-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, FfCQfpACXA38TeIEzaFCtRHhM6qz6UYoRhbem5dF6dXMPQLICQ7PIWFhOc7pOXrn 1XRQP9H49gUW3iw4NTvtfQ== 0001193125-08-236839.txt : 20081114 0001193125-08-236839.hdr.sgml : 20081114 20081114160115 ACCESSION NUMBER: 0001193125-08-236839 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20080930 FILED AS OF DATE: 20081114 DATE AS OF CHANGE: 20081114 FILER: COMPANY DATA: COMPANY CONFORMED NAME: LBI MEDIA HOLDINGS INC CENTRAL INDEX KEY: 0001267023 STANDARD INDUSTRIAL CLASSIFICATION: RADIO BROADCASTING STATIONS [4832] IRS NUMBER: 000000000 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 333-110122 FILM NUMBER: 081191223 BUSINESS ADDRESS: STREET 1: 1845 WEST EMPIRE AVE. CITY: BURBANK STATE: CA ZIP: 91504 BUSINESS PHONE: 8185635722 MAIL ADDRESS: STREET 1: 1845 WEST EMPIRE AVE CITY: BURBANK STATE: CA ZIP: 91504 10-Q 1 d10q.htm FORM 10-Q Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

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

For the quarterly period ended September 30, 2008

OR

 

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

For the transition period from              to             

Commission file number 333-110122

 

 

LBI MEDIA HOLDINGS, INC.

(Exact Name of Registrant as Specified in Its Charter)

 

 

 

Delaware   05-05849018

(State or other Jurisdiction of

Incorporation or Organization)

 

(IRS Employer

Identification No.)

1845 West Empire Avenue

Burbank, California 91504

(Address of principal executive offices) (Zip code)

Registrant’s Telephone Number, Including Area Code: (818) 563-5722

Not Applicable

(Former name, former address and former fiscal year, if changed since last report).

 

 

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

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

 

Large accelerated filer  ¨       Accelerated filer  ¨

Non-accelerated filer  x

      Smaller reporting company  ¨

(Do not check if a smaller reporting company)

     

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

As of November 14, 2008, there were 100 shares of common stock, $0.01 par value per share, of LBI Media Holdings, Inc. issued and outstanding.

 

 

 


Table of Contents

LBI MEDIA HOLDINGS, INC.

FORM 10-Q QUARTERLY REPORT

TABLE OF CONTENTS

 

     Page

PART I. FINANCIAL INFORMATION

   1

Item 1. Financial Statements

   1

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

   17

Item 3. Quantitative and Qualitative Disclosures About Market Risk

   33

Item 4T. Controls and Procedures

   33

PART II. OTHER INFORMATION

   35

Item 1. Legal Proceedings

   35

Item 1A. Risk Factors

   35

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

   35

Item 3. Defaults upon Senior Securities

   35

Item 4. Submission of Matters to a Vote of Security Holders

   35

Item 5. Other Information

   35

Item 6. Exhibits

   35


Table of Contents

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

LBI MEDIA HOLDINGS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

 

     September 30,
2008
    December 31,
2007
 
     (unaudited)     (Note 1)  

Assets

    

Current assets:

    

Cash and cash equivalents

   $ 357     $ 1,697  

Accounts receivable (less allowances for doubtful accounts of $2,499 as of September 30, 2008 and $2,217 as of December 31, 2007)

     22,344       17,780  

Current portion of program rights, net

     433       321  

Amounts due from related parties

     53       14  

Current portion of notes receivable from related parties

     454       449  

Current portion of employee advances

     83       81  

Prepaid expenses and other current assets

     1,199       1,166  
                

Total current assets

     24,923       21,508  

Property and equipment, net

     95,674       96,990  

Broadcast licenses, net

     336,020       382,574  

Deferred financing costs, net

     8,451       9,014  

Notes receivable from related parties, excluding current portion

     2,385       2,340  

Employee advances, excluding current portion

     1,543       1,127  

Program rights, excluding current portion

     862       228  

Other assets

     3,987       2,775  
                

Total assets

   $ 473,845     $ 516,556  
                

Liabilities and stockholder’s equity

    

Current liabilities:

    

Accounts payable

   $ 3,284     $ 3,739  

Accrued liabilities

     3,188       3,642  

Accrued interest

     3,647       8,701  

Current portion of long-term debt

     1,343       1,239  
                

Total current liabilities

     11,462       17,321  

Long-term debt, excluding current portion

     429,321       421,522  

Fair value of interest rate swap

     4,208       4,194  

Deferred income taxes

     38,702       49,515  

Other liabilities

     2,250       1,603  
                

Total liabilities

     485,943       494,155  

Commitments and contingencies

    

Stockholder’s (deficiency) equity:

    

Common stock, $0.01 par value:

    

Authorized shares — 1,000

    

Issued and outstanding shares — 100

     —         —    

Additional paid-in capital

     63,056       63,298  

Accumulated deficit

     (75,154 )     (40,897 )
                

Total stockholder’s (deficiency) equity

     (12,098 )     22,401  
                

Total liabilities and stockholder’s (deficiency) equity

   $ 473,845     $ 516,556  
                

See accompanying notes.

 

1


Table of Contents

LBI MEDIA HOLDINGS, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands)

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2008     2007     2008     2007  

Net revenues

   $ 30,843     $ 30,323     $ 91,258     $ 87,983  

Operating expenses:

        

Program and technical, exclusive of depreciation and amortization, loss on disposal of property and equipment and impairment of broadcast licenses shown below

     6,892       5,852       19,415       17,321  

Promotional, exclusive of depreciation and amortization, loss on disposal of property and equipment and impairment of broadcast licenses shown below

     1,026       938       2,339       2,046  

Selling, general and administrative, exclusive of deferred compensation benefit of $0 for the three months ended September 30, 2008 and 2007, respectively, $0 and $(3,952) for the nine months ended September 30, 2008 and 2007, respectively, depreciation and amortization, loss on disposal of property and equipment and impairment of broadcast licenses shown below

     9,913       9,831       31,280       29,700  

Deferred compensation benefit

     —         —         —         (3,952 )

Depreciation and amortization

     2,596       2,228       7,460       6,755  

Loss on disposal of property and equipment

     829       —         829       —    

Impairment of broadcast licenses

     46,666       3,046       46,666       3,046  
                                

Total operating expenses

     67,922       21,895       107,989       54,916  
                                

Operating (loss) income

     (37,079 )     8,428       (16,731 )     33,067  

Interest expense, net of amount capitalized

     (9,213 )     (10,212 )     (27,822 )     (27,862 )

Interest rate swap expense

     (88 )     (1,713 )     (14 )     (586 )

Loss on subordinated note redemption

     —         (8,776 )     —         (8,776 )

Equity in loss of equity method investment

     (213 )     —         (213 )     —    

Impairment of equity method investment

     (161 )     —         (161 )     —    

Interest and other (loss) income

     (38 )     659       18       764  
                                

(Loss) income before benefit from (provision for) income taxes

     (46,792 )     (11,614 )     (44,923 )     (3,393 )

Benefit from (provision for) income taxes

     15,575       (1,138 )     10,666       (50,456 )
                                

Net loss

   $ (31,217 )   $ (12,752 )   $ (34,257 )   $ (53,849 )
                                

See accompanying notes.

 

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Table of Contents

LBI MEDIA HOLDINGS, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

 

     Nine Months Ended
September 30,
 
     2008     2007  

Operating activities

    

Net loss

   $ (34,257 )   $ (53,849 )

Adjustments to reconcile net loss to net cash provided by (used in) operating activities:

    

Depreciation and amortization

     7,460       6,755  

Amortization of deferred financing costs

     1,062       926  

Write-off of unamortized deferred financing costs

     —         1,181  

Amortization of discount on subordinated notes

     189       —    

Amortization of program rights

     413       455  

Accretion on discount notes

     5,243       4,756  

Deferred compensation benefit

     —         (3,952 )

Impairment of broadcast licenses

     46,666       3,046  

Impairment of equity method investment

     161       —    

Interest rate swap expense

     14       586  

Equity in loss of equity method investment

     213       —    

Loss on disposal of property and equipment

     829       —    

Loss on sale of property and equipment

     62       —    

Provision for doubtful accounts

     929       821  

Changes in operating assets and liabilities:

    

Accounts receivable

     (5,493 )     (3,101 )

Deferred compensation payments

     —         (4,377 )

Program rights

     (1,159 )     —    

Amounts due from related parties

     (39 )     12  

Prepaid expenses and other current assets

     (33 )     139  

Employee advances

     (418 )     10  

Accounts payable and accrued expenses

     (497 )     (2,053 )

Accrued interest

     (5,054 )     (4,715 )

Deferred taxes payable

     (10,813 )     50,123  

Other assets and liabilities

     (68 )     126  
                

Net cash provided by (used in) operating activities

     5,410       (3,111 )
                

Investing activities

    

Purchases of property and equipment

     (7,524 )     (11,744 )

Acquisition of broadcast licenses

     (139 )     —    

Acquisition costs (including amounts deposited into escrow for the acquisition of selected radio and television station assets)

     (999 )     (26,008 )

Net proceeds from the sale of property and equipment

     670       —    

Investment in equity method investment (including acquisition costs)

     (488 )     —    
                

Net cash used in investing activities

     (8,480 )     (37,752 )
                

Financing activities

    

Proceeds from issuance of long-term debt and bank borrowings

     38,700       268,100  

Payments on long-term debt and bank borrowings

     (36,229 )     (269,149 )

Payments of deferred financing costs

     (499 )     (4,663 )

Contributions from Parent

     —         47,946  

Distributions to Parent

     (242 )     (2,205 )
                

Net cash provided by financing activities

     1,730       40,029  
                

Net decrease in cash and cash equivalents

     (1,340 )     (834 )

Cash and cash equivalents at beginning of period

     1,697       1,501  
                

Cash and cash equivalents at end of period

   $ 357     $ 667  
                

Supplemental disclosure of cash flow information:

    

Non-cash amounts included in accounts payable:

    

Purchase of property and equipment

   $ 1,351     $ 59  
                

Acquisition costs

   $ 564     $ —    
                

Cash paid during the period for:

    

Interest

   $ 26,329     $ 27,304  
                

Income taxes

   $ 214     $ 39  
                

See accompanying notes.

 

3


Table of Contents

LBI MEDIA HOLDINGS, INC.

NOTES TO INTERIM UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. Description of Business and Basis of Presentation

LBI Media Holdings, Inc. (“LBI Media Holdings”) was incorporated in Delaware on June 23, 2003 and is a wholly owned subsidiary of Liberman Broadcasting, Inc., a Delaware corporation (successor in interest to LBI Holdings I, Inc.) (the “Parent” or “Liberman Broadcasting”). Pursuant to an Assignment and Exchange Agreement dated September 29, 2003 between the Parent and LBI Media Holdings, the Parent assigned to LBI Media Holdings all of its right, title and interest in 100 shares of common stock of LBI Media, Inc. (“LBI Media”) (constituting all of the outstanding shares of LBI Media) in exchange for 100 shares of common stock of LBI Media Holdings. Thus, upon consummation of the exchange, LBI Media Holdings became a wholly owned subsidiary of the Parent, and LBI Media became a wholly owned subsidiary of LBI Media Holdings.

LBI Media Holdings is not engaged in any business operations and has not acquired any assets or incurred any liabilities, other than the acquisition of stock of LBI Media, the issuance of senior discount notes (see Note 5) and the operations of its subsidiaries. Accordingly, its only material source of cash is dividends and distributions from its subsidiaries, which are subject to restriction by LBI Media’s senior credit facilities and the indenture governing the senior subordinated notes issued by LBI Media (see Note 5). Parent-only condensed financial information of LBI Media Holdings on a stand-alone basis has been presented in Note 13.

LBI Media Holdings and its wholly owned subsidiaries (collectively referred to as the “Company”) own and operate radio and television stations located in California, Texas and Utah. In addition, the Company owns television production facilities that are used to produce programming for Company-owned television stations. The Company sells commercial airtime on its radio and television stations to local, regional and national advertisers. In addition, the Company has entered into time brokerage agreements with third parties for three of its radio stations.

The Company’s KHJ-AM, KVNR-AM, KWIZ-FM, KBUE-FM, KBUA-FM, KEBN-FM and KRQB-FM radio stations service the greater Los Angeles, California market (including Riverside/San Bernardino), its KQUE-AM, KJOJ-AM, KSEV-AM, KEYH-AM, KJOJ-FM, KTJM-FM, KQQK-FM, KNTE-FM (formerly KIOX-FM) and KXGJ-FM radio stations service the Houston, Texas market and its KNOR-FM, KZMP-AM, KTCY-FM, KZZA-FM, KZMP-FM and KBOC-FM radio stations service the Dallas-Fort Worth, Texas market.

The Company’s television stations, KRCA, KSDX, KZJL, KMPX, and KPNZ, service the Los Angeles, California, San Diego, California, Houston, Texas, Dallas-Fort Worth, Texas and Salt Lake City, Utah markets, respectively.

The Company’s television studio facilities in Burbank, California, Houston, Texas, and Dallas, Texas, are owned and operated by its indirect wholly owned subsidiaries, Empire Burbank Studios LLC (“Empire”), Liberman Television of Houston LLC and Liberman Television of Dallas LLC, respectively.

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and with the instructions for Rule 10-01 of Regulation S-X promulgated by the Securities and Exchange Commission (the “SEC”). Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. The results of operations for interim periods are not necessarily indicative of the results that may be expected for the fiscal year. The condensed consolidated financial statements should be read in conjunction with the Company’s December 31, 2007 consolidated financial statements and accompanying notes included in the Company’s annual report on Form 10-K (the “Annual Report”). All terms used but not defined elsewhere herein have the meanings ascribed to them in the Annual Report.

The condensed consolidated balance sheet at December 31, 2007 has been derived from the audited financial statements at that date but does not include all the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. The condensed consolidated financial statements include the accounts of LBI Media Holdings and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. The accounts of the Parent are not included in the accompanying unaudited condensed consolidated financial statements.

2. Recent Accounting Pronouncements

In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS 157 establishes a single authoritative definition of fair value, sets out a framework for measuring fair value and expands on required disclosures about fair value measurement. The Company adopted on January 1, 2008, certain provisions of SFAS 157 related to financial assets and liabilities as well as other assets and liabilities carried at fair value on a recurring basis, and has determined that such adoption has no material effect on its financial position, results of operations or cash flows. The provisions of SFAS 157 related to other non-financial assets and liabilities will be

 

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Table of Contents

LBI MEDIA HOLDINGS, INC.

NOTES TO INTERIM UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

effective on January 1, 2009, and will be applied prospectively. The Company is currently evaluating the impact the provisions of SFAS 157 will have on the Company’s financial position, results of operations and cash flows as it relates to other non-financial assets and non-financial liabilities.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities-including an amendment of FASB Statement No. 115” (“SFAS 159”). SFAS 159 expands the use of fair value accounting but does not affect existing standards that require assets or liabilities to be carried at fair value. Under SFAS 159, a company may elect to use fair value to measure certain financial assets and liabilities and any changes in fair value are recognized in earnings. This statement was effective on January 1, 2008. The Company did not elect the fair value option upon adoption of SFAS 159.

In December 2007, the FASB issued SFAS No. 141R, “Business Combinations” (“SFAS 141R”), which requires an acquirer to measure the identifiable assets acquired, the liabilities assumed and any noncontrolling interest in the acquiree at their fair values on the acquisition date, with goodwill being the excess value over the net identifiable assets acquired. SFAS 141R also changes the accounting for the treatment of acquisition related transaction costs. SFAS 141R is effective beginning January 1, 2009. The Company is currently evaluating what impact, if any, the adoption of SFAS 141R will have on its financial position, results of operations and cash flows.

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements” (“SFAS 160”), which clarifies that a noncontrolling interest in a subsidiary should be reported as equity in the consolidated financial statements. SFAS 160 is effective beginning January 1, 2009. The Company is currently evaluating what impact, if any, the adoption of SFAS 160 will have on its financial position, results of operations and cash flows.

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133” (“SFAS 161”), which requires enhanced disclosures for derivative and hedging activities. SFAS 161 will become effective beginning January 1, 2009. The Company is currently evaluating what impact, if any, the adoption of SFAS 161 will have on its financial statements.

In April 2008, the FASB issued FASB Staff Position (“FSP”) No. FAS 142-3, “Determination of Useful Life of Intangible Assets” (“FSP 142-3”). FSP 142-3 amends the factors that should be considered in developing the renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”). The intent of this FSP is to improve the consistency between the useful life of an intangible asset determined under SFAS 142 and the period of expected cash flows used to measure the fair value of the asset under SFAS 141R. FSP 142-3 is effective for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. The Company is currently evaluating what impact, if any, the adoption of FSP 142-3 will have on its financial statements.

3. Broadcast Licenses

The Company’s indefinite-lived assets consist of its Federal Communications Commission (“FCC”) broadcast licenses. The Company believes its broadcast licenses have indefinite useful lives given that they are expected to indefinitely contribute to the future cash flows of the Company and that they may be continually renewed without substantial cost to the Company. In certain prior years, the licenses were considered to have finite lives and were subject to amortization. Accumulated amortization of broadcast licenses totaled approximately $17.7 million at September 30, 2008 and December 31, 2007.

In accordance with SFAS 142, the Company no longer amortizes its broadcast licenses. The Company tests its broadcast licenses for impairment at least annually or when indicators of impairment are identified. The Company’s valuations principally use the discounted cash flow methodology, an income approach based on market revenue projections and not company-specific projections, which assumes broadcast licenses are acquired and operated by a third party. This approach incorporates variables such as types of signals, media competition, audience share, market advertising revenue projections, anticipated operating margins and discount rates, without taking into consideration the station’s format or management capabilities. This method calculates the estimated present value that would be paid by a prudent buyer for the Company’s FCC licenses as new radio or television stations as of September 30, 2008. If the discounted cash flows estimated to be generated from these assets are less than the carrying value, an adjustment to reduce the carrying value to the fair market value of the assets is recorded.

The Company generally tests its broadcast licenses for impairment at the individual license level. However, the Company has applied the guidance of EITF 02-07, “Unit of Accounting for Testing Impairment of Indefinite-Lived Intangible Assets” (“EITF 02-07”), to certain of its broadcast licenses. EITF 02-07 states that separately recorded indefinite-lived intangible assets should be combined into a single unit of accounting for purposes of testing impairment if they are operated as a single asset and, as such, are essentially inseparable from one another. The Company aggregates broadcast licenses for impairment testing if their signals are simulcast and are operating as one revenue-producing asset.

 

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Table of Contents

LBI MEDIA HOLDINGS, INC.

NOTES TO INTERIM UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

During the three months ended September 30, 2008, the Company completed its annual impairment review and concluded that several of its broadcast licenses were impaired. As such, the Company recorded a non-cash impairment loss of approximately $46.7 million related to the broadcast licenses for certain individual stations in its California, Texas and Utah markets. The tax impact of the impairment charge was approximately a $18.0 million tax benefit, which related to the reduction of the book-tax basis differences on the Company’s broadcast licenses. The impairment charge was due to market changes in estimates and assumptions which resulted in lower advertising revenue growth projections for the broadcasting industry, increased discount rates and a decline in cash flow multiples for recent station sales.

During the three months ended September 30, 2007, the Company recorded a $3.0 million impairment loss resulting from its annual SFAS 142 review. This impairment loss was primarily due to lower projected advertising revenue resulting from greater competition from non-traditional media in several of the Company’s markets. The tax impact of this impairment charge was approximately a $1.2 million tax benefit.

4. Loss on Disposal of Property and Equipment

In September 2008, Hurricane Ike caused substantial damage across the state of Texas. As a result of this hurricane, the Company sustained damage to its corporate office and broadcast facility in Houston and several of its tower and transmitter sites. The Company is currently in the process of assessing the total damages; however, it has estimated that the carrying value of the assets damaged by Hurricane Ike was approximately $0.6 million at September 30, 2008. As such, the write-off of these assets is included in loss on disposal of property and equipment in the accompanying condensed consolidated statements of operations. The Company plans to complete its damage assessment in the fourth quarter of 2008, and will make any appropriate adjustments to the estimated loss at that time, if necessary.

During the three and nine months ended September 30, 2008, the Company also disposed of $0.2 million in other property and equipment which was removed from operations.

5. Long-Term Debt

Long-term debt consists of the following:

 

     September 30,
2008
    December 31,
2007
 
     (Unaudited)     (Note 1)  
     (In thousands)  

2006 Revolver due 2012

   $ 17,950     $ 24,500  

2006 Term Loan due 2012

     117,200       108,075  

2007 Senior Subordinated Notes due 2017

     225,295       225,106  

Senior Discount Notes due 2013

     68,128       62,885  

2004 Empire Note

     2,091       2,195  
                
     430,664       422,761  

Less current portion

     (1,343 )     (1,239 )
                
   $ 429,321     $ 421,522  
                

LBI Media’s 2006 Revolver and 2006 Term Loan

In May 2006, LBI Media refinanced its then existing senior revolving credit facility with a $110.0 million senior term loan credit facility (as amended by the term loan commitment increase in January 2008, the “2006 Term Loan”) and a $150.0 million senior revolving credit facility (the “2006 Revolver”, and together with the 2006 Term Loan, the “2006 Senior Credit Facilities”). The 2006 Revolver includes a $5.0 million swing line sub-facility and allows for letters of credit up to the lesser of $5.0 million and the available remaining revolving commitment amount. In January 2008, LBI Media increased its 2006 Senior Term Loan by $10.0 million. LBI Media has the option to request its existing or new lenders under the 2006 Term Loan and under the 2006 Revolver to increase the aggregate amount of the 2006 Senior Credit Facilities by an additional $40.0 million; however, its existing and new lenders are not obligated to do so. The increases under the 2006 Senior Credit Facilities, taken together, cannot exceed $50.0 million in the aggregate (including the $10.0 million increase in January 2008).

LBI Media must pay 0.25% of the original principal amount of the 2006 Term Loan each quarter plus 0.25% of amounts borrowed in connection with the term loan increase, and 0.25% of any additional principal amount incurred in the future under the 2006 Term Loan. There are no scheduled reductions of commitments under the 2006 Revolver.

 

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LBI MEDIA HOLDINGS, INC.

NOTES TO INTERIM UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Borrowings under the 2006 Senior Credit Facilities bear interest based on either, at the option of LBI Media, the base rate or the LIBOR rate, in each case plus the applicable margin stipulated in the senior credit agreements. The base rate is the higher of (i) Credit Suisse’s prime rate and (ii) the Federal Funds Effective Rate (as published by the Federal Reserve Bank of New York) plus 0.50%. The applicable margin for loans under the 2006 Revolver, which is based on LBI Media’s total leverage ratio, will range from 0% to 1.00% per annum for base rate loans and from 1.00% to 2.00% per annum for LIBOR loans. The applicable margin for the original principal amount of the 2006 Term Loan is 0.50% for base rate loans and 1.50% for LIBOR loans. The applicable margin for the $10.0 million increase in the Term Loan that occurred in January 2008 is 0.75% for base rate loans and 1.75% for LIBOR loans. The applicable margin for any future term loans will be agreed upon at the time those term loans are incurred. Interest on base rate loans is payable quarterly in arrears and interest on LIBOR loans is payable either monthly, bimonthly or quarterly depending on the interest period elected by LBI Media. All amounts that are not paid when due under either the 2006 Revolver or 2006 Term Loan will accrue interest at the rate otherwise applicable plus 2.00% until such amounts are paid in full. Borrowings under the 2006 Revolver and 2006 Term Loan bore interest at rates between 4.24% and 5.75%, including the applicable margin, at September 30, 2008.

Borrowings under the 2006 Senior Credit Facilities are secured by substantially all of the tangible and intangible assets of LBI Media and its wholly owned subsidiaries, including a first priority pledge of all capital stock of each of LBI Media’s subsidiaries. The 2006 Senior Credit Facilities also contain customary representations, affirmative and negative covenants and defaults for a senior credit facility, including restrictions on LBI Media’s ability to pay dividends. At September 30, 2008, LBI Media was in compliance with all such covenants.

