<PAGE> 1
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM 10-K/A
(MARK ONE)
[X] AMENDMENT NO. 3 TO ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED SEPTEMBER 26, 1999
COMMISSION FILE NUMBER 000-27823
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________ TO __________
SPANISH BROADCASTING SYSTEM, INC.
(Exact name of registrant as specified in its charter)
SEE TABLE OF ADDITIONAL REGISTRANTS
<TABLE>
<S> <C>
DELAWARE 13-3827791
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
</TABLE>
3191 CORAL WAY
MIAMI, FLORIDA 33145
(Address of principal executive offices and zip code)
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:
CLASS A COMMON STOCK, PAR VALUE $.0001 PER SHARE
(Title of Class)
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 [ ]
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]
As of December 20, 1999, the aggregate market value of the Class A Common
Stock held by non-affiliates of the Company was approximately $862.8 million.
The aggregate market value of the Class B Common Stock held by non-affiliates of
the Company was approximately $226.5 million. (We have assumed that our shares
of Class B Common Stock would trade at the same price per share as our shares of
Class A Common Stock.) (For purposes of this paragraph, directors, executive
officers and 10% or greater shareholders have been deemed affiliates.)
As of December 20, 1999, 25,723,210 shares of Class A Common Stock, par
value $.0001 per share and 34,493,450 shares of Class B Common Stock, par value
$.0001 per share were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE: NONE
- --------------------------------------------------------------------------------
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<PAGE> 2
TABLE OF ADDITIONAL REGISTRANTS
<TABLE>
<CAPTION>
PRIMARY STANDARD
STATE OR OTHER INDUSTRIAL I.R.S. EMPLOYER
JURISDICTION OF CLASSIFICATION IDENTIFICATION
NAME INCORPORATION NUMBER NUMBER
- ---- --------------- ----------------- ---------------
<S> <C> <C> <C>
Spanish Broadcasting System of California, Inc..... California 4832 92-3952357
Spanish Broadcasting System Network, Inc........... New York 4899 13-3511101
SBS Promotions, Inc................................ New York 7999 13-3456128
SBS Funding, Inc................................... Delaware 4832 52-6999475
Alarcon Holdings, Inc.............................. New York 6512 13-3475833
SBS of Greater New York, Inc....................... New York 4832 13-3888732
Spanish Broadcasting System of Florida, Inc........ Florida 4832 58-1700848
Spanish Broadcasting System of Greater Miami,
Inc.............................................. Delaware 4832 65-0774450
Spanish Broadcasting System of Puerto Rico, Inc.... Delaware 4832 52-2139546
Spanish Broadcasting System, Inc................... New Jersey 4832 13-3181941
Spanish Broadcasting System of Illinois, Inc....... Delaware 4832 36-4174296
Spanish Broadcasting System of San Antonio, Inc.... Delaware 4832 65-0820776
Spanish Broadcasting System of Puerto Rico, Inc.... Puerto Rico 4832 66-0564244
</TABLE>
2
<PAGE> 3
The registrant, Spanish Broadcasting System, Inc., together with its
subsidiaries listed herein under the Table of Additional Registrants
(collectively, "SBS" or the "Company"), hereby amends its Annual Report on Form
10-K (the "10-K") for the year ended September 26, 1999, filed with the
Securities and Exchange Commission on December 27, 1999, as amended, by making
the following changes:
1. ITEM 6 -- the Selected Financial Data -- is hereby amended as follows:
a. the "Other Financial Data" is hereby revised to be placed below the "Balance
Sheet Data" and supplemented by adding three additional line items at the bottom
of the table which read as follows:
<TABLE>
<S> <C> <C> <C> <C> <C>
Net cash provided by operating activities................... 14,438 8,813 6,386 10,923 20,782
Net cash provided by (used in) investing activities......... (4,988) (90,195) (144,358) 32,190 (38,384)
Net cash provided by (used in) financing activities......... (3,769) 69,034 144,792 (17,758) (3,065)
</TABLE>
b. Footnote 5 to the Selected Historical Consolidated Financial Information is
hereby revised to add three additional sentences at the end which read as
follows:
Broadcast cash flow may not be comparable to a similarly entitled item
reported by other entities that do not define the term exactly as the Company
defines it. The Company believes that broadcast cash flow is a useful indicator
to investors of the cash flow generated by the operations of the Company's
stations and permits investors to compare the Company's performance with respect
to station operations with those of other radio broadcast companies. The Company
believes that broadcast cash flow is particularly useful in analyzing
acquisition opportunities.
c. Footnote 6 to the Selected Historical Consolidated Financial Information is
hereby revised to delete the second sentence thereof and add three sentences at
the end which read as follows:
Although EBITDA is not a measure of performance calculated in accordance
with generally accepted accounting principles, EBITDA is widely used in the
broadcasting industry as a measure of a broadcasting company's operating
performance. EBITDA may not be comparable to a similarly entitled item reported
by other entities that do not define the term exactly as the Company defines it.
The Company believes that EBITDA is a useful indicator to investors of the
Company's capacity to incur and service debt. Many debt instruments, including
the indenture governing the Company's 9 5/8% Senior Subordinated Notes, contain
covenants which use formulas based on EBITDA calculations.
The revised Item 6 in its entirety reads as follows:
3
<PAGE> 4
ITEM 6. SELECTED FINANCIAL DATA
SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION
(IN THOUSANDS EXCEPT RATIOS, SHARES OUTSTANDING AND PER SHARE DATA)
The following table sets forth the historical financial information of our
business. The selected historical consolidated financial information presented
below under the caption "Statement of Operations Data" and "Balance Sheet Data,"
as of and for each of the fiscal years in the five-year period ended September
26, 1999 are derived from our historical consolidated financial statements,
which have been audited by KPMG LLP, independent certified public accountants.
Our selected historical consolidated financial data should be read in
conjunction with our historical consolidated financial statements as of
September 27, 1998 and September 26, 1999, and for each of the fiscal years in
the three-year period ended September 26, 1999, the related notes and
independent auditor's report included elsewhere in this report. For additional
information see the financials section of this report and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-------------------------------------------------------------------
9/24/95 9/29/96 9/28/97 9/27/98 9/26/99
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Gross revenues........................................ $ 54,152 $ 55,338 $ 67,982 $ 86,766 $ 111,233
Less: agency commissions.............................. 6,828 6,703 7,972 10,623 13,882
----------- ----------- ----------- ----------- -----------
Net revenues.......................................... 47,324 48,635 60,010 76,143 97,351
Station operating expenses(1)......................... 22,998 27,876 31,041 39,520 44,620
Corporate expenses.................................... 4,281 3,748 5,595 6,893 10,636
Depreciation and amortization......................... 3,389 4,556 7,619 8,877 9,906
----------- ----------- ----------- ----------- -----------
Operating income.................................. 16,656 12,455 15,755 20,853 32,189
Interest expense, net(2).............................. (12,874) (16,533) (22,201) (20,860) (21,178)
Other income (expense), net(3)........................ (381) (1,574) (791) (213) (749)
Gain on sale of AM stations........................... -- -- 36,242 -- --
----------- ----------- ----------- ----------- -----------
Income (loss) before income taxes
and extraordinary item.......................... 3,401 (5,652) (7,237) 36,022 10,262
Income tax expense (benefit).......................... 1,411 (1,166) (2,715) 15,624 4,445
----------- ----------- ----------- ----------- -----------
Income (loss) before extraordinary items.............. 1,990 (4,486) (4,522) 20,398 5,817
Extraordinary gain (loss) net of income taxes(4)...... -- (1,647) (1,613) -- --
----------- ----------- ----------- ----------- -----------
Net income (loss)................................. $ 1,990 $ (4,486) $ (6,169) $ 18,785 $ 5,817
=========== =========== =========== =========== ===========
Dividends on preferred stock.......................... -- (2,994) (17,044) (30,270) (34,749)
----------- ----------- ----------- ----------- -----------
Net income (loss) applicable to common stock...... $ 1,990 $ (7,480) $ (23,213) $ (11,485) $ (28,932)
=========== =========== =========== =========== ===========
Dividends per share on common stock................... $ -- $ -- $ -- $ 0.11 $ --
=========== =========== =========== =========== ===========
Earnings (loss) per common share:
Basic (before extraordinary item)................. $ 0.07 $ (0.25) $ (0.71) $ (0.33) $ (0.86)
Diluted (before extraordinary item)............... 0.06 (0.25) (0.71) (0.33) (0.86)
Basic............................................. 0.07 (0.25) (0.77) (0.38) (0.86)
Diluted........................................... 0.06 (0.25) (0.77) (0.38) (0.86)
Weighted average common shares outstanding(8):
Basic............................................. 30,333,400 30,333,400 30,333,400 30,333,400 33,584,576
Diluted........................................... 35,793,409 30,333,400 30,333,400 30,333,400 33,584,576
</TABLE>
4
<PAGE> 5
<TABLE>
<CAPTION>
AS OF
-----------------------------------------------------
9/24/95 9/29/96 9/28/97 9/27/98 9/26/99
-------- -------- --------- -------- --------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 17,817 $ 5,468 $ 12,288 $ 37,642 $ 16,975
Total assets................................................ 103,629 176,860 334,367 351,034 365,681
Total debt (including current portion)...................... 95,523 135,914 183,013 171,126 172,486
Preferred stock............................................. -- 35,939 171,262 201,368 235,918
Total stockholders' deficiency.............................. (1,150) (3,569) (32,047) (46,193) (75,122)
OTHER FINANCIAL DATA:
Broadcast cash flow(5)...................................... $ 24,326 $ 20,759 $ 28,969 $ 36,623 $ 52,731
Broadcast cash flow margin.................................. 51.4% 42.7% 48.3% 48.1% 54.2%
BITDA(6).................................................... 20,045 17,011 23,374 29,730 42,095
After-tax cash flow(7)...................................... 5,379 70 3,097 7,530 15,723
Capital expenditures........................................ 4,888 3,811 2,022 1,645 2,100
Net cash provided by operating activities................... 14,438 8,813 6,386 10,923 20,782
Net cash provided by (used in) investing activities......... (4,988) (90,195) (144,358) 32,190 (38,384)
Net cash provided by (used in) financing activities......... (3,769) 69,034 144,792 (17,758) (3,065)
</TABLE>
NOTES TO SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION
(1) Station operating expenses include engineering, programming, selling and
general and administrative expenses.
