 10-Q)

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 000-27823

Spanish Broadcasting System, Inc.

(Exact name of registrant as specified in its charter)

Delaware (State or other jurisdiction of incorporation or organization)		13-3827791 (I.R.S. Employer Identification No.)

2601 South Bayshore Drive, PH 2
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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o 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.

Large accelerated filer o		Accelerated filer o		Non-accelerated filer o (Do not check if a smaller reporting company)		Smaller reporting company þ

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 August 12, 2010, 41,596,513 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

		Page
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements — Unaudited			4
Unaudited Condensed Consolidated Balance Sheets as of June 30, 2010 and December 31, 2009			4
Unaudited Condensed Consolidated Statements of Operations for the Three- and Six-Months Ended June 30, 2010 and 2009			5
Unaudited Condensed Consolidated Statement of Changes in Stockholders’ Deficit and Comprehensive Income for the Six-Months Ended June 30, 2010			6
Unaudited Condensed Consolidated Statements of Cash Flows for the Six-Months Ended June 30, 2010 and 2009			7
Notes to Unaudited Condensed Consolidated Financial Statements			8
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			14
ITEM 4. Controls and Procedures			22
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings			22
ITEM 1A. Risk Factors			22
ITEM 6. Exhibits			23
Exhibit 10.1
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2

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 (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”, “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 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, 2009, and those described from time to time in our future reports filed with the Securities and Exchange Commission (the SEC).

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements — Unaudited

SPANISH BROADCASTING SYSTEM, INC. AND SUBSIDIARIES

Unaudited Condensed Consolidated Balance Sheets

		June 30,				December 31,
		2010				2009
		(In thousands, except share data)
Assets
Current assets:
Cash and cash equivalents		$	44,648				53,580
Receivables, net of allowance for doubtful accounts of $839 in 2010 and $1,247 in 2009			25,824				24,800
Prepaid expenses and other current assets			3,301				3,439
Total current assets			73,773				81,819
Property and equipment, net of accumulated depreciation of $52,540 in 2010 and $49,560 in 2009			43,162				45,365
FCC broadcasting licenses			312,623				312,623
Goodwill			32,806				32,806
Other intangible assets, net of accumulated amortization of $231 in 2010 and $214 in 2009			1,202				1,220
Deferred financing costs, net of accumulated amortization of $5,559 in 2010 and $5,028 in 2009			2,043				2,574
Other assets			2,322				2,386
Total assets		$	467,931				478,793
Liabilities and Stockholders’ Deficit
Current liabilities:
Accounts payable and accrued expenses		$	18,569				18,211
Accrued interest			4,066				5,608
Unearned revenue			471				570
Other liabilities			266				602
Derivative instruments			—				5,863
Senior credit facility revolver due 2010			—				15,000
Current portion of the senior credit facility term loan due 2012			3,250				3,250
Current portion of other long-term debt			441				447
Series B cumulative exchangeable redeemable preferred stock dividends payable			9,514				7,032
Total current liabilities			36,577				56,583
Other liabilities, less current portion			2,249				405
Derivative instruments			838				612
Senior credit facility term loan due 2012, less current portion			304,687				306,313
Other long-term debt, less current portion			6,388				6,605
Deferred income taxes			74,895				71,408
Total liabilities			425,634				441,926
Commitments and contingencies (note 7)
Cumulative exchangeable redeemable preferred stock 103/4% Series B cumulative exchangeable redeemable preferred stock, $0.01 par value, liquidation value $1,000 per share. Authorized 280,000 shares; 92,349 shares issued and outstanding at June 30, 2010 and December 31, 2009, respectively			92,349				92,349
Stockholders’ deficit:
Series C convertible preferred stock, $0.01 par value and liquidation value. Authorized 600,000 shares; 380,000 shares issued and outstanding at June 30, 2010 and December 31, 2009, respectively			4				4
Class A common stock, $0.0001 par value. Authorized 100,000,000 shares; 41,596,513 and 41,542,513 shares issued and outstanding at June 30, 2010 and December 31, 2009, respectively			4				4
Class B common stock, $0.0001 par value. Authorized 50,000,000 shares; 23,403,500 shares issued and outstanding at June 30, 2010 and December 31, 2009, respectively			2				2
Additional paid-in capital			525,142				525,026
Accumulated other comprehensive loss			(838	)			(2,513	)
Accumulated deficit			(574,366	)			(578,005	)
Total stockholders’ deficit			(50,052	)			(55,482	)
Total liabilities and stockholders’ deficit		$	467,931				478,793