LBI Media pays quarterly commitment fees on the unused portion of the 2006 Revolver based on its utilization rate of the total borrowing capacity. Under certain circumstances, if LBI Media borrows less than 50% of the revolving credit commitment, it must pay a quarterly commitment fee of 0.50% times the unused portion. If LBI Media borrows 50% or more of the total revolving credit commitment, it must pay a quarterly commitment fee of 0.25% times the unused portion.

In connection with the issuance of the 2006 Senior Credit Facilities, LBI Media entered into an interest rate swap agreement with a notional principal amount of $80.0 million for three years and $60.0 million for the following two years. LBI Media pays interest at a fixed rate of 5.56% and receives interest based on LIBOR. As this swap agreement did not meet the requirements for hedge accounting at its inception, changes in its fair value are recorded into earnings each period, with an offsetting asset or liability reflecting the fair value of the interest rate swap, related to the difference between the fixed rate and the floating rate of interest on the swap, recorded in the accompanying consolidated balance sheets. Accordingly, during the three months ended September 30, 2008 and 2007, the Company recognized interest rate swap expense of $0.1 million and $1.7 million, respectively. During the nine months ended September 30, 2008 and 2007, the Company recognized interest rate swap expense of $0 and $0.6 million, respectively, in the accompanying condensed consolidated statements of operations. As of September 30, 2008 and December 31, 2007, the Company has recorded a long-term liability of $4.2 million in its condensed consolidated balance sheets.

LBI Media’s 2002 Senior Subordinated Notes

In July 2002, LBI Media issued $150.0 million of senior subordinated notes due 2012 (the “2002 Senior Subordinated Notes”). The 2002 Senior Subordinated Notes bore interest at the rate of 10.125% per annum, and interest payments were made on a semi-annual basis each January 15 and July 15. All of LBI Media’s subsidiaries are wholly owned and provided full and unconditional joint and several guarantees of the 2002 Senior Subordinated Notes.

LBI Media redeemed all of the outstanding 2002 Senior Subordinated Notes in August 2007 (the “Redemption Date”) at a redemption price of 105.0625% of the outstanding principal amount, plus accrued and unpaid interest to the Redemption Date. In connection with this redemption, the Company wrote off approximately $1.8 million in unamortized deferred financing costs, which is included in interest expense, net of amounts capitalized, for the three and nine months ended September 30, 2007 in the accompanying condensed consolidated statements of operations.

LBI Media’s 2007 Senior Subordinated Notes

In July 2007, LBI Media issued approximately $228.8 million aggregate principal amount of 8.5% Senior Subordinated Notes due 2017 (the “2007 Senior Subordinated Notes”). The 2007 Senior Subordinated Notes were sold at 98.350% of the principal amount, resulting in gross proceeds of approximately $225.0 million. All of LBI Media’s subsidiaries are wholly owned and provide full and unconditional joint and several guarantees of the 2007 Senior Subordinated Notes.

The 2007 Senior Subordinated Notes bear interest at a rate of 8.5% per annum. Interest payments commenced on February 1, 2008 and are made on a semi-annual basis each February 1 and August 1. The 2007 Senior Subordinated Notes will mature on August 1, 2017.

 

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NOTES TO INTERIM UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

The indenture governing the 2007 Senior Subordinated Notes limits, among other things, LBI Media’s ability to borrow under the 2006 Senior Credit Facilities and pay dividends. LBI Media could borrow up to an aggregate of $260.0 million under the 2006 Senior Credit Facilities (subject to certain reductions under certain circumstances) without having to comply with specified leverage ratios contained in the indenture, but any amount over $260.0 million (subject to certain reductions under certain circumstances) would be subject to LBI Media’s compliance with a specified leverage ratio (as defined in the indenture governing the 2007 Senior Subordinated Notes).

The indenture governing the 2007 Senior Subordinated Notes also prohibits the incurrence of indebtedness, the proceeds of which would be used to repay, redeem, repurchase or refinance any of LBI Media Holdings’ Senior Discount Notes (defined below) earlier than one year prior to the stated maturity of the Senior Discount Notes unless such indebtedness is (i) unsecured, (ii) pari passu or junior in right of payment to the 2007 Senior Subordinated Notes, and (iii) otherwise permitted to be incurred under the indenture governing the 2007 Senior Subordinated Notes. At September 30, 2008, LBI Media was in compliance with all such covenants.

The indenture governing the 2007 Senior Subordinated Notes provides for customary events of default, which include (subject in certain instances to cure periods and dollar thresholds): nonpayment of principal, interest and premium, if any, on the 2007 Senior Subordinated Notes, breach of covenants specified in the indenture, payment defaults or acceleration of other indebtedness, a failure to pay certain judgments and certain events of bankruptcy, insolvency and reorganization. The 2007 Senior Subordinated Notes will become due and payable immediately without further action or notice upon an event of default arising from certain events of bankruptcy or insolvency with respect to LBI Media and certain of its subsidiaries. If any other event of default occurs and is continuing, the trustee or the holders of at least 25% in principal amount of the then outstanding 2007 Senior Subordinated Notes may declare all the 2007 Senior Subordinated Notes to be due and payable immediately.

Senior Discount Notes

In October 2003, LBI Media Holdings issued $68.4 million aggregate principal amount at maturity of senior discount notes that mature in 2013 (the “Senior Discount Notes”). The notes were sold at 58.456% of principal amount at maturity, resulting in gross proceeds of approximately $40.0 million and net proceeds of approximately $38.8 million after certain transaction costs. Under the terms of the Senior Discount Notes, cash interest did not accrue on the notes prior to October 15, 2008 and instead the value of the notes increased each period until it equaled $68.4 million on October 15, 2008; such accretion (approximately $1.8 million and $1.6 million for the three months ended September 30, 2008 and 2007, respectively, and approximately $5.2 million and $4.7 million for the nine months ended September 30, 2008 and 2007, respectively) is recorded as additional interest expense in the accompanying condensed consolidated statements of operations. On October 15, 2008, cash interest on the notes began to accrue at a rate of 11% per year, payable semi-annually on each April 15 and October 15, with the first payment due on April 15, 2009. The Senior Discount Notes may be redeemed by LBI Media Holdings at any time on or after October 15, 2008 at redemption prices specified in the indenture governing the Senior Discount Notes, plus accrued and unpaid interest. The indenture governing the Senior Discount Notes contains certain restrictive covenants that, among other things, limit LBI Media Holdings’ ability to incur additional indebtedness and pay dividends. As of September 30, 2008, LBI Media Holdings was in compliance with all such covenants. The Senior Discount Notes are structurally subordinated to the 2006 Senior Credit Facilities and the 2007 Senior Subordinated Notes.

LBI Media’s 2004 Empire Note

In July 2004, Empire issued an installment note for approximately $2.6 million (the “2004 Empire Note”). The 2004 Empire Note bears interest at the rate of 5.52% per annum and is payable in monthly principal and interest payments of $21,411 through maturity in July 2019. The borrowings under the 2004 Empire Note are secured primarily by all of Empire’s real property.

Scheduled Debt Repayments

As of September 30, 2008, the Company’s long-term debt had scheduled repayments for each of the next five fiscal years as follows:

 

     (in thousands)

2008

   $ 336

2009

     1,347

2010

     1,355

2011

     1,364

2012

     131,423

Thereafter

     294,839
      
   $ 430,664
      

The above table does not include projected interest payments the Company may ultimately pay.

 

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NOTES TO INTERIM UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Interest Paid and Capitalized

The total amount of interest paid was approximately $11.9 million and $11.7 million for the three months ended September 30, 2008 and 2007, respectively, and approximately $26.3 million and $27.3 million for the nine months ended September 30, 2008 and 2007, respectively. Interest is capitalized on individually significant construction projects during the construction period. The amount of interest capitalized was approximately $0.2 million and $0.6 million for the three and nine months ended September 30, 2007, respectively. Capitalized interest for the three and nine months ended September 30, 2008 was less than $0.1 million and related to the construction of a new corporate office building and studio facility in Dallas. Capitalized interest in 2007 related to the construction of several new radio tower and transmitter sites in Texas.

6. Interest Rate Swap

In July 2006, the Company entered into a fixed-for-floating interest rate swap to hedge the underlying interest rate risk on the expected outstanding balance of the 2006 Term Loan over time. Pursuant to the terms of this interest rate swap, the Company pays a fixed rate of 5.56% on the $80.0 million notional amount and receives payments based on LIBOR. This swap fixes the interest rate at 7.31% and terminates in November 2011.

The Company accounts for its interest rate swap in accordance with SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities”, and its related interpretations. This interest rate swap essentially fixes the interest rate at the percentage noted above. However, changes in the fair value of the interest rate swap for each reporting period have been recorded in interest rate swap expense in the accompanying condensed consolidated statements of operations, because the interest rate swap does not qualify for hedge accounting.

The Company measures the fair value of its interest rate swap on a recurring basis pursuant to SFAS 157. SFAS 157 establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. The three tiers are: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions. The Company categorizes this swap contract as Level 2.

The fair value of the Company’s interest rate swap was a liability of $4.2 million at September 30, 2008 and December 31, 2007, respectively. The fair value approximates the amount the Company would pay if these contracts were settled at the respective valuation dates. Fair value is estimated based upon current, and predictions of future, interest rate levels along a yield curve, the remaining duration of the instrument and other market conditions, and therefore is subject to significant estimation and a high degree of variability and fluctuation between periods.

7. Acquisitions

In September 2008, two of LBI Media Holdings’ indirect, wholly owned subsidiaries, Liberman Broadcasting of California LLC (“LBI California”) and LBI Radio License LLC (“LBI Radio”), as buyers, entered into an asset purchase agreement with Sun City Communications, LLC and Sun City Licenses, LLC, as sellers, pursuant to which the buyers have agreed to acquire certain assets of radio station KVIB-FM, 95.1 FM, licensed to Phoenix, Arizona, from the sellers. Those assets include, among other things, (i) licenses and permits authorized by the FCC for or in connection with the operation of the station, (ii) antenna and transmitter facilities, (iii) broadcast and other studio equipment used to operate the station, and (iv) contract rights and other intangible assets. The total purchase price will be approximately $15.0 million in cash, subject to certain adjustments, of which $0.8 million has been deposited into escrow. As of September 30, 2008, the Company had incurred approximately $0.2 million in acquisition costs related to this proposed acquisition.

In August 2008, two of LBI Media Holdings’ indirect, wholly owned subsidiaries, KRCA Television LLC and KRCA License LLC, as buyers, entered into an asset purchase agreement with Latin America Broadcasting of Arizona, Inc., as seller, pursuant to which the buyers agreed to acquire selected assets of television station KVPA-LP, Channel 42, licensed to Phoenix, Arizona, from the seller. The selected assets include, among other things, (i) licenses and permits authorized by the FCC for or in connection with the operation of the station and (ii) transmission and other broadcast equipment used to operate the station. The total purchase price will be approximately $1.3 million in cash, subject to certain adjustments, of which $0.1 million has been deposited into escrow. As of September 30, 2008, the Company had incurred approximately $0.1 million in acquisition costs related to this proposed acquisition.

 

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LBI MEDIA HOLDINGS, INC.

NOTES TO INTERIM UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

In November 2007, LBI California and LBI Radio, as buyers, entered into an asset purchase agreement with R&R Radio Corporation, as seller, pursuant to which the buyers have agreed to acquire the selected assets of radio station KDES-FM, located in Palm Springs, California, from the seller. The selected assets will include, among other things, (i) licenses and permits authorized by the FCC for or in connection with the operation of the station and (ii) transmitter and other broadcast equipment used to operate the station. The total purchase price will be approximately $17.5 million in cash, subject to certain adjustments, of which $0.5 million has been deposited into escrow. As of September 30, 2008, the Company had incurred approximately $0.7 million in acquisition costs related to this proposed acquisition. The Company intends to change the location of KDES-FM from Palm Springs, California to Redlands, California.

The acquisition costs for each proposed acquisition, together with the escrow deposits, are included in other assets in the accompanying condensed consolidated balance sheets. Consummation of each acquisition is subject to customary closing conditions, including regulatory approval from the FCC.

8. Commitments and Contingencies

Deferred Compensation

LBI California and the Parent have entered into employment agreements with certain current and former employees. Services required under the employment agreements are rendered to the Company. Accordingly, the Company has reflected amounts due under the employment agreements in its financial statements. In addition to annual compensation and other benefits, these agreements have provided the employees with the ability to participate in the increase of the “net value” (as defined in the applicable employment agreement) of the Parent, on a consolidated basis, over certain base amounts (“Incentive Compensation”). There are two components of Incentive Compensation: (i) a component that vests in varying amounts over time; and (ii) a component that vests upon the attainment of certain performance measures. The time vesting component is accounted for over the vesting periods specified in the respective employment agreements. Performance based amounts are accounted for at the time it is considered probable that the performance measures will be attained. Any Incentive Compensation amounts due are required to be paid within thirty days after the date the “net value” of the Parent is determined.

The employment agreements contain provisions, however, that allow for limited accelerated vesting in the event of a change in control of the Parent (as defined in the applicable employment agreement). The “net value” (as defined in the applicable employment agreement) of the Parent was determined as of December 31, 2005 and December 31, 2006 for all but one of the employment agreements and, unless there is a change of control of the Parent (as defined in the applicable employment agreement), will be determined as of December 31, 2009 for the remaining employment agreement.

Until the “net value” of the Parent has been determined by appraisal as of each valuation date, the Company evaluates and estimates the deferred compensation liability under these employment agreements. As a part of the calculation of this Incentive Compensation, the Company uses the income and market valuation approaches to estimate the “net value” of the Parent. The income approach analyzes future cash flows and discounts them to arrive at a current estimated fair value. The market approach uses recent sales and offering prices of similar properties to determine estimated fair value. Each employee negotiated the base amount at the time the employment agreement was entered into. The estimated vested and unpaid amounts are shown as deferred compensation in the accompanying condensed consolidated balance sheets; the related benefit is shown as deferred compensation benefit in the accompanying condensed consolidated statements of operations; and related cash payments are shown as deferred compensation payments in the accompanying condensed consolidated statements of cash flows.

There is currently only one employment agreement which contains an Incentive Compensation component. During the nine months ended September 30, 2007, the company satisfied its obligations under certain employment agreements that had December 31, 2006 “net value” determination dates with an aggregate cash payment of approximately $4.4 million, which was approximately $4.0 million less than the amounts accrued as of December 31, 2006. The remaining employment agreement has a “net value” determination date of December 31, 2009, and as of September 30, 2008, the Company estimated that this employee had not vested in any unpaid Incentive Compensation.

Litigation

In June 2005, eight former employees of LBI California, filed suit in Los Angeles County Superior Court alleging claims on their own behalf and also on behalf of a purported class of former and current employees of LBI California. The complaint alleged, among other things, wage and hour violations relating to overtime pay, and wrongful termination and unfair competition under the California Business and Professions Code. Plaintiffs sought to recover, among other relief, unspecified general, treble and punitive damages, as well as profit disgorgement, restitution and their attorneys’ fees. In June 2007, two former employees of LBI California filed another suit in Los Angeles County Superior Court, alleging claims on their own behalf and also on behalf of a purported class of former and current employees of LBI California. The complaint alleged, among other things, violations of California labor laws with

 

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LBI MEDIA HOLDINGS, INC.

NOTES TO INTERIM UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

respect to providing meal and rest breaks. Plaintiffs sought, among other relief, unspecified liquidated and general damages, declaratory, equitable and injunctive relief, and attorney’s fees.

In July 2007, LBI California entered into a settlement agreement with class action representatives to settle these lawsuits. While LBI California denied the allegations in both lawsuits, it agreed to the final settlement of both actions to avoid significant legal fees, other expenses and management time that would have to be devoted to the two litigation matters. The final settlement provided for a settlement payment of $469,000 (including attorneys’ fees and costs and administrative fees) and was approved by the court in January 2008. Selling, general and administrative expenses for the three and nine months ended September 30, 2007 include a litigation reserve of approximately $0 and $825,000, respectively, related to this matter. The Company reduced the total litigation reserve by $356,000 in the fourth quarter of 2007, reflecting the final settlement.

In consideration of the settlement payment, the plaintiffs in both cases agreed to dismiss the two class actions with prejudice and to release all known and unknown claims arising out of or relating to such claims. Because the settlement has received court approval, the settlement has become effective and binding on the parties.

The Company is a party to an ongoing dispute with Broadcast Music, Inc. (“BMI”) related to royalties due to BMI in the amount of approximately $1.3 million. As of September 30, 2008, the Company had reserved approximately $0.5 million related to this dispute. In September 2008, the Company submitted its second formal offer to settle all amounts due related to all disputed matters with BMI totaling approximately $0.5 million. It is the Company’s position that the remaining portion of the total disputed amounts is attributable primarily to billings related to the Company’s time-brokered and simulcast stations, as well as other differences, for which the Company was improperly billed. BMI has yet to respond to the Company’s second offer, and therefore, the parties are continuing their discussions.

The Company has also been a party to a dispute with the American Society of Composers, Authors and Publishers (“ASCAP”) related to royalties owed to ASCAP. In September 2008, the Company submitted a formal offer and paid $0.8 million to ASCAP which represented settlement of all music license fees owed to date. Although no formal settlement agreement was obtained from ASCAP, the Company believes that the matter had been satisfactorily resolved. The settlement resulted in a charge of $0.1 million, which is included in programming and technical expenses in the accompanying condensed consolidated statement of operations for the three and nine months ended September 30, 2008.

The Company is also subject to other pending litigation arising in the normal course of its business. While it is not possible to predict the results of such litigation, management does not believe the ultimate outcome of these matters will have a materially adverse effect on the Company’s financial position or results of operations.

9. Related Party Transactions

The Company had approximately $2.9 million and $2.8 million due from stockholders of the Parent and from affiliated companies at September 30, 2008 and December 31, 2007, respectively. The Company loaned approximately $1.9 million to a stockholder of the Parent in July 2002. These loans bear interest at the applicable federal rate and mature through July 2009.

The Company also had approximately $690,000 due from one if its executive officers and directors at September 30, 2008 and December 31, 2007, which is included in employee advances, excluding current portion, in the accompanying condensed consolidated balance sheets. The Company loaned approximately $690,000 to this individual in various transactions in 1998, 2002 and 2006. Except for $30,000, which does not bear interest and does not have a maturity date, the remaining loans bear interest at 8.0% and mature through December 2010.

In April 2008, LBI California entered into a Purchase Agreement and an Investor’s Rights Agreement with PortalUno, Inc. (“PortalUno”) and Reivax Technology, Inc. (“Reivax”). Under these agreements, LBI California purchased shares of the Series A Preferred Stock of PortalUno representing 30% of the fully diluted capital stock of PortalUno. LBI California purchased the shares for $450,000, of which $425,000 was paid in cash and $25,000 of consideration was the cancellation of a $25,000 note in favor of LBI California. An employee of one of LBI Media Holdings’ indirect, wholly owned subsidiaries is an owner of Reivax, which holds the remaining ownership interest in PortalUno.

The Company accounts for its investment in PortalUno using the equity method. The general provisions under APB Opinion No. 18, “The Equity Method of Accounting for Investments in Common Stock” (“APB 18”), would require the Company to recognize its share of PortalUno’s net earnings in its statement of operations. However, because the Company is the only party that contributed capital to PortalUno, the Company will recognize 100% of the net loss of Portal Uno ($213,000 for the period from April 1, 2008 through September 30, 2008) in its statements of operations until the cost basis of its investment has been recovered. Thereafter, the Company will recognize its proportionate share in PortalUno’s net earnings in accordance with the general provisions of APB 18.

 

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LBI MEDIA HOLDINGS, INC.

NOTES TO INTERIM UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

In accordance with APB 18, during the three months ended September 30, 2008, the Company tested its equity investment in PortalUno for impairment. Based on its analysis, including a review of the factors which contributed to the impairment charge the Company recorded during the third quarter related to its broadcast licenses (see Note 3), the Company determined that an other-than-temporary decline in the estimated fair value of PortalUno had occurred, and therefore concluded that the investment was impaired. As such, the Company recorded an impairment loss of approximately $0.2 million to write down the investment in PortalUno to its estimated fair value. Such charge is included in impairment of equity method investment in the accompanying condensed consolidated statements of operations.

Condensed financial information has not been provided because the operations are not considered to be significant.

One of the Parent’s stockholders is the sole shareholder of L.D.L. Enterprises, Inc. (“LDL”), a mail order business. From time to time, the Company allows LDL to use, free of charge, unsold advertising time on its radio and television stations.

10. Segment Data

SFAS No. 131, “Disclosures About Segments of an Enterprise and Related Information,” requires companies to provide certain information about their operating segments. The Company has two reportable segments—radio operations and television operations. Management uses operating income before depreciation and amortization, loss on disposal of property and equipment, impairment of broadcast licenses and deferred compensation benefit as its measure of profitability for purposes of assessing performance and allocating resources.

 

     Three Months Ended
September 30,
   Nine Months Ended
September 30,
 
     2008    2007    2008    2007  
     (in thousands)  

Net revenues:

           

Radio operations

   $ 17,486    $ 16,537    $ 50,946    $ 45,673  

Television operations

     13,357      13,786      40,312      42,310  
                             

Consolidated net revenues

     30,843      30,323      91,258      87,983  
                             

Operating expenses, excluding depreciation and amortization, loss on disposal of property and equipment, impairment of broadcast licenses and deferred compensation benefit:

           

Radio operations

     8,662      8,105      24,735      21,811  

Television operations

     9,169      8,516      28,299      27,256  
                             

Consolidated operating expenses, excluding depreciation and amortization, loss on disposal of property and equipment, impairment of broadcast licenses and deferred compensation benefit

     17,831      16,621      53,034      49,067  
                             

Operating income before depreciation and amortization, loss on disposal of property and equipment, impairment of broadcast licenses and deferred compensation benefit:

           

Radio operations

     8,824      8,432      26,211      23,862  

Television operations

     4,188      5,270      12,013      15,054  
                             

Consolidated operating income before depreciation and amortization, loss on disposal of property and equipment, impairment of broadcast licenses and deferred compensation benefit

     13,012      13,702      38,224      38,916  
                             

Depreciation and amortization expense:

           

Radio operations

     1,299      1,080      3,821      3,311  

Television operations

     1,297      1,148      3,639      3,444  
                             

Consolidated depreciation and amortization expense

     2,596      2,228      7,460      6,755  
                             

Loss on disposal of property and equipment:

           

Radio operations

     430      —        430      —    

Television operations

     399      —        399      —    
                             

Consolidated loss on disposal of property and equipment

     829      —        829      —    
                             

Impairment of broadcast licenses:

           

Radio operations

     33,989      3,046      33,989      3,046  

Television operations

     12,677      —        12,677      —    
                             

Consolidated impairment of broadcast licenses

     46,666      3,046      46,666      3,046  
                             

Deferred compensation benefit:

           

Radio operations

     —        —        —        (3,952 )
                             

Consolidated deferred compensation benefit

     —        —        —        (3,952 )
                             

 

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LBI MEDIA HOLDINGS, INC.