(2) Interest expense includes non-cash interest, such as the accretion of
principal, the amortization of discounts on debt and the amortization of
deferred financing costs.
(3) During the 1996, 1997 and 1999 fiscal years, we wrote down the value of our
land and building located on Sunset Boulevard in Los Angeles by $697,741,
$487,973 and $451,048, respectively. The write-downs were based on current
market values of real estate in the Los Angeles area. Financing costs are
also included in other income (expenses).
(4) On June 29, 1994, we sold 107,059 units, each consisting of $1,000 principal
amount of our 12 1/2% notes and warrants to purchase one share of common
stock per unit. The 12 1/2% notes were issued at a substantial discount from
their principal amount. The sale of the 12 1/2% notes and warrants generated
gross proceeds of $94,000,000 and proceeds to us 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 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 warrants,
$83,000,000 was used to satisfy in full our obligations to our two former
principal lenders and the balance was used to settle litigation with a
former stockholder and for general corporate purposes.
For the fiscal year ended September 28, 1997, we recorded an extraordinary
loss resulting from the redemption of our 12 1/4% senior secured notes due
2001 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.
For the fiscal year ended September 27, 1998, we recorded an extraordinary
loss resulting from the repurchase of $13.2 million par value of 12 1/2%
notes, at a premium of approximately $2.2 million in excess of their
carrying value and from the write-off of the related unamortized deferred
financing costs of approximately $0.5 million, net of the related tax
benefit of approximately $1.1 million.
(5) The term "broadcast cash flow" means operating income before depreciation,
amortization 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 our 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. Broadcast cash flow may not be comparable to a similarly
entitled item reported by other entities that do not define the term exactly
as the Company defines it. The Company believes that broadcast cash flow is
a useful indicator to investors of the cash flow generated by the operations
of the Company's stations and permits investors to compare the Company's
performance with respect to station operations with those of other
5
<PAGE> 6
radio broadcast companies. The Company believes that broadcast cash flow is
particularly useful in analyzing acquisition opportunities.
(6) The term "EBITDA" means earnings before extraordinary items, gain on sale of
AM stations, net interest expense, income taxes, depreciation, amortization
and other income or expense. Although EBITDA is not a measure of performance
calculated in accordance with generally accepted accounting principles,
EBITDA is widely used in the broadcasting industry as a measure of a
broadcasting company's operating performance. EBITDA may not be comparable
to a similarly entitled item reported by other entities that do not define
the term exactly as the Company defines it. The Company believes that EBITDA
is a useful indicator to investors of the Company's capacity to incur and
service debt. Many debt instruments, including the indenture governing the
Company's 9 5/8% Senior Subordinated Notes, contain covenants which use
formulas based on EBITDA calculations.
(7) The term "after-tax cash flow" means income before income tax benefit
(expense) and extraordinary items, minus net gain on sale of AM stations
(net of tax) and the current income tax provision, plus depreciation and
amortization expense. Although after-tax cash flow is not a measure of
performance calculated in accordance with generally accepted accounting
principles, after-tax cash flow is widely used in the broadcasting industry
as a measure of a broadcasting company's operating performance.
(8) On September 29, 1999, we filed a third amended and restated certificate of
incorporation which resulted in (1) the redesignation of our previously
outstanding shares of Class A Common Stock into shares of Class B Common
Stock, (2) a 50-to-1 stock split of our Class B Common Stock and (3) a
reduction in the par value of our Class A Common Stock and Class B Common
Stock from $0.01 per share to $0.0001 per share. The financial information
has been restated to reflect this redesignation, stock split and change in
par value.
2. The following changes have been made to the Consolidated Financial
Statements:
a. INDEPENDENT AUDITOR'S REPORT: The Independent Auditor's Report on page F-2
is hereby revised to add "Miami Florida," the city and state where the report
was issued and "/s/ KPMG LLP", the signature of the independent auditors.
b. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS: The unaudited pro forma summary
at the end of Footnote 3 to the Consolidated Financial Statements is hereby
revised to add the line item "Net loss per share (0.17)" after the line item
"Net loss" to the unaudited pro forma summaries to read as follows:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 28, 1997
-----------------------------
(UNAUDITED)
<S> <C>
Net revenues................................................ $66,762,000
Loss before extraordinary item.............................. (3,498,000)
Net loss.................................................... (5,145,000)
Net loss per share.......................................... (0.17)
</TABLE>
The revised Consolidated Financial Statements in their entirety read as follows:
6
<PAGE> 7
SPANISH BROADCASTING SYSTEM, INC.
AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of KPMG LLP, independent auditors.................... F-2
Consolidated Balance Sheets as of September 27, 1998 and
September 26, 1999........................................ F-3
Consolidated Statements of Operations for each of the fiscal
years in the three-year period ended September 26, 1999... F-4
Consolidated Statements of Changes in Stockholders'
Deficiency for each of the fiscal years in the three-year
period ended September 26, 1999........................... F-5
Consolidated Statements of Cash Flows for each of the fiscal
years in the three-year period ended September 26, 1999... F-6
Notes to Consolidated Financial Statements.................. F-8
Financial Statement Schedule -- Valuation and Qualifying
Accounts.................................................. F-26
</TABLE>
F-1
<PAGE> 8
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 27, 1998 and
September 26, 1999, and the results of their operations and their cash flows for
each of the fiscal years in the three-year period ended September 26, 1999, 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.
/s/ KPMG LLP
--------------------------------------
Miami, Florida
December 10, 1999
F-2
<PAGE> 9
SPANISH BROADCASTING SYSTEM, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 27, 1998 AND SEPTEMBER 26, 1999
<TABLE>
<CAPTION>
SEPTEMBER 27, SEPTEMBER 26,
1998 1999
------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 37,642,227 16,974,650
Receivables:
Trade................................................... 20,777,151 26,006,007
Barter.................................................. 3,582,751 2,260,217
------------ ------------
24,359,902 28,266,224
Less allowance for doubtful accounts...................... 7,770,060 6,365,959
------------ ------------
Net receivables.................................... 16,589,842 21,900,265
Other current assets.................................... 1,822,584 2,194,387
------------ ------------
Total current assets............................... 56,054,653 41,069,302
Property and equipment, net................................. 14,942,933 14,777,703
Intangible assets, net of accumulated amortization of
$27,563,051 in 1998 and $35,654,956 in 1999............... 272,261,440 301,454,059
Deferred financing costs, net of accumulated amortization of
$4,257,074 in 1998 and $5,815,931 in 1999................. 7,275,980 6,228,716
Due from related party...................................... 289,869 --
Deferred offering costs..................................... -- 1,965,551
Other assets................................................ 209,301 185,190
------------ ------------
$351,034,176 365,680,521
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities:
Current portion of other long-term debt................... $ 47,496 1,800,572
Accounts payable.......................................... 2,612,952 1,381,966
Accrued expenses.......................................... 5,838,808 10,112,106
Accrued interest.......................................... 3,941,088 3,941,088
Deferred commitment fee................................... 2,141,456 2,686,004
Dividends payable......................................... 1,124,360 1,323,018
------------ ------------
Total current liabilities.......................... 15,706,160 21,244,754
12 1/2% Senior unsecured notes due 2002, net of unamortized
discount of $2,224,535 in 1998 and $1,630,076 in 1999..... 91,668,465 92,262,924
11% Senior unsecured notes due 2004......................... 75,000,000 75,000,000
Other long-term debt, less current portion.................. 4,410,505 3,422,341
Deferred income taxes....................................... 9,074,596 12,954,515
Redeemable Preferred Stock:
14 1/4% Series A Senior Exchangeable Preferred Stock, $.01
par value. Authorized 1,000,000 shares, issued and
outstanding 214,260 shares (liquidation value
$214,260,000) in 1998 and 245,815 shares (liquidation
value $245,815,000) in 1999............................. 201,367,927 235,918,055
Stockholders' deficiency:
Class A common stock, $.0001 par value. Authorized
100,000,000 shares; none issued and outstanding......... -- --
Class B common stock, $.0001 par value. Authorized
50,000,000 shares; issued and outstanding 30,333,400
shares in 1998 and 39,448,550 shares in 1999............ 3,033 3,945
Additional paid-in capital.................................. 6,867,334 6,869,241
Accumulated deficit......................................... (50,604,436) (79,535,846)
------------ ------------
(43,734,069) (72,662,660)
Less loans receivable from stockholders..................... (2,459,408) (2,459,408)
------------ ------------
Total stockholders' deficiency..................... (46,193,477) (75,122,068)
------------ ------------
Commitments and contingencies (notes 10, 12 and 15)......... $351,034,176 365,680,521
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 10
SPANISH BROADCASTING SYSTEM, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FISCAL YEARS ENDED SEPTEMBER 28, 1997,
SEPTEMBER 27, 1998 AND SEPTEMBER 26, 1999
<TABLE>
<CAPTION>
YEAR ENDED
------------------------------------------
1997 1998 1999
------------ ------------ ------------
<S> <C> <C> <C>
Gross revenues....................................... $ 67,981,407 86,766,158 111,233,463
Less agency commissions.............................. 7,971,827 10,623,062 13,882,877
------------ ------------ ------------
Net revenues............................... 60,009,580 76,143,096 97,350,586
------------ ------------ ------------
Operating expenses:
Engineering........................................ 2,099,116 1,924,744 2,222,605
Programming........................................ 7,081,521 8,462,258 10,120,338
Selling............................................ 14,980,035 18,574,529 22,015,346
