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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934, AS AMENDED
For the fiscal year ended September 28, 1997
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________.
Commission File Number 33-82114
SPANISH BROADCASTING SYSTEM, INC.
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(Exact name of registrant as specified in its charter)
Delaware 13-3827791
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(State or other jurisdiction of (I.R.S. employer identification)
incorporation or organization
number)
3191 Coral Way
Miami, FL 33145
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(Address of principal executive (Zip Code)
offices)
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See Table of Additional Registrants
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Registrant's telephone number, including area code: (305) 441-6901
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Title of Class: None
Name of each exchange on which registered: None
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 X No ___
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
All of the Company's Common Stock is held by affiliates, accordingly, as
of September 28, 1997, the aggregate value of the Company's voting common stock
held by non-affiliates was $0.00.
Number of shares of the Registrant's Common Stock, par value $.01 per
share, outstanding as of September 28, 1997; 606, 668 shares of Common Stock of
which 558,135 shares are designated Class A Common Stock and 48,533 shares are
designated Class B Common Stock.
Documents Incorporated by Reference: None
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Name State or Primary Standard I.R.S. Employer
Other Industrial Identification
Jurisdiction Classification Number
of Number
Incorporation
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Spanish Broadcasting New Jersey 4832 13-3181941
System, Inc.
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Spanish Broadcasting System California 4832 92-3952357
of California, Inc.
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Spanish Broadcasting System Florida 4832 58-1700848
of Florida, Inc.
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Alarcon Holdings, Inc. New York 6512 13-3475833
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Spanish Broadcasting System New York 4899 13-3511101
Network, Inc.
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SBS Promotions, Inc. New York 7999 13-3456128
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SBS of Greater New York, New York 4832 13-3888732
Inc.
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Spanish Broadcasting System Florida 4832 65-0774450
of Greater Miami, Inc.
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Spanish Broadcasting System Illinois 4832 36-4174296
of Illinois, Inc.
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TABLE OF CONTENTS
Page
----
Item 1. BUSINESS..............................................................1
Item 2. PROPERTIES...........................................................12
Item 3. LEGAL PROCEEDINGS....................................................13
Item 4. SUBMISSION OF MATTERS TO A VOTE
OF SECURITY HOLDERS..................................................13
Item 5. MARKET FOR REGISTRANT'S COMMON STOCK
AND RELATED STOCKHOLDERS MATTERS.....................................14
Item 6. SELECTED FINANCIAL DATA..............................................15
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS........................18
Item 7A. QUANTITATVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK..........................................................24
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA..........................24
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE...............................25
Item 10. DIRECTORS AND OFFICERS OF THE EXECUTIVE REGISTRANT...................25
Item 11. EXECUTIVE COMPENSATION...............................................26
Item 12. COMMON STOCK.........................................................29
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.......................30
Item 14. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES...........................31
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Item 1. BUSINESS
Spanish Broadcasting System, Inc. (the "Company"), incorporated in the
State of Delaware in 1994, is one of the leading Spanish-language radio
broadcasting companies in the United States. The Company owns and operates seven
major market FM radio stations in Los Angeles, New York, Chicago and Miami. The
Company also owns and operates FM stations in Key Largo and Key West, Florida. A
description of each of the Company's stations, organized by market, is set forth
below.
The Company's strategy is to capitalize on the combined national marketing
power derived from owning and operating radio stations in large Hispanic media
markets in the United States and the economies of scale and ability to target
multiple demographics resulting from multiple station ownership within a
particular market. Multiple station ownership permits the Company to offer
advertising packages on multiple radio stations at attractive price levels and
expand the market for advertising targeted at Hispanics, thereby allowing the
Company to capture a larger share of a market's overall advertising revenues.
Los Angeles. KLAX-FM serves the Los Angeles market which has an Area of
Dominant Influence ("ADI") population of approximately 16.1 million, of which
approximately 37.3% is Hispanic. The station features a Ranchera format, best
described as regional Mexican music including Grupo (romantic ballads) and
Norteno (music from border states north of Mexico). Market ratings herein are
reported as determined by the Arbitron Company ("Arbitron"). Of the 46
Arbitron-ranked radio stations serving the Los Angeles metropolitan area,
KLAX-FM is currently the #3 ranked Spanish-language radio station and the #15
ranked station overall. KLAX-FM had a 2.3 share for the Summer 1997 Arbitron
rating period. KLAX-FM is licensed at 97.9 MHz. With its transmitter site in
Baldwin Hills, KLAX-FM has a powerful radio signal which enables it to reach Los
Angeles County in addition to Orange County, and parts of Ventura, San
Bernardino, Riverside and San Diego Counties. On November 21, 1997 the Company
received a construction permit from the Federal Communications Commission (the
"FCC") to change its city of license from Long Beach to East Los Angeles and to
move its transmitting facilities to Flint Peak, thereby allowing the station to
extend its coverage to an additional 1.9 million listeners. KLAX-FM has an
auxiliary transmitter in Long Beach, California.
New York City. WSKQ-FM and WPAT-FM serve the New York City metropolitan
area, which has an ADI population of approximately 20.0 million, of which
approximately 16.4% is Hispanic. Of the 56 Arbitron-ranked radio stations
serving the New York metropolitan area, WSKQ-FM and WPAT-FM are currently the #1
and #2 ranked Spanish-language radio stations and the #3 and #16 ranked stations
overall. The Company's New York stations had a combined 7.9 share for the Summer
1997 Arbitron rating period. WSKQ-FM and WPAT-FM are the only Spanish-language
FM stations currently serving the New York market.
WSKQ-FM. WSKQ-FM was the first Spanish-language FM station to serve the
New York City metropolitan area, making its debut in 1989. In 1993, the Company
changed the station format to a Latin Power format to increase ratings and
revenues. The Latin Power format
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is a mix of fast paced music such as salsa and merengue. WSKQ-FM is licensed at
97.9 MHz. The antenna for WSKQ-FM is on the top of the Empire State Building and
covers New York City, northern New Jersey, much of Suffolk, Nassau and
Westchester Counties in New York, and parts of Fairfield County in Connecticut.
WSKQ-FM's signal in the New York metropolitan area is comparable to other
leading FM stations serving the area.
WPAT-FM. The Company acquired WPAT-FM in March 1996 because the Company
believed that the New York Spanish-language radio market was underserved. Upon
its acquisition, WPAT-FM was reformatted with a Spanish-language romantic adult
contemporary format designed to complement WSKQ-FM's upbeat salsa and merengue
format. The Company believes that the acquisition and reformatting of WPAT-FM
has served to expand the Spanish-language listening audience in the New York
metropolitan area. WPAT-FM is licensed at 93.1 MHz and transmits from an antenna
on top of the World Trade Center. The station's signal covers New York City,
northern New Jersey, much of Suffolk, Nassau and Westchester Counties in New
York and parts of Fairfield County in Connecticut. WPAT-FM has clarity of sound
within the New York metropolitan area comparable to other leading FM stations
serving the area.
Miami. WRMA-FM, WXDJ-FM and WCMQ-FM serve the Miami metropolitan market,
which has an ADI population of approximately 3.7 million, of which approximately
37.1% is Hispanic. Of the 39 Arbitron-ranked radio stations serving the Miami
metropolitan area, WRMA-FM, WXDJ-FM and WCMQ-FM are currently ranked #3, #4, and
#6, respectively, among Spanish language radio stations and ranked #8, #9 and
#20, respectively, among stations overall.
WRMA-FM. WRMA-FM was acquired by the Company in March 1997. See "--The
Acquisitions." WRMA-FM originally went on the air in August 1994 when the
previous owner acquired WTPX-FM, an underperforming FM station. The call letters
were changed to WRMA-FM and the station was reformatted to a Spanish-language
adult contemporary format, consisting of a blend of ballads and pop
songs from the 1970's to today. WRMA-FM is licensed at 106.7 MHz. Its
transmitter is located on top of the Biscayne Tower in downtown Miami. The
Company believes WRMA-FM's signal provides market coverage of the Miami
metropolitan area comparable to other FM stations licensed in the area.
WXDJ-FM. WXDJ-FM was acquired by the Company in March 1997. See "--The
Acquisitions." WXDJ-FM has served the Miami market since February 1992. Together
with WRMA-FM, WXDJ formed the first Spanish-language FM duopoly serving the
Miami metropolitan market. WXDJ-FM plays a blend of salsa and merengue targeting
the emerging musical tastes of the rapidly changing face of the Miami Hispanic
population. WXDJ-FM is licensed at 95.7 MHz. Its transmitter is located on top
of the Biscayne Tower located in downtown Miami. The Company believes WXDJ-FM's
signal provides market coverage of the Miami metropolitan area comparable to
other FM stations licensed in the area.
WCMQ-FM. The Company reformatted WCMQ-FM in October 1996 with a "Spanish
Oldies" format consisting of pop hits from the 1960's and 1970's to fill a
programming void and
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to complement the formats of WRMA-FM and WXDJ-FM. WCMQ-FM is licensed at 92.3
MHz. Its main transmitter location is on top of the Biscayne Tower in downtown
Miami and its auxiliary transmitter is located in Hialeah, Florida. The company
believes WCMQ-FM's signal provides market coverage of the Miami metropolitan
area comparable to other FM stations licensed in the area.
WZMQ-FM. WZMQ-FM has served the Key Largo and the broader Florida Keys
community since January 1990. WZMQ-FM plays Spanish-language contemporary songs
from the 1980's and 1990's and is licensed at 106.3 Mhz. Its transmitter is
located in Key Largo, Florida. The Company believes that WZMQ-FM's signal
provides market coverage of the Key Largo area comparable to other FM stations
licensed in the area.
Chicago. WLEY-FM was acquired by the Company in March 1997. See "-The
Acquisitions." WLEY-FM serves the Chicago metropolitan area, which has an ADI
population of approximately 9.4 million of which 11.8% is Hispanic. Of the 42
Arbitron-ranked radio stations in the Chicago metropolitan area, there is
currently only one other high power Spanish-language FM station. Accordingly,
the Company believes that this market is underserved and offers significant
opportunities for growth. The Company changed this station's format from 70's
rock to Spanish-language in July of 1997. WLEY-FM is licensed at 107.9 MHz. The
Company believes WLEY-FM's signal provides market coverage of the Chicago
metropolitan area comparable to other FM stations licensed to this area. Of the
42 Arbitron-ranked radio stations serving the Chicago metropolitan area, WLEY-FM
is currently ranked #2 among Spanish-language radio stations and #23 among
stations overall.
The Acquisitions
On March 27, 1997, the Company acquired from Infinity Holdings Corp. of
Orlando ("Infinity") the FCC broadcast license and substantially all of the
assets used or useful in the operation of radio station WLEY-FM serving the
Chicago metropolitan area for a purchase price of approximately $33 million,
including a $3.0 million seller note.
On March 27, 1997, the Company acquired from New Age Broadcasting, Inc.
and The Seventies Broadcasting Corporation the FCC broadcasting licenses and
substantially all of the assets used or useful in the operation of the radio
stations WRMA-FM and WXDJ-FM for a cash purchase price of $111.0 million.
The Dispositions
On July 2, 1997, the Company entered into a definitive agreement (as
amended, the "One-on-One Agreement") with One-on-One Sports, Inc. ("One-on-One")
for the sale of the assets, certain liabilities (other than potential
environmental liabilities at the transmitter site of WXLX-AM) and FCC licenses
of radio stations WXLX-AM, serving the New York metropolitan area, KXMG-AM,
serving the Los Angeles metropolitan area, and WCMQ-AM, serving the Miami
metropolitan area. The One-on-One Agreement contained customary
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representations, warranties and conditions, including receipt of FCC approval to
the transfer of the FCC licenses. Pursuant to the One-on-One Agreement, on
September 29, 1997, the Company sold the assets and FCC licenses of WXLX-AM and
WCMQ-AM to One-on-One for a purchase price of $26 million. On December 2, 1997,
the Company consummated the sale of the assets and FCC licenses of KXMG-AM to
One-on-One for a purchase price of $18 million (together with the sale of
WXLX-AM and WCMQ-AM, the "Dispositions").
Industry Background
General. Radio reaches approximately 96% of all Americans over the age of
12. Radio stations derive their gross revenues primarily from the sale of
advertising. In the major U.S. markets tracked by Duncan's Radio Market Guide,
total radio advertising spending rose from an estimated $5.6 billion in 1993 to
an estimated $7.4 billion in 1996. Advertisers generally regard radio as an
efficient means of reaching specifically identified demographic groups. Stations
are typically identified by their music format, such as country,
adult/contemporary, news/talk and Spanish-language, among others. Through a
station's format, a broadcaster focuses on specific demographic groups, making
its station attractive to advertisers who also target these groups. The ability
to deliver an audience comprised of individuals targeted by a particular
advertiser may make a station attractive to that advertiser even though the
station may not command a large share of total radio listeners in that market.
Formats evolve or change as new formats gain popularity and the composition of
audiences change. The largest portion of a radio station's programming is
usually produced by the radio station itself. This programming includes locally
produced shows featuring recorded music, news and talk shows. Additional
programming may be obtained from various radio syndication services on a cash,
barter (the exchange of goods and services for advertising) or cash-plus-barter
basis.
Ratings and Sources of Information. A station's programming determines the
demographics of each station's listeners and, in part, the station's market
share. These factors, in turn, largely determine the price of commercial air
time paid by advertisers. A station's listening audience is measured by rating
service surveys of the number of radios tuned to the station at various times of
the day. Unless otherwise indicated, all market revenue rankings that are
contained in this Annual Report are based on information for calendar year 1996
contained in James H. Duncan, Jr., Duncan's Radio Market Guide (1996 ed.).
Unless otherwise indicated, rank in audience share data ("ratings") is based on
the "12+ average quarter hour share", i.e., the number of persons, aged 12 and
over, who listen to the station for at least five minutes in a quarter-hour
segment Monday through Sunday, 6 a.m. to midnight, in the most recent survey
period (Summer, 1997) as published by Arbitron. Arbitron periodically samples
radio listeners in defined market areas, principally through the use of diaries
maintained by randomly selected listeners. A station's audience share is
calculated by dividing (i) the average number of persons listening to a
particular station for at least five minutes during an average quarter hour in a
given time period by (ii) the average number of such persons for all stations in
the market area. Arbitron also measures listener levels in a number of
demographic categories classified by the age and gender of the audience. This
information is used by advertisers to target specific audience segments.
Further, and unless otherwise noted, references herein to the rank of a
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station among all the radio stations within a market has been determined with
reference to all radio stations rated by Arbitron within the applicable market.
ADI information contained herein is based on Arbitron's 1993 ADI definitions.
Unless otherwise indicated, all references to the demographic statistics in this
Annual Report are derived from Strategy Research Corporation's 1996 United
States Hispanic Market Study (the "SRC Study"), United States Census Bureau and
Hispanic Business Magazine. The SRC Study is sponsored by advertisers and other
businesses targeting the Hispanic market, including the Company and many of its
principal competitors.
The Hispanic Market in the United States
The Company broadcasts primarily to United States Hispanics which is one
of the most rapidly growing segments of the United States population. With
approximately 27.2 million Hispanics, representing approximately 10.3% of the
total population, the United States has the fifth largest Hispanic population in
the world. The United States Hispanic population is highly concentrated in
discrete geographic areas, with approximately 63% of all Hispanics residing in
the ten largest Hispanic markets in the United States. By the year 2010,
Hispanics are projected to account for approximately 13.5% of the total
population of the United States and will be the country's largest minority
group. According to market studies, the United States Hispanic population has an
estimated annual disposable income in excess of $228 billion. In addition,
approximately 78% of Hispanics living in the United States prefer to speak
Spanish at home, further contributing to the popularity of Spanish-language
radio as a source of Spanish-language entertainment, information and culture.
In addition to its anticipated rapid growth, the Hispanic market has
several other characteristics which, the Company believes, make it attractive to
advertisers, including the following:
o United States Census Bureau data indicate that Hispanic households
are larger than those of the general population, with 3.4 persons
living in an average Hispanic household compared to 2.6 persons
living in the average household;
o the Hispanic population is generally younger than the general
population, with a median age of 26.6 years compared to 34.0 years;
o Hispanic consumers generally spend a higher percentage of their
disposable income on consumer goods than the general public; and
o market studies have shown that Hispanics are generally more brand
conscious than the general population.
Primarily due to these factors, the Company believes that the United
States Hispanic population represents an attractive market for local and
national advertisers. Total media advertising expenditures targeting Hispanics
have increased significantly from $166 million in
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1983 to an estimated $1.4 billion in 1997, with $375 million, or 27%, of the
total Hispanic media advertising allocated to radio advertising.
The Hispanic population is concentrated in major markets making it more
accessible to national advertisers. Over 43% of the Hispanic population in the
United States resides in the Company's markets -- Los Angeles, New York, Miami
and Chicago.
Advertising
Virtually all radio station revenue is derived from advertising. This
revenue is usually classified in one of two categories -- "national" and
"local." "National" connotes advertising that is solicited by a national
representative firm that represents the station and is compensated on a
commission-only basis. "Local" refers to advertising purchased by advertisers in
the local community served by a particular station.
The Company believes that radio is one of the most efficient and
cost-effective means for advertisers to reach targeted demographic groups.
Advertising rates charged by a radio station are based primarily on the
station's ability to attract listeners in a given market and on the
attractiveness to advertisers of the station's listener demographics. Rates vary
depending upon a program's popularity among the listeners an advertiser is
seeking to attract, the number of advertisers vying for available air time and
the availability of alternative media in the market. Radio advertising rates
generally are highest during the morning and afternoon drive-time hours which
are the peak hours for radio audience listening. The Company believes that
having multiple stations in a market is desirable to national advertisers and,
as a result, commands attractive advertising rates. The Company believes it will
be able to increase its rates as new and existing advertisers recognize the
increasing desirability of targeting the growing Hispanic population in the
United States.
Each station broadcasts a predetermined number of advertisements each hour
with the actual number depending upon the format of a particular station. The
Company determines the number of advertisements broadcast hourly that can
maximize the station's available revenue dollars without jeopardizing its
audience listener levels. While there may be shifts from time to time in the
number of advertisements broadcast during a particular time of the day, the
total number of advertisements broadcast on a particular station generally does
not vary significantly from year to year.
The Company's revenue mix between local and national advertising varies
significantly by market. Management's objective for its stations is to increase
the level of national advertising since national advertising generally commands
a higher dollar rate per advertising spot than does local advertising.
Approximately 80% of the Company's advertising is local and 20% is national.
During the first quarter of fiscal 1997, the Company terminated its
relationship with Katz Communications, Inc. ("Katz") who had served as the
Company's national sales representative for national broadcast advertising.
Katz's termination resulted from a dispute over the Company's exclusivity
arrangement with Katz. The Company and Katz entered into a settlement agreement
pursuant to which the Company released Katz from any further obligations under
the
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contract. During the second quarter of fiscal 1997, the Company entered into a
new seven year agreement with Caballero Spanish Media, LLC, a division of
Interep, to act as its new national sales representative.