NOTES TO INTERIM UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2008     2007     2008     2007  
     (in thousands)  

Operating (loss) income:

        

Radio operations

     (26,894 )     4,306       (12,029 )     21,457  

Television operations

     (10,185 )     4,122       (4,702 )     11,610  
                                

Consolidated operating (loss) income

   $ (37,079 )   $ 8,428     $ (16,731 )   $ 33,067  
                                

Reconciliation of operating income before depreciation and amortization, loss on disposal of property and equipment, impairment of broadcast licenses and deferred compensation benefit to loss before income taxes:

        

Operating income before depreciation and amortization loss on disposal of property and equipment, impairment of broadcast licenses, and deferred compensation benefit

   $ 13,012     $ 13,702     $ 38,224     $ 38,916  

Depreciation and amortization

     (2,596 )     (2,228 )     (7,460 )     (6,755 )

Loss on disposal of property and equipment

     (829 )     —         (829 )     —    

Impairment of broadcast licenses

     (46,666 )     (3,046 )     (46,666 )     (3,046 )

Deferred compensation benefit

     —         —         —         3,952  

Loss on note redemption

     —         (8,776 )     —         (8,776 )

Interest expense, net of amounts capitalized

     (9,213 )     (10,212 )     (27,822 )     (27,862 )

Interest rate swap expense

     (88 )     (1,713 )     (14 )     (586 )

Equity in loss of equity method investment

     (213 )     —         (216 )     —    

Impairment of equity method investment

     (161 )     —         (161 )     —    

Interest and other (loss) income

     (38 )     659       18       764  
                                

Loss before income taxes

   $ (46,792 )   $ (11,614 )   $ (44,923 )   $ (3,393 )
                                

11. Parent Issuance of Class A Common Stock

In March 2007, affiliates of Oaktree Capital Management LLC and Tinicum Capital Partners II, L.P. purchased approximately 113 shares of Class A common stock of the Parent and the stockholders of the Parent. The sale of Class A common stock by the Parent resulted in net proceeds to the Parent at closing of approximately $117.3 million, after deducting approximately $7.7 million in closing and transaction costs. A portion of these net proceeds were used to repay the Parent’s 9% subordinated notes due 2014 and to redeem the related warrants. Approximately $47.9 million of the net proceeds were contributed by the Parent to LBI Media (through LBI Media Holdings). The contribution of $47.9 million was used by LBI Media to repay outstanding amounts under the 2006 Revolver in April 2007.

In connection with the sale of its Class A common stock, the Parent and the stockholders of the Parent entered into an investor rights agreement that defines certain rights and obligations of the Parent and its stockholders. Pursuant to this investor rights agreement, the minority stockholders of the Parent have the right to consent, in their sole discretion, to certain transactions involving LBI Media Holdings, subsidiaries of LBI Media Holdings, and the Parent, including, among other things, certain acquisitions or dispositions of assets by LBI Media Holdings, subsidiaries of LBI Media Holdings, and the Parent. The investor rights agreement also contains customary representations and affirmative and negative covenants.

12. Income Taxes

During the three months ended September 30, 2008, the Company recorded a $46.7 million non-cash impairment charge to reduce the value of certain broadcast licenses. This impairment charge substantially reduced the Company’s deferred tax liability because the difference between the carrying value of these broadcast licenses for income tax purposes and the value for financial reporting purposes was substantially reduced. Accordingly, the Company recorded a benefit from income taxes for the three and nine months ended September 30, 2008 of $15.6 million and $10.7 million, respectively, as compared to a provision for income taxes of $1.1 million and $50.4 million for the three and nine months ended September 30, 2007, respectively. The deferred benefit from income taxes for the three and nine months ended September 30, 2008 was $15.6 million and $10.8 million, respectively, as compared to a deferred provision for income taxes of $1.0 million and $50.1 million for the three and nine months ended September 30, 2007, respectively. The three months ended March 31, 2007 was the period in which the Company became a C corporation. As a result of the loss of S corporation status, the Company recorded a one-time non-cash charge of $46.8 million to adjust its deferred tax accounts at March 30, 2007. This charge is included in the provision for income taxes for the nine months ended September 30, 2007 in the accompanying condensed consolidated statements of operations.

The Company’s effective tax rate was 33.3% (benefit) and 9.8% (provision) for the three months ended September 30, 2008 and 2007, respectively. The difference was primarily attributable to the impairment charge recorded during the three months ended September 30, 2008, which reduced the Company’s deferred tax liability. For the nine months ended September 30, 2008, the

 

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LBI MEDIA HOLDINGS, INC.

NOTES TO INTERIM UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Company’s effective tax rate was 23.7% (benefit). For the nine months ended September 30, 2007, the Company’s effective tax rate is not a meaningful figure as a result of the one-time non-cash charge discussed above.

The Company’s net deferred tax liabilities as of September 30, 2008 and December 31, 2007 were approximately $38.7 million and $49.5 million, respectively, and result primarily from book and tax basis differences of the Company’s indefinite-lived intangible assets. In addition to the deferred tax liability for its indefinite-lived intangible assets, the Company has net deferred tax assets for which it has provided a full valuation allowance. The valuation allowance on deferred taxes relates to future deductible temporary differences and net operating losses for which the Company has concluded it is more likely than not that these items will not be realized in the ordinary course of operations. As of September 30, 2008 and December 31, 2007, the net deferred tax asset and the related valuation allowance were approximately $16.5 million and $10.1 million, respectively.

 

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LBI MEDIA HOLDINGS, INC.

NOTES TO INTERIM UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

13. LBI Media Holdings, Inc. (Parent Company Only)

The terms of LBI Media’s 2006 Senior Credit Facilities and the indenture governing LBI Media’s 2007 Senior Subordinated Notes (and previously, LBI Media’s 2002 Senior Subordinated Notes) restrict LBI Media’s ability to transfer net assets to LBI Media Holdings in the form of loans, advances, or cash dividends. The following parent-only unaudited condensed financial information presents balance sheets and related statements of operations and cash flows of LBI Media Holdings by accounting for the investments in the owned subsidiaries on the equity method of accounting. The accompanying unaudited condensed financial information should be read in conjunction with the condensed consolidated financial statements and notes thereto.

Condensed Balance Sheet Information:

(in thousands)

 

     As of  
     September 30,
2008
    December 31,
2007
 
     (Unaudited)     (Note 1)  

Assets

    

Deferred financing costs

   $ 996     $ 1,142  

Investment in subsidiaries

     55,034       84,141  

Other assets

     —         3  
                

Total assets

   $ 56,030     $ 85,286  
                

Liabilities and stockholder’s equity

    

Long term debt

   $ 68,128     $ 62,885  

Stockholder’s equity:

    

Common stock

     —         —    

Additional paid-in capital

     63,056       63,298  

Accumulated deficit

     (75,154 )     (40,897 )
                

Total stockholder’s (deficit) equity

     (12,098 )     22,401  
                

Total liabilities and stockholder’s (deficit) equity

   $ 56,030     $ 85,286  
                

Condensed Statement of Operations Information:

(In thousands)

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2008     2007     2008     2007  

Loss:

        

Equity in losses of subsidiaries

   $ (29,384 )   $ (11,102 )   $ (28,865 )   $ (48,992 )

Expenses:

        

Interest expense

     (1,833 )     (1,653 )     (5,392 )     (4,861 )
                                

Loss before taxes

     (31,217 )     (12,755 )     (34,257 )     (53,853 )

Income tax benefit

     —         3       —         4  
                                

Net loss

   $ (31,217 )   $ (12,752 )   $ (34,257 )   $ (53,849 )
                                

 

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LBI MEDIA HOLDINGS, INC.

NOTES TO INTERIM UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Condensed Statement of Cash Flows Information:

(In thousands)

 

     Nine Months Ended
September 30,
 
     2008     2007  

Cash flows provided by operating activities:

    

Net loss

   $ (34,257 )   $ (53,849 )

Adjustments to reconcile net loss to net cash provided by operating activities:

    

Equity in losses of subsidiaries

     28,865       48,992  

Amortization of deferred financing costs

     146       148  

Accretion on senior discount notes

     5,243       4,711  

Change in other assets

     3       8  

Distributions from subsidiaries

     242       2,149  
                

Net cash provided by operating activities

     242       2,159  

Cash flows used in financing activities:

    

Contribution to subsidiaries

     —         (47,900 )

Contribution from Parent

     —         47,946  

Distributions to Parent

     (242 )     (2,205 )
                

Net cash used in financing activities

     (242 )     (2,159 )

Net change in cash and cash equivalents

     —         —    

Cash and cash equivalents at beginning of period

     —         —    
                

Cash and cash equivalents at end of period

   $ —       $ —    
                

14. Subsequent Events

On November 7, 2008, two of LBI Media Holdings’ indirect, wholly owned subsidiaries, KRCA Television LLC and KRCA License LLC, as buyers, entered into an asset purchase agreement with Venture Technologies Group, LLC, as seller, pursuant to which the buyers agreed to acquire selected assets of low-power television station WASA-LP, licensed to Port Jervis, New York, from the seller. The selected assets include, among other things, licenses and permits authorized by the FCC for or in connection with the operation of the station. The total purchase price will be $6.0 million in cash, subject to certain adjustments, of which $0.6 million has been deposited into escrow. As of September 30, 2008, the Company had incurred approximately $0.1 million in acquisition costs related to this proposed acquisition. Such amount is included in other assets in the accompanying condensed consolidated balance sheets.

 

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

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the financial statements included elsewhere in this Quarterly Report on Form 10-Q and the audited financial statements for the year ended December 31, 2007, included in our Annual Report on Form 10-K (File No. 333-110122). This Quarterly Report contains, in addition to historical information, forward-looking statements, which involve risk and uncertainties. The words “believe”, “expect”, “estimate”, “may”, “will”, “could”, “plan”, or “continue”, and similar expressions are intended to identify forward-looking statements. Our actual results could differ significantly from the results discussed in such forward-looking statements.

Overview

We own and operate radio and television stations in Los Angeles (including Riverside and San Bernardino Counties), California, Houston, Texas and Dallas, Texas and television stations in San Diego, California and Salt Lake City, Utah. Our radio stations consist of five FM and two AM stations serving Los Angeles, California and its surrounding areas, five FM and four AM stations serving Houston, Texas and its surrounding areas, and five FM stations and one AM station serving Dallas-Fort Worth, Texas and its surrounding areas. Our five television stations consist of four full-power stations serving Los Angeles, California, Houston, Texas, Dallas-Fort Worth, Texas and Salt Lake City, Utah and we also have a low-power television station serving San Diego, California.

In addition, we operate a television production facility, Empire Burbank Studios, in Burbank, California that we use to produce our core programming for all of our television stations, and we have television production facilities in Houston and Dallas-Fort Worth that allow us to produce programming in those markets as well.

We operate in two reportable segments, radio and television. We generate revenue from sales of local, regional and national advertising time on our radio and television stations and the sale of time to brokered or infomercial customers on our radio and television stations. Advertising rates are, in large part, based on each station’s ability to attract audiences in demographic groups targeted by advertisers. Our stations compete for audiences and advertising revenue directly with other Spanish-language radio and television stations, and we generally do not obtain long-term commitments from our advertisers. As a result, our management team focuses on creating a diverse advertiser base, producing cost-effective, focused programming, providing creative advertising solutions for clients, executing targeted marketing campaigns to develop a local audience, implementing strict cost controls and cross-selling radio and television. We recognize revenues when the commercials are broadcast or the brokered time is made available to the customer. We incur commissions from agencies on local, regional and national advertising, and our net revenue reflects deductions from gross revenue for commissions to these agencies.

Our primary expenses are employee compensation, including commissions paid to our local and national sales staffs, promotion, selling, programming and engineering expenses, general and administrative expenses and interest expense. Our programming expenses for television consist of costs related to the production of original programming content, production of local newscasts and, to a lesser extent, the acquisition of programming content from other sources. Because we are highly leveraged, we will need to dedicate a substantial portion of our cash flow from operations to pay interest on our debt. We may need to pursue one or more alternative strategies in the future to meet our debt obligations, such as refinancing or restructuring our indebtedness, selling equity securities or selling assets.

We are organized as a Delaware corporation. Prior to March 30, 2007, we were a qualified subchapter S subsidiary as we were deemed for tax purposes to be part of our parent, an S corporation under federal and state tax laws. Accordingly, our taxable income was reported by the stockholders of our parent on their respective federal and state income tax returns. As a result of the sale of Class A common stock of our parent (as described below under “—Sale and Issuance of Liberman Broadcasting’s Class A Common Stock”), Liberman Broadcasting, Inc., a Delaware corporation and successor in interest to LBI Holdings I, Inc., no longer qualified as an S corporation, and none of its subsidiaries, including us, are able to qualify as qualified subchapter S subsidiaries. Thus, we have been taxed at regular corporate rates since March 30, 2007.

Sale and Issuance of Liberman Broadcasting’s Class A Common Stock

On March 30, 2007, our parent, Liberman Broadcasting, sold shares of its Class A common stock to affiliates of Oaktree Capital Management LLC and Tinicum Capital Partners II, L.P. The sale resulted in net proceeds to Liberman Broadcasting at closing of approximately $117.3 million, after deducting approximately $7.7 million in closing and transaction costs. A portion of these net proceeds were used to repay Liberman Broadcasting’s 9% subordinated notes due 2014 and to redeem related warrants to purchase shares of common stock of the predecessor of Liberman Broadcasting. Liberman Broadcasting contributed approximately $47.9 million of the net proceeds to us, and we, in turn, contributed $47.9 million to LBI Media. LBI Media used the proceeds contributed to it to repay outstanding amounts borrowed under LBI Media’s senior revolving credit facility.

In connection with the sale of Liberman Broadcasting’s Class A common stock, Liberman Broadcasting and its stockholders entered into an investor rights agreement that defines certain rights and obligations of Liberman Broadcasting and the stockholders of

 

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Liberman Broadcasting. Pursuant to this investor rights agreement, the investors have the right to consent to certain transactions involving us, Liberman Broadcasting, and our subsidiaries, including:

 

   

certain acquisitions or dispositions of assets by us, Liberman Broadcasting and our subsidiaries that are consummated on or after September 30, 2009;

 

   

certain transactions between us, Liberman Broadcasting and our subsidiaries, on the one hand, and Jose Liberman, our chairman and president and LBI Media’s chairman and president, Lenard Liberman, our executive vice president and secretary and LBI Media’s executive vice president and secretary, or certain of their respective family members, on the other hand;

 

   

certain issuances of equity securities to employees or consultants of ours, Liberman Broadcasting, and our subsidiaries;

 

   

certain changes in the compensation arrangements with Jose Liberman, Lenard Liberman or certain of their respective family members;

 

   

material modifications in our business strategy and the business strategy of Liberman Broadcasting and our subsidiaries;

 

   

commencement of a bankruptcy proceeding related to us, Liberman Broadcasting, or our subsidiaries;

 

   

certain issuances of new equity securities to the public prior to March 30, 2010;

 

   

certain changes in Liberman Broadcasting’s corporate form to an entity other than a Delaware corporation;

 

   

any change in Liberman Broadcasting’s auditors to a firm that is not a big four accounting firm; and

 

   

certain change of control transactions.

Refinancing of LBI Media Senior Subordinated Notes

In July 2007, LBI Media issued approximately $228.8 million aggregate principal amount of 8 1/2% Senior Subordinated Notes that mature in 2017, resulting in gross proceeds of approximately $225.0 million and net proceeds of approximately $221.6 million after certain transaction costs. The net proceeds of the 8 1/2% senior subordinated notes were used to redeem LBI Media’s 10 1/8 % senior subordinated notes due 2012, to repay a portion of the borrowings under LBI Media’s senior revolving credit facility and for general corporate purposes. The 10 1/8% senior subordinated notes were redeemed in full in August 2007. See “—Liquidity and Capital Resources” for more information on the 8 1/2% senior subordinated notes.

Acquisitions

On November 7, 2008, two of our indirect, wholly owned subsidiaries, KRCA Television LLC and KRCA License LLC, entered into an asset purchase agreement with Venture Technologies Group, LLC, as seller, pursuant to which we have agreed to acquire selected assets of low-power television station WASA-LP, licensed to Port Jervis, New York, from the seller. The selected assets include, among other things, licenses and permits authorized by the Federal Communications Commission, or FCC, for or in connection with the operation of the station. The total purchase price will be $6.0 million in cash, subject to certain adjustments, of which $0.6 million has been deposited into escrow. Consummation of the acquisition is subject to customary closing conditions and regulatory approval from the FCC.

In September 2008, two of our indirect, wholly owned subsidiaries, Liberman Broadcasting of California LLC and LBI Radio License LLC, entered into an asset purchase agreement with Sun City Communications, LLC and Sun City Licenses, LLC, as sellers, pursuant to which we have agreed to acquire certain assets of radio station KVIB-FM, 95.1 FM, licensed to Phoenix, Arizona, from the sellers. Those assets include, among other things, (i) licenses and permits authorized by the FCC, for or in connection with the operation of the station, (ii) antenna and transmitter facilities, (iii) broadcast and other studio equipment used to operate the station, and (iv) contract rights and other intangible assets. The total purchase price will be approximately $15.0 million in cash, subject to certain adjustments, of which $0.8 million has been deposited into escrow. Consummation of the acquisition is subject to customary closing conditions and regulatory approval from the FCC.

In August 2008, KRCA Television LLC and KRCA License LLC entered into an asset purchase agreement with Latin America Broadcasting of Arizona, Inc., as seller, pursuant to which we have agreed to acquire selected assets of television station KVPA-LP, Channel 42, licensed to Phoenix, Arizona, from the seller. The selected assets include, among other things, (i) licenses and permits authorized by the FCC, for or in connection with the operation of the station and (ii) transmission and other broadcast equipment used to operate the station. The total purchase price will be approximately $1.3 million in cash, subject to certain adjustments, of which $0.1 million has been deposited into escrow. Consummation of the acquisition is subject to customary closing conditions and regulatory approval from the FCC.

In November 2007, KRCA Television LLC and KRCA License LLC, consummated the acquisition of selected assets of television station KPNZ-TV, licensed in Ogden, Utah, that were owned and operated by Utah Communications, LLC pursuant to that certain asset purchase agreement, entered into by the parties in May 2007. The selected assets included, among other things, (i) licenses and permits authorized by the FCC for or in connection with the operation of the station and (ii) broadcast and other

 

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television studio equipment used to operate the station. The purchase of these assets marks our first entry into this market. The total purchase price of approximately $10.0 million was paid in cash through borrowings under LBI Media’s senior secured revolving credit facility.

Also in November 2007, Liberman Broadcasting of California LLC and LBI Radio License LLC entered into an asset purchase agreement with R&R Radio Corporation, as the seller, pursuant to which we have agreed to acquire selected assets of radio station KDES-FM, located in Palm Springs, California, from the seller. The selected assets include, among other things, (i) licenses and permits authorized by the FCC for or in connection with the operation of the station, (ii) transmitter and other broadcast equipment used to operate the station, and (iii) other related assets. We intend to change the programming format and the location of KDES-FM from Palm Springs, California to Redlands, California.

The aggregate purchase price will be approximately $17.5 million in cash, subject to certain adjustments, of which $0.5 million has been deposited in escrow. We will pay $10.5 million of the aggregate purchase price to the seller and $7.0 million to Spectrum Scan-Idyllwild, LLC, or Spectrum Scan. As a condition to our purchase of the assets from the seller, Liberman Broadcasting of California LLC has entered into an agreement with Spectrum Scan whereby it will pay $7.0 million to Spectrum Scan in exchange for Spectrum Scan’s agreement to terminate its option to purchase KWXY-FM, located in Cathedral City, California, and Spectrum Scan’s assistance in the relocation of KDES-FM from Palm Springs, California to Redlands, California. Payment to Spectrum Scan is conditioned on the completion of the purchase of the assets from the seller. If the purchase of KDES-FM is not completed, we must pay a $500,000 fee to Spectrum Scan.

Consummation of the acquisition is subject to regulatory approval from the FCC, including consent to the relocation of KDES-FM from Palm Springs, California to Redlands, California, and to other customary closing conditions.

In September 2007, Liberman Broadcasting of California LLC and LBI Radio License LLC, consummated the acquisition of selected assets of radio station KWIE-FM (currently known as KRQB-FM), 96.1 FM, licensed to San Jacinto, California, from KWIE, LLC, KWIE Licensing LLC and Magic Broadcasting, Inc. pursuant to an asset purchase agreement entered into by the parties in July 2007. The total purchase price of approximately $25.0 million was paid for in cash primarily through borrowings under LBI Media’s senior secured revolving credit facility. The assets that were acquired included, among other things, (i) licenses and permits authorized by the FCC for or in connection with the operation of the radio station and (ii) broadcast and other studio equipment used to operate the radio station.

We generally experience lower operating margins for several months following the acquisition of radio and television stations. This is primarily due to the time it takes to fully implement our format changes, build our advertiser base and gain viewer or listener support.

From time to time, we engage in discussions with third parties concerning our possible acquisition of additional radio or television stations or related assets. Any such discussions may or may not lead to our acquisition of additional broadcasting assets.

 

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Results of Operations

Separate financial data for each of our operating segments is provided below. We evaluate the performance of our operating segments based on the following:

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2008     2007     2008     2007  

Net revenues:

        

Radio

   $ 17,486     $ 16,537     $ 50,946     $ 45,673  

Television

     13,357       13,786       40,312       42,310  
                                

Total

   $ 30,843     $ 30,323     $ 91,258     $ 87,983  
                                

Total operating expenses before deferred compensation benefit, impairment of broadcast licenses, loss on disposal of property and equipment and depreciation and amortization:

        

Radio

   $ 8,662     $ 8,105     $ 24,735     $ 21,811  

Television

     9,169       8,516       28,299       27,256  
                                

Total

   $ 17,831     $ 16,621     $ 53,034     $ 49,067  
                                

Deferred compensation benefit:

        

Radio

   $ —       $ —       $ —       $ (3,952 )
                                

Total

   $ —       $ —       $ —       $ (3,952 )
                                

Impairment of broadcast licenses:

        

Radio

   $ 33,989     $ 3,046     $ 33,989     $ 3,046  

Television

     12,677       —         12,677       —    
                                

Total

   $ 46,666     $ 3,046     $ 46,666     $ 3,046  
                                

Loss on disposal of property and equipment:

        

Radio

   $ 430     $ —       $ 430     $ —    

Television

     399       —         399       —    
                                

Total

   $ 829     $ —       $ 829     $ —    
                                

Depreciation and amortization:

        

Radio

   $ 1,299     $ 1,080     $ 3,821     $ 3,311  

Television

     1,297       1,148       3,639       3,444  
                                

Total

   $ 2,596     $ 2,228     $ 7,460     $ 6,755  
                                

Operating (loss) income:

        

Radio

   $ (26,894 )   $ 4,306     $ (12,029 )   $ 21,457  

Television

     (10,185 )     4,122       (4,702 )     11,610  
                                

Total

   $ (37,079 )   $ 8,428     $ (16,731 )   $ 33,067  
                                

Adjusted EBITDA (1):

        

Radio

   $ 8,824     $ 8,432     $ 26,211     $ 27,814  

Television

     4,188       5,270       12,013       15,054  

Corporate

     —         (7,594 )     —         (7,594 )
                                

Total

   $ 13,012     $ 6,108     $ 38,224     $ 35,274  
                                

 

(1)

We define Adjusted EBITDA as net income or loss plus income tax expense or benefit, net interest expense, interest rate swap expense, impairment of equity method investment, equity in loss of equity method investment, impairment of broadcast licenses, loss on disposal of property and equipment, depreciation and amortization and other non-cash gains and losses. For the three and nine months ended September 30, 2007, other non-cash losses includes a $1.2 million charge related to the write off of unamortized deferred financing costs associated with LBI Media’s former 10 1/8% senior subordinated notes, which were redeemed in August 2007.

 

     Management considers this measure an important indicator of our liquidity relating to our operations because it eliminates the effects of certain non-cash items and our capital structure. This measure should be considered in addition to, but not as a substitute for or superior to, other measures of liquidity and financial performance prepared in accordance with U.S. generally accepted accounting principles, such as cash flows from operating activities, operating income or loss and net income or loss. In addition, our definition of Adjusted EBITDA may differ from those of many companies reporting similarly named measures.

 

     We discuss Adjusted EBITDA and the limitations of this financial measure in more detail under “—Non-GAAP Financial Measures.”