General and administrative......................... 6,879,443 10,558,965 10,260,931
Corporate expenses................................. 5,595,403 6,892,705 10,636,435
Depreciation and amortization...................... 7,618,921 8,876,876 9,905,574
------------ ------------ ------------
44,254,439 55,290,077 65,161,229
------------ ------------ ------------
Operating income........................... 15,755,141 20,853,019 32,189,357
Other income (expense):
Interest expense, net.............................. (22,201,114) (20,860,210) (21,178,164)
Other, net......................................... (790,548) (213,239) (748,898)
Gain on sale of AM stations........................ -- 36,241,947 --
------------ ------------ ------------
Income (loss) before income taxes and
extraordinary item....................... (7,236,521) 36,021,517 10,262,295
Income tax expense (benefit)......................... (2,714,411) 15,624,032 4,444,919
------------ ------------ ------------
Income (loss) before extraordinary item.............. (4,522,110) 20,397,485 5,817,376
Extraordinary item -- loss on extinguishment debt,
net of income taxes of $1,097,836 in 1997 and
$1,075,149 in 1998................................. (1,646,753) (1,612,723) --
------------ ------------ ------------
Net income (loss).......................... $ (6,168,863) 18,784,762 5,817,376
============ ============ ============
Net loss applicable to common stockholders [note
2(n)].............................................. $(23,212,494) (11,484,845) (28,931,410)
============ ============ ============
Basic and diluted loss per common share:
Net loss per common share before extraordinary
item............................................ $ (0.71) (0.33) (0.86)
Net loss per common share for extraordinary item... (0.06) (0.05) --
------------ ------------ ------------
Net loss per common share.......................... $ (0.77) (0.38) (0.86)
============ ============ ============
Weighted average common shares outstanding (basic
and diluted).................................... 30,333,400 30,333,400 33,584,576
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 11
SPANISH BROADCASTING SYSTEM, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIENCY
FISCAL YEARS ENDED SEPTEMBER 28, 1997,
SEPTEMBER 27, 1998 AND SEPTEMBER 26, 1999
<TABLE>
<CAPTION>
CLASS B
COMMON STOCK LESS: LOANS
------------------- ADDITIONAL RECEIVABLE TOTAL
NUMBER PAR PAID-IN ACCUMULATED FROM STOCKHOLDERS'
OF SHARES VALUE CAPITAL DEFICIT STOCKHOLDERS DEFICIENCY
---------- ------ ----------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at September 29, 1996............... 30,333,400 $3,033 10,809,037 (11,906,690) (2,474,236) (3,568,856)
Retirement of preferred stock and
warrants.................................. -- -- (11,887,981) -- -- (11,887,981)
Issuance of warrants........................ -- -- 16,625,000 -- -- 16,625,000
Accretion of preferred stock................ -- -- -- (1,659,695) -- (1,659,695)
Preferred stock dividends................... -- -- -- (15,383,936) -- (15,383,936)
Issuance costs for preferred stock.......... -- -- (8,952,550 -- -- (8,952,550)
Increase in loans receivable from
stockholders.............................. -- -- -- -- (1,050,230) (1,050,230)
Net loss.................................... -- -- -- (6,168,863) -- (6,168,863)
---------- ------ ----------- ----------- ---------- -----------
Balance at September 28, 1997............... 30,333,400 3,033 6,593,506 (35,119,184) (3,524,466) (32,047,111)
Preferred stock dividends................... -- -- -- (27,717,142) -- (27,717,142)
Accretion of preferred stock................ -- -- -- (2,552,465) -- (2,552,465)
Decrease in loans receivable from
stockholders.............................. -- -- -- -- 14,827 14,827
Cash dividends on common stock.............. -- -- -- (3,726,579) 1,050,231 (2,676,348)
Issuance of warrants as dividends........... -- -- 273,828 (273,828) -- --
Net income.................................. -- -- -- 18,784,762 -- 18,784,762
---------- ------ ----------- ----------- ---------- -----------
Balance at September 27, 1998............... 30,333,400 3,033 6,867,334 (50,604,436) (2,459,408) (46,193,477)
Preferred stock dividends................... -- -- -- (31,755,475) -- (31,755,475)
Accretion of preferred stock................ -- -- -- (2,993,311) -- (2,993,311)
Exercised warrants for common stock......... 9,115,150 912 1,907 -- -- 2,819
Net income.................................. -- -- -- 5,817,376 -- 5,817,376
---------- ------ ----------- ----------- ---------- -----------
Balance at September 26, 1999............... 39,448,550 $3,945 6,869,241 (79,535,846) (2,459,408) (75,122,068)
========== ====== =========== =========== ========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 12
SPANISH BROADCASTING SYSTEM, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FISCAL YEARS ENDED SEPTEMBER 28, 1997,
SEPTEMBER 27, 1998 AND SEPTEMBER 26, 1999
<TABLE>
<CAPTION>
YEAR ENDED
-------------------------------------------
1997 1998 1999
------------- ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)................................. $ (6,168,863) 18,784,762 5,817,376
------------- ------------ ------------
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Loss on extinguishment of debt................. 2,744,589 2,687,872 --
Gain on sale of AM stations.................... -- (36,241,947) --
Depreciation and amortization.................. 7,618,921 8,876,876 9,905,574
Provision for doubtful accounts................ 3,530,259 2,634,509 1,670,438
Amortization of debt discount.................. 4,772,539 658,297 594,459
Interest satisfied through issuance of notes... 1,185,722 -- --
Amortization of deferred financing costs....... 1,390,736 1,555,016 1,601,594
Write-down of fixed assets..................... 487,973 -- 451,048
Write-off of amounts due from related party.... -- -- 289,869
Accretion of interest to principal on long-term
debt......................................... 161,523 307,200 313,037
Deferred income taxes.......................... (4,062,247) 12,748,883 3,879,919
Changes in operating assets and liabilities:
Increase in receivables...................... (7,812,211) (4,112,373) (6,980,861)
Increase in other current assets............. (294,574) (412,678) (371,803)
Decrease (increase) in other assets.......... (158,490) 80,483 24,111
Increase (decrease) in accounts payable...... (196,443) 1,245,380 (1,230,986)
Increase in accrued expenses................. 368,585 2,116,031 4,273,298
Increase (decrease) in accrued interest...... 2,142,006 (595,539) --
Increase in deferred commitment fee.......... 675,999 590,201 544,548
------------- ------------ ------------
Total adjustments....................... 12,554,887 (7,861,789) 14,964,245
------------- ------------ ------------
Net cash provided by operating
activities........................... 6,386,024 10,922,973 20,781,621
------------- ------------ ------------
Cash flows from investing activities:
Proceeds from sale of AM stations, net of disposal
costs of $838,167.............................. -- 43,161,833 --
Additions to property and equipment............... (2,022,344) (1,644,533) (2,099,507)
Acquisition of radio licenses..................... (142,335,513) (9,327,713) (26,284,504)
Deposit for acquisition of radio stations......... -- -- (10,000,000)
------------- ------------ ------------
Net cash provided by (used in) investing
activities........................... (144,357,857) 32,189,587 (38,384,011)
------------- ------------ ------------
</TABLE>
F-6
<PAGE> 13
SPANISH BROADCASTING SYSTEM, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED)
FISCAL YEARS ENDED SEPTEMBER 28, 1997,
SEPTEMBER 27, 1998 AND SEPTEMBER 26, 1999
<TABLE>
<CAPTION>
YEAR ENDED
------------------------------------------
1997 1998 1999
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from financing activities:
Dividends on common stock.......................... $ -- (2,676,348) --
Purchase of Senior unsecured notes................. -- (15,055,055) --
Retirement of Senior secured notes................. (38,414,562) -- --
Retirement of Series A preferred stock............. (42,699,590) -- --
Redemption of warrants............................. (8,323,000) -- --
Exercise of warrants............................... -- -- 2,819
Repayments of debt, including accrued interest..... (56,143) (41,521) (548,125)
Proceeds from senior notes, net of financing costs
of $5,712,407................................... 69,287,593 -- --
Proceeds from Redeemable Series A Preferred stock
and warrants, net of issuance cost of
$8,952,550...................................... 166,047,450 -- --
Increase in deferred financing costs............... -- -- (554,330)
Increase in deferred offering costs................ -- -- (1,965,551)
Decrease (increase) in loans receivable from
stockholders.................................... (1,050,230) 14,827 --
------------ ------------ ------------
Net cash provided by (used in) financing
activities............................ 144,791,518 (17,758,097) (3,065,187)
------------ ------------ ------------
Net (decrease) increase in cash and cash
equivalents........................... 6,819,685 25,354,463 (20,667,577)
Cash and cash equivalents at beginning of period..... 5,468,079 12,287,764 37,642,227
------------ ------------ ------------
Cash and cash equivalents at end of period........... $ 12,287,764 37,642,227 16,974,650
============ ============ ============
Supplemental cash flow information:
Interest paid during the period.................... $ 13,175,308 20,561,613 20,540,882
============ ============ ============
Income taxes paid during the period................ $ 294,262 1,787,191 1,166,846
============ ============ ============
Noncash investing and financing activities:
Issuance of notes as payment for interest.......... $ 1,185,722 -- --
============ ============ ============
Dividends declared on preferred stock.............. $ 15,383,936 27,717,142 31,755,475
============ ============ ============
Issuance of preferred stock as payment of preferred
stock dividends................................. $(13,030,211) (27,553,543) (31,556,817)
============ ============ ============
Issuance of warrants as payment of dividends....... $ -- 273,828 --
============ ============ ============
Issuance of note as payment towards purchase price
of radio station................................ $ 3,000,000 -- 1,000,000
============ ============ ============
Repayment of stockholder loan and accrued interest
through dividend withholding.................... $ -- 1,098,368 --
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE> 14
SPANISH BROADCASTING SYSTEM, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 27, 1998 AND SEPTEMBER 26, 1999
(1) ORGANIZATION AND NATURE OF BUSINESS
Spanish Broadcasting System, Inc., a Delaware corporation, and subsidiaries
(the "Company") owns and operates thirteen Spanish-language radio stations
serving the New York, Puerto Rico, Miami, Chicago, San Antonio and Los Angeles
markets through its subsidiaries, SBS of Greater New York, Inc., Spanish
Broadcasting System of Florida, Inc., Spanish Broadcasting System of California,
Inc., Spanish Broadcasting System of Greater Miami, Inc., Spanish Broadcasting
System of San Antonio, Inc., Spanish Broadcasting System of Illinois, Inc. and
Spanish Broadcasting System of Puerto Rico, Inc., a Puerto Rico corporation.