Although the majority of the Company's advertising contracts are
short-term (generally running for less than one month), the Company has
long-term relationships with some of its advertisers. In each of its
broadcasting markets, the Company employs sales people to obtain local
advertising revenues. The Company believes that its local sales force is crucial
in maintaining relationships with key local advertisers and agencies and
identifying new advertisers. The Company generally pays sales commissions to its
local sales staff upon the receipt from advertisers of the payments related to
such sales. The Company offers assistance to local advertisers by providing them
with studio facilities to produce 60-second commercials free of charge.
Competition
The success of each of the Company's stations depends significantly upon
its audience ratings and its share of the overall advertising revenue within its
market. The radio broadcasting industry is a highly competitive business. Each
of the Company's radio stations competes with other radio stations in its market
area (both Spanish-language and English-language), as well as with other
advertising media such as newspapers, broadcast television, cable television,
magazines, outdoor advertising, transit advertising and direct mail marketing.
Several of the stations with which the Company competes are subsidiaries of
large national or regional companies that have substantially greater resources
than the Company. Factors which are material to competitive position include
management experience, the station's rank in its market, power, signal and
frequency, and audience demographics (including the nature of the Spanish market
targeted by a particular station).
Seasonality
The Company's revenues and cash flow are typically lowest in the first
calendar quarter and highest in the second calendar quarter. Seasonal
fluctuations are common in the radio broadcasting industry and are due primarily
to fluctuations in advertising expenditures.
Management and Personnel
As of September 28, 1997, the Company had approximately 296 full-time
employees of whom 8 were primarily involved in management, 130 in
programming, 99 in sales, 51 in general administration and 8 in technical
activities.
The Company operates with a small headquarter's staff in Miami. The
Company's corporate headquarters were moved from New York City to Miami in late
September/early October of 1997. To facilitate efficient management from its
headquarters, the Company accesses and utilizes computerized accounting systems
from its properties to provide current information to management on station
operations and to assist in cost control and the preparation of monthly
financial statements.
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Corporate executives regularly visit each station to monitor its operations and
ensure that headquarters' policies are implemented.
Federal Regulations of Radio Broadcasting
Existing Regulation and Legislation. Radio broadcasting is subject to the
jurisdiction of the FCC under the Communications Act of 1934, as amended (the
"Communications Act"), and by the Telecommunications Act of 1996 (the "1996
Act"). The Communications Act prohibits the operations of a radio broadcasting
station except under a license by the FCC and empowers the FCC, among other
things, to issue, renew, revoke and modify broadcasting licenses; assign
frequency banks; determine stations' frequencies, locations, and power, regulate
the equipment used by stations; adopt other regulations to carry out the
provisions of the Communications Act; impose penalties for violation of such
regulations; and impose fees for processing applications and other
administrative functions. The Communications Act prohibits the assignment of a
license or the transfer of control of a licensee without prior approval of the
FCC.
The 1996 Act represents the most comprehensive overhaul of the country's
telecommunications laws in more than 60 years. The 1996 Act significantly
changes both the broadcast ownership rules and the process for renewal of
broadcast station licenses. The 1996 Act also relaxes local radio ownership
restrictions, and the FCC continues to explore implementation of new ownership
policies in a series of rule makings. The FCC has already implemented some
changes through administrative orders. The 1996 Act establishes a "two-step"
renewal process that limits the FCC's discretion to consider applications filed
in competition with an incumbent's renewal application. Additionally, the 1996
Act substantially liberalizes the national broadcast ownership rules,
eliminating the national radio limits.
This new regulatory flexibility has engendered aggressive local, regional,
and/or national acquisition campaigns. Removal of previous station ownership
limitations on leading incumbents (i.e., existing networks and major station
groups) has increased sharply the competition for, and the prices of, attractive
stations.
Multiple Ownership Restrictions. The FCC has promulgated rules that, among
other things, limit the ability of individuals and entities to own or have an
official position or ownership interest above a certain level (an "attributable"
interest, as defined more fully below) in broadcast stations, as well as other
specified mass media entities. Prior to the passage of the 1996 Act, these rules
included limits on the number of radio stations that could be owned on both a
national and local basis. On a national basis, the rules generally precluded any
individual or entity from having an attributable interest in more than 20 AM
radio stations and 20 FM radio stations.
The 1996 Act substantially relaxed the radio ownership limitations. The
FCC began its implementation of the 1996 Act with several orders issued on March
8, 1996. The 1996 Act and the FCC's subsequently issued rule changes eliminated
the national ownership restriction, allowing a single entity to own nationally
any number of AM or FM broadcast stations. The 1996 Act and the FCC's new rules
also greatly eased local radio ownership restrictions. As with the old rules,
the
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maximum allowable varies depending on the number of radio stations within a
market. In markets with more than 45 stations, one company may own, operate or
control eight stations, with no more than five in any one service (AM or FM). In
markets of 30-44 stations, one company may own seven stations, with no more than
four in any one service, in markets with 15-29 stations, one entity may own six
stations, with no more than four in any one service. In markets with 14
commercial stations or less, one company may own up to five stations or 50% of
all of the stations, whichever is less, with no more than three in any one
service.
In 1992, the FCC placed limitations on time brokerage (local marketing)
agreements ("LMAs") through which the licensee of one radio station provides
programming for another licensee's station in the same market. Stations
operating in the same service (e.g., where both stations are AM) and in the same
market are prohibited from simulcasting more than 25% of their programming.
Moreover, in determining the number of stations that a single entity may
control, an entity programming a station pursuant to an LMA is required, under
certain circumstances, to count that station toward its maximum even though it
does not own the station.
A number of cross-ownership rules pertain to licensees of television and
radio stations. FCC rules, the Communications Act or both generally prohibit an
individual or entity from having an attributable interest in both a television
station and a radio station, daily newspaper or cable television system that is
located in the same local market area served by the television station. The FCC
has employed a liberal waiver policy with respect to the TV/radio
cross-ownership restriction (the so-called "one-to-a-market" rule), generally
permitting common ownership of one AM, one FM, and one TV station in any of the
25 largest markets, provided there are at least 30 separately owned stations in
the market. The 1996 Act directed the FCC to extend its one-to-a-market waiver
policy to the top 50 markets, consistent with the public interest, convenience
and necessity; however, the FCC has not yet implemented this provision.
Moreover, in a pending 1995 rulemaking the FCC has proposed eliminating the
one-to-a-market rule entirely. In addition, there is now pending a Notice of
Inquiry which explores possible changes in the newspaper/radio cross-ownership
waiver policy.
Expansion of the Company's broadcast operations in particular areas and
nationwide will continue to be subject to the FCC's ownership rules and any
further changes the FCC or Congress may adopt. Significantly, the 1996 Act
requires the Commission to review its remaining ownership rules biennially -- as
part of its regulatory reform obligations -- to determine whether its various
rules are still necessary. The Company cannot predict the impact of the biennial
review process or any other agency or legislative initiatives upon the FCC's
broadcast rules. Further, the 1996 Act's relaxation of the FCC's ownership rules
may increase the level of competition in one or more of the markets in which the
Company's stations are located, particularly to the extent that any of the
Company's competitors may have greater resources and thereby be in a better
position to capitalize on such changes.
Under the FCC's ownership rules, a direct or indirect purchaser of certain
types of securities of the Company could violate FCC regulations if that
purchaser owned or acquired an "attributable" or "meaningful" interest in other
media properties in the same areas as stations owned by the Company or in a
manner otherwise prohibited by the FCC. All officers and directors of a
licensee,
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as well as general partners, limited partners who are not properly "insulated"
from management activities, and stockholders who own five percent or more of the
outstanding voting stock of a licensee (either directly or indirectly),
generally will be deemed to have an attributable interest in the licensee.
Certain institutional investors who exert no control or influence over a
licensee may own up to ten percent of such outstanding voting stock without
being considered "attributable." Under current FCC regulations, debt
instruments, non-voting stock, properly insulated limited partnership interests
(as to which the licensee certifies that the limited partners are not
"materially involved" in the management and operation of the subject media
property), warrants and voting stock held by minority stockholders in cases in
which there is a single majority stockholder generally are not attributable. The
FCC's "cross-interest" policy, which precludes an individual or entity from
having a "meaningful" (even though not attributable) interest in one media
property and an attributable interest in a broadcast, cable or newspaper
property in the same area, may be invoked in certain circumstances to reach
interests not expressly covered by the multiple ownership rules.
See the Notice of Inquiry referred to above.
In January 1995, the FCC initiated a rulemaking proceeding designed to
permit a "thorough review of [its] broadcast media attribution rules." Among the
issues on which comment was sought were (i) whether to change the voting stock
attribution benchmarks from five percent to ten percent and, for passive
investors, from ten percent to twenty percent; (ii) whether there are any
circumstances in which non-voting stock interests, which are currently
considered non-attributable, should be considered attributable; (iii) whether
the FCC should eliminate its single majority shareholder exception (pursuant to
which voting interests in excess of five percent are not considered cognizable
if a single shareholder owns more than fifty percent of the voting power); (iv)
whether to relax insulation standards for business development companies and
other widely-held limited partnerships; (v) how to treat limited liability
companies and other new business forms for attribution purposes; (vi) whether to
eliminate or modify the cross-interest policy; and (vii) whether to adopt a new
policy which would consider multiple cross interests or other significant
business relationships (such as time brokerage agreements, debt relationships or
holdings of nonattributable interests), which individually do not raise concerns
with respect to diversity and competition. In November 1996, the FCC issued a
Further Notice of Proposed Rulemaking intended to change rules regarding
attribution in light of the 1996 Act. The Company cannot predict with certainty
when this proceeding will be concluded or whether any of these standards will be
changed. Should the attribution rules be changed, the Company is unable to
predict what effect, if any, such changes would have on the Company or its
activities.
License Grant and Renewal. Prior to the passage of the 1996 Act, radio
broadcasting licenses generally were granted or renewed for a period of seven
years upon a finding by the FCC that the "public interest, convenience, and
necessity" would be served thereby. At the time an application is made for the
renewal of a radio license, parties in interest may file petitions to deny the
application, and such parties, including members of the public, may comment upon
the service the station has provided during the preceding license term. In
addition, prior to the passage of the 1996 Act, any person was permitted to file
a competing application for authority to operate on the station's channel and
replace the incumbent licensee. Renewal applications were granted without a
hearing if there were no competing applications or if issues raised by petitions
to deny such
10
<PAGE> 15
applications were not serious enough to cause the FCC to order a hearing. If
competing applications were filed, a full comparative hearing was required,
sometimes encompassing years of expensive litigation and uncertainty.
Under the 1996 Act, the statutory restriction on the length of broadcast
licenses has been amended to allow the FCC to grant broadcast licenses for terms
of up to eight years, although the FCC has not yet implemented this provision.
The 1996 Act also requires renewal of a broadcast license if the FCC finds that
(1) the station has served the public interest, convenience, and necessity; (2)
there have been no serious violations of either the Communications Act or the
FCC's rules and regulations by the licensee; and (3) there have been no other
serious violations which taken together constitute a pattern of abuse. In making
its determination, the FCC may still consider petitions to deny but cannot
consider whether the public interest would be better served by a person other
than the renewal applicant. Instead, under the 1996 Act, competing applications
for the same frequency may be accepted only in the second stage, after the
Commission has denied an incumbent's application for renewal of license.
By order dated April 12, 1996, the FCC modified its rules to implement the
new two-stage renewal procedure and to eliminate the right to file an
application that is mutually exclusive with renewal. Also on April 12, 1996, the
FCC issued a notice of Proposed Rulemaking to consider how to implement the new
(longer) license term provision of the 1996 Act.
Although in the vast majority of cases broadcast licenses are granted by
the FCC even when petitions to deny are filed against them, there can be no
assurance that any of the Company's stations' licenses will be renewed.
Alien Ownership Restrictions. The Communications Act restricts the ability
of foreign entities or individuals to own or hold certain interests in broadcast
licenses. Foreign governments, representatives of foreign governments, non-U.S.
citizens, representatives of non-U.S. citizens, and corporations or partnerships
organized under the laws of a foreign nation are barred from holding broadcast
licenses. Non-U.S. citizens, collectively, may directly or indirectly own or
vote up to twenty percent of the capital stock of a licensee. In addition, a
broadcast license may not be granted to representatives or held by any
corporation that is controlled, directly or indirectly, by any other corporation
more than one-fourth of whose capital stock is owned or voted by non-U.S.
citizens or their representatives, by foreign governments or their
representatives, or by non-U.S. corporations, if the FCC finds that the public
interest will be served by the refusal or revocation of such license. The FCC
has interpreted the provision of the Communications Act to require an
affirmative public interest finding before a broadcast license may be granted to
or held by any such corporation, and the FCC has made such an affirmative
finding only in limited circumstances. The Communications Act previously also
prohibited grant of a broadcast station license (i) to any corporation with an
alien officer or director, or (ii) to any corporation controlled by another
corporation with any alien officers or more than one-fourth alien directors. The
restrictions on non-U.S. citizens serving as officers or directors of licensees
and their parent corporations have been eliminated, however, by the 1996 Act
effective October 7, 1996.
11
<PAGE> 16
Other Regulations Affecting Radio Broadcasting Stations. The FCC has
significantly reduced its regulation of broadcast stations, including
elimination of formal ascertainment requirements and guidelines concerning
amounts of certain types of programming and commercial matter that may be
broadcast. In 1990, the U.S. Supreme Court refused to review a lower court
decision that upheld the FCC's 1987 action invalidating most aspects of the
Fairness Doctrine, which had required broadcasters to present contrasting views
on controversial issues of public importance. The FCC has, however, continued to
regulate other aspects of fairness obligations in connection with certain types
of broadcasts. In addition, there are FCC rules and policies, and rules and
policies of other federal agencies, that regulate matters such as political
advertising practices, equal employment opportunity, application procedures and
other areas affecting the business or operations of broadcast stations.
Recent Developments, Proposed Legislation and Regulation. The FCC
presently is seeking comment on its policies designed to increase minority
ownership of mass media facilities. Congress, however, has enacted legislation
that eliminated the minority tax certificate program of the FCC, which gave
favorable tax treatment to entities selling broadcast stations to entities
controlled by an ethnic minority. In addition, a recent Supreme Court decision
has cast into doubt the continued validity of other FCC programs designed to
increase minority ownership of mass media facilities.
Congress and the FCC currently have under consideration, and may in the
future adopt, new laws, regulations and policies regarding a wide variety of
matters that could affect, directly or indirectly, the operation and ownership
of the Company's broadcast properties. In addition to the changes and proposed
changes noted above, such matters include, for example, the license renewal
process, spectrum use fees, political advertising rates, potential restrictions
on the advertising of certain products (liquor, beer and wine, for example) and
the rules and policies to be applied in enforcing the FCC's equal employment
opportunity regulations. Other matters that could affect the Company's broadcast
properties include technological innovations and developments generally
affecting competition in the mass communications industry.
The foregoing does not purport to be a complete summary of all the
provisions of the Communications Act, or the 1996 Act, nor of the regulations
and policies of the FCC thereunder. The 1996 Act also covers satellite and
terrestrial delivery of digital audio radio service, and direct broadcast
satellite systems. Proposals for additional or revised regulations and
requirements are pending before and are being considered by Congress and federal
regulatory agencies from time to time. Also, various of the foregoing matters
are now, or may become, the subject of court litigation, and the Company cannot
predict the outcome of any such litigation or the impact on its broadcast
business.
Item 2. PROPERTIES
The Company's corporate headquarters were moved from New York City to
Miami in late September and early October 1997. The types of properties required
to support each of the Company's radio stations include offices, broadcasting
studios and antenna towers where its broadcasting transmitters and antenna
equipment are located. The Company owns the building
12
<PAGE> 17
housing the office and studios in New York City for WSKQ-FM and WPAT-FM, and in
Los Angeles for KLAX-FM. The Company owns the auxiliary transmitter site for
KLAX-FM in Long Beach, California and leases its other transmitter sites, with
lease terms that respectively expire between 1997 and 1998, assuming all renewal
options are exercised. The studios and offices of the Company's Miami and South
Florida stations are currently located in leased facilities with lease terms
that respectively expire in 2000 and 2012. See "Certain Relationships and
Related Transactions." The Company leases its office and studio facilities in
Chicago for its WLEY-FM station.
The transmitter sites for the Company's stations are material to the
Company's overall operations. Management believes that its properties are in
good condition and are suitable for its operations; however, the Company
continually seeks opportunities to upgrade its properties. The Company owns
substantially all of the equipment used in its radio broadcasting business.
Item 3. LEGAL PROCEEDINGS
Alfredo Rodriguez v. Spanish Broadcasting System of California, Inc.;
Spanish Broadcasting System, Inc.; Raul Alarcon, Los Angeles Superior Court Case
No. BC156965. A former general manager of the Company's Los Angeles' radio
stations filed suit in October 1996 alleging wrongful termination and breach of
contract, and damages of approximately $2 million. The Company believes that the
claim is without merit, since the general manager voluntarily resigned. The case
is at the beginning of litigation and has been tendered to the Company's
insurance carrier for coverage.
From time to time the Company is involved in litigation incidental to the
conduct of its business, such as contract matters and employee-related matters.
The Company is not currently a party to any other litigation which, in the
opinion of management, is likely to have a materially adverse effect on the
Company.
Environmental Matters
The Company sublets the transmitter for WXLX-AM in Lyndhurst, New Jersey.
Although WXLX-AM was sold as part of the Dispositions, the Company retained
certain potential environmental liabilities relating to such transmitter, which
is located on a former landfill. As the lessee of the property under a long-term
lease, the Company could become liable for costs associated with remediation of
the site. There can be no assurance that material costs or liabilities will not
be incurred in the event that cleanup of this site is required.
Item 4. SUBMISSION OF MATTERS TO A VOTE
OF SECURITY HOLDERS
Not applicable.
13
<PAGE> 18
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDERS MATTERS
Market Information and Holders
The Company's Common Stock has not been registered under the Securities
Act of 1933 (the "Securities Act") or the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), and is not listed on any national securities
exchange. There is no established public trading market for the Company's Common
Stock. There are currently three holders of the Company's Common Stock. See
"Item 12. Security Ownership of Certain Beneficial Owners and Management".
Dividends
The Company has not paid cash dividends on its Common Stock and does not
expect to do so in the foreseeable future. The Indenture governing the Company's
12 1/2% Senior Notes due 2002 (the "12 1/2% Notes") and the Indenture governing
the Company's 11% Senior Notes due 2004 (the "11% Notes", and together with the
12 1/2% Notes, the "Notes") and the Certificate of Designation governing the
Company's 14 1/4% Senior Exchangeable Preferred Stock (the "Preferred Stock")
limit the Company's ability to pay dividends on the Common Stock. The payment of
cash dividends in the future will depend on limitations in the Indentures
governing the 12 1/2% Notes, the Certificate of Designation governing the
Preferred Stock, the Company's earnings, financial condition, capital needs and
on other factors deemed relevant by the Board of Directors of the Company (the
"Board of Directors") at the time. It is the current policy of the Board of
Directors to retain earnings to finance the operations and growth of the
Company's business. See "Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K" and, Note 5 of Notes to Consolidated Financial Statements
of the Company.