See accompanying notes to the unaudited condensed consolidated financial statements.

SPANISH BROADCASTING SYSTEM, INC. AND SUBSIDIARIES

Unaudited Condensed Consolidated Statements of Operations

		Three-Months Ended								Six-Months Ended
		June 30,								June 30,
		2010				2009				2010				2009
		(In thousands, except per share data)
Net revenue		$	35,837				37,052				66,683				64,846
Operating expenses:
Engineering and programming			9,991				11,234				19,865				22,239
Selling, general and administrative			10,832				12,463				23,621				23,825
Corporate expenses			2,254				2,312				4,475				5,173
Depreciation and amortization			1,446				1,570				3,002				3,163
Total operating expenses			24,523				27,579				50,963				54,400
Loss (gain) on the disposal of assets, net			8				(26	)			8				(15	)
Impairment of assets and restructuring costs			—				70				—				10,686
Operating income (loss)			11,306				9,429				15,712				(225	)
Other (expense) income:
Interest expense, net			(3,123	)			(6,701	)			(9,426	)			(13,118	)
Change in fair value of derivative instrument			3,016				(366	)			5,863				2,490
Other, net			—				1				—				1
Income (loss) before income taxes			11,199				2,363				12,149				(10,852	)
Income tax expense (benefit)			1,768				1,904				3,546				(365	)
Net income (loss)			9,431				459				8,603				(10,487	)
Dividends on Series B preferred stock			(2,482	)			(2,482	)			(4,964	)			(4,964	)
Net income (loss) applicable to common stockholders		$	6,949				(2,023	)			3,639				(15,451	)
Basic and diluted net income (loss) per common share		$	0.10				(0.03	)			0.05				(0.21	)
Weighted average common shares outstanding:
Basic			72,600				72,502				72,600				72,502
Diluted			72,870				72,502				72,824				72,502

See accompanying notes to the unaudited condensed consolidated financial statements.

SPANISH BROADCASTING SYSTEM, INC. AND SUBSIDIARIES

Unaudited Condensed Consolidated Statement of Changes in Stockholders’ Deficit
and Comprehensive Income for the Six-Months Ended June 30, 2010

		Class C								Class A								Class B												Accumulated
		preferred stock								common stock								common stock								Additional				other								Total
		Number of				Par				Number of				Par				Number of				Par				paid-in				comprehensive				Accumulated				stockholders’
		shares				value				shares				value				shares				value				capital				loss				deficit				deficit
		(In thousands, except share data)
Balance at December 31, 2009			380,000			$	4				41,542,513			$	4				23,403,500			$	2			$	525,026			$	(2,513	)		$	(578,005	)		$	(55,482	)
Issuance of Class A common stock from vesting of restricted stock			—				—				54,000				—				—				—				—				—				—				—
Stock-based compensation			—				—				—				—				—				—				116				—				—				116
Series B preferred stock dividends			—				—				—				—				—				—				—				—				(4,964	)			(4,964	)
Comprehensive income:
Net income			—				—				—				—				—				—				—				—				8,603				8,603
Amounts reclassified to earnings during the period			—				—				—				—				—				—				—				1,901				—				1,901
Unrealized loss on derivative instruments			—				—				—				—				—				—				—				(226	)			—				(226	)
Comprehensive income																																							10,278
Balance at June 30, 2010			380,000			$	4				41,596,513			$	4				23,403,500			$	2			$	525,142			$	(838	)		$	(574,366	)		$	(50,052	)

See accompanying notes to the unaudited condensed consolidated financial statements.