Additionally, the Company's other subsidiaries include Spanish Broadcasting
System, Inc., a New Jersey corporation, Spanish Broadcasting System of Puerto
Rico, Inc., a Delaware corporation, SBS Funding, Inc., a Delaware corporation,
JuJu Media, Inc., a New York corporation, 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.
The domestic broadcasting industry is subject to extensive federal
regulation which, among other things, requires approval by the Federal
Communications Commission ("FCC") for the issuance, renewal, transfer and
assignment of broadcasting station operating licenses and limits the number of
broadcasting properties the Company may acquire. The Company operates in the
domestic radio broadcasting industry which is subject to extensive and changing
regulation by the FCC.
(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 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 referred to in
note 6. The Company has not included separate financial statements of the
Subsidiary Guarantors because (i) the Subsidiary Guarantors are wholly owned and
constitute substantially all of the Company's direct or indirect subsidiaries,
and (ii) the Company is a holding company with no independent assets or
operations other than its investments in the Subsidiary Guarantors.
The Company's fiscal year is the 52-week or 53-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.
F-8
<PAGE> 15
SPANISH BROADCASTING SYSTEM, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 27, 1998 AND SEPTEMBER 26, 1999
(d) Long-Lived Assets
The Company follows the provisions of 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." 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. See note 5 for impairment losses related to fixed assets.
(e) Intangible Assets
Intangible assets primarily represent the portion of the purchase price of
station acquisitions allocated to FCC licenses of those stations and are
amortized on a straight-line basis over 40 years, based on the industry practice
of renewing FCC licenses periodically, and other intangible assets, including
goodwill, which are being amortized on a straight-line basis over 5 years. The
Company periodically assesses the recoverability of the carrying amount of
intangible assets, including goodwill, as well as the amortization period to
determine whether current events or circumstances warrant adjustments to the
carrying value and/or revised estimates of useful lives. This evaluation
consists of the projection of undiscounted cash flows for each of the Company's
radio stations over the remaining amortization periods of the related intangible
assets. If such projections indicate that undiscounted cash flows are not
expected to be adequate to recover the carrying amounts of the related
intangible assets, a loss is recognized to the extent the carrying amount of the
asset exceeds its fair value. At this time, the Company believes that no
significant impairment of its intangible assets, including goodwill, has
occurred and that no reduction of the estimated useful lives is warranted. This
assessment will be impacted if such projections are not achieved.
(f) Deferred Financing Costs
Deferred financing costs relate to the refinancing of the Company's debt
and additional debt financing obtained in connection with Company's acquisition
of WXDJ-FM and WRMA-FM in Miami and WLEY-FM in Chicago (see note 6).
Deferred financing costs are being amortized using a method which
approximates the effective-interest method over the respective lives of the
related indebtedness.
(g) Barter Transactions
Barter transactions represent advertising time exchanged for promotional
items, advertising, supplies, equipment and services. Revenues from barter
transactions are recognized as income when advertisements are broadcast.
Expenses are recognized when goods or services are received or used. 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 marrket
accounts and certificates of deposits which have an original maturity date of
less than three months, totaled approximately $37.6 million and $17.0 million at
September 27, 1998 and September 26, 1999, respectively.
(i) Income Taxes
The Company files a consolidated federal income tax return with its
subsidiaries. The Company accounts for income taxes under the asset and
liability method. Deferred tax assets and liabilities are recognized for the
F-9
<PAGE> 16
SPANISH BROADCASTING SYSTEM, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 27, 1998 AND SEPTEMBER 26, 1999
future tax consequences attributable to temporary 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. 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) Advertising Costs
The Company incurs various marketing and promotional costs to add and
maintain listenership. These costs are charged to expense in the period
incurred.
(k) Deferred Commitment Fee
On December 30, 1996, the Company entered into an agreement with a national
advertising agency (the "Agency") whereby the Agency would serve as the
Company's exclusive sales representative for all national sales for a seven-year
period. Pursuant to this agreement, the Agency agreed to pay a commitment fee of
$5.1 million to the Company, of which $1.0 million was paid upon execution of
the agreement and $4.1 million is to be remitted on a monthly basis over a
three-year period. The commitment fee is recognized on a straight-line basis
over the seven-year contractual term of the arrangement as a reduction of Agency
commissions. Deferred commitment fee represents the excess of payments received
from the Agency over the amount recognized.
(l) 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.
(m) Concentration of Risk
All of the Company's business is conducted in the New York, Miami, Los
Angeles, Chicago, San Antonio and Puerto Rico markets. Net revenue earned from
radio stations in these markets as a percentage of total revenue for the fiscal
years ended September 28, 1997, September 27, 1998 and September 26, 1999 is as
follows:
<TABLE>
<CAPTION>
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
New York................................................ 49% 44% 44%
Miami................................................... 22% 28% 24%
Los Angeles............................................. 28% 17% 17%
Chicago................................................. 1% 11% 11%
San Antonio............................................. -- -- 2%
Puerto Rico............................................. -- -- 2%
--- --- ---
100% 100% 100%
=== === ===
</TABLE>
F-10
<PAGE> 17
SPANISH BROADCASTING SYSTEM, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 27, 1998 AND SEPTEMBER 26, 1999
The increase in market concentration risk in Miami and Chicago in fiscal
1997 and 1998 results from the acquisitions of WRMA-FM and WXDJ-FM in Miami and
WLEY-FM (formerly WYSY-FM) in Chicago as discussed in note 3.
(n) Basic and Diluted Net Loss Per Common Share
The Company has presented net loss per common share pursuant to SFAS No.
128, "Earnings Per Share", and the Securities and Exchange Commission Staff
Accounting Bulletin No. 98.
In accordance with Securities and Exchange Commission ("SEC") Staff
Accounting Bulletin No. 98, certain common stock and common stock equivalents
issued for nominal consideration prior to the initial filing of a registration
statement relating to an initial public offering are treated as outstanding for
the entire period. The Company had no nominal issuances during this period.
Basic net loss per common share was computed by dividing net loss by the
weighted average number of shares of common stock outstanding for each period
presented. Diluted net loss per common share is computed by giving effect to
common stock equivalents as if they were outstanding for the entire period.
Common stock equivalents were not considered for the years presented since their
effect would be antidilutive. Common stock equivalents of 8,772,776 and
8,798,612 in 1997 and 1998, respectively, related to warrants outstanding (see
note 7). There were no common stock equivalents outstanding at September 26,
1999.
<TABLE>
<CAPTION>
1997 1998 1999
------------ ----------- ------------
<S> <C> <C> <C>
Income (loss) before extraordinary item....... $ (4,522,110) 20,397,485 5,817,376
Less accretion of preferred stock............. 1,659,695 2,552,465 2,993,311
Less dividends on preferred stock............. 15,383,936 27,717,142 31,755,475
------------ ----------- ------------
Loss before extraordinary item................ (21,565,741) (9,872,122) (28,931,410)
Extraordinary item............................ (1,646,753) (1,612,723) --
------------ ----------- ------------
Net loss applicable to common stockholders.... $(23,212,494) (11,484,845) (28,931,410)
============ =========== ============
Weighted average common shares outstanding
(basic and diluted)......................... 30,333,400 30,333,400 33,584,576
============ =========== ============
Basic and diluted loss per common share
Net loss per common share before
extraordinary item.......................... $ (0.71) (0.33) (0.86)
Net loss per common share for extraordinary
item........................................ (0.06) (0.05) --
------------ ----------- ------------
Net loss per common share..................... $ (0.77) (0.38) (0.86)
============ =========== ============
</TABLE>
(o) Fair Value of Financial Instruments
Statement of Financial Accounting Standards No. 107, "Disclosures About
Fair Value of Financial Instruments," requires disclosure of fair value of
certain financial instruments. Cash and cash equivalents, receivables, other
current assets and due from related party, as well as accounts payable, accrued
expenses and other current liabilities, as reflected in the consolidated
financial statements, approximate fair value because of the short-term maturity
of these instruments. The estimated fair value of the Company's other long-term
debt instruments approximate the carrying amount as the interest rates
approximate the Company's current borrowing rate for similar debt instruments of
comparable maturity.
Fair value estimates are made at a specific point in time, based on
relevant market information and information about the financial instrument.
These estimates are subjective in nature and involve uncertainties
F-11
<PAGE> 18
SPANISH BROADCASTING SYSTEM, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 27, 1998 AND SEPTEMBER 26, 1999
and matters of significant judgment and therefore cannot be determined with
precision. Changes in assumptions could significantly affect the estimates.