Recent Sales of Unregistered Securities
On March 27, 1997, the Company consummated an offering (the "Notes
Offering") of the 11% Notes Series A and an offering (the "Units Offering," and
together with the Notes Offering, the "Offerings") of 175,000 units (the
"Units"), each Unit consisting of one share of the Preferred Stock and one
warrant (the "Warrants") to purchase 0.428 shares of the Company's Class A
Common Stock in transactions exempt from the registration requirements of the
Securities Act. In conjunction with the Offerings, the Company effected a series
of transactions (collectively, including the Offerings, the "Transactions")
including (i) certain acquisitions, (ii) the redemption (the "Redemption") of
the Company's Senior Secured Notes due 2001 (the "Redeemed Notes") and Senior
Exchangeable Preferred Stock, Series A (the "Old Preferred Stock") and the
repurchase of related warrants to purchase an aggregate of 6.0% of the Company's
Common Stock, on a fully-diluted basis (the "Old Warrants"), and (iii) the
solicitation (the "Consent Solicitation") of certain consents from the holders
of the 12 1/2% Notes.
14
<PAGE> 19
The Preferred Stock was sold in transactions exempt from the registration
requirements of the Securities Act by the Company on March 27, 1997 to CIBC
Oppenheimer Corp. (formerly CIBC Wood Gundy Securities Corp.) (the "Initial
Purchaser") pursuant to a Securities Purchase Agreement dated as of March 24,
1997 by and among the Company, the Guarantors named therein and the Initial
Purchaser (the "Purchase Agreement"). The Initial Purchaser subsequently sold
the Preferred Stock to qualified institutional buyers in reliance on Rule 144A
under the Securities Act. Subject to certain conditions, the Senior Preferred
Stock is exchangeable in whole or in part on a pro rata basis, at the option of
the Company, on any dividend payment date for the Company's 14 1/4% Exchange
Debentures due 2005 (including any such securities paid in lieu of cash
dividends, as described herein, the "Exchange Debentures"); provided, that
immediately after giving effect to any partial exchange, there shall be
outstanding shares of Senior Preferred Stock with an aggregate liquidation
preference of not less than $75 million and not less than $50 million in
aggregate principal amount of Exchange Debentures.
Concurrently with the consummation of the Offerings, the Company redeemed
or repurchased the Redeemed Notes, Old Preferred Stock and Old Warrants for
approximately $89.4 million. The Company issued the Redeemed Notes and Series A
Preferred Stock to partially finance the acquisition of WPAT-FM in New York in
March 1996. The Old Warrants were redeemed pursuant to the redemption price
schedule which was determined at the time of issuance.
Item 6. SELECTED FINANCIAL DATA
The selected consolidated financial data presented below under the
captions "Statement of Operations Data" and "Balance Sheet Data" as of and for
each of the fiscal years in the five-year period ended September 28, 1997, are
derived from the consolidated financial statements of the Company, which
consolidated financial statements have been audited by KPMG Peat Marwick LLP,
independent certified public accountants. The consolidated financial statements
for each of the years in the three-year period ended September 28, 1997 and the
report thereon, are included elsewhere in this Annual Report. The selected
consolidated financial data of the Company should be read in conjunction with
the consolidated financial statements of the Company as of September 29, 1996
and September 28, 1997 and for each of the fiscal years in the three-year period
ended September 28, 1997, the related notes and independent auditor's report,
included elsewhere in this Annual Report. For additional information see "Item
7. Management's Discussion and Analysis of Financial Condition and Results of
Operations."
15
<PAGE> 20
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
(in thousands, except ratios)
<TABLE>
<CAPTION>
Fiscal Year Ended
9/26/93 9/25/94 9/24/95 9/29/96 9/28/97
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Gross broadcasting revenues ........................... $ 35,744 $ 45,825 $ 54,152 $ 55,338 $ 67,982
Less: agency commissions ............................. (4,116) (5,688) (6,828) (6,703) (7,972)
-------- -------- -------- -------- --------
Net revenues ....................................... 31,628 40,137 47,324 48,635 60,010
Station operating expenses (1) ........................ 19,461 22,145 22,998 27,876 31,041
Corporate expenses (1) ................................ 2,518 2,884 4,281 3,748 5,595
Depreciation and amortization ......................... 3,598 3,256 3,389 4,556 7,619
Write-off of franchise costs (2) ...................... 16,365 -- -- -- --
-------- -------- -------- -------- --------
Operating income (loss) ............................ (10,314) 11,852 16,656 12,455 15,755
Interest expense, net ................................. 14,132 14,203 12,874 16,533 22,201
Financing costs ....................................... 555 3,458 -- 876 299
Other expense (income) (3) ............................ (48) (35) 381 698 492
-------- -------- -------- -------- --------
Income (loss) before income taxes and extraordinary
items ............................................ (24,953) (5,774) 3,401 (5,652) (7,237)
Income tax expense (benefit) .......................... 46 (2,231) 1,411 (1,166) (2,715)
-------- -------- -------- -------- --------
Income (loss) before extraordinary items ........... (24,999) (3,543) 1,990 (4,486) (4,522)
Extraordinary gain (loss) (4) ......................... -- 70,255 -- -- (1,647)
-------- -------- -------- -------- --------
Net income (loss) .................................. $(24,999) $ 66,712 $ 1,990 $ (4,486) $ (6,169)
======== ======== ======== ======== ========
Other Data:
Broadcast cash flow (5) ............................... $ 12,167 $ 17,992 $ 24,326 $ 20,759 $ 28,969
EBITDA (6) ............................................ 9,649 15,108 20,045 17,011 23,374
Capital expenditures .................................. 1,723 897 4,888 3,811 2,022
Net cash interest ..................................... 11,066 12,916 7,459 7,759 13,175
Non-cash interest ..................................... 3,066 1,287 5,415 8,774 9,026
-------- -------- -------- -------- --------
Interest expense, net .............................. 14,132 14,203 12,874 16,533 22,201
Net cash provided by operating activities ............. 4,803 4,121 14,438 8,813 6,386
Net cash used in investing activities ................. (1,723) (897) (4,988) (90,195) (144,358)
Net cash provided by (used in) financing activities ... (1,373) 4,514 (3,769) 69,036 144,791
</TABLE>
<TABLE>
<CAPTION>
At
9/26/93 9/25/94 9/24/95 9/29/96 9/28/97
------- ------- ------- ------- -------
<S> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents.............................. $ 4,398 $ 12,137 $ 17,817 $ 5,468 $12,288
Net working capital (deficiency)....................... (142,807) 11,981 21,994 9,172 1,626
</TABLE>
16
<PAGE> 21
Notes to Selected Historical Financial Data
(1) Station operating expenses include engineering, programming, selling and
general and administrative expenses.
(2) Concurrently with the refinancing described below in note 4, the Company
obtained appraisals for the assets of its radio stations. The appraised
values of certain stations were less than the carrying values of such
assets, including franchise costs, by $16, 365,255, in the aggregate.
Based on the appraisals and management's own evaluation of the
recoverability of franchise costs in relation to the then current market
conditions in the broadcasting industry, the Company reduced the carrying
amounts of the applicable franchise costs by $16,365,255 through a charge
to operations in fiscal 1993 consolidated statement of operations.
(3) During the 1996 and 1997 fiscal years, the Company wrote down the value of
the land and building which had been used for the offices and studios of
KLAX-FM in Los Angeles. The write down, of $697,741, and $487,973,
respectively, were based on current market values of real estate in the
Los Angeles area.
(4) On June 29, 1994, the Company sold 107,059 units, each consisting of
$1,000 principal amount of the Company's 12 1/2% Notes and the
Warrants. The 12 1/2% Notes were issued at a substantial discount from
their principal amount. The sale of the 12 1/2% Notes and the
Warrants generated gross proceeds of $94,000,000 and proceeds to the
Company of $87,774,002, net of financing costs of $6,225,998. Of the
$94,000,000 of gross proceeds from the sale of the 12 1/2% Notes and the
Warrants, $88,603,000 was allocated to the 12 1/2% Notes and
$5,397,000 was determined to be the value of the Warrants. Of the net
proceeds from the sale of the 12 1/2% Notes and the Warrants,
$83,000,000 was used to satisfy in full the Company's obligations to its
two former principal lenders and the balance was used to settle litigation
with a former stockholder and for general corporate purposes. The Company
realized a gain of $70,254,772 in connection with its repayment of all
obligations to its two former principal lenders because it was able to
satisfy in full these obligations at substantial discounts to their face
amounts in accordance with restructuring agreements between the Company
and such lenders.
In March 1997, the Company recorded an extraordinary loss resulting from
the redemption of the Redeemed Notes at par which was approximately $1.5
million in excess of their carrying value and from the write-off of the
related unamortized deferred financing costs of approximately $1.3
million, net of the related tax benefit of approximately $1.1 million.
(5) The term "broadcast cash flow" means operating income before depreciation
and amortization, write-down of franchise costs and corporate expenses.
Broadcast cash flow should not be considered in isolation from, or as a
substitute for, net income or cash flow and other consolidated income or
cash flow statement data or as a measure of the Company's
17
<PAGE> 22
profitability or liquidity. Although broadcast cash flow is not a measure
of performance calculated in accordance with generally accepted accounting
principles, broadcast cash flow is widely used in the broadcasting
industry as a measure of a broadcasting company's operating performance.
(6) EBITDA represents income before extraordinary item, net interest expense,
financing costs, income taxes, depreciation and amortization, write-down
of franchise costs and other expenses and income. The Company has included
information concerning EBITDA because it is used by certain investors as a
measure of a company's ability to service its debt obligations. EBITDA
should not be used as an alternative to, or be considered more meaningful
than, operating income, net income or cash flow as an indicator of the
Company's operating performance.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
General
The Company's financial results depend on a number of factors, including
the strength of the national economy and the local economies served by the
Company's stations, total advertising dollars dedicated to the markets served by
the Company's stations, advertising dollars targeted to the Hispanic consumers
in the markets served by the Company's stations, the Company's stations'
audience ratings, the Company's ability to provide popular programming, local
market competition from other radio stations and other advertising media, and
governmental regulation and policies.
Gross revenues derived from radio advertising are affected primarily by
the advertising rates the Company's radio stations are able to charge and the
number of advertisements that can be broadcast without jeopardizing audience
listening levels and the resultant audience ratings. Advertising rates are, in
large part, based upon each station's ability to attract audiences in
demographic groups targeted by advertisers. Audience levels are generally
measured by quarterly Arbitron Radio Market Reports. Each of the Company's
stations strives to maximize net revenues by actively managing the amount of
airtime available for sale and adjusting prices based upon local market
conditions and audience ratings.
In the radio broadcasting industry, stations may utilize trade or barter
agreements to provide advertising time in exchange for goods or services (such
as travel and products used in promotional campaigns or "give-aways") instead of
cash compensation. In each of the 1995, 1996 and 1997
18
<PAGE> 23
fiscal years the Company sold approximately 94%, 94% and 96%, respectively, of
its available advertising time for cash. The Company believes that its
percentage of advertising time sold for cash will increase in the future as its
stations' ratings increase.
Although advertising contracts are generally short-term, the Company has
long-term relationships with many of its advertisers. In the 1996 and 1997
fiscal years, approximately 80% of the Company's gross revenues from the
broadcast of advertising was generated from local advertising and approximately
20% was from national advertising. Each station's local sales staff solicits
advertising directly from local advertisers or through an advertising agency
representing local advertisers. During the first quarter of the 1997 fiscal
year, the Company terminated its relationship with Katz Communications, Inc.,
who served as the Company's national sales representative for national broadcast
advertising. During the second quarter of fiscal 1997, the Company entered into
a seven-year agreement with Caballero Spanish Media, LLC, a division of Interep
("Caballero"), to act as its new national sales representative on terms which
the Company believes are more favorable than the Katz contract. See
"Business--Advertising."
In March 1996, the Company acquired WPAT-FM in New York for $86.4 million
including financing costs and the Company's results include the operations of
WPAT-FM from such date. Pursuant to the terms of an LMA, the Company began
operating WPAT-FM on January 26, 1996 and the revenues of WPAT-FM and the costs
associated with the LMA are included in the Company's operating results from
that date until the date of the acquisition.
In March 1997, the Company acquired WRMA-FM and WXDJ-FM in Miami and
WLEY-FM (formerly WYSY-FM) in Chicago for $111 million and $33.0 million,
respectively. The Company's results include the operations of these stations
from such date.
The Company reports its revenues and expenses on a broadcast month basis.
"Broadcast month basis" means a four or five week period ending on the last
Sunday of each calendar month. For the 1997 and 1995 fiscal years, the Company
reported 52 weeks of revenues and expenses as compared to 53 weeks for the 1996
fiscal year.
As is true of other radio groups, the Company's performance is customarily
measured by its ability to generate broadcast cash flow and EBITDA. "Broadcast
cash flow" means operating income before depreciation and amortization,
write-down of franchise costs and corporate expenses. Although broadcast cash
flow and EBITDA are not measures of performance calculated in accordance with
generally accepted accounting principles, the Company believes that broadcast
cash flow and EBITDA are useful in evaluating the Company because such measures
are accepted by the broadcasting industry as generally recognized measures of
performance and are used by securities industry analysts who publish reports on
the performance of broadcasting companies. In addition, the Company has included
information concerning EBITDA in this Annual Report because it is used by
certain investors as a measure of a company's ability to service its debt
obligations and it is also the basis for determining compliance with certain
covenants in the Indentures and the Certificate of Designation. Broadcast cash
flow and EBITDA are not intended to be substitutes for operating
19
<PAGE> 24
income (as determined in accordance with generally accepted accounting
principles), or alternatives to cash flow from operating activities (as a
measure of liquidity), or alternatives to net income.
The Company's revenues fluctuate throughout the year. The Company's second
fiscal quarter (January through March) generally produces the lowest revenues
for the year and the third fiscal quarter (April through June) generally
produces the highest revenues, primarily due to increased levels of advertising
during this period. The Company's operating results in any period may also be
affected by the occurrence of advertising and promotional expenses that do not
produce revenues in the period in which the expenses are incurred.
Fiscal Year 1997 Compared to Fiscal Year 1996
Net revenues. Net revenues increased to $60.0 million for fiscal 1997 from
$48.6 million for fiscal 1996, an increase of $11.4 million, or 23.5%. This
increase was due primarily to the inclusion of results of WRMA-FM and WXDJ-FM
which were purchased on March 27, 1997 and increased net revenues by $7.7
million and the inclusion of the results of WPAT-FM for the entire year as
opposed to the eight months during the previous year. The increase in net
revenues also resulted from an increase of $1.1 million in net revenues from the
Company's Los Angeles stations. These increases were offset by decreases in net
revenues from certain of the Company's existing stations, including a decrease
of $3.0 million from the operations of WCMQ-AM and WCMQ-FM, and a decrease of
$0.5 million from the operations of WSKQ-FM and WXLX-AM. Additionally, the
acquisition in the Chicago market, WLEY-FM, contributed $0.4 million in net
revenues.
Operating expenses. Total operating expenses increased to $44.3 million
for fiscal 1997 from $36.2 million in fiscal 1996, an increase of $8.1 million,
or 22.4%. The higher operating expenses were caused by an increase of $3.2
million in broadcasting operating expenses, $3.1 million in depreciation and
amortization expense and an increase of $1.8 million in corporate expenses.
The increase in broadcasting operating expenses was caused mainly by the
inclusion of the results of the recently acquired stations in Miami, WRMA-FM and
WXDJ-FM, the newly acquired station in Chicago, WLEY-FM as well as a full year
of expenses for WPAT-FM. The increase in corporate expenses was caused by higher
salaries and higher professional fees. The increase in depreciation and
amortization was the result of increased amortization of franchise costs related
to the acquisitions of WRMA-FM, WXDJ-FM, WLEY-FM and WPAT-FM.
Operating income. Operating income increased to $15.8 million in fiscal
1997 from $12.5 million in fiscal 1996, an increase of $3.3 million, or 26.4%.
The increase was due to the significant increase in net revenues partially
offset by the increase in operating expenses.
EBITDA. EBITDA increased $6.4 million, or 37.6% from $17.0 million in
fiscal 1996 to $23.4 million in fiscal 1997. The increase in EBITDA was caused
by the increase in net revenues, partially offset by an increase in operating
expenses.
20
<PAGE> 25
Other expenses. Other expenses, comprised mostly of interest expense,
increased to $23.0 million for fiscal 1997 from $18.1 million in fiscal 1996, an
increase of $4.9 million, or 27.1%. The increase was caused mostly by interest
expense on the 11% Notes issued to partially finance the acquisitions of
WRMA-FM, WXDJ-FM and WLEY-FM and the retirement of the Redeemed Notes, which
only resulted in six months of interest expense in fiscal year 1996.
Net loss. As a result of the Company's refinancing of its debt and the
issuance of the 11% Notes which partially financed the acquisitions of WRMA-FM,
WXDJ-FM and WLEY-FM, the Company recorded an extraordinary loss on the
retirement of old debt for the amount paid in excess of the Company's carrying
value and the write-off of the related unamortized debt issuance costs. The
amount of this loss is $1.6 million, net of income taxes. Consequently, the
Company's net loss for fiscal year 1997 was $6.2 million compared to a net loss
of $4.5 million for fiscal year 1996, an increase in the net loss of $1.7
million, or 37.8%.
Fiscal Year 1996 Compared to Fiscal Year 1995
Net revenues. Net revenues increased to $48.6 million for fiscal 1996 from
$47.3 million for fiscal 1995, an increase of $1.3 million, or 2.7%. This
increase was due primarily to an increase in net revenues of $7.2 million and
$0.7 million by the Company's stations in New York and Miami, respectively,
offset by a decrease in revenues of $6.6 million from the Los Angeles stations.
The newly acquired radio station WPAT-FM which commenced operations in January
1996 had net revenues of $4.6 million. The Company's other New York stations
experienced net revenue increases primarily as a result of rating increases that
allowed the stations to increase their advertising rates. The Miami stations
contributed to the net revenues growth due to more effective sales efforts. The
Company's Los Angeles stations' revenues were adversely affected by a decline in
ratings which resulted in decreased advertising revenues. In fiscal 1996, net
revenues from national advertising decreased 5% while local advertising
increased by 3%.
Operating expenses. Total operating expenses increased to $36.2 million
during fiscal 1996 from $30.7 million during fiscal 1995, an increase of $5.5
million or 17.9%. As a percentage of net revenues, total operating expenses
increased to 74.4% in fiscal 1996 from 64.8% in fiscal 1995. The increase was
caused by increases of $1.1 million in engineering and programming expenses,
$3.7 million in selling, general and administrative expenses and $1.2 million in
depreciation and amortization, partially offset by a $0.5 million decline in
corporate expenses.
The primary reasons for the increase in engineering and programming
expenses were the costs associated with operating the newly acquired station in
New York, WPAT-FM, the settlement of a lawsuit with an ex-employee in Miami, the
increase in salary and a starting bonus for a new on-air personality in Miami
and increased engineering costs in the New York and Miami markets. Selling,
general and administrative expenses were also impacted by the operation of
WPAT-FM. Additionally, the Company's other stations in the New York market
experienced increases in selling salaries, bonuses and national representative
commissions due to the sales improvements, the settlement of a lawsuit with a
former customer and the reserve of a loan to a former employee. The Los Angeles
stations' advertising and promotional expenses increased primarily due to
billboard and
21
<PAGE> 26
television campaigns. The Miami stations experienced a rise in salaries and
commissions resulting from higher revenues. Sports related programming increased
due to the first year of the Company broadcasting the Miami Dolphins' football
games.