 

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The table set forth below reconciles net cash provided by (used in) operating activities, calculated and presented in accordance with U.S. generally accepted accounting principles, to Adjusted EBITDA:

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2008     2007     2008     2007  
     (In thousands)  

Net cash provided by (used in) operating activities

   $ 1,345     $ (8,743 )   $ 5,410     $ (3,111 )

Add:

        

Income tax (benefit) expense

     (15,575 )     1,138       (10,666 )     50,456  

Interest expense and other income, net

     9,251       9,554       27,804       27,099  

Less:

        

Amortization of deferred financing costs

     (333 )     (325 )     (1,062 )     (926 )

Amortization of discount on subordinated notes

     (64 )     —         (189 )     —    

Amortization of program rights

     (133 )     (133 )     (413 )     (455 )

Accretion on senior discount notes

     (1,784 )     (1,648 )     (5,243 )     (4,756 )

Provision for doubtful accounts

     (292 )     (300 )     (929 )     (821 )

Deferred compensation benefit

     —         —         —         3,952  

Loss on sale of property and equipment

     (62 )     —         (62 )     —    

Changes in operating assets and liabilities:

        

Accounts receivable

     (100 )     475       5,493       3,101  

Deferred compensation payments

     —         3,003       —         4,377  

Program rights

     —         —         1,159       —    

Amounts due from related parties

     4       3       39       (12 )

Prepaid expenses and other current assets

     154       55       33       (139 )

Employee advances

     14       (2 )     418       (10 )

Accounts payable and accrued expenses

     (673 )     732       497       2,053  

Accrued interest

     4,850       3,332       5,054       4,715  

Deferred taxes payable

     15,585       (1,041 )     10,813       (50,123 )

Other assets and liabilities

     825       8       68       (126 )
                                

Adjusted EBITDA

   $ 13,012     $ 6,108     $ 38,224     $ 35,274  
                                

Excluding the $7.6 million early redemption premium paid to redeem LBI Media’s former 10 1/8% senior subordinated notes in the third quarter of 2007, Adjusted EBITDA decreased 5.0% to $13.0 million during the three months ended September 30, 2008, as compared to $13.7 million for the same period in 2007. For the nine months ended September 30, 2008, Adjusted EBITDA decreased 10.8% to 38.2 million as compared to $42.9 million in the same period of 2007 excluding this $7.6 million early redemption premium. The following is a reconciliation of our Adjusted EBITDA, as reported, to our Adjusted EBITDA excluding this one-time redemption charge:

 

     Three Months Ended
September 30,
   Nine Months Ended
September 30,
     2008    2007    2008    2007
     (In thousands)

Adjusted EBITDA, as reported

   $ 13,012    $ 6,108    $ 38,224    $ 35,274

Early redemption premium on 10 1/8% senior subordinated notes

     —        7,594      —        7,594
                           

Adjusted EBITDA, excluding redemption charge

   $ 13,012    $ 13,702    $ 38,224    $ 42,868
                           

Three Months Ended September 30, 2008 Compared to the Three Months Ended September 30, 2007

Net revenues. Net revenues increased by $0.5 million, or 1.7%, to $30.8 million for the three months ended September 30, 2008, from $30.3 million for the same period in 2007. The increase was primarily attributable to increased advertising revenue in our radio markets and incremental revenue in our Utah television market. These gains were partially offset by (i) declines in our California and Texas television markets, primarily resulting from lower infomercial advertising, and (ii) lost advertising revenue associated with Hurricane Ike, which caused substantial damage and power outages throughout Houston in September 2008.

Net revenues for our radio segment increased by $1.0 million, or 5.7%, to $17.5 million for the three months ended September 30, 2008, from $16.5 million for the same period in 2007. This increase was attributable to growth in all of our radio markets — Los Angeles, Dallas and Houston — reflecting improved station ratings and increased national advertiser acceptance of our station formats. Our third quarter 2008 results were negatively impacted by lost air time and ad cancellations resulting from the damage caused by Hurricane Ike in September 2008.

 

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Net revenues for our television segment decreased by $0.5 million, or 3.1%, to $13.3 million for the three months ended September 30, 2008, from $13.8 million for the same period in 2007. This decrease was primarily attributable to lower infomercial sales, partially offset by increased national advertising revenue as a result of the improved ratings of our internally produced television programs. Our third quarter 2008 results were also negatively impacted by lost air time and ad cancellations resulting from the damage caused by Hurricane Ike in September 2008.

We currently anticipate that our full year 2008 net revenues will be higher than our 2007 net revenues, reflecting continued growth in our radio segment and improving trends in our California television market, partially offset by the impact of the broader economic slowdown on our projected advertising revenues.

Total operating expenses. Total operating expenses increased by $46.0 million, or 210.2%, to $67.9 million for the three months ended September 30, 2008 from $21.9 million for the same period in 2007. This increase was primarily attributable to:

 

  (1) a $43.6 million increase in non-cash broadcast license impairment charges, primarily due to (a) a decrease in advertising revenue growth projections for the broadcast industry, (b) an increase in discount rates and (c) a decline in cash flow multiples for recent station sales;

 

  (2) a $1.0 million increase in programming and technical expenses primarily related to (a) higher music license fees, including charges associated with the settlement of a royalty dispute with ASCAP, (b) an increase in the production of in-house television programs and (c) incremental expenses related to our Salt Lake City television station, which we acquired in November 2007;

 

  (3) a $0.8 million increase in loss on disposal of property and equipment, primarily reflecting damage caused by Hurricane Ike in September 2008;

 

  (4) a $0.4 million increase in depreciation and amortization, primarily due to incremental expenses relating to our 2007 asset acquisitions and the completion of construction on two radio tower sites in Texas in the fourth quarter of 2007;

 

  (5) a $0.1 million increase in selling, general and administrative expenses, primarily related to expenses incurred to restore power and repair several tower sites damaged by Hurricane Ike; and

 

  (6) a $0.1 million increase in promotional expenses.

We believe that our total operating expenses, before consideration of any impairment charges and adjustments to deferred compensation expense or benefit, will increase in the remainder of 2008 due to (a) additional expenses related to our radio station in the Riverside and San Bernardino region of our Los Angeles market and our television station in Salt Lake City, each acquired in the second half of 2007, and (b) increased programming costs for both our radio and television segments. Continued growth in expenses may also occur as a result of acquisitions of radio and television assets we may complete by the end of 2008. We anticipate that the growth rate of our 2008 total operating expenses, excluding any impairment charges and deferred compensation, will be higher than the growth rate of our 2008 net revenue. This expectation could be negatively impacted by the number and size of additional radio and television assets that we acquire, if any, during the remainder of 2008.

Total operating expenses for our radio segment increased by $32.1 million, or 262.8%, to $44.3 million for the three months ended September 30, 2008, from $12.2 million in the three months ended September 30, 2007. This increase was primarily attributable to:

 

  (1) a $30.9 million increase in non-cash broadcast license impairment charges, based on the factors previously discussed;

 

  (2) a $0.4 million increase in programming and technical expenses primarily associated with (a) higher music license fees, and (b) an increase in market research costs;

 

  (3) a $0.4 million increase in loss on disposal of property and equipment, primarily reflecting damage caused by Hurricane Ike in September 2008;

 

  (4) a $0.2 million increase in depreciation and amortization primarily due to incremental expenses relating to our 2007 asset acquisition and the completion of construction on two radio tower sites in Texas in the fourth quarter of 2007;

 

  (5) a $0.1 million increase in selling, general and administrative expenses, primarily related to expenses incurred to restore power and repair several tower sites damaged by Hurricane Ike; and

 

  (6) a $0.1 million increase in promotional expenses.

 

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Total operating expenses for our television segment increased by $13.9 million, or 143.6%, to $23.6 million for the three months ended September 30, 2008, from $9.7 million for the same period in 2007. This increase was primarily attributable to:

 

  (1) a $12.7 million increase in non-cash broadcast license impairment charges, based on the factors previously discussed;

 

  (2) a $0.6 million increase in programming and technical expenses associated with (a) higher music license fees, including charges associated with the settlement of a royalty dispute with ASCAP, (b) an increase in the production of in-house television programs and (c) incremental expenses related to KPNZ-TV, our Salt Lake City television station, which we acquired in November 2007;

 

  (3) a $0.4 million increase in loss on disposal of property and equipment, primarily reflecting damage caused by Hurricane Ike in September 2008; and

 

  (4) a $0.2 million increase in depreciation and amortization, primarily reflecting incremental expenses related to our acquisition of KPNZ-TV in November 2007.

Interest expense, net. Interest expense, net, was $9.2 million and $9.6 million for the three months ended September 30, 2008 and 2007, respectively. As a result of the acquisitions we completed in the second half of 2007 and the $10.0 million incremental borrowing under LBI Media’s term loan facility in January 2008, our average debt balance increased in the third quarter of 2008, as compared to the same period in 2007. However, our average interest rates were lower in the third quarter of 2008 compared to the same period in 2007 and more than offset the effect of higher average balances. As a result, interest expense decreased by $0.4 million for the three months ended September 30, 2008, as compared to the same period in 2007.

Our interest expense may increase in the remainder of 2008 if interest rates increase or we borrow additional amounts under LBI Media’s senior revolving credit facility to acquire additional radio or television station assets, including the acquisition of the selected assets of radio station KDES-FM from R&R Radio Corporation, KVPA-LP from Latin America Broadcasting of Arizona, Inc., KVIB-FM from Sun City Communications, LLC and Sun City Licenses, LLC and WASA-LP from Venture Technologies Group, LLC. See “—Acquisitions.”

Interest rate swap expense. Interest rate swap expense decreased by $1.6 million to $0.1 million for the three months ended September 30, 2008, from $1.7 million for the same period of 2007. This decrease was attributable to a smaller change in the fair market value of our interest rate swap during the third quarter of 2008, as compared to the same period in 2007.

Loss on note redemption. In July 2007, LBI Media deposited amounts in trust to redeem all of its outstanding 10 1/8% senior subordinated notes at a redemption price of 105.0625% of the outstanding principal amount, plus accrued and unpaid interest to August 22, 2007, the redemption date. In connection with the redemption of these notes, we recorded a charge of $8.8 million in the third quarter of 2007, which represented the early redemption premium on the notes of $7.6 million, and the write off of the unamortized deferred financing costs related to these notes of $1.2 million (see “—Liquidity and Capital Resources—LBI Media’s 10 1/8% Senior Subordinated Notes”).

Equity in loss of equity method investment. In April 2008, one of our indirect, wholly owned subsidiaries purchased a 30% interest in PortalUno, Inc. (“PortalUno”), a development stage, online search engine for the Hispanic community. Equity in loss of equity method investment of $0.2 million for the three months ended September 30, 2008 represents our share of PortalUno’s loss during the period.

Impairment of equity method investment. In the third quarter of 2008, we tested our equity investment in PortalUno for impairment. Based on this analysis, including a review of the factors which contributed to the impairment charge we recorded during the third quarter relating to our broadcast licenses, we determined that an other-than-temporary decline in the estimated fair value of the investment had occurred. As such, during the three months ended September 30, 2008, we recorded a $0.2 million impairment charge to reduce the carrying value of the investment to its estimated fair value.

Benefit from (provision for) income taxes. During the three months ended September 30, 2008, we recognized an income tax benefit of $15.6 million, as compared to an income tax provision of $1.1 million for the same period of 2007. This change was primarily the result of the impact of the $43.6 million increase in broadcast license impairment charges during the third quarter of 2008, as compared to the three months ended September 30, 2007.

Net loss. We recognized a net loss of $31.2 million for the three months ended September 30, 2008, as compared to a $12.8 million net loss for the same period of 2007, an increase of $18.4 million. This change was primarily attributable to the $43.6 million increase in non-cash broadcast license impairment charges, partially offset by the $16.7 million net tax benefit primarily resulting from this increase in impairment losses, the absence of the loss on note redemption during the third quarter of 2008, and a decrease in net interest and interest rate swap expenses, as described above.

 

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Adjusted EBITDA. Adjusted EBITDA increased by $6.9 million, or 113.0%, to $13.0 million for the three months ended September 30, 2008, as compared to $6.1 million for the same period in 2007. This change resulted primarily from the absence of the $7.6 million early redemption premium paid to redeem LBI Media’s former 10 1/8% senior subordinated notes in the third quarter of 2007 and a modest increase in net revenues. These increases were partially offset by incremental expenses incurred for our Utah television station acquired in November 2007, and the increase in program and technical expenses, as described above.

Excluding the $7.6 million early redemption premium paid to redeem LBI Media’s former 10 1/8% senior subordinated notes in the third quarter of 2007, Adjusted EBITDA decreased 5.0% to $13.0 million during the three months ended September 30, 2008, as compared to $13.7 million for the same period in 2007.

Adjusted EBITDA for our radio segment increased by $0.4 million, or 4.6%, to $8.8 million for the three months ended September 30, 2008, as compared to $8.4 million for the same period in 2007. The increase resulted primarily from higher net revenues, partially offset primarily by the increase in program and technical expenses.

Adjusted EBITDA for our television segment decreased by $1.1 million, or 20.5%, to $4.2 million for the three months ended September 30, 2008, from $5.3 million for the same period in 2007. This decrease primarily resulted from incremental expenses for our Utah station acquired in November 2007 and higher program and technical expenses.

Nine Months Ended September 30, 2008 Compared to the Nine Months Ended September 30, 2007

Net revenues. Net revenues increased by $3.3 million, or 3.7%, to $91.3 million for the nine months ended September 30, 2008, from $88.0 million for the same period in 2007. The increase was primarily attributable to increased advertising revenue in our radio markets and incremental revenue in our Utah television market. These gains were partially offset by declines in our California and Texas television markets, primarily resulting from lower infomercial advertising.

Net revenues for our radio segment increased by $5.3 million, or 11.5%, to $51.0 million for the nine months ended September 30, 2008, from $45.7 million for the same period in 2007. This increase was attributable to growth in all of our radio markets — Los Angeles, Dallas and Houston — reflecting improved station ratings and increased national advertiser acceptance of our station formats.

Net revenues for our television segment decreased by $2.0 million, or 4.7%, to $40.3 million for the nine months ended September 30, 2008, from $42.3 million for the same period in 2007. This decrease was primarily attributable to lower infomercial sales in our California and Texas markets, partially offset by incremental advertising revenue in our Utah market.

Total operating expenses. Total operating expenses increased by $53.1 million, or 96.6%, to $108.0 million for the nine months ended September 30, 2008 from $54.9 million for the same period in 2007. This increase was primarily attributable to:

 

  (1) a $43.6 million increase in non-cash broadcast license impairment charges, primarily due to (a) lower net revenue growth projections for the broadcast industry, (b) an increase in discount rates and (c) a decline in cash flow multiples for recent station sales;

 

  (2) a $4.0 million decrease in deferred compensation benefit, reflecting the impact of the accrual reduction that we recorded in the first nine months of 2007;

 

  (3) a $2.1 million increase in programming and technical expenses primarily related to (a) higher music license fees, including charges associated with the settlement of a royalty dispute with ASCAP, (b) incremental expenses related to our Salt Lake City television station, which we acquired in November 2007, (c) increased production of in-house television programs and (d) the expansion of our programming department in Dallas;

 

  (4) a $1.6 million increase in selling, general and administrative expenses primarily attributable to (a) additional expenses related to our radio station in the Riverside and San Bernardino region of our Los Angeles market and our television station in Salt Lake City, each acquired in the second half of 2007 and (b) additional expenses incurred for our Texas radio stations, reflecting the overall growth in net revenue;

 

  (5) a $0.8 million increase in loss on disposal of property and equipment, primarily reflecting damage caused by Hurricane Ike in September 2008;

 

  (6) a $0.7 million increase in depreciation and amortization, primarily attributable to incremental expenses relating to our 2007 asset acquisitions and the completion of construction on two radio tower sites in Texas in the fourth quarter of 2007; and

 

  (7) a $0.3 million increase in promotional expenses, primarily reflecting new events that our radio stations conducted in 2008.

 

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As noted above, we recognized a deferred compensation benefit of $4.0 million in the first nine months of 2007 compared to no deferred compensation expense or benefit for the same period in 2008. The $4.0 million benefit recorded during the first nine months of 2007 resulted from a reduction in the deferred compensation accrual because the amounts that were ultimately paid to employees during the first nine months of 2007 were less than the amounts that had been accrued at December 31, 2006. Our deferred compensation liability can increase in future periods based on changes in an employee’s vesting percentage, which is based on time and performance measures, and can increase or decrease in future periods based on changes in the net value of our parent, Liberman Broadcasting. See “—Critical Accounting Policies—Deferred Compensation”.

Total operating expenses for our radio segment increased by $38.7 million, or 160.1%, to $63.0 million for the nine months ended September 30, 2008, from $24.2 million in the nine months ended September 30, 2007. This increase was primarily attributable to:

 

  (1) a $30.9 million increase in non-cash broadcast license impairment charges, based on the factors previously discussed;

 

  (2) a $4.0 million decrease in deferred compensation benefit, reflecting the impact of the accrual reduction we recorded in the first nine months of 2007;

 

  (3) a $1.5 million increase in selling, general and administrative expenses, primarily due to (a) increased salaries, including new personnel in connection with our radio station in the Riverside and San Bernardino region of our Los Angeles market acquired in September 2007 and (b) higher selling expenses incurred for our Texas radio stations, reflecting overall growth in net revenue;

 

  (4) a $1.2 million increase in programming and technical expenses primarily associated with (a) higher music license fees, (b) additional expenses related to our radio station in the Riverside and San Bernardino region of our Los Angeles market acquired in September 2007, and (c) an increase in market research costs;

 

  (5) a $0.5 million increase in depreciation and amortization primarily due to incremental expenses relating to our 2007 asset acquisitions and the completion of construction on two radio tower sites in Texas in the fourth quarter of 2007;

 

  (6) a $0.4 million increase in loss on disposal of property and equipment, primarily reflecting damage caused by Hurricane Ike in September 2008; and

 

  (7) a $0.2 million increase in promotional expenses.

Total operating expenses for our television segment increased by $14.4 million, or 46.6%, to $45.1 million for the nine months ended September 30, 2008, from $30.7 million for the same period in 2007. This increase was primarily due to:

 

  (1) a $12.7 million increase in non-cash broadcast license impairment charges, based on the factors previously discussed;

 

  (2) a $0.9 million increase in programming and technical expenses reflecting (a) higher music license fees, including charges associated with the settlement of a royalty dispute with ASCAP, (b) incremental expenses for our Salt Lake City station acquired in November 2007 and (c) an increase in the production of in-house television programs;

 

  (3) a $0.4 million increase in loss on disposal of property and equipment, primarily reflecting damage caused by Hurricane Ike in September 2008;

 

  (4) a $0.2 million increase in depreciation and amortization primarily related to incremental expenses related to our Salt Lake City station acquired in November 2007;

 

  (5) a $0.1 million increase in selling, general and administrative expenses; and

 

  (6) a $0.1 million increase in promotional expenses.

Interest expense, net. Interest expense, net, was $27.8 million and $27.1 million for the nine months ended September 30, 2008 and 2007, respectively, an increase of $0.7 million. As a result of our 2007 acquisitions and the $10.0 million incremental borrowing under LBI Media’s term loan facility in January 2008, our average debt balance increased in the first nine months of 2008, as compared to the same period in 2007. Although average interest rates were lower during the nine months ended September 30, 2008 compared to the same period in 2007, the higher average debt balance and lower interest income contributed to the increase in net interest expense.

Interest rate swap expense. Interest rate swap expense decreased by $572,000 to $14,000 for the nine months ended September 30, 2008, from $586,000 for the same period of 2007. This decrease was attributable to a smaller change in the fair market value of our interest rate swap during the nine months ended September 30, 2008, as compared to the same period of 2007.

Loss on note redemption. In July 2007, LBI Media deposited amounts in trust to redeem all of its outstanding 10 1/8% senior subordinated notes at a redemption price of 105.0625% of the outstanding principal amount, plus accrued and unpaid interest to

 

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August 22, 2007, the redemption date. In connection with the redemption of these notes, we recorded a charge of $8.8 million, which represented the early redemption premium on the notes of $7.6 million, and the write off of the unamortized deferred financing costs related to these notes of $1.2 million (see“—Liquidity and Capital Resources—LBI Media’s 10 1/8% Senior Subordinated Notes”).

Equity in loss of equity method investment. In April 2008, one of our indirect, wholly owned subsidiaries purchased a 30% interest in PortalUno, Inc. (“PortalUno”), a development stage, online search engine for the Hispanic community. Equity in loss of equity method investment of $0.2 million for the nine months ended September 30, 2008 represents our share of PortalUno’s loss during the period.

Impairment of equity method investment. In the third quarter of 2008, we tested our equity investment in PortalUno for impairment. Based on this analysis, including a review of the factors which contributed to the impairment charge we recorded during the third quarter relating to our broadcast licenses, we determined that an other-than-temporary decline in the estimated fair value of the investment had occurred. As such, during the nine months ended September 30, 2008, we recorded a $0.2 million impairment charge to reduce the carrying value of the investment to its estimated fair value.

Benefit from (provision for) income taxes. During the nine months ended September 30, 2008, we recognized an income tax benefit of $10.7 million, as compared to an income tax provision of $50.5 million for the same period of 2007. As described above under “—Sale and Issuance of Liberman Broadcasting’s Class A Common Stock,” certain investors purchased shares of our parent’s Class A common stock in March 2007. As a result, our parent no longer qualified as an S corporation and we and our subsidiaries no longer qualified as qualified subchapter S corporations. Accordingly, we recorded a one-time non-cash charge of $46.8 million to adjust our deferred tax accounts in the first nine months of 2007. The change in our income tax benefit (provision) also resulted from the impact of the $43.6 million increase in broadcast license impairment charges, as described above.

Net loss. We recognized a net loss of $34.3 million for the nine months ended September 30, 2008, as compared to a net loss of $53.8 for the same period of 2007, a decrease of $19.5 million. This change reflects the $61.1 million decrease in our income tax provision and the absence of the $8.8 million loss on note redemption, as described above. However, these expense declines were partially offset by the $43.6 million increase in non-cash impairment of broadcast licenses, the $4.0 million decrease in deferred compensation benefit and higher net interest expense.

Adjusted EBITDA. Adjusted EBITDA increased by $2.9 million, or 8.4%, to $38.2 million for the nine months ended September 30, 2008 as compared to $35.3 million for the same period in 2007. This change resulted primarily from the absence of the $7.6 million early redemption premium paid to redeem LBI Media’s former 10 1/8% senior subordinated notes in the third quarter of 2007 and a modest increase in net revenues. This increase was partially offset by the $4.0 million decrease in deferred compensation benefit reflecting the impact of the accrual reduction we recorded in the first nine months of 2007 and an increase in program and technical and selling, general and administrative expenses, as described above.

Excluding the $7.6 million early redemption premium paid to redeem LBI Media’s former 10 1/8% senior subordinated notes in the third quarter of 2007, Adjusted EBITDA decreased 10.8% to $38.2 million during the nine months ended September 30, 2008, as compared to $42.9 million for the same period in 2007.

Adjusted EBITDA for our radio segment decreased by $1.6 million, or 5.8%, to $26.2 million for the nine months ended September 30, 2008, as compared to $27.8 million for the same period in 2007. The decrease was primarily the result of the $4.0 million decrease in deferred compensation benefit and an increase in program and technical and selling, general and administrative expenses, partially offset by higher net revenues.

Adjusted EBITDA for our television segment decreased by $3.1 million, or 20.2%, to $12.0 million for the nine months ended September 30, 2008, from $15.1 million for the same period in 2007. This decrease was primarily the result of lower advertising revenue, incremental expenses related to our Utah television station acquired in November 2007 and higher program and technical expenses, as discussed above.

Liquidity and Capital Resources

LBI Media’s Senior Credit Facilities. Our primary sources of liquidity are cash provided by operations and available borrowings under LBI Media’s $150.0 million senior revolving credit facility. In May 2006, LBI Media refinanced its prior $220.0 million senior revolving credit facility with a $150.0 million senior revolving credit facility and a $110.0 million senior term loan facility. In January 2008, LBI Media entered into a commitment increase agreement pursuant to which its senior term loan facility increased by $10.0 million. LBI Media borrowed the full amount of the increase in the commitment.

LBI Media has the option to request its existing or new lenders under its senior secured term loan and revolving credit facilities to increase the aggregate amount of its senior credit facilities by an additional $40.0 million; however, its existing and new lenders are not obligated to do so. The increases under the senior secured revolving credit facility and the senior secured term loan credit facility, taken together, cannot exceed $50.0 million in the aggregate (including the $10.0 million increase in January 2008).