SPANISH BROADCASTING SYSTEM, INC. AND SUBSIDIARIES

Unaudited Condensed Consolidated Statements of Cash Flows

		Six-Months Ended
		June 30,
		2010				2009
		(In thousands)
Cash flows from operating activities:
Net income (loss)		$	8,603				(10,487	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Loss (gain) loss on the sale of assets			8				(15	)
Impairment of assets			—				10,123
Stock-based compensation			116				132
Depreciation and amortization			3,002				3,163
Net barter income			(216	)			(248	)
Provision for trade doubtful accounts			202				(115	)
Amortization of deferred financing costs			531				537
Deferred income taxes			3,487				(684	)
Unearned revenue			99				135
Change in fair value of derivative instrument			(3,962	)			201
Amortization of other liabilities			—				(33	)
Changes in operating assets and liabilities:
Trade receivables			(1,208	)			1,700
Prepaid expenses and other current assets			138				528
Other assets			64				627
Accounts payable and accrued expenses			376				1,250
Accrued interest			(1,542	)			4,532
Other liabilities			1,508				—
Net cash provided by operating activities			11,206				11,346
Cash flows from investing activities:
Purchases of property and equipment			(807	)			(547	)
Proceeds from the sale of property and equipment and insurance recoveries			—				212
Net cash used in investing activities			(807	)			(335	)
Cash flows from financing activities:
Payment of senior credit facility revolver due 2010			(15,000	)			—
Payment of senior secured credit facility term loan 2012			(1,626	)			(1,626	)
Payment of Series B preferred stock cash dividends			(2,482	)			(4,964	)
Payments of other long-term debt			(223	)			(217	)
Net cash used in financing activities			(19,331	)			(6,807	)
Net (decrease) increase in cash and cash equivalents			(8,932	)			4,204
Cash and cash equivalents at beginning of period			53,580				32,852
Cash and cash equivalents at end of period		$	44,648				37,056
Supplemental cash flows information:
Interest paid		$	6,539				5,362
Income taxes paid, net		$	8				22
Noncash investing and financing activities:
Accrual of Series B preferred stock cash dividends not declared		$	2,482				—
Unrealized (loss) gain on derivative instruments		$	(226	)			359

See accompanying notes to the unaudited condensed consolidated financial statements.

SPANISH BROADCASTING SYSTEM, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. Basis of Presentation

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, 2010 and December 31, 2009 and for the three- and six-month periods ended June 30, 2010 and 2009 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 U.S. 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, 2009, included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2009. 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. Additionally, we evaluated subsequent events after the balance sheet date of June 30, 2010 through the financial statements issuance date. The results of operations for the three- and six-month period ended June 30, 2010 are not necessarily indicative of the results for a full year.

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions about future events that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities at the date of the financial statements. Significant items subject to such estimates and assumptions include: the useful lives of fixed assets, allowance for doubtful accounts, the valuation of derivatives, deferred tax assets, fixed assets, intangible assets, stock-based compensation, contingencies and litigation. These estimates and assumptions are based on management’s best judgments. Management evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors, including the current economic environment, which management believes to be reasonable under the circumstances. Management adjusts such estimates and assumptions as facts and circumstances dictate. Illiquid credit markets, volatile equity markets and reductions in advertising spending have combined to increase the uncertainty inherent in such estimates and assumptions. Actual results could differ from these estimates. Certain prior year amounts have been reclassified to conform with the current year presentation.

2. Stockholders’ Deficit

(a) Series C Convertible Preferred Stock

On December 23, 2004, in connection with the closing of the merger agreement, dated October 5, 2004, with CBS Radio (formerly known as Infinity Media Corporation, CBS Radio), a division of CBS Corporation, 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 CBS Radio (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). 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.