The lower corporate expenses were caused by lower bonuses, as well as
lower professional fees. An increase in depreciation and amortization resulted
mainly from the amortization of the franchise costs related to the WPAT-FM
purchase.
Operating income. Operating income decreased from $16.7 million in fiscal
1995 to $12.5 million in fiscal year 1996, a decrease of $4.2 million or 25.1%.
This decrease was due to the increase in operating expenses partially offset by
the increase in net revenues.
EBITDA. EBITDA decreased to $17.0 million from $20.0 million, a decrease
of $3.0 million, or 15.0%. Such decrease, similar to operating income, was
caused by the increase in operating expenses exclusive of depreciation and
amortization, partially offset by the increase in net revenues.
Other expenses. Other expenses, comprised of interest expense, net of
interest income and refinancing costs, increased to $18.1 million from $13.3
million, an increase of $4.8 million, or 36.1%. The increase resulted mainly
from the additional interest incurred on the Redeemed Notes issued during this
fiscal year to help purchase WPAT-FM. Additionally, the Company incurred
non-recurring financial costs and wrote down the carrying value of a building in
Los Angeles.
Net income (loss). The Company had a net loss of $4.5 million in fiscal
year 1996 compared to net income of $2.0 million in fiscal year 1995. This
change was caused by the decrease in operating income combined with the increase
in other expenses, previously discussed.
Fiscal Year 1995 Compared to Fiscal Year 1994
Net revenues. Net revenues increased to $47.3 million for fiscal 1995 from
$40.1 million for fiscal 1994, an increase of $7.2 million, or 18.0%. The
increase in net revenues primarily was due to an increase in net revenues of
$4.6 million in New York as a result of advertising price increases related to
WSKQ-FM's improved Arbitron ranking, growth in net revenues in Los Angeles of
$1.6 million due to a 41.5% increase in national advertising at KLAX-FM and
KXMG-AM and growth in net revenues in Miami of $1.0 million due to promotional
and sports programming events. In fiscal 1995, net revenues from national and
local advertising increased 41% and 18%, respectively.
Operating expenses. Total operating expenses increased to $30.7 million
during fiscal 1995 from $28.3 million in fiscal 1994, an increase of $2.4
million or 8.5%. However, as a percentage of net revenues, total operating
expenses decreased to 64.8% in fiscal 1995 from 70.5% in fiscal 1994. Operating
expenses increased in fiscal 1995 as follows: corporate expenses increased by
$1.4 million, selling, general and administrative expenses increased by $0.6
million, engineering and programming expenses increased by $0.2 million and
depreciation and amortization increased by
22
<PAGE> 27
$0.1 million. Corporate expenses increased as a result of higher salaries,
bonuses (principally to Messrs. Alarcon, Jr. and Garcia totaling approximately
$783,000), professional fees and insurance costs. Selling, general and
administrative expenses increased in all markets, primarily as a result of
higher promotion expenses and higher sales commissions due to increased net
revenues. The increase in engineering and programming expenses resulted
primarily from higher music license fees related to increased sales in New York
and the settlement of a lawsuit relating to music license fees.
Operating income. For fiscal 1995, the Company had operating income of
$16.7 million compared to operating income of $11.9 million for fiscal 1994, an
increase of $4.8 million, or 40.3%. This growth was caused by the increase in
net revenues in fiscal 1995, which was offset by the increase in operating
expenses discussed above.
EBITDA. EBITDA increased to $20.0 million during fiscal 1995 from $15.1
million during fiscal 1994, an increase of $4.9 million or 32.5%. The growth in
EBITDA was caused by an increase in net revenues which was partially offset by
the increase in operating expenses discussed above. EBITDA margin increased to
42.4% during fiscal 1995 from 37.6% during fiscal 1994.
Other expenses. Other expenses decreased to $13.3 million in fiscal 1995,
from $17.6 million in fiscal 1994, a decrease of $4.3 million or 24.4%. The
principal reasons for the decrease were the absence of refinancing costs in
fiscal 1995, higher interest income of $0.5 million, as well as lower interest
expenses. These decreases were offset by a charge of $0.4 million related to the
settlement of litigation with a former stockholder.
Net income. The Company had net income of $2.0 million for fiscal 1995
compared to net income of $66.7 million for fiscal 1994. This decrease was due
primarily to the absence in fiscal 1995 of an extraordinary gain of $70.3
million (net of income taxes) associated with the refinancing of the Company's
indebtedness in fiscal 1994. Excluding the extraordinary gain, the Company had a
net loss of $3.5 million in fiscal 1994 compared to net income of $2.0 million
for fiscal 1995. The increase in net income before extraordinary items in fiscal
1995 was due primarily to the increase in the Company's net operating income in
fiscal 1995 described above and the decrease in other expenses.
23
<PAGE> 28
Liquidity and Capital Resources
Management believes that cash from operating activities should be
sufficient to permit the Company to meet required cash interest obligations
(which will consist of cash interest expense on the 11% Notes and cash interest
expense on the 12 1/2% Notes, which, commencing June 15, 1997, began accruing
cash interest at a rate of 12 1/2% per annum) for the foreseeable future,
capital expenditures and operating obligations. However, significant assumptions
(none of which can be assured) underlie this belief, including that (i) the
Company will be able to successfully integrate the Acquisitions, (ii) economic
conditions within the radio broadcasting market and economic conditions
generally will not deteriorate in any material respect, (iii) the Company will
be able to successfully implement its business strategy, (iv) the Company will
not incur any material unforeseen liabilities, including, without limitation,
environmental liabilities, and (v) no future acquisition will adversely affect
the Company's liquidity. The Company expects that it may be required to
refinance additional 12 1/2% Notes on or prior to their maturity on June 15,
2002, and no assurance can be given that it will not be required to refinance
the 11% Notes and/or the Preferred Stock. No assurance can be given that any
such refinancing, if required, will be obtained on terms satisfactory to the
Company, if at all.
Historically, the Company's capital expenditures have been for the
improvements and technical upgrades of its broadcasting equipment as well as for
acquisitions of and upgrades of its facilities. For the fiscal year ended
September 28, 1997, capital expenditures were $2.0 million, primarily used for
the construction of a new tower and antenna system at the leased site in New
Jersey for WXLX-AM. For the fiscal year ended September 29, 1996, capital
expenditures were $3.8 million, used mostly for the upgrade of the Company's Los
Angeles building. In fiscal 1995, the Company's capital expenditures were $4.9
million, of which $3.6 million was used to produce and upgrade a building to
which the Company relocated the studio and administrative facilities for its Los
Angeles stations; $0.3 million used to upgrade the studio and technical
equipment in Los Angeles; and $0.4 million used to purchase the antenna and
broadcast license of WSKP-FM in Key West.
On July 2, 1997, the Company entered into the One-on-One Agreement with
respect to the sale of WXLX-AM, KXMG-AM and WCMQ-AM. On September 29, 1997, the
Company sold the assets, certain liabilities (other than potential environmental
liabilities at the transmitter site of WXLX-AM) and FCC licenses of WXLX-AM and
WCMQ-AM to One-on-One for a purchase price of $26 million. On December 2, 1997,
the Company consummated the sale of the assets and FCC licenses of KXMG-AM to
One-on-One for a purchase price of $18 million.
In accordance with the terms of the 12 1/2% Notes, as modified by the
Second Supplemental Indenture, dated as of March 21, 1997, the Company used $25
million of the net proceeds of the Dispositions to make offers to purchase 12
1/2% Notes.
Item 7A. QUANTITATVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information called for by this Item 8 is included following "Item 14.
Index to Consolidated Financial Statements and Schedules, and Reports on Form
8-K" appearing at the end of this Annual Report on Form 10-K.
24
<PAGE> 29
PART III
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
Item 10. DIRECTORS AND OFFICERS OF THE EXECUTIVE REGISTRANT
The following table sets forth the names, ages and positions of the
directors and executive officers of the Company. Each director of the Company
serves until his successor is elected and qualifies.
Name Age Current Position with the Company
- ---- --- ---------------------------------
Raul Alarcon Jr* 41 President and Chief Executive Officer and a
Director of the Company
Jose Grimalt 69 Secretary and a Director of the Company
Joseph Garcia 52 Executive Vice President, Chief Financial
Officer of the Company and Assistant Secretary
Carey Davis 43 Vice President and General Manager of the
New York Stations
Pablo Raul Alarcon, Sr. 71 Chairman of the Board of Directors of the
Company
Arnold Sheiffer* 64 Director of the Company
- ----------
* Member of the Audit and the Compensation Committees of the Board of Directors.
Raul Alarcon, Jr. has been the President and Chief Executive Officer of
the Company since its formation in June 1994. He also serves as the President
and a Director of Spanish Broadcasting System, Inc., a New Jersey corporation
that is wholly-owned by the Company ("SBS-NJ"), and President or Vice President
of those of the Company's other subsidiaries that own and operate the Company's
radio stations. Mr. Alarcon, Jr. joined SBS-NJ as a sales manager in 1983 and
became a Director and the President and Chief Executive Officer of SBS-NJ in
1986. Mr. Alarcon, Jr. is responsible for the Company's long-range strategic
planning and was instrumental in the acquisition and financing of each of the
Company's radio stations. Mr. Alarcon, Jr. is the son of Mr. Alarcon, Sr. and
the son-in-law of Mr. Grimalt.
Jose Grimalt has been the Secretary of the Company since its formation in
June 1994. He also serves as a Director and the Secretary of SBS-NJ and those of
the Company's subsidiaries that own and operate the Company's radio stations.
From 1969 to 1986, Mr. Grimalt owned and
25
<PAGE> 30
operated Spanish language station WLVH-FM in Hartford, Connecticut with a
contemporary Spanish language music format. In 1984, Mr. Grimalt became a
stockholder and the President of the Company's California subsidiary which
operates KXMG-AM in Los Angeles. Mr. Grimalt is Mr. Alarcon, Jr.'s
father-in-law.
Joseph Garcia has been the Chief Financial Officer of the Company since
the Company was formed in June 1994. He was appointed Vice President in March
1996. He joined SBS-NJ in 1984 and since then has served as the Chief Financial
Officer of SBS-NJ and those of the Company's subsidiaries that own and operate
the Company's radio stations. Before joining SBS-NJ, Mr. Garcia spent thirteen
years in financial positions with General Foods, Philip Morris and Revlon, where
he was Manager of Financial Planning for Revlon -- Latin America. In addition to
conventional financial duties, Mr. Garcia assists the Company's President in
formulating strategic plans for the acquisition of radio properties and
negotiating for bank financing and capital formation.
Carey Davis has been the Vice President and General Manager of the New
York stations since February 1997. Mr. Davis previously spent 11 years with
Westinghouse/CBS Corp., including six years as the General Sales Manager for
WINS-AM in New York City and most recently as Vice President/Sales Development
for the CBS and Westinghouse stations.
Pablo Raul Alarcon, Sr. has been the Chairman of the Board of Directors of
the Company since its formation in June 1994. He also serves as the Chairman of
the Board of SBS-NJ, and those of the Company's other subsidiaries that own and
operate the Company's radio stations. Mr. Alarcon, Sr. has been involved in
Spanish language radio broadcasting for much of his life. Mr. Alarcon, Sr. is
the father of Raul Alarcon, Jr.
Arnold Sheiffer was elected to the Company's Board of Directors in
December 1994. He is a private investor. From January 1990 until September 30,
1994, Mr. Scheiffer was an officer, director and stockholder of Katz, the
largest national sales representation firm in the broadcasting industry. From
January 1992 until September 30, 1994, Mr. Sheiffer served as Executive Vice
President and Chief Operating Officer of Katz. From January 1990 to January
1992, he was Senior Vice President and Chief Financial Officer of Katz. From
June 1989 until January 1990, Mr. Sheiffer was retained by Katz as a financial
consultant. For approximately 30 years prior thereto, Mr. Sheiffer was the
managing director of A. Sheiffer & Company, certified public accountants.
Item 11. EXECUTIVE COMPENSATION
The following sets forth all compensation awarded to, earned by or paid
for services rendered to the Company and its subsidiaries in all capacities
during the fiscal years 1997, 1996 and 1995 by the Company's Chief Executive
Officer and the Company's next three highest paid executive officers at
September 28, 1997, whose annual salary and bonus exceeded $100,000 (the "named
executive officers").
26
<PAGE> 31
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Other Annual
Name Principal Position Year Salary Bonus Compensation
- ---- ------------------ ---- ------ ----- ------------
<S> <C> <C> <C> <C> <C>
Raul Alarcon, Jr. President and Chief 1997 $1,361,647 $ -- $ (2)
Executive Officer 1996 746,584 (1) 237,000 (2)
1995 374,725 (1) 552,000 (2)
Pablo Raul Alarcon, Sr. Chairman of the Board of 1997 474,000 200,000 (2)
Directors 1996 464,000 112,000 (2)
1995 424,246 100,000 (2)
Jose Grimalt Secretary and Director 1997 310,184 -- (2)
1996 250,000 12,000 (2)
1995 235,000 -- (2)
Joseph A. Garcia Executive Vice President 1997 244,671 53,100 (2)
and Chief Financial Officer 1996 214,659 5,000 (2)
1995 182,807 231,000 (2)
</TABLE>
- ----------
(1) Excludes amounts paid by the Company in connection with the lease by the
Company of an apartment in New York, New York owned by Mr. Alarcon, Jr.
and used by the Company's employees and customers. See "Certain
Relationships and Related Transactions."
(2) Excludes perquisites and other personal benefits, securities or property
which aggregate the lesser of $50,000 or 10% of the total of annual salary
and bonus.
Director Compensation
Directors do not receive any compensation for serving on the Company's
Board of Directors. Directors are reimbursed for their out-of-pocket expenses
incurred in connection with their service as directors. The Company also
maintains a directors' and officers' liability insurance policy for its
directors.
Employment Agreements and Arrangements
In February 1997, the Company entered into a three-year employment
agreement with Carey Davis, pursuant to which Mr. Davis will serve as the Vice
President and General Manager of the New York stations. Mr. Davis will be paid a
base salary of $225,000 per year and will receive customary executive benefits.
Additionally, he will be paid a cash bonus in the event the New York stations
achieve certain broadcast cash flow targets. The agreement also contains a
non-competition provision for a three-month period following termination of Mr.
Davis' employment.
In March 1997, the Company entered into a five-year employment agreement
with Raul Alarcon, Jr. pursuant to which Mr. Alarcon, Jr. will continue to serve
as President and Chief Executive Officer of the Company. The agreement provides
for a base salary of $1.3 million, which may be increased by the Board of
Directors in its sole discretion. Under the terms of the agreement,
27
<PAGE> 32
Mr. Alarcon, Jr. will be paid a cash bonus equal to the sum of (i) 2.5% of the
dollar increase in same station revenue in the aggregate for any fiscal year and
(ii) 5.0% of the dollar increase in same station broadcast cash flow for any
fiscal year (collectively "Incentive Compensation"). If Mr. Alarcon, Jr.'s
employment is terminated by the Company as a result of Mr. Alarcon, Jr.'s
disability (as defined), or by Mr. Alarcon, Jr. for Good Reason, he will be
entitled to receive all accrued salary, bonuses and Incentive Compensation to
the date of termination plus his salary, bonuses and Incentive Compensation for
the remainder of the term of his employment agreement. Mr. Alarcon, Jr. will
also receive certain executive benefits, including use of automobiles, and an
apartment in New York City (not to exceed $150,000 per year). Mr. Alarcon, Jr.
will also be reimbursed for his relocation expenses to Miami, Florida in an
amount not to exceed $100,000. The Company intends to declare a dividend on the
Common Stock of $4 million the ("Distribution") of which Mr. Alarcon, Jr. will
receive 78.2% (or $3.1 million).
Option Plan
The Company adopted a stock option plan in 1994 (the "Plan") pursuant to
which 26,750 shares of the Company's Class A Common Stock are reserved for
issuance upon the exercise of options to be granted thereunder. Officers,
directors and/or key employees of the Company are eligible to participate in the
Plan. As of September 28, 1997, no options had been granted under the Plan.
Compensation Committee Interlocks and Insider Participation in Compensation
Decisions
The members of the Compensation Committee are Messrs. Alarcon, Jr. and
Scheiffer. Mr. Alarcon, Jr. is the President and Chief Executive Officer of the
Company. The Compensation Committee did not meet in fiscal 1997. Compensation
for the Company's executive officers for fiscal 1997 was determined by Mr.
Alarcon, Jr. See "Item 13. Certain Relationships and Related Transactions."
Limitations on Directors' and Officers' Liability
The Company's Amended and Restated Certificate of Incorporation (the
"Charter") limits the liability of directors to the maximum extent permitted by
Delaware law, which specifies that a director of a company adopting such a
provision will not be personally liable for monetary damages for breach of
fiduciary duty as a director, except for liability: (i) for any breach of the
director's duty of loyalty to the company or its stockholders; (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law; (iii) for unlawful payments of dividends or unlawful stock
repurchases or redemptions as provided in Section 174 of the Delaware General
Corporation Law; or (iv) for any transaction from which the director denied an
improper personal benefit.
The Company's By-laws provide for mandatory indemnification of directors
and authorize indemnification for officers (and others) in such manner, under
such circumstances and to the fullest extent permitted by the Delaware General
Corporation Law, which generally authorizes
28
<PAGE> 33
indemnification as to all expenses incurred or imposed as a result of actions,
suits or proceedings if the indemnified parties act in good faith and in a
manner they reasonably believe to be in or not opposed to the best interests of
the Company. The Company believes that these provisions are necessary or useful
to attract and retain qualified persons as directors and officers.
There is no pending litigation or proceeding involving a director or
officer as to which indemnification is being sought.
Item 12. COMMON STOCK
The following table sets forth information concerning the beneficial
ownership of the Company's common stock as of the date of this Prospectus by:
(i) each person known to the Company to own beneficially more than 5% of any
class of common stock; (ii) each director and each named executive officer; and
(iii) all directors and executive officers of the Company as a group. All shares
are owned with sole voting and investment power.
<TABLE>
<CAPTION>
Percentage
of
Economic Percentage
Percent Ownership of Voting
of Percentage of all Power of
Class A Class A Class B of Class B Common all Common
Executive Officers (1) Shares (2) Shares Shares (2) Shares Stock Stock
- ---------------------- ---------- -------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Pablo Raul Alarcon, Sr ............. -- -- 36,400 75% 6% 31%
Raul Alarcon, Jr ................... 558,135 100% -- -- 92% 59%
Jose Grimalt ....................... -- -- 12,133 25% 2% 10%
Arnold Sheiffer .................... -- -- -- -- -- --
Joseph Garcia ...................... -- -- -- -- -- --
All executive officers and directors
as a group ......................... 558,135 100% 48,533 100% 100% 100%
</TABLE>
- ----------
(1) The address of all directors and executive officers in this table, unless
otherwise specified, is c/o Spanish Broadcasting System, Inc., 3191 Coral
Way, Miami, FL 33145.