 

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Under the senior revolving credit facility, LBI Media has a swing line sub-facility equal to an amount of not more than $5.0 million. Letters of credit are also available to LBI Media under the senior revolving credit facility and may not exceed the lesser of $5.0 million or the available revolving commitment amount. There are no scheduled reductions of commitments under the senior revolving credit facility. Under the senior term loan facility, LBI Media must pay, each quarter, 0.25% of the original principal amount of the term loans, plus 0.25% of the additional amount borrowed in January 2008 and 0.25% of any additional principal amount incurred in the future under the senior term loan facility. The senior credit facilities mature on March 31, 2012.

As of September 30, 2008, LBI Media had $18.0 million aggregate principal amount outstanding under the senior revolving credit facility and $117.2 million aggregate principal amount of outstanding senior term loans.

Borrowings under the senior credit facilities bear interest based on either, at LBI Media’s option, the base rate or the LIBOR rate, in each case plus the applicable margin stipulated in the senior credit agreements. The base rate is the higher of (i) Credit Suisse’s prime rate and (ii) the Federal Funds Effective Rate (as published by the Federal Reserve Bank of New York) plus 0.50%. The applicable margin for revolving loans, which is based on LBI Media’s total leverage ratio, will range from 0% to 1.00% per annum for base rate loans and from 1.00% to 2.00% per annum for LIBOR loans. Including the $10.0 million increase to LBI Media’s senior secured term loan facility in January 2008, the applicable margin for term loans ranges from 0.50% to 0.75% for base rate loans and from 1.50% to 1.75% for LIBOR loans. The applicable margin for any future term loans will be agreed upon at the time those loans are incurred. Interest on base rate loans is payable quarterly in arrears, and interest on LIBOR loans is payable either monthly, bimonthly or quarterly depending on the interest period elected by LBI Media. All amounts that are not paid when due under either the senior revolving credit facility or the senior term loan facility will accrue interest at the rate otherwise applicable plus 2.00% until such amounts are paid in full. In addition, LBI Media pays a quarterly unused commitment fee ranging from 0.25% to 0.50% depending on the level of facility usage. At September 30, 2008, borrowings under LBI Media’s senior credit facilities bore interest at rates between 4.24% and 5.75%, including the applicable margin.

Under the indentures governing LBI Media’s 8 1/2% senior subordinated notes and our senior discount notes (described below), LBI Media is limited in its ability to borrow under the senior revolving credit facility and to borrow additional amounts under the senior term loan facility. LBI Media may borrow up to an aggregate of $260.0 million under the senior credit facilities (subject to certain reductions under certain circumstances) without having to comply with specified leverage ratios under the indentures governing its 8 1/2% senior subordinated notes and our senior discount notes, but any amount over $260.0 million that LBI Media may borrow under the senior credit facilities (subject to certain reductions under certain circumstances) will be subject to LBI Media’s and our compliance with specified leverage ratios (as defined in the indentures governing LBI Media’s 8 1/2% senior subordinated notes and our senior discount notes). Also, the indenture governing LBI Media’s 8 1/2% senior subordinated notes prohibits borrowings under LBI Media’s senior credit facilities, the proceeds of which would be used to repay, redeem, repurchase or refinance any of our senior discount notes earlier than one year prior to their stated maturity.

LBI Media’s senior credit facilities contain customary restrictive covenants that, among other things, limit its ability to incur additional indebtedness and liens in connection therewith and pay dividends. Under the senior revolving credit facility, LBI Media must also maintain a maximum senior secured leverage ratio (as defined in the senior credit agreement) on and after the fiscal quarter ended June 30, 2009.

LBI Media’s 8 1/2% Senior Subordinated Notes. In July 2007, LBI Media issued approximately $228.8 million aggregate principal amount of 8 1/2% Senior Subordinated Notes that mature in 2017, resulting in gross proceeds of approximately $225.0 million and net proceeds of approximately $221.6 million after deducting certain transaction costs. Under the terms of LBI Media’s 8 1/2 % senior subordinated notes, it must pay semi-annual interest payments of approximately $9.7 million each February 1 and August 1, commencing on February 1, 2008. LBI Media may redeem the 8 1/2% senior subordinated notes at any time on or after August 1, 2012 at redemption prices specified in the indenture governing its 8 1/2% senior subordinated notes, plus accrued and unpaid interest. At any time prior to August 1, 2012, LBI Media may redeem some or all of its 8 1/2% senior subordinated notes at a redemption price equal to a “make whole” amount as set forth in the indenture governing such senior subordinated notes. Also, LBI Media may redeem up to 35% of the aggregate principal amount of the notes with the net proceeds of certain equity offerings completed on or prior to August 1, 2010 at a redemption price of 108.5% of the principal amount of the notes, plus accrued and unpaid interest, if any, thereon to the applicable redemption date.

The indenture governing these notes contains restrictive covenants that limit, among other things, LBI Media’s and its subsidiaries’ ability to incur additional indebtedness, issue certain kinds of equity, and make particular kinds of investments. The indenture governing LBI Media’s 8 1/2% senior subordinated notes also prohibits the incurrence of indebtedness, the proceeds of which would be used to repay, redeem, repurchase or refinance any of our senior discount notes earlier than one year prior to the stated maturity of the senior discount notes unless such indebtedness is (i) unsecured, (ii) pari passu or junior in right of payment to the 8 1/2% senior subordinated notes of LBI Media, and (iii) otherwise permitted to be incurred under the indenture governing LBI Media’s 8 1/2% senior subordinated notes.

The indenture governing these notes also provides for customary events of default, which include (subject in certain instances to cure periods and dollar thresholds): nonpayment of principal, interest and premium, if any, on the notes, breach of covenants specified

 

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in the indenture, payment defaults or acceleration of other indebtedness, a failure to pay certain judgments and certain events of bankruptcy, insolvency and reorganization. The notes will become due and payable immediately without further action or notice upon an event of default arising from certain events of bankruptcy or insolvency with respect to us and certain of our subsidiaries. If any other event of default occurs and is continuing, the trustee or the holders of at least 25% in principal amount of the then outstanding notes may declare all the notes to be due and payable immediately.

Senior Discount Notes. In October 2003, we issued $68.4 million aggregate principal amount at maturity of senior discount notes that mature in 2013. Under the terms of the senior discount notes, cash interest did not accrue on the senior discount notes prior to October 15, 2008, and instead the accreted value of the senior discount notes increased until such date. On October 15, 2008, cash interest on the senior discount notes began to accrue at a rate of 11% per year payable semi-annually on each April 15 and October 15, with the first payment due on April 15, 2009. We may redeem the senior discount notes at any time on or after October 15, 2008 at redemption prices specified in the indenture governing our senior discount notes, plus accrued and unpaid interest.

The indenture governing the senior discount notes contains certain restrictive covenants that, among other things, limit our ability to incur additional indebtedness and pay dividends to Liberman Broadcasting. Our senior discount notes are structurally subordinated to LBI Media’s senior credit facilities and LBI Media’s 8 1/2% senior subordinated notes.

Empire Burbank Studios’ Mortgage Note. In July 2004, one of our indirect, wholly owned subsidiaries, Empire Burbank Studios, issued an installment note for approximately $2.6 million. The loan is secured by Empire Burbank Studios’ real property and bears interest at 5.52% per annum. The loan is payable in monthly principal and interest payments of $21,411 through maturity in July 2019.

The following table summarizes our various levels of indebtedness as of September 30, 2008.

 

Issuer

  

Form of Debt

  

Principal Amount
Outstanding

  

Scheduled

Maturity Date

  

Interest rate

LBI Media, Inc.

   $150.0 million senior secured revolving credit facility    $18.0 million    March 31, 2012    LIBOR or base rate, plus an applicable margin dependent on LBI Media’s leverage ratio

LBI Media, Inc.

   Senior secured term loan credit facility    $117.2 million    March 31, 2012    LIBOR or base rate, plus an applicable margin

LBI Media, Inc.

   Senior subordinated notes    $228.8 million aggregate principal amount at maturity    August 1, 2017    8.5%

LBI Media Holdings, Inc.

   Senior discount notes    $68.4 million aggregate principal amount at maturity    October 15, 2013    11%

Empire Burbank Studios LLC

   Mortgage note    $2.1 million    July 1, 2019    5.52%

Cash Flows. Cash and cash equivalents were $0.4 million and $1.7 million at September 30, 2008 and December 31, 2007, respectively.

Net cash provided by operating activities was $5.4 million for the nine months ended September 30, 2008 and net cash flow used in operating activities was $3.1 million for the nine months ended September 30, 2007, respectively. The increase in our net cash provided by operating activities during the nine months ended September 30, 2008 as compared to 2007 primarily resulted from (a) the absence of the $7.6 million early redemption premium paid to redeem LBI Media’s 10 1/8% senior subordinated notes in July 2007 and (b) the absence of deferred compensation payments during the first nine months of 2008, as compared to $4.4 million in 2007. These changes were offset by an increase in accounts receivable, reflecting the overall growth in net revenue and the timing of cash collections, and an increase in television program purchases to expand our television line-up as a result of lower infomercial sales during the nine months ended September 30, 2008.

Net cash used in investing activities was $8.5 million and $37.8 million for the nine months ended September 30, 2008 and 2007, respectively. The decrease was primarily attributable to (a) the absence of any asset acquisitions that have closed during the first nine months of 2008, as compared to $26.0 million in costs related to the purchase of KRQB-FM (formerly KWIE-FM) in the third quarter of 2007 and (b) lower capital expenditures. Capital expenditures during the nine months ended September 30, 2007 primarily reflected costs related to the construction of new tower and transmission sites for several of our Dallas and Houston radio stations.

 

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Net cash provided by financing activities was $1.7 million and $40.0 million for the nine months ended September 30, 2008 and 2007, respectively. Net cash provided by financing activities for the nine months ended September 30, 2007 included a $47.9 million capital contribution from our parent, resulting from the issuance of its Class A common stock during that period. We, in turn, contributed the net proceeds to LBI Media, which were used to pay down outstanding borrowings under its senior credit facility. Net cash provided by financing activities for the 2007 period also included approximately $46.9 million in net bank borrowings, excluding the $47.9 million repayment described above, as compared to $2.5 million for the nine months ended September 30, 2008. Net cash provided by financing activities for the nine months ended September 30, 2008 also reflects a $4.2 million decrease in payments of deferred financing costs and a $1.8 million decline in distributions to our parent.

Contractual Obligations. Other than the additional $10.0 million borrowing under our senior term loan facility described above, we had no material changes in commitments for long-term debt obligations or operating lease obligations as of September 30, 2008 as compared to those disclosed in our table of contractual obligations included in our Annual Report on Form 10-K for the year ended December 31, 2007. We anticipate that funds generated from operations and funds available under LBI Media’s senior revolving credit facility will be sufficient to meet our working capital and capital expenditure needs in the foreseeable future.

Expected Use of Cash Flows. We believe that our cash on hand, cash provided by operating activities and borrowings under LBI Media’s senior revolving credit facility will be sufficient to permit us to fund our contractual obligations and operations for at least the next twelve months. For both our radio and television segments, we have historically funded, and will continue to fund, expenditures for operations, administrative expenses, capital expenditures and debt service from our operating cash flow and borrowings under LBI Media’s senior revolving credit facility. For our television segment, our planned uses of liquidity during the next twelve months will include purchasing additional transmission equipment for all of our television stations relating to our digital signal conversion at an estimated cost of $3.5 million. In connection with the purchase of the selected assets of five radio stations from Entravision Communications Corporation, one of our indirect, wholly owned subsidiaries, Liberman Broadcasting of Dallas, Inc. (predecessor in interest to Liberman Broadcasting of Dallas LLC), also purchased a building in Dallas, Texas to accommodate our growth in stations owned and operated in the Dallas-Fort Worth market. We estimate we will spend approximately a total of $10.0 million on improvements and equipment for our new Dallas building. As of September 30, 2008, we had incurred approximately $2.2 million in costs related to the new building. In addition, our senior discount notes began accruing cash interest at a rate of 11% per year on October 15, 2008, with the first payment due on April 15, 2009. The interest payments will be payable on April 15 and October 15 of each year until the notes mature on October 15, 2013. Prior to October 15, 2008, our senior discount notes had not been accruing cash interest and instead the accreted value of the notes had been increasing. We expect to use cash to fund the purchase prices for the selected assets of television stations WASA-LP and KVPA-LP and radio stations KDES-FM and KVIB-FM within the next twelve months, primarily through borrowings under LBI Media’s senior revolving credit facility.

We have used, and expect to continue to use, a significant portion of our capital resources to fund acquisitions. Future acquisitions will be funded from amounts available under LBI Media’s senior revolving credit facility, the proceeds of future equity or debt offerings and our internally generated cash flows. However, our ability to pursue future acquisitions may be impaired if we or our parent are unable to obtain funding from other capital sources. As a result, we may not be able to increase our revenues at the same rate as we have in recent years.

Seasonality

Seasonal net revenue fluctuations are common in the television and radio broadcasting industry and result primarily from fluctuations in advertising expenditures by local and national advertisers. Our first fiscal quarter generally produces the lowest net revenue for the year.

Non-GAAP Financial Measures

We use the term “Adjusted EBITDA” throughout this report. Adjusted EBITDA consists of net loss plus income tax expense, net interest expense, interest rate swap expense, impairment of equity method investment, equity in loss of equity method investment, impairment of broadcast licenses, loss on disposal of property and equipment, depreciation and amortization and other non-cash gains and losses.

This term, as we define it, may not be comparable to a similarly titled measure employed by other companies and is not a measure of performance calculated in accordance with U.S. generally accepted accounting principles, or GAAP.

Management considers this measure an important indicator of our liquidity relating to our operations, as it eliminates the effects of certain non-cash items and our capital structure. Management believes liquidity is an important measure for our company because it reflects our ability to meet our interest payments under our substantial indebtedness and is a measure of the amount of cash available to grow our company through our acquisition strategy. This measure should be considered in addition to, but not as a substitute for or superior to, other measures of liquidity and financial performance prepared in accordance with GAAP, such as cash flows from operating activities, operating income and net income.

 

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We believe Adjusted EBITDA is useful to an investor in evaluating our liquidity and cash flow because:

 

   

it is widely used in the broadcasting industry to measure a company’s liquidity and cash flow without regard to items such as depreciation and amortization, loss on disposal of property and equipment and impairment of broadcast licenses. The broadcast industry uses liquidity to determine whether a company will be able to cover its capital expenditures and whether a company will be able to acquire additional assets and broadcast licenses if the company has an acquisition strategy. We believe that by eliminating the effect of certain non-cash items, Adjusted EBITDA provides a meaningful measure of liquidity;

 

   

it gives investors another measure to evaluate and compare the results of our operations from period to period by removing the impact of non-cash expense items, such as depreciation and amortization, loss on disposal of property and equipment and impairment of broadcast licenses. By removing the non-cash items, it allows our investors to better determine whether we will be able to meet our debt obligations as they become due; and

 

   

it provides a liquidity measure before the impact of a company’s capital structure by removing net interest expense items and interest rate swap expenses.

Our management uses Adjusted EBITDA:

 

   

as a measure to assist us in planning our acquisition strategy;

 

   

in presentations to our board of directors to enable them to have the same consistent measurement basis of liquidity and cash flow used by management;

 

   

as a measure for determining our operating budget and our ability to fund working capital; and

 

   

as a measure for planning and forecasting capital expenditures.

The Securities and Exchange Commission, or SEC, has adopted rules regulating the use of non-GAAP financial measures, such as Adjusted EBITDA, in filings with the SEC and in disclosures and press releases. These rules require non-GAAP financial measures to be presented with and reconciled to the most nearly comparable financial measure calculated and presented in accordance with GAAP. We have included a presentation of net cash provided by (used in) operating activities and a reconciliation to Adjusted EBITDA on a consolidated basis under “—Results of Operations”.

Critical Accounting Policies

The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to allowance for doubtful accounts, acquisitions of radio station and television station assets, intangible assets, deferred compensation and commitments and contingencies. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

We believe the following accounting policies and the related judgments and estimates affect the preparation of our condensed consolidated financial statements.

Acquisitions of radio and television station assets

Our radio and television station acquisitions have consisted primarily of FCC licenses to broadcast in a particular market (broadcast licenses). We generally acquire the existing format and change it upon acquisition. As a result, a substantial portion of the purchase price for the assets of a radio or television station is allocated to its broadcast license. The allocations assigned to acquired broadcast licenses and other assets are subjective by their nature and require our careful consideration and judgment. We believe the allocations represent appropriate estimates of the fair value of the assets acquired.

Allowance for doubtful accounts

We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. A considerable amount of judgment is required in assessing the likelihood of ultimate realization of these receivables including our history of write-offs, relationships with our customers and the current creditworthiness of each advertiser. Our historical estimates have been a reliable method to estimate future allowances, with historical reserves averaging approximately 9.0% of our outstanding receivables. If the financial condition of our advertisers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. The effect of an increase in our allowance of 3.0% of our

 

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outstanding receivables as of September 30, 2008, from 10.2% to 13.2% or $2.5 million to $3.2 million, would result in a decrease in pre-tax income of $0.7 million for the three months and nine months ended September 30, 2008.

Intangible assets

Our indefinite-lived assets consist of our FCC broadcast licenses. We believe that our broadcast licenses have indefinite useful lives given that they are expected to indefinitely contribute to our future cash flows and that they may be continually renewed without substantial cost to us. In certain prior years, the licenses were considered to have finite lives and were subject to amortization.

In accordance with SFAS 142, we do not amortize our broadcast licenses. We test our broadcast licenses for impairment at least annually or when indicators of impairment are identified. Our valuations principally use the discounted cash flow methodology, an income approach based on market revenue projections and not company-specific projections, which assumes broadcast licenses are acquired and operated by a third party. This approach incorporates variables such as types of signals, media competition, audience share, market advertising revenue projections, anticipated operating margins and discount rates, without taking into consideration the station’s format or management capabilities. This method calculates the estimated present value that would be paid by a prudent buyer for our FCC licenses as new radio or television stations as of September 30, 2008. If the discounted cash flows estimated to be generated from these assets are less than the carrying value, an adjustment to reduce the carrying value to the fair market value of the assets is recorded.

We generally test our broadcast licenses for impairment at the individual license level. However, we have applied the guidance of EITF 02-07 (“EITF 02-07”), “Unit of Accounting for Testing Impairment of Indefinite-Lived Intangible Assets”, to certain of our broadcast licenses. EITF 02-07 states that separately recorded indefinite-lived intangible assets should be combined into a single unit of accounting for purposes of testing impairment if they are operated as a single asset and, as such, are essentially inseparable from one another. We aggregate broadcast licenses for impairment testing if their signals are simulcast and are operating as one revenue-producing asset.

During the three months ended September 30, 2008, we completed our annual impairment review and concluded that several of our broadcast licenses were impaired. As such, we recorded a non-cash impairment loss of approximately $46.7 million related to the broadcast licenses for certain individual stations in our California, Texas and Utah markets. The tax impact of the impairment charge was approximately an $18.0 million tax benefit, which related to the reduction of the book-tax basis differences on our broadcast licenses. The impairment charge was due to market changes in estimates and assumptions which resulted in lower advertising revenue growth projections for the broadcasting industry, higher discount rates and a decline in cash flow multiples for recent station sales.

During the three months ended September 30, 2007, we recorded a $3.0 million impairment loss resulting from our annual FAS 142 review. This impairment loss was primarily due to lower projected advertising revenue resulting from greater competition from non-traditional media in several of our markets. The tax impact of this impairment charge was approximately a $1.2 million tax benefit.

In assessing the recoverability of our indefinite-lived intangible assets, we must make assumptions about the estimated future cash flows and other factors to determine the fair value of these assets. Assumptions about future revenue and cash flows require significant judgment because of the current state of the economy and the fluctuation of actual revenue and the timing of expenses. We develop future revenue estimates based on projected ratings increases, planned timing of signal strength upgrades, planned timing of promotional events, customer commitments and available advertising time. Estimates of future cash flows assume that expenses will grow at rates consistent with historical rates. Alternatively, some stations under evaluation have had limited relevant cash flow history due to planned conversion of format or upgrade of station signal. The assumptions about cash flows after conversion reflect estimates of how these stations are expected to perform based on similar stations and markets and possible proceeds from the sale of the assets. If the expected cash flows are not realized, impairment losses may be recorded in the future. If we experienced a 10% decrease in the fair value of each of our broadcast licenses from that determined during our September 30, 2008 annual impairment testing, we would require an additional impairment write-down of approximately $17.4 million.

Deferred compensation

One of our indirect, wholly owned subsidiaries and our parent, Liberman Broadcasting, have entered into employment agreements with certain current and former employees. In addition to annual compensation and other benefits, these agreements provide certain employees with the ability to participate in the increase of the “net value” of Liberman Broadcasting, on a consolidated basis, over certain base amounts.

Our deferred compensation liability can increase based on changes in the applicable employee’s vesting percentage and can increase or decrease based on changes in the “net value” of Liberman Broadcasting. We have two deferred compensation components that comprise the employee’s vesting percentage: (i) a component that vests in varying amounts over time, and (ii) a component that vests upon the attainment of certain performance measures (each unique to the individual agreements). We account for the time

 

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vesting component over the vesting periods specified in the employment agreements and account for the performance based component when we consider it probable that the performance measures will be attained.

As part of the calculation of the deferred compensation liability, we use the income and market valuation approaches to estimate the “net value” of Liberman Broadcasting. The income approach analyzes future cash flows and discounts them to arrive at a current estimated fair value. The market approach uses recent sales and offering prices of similar properties to determine estimated fair value. Based on the “net value” of Liberman Broadcasting as determined in these analyses, and based on the percentage of incentive compensation that has vested (as specified in the employment agreements), we record deferred compensation expense or benefit (and a corresponding credit or charge to deferred compensation liability). As such, estimation of the “net value” of Liberman Broadcasting requires considerable management judgment and the amounts recorded as periodic deferred compensation expense or benefit are dependent on that judgment.

During the nine months ended September 30, 2007, we satisfied our obligations under certain employment agreements that had December 31, 2006 “net value” determination dates with an aggregate cash payment of approximately $4.4 million, which was approximately $4.0 million less than the amount accrued as of December 31, 2006. The remaining employment agreement has a “net value” determination date of December 31, 2009, and as of September 30, 2008, we estimated that this employee had not vested in any unpaid deferred compensation.

If we assumed no change in the “net value” of Liberman Broadcasting from that at September 30, 2008, we would not expect to record any deferred compensation expense during the remainder of 2008 relating solely to the time vesting portion of the deferred compensation. The remaining agreement requires us to pay the deferred compensation amount in cash until Liberman Broadcasting’s common stock becomes publicly traded, at which time we may pay such amount in cash or Liberman Broadcasting’s common stock, at our option.

Commitments and contingencies

We periodically record the estimated impacts of various conditions, situations or circumstances involving uncertain outcomes. These events are called “contingencies,” and our accounting for these events is prescribed by SFAS No. 5, “Accounting for Contingencies.”

The accrual of a contingency involves considerable judgment on the part of our management. We use our internal expertise, and outside experts (such as lawyers), as necessary, to help estimate the probability that a loss has been incurred and the amount (or range) of the loss. We currently do not have any material contingencies that we believe require loss accruals; however, we refer you to Note 8 of our condensed consolidated financial statements for discussion of other known contingencies.

Recent Accounting Pronouncements

In September 2006, the FASB issued Statement of Financial Accounting Standards (“Statement”) No. 157, “Fair Value Measurements” (“FAS 157”). FAS 157 establishes a single authoritative definition of fair value, sets out a framework for measuring fair value and expands on required disclosures about fair value measurement. We adopted certain provisions of FAS 157 related to financial assets and liabilities as well as other assets and liabilities carried at fair value on a recurring basis on January 1, 2008, and have determined that such adoption has no material effect on our financial position, results of operations and cash flows. The provisions of FAS 157 related to other non-financial assets and liabilities will be effective on January 1, 2009, and will be applied prospectively. We are currently evaluating the impact, if any, that these provisions of FAS 157 will have on our financial position, results of operations and cash flows as it relates to other non-financial assets and liabilities.

In addition, in February 2007, the FASB issued FAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities-including an amendment of FASB Statement No. 115” (“FAS 159”). FAS 159 expands the use of fair value accounting but does not affect existing standards that require assets or liabilities to be carried at fair value. Under FAS 159, a company may elect to use fair value to measure certain financial assets and liabilities and any changes in fair value are recognized in earnings. This statement was effective on January 1, 2008. We did not elect the fair value option upon adoption of FAS 159.