The estimated fair value of the Company's unsecured notes and preferred
stock is as follows (in millions):
<TABLE>
<CAPTION>
1998 1999
---------------- ----------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- ----- -------- -----
<S> <C> <C> <C> <C>
12 1/2% Senior unsecured notes......................... $ 91.6 91.6 92.3 102.5
11% Senior unsecured notes............................. 75.0 75.0 75.0 81.4
14 1/4% Series A senior exchangeable preferred stock... 201.3 201.3 235.9 258.4
</TABLE>
The fair value estimates of the unsecured notes and preferred stock were
based upon quotes from major financial institutions taking into consideration
current rates offered to the Company for debt instruments of the same remaining
maturities.
(p) Redeemable Preferred Stock
Redeemable preferred stock is stated at redemption value less the
unamortized discount. The discount is accreted into the carrying value of the
preferred stock through the date at which the preferred stock is mandatorily
redeemable with a charge to accumulated deficit using the effective-interest
method.
(q) Reclassification
Certain prior year amounts have been reclassified to conform with the
current year presentation.
(r) Segment Reporting
In June 1997, the FASB issued Statement of Financial Accounting Standard
No. 131, "Disclosures about Segment of an Enterprise and Related Information"
(SFAS 131). SFAS No. 131 is effective for financial statements for periods
beginning after December 15, 1997. SFAS No. 131 establishes standards for the
way public business enterprises report information about operating segments in
annual financial statements and requires those enterprises to report selected
information about operating segments in interim financial reports issued to
shareholders. The adoption of SFAS No. 131 did not have a significant impact on
the Company's financial reporting as of and for each of the fiscal years in the
three-year period ended September 26, 1999, since the Company believes it has
one reportable segment.
(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 $84.6 million, plus financing and closing costs of $1.8 million. The
Company assumed operational responsibility of WPAT-FM on January 26, 1996 under
an interim agreement, at which time the Company changed the musical format of
WPAT-FM to Spanish language adult contemporary. The Company financed the
acquisition of WPAT-FM through the issuance of senior notes and preferred stock
in March 1996 (see note 6).
On March 27, 1997, the Company acquired the FCC broadcast license and
substantially all of the assets used or useful in the operation of WLEY-FM
(formerly WYSY-FM) in Chicago for $33.0 million plus financing and closing costs
of $0.2 million.
F-12
<PAGE> 19
SPANISH BROADCASTING SYSTEM, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 27, 1998 AND SEPTEMBER 26, 1999
On March 27, 1997, the Company acquired the FCC broadcast licenses and
substantially all of the assets used or useful in the operation of WRMA-FM and
WXDJ-FM in Miami for $111.0 million plus financing and closing costs of $1.1
million.
The Company financed the purchases of WLEY-FM (formerly WYSY-FM), WRMA-FM
and WXDJ-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
(see note 6) and warrants to purchase 3,745,000 shares of the Company's Class B
common stock (par value $.0001 per share) and $75 million aggregate principal
amount of the Company's 11% Senior Notes due 2004 (see note 6), plus a note
payable to the seller of WLEY-FM (formerly WYSY-FM) for $3.0 million.
The following unaudited pro forma 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 1997 after giving effect to certain
adjustments, including amortization of intangible assets 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 occur in
the future. The results of WYSY-FM prior to its respective acquisition date has
not been included in the pro forma summary as this acquisition was not
considered material.
<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 28,
1997
-------------
(UNAUDITED)
<S> <C>
Net revenues............................................ $66,762,000
Loss before extraordinary item.......................... (3,498,000)
Net loss................................................ (5,145,000)
Net loss per share...................................... (0.17)
</TABLE>
On May 13, 1998, the Company acquired the FCC broadcast license and
substantially all of the assets used or useful in the operation of radio station
KRIO-FM serving the San Antonio area for $9.2 million, plus closing costs of
$0.1 million. The Company financed this purchase from cash on hand and from
operations. The Company subsequently changed the call letters to KLEY-FM. The
aforementioned acquisition was not deemed material in fiscal 1998 for financial
pro forma presentation purposes.
On December 1, 1998, the Company acquired from Pan Caribbean Broadcasting
Corporation the FCC broadcast license and substantially all of the assets of
WCMA-FM (formerly WDOY-FM) in Puerto Rico for $8.3 million. The acquisition of
WCMA-FM was financed from cash on hand and cash from operations.
On April 30, 1999, the Company acquired the FCC broadcast licenses and
substantially all of the assets used or useful in the operation of WMEG-FM and
WEGM-FM, in Puerto Rico for $16.0 million. The Company financed this purchase
from cash on hand and cash from operations.
On April 26, 1999, the Company acquired 80 percent of the issued and
outstanding capital stock of JuJu Media, Inc., the owner and operator of
LaMusica.com, an Internet web site and "portal" targeting the U.S. hispanic
market, for $2.0 million in cash and the issuance of a promissory note for $1.0
million.
On September 22, 1999, the Company entered into a definitive agreement to
purchase all of the outstanding capital stock of nine subsidiaries of Chancellor
Media Corporation of Los Angeles. The Company has agreed to purchase, own and
operate eight radio stations in Puerto Rico, including stations WIOA-FM,
WIOP-FM, WIOC-FM, WCOM-FM, WZMT-FM, WZNT-FM, WOYE-FM, and WCTA-FM. The purchase
price is $90.0 million. In connection with this acquisition, the Company made a
$10.0 million nonrefundable deposit on the purchase price into escrow. The
closing of this acquisition is subject to
F-13
<PAGE> 20
SPANISH BROADCASTING SYSTEM, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 27, 1998 AND SEPTEMBER 26, 1999
satisfaction of certain customary conditions, including receipt of regulatory
approvals from the FCC and Department of Justice. The Company expects to finance
the purchase of these companies from a combination of bank borrowings and cash
on hand. The Company expects to close the acquisition of these companies in
January 2000. However, there can be no assurance that this acquisition can be
completed during the expected time frame or at all.
The aforementioned acquisitions are not deemed material in fiscal 1999 for
financial pro forma presentation purposes.
The Company's consolidated results of operations include the results of
WPAT-FM, WLEY-FM, WRMA-FM, WXDJ-FM, KLEY-FM, WCMA-FM, WMEG-FM, WEGM-FM, and JuJu
Media, Inc. from the respective dates of acquisition. These acquisitions have
been accounted for under the purchase method of accounting. The purchase price
has been allocated to the assets acquired, principally FCC licenses.
(4) SALE OF AM STATIONS
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 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 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 sales price of $26.0 million
and recorded a gain of $18.6 million. On December 2, 1997, the Company
consummated the sale of the assets and FCC license of KXMG-AM to One-on-One for
a sales price of $18.0 million and recorded a gain of $17.6 million. These
transactions are classified under other income as gain on sale of AM stations.
Pursuant to the 1994 12 1/2% Senior Notes due 2002 (the "12 1/2% Notes")
(see note 6) the Company is required to use the greater of $25.0 million or 50%
of the net proceeds from any disposition of certain asset sales including the
FCC broadcast licenses of the aforementioned AM stations to make offers to
purchase the 12 1/2% Notes at 110% of the principal value thereof.
On October 17, 1997, the Company made a tender offer to purchase for cash
any and all of the 12 1/2% Notes up to $22.7 million plus accrued interest up
to, but not including the payment date. The amount payable by the Company was
110% of the principal amount of the 12 1/2% Notes. The Company paid $6.3 million
to the noteholders who responded to the tender offer and purchased $5.5 million
in principal amount of 12 1/2% Notes for $6.0 million plus accrued interest of
$0.3 million in November 1997. The Company also repurchased $7.7 million in
principal amount of 12 1/2% Notes for $9.0 million plus accrued interest of $0.4
million in November 1997. The Company recognized a loss on the tender offer and
repurchased notes of $1.6 million, net of income tax benefit of $1.1 million,
due to the premium paid for the 12 1/2% Notes and the subsequent write-off of
the deferred financing costs and original issue discounts related to the 12 1/2%
Notes purchased. This amount has been classified as an extraordinary item in the
accompanying consolidated statement of operations.
Prior to the sale of the assets of WCMQ-AM, the station operated on the
frequency of 1210 kHz. As part of the sale of WCMQ-AM, the Company entered into
a five-year local marketing agreement ("LMA") with One-on-One in November 1997.
Under the terms of the LMA, the Company began programming and selling
advertising on WCMQ-AM using a newly-authorized frequency of 1700 kHz. The 1700
kHz transmitter is co-located at the 1210 kHz transmitter/antenna site which was
part of the aforementioned asset sale.
F-14
<PAGE> 21
SPANISH BROADCASTING SYSTEM, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 27, 1998 AND SEPTEMBER 26, 1999
(5) PROPERTY AND EQUIPMENT
Property and equipment consist of the following at September 27, 1998 and
September 26, 1999:
<TABLE>
<CAPTION>
ESTIMATED
1998 1999 USEFUL LIVES
----------- ---------- ------------
<S> <C> <C> <C>
Land.............................................. $ 1,368,407 1,000,000 --
Building and building leasehold improvements...... 11,250,742 14,995,440 20 years
Tower and antenna systems......................... 2,138,824 2,257,814 7-15 years
Studio and technical equipment.................... 5,135,586 5,564,258 10 years
Furniture and fixtures............................ 1,685,745 2,072,817 3-10 years
Transmitter equipment............................. 931,750 1,220,225 7-10 years
Leasehold improvements............................ 1,405,759 1,873,609 5-13 years
Computer equipment................................ 1,333,888 1,739,392 5 years
Other............................................. 520,369 629,997 5 years
----------- ----------
25,771,070 31,353,552
Less accumulated depreciation and amortization.... 10,828,137 16,575,849
----------- ----------
$14,942,933 14,777,703
=========== ==========
</TABLE>
During fiscal 1997 and 1999, the Company wrote down the value of one of its
properties in Los Angeles (which was part of the assets acquired in the purchase
of the Los Angeles AM radio station) by $0.4 million and $0.5 million,
respectively. The write-downs were based on current market values of real estate
in the Los Angeles area. These amounts are included in other, net in the
accompanying consolidated statements of operations.