(2) As used in this table, "beneficial ownership" means the sole or shared
power to vote or direct the voting of a security, or the sole or shared
investment power with respect to a security (i.e., the power to dispose,
or direct the disposition, of a security). A person is deemed as of any
date to have "beneficial ownership" of any security that such person has
the right to acquire within 60 days after such date. For purposes of
computing the percentage of outstanding shares held by each person named
above, any security that such person has the right to acquire within 60
days of the date of calculation is deemed to be outstanding, but is not
deemed to be outstanding for purposes of computing the percentage
ownership of any other person.
In August 1995, the Company loaned $200,000 to a former employee, which
amount remains outstanding. The amount is fully reserved.
29
<PAGE> 34
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In 1992, Mr. Alarcon, Jr. organized Nuestra Telefonica, Inc., a New York
corporation ("Nuestra") to operate long distance telephone service in Spanish to
serve the Hispanic population in the markets served by the Company's radio
stations. In February 1993, Nuestra entered into an access agreement with a
common carrier and commenced operations. Nuestra advertised its Spanish language
long distance telephone service on the Company's radio stations in Los Angeles
and New York and purchased such air time at standard station rates. Since early
1994, Nuestra has not utilized any air time on the Company's radio stations. As
of September 29, 1996 and September 28, 1997, Nuestra owed the Company,
$663,059, of which $373,190 relates to unpaid air time and $289,869 relates to
certain expenses paid by the Company on Nuestra's behalf. The amounts due are
recorded on the Company's books as a receivable and due from related party
asset, respectively. Mr. Alarcon, Jr. has personally guaranteed the payment of
$533,124 of Nuestra's obligations to the Company. Mr. Alarcon, Jr., the
Company's President and Chief Executive Officer, is Nuestra's Chairman and
majority shareholder. Joseph A. Garcia, the Company's Chief Financial Officer,
is Nuestra's President and a minority shareholder.
In 1992, Messrs. Alarcon, Sr. and Alarcon, Jr. acquired a building in
Coral Gables, Florida, for the purpose of housing the studios of WCMQ-AM (which
has since been sold as part of the Dispositions) and WCMQ-FM. In June 1992,
SBS-Florida, a subsidiary of the Company, entered into a 20-year net lease with
Messrs. Alarcon, Sr. and Alarcon, Jr. for the Coral Gables building which
provides for a base monthly rent of $9,000. This building currently houses the
offices and studios of WCMQ-FM and WZMQ-FM. The lease on the stations' previous
studios expired in October 1993, was for less than half the space of the
stations' present studios and had a monthly rental of approximately $7,500.
Based upon its prior lease for studio space, the Company believes that the lease
for the current studio is at market rates.
Effective July 1993, Messrs. Alarcon, Sr. and Alarcon, Jr. executed
promissory notes to the Company for the principal amounts of $492,173 and
$1,617,086, respectively. Those promissory notes evidenced loans made by the
Company to Messrs. Alarcon, Sr. and Alarcon, Jr. over several prior years. They
were to mature in 2001 and bore interest at the rate of six (6%) percent per
annum until July 19, 1994 and thereafter at the lesser of nine (9%) percent per
annum or the prime rate charged by the Chase Manhattan Bank, N.A. Interest on
the unpaid principal amount was payable annually. In December 1995, the Company
exchanged the promissory notes described above for amended and restated notes in
the principal amounts of $577,323 and $1,896,913 due from Messrs. Alarcon, Sr.
and Alarcon, Jr., respectively. The amended and restated notes bear interest at
the rate of 6.36% per annum, and mature on December 30, 2025, and are payable in
thirty (30) equal annual installments of $43,570 and $143,158, respectively, on
December 30th of each year commencing December 30, 1996. The payments due on
December 30, 1996 have not yet been made. As of September 28, 1997 $577,323 and
$1,896,913, plus accrued and unpaid interest to date, was outstanding,
respectively, on such promissory notes.
30
<PAGE> 35
In connection with Mr. Alarcon, Jr.'s relocation from the New York
metropolitan area to the Miami metropolitan area, the Company has advanced to
Mr. Alarcon, Jr. an aggregate of $1,050,229.63 to pay certain relocation
expenses. On July 16, 1997, Mr. Alarcon, Jr. executed a promissory note to the
Company for the principal amount of $1,050,229.63 to evidence such advances. The
note is payable on demand and bears interest at a rate of 7% per annum. In the
event the Company declares the Distribution, the Company may, at its option,
reduce the amount of principal and interest owing under the note in lieu of
making such payments to Mr. Alarcon, Jr.
For the year ended September 28, 1997, the Company paid operating expenses
aggregating approximately $116,000 for a boat owned by CMQ Radio, Inc. ("CMQ"),
a North Carolina corporation owned equally by Messrs. Alarcon, Sr. and Alarcon,
Jr. The boat is used by the Company for business entertainment. For the year
ended September 28, 1997, the amount paid by the Company for its use of the boat
owned by CMQ was comparable to amounts it would have paid had the Company leased
the boat from an unaffiliated party.
The Company leases a two-bedroom furnished condominium apartment in
midtown Manhattan from Mr. Alarcon, Jr. for a monthly rent of $9,000. The lease
commenced in August 1987 and expired in August 1997. It is now on a
month-to-month basis. Generally, the apartment is used by the Company's
executives, customers and business associates. The Company believes that the
lease for this apartment is at market rates. It is also leasing an apartment in
the same area from Mr. Grimalt for a monthly rent of $3,000 which is being used
by the New York operations Programming Director when he is in New York.
Mr. Grimalt's son was employed by the Company as an operations manager for
which he was paid $110,355 for the year ended September 28, 1997.
Item 14. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a)(1) Financial Statements
o Index to Consolidated Financial Statements
o Independent Auditors' Report
o Consolidated Balance Sheets as of September 29, 1996 and
September 28, 1997.
o Consolidated Statements of Operations for each of the years in
the three-year period ended September 28, 1997.
o Consolidated Statements of Changes in Stockholders' Deficiency
for each of the years in the three-year period ended September
28, 1997.
o Consolidated Statements of Cash Flows for each of the years in
the three-year period ended September 28, 1997.
o Notes to Consolidated Financial Statements.
(2) Financial Statement Schedules
o Schedule II Valuation and Qualifying Accounts
All other schedules are omitted because they either are not
applicable or the required information is included in the
financial statements or notes thereto appearing elsewhere in
this Annual Report.
(b) Reports on Form 8-K
o Form 8-K, dated as of September 15, 1997 (Commission File No.
33-82114)
(c) Exhibits
Exhibit
Number Description
------- -----------
10.1 Amended and Restated Certificate of Incorporation of the
Company, dated March 21, 1996 (incorporated by reference to
Exhibit 3.1.1 of the Company's Current Report on Form 8-K
dated March 25, 1996 (the "1996 Current Report")).
10.2 By-Laws of the Company (incorporated by reference to Exhibit
3.1.2 of the Company's Registration Statement on Form S-4
(Commission File No. 33- 82114) (the "1994 Registration
Statement")).
10.3 Certificate of Designation of Senior Exchangeable Preferred
Stock, Series A, filed March 27, 1997 (incorporated by
reference to the Current Report).
31
<PAGE> 36
10.4 Indenture dated June 29, 1994 among the Company, IBJ Schroder
Bank & Trust Company, as Trustee, the Guarantors named therein
and the Purchasers named therein (incorporated by reference to
Exhibit 4.1 of the 1994 Registration Statement).
10.5 Second Supplemental Indenture dated as of March 21, 1997 to
Indenture dated as of June 29, 1994 among the Company, the
Guarantors named therein and IBJ Schroder Bank & Trust
Company, as Trustee (incorporated by reference to the Current
Report).
10.6 Indenture dated as of March 15, 1997, among the Company, the
Guarantors named therein, IBJ Schroder Bank & Trust Company,
as Trustee, and CIBC Wood Gundy Securities Corp., as Initial
Purchaser (incorporated by reference to the Current Report).
10.7 Exchange Debenture Indenture dated as of March 15, 1997, among
the Company, the Guarantors named therein, U.S. Trust Company
of New York, as Trustee, and CIBC Wood Gundy Securities Corp.,
as Initial Purchaser (incorporated by reference to the Current
Report).
10.8 Securities Purchase Agreement dated as of March 24, 1997 among
the Company, the Guarantors named therein and CIBC Wood Gundy
Securities Corp., as Initial Purchaser (incorporated by
reference to the Current Report).
10.9 Unit Agreement dated as of March 15, 1997 among the Company,
the Guarantors and IBJ Schroder Bank & Trust Company, as
Trustee (incorporated by reference to the Current Report).
10.10 Warrant Agreement dated as of March 15, 1997 among the Company
and IBJ Schroder Bank & Trust Company, as Warrant Agent
(incorporated by reference to the Current Report).
10.11 Common Stock Registration Rights and Stockholders Agreement
dated as of March 15, 1997 among the Company, certain
Management Stockholders named therein and CIBC Wood Gundy
Securities Corp., as Initial Purchaser (incorporated by
reference to the Current Report).
10.12 Notes Registration Rights Agreement dated as of March 15, 1997
among the Company, the Guarantors named therein and CIBC Wood
Gundy Securities Corp., as Initial Purchaser (incorporated by
reference to the Current Report).
10.13 Preferred Stock Registration Rights Agreement dated as of
March 15, 1997 among the Company, the Guarantors named therein
and CIBC Wood Gundy
32
<PAGE> 37
Securities Corp., as Initial Purchaser (incorporated by
reference to the Current Report).
10.14 National Radio Sales Representation Agreement dated as of
February 3, 1997 between Caballero Spanish Media, L.L.C. and
the Company (incorporated by reference to the Current Report).
10.15 Employment Agreement dated as of March 4, 1997 between Raul
Alarcon, Jr. and the Company (incorporated by reference to the
Current Report).
10.16 Employment Agreement dated September 27, 1996 between Russell
Oasis and the Company (incorporated by reference to Exhibit
10.42 of the Company's Annual Report on Form 10-K for the Year
Ended September 29, 1997 (the "1996 10-K").
10.17 Asset Purchase Agreement dated September 16, 1996 among Raul
Alarcon, Jr., New Age Broadcasting, Inc., The Seventies
Broadcasting Corporation and the Company, and with respect
only to Section 9.3 thereof, Alan Potamkin, Russell Oasis and
Robert Potamkin (incorporated by reference to Exhibit 10.43 of
the 1996 10-K).
10.18 First Amendment to Asset Purchase Agreement dated December 26,
1996 among Raul Alarcon, Jr., New Age Broadcasting, Inc., The
Seventies Broadcasting Corporation and the Company, and with
respect only to Section 9.3 thereof, Alan Potamkin, Russell
Oasis and Robert Potamkin (incorporated by reference to the
Current Report).
10.19 Second Amendment to Asset Purchase Agreement dated February
28, 1997 among Raul Alarcon, Jr., New Age Broadcasting, Inc.,
The Seventies Broadcasting Corporation and the Company, and
with respect only to Section 9.3 thereof, Alan Potamkin,
Russell Oasis and Robert Potamkin (incorporated by reference
to the Current Report).
10.20 Asset Purchase Agreement dated August 22, 1996 between
Infinity Holdings Corp. of Orlando and the Company
(incorporated by reference to Exhibit 10.44 of the 1996 10-K).
10.21 Letter Agreement dated January 13, 1997 between the Company
and Caballero Spanish Media, LLC (incorporated by reference to
the Current Report).
10.22 1994 Stock Option Plan of the Company (incorporated by
reference to Exhibit 10.4 of the 1994 Registration Statement).
33
<PAGE> 38
10.23 Broadcast Station License dated September 20, 1983 issued by
the Federal Communications Commission ("FCC") to Sabre
Broadcasting Corporation in connection with WXLX-AM, together
with an Assignment thereof from Sabre Broadcasting Corporation
to Spanish Broadcasting System, Inc., a New Jersey Corporation
("SBS-NJ") and evidence of license renewal (incorporated by
reference to Exhibit 10.8.1 of the 1994 Registration
Statement).
10.24 Construction Permit dated July 21, 1993 issued by the FCC to
SBS-NJ in connection with WXLX-AM (incorporated by reference
to Exhibit 10.8.2 of the 1994 Registration Statement).
10.25 AM Broadcast Station Construction Permit dated February 1,
1991 issued by the FCC to SBS-NJ in connection with WXLX-AM
(incorporated by reference to the 1996 Current Report).
10.26 Ground Lease dated December 18, 1995 between Louis Viola
Company and SBS-NJ (incorporated by reference to the 1996
Current Report).
10.27 Ground Lease dated December 18, 1995 between Frank F. Viola
and Estate of Thomas C. Viola and SBS-NJ (incorporated by
reference to the 1996 Current Report).
10.28 Broadcast Station License dated November 23, 1994 issued by
the FCC to Spanish Broadcasting System of New York, Inc.
("SBS-NY"), in connection with WSKQ-FM (incorporated by
reference to the Company's Annual Report on Form 10-K for the
fiscal year ended September 24, 1994 (the "1994 10- K")).
10.29 Broadcast Station License dated September 24, 1990 issued by
the FCC to Spanish Broadcasting System of Florida, Inc.
("SBS-Fla") in connection with WCMQ-AM, together with evidence
of license renewal (incorporated by reference to Exhibit 10.10
of the 1994 Registration Statement).
10.30 Evidence of renewal of Federal Communications Commission
("FCC") Broadcast Radio License of WCMQ-AM (incorporated by
reference to the 1996 Current Report).
10.31 Broadcast Station License dated April 1, 1994 issued by the
FCC to SBS-Fla in connection with WCMQ-FM, together with
evidence of license (incorporated by reference to Exhibit
10.11 of the 1994 Registration Statement).
34
<PAGE> 39
10.32 Evidence of renewal of FCC Broadcast Radio License for WCMQ-FM
(incorporated by reference to the 1996 Current Report).
10.33 Broadcast Station License dated July 28, 1993 issued by the
FCC to SBS-Fla in connection with WZMQ-FM (incorporated by
reference to Exhibit 10.12 of the 1994 Registration
Statement).
10.34 Evidence of renewal of FCC Broadcast Radio License for WZMQ-FM
(incorporated by reference to the 1996 Current Report).
10.35 Broadcast Station License dated April 8, 1986 issued by the
FCC to SBS-NJ in connection with KXMG-AM, together with
evidence of license renewal (incorporated by reference to
Exhibit 10.13 of the 1994 Registration Statement).
10.36 Broadcast Station License dated February 21, 1992 issued by
the FCC to SBS-Fla in connection with KLAX-FM, together with
evidence of license renewal (incorporated by reference to
Exhibit 10.14 of the 1994 Registration Statement).
10.37 Broadcast Station License dated June 26, 1995 issued by the
FCC to CSJ Investments, Inc. in connection with WSKP-FM (the
"WSKP Broadcast License") (incorporated by reference to the
Company's Annual Report on Form 10-K for the fiscal year ended
September 26, 1995 (the "1995 10-K")).
10.38 Consent to Assignment of the WSKP Broadcast License from CSJ
Investments, Inc. to SBS-Fla issued by the FCC (incorporated
by reference to the 1995 10-K).
10.39 Evidence of renewal of FCC Broadcast Radio License for WSKP-FM
(incorporated by reference to the 1996 Current Report).
10.40 Lease and License Agreement dated February 1, 1991 between
Empire State Building Company, as landlord, and SBS-NY, as
tenant (incorporated by reference to Exhibit 10.15.1 of the
1994 Registration Statement).
10.41 Modification of Lease and License dated June 30, 1992 between
Empire State Building Company and SBS-NY related to WSKQ-FM
(incorporated by reference to Exhibit 10.15.2 of the 1994
Registration Statement).
10.42 Lease and License Modification and Extension Agreement dated
as of June 30, 1992 between Empire State Building Company, as
landlord, and SBS-NY as tenant (incorporated by reference to
Exhibit 10.15.3 of the 1994 Registration Statement).
35
<PAGE> 40
10.43 Employment Agreement dated April 26, 1993 by and between
SBS-NY, and Alfredo Rodriguez (incorporated by reference to
Exhibit 10.16 of the 1994 Registration Statement).
10.44 Employment Agreement dated June 23, 1995 by and between
Spanish Broadcasting Systems of California, Inc. ("SBS-CA")
and Alfredo Rodriquez (incorporated by reference to Exhibit
10.15 to 1995 10-K).
10.45 Employment Agreement dated October 24, 1995 between SBS-NY and
Beatriz Pino (incorporated by reference to Exhibit 10.18 of
1995 10-K).
10.46 Representation Agreement dated as of September 27, 1993
between Katz Communications, Inc. and SBS-NJ in connection
with WXLX-AM (incorporated by reference to Exhibit 10.20 of
the 1994 Registration Statement).
10.47 Representation Agreement dated as of September 27, 1993
between Katz Communications, Inc. and SBS-NY in connection
with WSKQ-FM (incorporated by reference to Exhibit 10.21 of
the 1994 Registration Statement).
10.48 Representation Agreement dated as of September 27, 1993
between Katz Communications, Inc. and SBS-CA in connection
with KXMG-AM (incorporated by reference to Exhibit 10.22 of
the 1994 Registration Statement).
10.49 Representation Agreement dated as of September 27, 1993
between Katz Communications, Inc. and SBS-CA in connection
with KLAX-FM (incorporated by reference to Exhibit 10.23 of
the 1994 Registration Statement).
10.50 Representation Agreement dated as of September 27, 1993
between Katz Communications, Inc. and SBS-Fla in connection
with WCMQ-AM (incorporated by reference to Exhibit 10.24 of
the 1994 Registration Statement).
36
<PAGE> 41
10.51 Representation Agreement dated as of September 27, 1993
between Katz Communications, Inc. and SBS-Fla in connection
with WCMQ-FM (incorporated by reference to Exhibit 10.25 of
the 1994 Registration Statement).
10.52 Representation Agreement dated as of September 27, 1993
between Katz Communications, Inc. and SBS-Fla in connection
with WZMQ-FM (incorporated by reference to Exhibit 10.26 of
the 1994 Registration Statement).
10.53 Promissory Note, dated as of December 31, 1995 of Raul
Alarcon, Sr. to SBS-NJ in the principal amount of $577,323
(incorporated by reference to Exhibit 10.26 of the 1995 10-K).
10.54 Promissory Note, dated as of December 31, 1995 of Raul
Alarcon, Jr. to SBS-NJ in the principal amount of $1,896,913
(incorporated by reference to Exhibit 10.27 of the 1995 10-K).
10.55 Lease Agreement dated June 1, 1992 among Raul Alarcon, Sr.,
Raul Alarcon, Jr. and SBS-Fla (incorporated by reference to
Exhibit 10.30 of the 1994 Registration Statement).
10.56 Transmitted Facility Sublicense (KTYM/KSKQ-FM) dated as of
June 1, 1991 between Trans-America Broadcasting Corporation
and SBS-CA relating to KSKQ-FM (Baldwin Hills Tower Lease)
(incorporated by reference to Exhibit 10.31 of the 1994
Registration Statement).
10.57 Indenture dated October 12, 1988 between Alarcon Holdings,
Inc. and SBS-NJ related to the studio located at 26 West 56th
Street, NY, NY (incorporated by reference to Exhibit 10.32 of
the 1994 Registration Statement).