In December 2007, the FASB issued SFAS No. 141R, “Business Combinations” (“FAS 141R”), which requires an acquirer to measure the identifiable assets acquired, the liabilities assumed and any noncontrolling interest in the acquiree at their fair values on the acquisition date, with goodwill being the excess value over the net identifiable assets acquired. FAS 141R is effective beginning January 1, 2009. We are currently evaluating what impact, if any, the adoption of FAS 141R will have on our financial position, results of operations and cash flows.

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements” (“FAS 160”), which clarifies that a noncontrolling interest in a subsidiary should be reported as equity in the consolidated financial statements. FAS 160 is effective beginning January 1, 2009. We are currently evaluating what impact, if any, the adoption of FAS 160 will have on our financial position, results of operations and cash flows.

 

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In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133” (“FAS 161”), which requires enhanced disclosures for derivative and hedging activities. FAS 161 will become effective beginning January 1, 2009. We are currently evaluating what impact, if any, the adoption of FAS 161 will have on our financial statements.

In April 2008, the FASB issued FASB Staff Position (“FSP”) No. FAS 142-3, “Determination of Useful Life of Intangible Assets” (“FSP 142-3). FSP 142-3 amends the factors that should be considered in developing the renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142 (“SFAS 142”), “Goodwill and Other Intangible Assets”. The intent of this FSP is to improve the consistency between the useful life of an intangible asset determined under SFAS 142 and the period of expected cash flows used to measure the fair value of the asset under SFAS 141R. FSP 142-3 is effective for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. We are currently evaluating what impact, if any, the adoption of FSP 142-3 will have on our financial statements.

Cautionary Statement Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements, as defined in the Private Securities Litigation Reform Act of 1995. You can identify these statements by the use of words like “may,” “will,” “could,” “continue,” “expect” and variations of these words or comparable words. Actual results could differ substantially from the results that the forward-looking statements suggest for various reasons. The risks and uncertainties include, but are not limited to:

 

   

our dependence on advertising revenues;

 

   

general economic conditions in the United States;

 

   

our ability to reduce costs without adversely impacting revenues;

 

   

changes in the rules and regulations of the FCC;

 

   

our ability to attract, motivate and retain salespeople and other key personnel;

 

   

our ability to successfully convert acquired radio and television stations to a Spanish-language format;

 

   

our ability to maintain FCC licenses for our radio and television stations;

 

   

successful integration of acquired radio and television stations;

 

   

potential disruption from natural hazards;

 

   

our ability to protect our intellectual property rights;

 

   

strong competition in the radio and television broadcasting industries;

 

   

sufficient cash to meet our debt service obligations; and

 

   

our ability to obtain regulatory approval for future acquisitions.

The foregoing factors are not exhaustive, and new factors may emerge or changes to the foregoing factors may occur that could impact our business. The forward-looking statements in this Quarterly Report, as well as subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf, are hereby expressly qualified in their entirety by the cautionary statements in this Quarterly Report, the risk factors included in our Annual Report on Form 10-K for the year ended December 31, 2007 and other documents that we file from time to time with the Securities and Exchange Commission, particularly any Current Reports on Form 8-K. We are not obligated to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

In the ordinary course of business, we are exposed to various market risk factors, including fluctuations in interest rates and changes in general economic conditions. Please see “Item 7A. Quantitative and Qualitative Disclosures about Market Risk”, contained in our Annual Report on Form 10-K for the year ended December 31, 2007 for further discussion on quantitative and qualitative disclosures about market risk.

 

Item 4T. Controls and Procedures

As required by SEC Rule 15d-15(b), we carried out an evaluation, under the supervision and with the participation of our management, including our President and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures as of September 30, 2008. Based on the foregoing, our President and Chief Financial Officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective at the reasonable assurance level.

 

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There have been no significant changes in our internal control over financial reporting, identified in connection with the evaluation of such internal control that occurred during our last fiscal quarter, which have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II. OTHER INFORMATION

 

Item 1. Legal Proceedings

Our dispute with Broadcast Music, Inc. related to royalties is ongoing. No material developments in these proceedings occurred during the three months ended September 30, 2008. For more information on these proceedings, see “Item 1. Legal Proceedings” in our Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2008.

We have also been a party to a dispute with the American Society of Composers, Authors and Publishers (“ASCAP”) related to royalties owed to ASCAP. In September 2008, we submitted a formal offer and paid $0.8 million to ASCAP to settle all amounts owed related to ASCAP. Although no formal settlement agreement has been obtained from ASCAP, we believe that the matter had been satisfactorily resolved.

We are subject to pending litigation arising in the normal course of its business. While it is not possible to predict the results of such litigation, management does not believe the ultimate outcome of these matters will have a materially adverse effect on our financial position or results of operations.

 

Item 1A. Risk Factors

In addition to the other information in this report, you should carefully consider the risk factors below, which could materially affect our business, financial condition or future results. The risks described in this report and our Annual Report on Form 10-K for the year ended December 31, 2007 are not the only risks facing our company.

Our debt service obligations will require a significant amount of cash and continued disruption in the financial markets could adversely impact the cost and availability of refinancing or restructuring our indebtedness, each of which could adversely affect our ability to operate our company successfully and achieve growth through acquisitions.

We currently have a substantial amount of debt. At December 31, 2007, we had total indebtedness of approximately $422.8 million, representing approximately 95% of our total capitalization.

Based on interest rates as of December 31, 2007 and assuming no additional borrowings or principal payments on LBI Media’s senior revolving credit facility until its maturity on March 31, 2012 or on our other indebtedness, as of December 31, 2007, we would need approximately $296.5 million over the next five years to meet our principal and interest payments under our debt agreements, of which approximately $29.2 million would be due over the next year. This includes interest on our senior discount notes, which began accruing cash interest at a rate of 11% per year on October 15, 2008, with the first payment due on April 15, 2009. Prior to October 15, 2008, our senior discount notes had not been accruing cash interest and instead the accreted value of the notes had been increasing.

Because we will need to dedicate a substantial portion of our cash flow from operations to pay principal and interest on our debt, it may reduce our ability to fund working capital and to expand our business through capital expenditures, acquisitions and other means.

In addition, if we are not able to pay our debts as they become due, we will be required to pursue one or more alternative strategies, such as, refinancing or restructuring our indebtedness, selling additional debt or equity securities or selling assets. The current situation in the world credit markets and the disruption in the normal flow of credit among financial institutions may adversely impact the availability and cost of credit, which could adversely affect our ability to refinance or restructure our debt or obtain any additional financing. There can be no assurances that government responses to the disruptions in the financial and credit markets will restore consumer confidence, stabilize the markets or increase liquidity and the availability of credit. As a result, we may not be able to refinance our debt or issue additional debt or equity securities on favorable terms, if at all, and if we must sell our assets, it may negatively affect our ability to generate net revenues.

Our television and radio stations could be adversely affected by changes in the advertising market or a recession in the U.S. economy or in the local economies of the regions in which we operate.

Revenue generated by our television and radio stations depends primarily upon the sale of advertising and is, therefore, subject to various factors that influence the advertising market for the broadcasting industry as a whole, including:

 

   

changes in the financial condition of advertisers, which may reduce their advertising budgets; and

 

   

changes in the tax laws applicable to advertisers.

We also believe that advertising is largely a discretionary business expense. Advertising expenditures generally tend to decline during an economic recession or downturn. Because of the current volatility and uncertainty in the capital and credit markets, advertisers have cutback their advertising budgets in response to a decline in consumer confidence and spending. If the economic downturn and current levels of market disruption and volatility continue or worsen, especially in the local markets in which we operate, the overall demand for advertising could be further adversely impacted, and will negatively affect our revenues and results of operations.

In addition, shifts in populations and demographics could adversely affect advertising expenditures. Consequently, our television and radio station revenues are likely to be adversely affected by shifts in Hispanic populations and demographics or other events or circumstances that adversely affect advertising activity. Foreign hostilities and terrorist attacks may also affect our revenues and results of operations in the future.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

 

Item 3. Defaults upon Senior Securities

None.

 

Item 4. Submission of Matters to a Vote of Security Holders

The following matters were submitted to a vote of the sole security holder of LBI Media, Holdings during the three month period ended September 30, 2008:

On July 18, 2008, the sole stockholder approved by written consent the re-election of the following directors William Adams, Winter Horton, Jose Liberman, Lenard Liberman, Bruce Karsh, and Terence O’Toole.

 

Item 5. Other Information

None.

 

Item 6. Exhibits

(a)    Exhibits

 

Exhibit
Number

  

Exhibit Description

3.1    Restated Certificate of Incorporation of LBI Media Holdings, Inc.(1)
3.2    Amended and Restated Bylaws of LBI Media Holdings, Inc.(1)
4.1    Indenture governing LBI Media Holdings, Inc.’s 11% Senior Discount Notes due 2013, dated October 10, 2003, by and among LBI Media Holdings, Inc. and U.S. Bank National Association, as Trustee (2)
4.2    Form of Exchange Note (included as Exhibit A-1 to Exhibit 4.1)
10.1    Asset Purchase Agreement, dated September 12, 2008, by and among Liberman Broadcasting of California LLC, LBI Radio License LLC, Sun City Communications, LLC and Sun City Licenses, LLC*
31.1    Certification of President pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934*
31.2    Certification of Chief Financial Officer pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934*

 

* Filed herewith.
(1) Incorporated by reference to LBI Media Holdings, Inc.’s Quarterly Report on Form 10-Q filed on May 17, 2007.

 

(2) Incorporated by reference to LBI Media Holdings, Inc.’s Registration Statement on Form S-4 (Registration No. 333-110122), filed with the Securities and Exchange Commission on October 30, 2003, as amended.

 

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SIGNATURE

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

 

LBI MEDIA HOLDINGS, INC.
By:  

/s/    Wisdom Lu

      Wisdom Lu
      Chief Financial Officer

Date: November 14, 2008

 

36

EX-10.1 2 dex101.htm ASSET PURCHASE AGREEMENT Asset Purchase Agreement

Exhibit 10.1

 

 

ASSET PURCHASE AGREEMENT

BY AND AMONG

LIBERMAN BROADCASTING OF CALIFORNIA LLC,

a California limited liability company

LBI RADIO LICENSE LLC,

a California limited liability company

SUN CITY COMMUNICATIONS, LLC

a Delaware limited liability company

AND

SUN CITY LICENSES, LLC,

a Delaware limited liability company

DATED AS OF SEPTEMBER 12, 2008

 

 


TABLE OF CONTENTS

 

SECTION 1 : DEFINITIONS

   1
 

  1.1

   Terms Defined in this Section    1
 

  1.2

   Terms Defined Elsewhere in this Agreement    8
 

  1.3

   Clarifications    8

SECTION 2 : PURCHASE OF ASSETS

   9
 

  2.1

   Agreement to Sell and Buy    9
 

  2.2

   Purchase Price    9
 

  2.3

   Adjustments and Prorations    9
 

  2.4

   Assumed Liabilities    12

SECTION 3 : REPRESENTATIONS AND WARRANTIES OF SELLER

   12
 

  3.1

   Organization and Authority    12
 

  3.2

   Authorization and Binding Obligations    13
 

  3.3

   No Contravention; Consents    13
 

  3.4

   Title to Assets    13
 

  3.5

   Real Property    13
 

  3.6

   Equipment    14
 

  3.7

   Licenses    14
 

  3.8

   Assumed Contracts    15
 

  3.9

   Insurance    15
 

  3.10

   Intellectual Property    15
 

  3.11

   Personnel Matters    15
 

  3.12

   Financial Information    17
 

  3.13

   Taxes    17
 

  3.14

   Claims and Litigation    17
 

  3.15

   No Interference with Signal    17
 

  3.16

   Compliance with Laws    18
 

  3.17

   Environmental Matters    18
 

  3.18

   Conduct of Business in Ordinary Course    18
 

  3.19

   Brokers    18
 

  3.20

   Absence of Other Express or Implied Representations    18

SECTION 4 : REPRESENTATIONS AND WARRANTIES OF BUYER

   19
 

  4.1

   Organization and Authority    19
 

  4.2

   Authorization and Binding Obligations    19

 

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TABLE OF CONTENTS

 

 

  4.3

   No Contravention; Consents    19
 

  4.4

   Qualifications    19
 

  4.5

   Claims and Litigation    19
 

  4.6

   Availability of Funds    19
 

  4.7

   Brokers    19
 

  4.8

   Absence of Other Express or Implied Representations    19

SECTION 5 : PRE-CLOSING COVENANTS OF THE PARTIES

   20
 

  5.1

   Covenants of Seller    20
 

  5.2

   Covenants of Buyer    22

SECTION 6 : JOINT COVENANTS

   23
 

  6.1

   Consultations regarding Consents of Governmental Authorities    23
 

  6.2

   Joint Filings    23
 

  6.3

   Notice of Breach    23
 

  6.4

   Confidentiality    23
 

  6.5

   Press Releases    24
 

  6.6

   Allocation of Purchase Price    24
 

  6.7

   Bulk Sales    24
 

  6.8

   Risk of Loss    24
 

  6.9

   Further Assurances    25
 

  6.10

   Cooperation with Financings    25
 

  6.11

   Accounts Receivable    25

SECTION 7 : CONDITIONS PRECEDENT TO OBLIGATION OF SELLER TO CLOSE

   26
 

  7.1

   Representations, Warranties and Covenants    26
 

  7.2

   Closing Deliveries    26
 

  7.3

   FCC Consent    26
 

  7.4

   No Injunction    26

SECTION 8 : CONDITIONS PRECEDENT TO OBLIGATION OF BUYER TO CLOSE

   26
 

  8.1

   Representations, Warranties and Covenants    26
 

  8.2

   Closing Deliveries    27
 

  8.3

   FCC Consent    27
 

  8.4

   Material Consents    27

 

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TABLE OF CONTENTS

 

 

  8.5

   Estoppels    27
 

  8.6

   No Injunction    27
 

  8.7

   No Material Adverse Effect    27
 

  8.8

   Agreement with Prime Lease Lessee    27
 

  8.9

   Prime Lease    28

SECTION 9 : THE CLOSING

   28
 

  9.1

   The Closing    28
 

  9.2

   Deliveries by Seller to Buyer    28
 

  9.3

   Deliveries by Buyer to Seller    29

SECTION 10 : INDEMNIFICATION

   29
 

10.1

   Survival    29
 

10.2

   Seller’s Indemnity    29
 

10.3

   Buyer’s Indemnity    30
 

10.4

   Procedures    30
 

10.5

   Qualifications and Limitations    31
 

10.6

   Indemnity Escrow    32

SECTION 11 : TERMINATION

   32
 

11.1

   Termination by the Parties    32
 

11.2

   Effect of Termination    33
 

11.3

   Specific Performance    33
 

11.4

   Payment of Escrow Deposit to Seller as Liquidated Damages    34
 

11.5

   Surviving Obligations    34

SECTION 12 : MISCELLANEOUS

   34
 

12.1

   Notices    34
 

12.2

   Expenses    35
 

12.3

   Choice of Law    35
 

12.4

   Assignment    35
 

12.5

   Entire Agreement    35
 

12.6

   Waivers of Compliance; Consents    35
 

12.7

   Severability    36
 

12.8

   Counterparts    36

 

iii


     EXHIBITS     

Exhibit A

      Form of Escrow and Indemnity Agreement
   SCHEDULES   

Schedule 1.1A

      Barter Agreements

Schedule 1.1B

      Excluded Assets

Schedule 1.1C

      Excluded Contracts

Schedule 1.1D

      Key Employees

Schedule 1.1E

      Permitted Liens

Schedule 3.3

      Consents

Schedule 3.5

      Real Property

Schedule 3.5(b)

      Power Interruptions

Schedule 3.6

      Equipment

Schedule 3.7

      Licenses

Schedule 3.8

      Assumed Contracts

Schedule 3.9

      Insurance

Schedule 3.10

      Intellectual Property

Schedule 3.11

      Personnel Matters

Schedule 3.12

      Financial Statements

Schedule 3.12

      Litigation

Schedule 4.3

      Consents

 

iv


ASSET PURCHASE AGREEMENT

This ASSET PURCHASE AGREEMENT (this “Agreement”) is dated September 12, 2008, by and among Liberman Broadcasting of California LLC, a California limited liability company (“LBI”), LBI Radio License LLC, a California limited liability company (“License Sub” and together with LBI, “Buyer”), Sun City Communications, LLC, a Delaware limited liability company (“Sun City”) and Sun City Licenses, LLC, a Delaware limited liability company (“License Holder” and together with Sun City, “Seller”). Seller and Buyer are sometimes referred to herein as the “Parties” and each as a “Party.”

R E C I T A L S:

A. Seller is the holder of certain FCC Licenses (defined herein) issued by the Federal Communications Commission (“FCC”) which are used or useful in the operation of radio station KVIB(FM), Phoenix, Arizona (Facility ID No. 16770) (such facility, together with the business and operations of Seller related to such facility, referred to herein as the “Station”).

B. Seller owns, leases, or otherwise has the right to use and operate the Assets (as defined herein) used in the operation of the Station.

C. Seller desires to convey, and Buyer wishes to acquire, all of the Assets on the terms and conditions hereinafter set forth.

A G R E E M E N T S:

NOW, THEREFORE, in consideration of the mutual covenants and promises contained herein and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the Parties agree as follows:

SECTION 1: DEFINITIONS

1.1 Terms Defined in this Section. The following terms, as used in this Agreement, have the meanings set forth in this Section:

Accounts Receivable” means all accounts receivable and other receivables of Seller relating to or arising out of the operation of the Station prior to the Closing.

Action” means, for any Person, any action, counterclaim, suit, litigation, arbitration, governmental investigation or other legal, administrative or Tax proceeding, or Judgment, claim, or complaint by or against such Person, excluding any litigation affecting the radio broadcasting industry generally in which such Person is not a named party, and any rule-making proceedings.

Advertising Contracts” means contracts entered into by Seller for the sale of advertising time on the Station in exchange for cash payment in the ordinary course of business.

Affiliate” of a Person means any Person, which directly or indirectly controls, is controlled by or is under common control with, such Person. The term “control” (including, with correlative meaning, the terms “controlled by” and “under common control with”), as used with


respect to any Person, means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such Person, whether through the ownership of voting securities, by contract or otherwise.

Ancillary Agreements” means the Escrow Agreement.

Assets” means all real and personal properties, assets, rights, benefits and privileges both tangible and intangible, of every kind, nature and description, used or useful by Seller in the operation of the Station (other than the Excluded Assets), including without limitation the following assets existing on the date of this Agreement and all such assets acquired between the date hereof and the Closing as permitted by and subject to the terms of this Agreement (in each case other than such assets that constitute Excluded Assets): (i) the Real Property, (ii) Equipment, (iii) FCC Licenses, any other License and any pending applications for new Licenses, (iv) Assumed Contracts and all of Seller’s rights thereunder relating to periods and events occurring on and after the Closing Date, (v) Intellectual Property and Technology, (vi) Books and Records, (vii) all prepaid rentals, security deposits and other prepaid expenses, and any other current assets, in each case related to or arising in connection with the operation of the Station to the extent allocated to Buyer in accordance with Section 2.3 hereof, as well as Accounts Receivable, (viii) any rights, claims or causes of action of Seller against third parties in connection with or relating to the operation of the Station other than those relating to Excluded Assets or Non-Assumed Liabilities, (ix) all rights and claims relating to any other Assets or any Assumed Liability, including all guarantees, warranties, indemnities and similar rights in favor of Seller in respect of any Assumed Liability, (x) all other assets or properties not referenced above that are reflected on the Financial Statements or acquired by Seller in the ordinary course of business after June 30, 2008, other than Excluded Assets, (xi) all of Seller’s goodwill in, and going concern value of, the Station and (xii) all other assets used or useful by Seller in connection with the operation of the Station.

Assignment Application” means the application filed jointly by Seller and Buyer with the FCC relating to the assignment of the FCC Licenses from License Holder to License Sub in the manner contemplated by this Agreement.

Assumed Contracts” means all Contracts other than Excluded Contracts.

Barter Agreements” means the agreements under which advertising time on the Station is exchanged for goods or services received or to be received that are (i) in existence as of the date of this Agreement and disclosed to Buyer on Schedule 1.1A hereto and (ii) entered into by Seller after the date of this Agreement with the written consent of Buyer.

Barter Basket” means an amount not to exceed Twenty-Five Thousand Dollars ($25,000).

Books and Records” means all of the written and electronic books and records of Seller related to the operation of the Station (other than any included in the Excluded Assets).

Business Day” means any day of the year on which banks are not required or authorized to be closed in the State of California.

 

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Closing” means the consummation of transactions contemplated by this Agreement, including the assignment, transfer, conveyance and delivery of the Assets and the Purchase Price as contemplated hereunder.

Closing Date” means the date of Closing, which shall occur on a date to be mutually agreed to by Buyer and Seller which shall not be later than five (5) Business Days after the satisfaction or waiver of all of the conditions set forth in Section 7 and Section 8 herein.

Closing Place” means the offices of Latham & Watkins LLP located at 555 Eleventh St., NW, Suite 1000, Washington, D.C., or such other location agreed upon by the Parties.

Code” means the Internal Revenue Code of 1986, as amended.

Compensation Arrangement” means any plan, contract, arrangement, or policy, other than an Employee Plan, whether written or unwritten, which, at each relevant time, Seller or any ERISA Affiliate sponsors, maintains, contributes to, or is required to contribute to, and which provides compensation or benefits to (i) current or former employees (including, without limitation, officers) of Seller or any ERISA Affiliate, or (ii) current and former directors, consultants, or other service providers of Seller, including, but not limited to, any bonus or incentive plan, stock rights plan, deferred compensation arrangement, life insurance, stock purchase plan, severance pay plan, employment or consulting agreement, and any other employee fringe benefit plan.

Consents” means the consents, permits or approvals of Government Authorities and other third parties required to transfer the Assets from Seller to Buyer or otherwise to consummate the transactions contemplated hereby.

Contracts” means the leases, subleases, licenses, contracts, commitments, understandings and agreements (including agreements related to any Internet site maintained for the benefit of the Station) relating to the operation of the Station to which Sun City and/or License Holder is a party, whether oral or written, including, but not limited to, Advertising Contracts.

Employee Plan” means any pension, retirement, profit-sharing, deferred compensation, vacation, severance, bonus, incentive, medical, vision, dental, disability, life insurance or other “employee benefit plan” as defined in Section 3(3) of ERISA (whether or not subject to ERISA) to which any ERISA Affiliate contributes (or has contributed), or which either Seller or any ERISA Affiliate sponsors or maintains (or has sponsored or maintained), or otherwise pursuant to which Seller or any ERISA Affiliate has any Liability or could reasonably be expected to have any Liability, and which provides compensation or benefits to any current or former employee of Seller or any ERISA Affiliate, or current and former director, consultant or other service provider of Seller.

Employees” means the persons employed by Seller on a full or part-time basis with respect to the operation of the Station.

 

3


Enforceability Exceptions” means the exceptions or limitations to the enforceability of contracts under bankruptcy, insolvency, reorganization, moratorium or similar laws affecting creditors’ rights generally, and by the application of general principles of equity.

Environmental Laws” means any Laws relating to health, safety or the environment, including the Handling of Hazardous Substances, the presence of Hazardous Substances on any Real Property, or any antipollution requirements.

Equipment” means the radio studio and transmitter site equipment, furniture, fixtures, furnishings, machinery, computer hardware, antennas, transmitters, inventory, office materials and supplies, spare parts and other personal property used or held for use by Seller in the operation of the Station as of the date of this Agreement, plus such additions, improvements or replacements thereto or deletions therefrom that may occur in the normal course of business between the date of this Agreement and the Closing Date, in accordance with the terms of this Agreement.

ERISA” means the Employee Retirement Income Security Act of 1974, as amended.

ERISA Affiliate” means any entity which is (or at any relevant time was) a member of a “controlled group of corporations” with, under “common control” with, or a member of an “affiliated service group” with, Seller as defined in Section 414(b), (c), (m) or (o) of the Code.