(6) SENIOR NOTES AND PREFERRED STOCK
12 1/2% Senior Unsecured Notes
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 "12 1/2% Notes") due
2002 and warrants to purchase 5,352,950 shares of Class B common stock. The
12 1/2% Notes and warrants are separately transferable. The 12 1/2% Notes were
issued at a discount and generated proceeds to the Company of $87.8 million, net
of financing costs of $6.2 million. Of the $94.0 million of gross proceeds,
$88.6 million was allocated to the 12 1/2% Notes and $5.4 million was determined
to be the value of the warrants.
On September 30, 1999, the Company commenced tender offers and consent
solicitations relating to the 12 1/2% Notes. Pursuant to these tender offers and
consent solicitations, the Company repurchased $101.5 million in principal
amount of 12 1/2% Notes on November 2, 1999 -- see note 15(a). In connection
with this repurchase, the Company will recognize an extraordinary loss on the
early extinguishment of debt of approximately $9.5 million, net of income taxes
of approximately $7.4 million, in the first quarter of fiscal 2000.
REDEEMABLE SERIES A PREFERRED STOCK AND 12 1/4% SENIOR SECURED NOTES DUE 2001
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 and $35.0
million of the Company's 12 1/4% Senior Secured Notes due 2001 together with
cash on hand.
F-15
<PAGE> 22
SPANISH BROADCASTING SYSTEM, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 27, 1998 AND SEPTEMBER 26, 1999
On March 27, 1997, these financial instruments were redeemed and retired
with a portion of the proceeds from issuance of the Series A Preferred Stock and
11% Senior Unsecured Notes described below. The Company realized a loss on the
extinguishment of the 12 1/4% Senior Secured Notes which has been classified as
an extraordinary item in the accompanying fiscal 1997 consolidated statement of
operations.
14 1/4% SERIES A SENIOR EXCHANGEABLE PREFERRED STOCK AND 11% SENIOR UNSECURED
NOTES
On March 27, 1997, the Company financed the purchase of radio stations
WYSY-FM (renamed WLEY-FM by the Company), WRMA-FM and WXDJ-FM with proceeds from
the sale through a private placement of 175,000 shares of the Company's 14 1/4%
Series A Senior Exchangeable Preferred Stock ("Series A Preferred Stock") and
warrants to purchase 3,745,000 shares of the Company's Class B common stock. The
Series A Preferred Stock and the warrants are separately transferable. The gross
proceeds from the issuance of the Series A Preferred Stock and warrants,
amounted to $175.0 million. The value of the warrants was determined to be $16.6
million. The Company also issued $75.0 million aggregate principal amount of the
Company's 11% Senior Unsecured Notes (the "11% Senior Notes") due 2004. In
connection with this transaction, the Company capitalized financing costs of
$5.7 million related to the 11% Senior Notes and charged issuance costs of $9.0
million related to the Series A Preferred Stock and warrants to paid-in capital.
On September 30, 1999, the Company commenced tender offers and consent
solicitations relating to the 11% Senior Notes. Pursuant to these tender offers
and consent solicitations, the Company repurchased $75.0 million in principal
amount of 11% Senior Notes on November 2, 1999 -- see note 15(a). In connection
with this repurchase, the Company will recognize an extraordinary loss on the
early extinguishment of debt of approximately $6.6 million, net of income taxes
of approximately $5.1 million, in the first quarter of fiscal 2000.
On December 2, 1999, the Company also redeemed in full the Series A
Preferred Stock - see note 15(a). In connection with this redemption, the
Company will recognize total additional dividends of approximately $28.4
million, on the Series A Preferred Stock, which will further reduce the income
available to common stockholders in the first quarter of fiscal 2000.
(7) WARRANTS
Warrants consist of the following:
<TABLE>
<CAPTION>
NUMBER OF CLASS B COMMON SHARES
REPRESENTED BY OUTSTANDING WARRANTS
-------------------------------------
1997 1998 1999
----------- ----------- ---------
<S> <C> <C> <C>
Issued in connection with:
12 1/2% Senior Notes(a)................................ 5,352,950 2,469,950 --
Redeemable Series A Preferred Stock and 12 1/4% Senior
Secured Notes(b)..................................... -- -- --
14 1/4% Series A Senior Exchangeable Preferred
Stock(c)............................................. 3,745,000 3,745,000 --
Replacement warrants(a)................................ -- 2,910,450 --
--------- --------- -------
Total........................................ 9,097,950 9,125,400 --
========= ========= =======
</TABLE>
(a) In 1994, in conjunction with the issuance of 12 1/2% Senior Notes, the
Company issued warrants exercisable for 5,352,950 shares of Class B
common stock at an exercise price of $.01 per warrant share which are
subject to adjustment upon the occurrence of certain events, as defined
in the warrant agreement. In connection with the declaration of a cash
dividend on common stock, in March 1998, holders of these warrants were
given the option to participate in such dividends in lieu
F-16
<PAGE> 23
SPANISH BROADCASTING SYSTEM, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 27, 1998 AND SEPTEMBER 26, 1999
of maintaining their antidilution rights with respect to such
dividends. Holders of warrants representing 2,910,450 shares of Class B
common stock exercised this option and received cash dividends of
$0.326 million and replacement warrants representing 2,910,450 shares
of Class B common stock which have an exercise price of $.01 per share.
The remaining warrant holders had their underlying shares adjusted
upward resulting in an increase to additional paid-in capital and a
charge to accumulated deficit of $0.274 million. The remaining warrant
holders exercised the warrants during the nine-month period ended June
27, 1999. During the fiscal year ended September 26, 1999, replacement
warrants were exercised for 2,900,950 shares of Class B common stock.
The remaining replacement warrants expired on June 30, 1999,
representing 9,500 shares of common stock.
(b) In 1996, in conjunction with the issuance of Redeemable Series A
Preferred Stock and 12 1/4% Senior Secured Notes, the Company issued
warrants exercisable for 6% at the Company's Class B common stock on a
fully diluted basis. In 1997, these warrants were redeemed with
proceeds from the Company's 14 1/4% Series A Exchangeable Preferred
Stock.
(c) In 1997, in conjunction with the issuance of the 14 1/4% Series A
Senior Exchangeable Preferred Stock, the Company issued warrants that
entitle the holder to acquire 21.4 shares of Class B common stock or
3,745,000 shares at a price equal to $0.01 per 21.4 shares, subject to
adjustment from time to time upon the occurrence of certain changes of
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 or common stock.
During the fiscal year ended September 26, 1999, warrants were
exercised for 3,744,250 shares of Class B common stock. The remaining
warrants expired on June 30, 1999, representing 750 shares of common
stock.
(8) OTHER LONG-TERM DEBT
Other long-term debt consists of the following at September 27, 1998 and
September 26, 1999:
<TABLE>
<CAPTION>
1998 1999
---------- ---------
<S> <C> <C>
Obligation under capital lease with related party payable in
monthly installments of $9,000, including interest at
6.25%, commencing June 1992 (see note 12)................. $ 989,278 941,761
Note payable due in quarterly installments of $187,500,
including interest at an annual rate of three-month LIBOR
plus 450 basis points, commencing September 1999, with
balance due on March 27, 2003; paid in full in December
1999 -- see note 15(a).................................... 3,468,723 3,281,152
Note payable due on April 26, 2000 including interest which
accrues at an annual rate of 6%........................... -- 1,000,000
---------- ---------
4,458,001 5,222,913
Less current portion........................................ 47,496 1,800,572
---------- ---------
$4,410,505 3,422,341
========== =========
</TABLE>
F-17
<PAGE> 24
SPANISH BROADCASTING SYSTEM, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 27, 1998 AND SEPTEMBER 26, 1999
The scheduled maturities of other long-term debt are as follows at
September 26, 1999:
<TABLE>
<CAPTION>
FISCAL YEAR ENDING SEPTEMBER
- ----------------------------
<S> <C>
2000................................................... $1,800,572
2001................................................... 803,825
2002................................................... 807,287
2003................................................... 1,091,246
2004................................................... 64,894
Thereafter............................................... 655,089
----------
$5,222,913
==========
</TABLE>
(9) LOANS RECEIVABLE FROM STOCKHOLDERS AND RELATED-PARTY TRANSACTIONS
Loans receivable from stockholders are comprised of loans receivable from
the Company's Chief Executive Officer ("CEO") and Chairman of the Board of
Directors ("Chairman"), and consist of notes which bear interest at 6.36% per
annum, mature on December 30, 2025, and are payable in 30 equal annual
installments of $0.2 million. Loans receivable have been classified as an
increase in stockholders' deficiency in the accompanying consolidated balance
sheets. Interest receivable of $0.4 million and $0.5 million, respectively, at
September 27, 1998 and September 26, 1999, is included in other current assets.
At September 27, 1998, the Company had advances totaling $0.3 million due
from a party related through common ownership. During fiscal 1999, the Company
agreed to forgive these advances and wrote off the amount due from the related
party. Additionally, at September 27, 1998, and September 26, 1999, the Company
had trade receivables totaling $0.4 million due from this related party which
have been fully reserved as being uncollectible.
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 $0.1 million for each of the fiscal years
ended September 28, 1997, September 27, 1998 and September 26, 1999.
The Company leases an apartment from its CEO for annual rentals of $0.1
million through August 2007. Certain renovation expenses were paid for by the
Company totaling $0.2 million during 1998 and 1999. Additionally, the Company
occupies a building under a capital lease agreement with certain stockholders
(see note 12). The building lease expires in 2012 and calls for an annual base
rent of approximately $0.1 million.