10.58 Communications Equipment Site Lease Agreement between Freeman
Properties, Inc. and SBS-Fla dated July 1, 1992 (WZMQ/WKLG-FM)
(incorporated by reference to Exhibit 10.33 of the 1994
Registration Statement).
10.59 Lease Option Agreement made as of October 1, 1995 between
KPWR, Inc. and the Company relating to Flint Peak
(incorporated by reference to the 1996 Current Report).
10.60 Form of Lease Agreement by and between KPWR, Inc. and the
Company relating to KLAX (incorporated by reference to the
1996 Current Report).
37
<PAGE> 42
10.61 Asset Purchase Agreement dated as of October 30, 1995 between
SBS-NJ and Park Radio of Greater New York, Inc. ("Park Radio")
(incorporated by reference to Exhibit 10.32 of the 1995 10-K).
10.62 First Amendment dated as of March 18, 1996 to the Asset
Purchase Agreement dated as of October 1995, among SBS-NJ,
Park Radio and SBS of Greater New York ("SBS-GNY")
(incorporated by reference to the 1996 Current Report).
10.63 Escrow Agreement dated as of October 30, 1995 by and among
SBS-NJ, Park Radio and Media Ventures (incorporated by
reference to the 1996 Current Report).
10.64 Time Brokerage Agreement dated as of January 20, 1995 between
the SBS-GNY and Park Radio (incorporated by reference to the
1996 Current Report).
10.65 Broadcast Station License dated June 1, 1984 issued by the FCC
to Capital Cities Communications, Inc. ("Capital Cities") in
connection with WPAT-FM, together with FCC License Renewal
authorization granted October 29, 1991 to Park Radio, as
assignee of Capital Cities and the assignment of the Broadcast
Station License for WPAT-FM from Park Radio to SBS-NY
(incorporated by reference to the 1996 Current Report).
10.66 Agreement of Lease dated as of March 1, 1996. No WT-1744-A119
1067 between The Port Authority of New Jersey and SBS-GNY as
assignee of Park Radio (incorporated by reference to the 1996
Current Report).
10.67 Asset Purchase Agreement dated as of July 2, 1997, by and
between Spanish Broadcasting System, Inc. (New Jersey),
Spanish Broadcasting System of California, Inc., Spanish
Broadcasting System of Florida, Inc., Spanish Broadcasting
System, Inc., and One-on-One Sports, Inc. (incorporated by
reference to Exhibit 10.62 of the Company's Registration
Statement on Form
S-4 (Commission File No. 333-26295)).
10.68 Amendment No. 1 dated as of September 29, 1997 to the Asset
Purchase Agreement dated as of July 2, 1997, by and between
Spanish Broadcasting System, Inc. (New Jersey), Spanish
Broadcasting System of California, Inc., Spanish Broadcasting
System of Florida, Inc., Spanish Broadcasting System, Inc. and
One-on-One Sports, Inc. (incorporated by reference to the
Company's Current Report on Form 8-K dated October 15, 1997
(Commission File No. 33-82114)).
10.69 Promissory Note, dated July 16, 1997 of Raul Alarcon, Jr. to
the Company in the principal amount of $1,050,229.63
(incorporated by reference to
38
<PAGE> 43
Exhibit 10.63 of the Company's Registration Statement on Form
S-4 (Commission File No. 333-26295)).
39
<PAGE> 44
Index to Consolidated Financial Statements
Page
Independent Auditors' Report F-2
Consolidated Balance Sheets as of September 29, 1996 and
September 28, 1997. F-3
Consolidated Statements of Operations for each of the years in
the three-year period ended September 28, 1997. F-4
Consolidated Statements of Changes in Stockholders' Deficiency
for each of the years in the three-year period ended September
28, 1997. F-5
Consolidated Statements of Cash Flows for each of the years in
the three-year period ended September 28, 1997. F-6
Notes to Consolidated Financial Statements. F-7
Financial Statement Schedule:
Schedule II Valuation and Qualifying Accounts F-30
F-1
<PAGE> 45
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Spanish Broadcasting System, Inc.:
We have audited the consolidated financial statements of Spanish Broadcasting
System, Inc. and subsidiaries as listed in the accompanying index. In connection
with our audits of the consolidated financial statements, we have also audited
the financial statement schedule as listed in the accompanying index. These
consolidated financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Spanish Broadcasting
System, Inc. and subsidiaries as of September 29, 1996 and September 28, 1997,
and the results of their operations and their cash flows for each of the fiscal
years in the three-year period ended September 28, 1997, in conformity with
generally accepted accounting principles. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
As discussed in note 2(d) to the consolidated financial statements, effective
September 25, 1995, the Company adopted Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of."
/s/ KPMG Peat Marwick LLP
New York, New York
December 22, 1997
F-2
<PAGE> 46
SPANISH BROADCASTING SYSTEM, INC.
AND SUBSIDIARIES
Consolidated Balance Sheets
September 29, 1996 and September 28, 1997
<TABLE>
<CAPTION>
Assets 1996 1997
---- ----
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 5,468,079 12,287,764
Receivables:
Trade (note 7) 12,104,500 17,226,345
Barter 3,236,289 3,290,728
------------ ------------
15,340,789 20,517,073
Less allowance for doubtful accounts 4,510,763 5,405,095
------------ ------------
Net receivables 10,830,026 15,111,978
Other current assets 1,115,332 1,409,906
------------ ------------
Total current assets 17,413,437 28,809,648
Property and equipment, net of accumulated depreciation
of $13,662,458 in 1996 and $15,448,267 in 1997
(notes 4 and 9) 18,873,036 18,409,415
Franchise costs, net of accumulated amortization
of $16,673,482 in 1996 and $22,048,929
in 1997 (notes 3 and 5) 133,917,182 273,631,766
Deferred financing costs, net of accumulated
amortization of $1,974,195 in 1996 and
$3,038,202 in 1997 (note 5) 6,235,341 9,262,314
Due from related party (note 7) 289,869 289,869
Deferred income taxes (note 10) -- 3,674,287
Other assets 131,294 289,784
------------ ------------
$176,860,159 334,367,083
============ ============
</TABLE>
<TABLE>
<CAPTION>
Liabilities and Stockholders' Deficiency 1996 1997
---------------------------------------- ---- ----
<S> <C> <C>
Current liabilities:
Current portion of Senior secured notes (note 5) $ -- 15,000,000
Current portion of other long-term debt (note 6) 53,572 44,644
Accounts payable 1,564,015 1,367,572
Accrued expenses 3,354,192 3,722,777
Accrued interest 2,394,621 4,536,627
Unearned revenue 875,256 1,551,255
Dividends payable -- 960,761
------------- ------------
Total current liabilities 8,241,656 27,183,636
12 1/2 % Senior secured notes due 2002, net of unamortized discount
of $7,612,631 in 1996 and $3,238,037 in 1997 (note 5) 99,446,369 88,820,963
12 1/4% Senior secured notes due 2001, net of unamortized discount
of $1,818,118 in 1996 (note 5) 35,381,003 --
11% Senior secured notes due 2004 (note 5) -- 75,000,000
Other long-term debt, less current portion (note 6) 1,033,368 4,147,676
Deferred income taxes payable 387,960 --
Redeemable Preferred Stock:
Series A Preferred Stock, $.01 par value. Authorized 49,201 shares
in 1996; issued and outstanding 39,951 shares (liquidation value
$39,951,000) in 1996 (note 5) 35,938,659 --
14 1/4% Senior Exchangeable Preferred Stock, $.01 par
value. Authorized 413,930 shares, issued and outstanding
186,706 shares (liquidation value $186,706,000) in 1997 (note 5) -- 171,261,919
Stockholders' deficiency (notes 5 and 8):
Class A common stock, $.01 par value. Authorized
5,000,000 shares; issued and outstanding
558,135 shares in 1996 and 1997 5,581 5,581
Class B common stock, $.01 par value. Authorized
200,000 shares; issued and outstanding
48,533 shares in 1996 and 1997 485 485
Additional paid-in capital 10,806,004 6,590,473
Accumulated deficit (11,906,690) (35,119,184)
------------- ------------
(1,094,620) (28,522,645)
Less loans receivable from stockholders (note 7) (2,474,236) (3,524,466)
------------- ------------
Total stockholders' deficiency (3,568,856) (32,047,111)
------------- ------------
Commitments and contingencies (notes 3, 9 and 11)
$ 176,860,159 334,367,083
============= ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 47
SPANISH BROADCASTING SYSTEM, INC.
AND SUBSIDIARIES
Consolidated Statements of Operations
Fiscal years ended September 24, 1995, September 29, 1996
and September 28, 1997
<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Gross revenues $ 54,152,328 55,337,720 67,981,407
Less agency commissions 6,828,430 6,702,302 7,971,827
------------ ----------- ------------
Net revenues 47,323,898 48,635,418 60,009,580
------------ ----------- ------------
Operating expenses (notes 7 and 9):
Engineering 1,484,585 1,773,027 2,099,116
Programming 5,044,967 5,864,066 7,081,521
Selling 11,106,770 13,864,695 14,980,035
General and administrative 5,361,320 6,374,622 6,879,443
Corporate expenses 4,281,141 3,747,714 5,595,403
Depreciation and amortization 3,389,034 4,555,978 7,618,921
------------ ----------- ------------
30,667,817 36,180,102 44,254,439
------------ ----------- ------------
Operating income 16,656,081 12,455,316 15,755,141
Other income (expense):
Interest expense, net of interest income of
$826,821 in 1995, $547,952 in 1996 and
$462,358 in 1997 (12,874,392) (16,533,278) (22,201,114)
Financing costs - (876,579) (299,240)
Other, net (notes 4 and 11) (380,660) (697,741) (491,308)
------------ ----------- ------------
Income (loss) before income taxes and
extraordinary item 3,401,029 (5,652,282) (7,236,521)
Income tax expense (benefit) (note 10) 1,411,394 (1,165,800) (2,714,411)
------------ ----------- ------------
Income (loss) before extraordinary item 1,989,635 (4,486,482) (4,522,110)
Extraordinary item - loss on extinguishment of
debt, net of deferred income taxes of
$1,097,836 (note 5) - - (1,646,753)
------------ ------------ -------------
Net income (loss) $ 1,989,635 (4,486,482) (6,168,863)
============ ============ =============
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 48
SPANISH BROADCASTING SYSTEM INC.
AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Deficiency
Fiscal years ended September 24, 1995, September 28, 1996 and
September 28, 1997
<TABLE>
<CAPTION>
Class A common stock Class B common stock
-------------------------- ------------------------
Total Additional
par value paid-in Accumulated
No. of shares Par value No. of Shares Par value common stock capital deficit
------------- ---------- ------------- --------- ------------ ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at September 25, 1994 ........ 558,135 $5,581 48,533 $485 6,066 5,660,934 (6,415,517)
Increase in loans receivable from
stockholders .................... - - - - - - -
Net income ........................... - - - - - - 1,989,635
-------- ------ ------- -------- ------- ---------- -----------
Balance at September 24, 1995 ........ 558,135 5,581 48,533 485 6,066 5,690,934 (4,425,882)
Increase in loans receivable from
stockholders .................... - - - - - - -
Costs incurred with issuance of
Series A Preferred Stock
(note 5) ...................... - - - - - (1,718,437) -
Issuance of warrants (note 5) ........ - - - - - 6,833,507 -
Accretion of preferred stock ......... - - - - - - (541,416)
Preferred stock issued as dividends
(note 5) ........................ - - - - - - (2,452,910)
Net loss ............................. - - - - - - (4,486,482)
-------- ------ ------- -------- ------- ---------- -----------
Balance at September 29, 1996 ........ 558,135 5,581 48,533 485 6,066 10,806,004 (11,906,690)
Increase in loans receivable
from stockholders ............... - - - - - - -
Purchase and retirement of preferred
stock and warrants (note 5) ..... - - - - - (11,887,981) -
Costs associated with issuance of
14 1/4% Senior Exchangeable
Preferred Stock (note 5) ........ - - - - - (8,952,550) -
Issuance of warrants (note 5)......... - - - - - 16,625,000 -
Accretion of Preferred Stock ......... - - - - - - (1,659,695)
Preferred Stock issued as dividends
(note 5) ........................ - - - - - - (13,030,211)
Cash dividends on Preferred Stock .... - - - - - - (2,353,725)
Net loss ............................. - - - - - - (6,168,863)
-------- ------ ------- -------- ------- ---------- -----------
Balance at September 28, 1997 ........ 558,135 $5,581 48,533 $485 6,066 6,590,473 (35,119,184)
======== ====== ======= ======== ======= ========== ===========
</TABLE>
- -------------------
See accompanying notes to consolidated financial statements
<TABLE>
<CAPTION>
Less: loans Total
receivable from stockholders'
stockholders deficiency
---------------- -------------
<S> <C> <C>
Balance at September 25, 1994 ........ (2,241,908) (2,960,485)
Increase in loans receivable from
stockholders .................... (179,304) (179,304)
Net income ........................... - 1,989,635
----------- ------------
Balance at September 24, 1995 ........ (2,421,272) (1,150,154)
Increase in loans receivable from
stockholders .................... (52,964) (52,964)
Costs incurred with issuance of
Series A Preferred Stock
(note 5) ...................... - (1,718,437)
Issuance of warrants (note 5) ........ - 6,833,507
Accretion of preferred stock ......... - (541,416)
Preferred stock issued as dividends
(note 5) ........................ - (2,452,910)
Net loss ............................. - (4,486,482)
----------- ------------
Balance at September 29, 1996 ........ (2,474,236) (3,568,856)
Increase in loans receivable
from stockholders ............... (1,050,230) (1,050,230)
Purchase and retirement of preferred
stock and warrants (note 5) ..... - (11,887,981)
Costs associated with issuance of
14 1/4% Senior Exchangeable
Preferred Stock (note 5) ........ - (8,952,550)
Issuance of warrants (note 5)......... - 16,625,000
Accretion of Preferred Stock ......... - (1,659,695)
Preferred Stock issued as dividends
(note 5) ........................ - (13,030,211)
Cash dividends on Preferred Stock .... - (2,353,725)
Net loss ............................. - (6,168,863)
----------- ------------
Balance at September 28, 1997 ........ (3,524,466) (32,047,111)
=========== ============
</TABLE>
- -------------------
See accompanying notes to consolidated financial statements
F-5
<PAGE> 49
SPANISH BROADCASTING SYSTEM, INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Fiscal years ended September 24, 1995, September 29, 1996 and
September 28, 1997
<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 1,989,635 (4,486,482) (6,168,863)
------------ ----------- ------------
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Loss on extinguishment of debt -- -- 2,744,589
Depreciation and amortization 3,389,034 4,555,978 7,618,921
Change in allowance for doubtful accounts 1,379,365 (674,123) 894,332
Amortization of debt discount 4,617,496 5,591,004 4,772,539
Interest satisfied through the issuance of New Notes -- 2,199,121 1,185,722
Amortization of deferred financing costs 797,766 984,001 1,390,736
Write down of fixed assets -- 697,741 487,973
Interest added to principal of seller note -- -- 161,523
Imputed interest 95,559 -- --
Deferred income taxes 1,081,738 (1,357,722) (4,062,247)
Changes in operating assets and liabilities:
(Increase) decrease in receivables (2,843,053) 1,043,961 (5,176,284)
Increase in other current assets (223,518) (566,062) (294,574)
(Increase) decrease in other assets 3,900,002 148,272 (158,490)
(Decrease) increase in accounts payable (249,024) 310,374 (196,443)
Increase in accrued expenses 275,432 292,468 368,585
Increase in accrued interest 38,179 52,702 2,142,006
Decrease in income taxes payable (8,101) (196,835) --
Increase in unearned revenue 197,468 218,381 675,999
------------ ----------- ------------
Total adjustments 12,448,343 13,299,261 12,554,887
------------ ----------- ------------
Net cash provided by operating activities 14,437,978 8,812,779 6,386,024
------------ ----------- ------------
Cash flows from investing activities:
Additions to property and equipment (4,888,188) (3,811,436) (2,022,344)
Acquisition of radio stations (100,305) (86,358,962) (142,335,513)
Increase in franchise costs -- (24,980) --
------------ ----------- ------------
Net cash used in investing activities (4,988,493) (90,195,378) (144,357,857)
------------ ----------- ------------
Cash flows from financing activities:
Increase in dividends payable -- -- --
Redemption of Senior secured notes -- -- (38,414,562)
Redemption of Series A preferred stock -- -- (42,699,590)
Redemption of warrants -- -- (8,323,000)
Repayments of other debt (2,843,176) (120,691) (56,143)
Proceeds from senior notes, net of financing costs
of $1,605,426 in 1996 and $5,712,407 in 1997 -- 33,394,574 69,287,593
Proceeds from Redeemable Series A Preferred Stock
and warrants, net of issuance costs of
$1,718,437 in 1996 and $8,952,550 in 1997 -- 35,781,563 166,047,450
(Increase) decrease in deferred financing costs (412,111) 33,999 --
Increase in loans receivable from stockholders (179,304) (52,964) (1,050,230)
Repayment of loan payable to stockholder (200,000) -- --
Advances to related party (134,342) (2,922) --
------------ ----------- ------------
Net cash provided by (used in) financing
activities (3,768,933) 69,033,559 144,791,518
------------ ----------- ------------
Net increase (decrease) in cash and
cash equivalents 5,680,552 (12,349,040) 6,819,685
Cash and cash equivalents at beginning of year 12,136,567 17,817,119 5,468,079
------------ ----------- ------------
Cash and cash equivalents at end of year $ 17,817,119 5,468,079 12,287,764
============ =========== ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 50
SPANISH BROADCASTING SYSTEM, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 24, 1995, September 29, 1996 and
September 28, 1997
(1) Organization and Nature of Business
Spanish Broadcasting System, Inc. (the "Company") was organized under the
laws of the State of Delaware on June 1, 1994 to serve as a holding
company, directly or indirectly, for seven active corporations, each of
which either owns or services radio stations and each of which was owned by
three Principal Stockholders. The Principal Stockholders and the Company
entered into a contribution agreement pursuant to which on June 29, 1994,
upon FCC approval, among other releases, the Principal Stockholders
contributed to the Company all of the capital stock in eight of the
corporations beneficially owned by them in exchange for common stock of the
Company.
The Company owns and operates twelve Spanish-language radio stations
serving the New York, Miami, Chicago and Los Angeles markets through its
direct and indirect subsidiaries, Spanish Broadcasting System of New York,
Inc., SBS of Greater New York, Inc., Spanish Broadcasting System of
Florida, Inc., Spanish Broadcasting System of California, Inc., SBS of
Greater Miami, Inc. and SBS of Illinois, Inc. Additionally, the Company's
other direct and indirect subsidiaries include Alarcon Holdings, Inc.
("Alarcon"), Spanish Broadcasting System Network, Inc. ("SBS Network") and
SBS Promotions, Inc. ("SBS Promotions"). Alarcon owns and operates the
building where the Company's New York offices are located. SBS Network and
SBS Promotions are currently dormant. SBS Network was formerly the
Company's exclusive agency representative for national advertising sales.
SBS Promotions formerly performed promotional services for the Company's
radio stations.