In connection with the closing of the merger transaction, we also entered into a registration rights agreement with CBS Radio, pursuant to which CBS Radio may instruct us to file up to three registration statements, on a best efforts basis, with the 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.

(b) Class A and B Common Stock

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 10 ³/4% 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.

(c) Share-Based Compensation Plans

2006 Omnibus Equity Compensation Plan

In July 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 vest according to the terms determined by the compensation committee of our board of directors, and have a contractual life of up to ten years from the date of grant. Options granted under the 1999 NQ Plan 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. In September 2009, our 1999 Stock Option Plans expired; therefore, no more options can be granted under these plans.

Stock Options and Nonvested Shares Activity

Stock options have only been granted to employees and directors. Our stock options have various vesting schedules and are subject to the employees and directors continuing their 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, 2009 and June 30, 2010, and changes during the six-months ended June 30, 2010, is presented below (in thousands, except per share data):

														Weighted
						Weighted								Average
						Average				Aggregate				Remaining
						Exercise				Intrinsic				Contractual
		Shares				Price				Value				Life (Years)
Outstanding at December 31, 2009			2,057			$	6.41
Granted			50				1.79
Exercised			—				—
Forfeited			(25	)			2.55
Outstanding at June 30, 2010			2,082			$	6.35			$	221				4.3
Exercisable at June 30, 2010			1,980			$	6.60			$	193				4.1

During the six-months ended June 30, 2010 and 2009, 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.

The following table summarizes information about stock options outstanding and exercisable at June 30, 2010 (in thousands, except per share data):

														Weighted
		Outstanding												Average				Exercisable
										Weighted				Remaining								Weighted
										Average				Contractual								Average
						Unvested				Exercise				Life				Number				Exercise
Range of Exercise Prices		Vested Options				Options				Price				(Years)				Exercisable				Price
$0.20 – 4.99			623				102			$	2.19				7.0				623			$	2.32
5.00 – 9.99			1,159				—				8.19				2.7				1,159				8.19
10.00 – 11.78			198				—				10.79				4.3				198				10.79
			1,980				102			$	6.35				4.3				1,980			$	6.60

Nonvested shares (restricted stock or restricted stock units) are awarded to employees under our Omnibus Plan. In general, nonvested shares will vest over three to five years and are subject to the employees continuing their 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, 2009 and June 30, 2010, and changes during the six-months ended June 30, 2010, is presented below (in thousands, except per share data):

						Weighted
						Average Grant-
						Date Fair Value
		Shares				(per Share)
Nonvested at December 31, 2009			127			$	1.73
Awarded			—				—
Vested			(54	)			2.78
Forfeited			—				—
Nonvested at June 30, 2010			73			$	0.96

3. Basic and Diluted Net Income (Loss) Per Common Share

Basic net income (loss) per common share was computed by dividing net income (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 income (loss) per common share is computed by giving effect to common stock equivalents as if they were outstanding for the entire period.

For the three- and six-month periods ended June 30, 2010, potential common shares were dilutive due to net income applicable to common stockholders. For the three- and six-month periods ended June 30, 2009, potential common shares were anti-dilutive due to a net loss applicable to common stockholders.

The following is a reconciliation of the shares used in the computation of basic and diluted net income (loss) per share for the three- and six-month periods ended June 30, 2010 and 2009 (in thousands):

		Three-Months Ended								Six-Months ended
		June 30,								June 30,
		2010				2009				2010				2009
Basic weighted average shares outstanding			72,600				72,502				72,600				72,502
Effect of dilutive equity instruments			270				—				224				—
Dilutive weighted average shares outstanding			72,870				72,502				72,824				72,502
Options to purchase shares of common stock and other stock-based awards outstanding which are not included in the calculation of diluted net income (loss) per share because their impact is anti-dilutive			1,757				2,712				1,789				2,712