In connection with the relocation of offices from the New York metropolitan
area to the Miami metropolitan area, the Company advanced the CEO an aggregate
of $1.1 million to pay for various expenses. On July 16, 1997, the CEO executed
a promissory note to the Company for the principal amount of $1.1 million to
evidence these advances. The note was payable on demand and bore interest at a
rate of 7% per annum. The Company declared and paid a dividend in 1998 and
applied a portion of the proceeds of such dividend which were otherwise payable
to the CEO to the repayment in full of this promissory note.
(10) BENEFIT PLANS
The Company maintains a stock option plan pursuant to which the Company has
reserved up to 1,337,500 shares of Class B 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 as of September 26, 1999.
F-18
<PAGE> 25
SPANISH BROADCASTING SYSTEM, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 27, 1998 AND SEPTEMBER 26, 1999
In September 1999, the Company adopted an employee incentive stock option
plan ("the 1999 ISO Plan"), a nonemployee director stock option plan ("the 1999
NQ Plan"), and a tax-qualified employee savings and retirement plan ("the 401(k)
Plan"). Options granted under the 1999 ISO Plan will vest according to terms to
be determined by the Compensation Committee of the Company's Board of Directors,
and will have a contractual life of five to ten years from date of grant.
Options granted under the 1999 NQ Plan will vest 20% upon grant, and 20% each
year for the first four years from grant. All options granted under the 1999 ISO
Plan and the 1999 NQ Plan vest immediately upon a change in control of the
Company, as defined. A total of 3,000,000 shares and 300,000 shares of Class A
common stock have been reserved for issuance under the 1999 ISO Plan and the
1999 NQ Plan, respectively. No options have been granted under this plan as of
September 26, 1999.
The 401(k) Plan provides for Company contributions to match 25% of an
eligible employee's contributions, up to 5% of the employee's base monthly
earnings. All employees over the age of 21 that have completed at least 500
hours of service are eligible to participate in the 401(k) Plan.
(11) CAPITAL STOCK
On September 29, 1999, the Company amended and restated its Certificate of
Incorporation, resulting in a conversion of all existing shares of Class A
common stock into shares of Class B common stock equal to the number of shares
representing a 50 to 1 stock split for each share. The number of authorized
shares of capital stock was increased to 151 million comprised of 100 million
shares of Class A common stock, 50 million shares of Class B common stock and 1
million shares of Preferred Stock, and the par values of both the Class A common
stock and Class B common stock were changed from $.01 per share to $.0001 per
share. In addition, Class B common stockholders are entitled to ten votes per
share and Class A common stockholders are entitled to one vote per share. Upon
transfer or sale of stock by Class B common stockholders to non-affiliate
parties, such shares automatically convert to shares of Class A common stock.
The accompanying consolidated financial statements have been retroactively
restated to reflect these actions.
The rights of the holders of shares of Class A common stock and Class B
common stock are identical except for voting rights and conversion provisions.
Holders of each class of common stock are entitled to receive dividends and upon
liquidation or dissolution are entitled to receive all assets available for
distribution to stockholders. The holders of each class have no preemptive or
other subscription rights and there are no redemption or sinking fund provisions
with respect to such shares. Each class of common stock is subordinate to the
Series A Preferred Stock with respect to dividend rights and rights on
liquidation, winding up and dissolution of the Company.
(12) COMMITMENTS AND CONTINGENCIES
Commitments
The Company occupies a building under a capital lease agreement with
certain stockholders of the Company expiring in June 2012. The amount
capitalized under this lease agreement and included in property and equipment at
September 27, 1998 and September 26, 1999 is as follows:
<TABLE>
<CAPTION>
1998 1999
---------- ---------
<S> <C> <C>
Building under capital lease................................ $1,230,440 1,230,440
Less: Accumulated depreciation.............................. (389,533) (451,055)
---------- ---------
$ 840,907 779,385
========== =========
</TABLE>
F-19
<PAGE> 26
SPANISH BROADCASTING SYSTEM, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 27, 1998 AND SEPTEMBER 26, 1999
The Company leases office space and facilities and certain equipment under
operating leases, one of which is with a related party (see note 9), that expire
at various dates through 2035. Certain leases provide for base rental payments
plus escalation charges for real estate taxes and operating expenses.
At September 26, 1999, future minimum lease payments under such leases are
as follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDING SEPTEMBER CAPITAL LEASE OPERATING LEASES
- ---------------------------- ------------- ----------------
<S> <C> <C>
2000................................................ $ 149,000 942,300
2001................................................ 149,000 730,600
2002................................................ 149,000 662,800
2003................................................ 149,000 583,000
2004................................................ 149,000 452,900
Thereafter.......................................... 1,120,229 2,962,800
---------- ---------
Total minimum lease payments............................. 1,865,229 6,334,400
=========
Less executory costs..................................... (509,114)
----------
1,356,115
Less interest at 6.25%................................... (414,354)
----------
Present value of minimum lease payments.................. $ 941,761
==========
</TABLE>
Total rent expense for the fiscal years ended September 28, 1997, September
27, 1998 and September 26, 1999 amounted to $1.6 million, $1.1 million and $1.4
million, respectively.
The Company has agreements to sublease its radio frequencies and portions
of its tower sites. Such agreements provide for payments through 2004. The
future minimum rental income to be received under these agreements as of
September 26, 1999 is as follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDING SEPTEMBER AMOUNT
- ---------------------------- -----------
<S> <C>
2000............................................... $ 609,718
2001............................................... 548,937
2002............................................... 398,374
2003............................................... 289,044
2004............................................... 289,044
-----------
$ 2,135,117
===========
</TABLE>
At September 26, 1999, the Company is committed to employment contracts for
certain executives, on-air talent and general managers expiring through 2005.
Future payments under such contracts are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDING SEPTEMBER AMOUNT
- ---------------------------- -----------
<S> <C>
2000............................................... $ 3,614,383
2001............................................... 3,312,367
2002............................................... 2,615,417
2003............................................... 1,575,000
2004............................................... 1,225,000
Thereafter.............................................. 475,000
-----------
$12,817,167
===========
</TABLE>
Included in the future payments schedule above is a five-year employment
agreement with the CEO. The agreement provides for a base salary of not less
than $1.3 million, which may be increased by the board of
F-20
<PAGE> 27
SPANISH BROADCASTING SYSTEM, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 27, 1998 AND SEPTEMBER 26, 1999
directors in its sole discretion. Under the terms of the agreement, the CEO is
paid a cash bonus equal to the sum of (a) 2.5% of the dollar increase in same
station revenue in the aggregate for any fiscal year and (b) 5.0% of the dollar
increase in same station broadcast cash flow for any fiscal year.
Certain employees' contracts provide for additional amounts to be paid if
station ratings or cash flow targets are met.
On September 24, 1999, the Company entered into letters of understanding
with its then Chairman and Secretary. These letters outline the mutual
intentions of the Company and these individuals in connection with the Company's
initial public offering ("IPO"), and were contingent upon the completion of the
IPO [see note 15(a)]. These letters provide for the following:
- The sale by these individuals of $14.0 million of their Class B common
stock in the IPO [see note 15(a)];
- The purchase by the Company of annuities providing aggregate annual
retirement compensation of $1.0 million to these individuals. These
annuities were purchased by the Company for $10.2 million in November
1999;
- The retention of these individuals as members of the Company's Board of
Directors, with titles of "Chairman Emeritus" and "Secretary Emeritus",
respectively;
- An agreement to sell, to the Chairman, the Company's two radio stations
located in the Florida Keys for $0.7 million. The closing of this
transaction is subject to satisfaction of certain customary conditions,
including receipt of regulatory approvals from the FCC and Department of
Justice;
- The repayment by the Chairman of a stockholder loan for approximately
$0.6 million, plus accrued interest of approximately $0.1 million. This
stockholder loan and the related accrued interest was repaid in full by
the Chairman in November 1999;
- An agreement by the Chairman to assume responsibility for a boat
currently leased by the Company. Responsibility for this boat was assumed
by the Chairman in November 1999; and
- The use by the Chairman of a car and driver, and by the Secretary of a
car, to be provided by the Company.
Contingencies
In connection with the sale of WXLX-AM (see note 4), the Company assigned a
lease for a transmitter site which is located on a former landfill which ceased
operations in the late 1960s. As part of the sales agreement, the Company
retained potential exposure relating to possible environmental liabilities
relating to this site. Management is unable to assess the likelihood that any
claim for remediation of this site will arise and no amounts have been accrued
in the consolidated financial statements relating to this contingent liability.
F-21
<PAGE> 28
SPANISH BROADCASTING SYSTEM, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 27, 1998 AND SEPTEMBER 26, 1999
(13) INCOME TAXES
Income tax expense (benefit) for the fiscal years ended September 28, 1997,
September 27, 1998 and September 26, 1999 consists of the following and was
allocated as follows:
<TABLE>
<CAPTION>
1997
---------------------------------------------
CURRENT-
STATE AND CURRENT DEFERRED
LOCAL FEDERAL FEDERAL TOTAL
--------- ------- ---------- ----------
<S> <C> <C> <C> <C>
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)
======== ======= ========== ==========
</TABLE>
<TABLE>
<CAPTION>
1998
---------------------------------------------
CURRENT-
STATE AND CURRENT DEFERRED
LOCAL FEDERAL FEDERAL TOTAL
--------- ------- ---------- ----------
<S> <C> <C> <C> <C>
Income from operations...................... $950,000 850,000 13,824,032 15,624,032
Extraordinary item -- loss on extinguishment
of debt................................... -- -- (1,075,149) (1,075,149)
-------- ------- ---------- ----------
$950,000 850,000 12,748,883 14,548,883
======== ======= ========== ==========
</TABLE>
<TABLE>
<CAPTION>
1998
---------------------------------------------
CURRENT-
STATE AND CURRENT DEFERRED
LOCAL FEDERAL FEDERAL TOTAL
--------- ------- ---------- ----------
<S> <C> <C> <C> <C>
Income from operations...................... $550,000 15,000 3,879,919 4,444,919
======== ======= ========== ==========
</TABLE>
During fiscal 1997, 1998 and 1999, the Company utilized net operating loss
carryforwards of approximately $0.7 million, $38.8 million and $0.2 million,
respectively.