Escrow Agent” means Chevy Chase Bank, and any successors thereto pursuant to the terms of the Escrow Agreement.

Escrow Agreement” means the Escrow and Indemnity Agreement being entered into among LBI, Sun City and the Escrow Agent on the date hereof in substantially the form attached hereto as Exhibit A.

Escrow Amount” means the sum of the Escrow Deposit, plus all interest or other earnings thereon.

Escrow Deposit” means the sum of Seven Hundred Fifty Thousand Dollars ($750,000) which is being deposited by Buyer with the Escrow Agent in immediately available funds on the date hereof to secure the obligations of Buyer to close under this Agreement, with such deposit being held by the Escrow Agent in accordance with the Escrow Agreement.

Excluded Assets” means (i) all cash on hand or in bank accounts and all cash equivalents of Seller and similar investments of Seller, including without limitation certificates of deposit, (ii) all Notes Receivable, (iii) those Accounts Receivable that have been collected in the ordinary course of business in compliance with Section 6.11 between the date of this Agreement and the Closing Date, (iv) all refunds or credits (including interest thereon or claims therefrom) of Taxes attributable to periods prior to the Closing Date, (v) all refunds of premiums paid on, and rights and claims under, insurance policies of Seller (subject to Section 6.8 (Risk of Loss)), (vi) bonds, letters of credit, surety instruments and other similar items (other than amounts posted by parties to Assumed Contracts as deposits or other security held by Seller), (vii) Seller’s corporate governance and tax records and the account books of original entry, general ledger and financial records used in connection with the operation of the Station

 

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(provided, that Seller shall provide Buyer with a copy of any such records related to the operation of the Station that Buyer shall reasonably request), (viii) all Employee Plans, Compensation Arrangements, insurance Contracts, and Excluded Contracts, (ix) all rights and claims of Seller to the extent relating to any other Excluded Asset or any Non-Assumed Liability (including any obligation of Sellers to indemnify Buyer), including all guarantees, warranties, indemnities and similar rights in favor of Seller in respect of any other Excluded Asset or any Non-Assumed Liability and (x) such additional assets as are set forth on Schedule 1.1B hereto.

Excluded Contracts” means (i) those Contracts identified on Schedule 1.1C hereto, (ii) Advertising Contracts other than (A) Advertising Contracts entered into by Seller prior to the date hereof in the ordinary course of business at rates that are consistent with those charged during the six moths prior to the date of this Agreement and (B) Advertising Contracts entered into by Seller on or after the date hereof in compliance with Section 5.1(d) of this Agreement, (iii) Barter Agreements in excess of the Barter Basket, and (iv) any Contract entered into by Seller other than in the ordinary course of business between the date of this Agreement and the Closing Date, unless, in the case of clauses (ii) through (iv) above, Buyer specifically agrees in writing to assume such Barter Agreement or Contract.

FCC” means the United States Federal Communications Commission.

FCC Consent” means action taken by the FCC (including action duly taken by the FCC’s staff pursuant to delegated authority) granting its consent to the assignment of the FCC Licenses by License Holder to License Sub as contemplated by this Agreement.

FCC Licenses” means the licenses, permits or other authorizations, including any applications therefor, issued or granted by the FCC to Seller and used or useful (or with respect to applications, intended to be used or useful) in the operation of the Station, all of which are identified on Schedule 3.7.

Final Order” means the FCC Consent has not been reversed, stayed, enjoined, set aside, annulled, or suspended, and with respect to which no requests or applications are pending for administrative or judicial review, reconsideration, appeal, or stay, and the time for filing any such request or application, and the time for the FCC to set aside the action on its own motion, has expired.

GAAP” means United States generally accepted accounting principles as currently in effect.

Governmental Authority” means any court or any federal, state, county, local or foreign governmental, legislative or regulatory body, agency, department, authority, instrumentality or other subdivision thereof, including the FCC.

Handling of Hazardous Substances” means the production, processing, use, generation, storage, treatment, recycling, disposal, discharge, release or other handling or disposition of any kind of any Hazardous Substance.

 

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Hazardous Substance” means any pollutant, contaminant, hazardous or toxic substance, material, constituent or waste, or any similarly named substance that is defined, labeled or regulated as such by any Law.

Intellectual Property” means all trademarks, trademark applications, patents, patent applications, service marks, service mark applications, trade names, copyrights, copyright applications, licenses, domain names, Internet sites (including related content), call letters (including rights in the call letters KVIB) and other intellectual property rights (whether or not registered) that are owned, licensed or otherwise used or useful by Seller in connection with the operation of the Station (including all slogans, liners and positioning statements), other than Intellectual Property associated exclusively with the Excluded Assets).

Judgment” means any judgment, writ, order, injunction, determination, award or decree of or by any court, judge, justice or magistrate, including any bankruptcy court or judge, and any order of or by a Governmental Authority.

Key Employee” means each Employee set forth on Schedule 1.1D hereto.

knowledge” or “to the knowledge” of a Party (or similar phrases) means actual knowledge of a fact, or constructive knowledge if a reasonably prudent person in a like position would have known or should have known, such fact.

Labor Laws” means all Laws governing or concerning labor relations, unions and collective bargaining, conditions of employment, employment discrimination and harassment, wages, hours, occupational safety and health, worker classification, immigration, workers compensation, or the payment of social security and similar taxes, including, without limitation, ERISA, the United States Immigration Reform and Control Act of 1986, the United States National Labor Relations Act, the United States Civil Rights Acts of 1866 and 1964, the United States Equal Pay Act, ADEA, ADA, FMLA, WARN, the United States Occupational Safety and Health Act, the United States Davis Bacon Act, the United States Walsh-Healy Act, the United States Service Contract Act, United States Executive Order 11246, FLSA and the United States Rehabilitation Act of 1973, and all rules and regulations promulgated under such acts, as each may be amended from time to time.

Law” means any statute, ordinance, code, law, rule, regulation, permit or permit condition, Judgment, or other requirement, standard, policy or procedure enacted, adopted or applied by any Governmental Authority.

Liabilities” means claims, obligations, commitments or liabilities of a Person of any nature, absolute, accrued, contingent or otherwise, known or unknown, whether matured or unmatured, and whether or not required to be disclosed on a balance sheet prepared in accordance with GAAP.

Licenses” means the licenses, permits, franchises, registrations, authorizations, consents or approvals issued by the FCC or any other Governmental Authority to Seller with respect to the operation of the Station.

 

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Lien” means any lien, pledge, charge, burden, easement, security interest, mortgage, deed of trust, right-of-way or other encumbrance.

Material Adverse Effect” means any event, circumstance or condition that, individually or when aggregated with all other similar events, circumstances or conditions, has had or would reasonably be expected to have a material adverse effect on (i) the Assets taken together (including the Real Property), (ii) the operation of the Station, (iii) the condition (financial or otherwise) or results of operations of the Station, or (iv) the ability of Seller to consummate the transactions contemplated by this Agreement; provided that such event, circumstance or condition shall not constitute a Material Adverse Effect if it would reasonably be expected to affect the FM radio broadcasting industry generally and does not disproportionately affect the Station.

Notes Receivable” means promissory notes or other similar obligations payable to Seller.

operation of the Station” and similar references shall mean and include all activities, in the aggregate, relating to the operation and ownership of the Station and the Assets utilized in connection therewith, including, without limitation, the use and occupancy of the Real Property.

Owned Real Property” means all real property owned by the Seller, including that identified on Schedule 3.5.

Permitted Liens” means the following: (i) statutory landlord’s liens and liens for current Taxes not yet due and payable; (ii) zoning laws and ordinances and similar land use Laws that do not individually or in the aggregate materially interfere with the right or ability to own, use, lease or operate the Real Property as presently utilized; (iii) rights reserved to any Governmental Authority to regulate the affected property; (iv) as to interests in Real Property, any easements, rights-of-way, servitudes, permits, restrictions and minor imperfections or irregularities in title that are reflected in the public records (if and to the extent applicable to a leasehold interest in accordance with the terms thereof) and that do not individually or in the aggregate materially interfere with the right or ability to own, use, lease or operate the Real Property as presently utilized; and (v) any Liens set forth on Schedule 1.1E hereto.

Person” means any person or entity, whether an individual, trustee, corporation, general partnership, limited partnership, trust, unincorporated organization, business association, firm, joint venture or Governmental Authority.

Real Property” has the meaning set forth in Section 3.5, and shall include the Owned Real Property, if any, and the property leased pursuant to the Real Property Leases.

Real Property Leases” means all leases, subleases, licenses, rights of entry, occupancy or similar agreements to which Seller is a party, including those identified on Schedule 3.5.

Subleases” means any Real Property Leases where Seller is the lessor or licensor identified on Schedule 3.5.

 

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Taxes” means any taxes, charges, fees, levies or other assessments, including income, excise, use, transfer, payroll, occupancy, property, sales, franchise, unemployment, withholding or other taxes of any kind whatsoever and including any penalties and interest imposed by the United States or any state, county, local or foreign government or subdivision or agency thereof.

Technology” means any trade secrets, inventions, know-how, formulae, processes, procedures and computer software.

Tower Leases” means all Real Property Leases for property that is used by Seller for broadcasting purposes (such as tower sites, antenna sites, rooftop broadcast locations or the like), including sites where backup broadcasting equipment is located.

1.2 Terms Defined Elsewhere in this Agreement. In addition to (i) the defined terms in the preamble, recitals and Section 1.1 hereof, or (ii) certain defined terms used solely within a single section hereof, the following is a list of terms used in this Agreement and a reference to the section hereof in which such term is defined:

 

Term

   Section

Adjustments

   2.3(b)

Assumed Liabilities

   2.4

Auditor

   2.3(d)

Buyer Indemnified Parties

   10.2

Buyer’s Calculation

   2.3(c)

Change in Circumstance

   8.8

Claimant

   10.4

Claim Notice

   10.4

Closing Cash Payment

   2.2(a)

Discovery Period

   2.3(d)

Financial Statements

   3.12

Indemnity Fund

   10.6

Indemnity Period

   10.1

Indemnitor

   10.4

Losses

   10.2

Non-Assumed Liabilities

   2.4

Oral Contracts

   3.11(b)

Prime Lease

   8.8

Prime Lease Lessee

   8.8

Prime Lease Lessor

   8.8

Purchase Price

   2.2(a)

Seller Indemnified Parties

   10.3

Seller’s Estimate

   2.3(b)

Side Letter

   8.8

1.3 Clarifications. Words used in this Agreement, regardless of the gender and number specifically used, shall be deemed and construed to include any other gender and any other number as the context requires. As used in this Agreement, the word “including” is not limiting, and the word “or” is both conjunctive and disjunctive. Except as specifically otherwise

 

8


provided in this Agreement in a particular instance, a reference to a section, schedule or exhibit is a reference to a section of this Agreement or a schedule or exhibit hereto, and the terms “hereof,” “herein,” and other like terms refer to this Agreement as a whole, including the Schedules and Exhibits to this Agreement, and not solely to any particular part of this Agreement. The descriptive headings in this Agreement are inserted for convenience of reference only and are not intended to be part of or to affect the meaning or interpretation of this Agreement.

SECTION 2: PURCHASE OF ASSETS

2.1 Agreement to Sell and Buy. Subject to the terms and upon satisfaction of the conditions contained in this Agreement, at the Closing, (i) Seller shall sell, convey, transfer, assign and deliver to Buyer all of Seller’s right, title and interest in and to the Assets (other than the FCC Licenses), and LBI shall purchase, acquire and accept from Seller all of Seller’s right, title and interest in and to the Assets (other than the FCC Licenses), free and clear of all Liens other than Permitted Liens and (ii) Seller shall assign and deliver to License Sub, and License Sub shall accept, assignment from Seller of, the FCC Licenses.

2.2 Purchase Price.

(a) The purchase price for the Assets shall be Fifteen Million Dollars ($15,000,000) (the “Purchase Price”), as adjusted pursuant to Section 2.3. The Purchase Price, less the amount of the Escrow Deposit and any amount necessary for the Indemnity Fund, plus or minus the amount of Seller’s Estimate (collectively, the “Closing Cash Payment”), shall be paid by Buyer at the Closing by wire transfer of immediately available funds in U.S. dollars to an account designated in writing by Seller.

(b) Concurrently with the execution and delivery of this Agreement, LBI and Sun City are executing and delivering the Escrow Agreement, and LBI is depositing the Escrow Deposit with the Escrow Agent to be held and released pursuant thereto. Upon the Closing, LBI and Sun City shall instruct the Escrow Agent to pay the amount of the Escrow Deposit by wire transfer of immediately available funds in U.S. dollars to an account designated by Seller, which amount shall be credited against the payment by Buyer of the Purchase Price; provided that at Buyer’s election, a portion of the Escrow Deposit that otherwise would be disbursed to Seller may be placed into escrow as the Indemnity Fund in accordance with Section 10.6 hereof. If this Agreement is terminated prior to the Closing, the Escrow Deposit shall be disbursed in accordance with Sections 11.2 and 11.4.

(c) At the Closing Buyer shall deposit the Indemnity Fund with the Escrow Agent to be held and released pursuant to the Escrow Agreement.

2.3 Adjustments and Prorations.

(a) Subject to the terms of this Agreement (including, the treatment of Accounts Receivable pursuant to Section 6.11, which if uncollected as of the Closing shall become the property of Buyer without proration or adjustment under this Section 2.3), all revenues and all expenses arising from the operation of the Station, including tower rental, business and license fees, utility charges and all other fees or charges arising under the Real

 

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Property Leases or payable with respect to the Owned Real Property; real and personal property Taxes and assessments levied against the Assets; property and Equipment rentals; applicable copyright or other fees (including program license payments); sales and service charges; annual regulatory fees; amounts owing in respect of unlicensed software; music license fees; and similar prepaid and deferred items shall be prorated between Seller and Buyer in accordance with GAAP and the general principle that Seller shall receive the benefit of all revenues, and be responsible for all costs, expenses and Liabilities, allocable to the Station for the period prior to the Closing Date, and Buyer shall receive the benefit of all revenues, and be responsible for all costs, expenses and Liabilities, allocable to the Station on or after the Closing Date, subject to the following:

(1) There shall be no proration for goods or services to be received by Seller under Barter Agreements in excess of the Barter Basket as of the Closing Date and Seller shall retain all liability with respect to Barter Agreements that exceed the Barter Basket.

(2) Seller shall be entitled to all revenue and bear all expenses and Liabilities related to the Excluded Assets and the Non-Assumed Liabilities both prior to and after the Closing Date.

(3) Seller shall receive a credit for any security deposits held by lessors of the Real Property Leases (other than Subleases) and Buyer shall receive a credit for any security deposits held by Seller as sublessor under any Subleases.

(4) There shall be no proration for Accounts Receivable that remain uncollected as of the Closing Date in compliance with Section 6.11.

(b) Seller shall prepare and submit to Buyer, not later than five (5) Business Days prior to the Closing Date, a good-faith written estimate of the adjustments and prorations set forth in subsection (a) above (the “Adjustments”) in accordance with this Section 2.3, along with Seller’s estimate of the Purchase Price resulting from the Adjustments (“Seller’s Estimate”). After delivery of Seller’s Estimate, including all supporting documentation of any proposed Adjustments, Buyer and Seller shall in good faith attempt to resolve prior to Closing any disputes between them with respect to the determination of the Closing Cash Payment. If as of Closing any items shall be in dispute between them with respect to the Closing Cash Payment, Seller’s Estimate, as adjusted to reflect any changes to the Adjustments agreed to by the Parties, shall be used as the amount of the Closing Cash Payment payable by Buyer on the Closing Date, with such disputed items to be settled between the Parties following Closing pursuant to subsections (c) and (d) below, and the size of the Indemnity Fund shall be increased by the amount in dispute, which increase shall be disbursed to Seller or returned to Buyer, as appropriate, as part of the settlement between the Parties upon the completion of the adjustment process pursuant to subsection (c) and if applicable, subsection (d) below.

(c) Buyer shall prepare and submit to Seller, not later than thirty (30) Business Days following the Closing Date, Buyer’s written good-faith determination of the Adjustments, including any changes to the Adjustments used to determine the Closing Cash Payment, along with a calculation of the Purchase Price resulting from the Adjustments as determined by Buyer (collectively, the “Buyer’s Calculation”), including all supporting

 

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documentation and the calculation of any amounts. Notwithstanding the foregoing, if the actual amount of Taxes payable with respect to Real Property is not available as of the Closing Date or within thirty (30) days thereafter, Buyer may prepare and submit Buyer’s Calculation, with respect to such Taxes only, within thirty (30) days after the date Buyer receives the final Tax Statement for such period, but Buyer’s Calculation shall be deemed delivered upon its earlier delivery without the calculations with respect to such Taxes. After delivery of Buyer’s Calculation to Seller, Seller may furnish Buyer, within ten (10) Business Days following delivery of Buyer’s Calculation, with written notification setting forth in reasonable detail any disputes Seller has with Buyer’s determination of the Purchase Price in Buyer’s Calculation. In the event that Seller does not provide such a written notification within such ten (10) Business Day period, Seller shall be deemed to have accepted the Adjustments and Buyer’s Calculation delivered by Buyer, shall be final, binding and conclusive for all purposes hereunder. In the event that Seller provides a timely written notification to Buyer, then Buyer and Seller shall, for a period of ten (10) Business Days (or such longer period as they may mutually agree), in good faith attempt to resolve any disputes between them with respect to the determination of the Purchase Price, with each Party claiming an adjustment to its credit providing the other with any documentation reasonably requested by the other Party to determine the appropriateness of such claimed Adjustment.

(d) If, following such ten (10) Business Day period, the Parties cannot agree on the amount of the final Adjustments, the determination shall be made by a national or regional accounting firm jointly designated by the Parties (the “Auditor”). No member, partner, officer, or employee of either Seller or Buyer or their respective Affiliates shall have any business or familial relationship (as defined in the FCC’s rules) with any officer, employee, director, member, stockholder, partner or Affiliate of the Auditor. No member, partner, officer, employee, or director of the Auditor or its Affiliates (if any) shall have any business or familial relationship (as defined in the FCC’s rules) with either Seller or Buyer. The Auditor shall make the determination based on GAAP in effect on the Closing Date. Either Party may invoke the use of the Auditor by notifying the other Party in writing. In the event that either Party invokes the use of the Auditor, there shall be a thirty (30) day period (the “Discovery Period”) when the Parties may request of and shall provide to each other in writing or computer format where appropriate any documentation or records in the possession of the other Party that are related to a claim or defense to be made to the Auditor. Fifteen (15) Business Days after the expiration of the Discovery Period, the Parties shall have the opportunity to present their claims and supporting documentation to the Auditor. The Parties shall use their commercially reasonable efforts to cause the Auditor to render a decision within fifteen (15) Business Days after each Party shall have presented (or have foregone the opportunity to present) its claims and supporting documentation to the Auditor. The decision of the Auditor shall be final and binding on the Parties and shall not be subject to any judicial challenge by either Party. Within five (5) Business Days after the Auditor provides the determination to the Parties, payment in accordance with that determination shall be made by release of any amount by which the Indemnity Fund was increased pursuant to Section 2.3(b) above to the appropriate Party or Parties, with any additional amounts paid by the appropriate Party by wire transfer of immediately available funds in U.S. dollars, to an account designated by the Party entitled to receive such payment. The expenses of the Auditor shall be paid by the Party which, based on the Auditor’s resolution of the disputed item(s), is not the prevailing Party.

 

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2.4 Assumed Liabilities. At and after the Closing, Buyer shall assume and timely pay, discharge and perform when due only those Liabilities attributable to periods after the Closing under or with respect to the Licenses and the Assumed Contracts (collectively, the “Assumed Liabilities”). All Liabilities not expressly assumed by Buyer hereunder are collectively referred to herein as “Non-Assumed Liabilities” and shall remain and be the obligations and liabilities solely of Seller. Without limiting the generality of the foregoing, the Non-Assumed Liabilities shall include the following: (i) any Liabilities arising from or related to the ownership of the Assets or operation of the Station attributable to periods before the Closing, (ii) all Liabilities relating to any of the Excluded Assets, (iii) any debts, obligations or other Liabilities owing from Seller or any of its Affiliates to Seller or any of its Affiliates, (iv) any Liability of Seller or any Affiliate of Seller for (A) income and franchise Taxes, (B) Taxes (other than income and franchise Taxes) that are not related to the operation of the Station or the Assets, (v) any Liability for Taxes arising from the transfer of the Assets and the consummation of the other transactions contemplated by this Agreement, except to the extent of Buyer’s obligation to pay such Liability under Section 12.2 of this Agreement; (vi) any claims or other Liabilities of Seller arising out of the operation of the Station prior to Closing under or relating to pre-Closing violations of Environmental Laws or pre-Closing releases of Hazardous Substances, (vii) any Liabilities under any Excluded Contract; (viii) any Liability to, in respect of, arising out of, or in connection with, the service relationship or the cessation of such service relationship between Seller and any current or former employees, including, without limitation, officers, directors, consultants or other service providers, including without limitation (A) any Liability under any employment or consulting agreement, whether or not written, between Seller and any Person, (B) any Liability under any Compensation Arrangement or any Employee Plan, (C) any Liability for any claim of an unfair labor practice or grievance or any claim under any unemployment compensation, employment standards, pay equity or worker’s compensation law or regulation, or under any federal, state or local employment discrimination law or regulation, which shall have been asserted on or prior to the Closing Date or is based on acts or omissions which occurred on or prior to the Closing Date, whether or not the affected employees are hired by Buyer or any of its Affiliates, (D) any Liability relating to payroll, vacation pay, personal day pay, or sick pay, except for any Liability incurred by Buyer with respect to any Employee hired by Buyer after the Closing, (E) any Liability with respect to any actual or alleged agreements or promises regarding stock options, equity or equity-based compensation plans, programs or arrangements maintained by Seller or any of its Affiliates, and (F) any Liability arising out of or relating to any stay bonus, severance plan or arrangement, special waiting bonus or special retention plan or agreement, (ix) any Liabilities for legal, accounting or broker’s fees incurred by Seller and its Affiliates in connection with this Agreement and the consummation of the transactions contemplated hereby, and (x) all Liabilities of Seller arising under this Agreement.

SECTION 3: REPRESENTATIONS AND WARRANTIES OF SELLER

Seller hereby represents and warrants to Buyer as follows:

3.1 Organization and Authority. Sun City and License Holder are each a limited liability company, duly organized, validly existing and in good standing under the laws of the State of Delaware. Sun City is qualified to do business in the State of Arizona and any other jurisdiction in which the nature of the business conducted by the Station or the ownership of the

 

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Assets requires such qualification. Seller has all requisite limited liability company power and authority (i) to execute, deliver and perform this Agreement and the Ancillary Agreements and to consummate the transactions contemplated hereby and thereby, and (ii) to own, lease and operate the Station and the Assets owned by it and to carry on the business as now being conducted.

3.2 Authorization and Binding Obligations. The execution, delivery and performance of this Agreement by Seller and each Ancillary Agreement to which Seller is or will be a party have been duly and validly authorized by all necessary action of Seller. This Agreement and each Ancillary Agreement has been (or when delivered will be) duly executed and delivered by Seller and constitutes (or will constitute) a valid and binding agreement of Seller enforceable against it in accordance with its terms, except as its enforceability may be limited by Enforceability Exceptions.

3.3 No Contravention; Consents. Subject to obtaining the Consents set forth on Schedule 3.3, the execution, delivery and performance of this Agreement and each Ancillary Agreement and the consummation of the transactions contemplated hereby by Seller will not, after the giving of notice, or the lapse of time, or otherwise (i) violate any provisions of the organizational documents of Seller, (ii) result in the breach of, constitute a default under, or result in the creation of any Lien upon any of the Assets under any Assumed Contract, or (iii) violate any Laws applicable to Seller or any of the Assets. Except for the Consents set forth on Schedule 3.3, no material consent, approval, or authorization of any Governmental Authorities or other third party is required by Seller in connection with the execution, delivery and performance of this Agreement and the Ancillary Agreements by Seller or the consummation by Seller of the transactions contemplated hereby.