4. Operating Segments

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,								June 30,
		2010				2009				2010				2009
		(In thousands)								(In thousands)
Net revenue:
Radio		$	31,823				33,189				58,903				57,365
Television			4,014				3,863				7,780				7,481
Consolidated		$	35,837				37,052				66,683				64,846
Engineering and programming expenses:
Radio		$	5,684				7,104				11,474				14,495
Television			4,307				4,130				8,391				7,744
Consolidated		$	9,991				11,234				19,865				22,239
Selling, general and administrative expenses:
Radio		$	9,084				10,303				19,955				19,455
Television			1,748				2,160				3,666				4,370
Consolidated		$	10,832				12,463				23,621				23,825
Corporate expenses:		$	2,254				2,312				4,475				5,173
Depreciation and amortization:
Radio		$	653				780				1,386				1,593
Television			564				552				1,126				1,090
Corporate			229				238				490				480
Consolidated		$	1,446				1,570				3,002				3,163
Loss (gain) on the disposal of assets, net:
Radio		$	—				(12	)			—				(20	)
Television			8				—				8				19
Corporate			—				(14	)			—				(14	)
Consolidated		$	8				(26	)			8				(15	)
Impairment of assets and restructuring costs:
Radio		$	—				66				—				10,614
Television			—				—				—				24
Corporate			—				4				—				48
Consolidated		$	—				70				—				10,686
Operating (loss) income:
Radio		$	16,402				14,948				26,088				11,228
Television			(2,613	)			(2,979	)			(5,411	)			(5,766	)
Corporate			(2,483	)			(2,540	)			(4,965	)			(5,687	)
Consolidated		$	11,306				9,429				15,712				(225	)
Capital expenditures:
Radio		$	342				216				401				394
Television			15				26				310				124
Corporate			65				16				96				29
Consolidated		$	422				258				807				547

		June 30,				December 31,
Total Assets:		2010				2009
		(In thousands)
Radio		$	415,891				425,565
Television			45,698				45,811
Corporate			6,342				7,417
Consolidated		$	467,931				478,793

5. Comprehensive Income (Loss)

Our total comprehensive income (loss), comprised of net income (loss), amounts reclassified to earnings during the period, and unrealized (loss) gain on derivative instruments, for the three- and six-months ended June 30, 2010 and 2009, respectively, was as follows (in thousands):

		Three-Months Ended								Six-Months ended
		June 30,								June 30,
		2010				2009				2010				2009
Net income (loss)		$	9,431				459			$	8,603				(10,487	)
Other comprehensive income (loss):
Amounts reclassified to earnings during the period			873				1,449				1,901				2,691
Unrealized (loss) gain on derivative instruments			(142	)			(29	)			(226	)			359
Total comprehensive income (loss)		$	10,162				1,879			$	10,278				(7,437	)

6. Income Taxes

We have determined that due to a number of reasons, we are no longer able to estimate our annual effective tax rate during our interim periods, which would be applied to our pre-tax ordinary income. We are calculating our effective income tax rate using a year-to-date income tax calculation. 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 reversal of our deferred tax liabilities related to the tax amortization of our FCC broadcasting licenses, which could no longer be assured over our net operating loss carry forward period. Therefore, our effective tax rate is impacted by the establishment of a valuation allowance on substantially all of our deferred tax assets.

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 2006 through 2009. The tax years that remain subject to assessment of additional liabilities by the Puerto Rico tax authority are 2004 through 2009.

Based on our evaluation, we have concluded that there are no significant uncertain tax positions requiring recognition in our consolidated financial statements as of June 30, 2010 and December 31, 2009.

7. Litigation

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.

8. Derivative and Hedging Activities

At June 30, 2010, derivative financial instruments are comprised of the following (in thousands):

		Fixed
		interest				Expiration		Notional				Fair
Agreement		rate				date		amounts				value
Interest rate swap			5.98	%		June 2010		$	—			$	—
Interest rate swap			6.31	%		January 2017			6,605				838
								$	6,605			$	838

In June 2005, we entered into a five-year interest rate swap agreement for the original notional principal amount of $324.2 million whereby we paid a fixed interest rate of 5.98% as compared to interest at a floating rate equal to three-month LIBOR plus 175 basis points. The interest rate swap amortization schedule was identical to the First Lien Credit Facility amortization schedule during June 2005 to June 2010.