F-22
<PAGE> 29
SPANISH BROADCASTING SYSTEM, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 27, 1998 AND SEPTEMBER 26, 1999
The tax effect of temporary differences and carryforwards that give rise to
deferred tax assets and deferred tax liabilities at September 28, 1997,
September 27, 1998 and September 26, 1999 is as follows:
<TABLE>
<CAPTION>
1997 1998 1999
------------ ----------- -----------
<S> <C> <C> <C>
Deferred tax assets:
Net operating loss carryforwards......... $ 32,955,490 16,919,249 16,849,019
Deferred interest..................... 5,717,617 6,080,278 6,458,459
Allowance for doubtful accounts....... 2,162,038 3,108,024 2,546,384
Fixed assets.......................... 474,286 474,286 474,286
Unearned revenue...................... -- 856,582 1,074,402
AMT credit............................ -- 850,000 865,000
------------ ----------- -----------
Total gross deferred tax
assets......................... 41,309,431 28,288,419 28,267,550
Less valuation allowance................... (17,396,470) (17,396,470) (17,396,470)
------------ ----------- -----------
Total net deferred tax assets.... 23,912,961 10,891,949 10,871,080
------------ ----------- -----------
Deferred tax liabilities:
Depreciation and amortization............ 11,776,023 14,463,595 18,322,645
Intangible assets........................ 8,382,950 5,502,950 5,502,950
Unearned revenue......................... 79,701 -- --
------------ ----------- -----------
Total gross deferred tax liabilities..... 20,238,674 19,966,545 23,825,595
------------ ----------- -----------
Net deferred tax asset
(liability).................... $ 3,674,287 (9,074,596) (12,954,515)
============ =========== ===========
</TABLE>
Total income tax expense (benefit) differed from the amounts computed by
applying the U.S. Federal income tax rate of 35% for fiscal years 1997, 1998 and
1999 as a result of the following:
<TABLE>
<CAPTION>
1997 1998 1999
------ ---- ----
<S> <C> <C> <C>
Computed "expected" tax expense (benefit)................... (35.0)% 35.0% 35.0%
State income taxes, net of federal income tax benefit....... (2.8)% 6.5% 5.5%
Nondeductible expenses...................................... 1.4% 0.4% 0.4%
Other....................................................... (1.8)% 1.8% 2.7%
------ ---- ----
38.2% 43.7% 43.6%
====== ==== ====
</TABLE>
The valuation allowance for deferred tax assets as of September 28, 1997,
September 27, 1998 and September 26, 1999 was $17,396,470. In assessing the
realizability of deferred tax assets, management considers whether it is more
likely than not that some portion or all of the deferred tax assets will not be
realized. The ultimate realization of deferred tax assets is dependent upon the
generation of future taxable income during the periods in which those temporary
differences become deductible. Management considers the scheduled reversal of
deferred tax liabilities, projected future taxable income, and tax planning
strategies in making this assessment.
Based upon the level of historical taxable income and projections for
future taxable income over the periods which the deferred tax assets are
deductible, management believes it is more likely than not the Company will
realize the benefits of these deductible differences, net of the existing
valuation allowances. The amount of the deferred tax asset considered
realizable, however, could be reduced in the near term if estimates of future
taxable income during the carryforward period are reduced.
F-23
<PAGE> 30
SPANISH BROADCASTING SYSTEM, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 27, 1998 AND SEPTEMBER 26, 1999
At September 26, 1999, the Company has net operating loss carryforwards
available to offset future taxable income expiring as follows:
<TABLE>
<CAPTION>
EXPIRING IN SEPTEMBER NET OPERATING LOSS CARRYFORWARDS
--------------------- --------------------------------
<S> <C>
2007.................................... $ 5,597,000
2008.................................... 12,213,000
2009.................................... 11,445,000
2010.................................... 12,868,000
-----------
$42,123,000
===========
</TABLE>
(14) 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 litigation which is probable to result in an unfavorable outcome
and can be reasonably estimated amounts to $0.3 million which the Company has
accrued. 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.
(15) SUBSEQUENT EVENTS
(a) Tender Offers and Initial Public Offering
On September 30, 1999, the Company commenced tender offers and consent
solicitations (the "Tender Offers") relating to any and all of its outstanding
11% Senior Notes and 12 1/2% Notes, at approximately 111% and 114%,
respectively, of their par values. The Tender Offers were contingent upon the
completion of the Company's IPO and debt offering (which were both completed on
November 2, 1999 -- see below), and the valid tender of not less than a majority
in aggregate principal amount of both the 11% Senior Notes and the 12 1/2%
Notes.
On October 27, 1999, the Company and selling shareholders sold 25,055,510
shares of Class A common stock in an IPO, from which the Company received
proceeds of $389.4 million after payment of underwriter commissions.
Concurrently with this IPO, on October 28, 1999, the Company sold $235.0 million
aggregate principal amount of 9 5/8% senior subordinated notes due 2009 (the
"1999 Notes"), from which the Company received proceeds of $228.0 million after
payment of underwriter commissions. On November 2, 1999, the Company repurchased
the 11% Senior Notes and 12 1/2% Notes solicited under the Tender Offers for
$205.0 million, including accrued interest of $6.0 million. In connection with
the repurchase of the 11% Senior Notes and the 12 1/2% Notes, the Company
realized a loss on the early extinguishment of debt of approximately $16.1
million, net of income taxes of approximately $12.5 million, in the first
quarter of fiscal 2000. This loss relates to the premium paid on the repurchase
of the 11% Senior Notes and 12 1/2% Notes, the write-off of related deferred
financing costs, and the amortization of the remaining original issue discount
on the 12 1/2% Notes.
On December 2, 1999, the Company redeemed in full the Series A Preferred
Stock for $265.6 million, including accrued dividends of $7.5 million. In
connection with the redemption of the Series A Preferred Stock, the Company
recorded additional dividends of approximately $28.4 million on the Series A
Preferred Stock in the first quarter of fiscal 2000. These additional dividends
relate to the premium on the redemption, and the accretion of the remaining
original issue discount on the Series A Preferred Stock, and will reduce the net
income available to common stockholders during the first quarter of fiscal 2000.
In connection with these offerings, in October 1999 the Company amended its
employment agreement with its CEO and entered into employment agreements with
two other executive officers of the Company. In
F-24
<PAGE> 31
SPANISH BROADCASTING SYSTEM, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 27, 1998 AND SEPTEMBER 26, 1999
addition, the CEO repaid a shareholder loan for approximately $1.9 million, plus
accrued interest of approximately $0.4 million, in November 1999.
In connection with the IPO, the Company also granted an aggregate of
100,000 options to non-employee directors, 250,000 options to a former director,
and an aggregate of 300,000 options to executives of the Company, in November
1999. These options were granted at an exercise price per share equal to the IPO
price per share, with vesting periods ranging from zero to four years.
On December 2, 1999, the Company repaid in full the note payable to the
seller of WLEY-FM (formerly WYSY-FM) of approximately $3.3 million, plus accrued
interest of approximately $0.1 million.
The Company has also entered into a commitment letter with a lender for the
arrangement of senior credit facilities in an amount of up to $150.0 million.
These senior credit facilities are currently contingent upon completion of a
definitive agreement with the lender. There is no assurance that the senior
credit facilities will be obtained.
(b) Contingency
On September 28, 1999, the Company received notice form the purchaser of
KXMG-AM that it would make a claim against the Company for indemnification under
the agreement pursuant to which KXMG-AM was sold, for the removal of an
underground fuel storage tank located on the site of KXMG-AM's transmitter. The
notice did not specify the amount involved in the indemnification claim. The
Company does not have sufficient information to assess the potential exposure
related to this matter, and no amounts have been accrued in the consolidated
financial statements relating to this contingent liability.
F-25
<PAGE> 32
SPANISH BROADCASTING SYSTEM, INC.
AND SUBSIDIARIES
FINANCIAL STATEMENT SCHEDULE -- VALUATION AND QUALIFYING ACCOUNTS
FISCAL YEARS ENDED SEPTEMBER 28, 1997,
SEPTEMBER 27, 1998 AND SEPTEMBER 26, 1999
<TABLE>
<CAPTION>
COLUMN C ADDITIONS
COLUMN B ----------------------- COLUMN E
BALANCE CHARGED TO CHARGED TO BALANCE AT
COLUMN A BEGINNING COST AND OTHER COLUMN D END
DESCRIPTION OF PERIOD EXPENSE ACCOUNTS DEDUCTIONS(1) OF PERIOD
- --------------------------------------------- ---------- ---------- ---------- ------------- -----------
<S> <C> <C> <C> <C> <C>
Fiscal year 1997:
Allowance for doubtful accounts............ $4,510,763 3,530,259 -- 2,635,927 5,405,095
Fiscal year 1998:
Allowance for doubtful accounts............ $5,405,095 2,634,509 -- 269,544 7,770,060
Fiscal year 1999:
Allowance for doubtful accounts............ $7,770,060 1,670,438 -- 3,074,539 6,365,959
</TABLE>
- ---------------
(1) Write-offs, net of recoveries.
F-26
<PAGE> 33
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this Amendment No. 3 to its Annual Report on Form
10-K to be signed on its behalf and on behalf of the additional registrants by
the undersigned, thereunto duly authorized, on the 5th day of May, 2000.
Spanish Broadcasting System, Inc.
and each of the additional registrants
listed on the Table of Additional
Registrants
By: /s/ Joseph A. Garcia
------------------------------------
Name: Joseph A. Garcia
Title: Executive Vice President and
Chief Financial Officer