(2) Summary of Significant Accounting Policies and Related Matters
(a) Basis of Presentation
The consolidated financial statements include the accounts of the
Company and its direct and indirect subsidiaries. The Company is a
holding company with no independent assets or operations other than its
investments in subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.
The Company's subsidiaries (hereinafter referred to in this paragraph
collectively as "Subsidiary Guarantors") are fully, unconditionally,
and jointly and severally liable for the Company's senior unsecured
notes and new senior secured notes referred to in
F-7
<PAGE> 51
SPANISH BROADCASTING SYSTEM, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(2), Continued
note 5. The Subsidiary Guarantors are wholly owned and constitute all
of the Company's direct and indirect subsidiaries, except for certain
subsidiaries that are not consequential. The Company has not included
separate financial statements of the aforementioned subsidiaries
because (i) the aggregate assets, liabilities, earnings and equity of
such subsidiaries are substantially equivalent to the assets,
liabilities, earnings and equity of the Company on a consolidated
basis, and (ii) the separate financial statements and other disclosures
concerning such subsidiaries are not deemed material to investors.
The Company's fiscal year is the 52-week period which ends on the
last Sunday of September.
(b) Revenue Recognition
Revenues are recognized when advertisements are aired.
(c) Property and Equipment
Property and equipment are stated at cost. The Company depreciates the
cost of its property and equipment using the straight-line method over
the respective estimated useful lives. Leasehold improvements are
amortized on a straight-line basis over the shorter of the remaining
life of the lease or the useful life of the improvements.
The Company capitalized interest in connection with the renovation of
its facilities. The capitalized interest is recorded as part of the
related building and is amortized over the estimated useful life of the
building.
(d) Long-Lived Assets
In March 1995, Statement of Financial Accounting Standards No. 121,
(Statement 121) "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed of," was issued. Statement 121
requires that long-lived assets and certain identifiable intangibles
to be held and used or disposed of by an entity be reviewed for
impairment whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable. In the fourth
F-8
<PAGE> 52
SPANISH BROADCASTING SYSTEM, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(2), Continued
quarter of fiscal 1996, the Company elected early adoption of Statement
121. See note 4 for impairment losses related to fixed assets.
(e) Franchise Costs
Franchise costs represent the excess cost to acquire the Company's
radio station assets over the allocated fair value of the net tangible
assets acquired and are amortized on a straight-line basis over periods
not exceeding 40 years, based on the industry practice of renewing
franchises periodically. In evaluating the recoverability of franchise
costs, management gives consideration to a number of factors, including
analysis of the estimated future undiscounted cash flows from
operations for each market, the dispositions of other radio properties
in specific markets and input from appraisers.
(f) Financing Costs
During fiscal 1996, the Company expensed $876,579 of costs related to
an initial public offering that was aborted. The net deferred financing
costs at September 29, 1996 and September 28, 1997 amount to $6,235,341
and $9,262,314, respectively. The 1996 balance relates to the
additional financing obtained in connection with the acquisition of
radio station WPAT-FM as discussed in note 5. Additional amounts in
1997 relate to the refinancing of certain of the Company's debt and
additional financing obtained in connection with the Company's
acquisition of WXDJ-FM and WRMA-FM in Miami and WLEY-FM in Chicago as
discussed in note 5.
Deferred financing costs are being amortized on a straight-line basis
over the respective lives of the related indebtedness and the related
amortization is included in interest expense.
(g) Barter Transactions
The Company records barter transactions at the fair value of goods or
services received.
(h) Cash Equivalents
Cash equivalents, consisting primarily of interest-bearing money market
accounts and certificates of deposits with original maturities of three
months or less, totaled approximately $4,697,000 and $12,288,000 at
September 29, 1996 and September 28, 1997, respectively.
F-9
<PAGE> 53
SPANISH BROADCASTING SYSTEM, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(2), Continued
(i) Income Taxes
The Company files a consolidated Federal income tax return with its
direct and indirect subsidiaries. The Company accounts for income taxes
in accordance with the Financial Accounting Standards Board's Statement
of Financial Accounting Standards No. 109 (Statement 109), "Accounting
for Income Taxes." Under the asset and liability method of Statement
109, deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases and operating loss and tax credit carryforwards.
Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. Under
Statement 109, the effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes
the enactment date.
(j) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities, and disclosure of contingent assets and liabilities at the
date of the financial statements, and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
(k) Concentration of Risk
All of the Company's business is conducted in the New York, Miami, Los
Angeles and Chicago markets. In fiscal 1995, net revenues earned from
radio stations located in New York, Miami, and Los Angeles represented
37%, 16%, and 47%, respectively, of total revenues; in fiscal 1996,
51%, 17%, and 32%, respectively, of total revenues and in fiscal 1997,
49%, 22%, and 28%, respectively, of total revenues. In fiscal 1997, 1%
of total revenues was represented by the Chicago market. The increase
in market concentration risk in New York in fiscal 1996 results from
the acquisition of WPAT-FM as discussed in note 3. The increase in
market concentration risk in Miami and Chicago in 1997 results from the
acquisitions of WRMA-FM and WXDJ-FM in Miami and WLEY-FM in Chicago as
discussed in note 3.
F-10
<PAGE> 54
SPANISH BROADCASTING SYSTEM, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(3) Acquisitions
On March 25, 1996, the Company acquired the FCC broadcast license and
substantially all of the assets used or useful in the operation of radio
station WPAT-FM for $84,550,000, plus financing and closing costs of
$1,808,962. The Company financed this purchase with a combination of the
proceeds from the issuance of the Company's Redeemable Series A Preferred
Stock, 12-1/4% Senior Secured Notes due 2001 (see note 5) together with
cash on hand. The Company assumed operational responsibility of WPAT-FM on
January 20, 1996 under an interim agreement, at which time the Company
changed the musical format of WPAT-FM to Spanish language adult
contemporary.
On March 27, 1997, the Company acquired the FCC broadcast license and
substantially all of the assets used or useful in the operation of WRMA-FM
and WXDJ-FM for $111,000,000 plus closing costs of $835,513.
On March 27, 1997, the Company acquired the FCC broadcast licenses and
substantially all of the assets used or useful in the operation of WYSY-FM
for $33,000,000 plus closing costs of $500,000. The Company subsequently
changed the call letters to WLEY-FM.
The Company financed the purchases of WRMA-FM, WXDJ-FM, and WLEY-FM with
proceeds from a combination of issuances consisting of 175,000 shares of
the Company's 14 1/4% Series A, Senior Exchangeable Preferred Stock,
liquidation preference $1,000 per share, and warrants to purchase 74,900
shares of the Company's Class A common stock par value $.01 per share and
$75 million aggregate principal amount of the Company's 11% Senior Notes
due 2004 (see note 5), plus a note payable to the seller of WLEY-FM for
$3,000,000.
The Company's consolidated results of operations include the results of
WPAT-FM, WRMA-FM, WXDJ-FM, and WLEY-FM from the dates of acquisition. These
acquisitions have been accounted for by the purchase method of accounting.
The purchase price has been allocated to the assets acquired, principally
franchise costs, based on their estimated fair values at the dates of
acquisition.
The following unaudited proforma summary presents the consolidated results
of operations as if the acquisitions of WPAT-FM, WRMA-FM and WXDJ-FM had
occurred as of the beginning of fiscal 1996 after giving effect to certain
adjustments, including amortization of franchise costs, and interest
expense on the acquisition debt. These pro forma results have been prepared
for comparative purposes only and do not purport to be indicative of what
would have occurred had the acquisitions been made as of that date or of
results which may
F-11
<PAGE> 55
SPANISH BROADCASTING SYSTEM, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(3), Continued
occur in the future. The results of WLEY-FM prior to its acquisition
have not been included in the pro forma summary as the acquisition does
not meet the significance test for presentation of pro forma
information.
Year ended
----------
September 29, 1996 September 28, 1997
------------------ ------------------
(unaudited)
Net revenues $ 65,173,000 66,762,000
Loss before extraordinary item (6,130,000) (3,498,000)
Net loss (6,130,000) (5,145,000)
(4) Property and Equipment
Property and equipment consist of the following at September 29, 1996 and
September 28, 1997:
<TABLE>
<CAPTION>
Estimated
1996 1997 useful lives
---- ---- ------------
<S> <C> <C> <C>
Land $ 1,798,785 1,413,287 --
Building and building leasehold
improvements 15,349,050 15,324,227 20 years
Tower and antenna systems 5,517,659 6,709,991 7-15 years
Studio and technical equipment 4,562,969 4,874,321 10 years
Furniture and fixtures 1,543,918 1,549,749 3-10 years
Transmitter equipment 1,264,093 1,266,747 7-10 years
Leasehold improvements 1,085,922 1,135,176 5-13 years
Computer equipment 935,563 1,378,908 5 years
Other 477,535 205,276 5 years
------------ ----------
32,535,494 33,857,682
Less accumulated depreciation
and amortization 13,662,458 15,448,267
------------ ----------
$ 18,873,036 18,409,415
============ ==========
</TABLE>
F-12
<PAGE> 56
SPANISH BROADCASTING SYSTEM, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(4), Continued
During fiscal 1996 and 1997, the Company wrote down the value of its land
and building located on Sunset Boulevard in Los Angeles (which was part of
the assets acquired in the purchase of the Los Angeles AM radio station) by
$697,741 and $487,973, respectively. The write downs were based on current
market values of real estate in the Los Angeles area. This amount is
included in "other, net" in the accompanying consolidated statement of
operations.
(5) Senior Notes and Preferred Stock
On June 29, 1994, the Company, through a private placement offering (the
"Offering") completed the sale of 107,059 units (the "Units"), each
consisting of $1,000 principal amount of 12-1/2% Senior Notes (the "Notes")
due 2002 and 107,059 Warrants (the "Warrants") each to purchase one share
of Class A voting common stock at a price of $0.01 per share. The Notes and
Warrants became separately transferable on June 29, 1994. The Notes were
issued at a substantial discount from their principal amount and generated
proceeds to the Company of $87,774,002, net of financing costs of
$6,225,998. Of the $94,000,000 of gross proceeds, $88,603,000 was allocated
to the Notes and $5,397,000 was determined to be the value of the Warrants.
The Notes bear interest at a rate of 7-1/2% per annum from the date of
original issue until June 15, 1997 and at a rate of 12-1/2% per annum from
and after such date until maturity on June 15, 2002. Interest is payable
semiannually on June 15 and December 15, commencing December 15, 1994. The
Notes will not be redeemable at the option of the Company, except that the
Company may redeem up to $20 million aggregate principal amount of the
Notes on or prior to June 15, 1997 at 110% of the accreted value of the
Notes, plus accrued and unpaid interest to the redemption date, out of the
proceeds of one or more public offerings of the Company's common stock. The
Notes are senior unsecured obligations of the Company and are
unconditionally guaranteed, on a senior unsecured basis, as to payment of
principal, premium, if any, and interest, jointly and severally, by each
subsidiary of the Company. In the event of a change of control, as defined,
the Company will be required to make an offer to purchase all of the
outstanding Notes at a purchase price equal to 101% of their accreted
value, in the case of a purchase prior to June 15, 1997, and thereafter at
a purchase price equal to 101% of the principal amount thereof, in each
case plus accrued and unpaid interest to the date of purchase. The
indenture pursuant to which the Notes are issued contains covenants
restricting the incurrence of additional indebtedness, the payment of
dividends and distributions, the creation of liens, asset sales, mergers
or consolidations, among other things. The Company registered the Notes
with the Securities and Exchange Commission, which
F-13
<PAGE> 57
SPANISH BROADCASTING SYSTEM, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(5), Continued
registration became effective on October 26, 1994. The discount on the
Notes is being amortized over the term of the Notes to result in an
effective interest rate of 12-1/2% per annum.
The Warrants will expire on June 30, 1999. Each warrant entitles the holder
to acquire, on or after the exercise date, as defined, and prior to the
expiration date, one share of Class A voting common stock at $0.01 per
share, subject to adjustment from time to time upon the occurrence of
certain changes in common stock, common stock distributions, issuances of
options or convertible securities, dividends and distributions and certain
other increases in the number of shares of common stock, as defined.
On March 25, 1996 the Company financed the purchase of radio station
WPAT-FM with a combination of the proceeds from the sale in a private
placement of 37,500 shares of the Company's Redeemable Series A Preferred
Stock (Preferred Stock) and $35 million of the Company's 12-1/4% Senior
Secured Notes due 2001 together with cash on hand. The Company also issued
to the holders of the Preferred Stock and Senior Notes warrants to
purchase, in the aggregate, 6% of the Company's common stock on a fully
diluted basis which are exercisable no later than June 29, 1998. Of the
gross proceeds of $72.5 million, $35 million relates to the Senior Notes
and $37.5 million relates to the Preferred Stock. The value of the Warrants
was determined to be $6,833,507 of which $2,277,840 was allocated to the
warrants associated with the Senior Notes and $4,555,667 was allocated to
the warrants associated with the Preferred Stock. In connection with this
transaction, the Company capitalized financing costs of $1,605,426 related
to the Senior Notes and charged issuance costs of $1,718,437 related to the
Preferred Stock to additional paid-in capital.
The Senior Notes were secured by the FCC license of radio station WPAT-FM
and were guaranteed by each of the Company's subsidiaries. They were senior
obligations of the Company that ranked senior in right of payment to all
subordinated indebtedness of the Company and equally ranked with all
existing and future senior indebtedness of the Company including the Notes.
The Senior Notes were due on June 1, 2001 and bore interest at the rate of
12-1/4% per annum payable quarterly, increasing by 0.25% for each
three-month period from the issue date to March 1997, and 0.5% for each
period of three months thereafter, provided that the interest rate on the
Senior Notes may not exceed 14.75% per annum. The discount on the Senior
Notes was being amortized over the term of the Senior Notes to result in an
effective interest rate of 15.9% per annum, inclusive of interest rate
escalations. Until March 24, 1998, interest could be paid in cash or in
additional Senior Notes. The Company elected to satisfy interest due
through the issuance of additional Senior Notes issued at face value of
$2,199,121 in June and September 1996 and of $1,185,722 in December 1996.
F-14
<PAGE> 58
SPANISH BROADCASTING SYSTEM, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(5), Continued
The Preferred Stock was entitled to dividends at the rate of 12.75% per
annum payable quarterly, increasing by 0.25% for each period of three
months from issue date through March 1997 and 0.50% for each period of
three months thereafter, provided that the dividend rate would at no time
exceed 15.25%. During the first three years, dividends could be paid in
cash or additional shares of Preferred Stock.
In June 1996 and September 1996, the Company elected to satisfy the
dividends due of $2,452,910 through the issuance of 2,451 additional
preferred shares and $1,910 in cash (for fractional shares). In December
1996, the Company elected to satisfy dividends of $1,323,440 through the
issuance of 1,322 additional Preferred shares. The holders of the Preferred
Stock could, at their option, exchange Preferred Stock into Senior Notes in
an amount equal to the accreted value of Notes that are redeemed or
otherwise retired by the Company. The Company was required to redeem the
Preferred Stock on December 1, 2002.
Covenants under the indentures governing the Senior Notes and Preferred
Stock were substantially identical to the covenants of the Notes.
The Company was permitted to repurchase the Warrants during the first two
years from issuance, assuming no Senior Notes or Preferred Stock are
outstanding and such purchase is permitted under the Indenture, at prices
ranging from $182.70 per Warrant to $439.38 per Warrant.
F-15
<PAGE> 59
SPANISH BROADCASTING SYSTEM, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(5), Continued
On March 27, 1997, the 1996 Senior Notes and Preferred Stock and the
related warrants redeemed were retired with a portion of the proceeds from
issuance of the 1997 Preferred Stock and Senior Notes described below. The
Company realized a loss on the extinguishment of the Senior Notes of
$1,646,753, net of taxes of $1,097,836 resulting from the purchase price
exceeding the Company's carrying value and the write-off of unamortized
deferred financing costs. This amount has been classified as an
extraordinary item in the accompanying fiscal 1997 consolidated statement
of operations.
During fiscal 1997, the Company paid $1,247,507 of interest on the Senior
Notes that were retired, of which $1,185,722 was paid through the issuance
of new Senior Notes. Also during 1997, the Company paid dividends of
$1,392,964 on the Preferred Stock that was retired.
On March 27, 1997, the Company financed the purchase of radio stations
WRMA-FM and WXDJ-FM and WLEY-FM with proceeds from the sale through a
private placement of 175,000 shares of the Company's 14 1/4% Senior
Exchangeable Preferred Stock (Senior Preferred Stock) and warrants to
purchase 74,900 shares of the Company's Class A Common Stock. The gross
proceeds from the issuance of the Senior Preferred Stock and warrants
amounted to $175 million. The value of the new warrants was determined to
be $16,625,000. The Company also issued $75 million aggregate principal
amount of 11% Senior Notes (the "New Senior Notes") due 2004. In connection
with this transaction, the Company capitalized financing costs of
$5,712,407 related to the New Senior Notes and charged issuance costs of
$8,952,550 related to the Senior Preferred Stock and new warrants to
paid-in-capital.
The New Senior Notes are secured by the FCC licenses of radio stations
WRMA-FM and WXDJ-FM and WLEY-FM and are guaranteed by each of the Company's
subsidiaries. New Senior Notes will be senior obligations of the Company
that will rank senior in right of payment to all subordinated indebtedness
of the Company and equally ranked with all existing and future senior
indebtedness of the Company including the Notes. The New Senior Notes are
due on March 15, 2004 and bear interest at a rate of 11% per annum payable
on each March 15 and September 15, commencing September 15, 1997.
The New Senior Notes will be redeemable at the Company's option at any time
on or after March 15, 2001 at the redemption prices set forth, together
with accrued and unpaid interest thereon to the redemption date. In
addition, the Company, at its option, may redeem in the aggregate up to 25%
of the original principal amount of New Senior Notes at
F-16
<PAGE> 60
SPANISH BROADCASTING SYSTEM, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(5), Continued
any time prior to March 15, 2000, at a redemption price equal to 110% of
the principal amount plus accrued and unpaid interest to the redemption
date. The carrying value of the Notes and the New Senior Notes approximates
market value at September 28, 1997.
The Senior Preferred Stock is entitled to dividends at the rate of 14-1/4%
per annum payable semi-annually beginning September 15, 1997. The Company,
at its option, may pay dividends on any dividend payment date occurring on
or before March 15, 2002 either in cash or by the issuance of additional
shares of Senior Preferred Stock. In September 1997, the Company elected to
satisfy the dividends due of $11,706,771 through the issuance of 11,706
additional preferred shares.
The Senior Preferred Stock is exchangeable at the option of the Company, on
any dividend payment date for the Company's 14-1/4% Exchange Debentures due
March 15, 2005. The Exchange Debentures are redeemable, at the option of
the Company, at any time, on or prior to March 15, 2000 at a redemption
price equal to 105% of the aggregate principal amount thereof, plus accrued
interest to the date of redemption. After March 15, 2000 and prior to March
15, 2002 the Exchange Debentures are not redeemable. On or after March 15,
2002, the Exchange Debentures are redeemable at the option of the Company.