In September and October 2008, the counterparty to this interest rate swap, Lehman Brothers Special Financing Inc., and its parent and credit support provider, Lehman Brothers Holdings Inc., each filed for bankruptcy. Based on these bankruptcy filings, this cash flow hedge was deemed ineffective and no longer qualified for hedge accounting. Therefore, the change in fair value from September 2008 to June 2010 was recorded in earnings as a “Change in fair value of derivative instrument.” For the three-month periods ended June 30, 2010 and 2009, the change in the fair value of derivative instrument totaled $3.0 million and $(0.4) million, respectively. For the six-month periods ended June 30, 2010 and 2009, the change in the fair value of derivative instrument totaled $5.9 million and $2.5 million, respectively. Additionally, the Accumulated Other Comprehensive Loss associated with this hedge as of September 2008 was $7.8 million and was reclassified into earnings (interest expense) monthly until June 2010. For the six-month periods ended June 30, 2010 and 2009, $1.9 million and $2.7 million were reclassified and recorded as interest expense, respectively.

As a result of the Lehman bankruptcy filings, a dispute arose with respect to the outstanding payments under the swap agreement. On June 17, 2010, the parties successfully resolved the dispute under mediation and entered into a confidential settlement and release agreement. The financial impact of the settlement is reflected in our unaudited condensed consolidated balance sheet and statement of operations.

On January 4, 2007, we entered into a ten-year interest rate swap agreement for the original notional principal amount of $7.7 million whereby we 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. The interest rate swap amortization schedule is identical to the promissory note amortization schedule, which has an effective date of January 4, 2007, monthly notional reductions and an expiration date of January 4, 2017.

9. Fair Value Measurement Disclosures

Fair Value of Financial Instruments

Cash and cash equivalents, receivables, as well as accounts payable, and other current liabilities, as reflected in the unaudited condensed consolidated balance sheets, approximate fair value because of the short-term maturity of these instruments. The estimated fair value of our other long-term debt instruments, approximate their carrying amounts as the interest rates approximate our current borrowing rate for similar debt instruments of comparable maturity, or have variable interest rates.

Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

The estimated fair values of our financial instruments are as follows (in millions):

		June 30, 2010								December 31, 2009
		Gross								Gross
		Carrying								Carrying
Description		Amount				Fair Value				Amount				Fair Value
Senior credit facility term loan		$	307.9				266.4				309.6				255.9
103/4% Series B cumulative exchangeable redeemable preferred stock			92.3				61.4				92.3				57.9
Promissory note payable, included in other long-term debt			6.6				6.5				6.8				6.5

The fair value estimates of these financial instruments were based upon either: (a) market quotes from a major financial institution taking into consideration the most recent market activity, or (b) a discounted cash flow analysis taking into consideration current rates.

Fair Value of Derivative Instruments

The following table represents required quantitative disclosures regarding fair values of our derivative instruments (in thousands).

Fair value measurements at June 30, 2010

Liabilities

June 30, 2010

Quoted prices in

Significant

carrying value and

active markets

other

Significant

Balance sheet

for identical

observable

unobservable

location of derivative

instruments

inputs

inputs

Description

instruments

(Level 1)

(Level 2)

(Level 3)

Derivative designated as a cash flow hedging instrument:

Interest rate swap

$

838

—

838

—

Fair value measurements at December 31, 2009

Liabilities

December 31, 2009

Quoted prices in

Significant

carrying value and

active markets

other

Significant

balance sheet

for identical

observable

unobservable

location of derivative

instruments

inputs

inputs

Description

instruments

(Level 1)

(Level 2)

(Level 3)

Derivative designated as a cash flow hedging instrument:

Interest rate swap

$

612

—

612

—

Derivative no longer designated as a cash flow hedging instrument:

Interest rate swap

5,863

—

5,863

—

Total

$

6,475

—

6,475

—

The interest rate swap fair value is derived from the present value of the difference in cash flows based on the forward-looking LIBOR yield curve rates, as compared to our fixed rate applied to the hedged amount through the term of the agreement, less adjustments for credit risk.