The Senior Preferred Stock will be redeemable, at the option of the
Company, in whole or in part, at any time on or prior to March 15, 2000 at
the redemption price equal to 105% of the liquidation preference thereof,
plus accumulated and unpaid dividends to the date of redemption. After
March 15, 2000 and prior to March 15, 2002, the Senior Preferred Stock is
not redeemable. On or after March 2002, the Senior Preferred Stock will be
redeemable, at the option of the Company, in whole or in part at any time,
at the following redemption prices (expressed as a percentage of
liquidation preference) if redeemed during the twelve-month period
commencing March 15, of the applicable year set forth below plus, without
duplication, an amount in cash equal to all accumulated and unpaid
dividends to the redemption date:
Year Percentage
---- ----------
2002 107%
2003 105%
2004 and thereafter 100%
F-17
<PAGE> 61
SPANISH BROADCASTING SYSTEM, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(5), Continued
The Company is required, subject to certain conditions, to redeem all of
the Senior Preferred Stock outstanding on March 15, 2005 at a redemption
price equal to 100% of the liquidation preference thereof, plus accumulated
and unpaid dividends to the date of the redemption.
The Warrants, which expire on June 30, 1999, will entitle the holder to
acquire, on or after the exercisability date and prior to the expiration
date, 0.428 shares of Class A Common Stock at a price equal to $0.01 per
0.428 shares, subject to adjustment from time to time upon the occurrence
of certain changes in Common Stock, certain Common Stock distributions,
certain issuances of options or convertible securities, certain dividends
and distributions and certain other increases in the number of shares of
Common Stock.
The Senior Preferred Stock and the Warrants are separately transferable,
subject to compliance with applicable securities laws.
Pursuant to the asset sale and covenants in its debt and preferred stock
agreements, the Company was required to use $25 million of the proceeds
from the sale of its AM stations to make an offer to purchase Notes at a
price of $1,100 for each $1,000 of principal. Pursuant to such an offer in
October 1997 (the "Tender Offer"), the Company purchased $5,500,000 in
principal amount of the Notes for total consideration of $6,050,000.
Pursuant to a provision of the Senior Preferred Stock agreement, if by
April 1, 1998, the Company did not use $15 million of the proceeds from the
sale of its AM stations to repurchase Notes or New Senior Notes, the
Company would have been required to issue shares of its Class A Common
Stock representing 1% in the aggregate of the outstanding Common Stock of
the Company to holders of the Senior Preferred Stock or any Exchange
Debentures then outstanding. The Company could also sell other assets or
issue capital stock, deriving certain minimum gross proceed amounts to
satisfy this provision. As a result of the notes purchased in the Company's
Tender Offer and the purchase by the Company of $7,666,000 in principal
amount of other Notes for $8,950,055 in November 1997 with proceeds from
the sale of its AM stations (see note 13), the Company has satisfied this
provision. As it was the Company's intent to sell the AM stations and apply
at least $15 million in proceeds to the purchase of Notes, $15 million of
Notes were classified as a current liability in the accompanying balance
sheet.
Other covenants under the New Senior Notes and Senior Preferred Stock are
substantially identical to the covenants of the Notes.
F-18
<PAGE> 62
SPANISH BROADCASTING SYSTEM, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(6) Other Long-Term Debt
Other long-term debt consists of the following at September 29, 1996 and
September 28, 1997:
1996 1997
---- ----
Obligation under capital lease with related
party payable in monthly installments of
$9,000, including interest at 6.25%,
commencing June 1992 (see note 9) $1,075,314 1,030,797
Note payable to seller of radio station
including interest which accrues at an
annual rate of three month LIBOR plus 450
basis points, all due on March 27, 2003 -- 3,161,523
Other 11,626 --
---------- ---------
1,086,940 4,192,320
Less current portion 53,572 44,644
---------- ---------
$1,033,368 4,147,676
========== =========
The scheduled maturities of other long-term debt for the five fiscal years
following September 28, 1997 are as follows:
Fiscal year ending September
----------------------------
1998 $ 44,644
1999 47,516
2000 50,572
2001 53,825
2002 57,287
Thereafter 3,938,476
-----------
$ 4,192,320
===========
F-19
<PAGE> 63
SPANISH BROADCASTING SYSTEM, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(7) Loans with Stockholders and Related Party Transactions
At September 28, 1997, the Company had loans receivable from stockholders
totaling $3,524,466. In May 1994, these stockholders entered into
agreements with the Company pursuant to which these loans would bear
interest at a rate that varied with the prime rate and were to mature in
2001. Effective in December 1995, the Company exchanged the existing notes
for amended and restated notes in the aggregate principal amounts of
$2,474,236, including accrued interest through that date. The amended and
restated notes bear interest at 6.36% per annum and mature on December 30,
2025. The notes are payable in 30 equal annual aggregate installments of
$186,728, commencing on December 30, 1996. No repayments have been made as
of September 29, 1997. In July 1997, the Company issued a loan to a
stockholder in the amount of $1,050,230 bearing interest at 7% per annum
and due on demand. The board of directors approved the issuance and the
terms of the exchange of the notes. Loans receivable from stockholders have
been classified as an increase in stockholders' deficiency in the
accompanying consolidated balance sheets. Interest receivable on
stockholder loans was $118,021 and $245,188 at September 29, 1996 and
September 28, 1997, respectively, and is included in other current assets.
At September 29, 1996 and September 28, 1997, the Company has advances
totaling $289,869 due from a party related through common ownership.
Payment of this balance is guaranteed by an officer of the Company.
Additionally, at September 29, 1996 and September 28, 1997, the Company had
trade receivables totaling $373,190 due from this related party which have
been fully reserved.
The Company pays the operating expenses for a boat owned by a party related
through common ownership which is used by the Company for business
entertainment purposes. Such expenses approximated $99,000, $126,000 and
$116,000 for the fiscal years ended September 24, 1995, September 29, 1996
and September 28, 1997, respectively.
The Company leased an apartment from a stockholder of the Company for
annual rentals of $108,000, which expired in August 1997. Additionally, the
Company occupies a building under a capital lease agreement with certain
stockholders (see note 9).
(8) Capital Stock
During fiscal 1996, the Company amended and restated its Certificate of
Incorporation to increase the aggregate number of authorized shares of
$0.01 par value Class A common stock from 2,000,000 to 5,000,000 and create
and authorize 500,000 shares of $0.01 par value preferred stock.
Characteristics and privileges concerning the preferred stock are at the
F-20
<PAGE> 64
discretion of the board of directors. During fiscal 1996, 49,201 of
preferred shares were designated as Redeemable Series A Preferred Stock
(see note 5). In addition, the Company
F-21
<PAGE> 65
SPANISH BROADCASTING SYSTEM, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(8), Continued
has authorized 200,000 shares of $0.01 par value Class B common stock. The
Class A common stock is entitled to one vote per share and the Class B
common stock is entitled to eight votes per share. Shares of Class B common
stock may be converted into an equal number of shares of Class A common
stock, at the option of the holder, at any time. Each share of Class B
common stock automatically converts into one share of Class A common stock
on the exercise date, as defined in the Warrant agreement relating to the
Notes discussed in note 5.
In 1994, the Company adopted a stock option plan pursuant to which the
Company has reserved up to 26,750 shares of Class A common stock for
issuance upon the exercise of options granted under the plan. The plan
covers all regular salaried employees of the Company and its subsidiaries.
No options have been granted under this plan to date.
(9) Commitments
The Company occupies a building under a capital lease agreement with a
stockholder of the Company expiring in June 2012. The amount capitalized
under this lease agreement and included in property and equipment at
September 29, 1996 and September 28, 1997 is $963,500 and $902,000, net of
accumulated depreciation of $266,500 and $328,000, respectively.
The Company leases office space and facilities and certain equipment under
operating leases, that expire at various dates through 2013. Certain leases
provide for base rental payments plus escalation charges for real estate
taxes and operating expenses.
F-22
<PAGE> 66
SPANISH BROADCASTING SYSTEM, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(9), Continued
At September 28, 1997, future minimum lease payments under such leases are
as follows:
Capital Operating
Fiscal year lease leases
----------- ----- ------
1998 $ 149,000 887,500
1999 149,000 704,700
2000 149,000 493,500
2001 149,000 301,800
2002 149,000` 136,400
Thereafter 1,437,208 3,597,700
---------- ----------
Total minimum lease payments 2,182,208 $6,121,600
==========
Less executory costs 601,333
----------
1,580,075
Less interest at 6.25% 550,078
-------
Present value of minimum lease
payments $1,030,797
==========
Total rent expense for the fiscal years ended September 24, 1995, September
29, 1996 and September 28, 1997 amounted to $943,107, $1,097,144 and
$1,554,550, respectively.
The Company has agreements to sublease its radio frequencies and portions
of its tower sites. Such agreements provide for payments through 2003. The
future minimum rental income to be received under these agreements as of
September 28, 1997 is as follows:
Fiscal year Amount
----------- ------
1998 $ 497,014
1999 623,130
2000 642,477
2001 305,674
2002 256,143
Thereafter 109,330
----------
$2,433,768
==========
F-23
<PAGE> 67
SPANISH BROADCASTING SYSTEM, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(9), Continued
At September 28, 1997, the Company is committed to the purchase of
broadcast rights for various sports, news and other programming and has
employment contracts for certain on-air talent and general managers
expiring through 2003. Future payments under such contracts are as follows:
Programming Employment
Fiscal year contracts contracts Total
----------- --------- --------- -----
1998 $ 69,653 2,168,617 2,238,270
1999 31,283 2,218,033 2,249,316
2000 14,286 2,005,450 2,019,736
2001 4,012 1,631,433 1,635,445
2002 -- 1,015,417 1,015,417
Thereafter -- 62,500 62,500
--------- --------- ---------
$ 119,234 9,101,450 9,220,684
========= ========= =========
Certain sports programming contracts provide for sharing in a portion of
advertising revenues or sharing of net profits relating to the specific
broadcasts. In addition, certain employment contracts provide for
additional amounts to be paid if station ratings or cash flow targets are
met.
(10) Income Taxes
Total income tax expense (benefit) for the fiscal year ended September 28,
1997 was allocated as follows:
Current- Deferred Total
State and local Federal
--------------- --------- -------
Loss from operations $ 250,000 (2,964,411) (2,714,411)
Extraordinary item - loss on
extinguishment of debt -- (1,097,836) (1,097,836)
----------- ---------- ----------
$ 250,000 (4,062,247) (3,812,247)
=========== ========== ==========
F-24
<PAGE> 68
SPANISH BROADCASTING SYSTEM, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(10), Continued
The provision (benefit) for income taxes for the fiscal years ended
September 24, 1995 and September 29, 1996 consists of the following:
1995 1996
---- ----
Current:
State and local $ 329,656 191,922
Deferred:
Federal 1,081,738 (1,357,722)
----------- ----------
$ 1,411,394 (1,165,800)
=========== ==========
During fiscal 1995 and 1996, the Company utilized net operating loss
carryforwards of approximately $837,000 and $686,000 respectively.
The difference between the fiscal 1995 income tax expense at the Federal
statutory rate and the effective rate was attributable to the utilization
of net operating loss carryforwards, as well as state and local income
taxes. The difference between the fiscal 1996 and 1997 income tax benefit
at the Federal statutory rate and the effective rate was primarily
attributable to state and local income taxes, recurring non-deductible
expenses and non-deductible expenses incurred in connection with the
Company's financing transactions.
F-25
<PAGE> 69
SPANISH BROADCASTING SYSTEM, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(10), Continued
The tax effect of temporary differences and carryforwards that give rise to
deferred tax assets and deferred tax liabilities at September 29, 1996 and
September 28, 1997 is as follows:
1996 1997
---- ----
Deferred tax assets:
Net operating loss carryforwards $ 27,627,781 22,955,490
Deferred interest 4,963,048 5,717,617
Allowance for doubtful accounts 1,804,305 2,162,038
Fixed assets 279,095 474,286
------------ -----------
Total deferred tax assets 34,674,229 41,309,431
------------ -----------
Deferred tax liabilities:
Depreciation and amortization 8,932,667 11,776,023
Intangible assets 8,382,950 8,382,950
Deferred debt forgiveness 17,396,470 17,396,470
Unearned revenue 350,102 79,701
------------ -----------
Total deferred tax liabilities 35,062,189 37,635,144
------------ -----------
Net deferred tax asset (liability) $ (387,960) 3,674,287
============ ===========
During fiscal 1994, as a result of the refinancing of the Company's debt
discussed in note 5, the Company recognized an extraordinary gain on debt
extinguishment of $70,254,772, net of income taxes of $3,060,924, for
financial statement purposes. For Federal income tax purposes, income from
the discharge of this indebtedness reduced available net operating loss
carryforwards and reduced the tax basis of certain assets. As a result, the
valuation allowance for gross deferred tax assets was eliminated in fiscal
1994, reflecting the utilization, as a result of the extraordinary gain, of
net operating loss carryforwards for financial statement purposes. In
addition, certain timing differences were created which gave rise to
deferred tax liabilities that will result in taxable income in future years
when the assets are realized or settled. During fiscal 1995, the
recognition of the $70,254,772 gain on debt extinguishment for Federal
income tax purposes was redistributed upon filing of the fiscal 1994 tax
returns.
F-26
<PAGE> 70
SPANISH BROADCASTING SYSTEM, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(10), Continued
This resulted in additional amounts used to reduce the tax basis of certain
assets, additional deferred debt forgiveness and preservation of available
net operating loss carryforwards. The net effect of the redistribution of
the discharge of indebtedness for Federal income tax purposes did not
significantly affect the Company's net deferred tax position.
At September 28, 1997, the Company has net operating loss carryforwards of
approximately $ 82,389,000 available to offset future taxable income
expiring as follows:
Net
operating loss
Expiring in September carryforwards
--------------------- -------------
2004 $ 6,282,000
2005 12,578,000
2006 14,233,000
2007 12,770,000
2008 12,213,000
2009 11,445,000
2012 12,868,000
------------
$ 82,389,000
============
(11) Litigation
The Company is the defendant in a number of lawsuits and claims incidental
in its ordinary course of business, certain of which have been brought by
former employees. The Company does not believe the outcome of any
litigation, current or pending, would have a material, adverse impact on
the financial position or the results of operations of the Company.
F-27
<PAGE> 71
SPANISH BROADCASTING SYSTEM, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(11), Continued
In April 1995, the Company settled ongoing litigation with a former
stockholder for $3.5 million, including imputed interest. The difference
between the amount accrued by the Company and the settlement amount totaled
$352,878 and is recorded in other, net in the accompanying consolidated
statement of operations for the fiscal year ended September 24, 1995.
(12) Supplemental Cash Flow Information
The Company paid $8,152,213, $8,254,402 and $13,175,308 for interest and
$337,757, $632,990 and $294,262 for income taxes during fiscal 1995, 1996
and 1997, respectively. During the year ended September 29, 1995, the
Company financed $80,000 of the purchase price of radio station WSKP-FM
through the issuance of a note payable to the seller. During the year ended
September 29, 1996, the Company issued $2,199,122 of Senior Notes as
payment for interest and issued $2,452,910 of Preferred Stock as payment of
dividends. During the year ended September 28, 1997, the Company issued
$1,185,722 of New Senior Notes as payment for interest and issued
$13,030,211 of Preferred Stock as payment of dividends. During the year
ended September 28, 1997, the Company financed $3 million of the purchase
price of radio station WYSY-FM through the issuance of a note payable to
the seller.
(13) Subsequent Events - Unaudited
On September 29, 1997, the Company consummated the sale of two of its radio
stations, WCMQ-AM in Miami and WXLX-AM in New York. The purchase price for
the assets was $8 million for WCMQ-AM and $18 million for WXLX-AM. On
December 2, 1997, the Company consummated the sale of KXMG-AM in Los
Angeles for $18 million. The Company sold the FCC broadcast licenses of the
aforementioned radio stations and the respective towers, antennas and
transmitters. The gain from the sale of these stations amounts to
approximately $34.2 million before income taxes.
Pursuant to the terms of the Company's debt agreements, in October 1997 the
Company made an offer to holders of its Notes to acquire $22,730,000 in
principal amount of Notes at a purchase price of $1,100 for each $1,000 in
principal amount. Pursuant to this
F-28
<PAGE> 72
tender offer, the Company purchased $5,500,000 in principal amount of Notes
for $6,050,000. In November 1997, the Company purchased an additional
$7,666,000 in principal amount of notes for $8,950,055.
F-29
<PAGE> 73
Schedule II
SPANISH BROADCASTING SYSTEM, INC.
AND SUBSIDIARIES
Valuation and Qualifying Accounts
Fiscal years ended September 24, 1995, September 29, 1996
and September 28, 1997
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E
-------- -------- -------- -------- --------
Additions
------------------------
Balance at Charged to Charged to Balance at
beginning costs and other end
Description of period expenses accounts Deductions of period
----------- --------- -------- -------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Fiscal year 1995
Allowance for doubtful
accounts $ 3,805,521 4,195,746 -- 2,816,381 5,184,886
Fiscal year 1996
Allowance for doubtful
accounts $ 5,184,886 4,908,699 -- 5,582,822 4,510,763
Fiscal year 1997
Allowance for doubtful
accounts $ 4,510,763 3,530,259 -- 2,635,927 5,405,095
</TABLE>
F-30
<PAGE> 74
SIGNATURES
Pursuant to the requirements of sections 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized on this 29 day of
December, 1997.
SPANISH BROADCASTING SYSTEM, INC.
By: /s/ Raul Alarcon, Jr.
---------------------------------------------
Name: Raul Alarcon, Jr.
Title: President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant in the capacities and as of December 29, 1997.
By: /s/ Raul Alarcon, Jr.
---------------------------------------------------------
Name: Raul Alarcon, Jr.
Title: President, Chief Executive Officer and a Director
(principal executive officer)
By: /s/ Joseph A. Garcia
---------------------------------------------------------
Name: Joseph A. Garcia
Title: Executive Vice President and Chief Financial Officer
(principal financial and accounting officer)
By: /s/ Pablo Raul Alarcon, Sr.
---------------------------------------------------------
Name: Pablo Raul Alarcon, Sr.
Title: Chairman of the Board of Directors
By: /s/ Jose Grimalt
---------------------------------------------------------
Name: Jose Grimalt
Title: Secretary and a Director
By: /s/ Arnold Sheiffer
---------------------------------------------------------
Name: Arnold Sheiffer
Title: Director
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-28-1997
<PERIOD-START> SEP-30-1996
<PERIOD-END> SEP-28-1997
<CASH> 12,287,764
<SECURITIES> 0
<RECEIVABLES> 20,517,073
<ALLOWANCES> 5,405,095
<INVENTORY> 0
<CURRENT-ASSETS> 28,809,648
<PP&E> 18,409,415
<DEPRECIATION> 0
<TOTAL-ASSETS> 334,367,083
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
171,261,919
<COMMON> 5,581
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 334,367,083
<SALES> 60,009,580
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 44,254,439
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (22,201,114)
<INCOME-PRETAX> (7,236,521)
<INCOME-TAX> (2,714,411)
<INCOME-CONTINUING> (4,522,110)
<DISCONTINUED> 0
<EXTRAORDINARY> (1,646,753)
<CHANGES> 0
<NET-INCOME> (6,168,863)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