		Three-Months Ended June 30,								Six-Months Ended June 30,
Interest rate swaps		2010				2009				2010				2009
(Loss) gain recognized in other comprehensive loss (effective portion)		$	(142	)			(29	)		$	(226	)			359
Loss reclassified from accumulated other comprehensive loss into interest expense			873				1,449				1,901				2,691
Gain (loss) recognized in change in fair value of derivative instrument			3,016				(366	)			5,863				2,490

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

We own and/or operate 21 radio stations in markets that reach approximately 48% of the Hispanic population in the U.S., including Puerto Rico. In addition, we own and operate two television stations and have various affiliation, distribution and/or programming agreements, which allow us to reach approximately 6.5 million households throughout the U.S., including Puerto Rico.

The success of each of our stations depends significantly upon its audience ratings and its share of the overall advertising revenue within its market. The 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. 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 usually compensation expenses, programming expenses, professional fees, and advertising and promotional expenses. 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 television stations and related affiliates operate under the “MegaTV” brand. We have created a unique television format which focuses on entertainment, current 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 develop and produce more than 70% of our programming and obtain 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 June 30, 2010 and 2009

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

		Three-Months Ended
		June 30,
		2010				2009
		(In thousands)
Net revenue:
Radio		$	31,823				33,189
Television			4,014				3,863
Consolidated		$	35,837				37,052
Engineering and programming expenses:
Radio		$	5,684				7,104
Television			4,307				4,130
Consolidated		$	9,991				11,234
Selling, general and administrative expenses:
Radio		$	9,084				10,303
Television			1,748				2,160
Consolidated		$	10,832				12,463
Corporate expenses:		$	2,254				2,312
Depreciation and amortization:
Radio		$	653				780
Television			564				552
Corporate			229				238
Consolidated		$	1,446				1,570
Loss (gain) on the disposal of assets, net:
Radio		$	—				(12	)
Television			8				—
Corporate			—				(14	)
Consolidated		$	8				(26	)
Impairment of assets and restructuring costs:
Radio		$	—				66
Television			—				—
Corporate			—				4
Consolidated		$	—				70
Operating (loss) income:
Radio		$	16,402				14,948
Television			(2,613	)			(2,979	)
Corporate			(2,483	)			(2,540	)
Consolidated		$	11,306				9,429

The following summary table presents a comparison of our results of operations for the three-months ended June 30, 2010 and 2009. Various fluctuations in the table are discussed below. This section should be read in conjunction with our unaudited condensed consolidated financial statements and notes.

		Three-Months Ended
		June 30,
		2010				2009
		(In thousands)
Net revenue		$	35,837				37,052
Engineering and programming expenses			9,991				11,234
Selling, general and administrative expenses			10,832				12,463
Corporate expenses			2,254				2,312
Depreciation and amortization			1,446				1,570
Loss (gain) on disposal of assets, net of disposal costs			8				(26	)
Impairment of assets and restructuring costs			—				70
Operating income		$	11,306				9,429
Interest expense, net			(3,123	)			(6,701	)
Change in fair value of derivative instrument			3,016				(366	)
Other income, net			—				1
Income tax expense			1,768				1,904
Net income		$	9,431				459

Net Revenue

The decrease in our consolidated net revenue of $1.2 million or 3% was due to the decrease in our radio segment net revenue. Our radio segment net revenue decreased $1.4 million or 4%, primarily due to national sales. The decrease in national sales occurred in all of our markets, with the exception of our San Francisco and Puerto Rico markets. Our television segment net revenue increased $0.2 million or 4%, primarily due to an increase in local spot sales and integrated sales, offset by a decrease in paid programming.

Engineering and Programming Expenses

The decrease in our consolidated engineering and programming expenses of $1.2 million or 11% was due to the decrease in our radio segment expenses. Our radio segment expenses decreased $1.4 million or 20%, primarily related to decreases in compensation and benefits for technical and programming personnel due to headcount reductions and music license fees. Our television segment expenses increased $0.2 million or 4%, primarily due to an increase in broadcasting rights fees for our new Puerto Rico, New York and Chicago outlets, offset by a decrease in acquired and original produced programming content.

Selling, General and Administrative Expenses

The decrease in our consolidated selling, general and administrative expenses of $1.6 million or 13% was due to decreases in both our radio and television segment expenses. Our radio segment expenses decreased $1.2 million or 12%, primarily due to decreases in rating services fees, facilities expenses and compensation and benefits for our selling, general and administrative personnel resulting from headcount reductions. Our television segment expenses decreased $0.4 million or 19%, primarily due to a decrease in professional fees, facilities expense and compensation and benefits for our selling, general and administrative personnel due to headcount reductions.

Corporate Expenses

The decrease in corporate expenses was primarily a result of decreases in compensation and benefits for our corporate personnel.

Operating Income

The increase in operating income was mainly due to the decrease in our operating expenses, offset by the decrease in our net revenue.

Interest Expense, Net

In September and October 2008, the counterparty to an interest rate swap, Lehman Brothers Special Financing Inc., and its parent and credit support provider, Lehman Brothers Holdings Inc., each filed for bankruptcy. Based on these bankruptcy filings, this cash flow hedge was deemed ineffective. As a result of the Lehman bankruptcy filings, a dispute arose with respect to the outstanding payments under the swap agreement. On June 17, 2010, the parties successfully resolved the dispute under mediation and entered into a confidential settlement and release agreement, resulting in a decrease in interest expense.

Change in Fair Value of Derivative Instrument

In September and October 2008, the counterparty to an interest rate swap, Lehman Brothers Special Financing Inc., and its parent and credit support provider, Lehman Brothers Holdings Inc., each filed for bankruptcy. Based on these bankruptcy filings, this cash flow hedge was deemed ineffective and no longer qualified for hedge accounting. Therefore, the change in fair value from September 2008 to June 2010 was recorded in earnings as a “Change in fair value of derivative instrument.” For the three-month periods ended June 30, 2010 and 2009, the change in the fair value of derivative instrument totaled $3.0 million and $(0.4) million, respectively.

Income Taxes

The income tax expense of $1.8 million arose primarily from the income tax expense resulting from the tax amortization of our FCC broadcasting licenses.

Net Income

The increase in net income was primarily due to the decreases in operating expenses, interest expense, and the increase in change in fair value of derivative instrument.

Comparison Analysis of the Operating Results for the Six-Months Ended June 30, 2010 and 2009

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

		Six-Months Ended
		June 30,
		2010				2009
		(In thousands)
Net revenue:
Radio		$	58,903				57,365
Television			7,780				7,481
Consolidated		$	66,683				64,846
Engineering and programming expenses:
Radio		$	11,474				14,495
Television			8,391				7,744
Consolidated		$	19,865				22,239
Selling, general and administrative expenses:
Radio		$	19,955				19,455
Television			3,666				4,370
Consolidated		$	23,621				23,825
Corporate expenses:		$	4,475				5,173
Depreciation and amortization:
Radio		$	1,386				1,593
Television			1,126				1,090
Corporate			490				480
Consolidated		$	3,002				3,163
Loss (gain) on the disposal of assets, net:
Radio		$	—				(20	)
Television			8				19
Corporate			—				(14	)
Consolidated		$	8				(15	)
Impairment of assets and restructuring costs:
Radio		$	—				10,614
Television			—				24
Corporate			—				48
Consolidated		$	—				10,686
Operating (loss) income:
Radio		$	26,088				11,228
Television			(5,411	)			(5,766	)
Corporate			(4,965	)			(5,687	)
Consolidated		$	15,712				(225	)