3.4 Title to Assets. Seller has good and marketable title to or a valid leasehold interest in, or otherwise has the right to use, all of the Assets, free and clear in each case of any Liens except for Permitted Liens. The Assets include all assets necessary to operate the Station as presently conducted, other than Excluded Assets, and represent substantially all of the assets of Seller.

3.5 Real Property.

(a) Identification of Real Property. Schedule 3.5 sets forth an accurate and complete list of all Owned Real Property and all Real Property Leases (including identification of the property leased pursuant thereto)(collectively, the “Real Property”).

(b) Condition; Quiet Enjoyment; Access. All Real Property (including the improvements thereon) is in good condition and repair, normal wear and tear excepted, and is reasonably adequate for its use in the operation of the Station as presently conducted. All Real Property is connected to and receives power from a reliable and regulated power provider in amounts sufficient to operate the Station as authorized under the FCC Licenses. The Station has not experienced any power interruptions during the previous three (3) years, except as set forth in Schedule 3.5(b). Seller has maintained the Real Property and the improvements, fixtures and personal property owned by Seller and located thereon in compliance with the terms of all applicable Laws. Seller has received no written notice of noncompliance with any Lien encumbering the Real Property. Seller has no knowledge of any complaints regarding the Real

 

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Property or any of the Assets located therein. There is no pending or, to Seller’s knowledge, threatened Action that would reasonably be expected to interfere with the ownership, quiet enjoyment, or use of the Real Property and the Assets located on the Real Property. As of the Closing Date, Buyer will have reasonable access to all the Real Property and a means of ingress and egress thereto by public roads.

(c) Real Property Leases. Each of the Real Property Leases is in full force and effect and is valid, binding and enforceable in accordance with its terms. Seller has complied in all material respects with all commitments and obligations on its part to be performed or observed under such Real Property Leases. No event or condition has occurred and presently exists that constitutes under the terms of any Real Property Lease a material default by Seller, or to Seller’s knowledge other third party bound thereby. Except for any Subleases identified on Schedule 3.5, no Person (other than Seller) has the right to use the Real Property or any transmission tower, the antenna system, microwave dish, satellite dish or other transmitting facility used by Seller in the operation of the Station and located at the Real Property, pursuant to lease, sublease, easement, license or otherwise.

(d) Tower Leases. At least ten (10) years remain in the term of each Tower Lease (taking into consideration any available extension options). To Seller’s knowledge, the owner(s) of any facilities, transmission towers or antenna systems leased by Seller pursuant to any Tower Leases have maintained and operated such facilities, transmission towers or antenna systems in accordance with all applicable Laws and the terms of such Tower Leases.

3.6 Equipment. Schedule 3.6 contains an accurate and complete list of all items of Equipment owned or leased by Seller as of June 30, 2008 that relate to the program, production, generation or transmission of the Station’s radio broadcast signal. Seller has good and marketable title to or a valid leasehold interest in all items of Equipment listed on Schedule 3.6, free and clear of all Liens except for Permitted Liens. Except as specified on Schedule 3.6, all Equipment is (i) in good operating condition and repair, normal wear and tear excepted, adequate for its current use, and available for use in all material respects in the operation of the Station as presently conducted, and (ii) maintained in material compliance with good engineering practice, industry practices and all applicable FCC rules and policies.

3.7 Licenses. Schedule 3.7 is a list of all FCC Licenses and other material Licenses held as of the date of this Agreement all of which taken in the aggregate constitute all licenses, permits, franchises, registrations, authorizations, consents and approvals from all Governmental Authorities necessary for the operation of the Station as currently operated. All FCC Licenses and other material Licenses are validly issued in the name of either Sun City or License Holder, are in full force and effect, are not subject to any conditions that would require the Station to be operated in a manner materially different than as conducted as of the date of this Agreement, and, to Seller’s knowledge, are not subject to any conditions outside the ordinary course other than those set forth on the face of such FCC Licenses or on Schedule 3.7, or that affect the radio broadcast industry generally. Except as set forth on Schedule 3.7, Seller has complied in all material respects with all the terms of the Licenses, and there are no pending applications filed by Seller seeking to modify any License, and no pending revocations of any License.

 

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3.8 Assumed Contracts. Schedule 3.8 is a list of all Assumed Contracts as of the date of this Agreement; provided, however, that Schedule 3.8 only includes Advertising Contracts involving obligations which are reasonably expected to extend more than thirty (30) days after the Closing Date or that involve amounts over $10,000. Each Assumed Contract is in full force and effect, and is valid, binding and enforceable against Seller and, to Seller’s knowledge, each other party thereto. Except as set forth on Schedule 3.3, no Assumed Contract requires the Consent of any other contracting party to the transactions contemplated by this Agreement. Seller is not (and, to Seller’s knowledge, no other party is) in breach or default under, any Assumed Contract, and no event has occurred and no condition exists which, with the passage of time or the giving of notice or both would constitute such a breach or default by Seller or, to Seller’s knowledge, any other party thereto. True and complete copies of each Assumed Contract (including all related amendments, modifications and waivers thereto) have been delivered to Buyer.

3.9 Insurance. Schedule 3.9 hereto sets forth a true and complete list of all insurance policies related to the operation of the Station and the Assets maintained by or for the benefit of Seller, all of which are in full force and effect.

3.10 Intellectual Property. Schedule 3.10 contains a description of the Intellectual Property and Technology (exclusive of those required to be listed on Schedule 3.7), all of which are valid and in full force and effect and uncontested. To Seller’s knowledge, Seller is not infringing upon or otherwise acting adversely to any trademarks, trade names, copyrights or similar intellectual property rights owned by any other Person or Persons. To Seller’s knowledge, no other Person is infringing upon or otherwise acting adversely with respect to any Intellectual Property or Technology.

3.11 Personnel Matters.

(a) Employees. Schedule 3.11 contains a complete and accurate list of all Employees and independent contractors providing services to the Station, together with each such Employee’s or independent contractor’s present position, start date, employment or service status (including when each such Employee on leave is expected to return to employment), salary, bonus payments for the previous fiscal year, bonus opportunities for the current fiscal year, and any other compensation. Each Employee and each independent contractor has been properly classified as an employee, independent contractor, or leased employee, and is legally employed in the United States. Each Employee and each independent contractor providing services to the Station has furnished Seller with proof of his or her legal employment in the United States.

(b) Employee Plans and Compensation Arrangements. Schedule 3.11 contains a list of all Employee Plans and Compensation Arrangements which provides or has an obligation to provide compensation or benefits to Employees. Except as described on Schedule 3.11, Seller has no written or oral contracts of employment with any Employee other than oral employment agreements terminable at will without penalty (collectively, the “Oral Contracts”). Seller is not and has never been required to contribute to any “multiemployer plan,” as defined in ERISA Section 3(37), nor has Seller ever withdrawn from such a “multiemployer plan.” Except as required under Code Section 4980B or ERISA Sections 601-609, no Employee Plan or

 

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Compensation Arrangement currently provides or is obligated to provide in the future health, medical, or other welfare benefit coverage to current or former Employees. Seller has furnished or made available to Buyer true and complete copies of all Employee Plans and all Compensation Arrangements listed on Schedule 3.11, accurate summaries of the material terms of each oral Employee Plan or Compensation Arrangement (except for the Oral Contracts) listed on Schedule 3.11, and all employee handbooks, employee rules and regulations, if any. Each Compensation Arrangement and each Employee Plan has been operated and maintained in material compliance with its terms and with the requirements prescribed by all applicable Laws (including, but not limited to, ERISA and the Code).

(c) Qualified Plans. Each Employee Plan that is intended to be tax-qualified, and each amendment thereto, is the subject of a favorable determination letter except as described on Schedule 3.11, and, to the knowledge of Seller, no event has occurred from the date that such Employee Plan was adopted that would reasonably be expected to cause such Employee Plan to lose its tax qualification and tax-exempt status. No liability to the Pension Benefit Guaranty Corporation has been or is reasonably expected by Seller to be incurred with respect to any Employee Plan. Neither Seller nor any ERISA Affiliate is currently contributing to, sponsoring or maintaining, or has at any time within the past six years contributed to, sponsored, or maintained an Employee Plan subject to Title IV of ERISA. No prohibited transaction, within the definition of Section 4975 of the Code or Title 1, Part 4 of ERISA, has occurred which would subject Seller to any liability.

(d) Labor Unions. Seller is not a party to any collective bargaining agreement. As of the date hereof, none of the Employees is a member of any collective bargaining unit related to his or her employment. As of the date hereof and in the last five (5) years, no collective bargaining unit has filed a petition for representation of any of the Employees. There is no labor strike, other labor disturbance (including, without limitation, a work slow down or work stoppage), or other labor dispute (including, without limitation, a material grievance or arbitration proceeding) pending or, to the best of Seller’s knowledge, threatened against Seller or the Station that relates to any current or former Employees, and in the past five (5) years, neither Seller nor the Station has experienced a labor strike, other labor disturbance (including, without limitation, a work slow down or work stoppage), or other labor dispute (including, without limitation, a material grievance or arbitration proceeding) that relates to any current or former Employees.

(e) Compliance with Labor Laws. Seller has materially complied, and has caused the Station to materially comply, with all Labor Laws with respect to current and former Employees and independent contractors providing services to the Station. Neither Seller nor the Station is liable for the payment of any compensation, damages, Taxes, fines, penalties or other amounts, however designated, for failure to comply with any Labor Law with respect to current and former Employees or independent contractors providing services to the Station. Neither Seller nor the Station has received notice during the past three (3) years of the intent of any Governmental Authority responsible for the enforcement of any Labor Law to conduct an investigation of or affecting the Station, and to the knowledge of Seller, no such investigation is in progress.

 

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(f) Other Employee Matters. Seller acknowledges that Buyer has no obligation to employ any of Seller’s Employees and that Seller shall be responsible for satisfying in full all amounts owed to such Employees, including without limitation wages, salaries, severance pay, sick pay, accrued vacation, any employment, incentive, compensation or bonus agreements or other benefits or payments relating to the period of employment by Seller and pursuant to the terms of any Compensation Arrangement and Employee Plan.

3.12 Financial Information. Schedule 3.12 comprises a true and complete copy of the audited balance sheet, statement of income and statement of cash flow of Seller’s business at the end of and for the twelve-month period ended December 31, 2007 and the unaudited balance sheet, statement of income and statement of cash flow of the business at the end of and for the three-month period ended March 31, 2008 and the six-month period ended June 30, 2008 (the “Financial Statements”). The Financial Statements have been prepared in accordance with GAAP, other than, with respect to unaudited statements only, for the absence of footnotes and year end adjustments, are based on the Books and Records of Seller and present fairly, in all material respects, the financial condition of Seller at the end of and for the 12-month period ended December 31, 2007 and the six-month period ended June 30, 2008. Seller is not subject, with respect to the Assets, to any Liability required in accordance with GAAP to be disclosed on a balance sheet for the Station, which is not shown or reserved for in the June 30, 2008 balance sheet included in the Financial Statements, other than (i) Liabilities incurred in the ordinary course of business since June 30, 2008 and (ii) Liabilities set forth on Schedule 3.12.

3.13 Taxes. Seller has filed, or caused to be filed, with the appropriate Governmental Authority, all required Tax returns and all Tax Returns that relate to the income, operation or ownership of the Station or the Assets, and Seller has paid, caused to be paid or accrued all Taxes shown to be due and payable or claimed to be due and payable thereon, except where the failure to file such returns or pay or accrue such Taxes could not reasonably be expected to result in a Lien on the Assets or in the imposition of transferee liability on Buyer for the payment of such Taxes. Seller has paid, caused to be paid or accrued all Taxes due and payable by Seller or claimed to be due and payable with respect to the Real Property.

3.14 Claims and Litigation. There are no Actions pending or, to Seller’s knowledge, threatened by or against Seller relating to the Assets, the operation of the Station or the transactions contemplated by this Agreement. Except as described on Schedule 3.14, to Seller’s knowledge, there is (i) no complaint or other proceeding pending, threatened or outstanding before the FCC as a result of which an investigation, notice of apparent liability or order of forfeiture may be issued from the FCC relating to the Station, (ii) no FCC notice of apparent liability or order of forfeiture pending, threatened or outstanding against Seller or the Station, and (iii) no investigation pending, threatened or outstanding with respect to any violation or alleged violation of any FCC rule, regulation or policy by Seller.

3.15 No Interference with Signal. To Seller’s knowledge, there currently exists no interference to the Station’s signal from other broadcast stations, or by the Station’s signal to other broadcast stations, in each case beyond that permitted by the FCC’s rules and policies and, to Seller’s knowledge, there are no applications pending at the FCC the grant of which would cause objectionable interference to the Station other than what might arise as a result of proceedings that generally affect the radio broadcast industry.

 

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3.16 Compliance with Laws. Seller is operating the Station in compliance with all FCC Licenses and is in material compliance with all other Laws and Licenses relating to the operation of the Station and the Assets.

3.17 Environmental Matters. Except in compliance with Environmental Laws, there is no (and there has not previously been any) (i) Handling of any Hazardous Substances at, on, around or from any Real Property, (ii) presence of Hazardous Substances on or around any Real Property, (iii) underground tanks, PCBs or asbestos-containing materials located on or around any Real Property, or (iv) asbestos, mold, or other indoor air quality issues on or around any Real Property. Neither Seller nor, to Seller’s knowledge, any Person acting on behalf of Seller has released any other Person from any claims Seller might have, or have had, for any matter relating to the presence of Hazardous Substances or Handling of Hazardous Substances on any Real Property. To Seller’s knowledge, there has not been any Handling of Hazardous Substances on any properties surrounding or adjacent to any Real Property. No Liens have been, or are, imposed on any of the Assets under any Environmental Laws. Seller has obtained any permits, licenses, registrations and other approvals and has filed all reports and notifications required under any Environmental Laws in connection with the Assets. Seller has not received any notice of or, to Seller’s knowledge, is not the subject of, any Action by any person alleging liability under or noncompliance with any Environmental Law. Seller has delivered to Buyer copies of all reports, notices, or other documentation in Seller’s possession relating to Hazardous Substances or the Handling of Hazardous Substances on or around the Real Property and has obtained and delivered to Buyer copies of any such reports, notices or other documentation in the possession of any lessors or master lessors under the Real Property Leases.

3.18 Conduct of Business in Ordinary Course. Since June 30, 2008, Seller has operated the Station in the ordinary and usual course consistent with past practice, and has not (i) made any increase in compensation payable to or become payable to any of the Employees, or any change in personnel policies, insurance benefits or other Compensation Arrangements or Employee Plans affecting the Employees except as described on Schedule 3.11, (ii) made any sale, assignment, lease or other transfer of, or mortgaged or pledged, or imposed or suffered any Lien (other than Permitted Liens) on, any of the Assets, other than obsolete or worn-out Assets no longer necessary for the operation of the Station, or other non-material Assets sold or disposed of in the normal course of business; (iii) suffered any material damage or destruction (whether or not covered by insurance) to any Assets which have not been repaired or replaced, or (iv) experienced any Material Adverse Effect.

3.19 Brokers. Except for Kalil & Co., Inc., for whose fees or commission it shall be responsible, Seller has not engaged any agent, broker or other Person acting pursuant to the express or implied authority of Seller which is or may be entitled to a commission or broker or finder’s fee in connection with the transactions contemplated by this Agreement or otherwise with respect to the sale of the Assets.

3.20 Absence of Other Express or Implied Representations. Except for the representations and warranties contained in this Section 3, any Ancillary Agreement or any certificate or instrument delivered pursuant hereto or thereto, neither Seller nor any other Person makes any express or implied representation or warranty on behalf of Seller.

 

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SECTION 4: REPRESENTATIONS AND WARRANTIES OF BUYER

Buyer hereby represents and warrants to Seller as follows:

4.1 Organization and Authority. Each Buyer is a limited liability company duly organized, validly existing and in good standing under the laws of California. Buyer has all requisite power and authority to execute, deliver and perform this Agreement and the Ancillary Agreements and to consummate the transactions contemplated hereby.

4.2 Authorization and Binding Obligations. The execution, delivery and performance of this Agreement by each Buyer and each Ancillary Agreement to which a Buyer is or will be a party have been duly and validly authorized by all necessary limited liability company action. This Agreement and each Ancillary has been (or when delivered will be) duly executed and delivered by each Buyer that is a party hereto or thereto and constitutes (or will constitute) a valid and binding agreement of Buyer, enforceable against Buyer in accordance with its terms, except as its enforceability may be limited by Enforceability Exceptions.

4.3 No Contravention; Consents. The execution, delivery and performance of this Agreement and each Ancillary Agreement, the consummation of the transactions contemplated hereby and thereby and the compliance with the provisions hereof and thereof by each Buyer that is a party hereto or thereto will not (i) violate any provisions of the organizational documents of such Buyer, (ii) violate any Laws applicable to such Buyer, or (iii) require the consent of any third party, or violate, or be in conflict with, or constitute a default under any contract or agreement to which such Buyer is a party, such that such Buyer cannot perform its obligations hereunder. Except for the Consents set forth on Schedule 4.3, no material consent, approval, license or authorization of any Governmental Authorities or other third party is required by Buyer in connection with the execution, delivery and performance of this Agreement by Buyer or the consummation by Buyer of the transactions contemplated hereby.

4.4 Qualifications. Buyer knows of no facts that would, under applicable Laws, disqualify License Sub with respect to the assignment or transfer of the FCC Licenses. Buyer has not engaged in any course of conduct that would impair the ability of License Sub to be the holder of the FCC Licenses.

4.5 Claims and Litigation. There are no Actions pending, or to Buyer’s knowledge, threatened by or against Buyer that would reasonably be expected to have a material adverse effect on Buyer’s ability to consummate the transactions contemplated by this Agreement.

4.6 Availability of Funds. At Closing, Buyer will have available the necessary funds to enable it to pay the Purchase Price and to consummate the transactions contemplated hereby.

4.7 Brokers. Buyer has not engaged any agent, broker or other Person acting pursuant to the express or implied authority of Buyer which is or may be entitled to a commission or broker or finder’s fee in connection with the transactions contemplated by this Agreement or otherwise with respect to the sale of the Assets.

4.8 Absence of Other Express or Implied Representations. Except for the representations and warranties contained in this Section 4, any Ancillary Agreement or any

 

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certificate or instrument delivered pursuant hereto or thereto, neither Buyer nor any other Person makes any express or implied representation or warranty on behalf of Buyer.

SECTION 5: PRE-CLOSING COVENANTS OF THE PARTIES

5.1 Covenants of Seller. Seller covenants and agrees from and after the execution and delivery of this Agreement to and including the Closing Date as follows:

(a) Commercially Reasonable Efforts. Seller shall use commercially reasonable efforts to cause the transactions contemplated by this Agreement to be consummated in accordance with the terms hereof, and, without limiting the generality of the foregoing, to obtain all necessary Consents required in connection with this Agreement and the transactions contemplated hereby including the FCC Consent and any required Consents of other Governmental Authorities; provided however that Seller shall not be required to make any material payments to any third party in connection with such Consents (other than application fees, payments due to third parties under existing Contracts or payments to consultants, advisors and other service providers in connection with the transactions contemplated hereby). Seller shall make all filings with and give all notices to third parties that may be reasonably necessary of Seller in order to consummate the transactions contemplated hereby.

(b) Control of the FCC Licenses and the Station. Notwithstanding any provision of this Agreement to the contrary, pending the Closing, Seller shall maintain actual and legal control over the FCC Licenses and the Station.

(c) Access. Seller shall give to Buyer and its agents reasonable access during normal business hours to all of Seller’s personnel, premises, properties, assets, financial statements and records, books, contracts, documents and commitments of or relating to the operation of the Station, and shall furnish Buyer with all such information concerning the affairs of the Station as Buyer reasonably may request. In furtherance, and not in limitation, of any right of access provided by this Section 5.1(c), Seller agrees to give Buyer reasonable access to Employees prior to Closing so that Buyer may make a determination as to which Employees, if any, it may want to hire after Closing and, if applicable, to permit Buyer to make offers of employment (to commence after Closing) to any such Employees. Seller further acknowledges that Buyer intends to purchase and install its own server for use in operation of the Station after Closing and Seller agrees to provide Buyer, prior to Closing, with reasonable space to install such server and any associated equipment and to cooperate with Buyer to ensure the complete transfer of data and information from the Seller’s server and system to the server to be installed by Buyer.

(d) Ordinary Course. Seller shall conduct the business, operate the Station, and preserve and maintain the Assets in good working order and condition in the ordinary course of business consistent with past practice, including maintaining existing insurance policies on the Assets as in effect on the date hereof. Seller shall also perform all obligations of Seller under the Real Property Leases and shall maintain the Real Property in good operating order and repair. Between the date hereof and the Closing Date, Seller will promptly (within three (3) Business Days of receipt) provide Buyer with copies of all correspondence and notices relating to those Assets material to the operation of the Station (including the Real Property Leases and the

 

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Owned Real Property). Seller shall use commercially reasonable efforts to keep its organization intact, to preserve the operation of the Station, and to preserve the goodwill of suppliers, customers, landlords, Governmental Authorities and others dealing with Seller. Seller’s financial Books and Records shall be maintained in accordance with GAAP, in the usual manner on a basis consistent with past practice. Without limiting the foregoing and notwithstanding anything in this Agreement to the contrary, Seller covenants and agrees that, between the date hereof and Closing, without the prior written consent of Buyer, Seller will not (i) change or modify the format of the Station as in effect on the date of this Agreement, (ii) terminate the employment relationship of any Key Employee other than for cause or fail to enforce any non-compete agreement with any Key Employee, (iii) sell, lease, license, transfer or dispose of any Assets, whether now owned or hereafter acquired, other than in the ordinary course of business consistent with past practices, (iv) fail to renew any License that expires prior to the Closing Date or fail to take all necessary actions to commence and pursue in the ordinary course the renewal process for all such Licenses expected to expire within the three-month period following the Closing Date, (v) materially and adversely modify the FCC Licenses or take (or fail to take any action the failure of which would cause the FCC to initiate (before or after Closing) proceedings for the revocation, suspension or adverse modification of any FCC Licenses, (vi) enter into any new Advertising Contracts involving obligations which extend more than thirty (30) days after the Closing Date or that involve amounts over $10,000, (vii) enter into any other new Contract (other than Advertising Contracts in accordance with clause (vi) above), including without limitation any Barter Agreement or (viii) incur any obligation, including obligations arising from an amendment to any existing Contract, that will be binding on Buyer after the Closing; provided, however, that with respect to clauses (vi) through (viii) above, Buyer’s consent shall not be unreasonably withheld or delayed.

(e) Compliance with Laws. Seller shall comply in all material respects with all Laws and Licenses applicable to Seller and its operation of the Station.

(f) Contracts and Liens. Seller shall not (i) default under, or breach any term or provision of, or suffer or permit to exist any condition or event that, after notice or lapse of time, or both, would constitute a default under, any Assumed Contract, (ii) cause or permit the termination, modification or amendment of any Assumed Contract, or (iii) create, assume, consent to or suffer to exist any Lien on any of the Assets (other than Permitted Liens). Seller agrees that all obligations of Seller under any Barter Agreement in excess of the Barter Basket will be fully paid or discharged by Seller prior to Closing.

(g) No Solicitation. Seller shall not, and shall cause its officers, directors, Employees, consultants, independent contractors, agents, representatives, equity holders and Affiliates not to (i) sell, transfer, lease, assign or otherwise dispose of or distribute any of the Assets (other than the disposal of worn out or obsolete Assets in the ordinary course of business consistent with past practice) or any equity interests of Seller (whether pursuant to merger, acquisition, consolidation, reorganization, recapitalization or otherwise) to any Person (other than Buyer), (ii) solicit, encourage, entertain, negotiate or enter into with any Person any such transaction or agreement of the nature described in clause (i) above, or (iii) provide any non-public information about the operation of the Station to any Person other than pursuant to the terms of a Contract listed on Schedule 3.8. Seller shall immediately notify Buyer if any discussions or negotiations regarding a transaction of the nature described in clause (i) above are

 

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sought to be initiated, any inquiry or proposal is made, any information is requested with respect to the Assets or Seller or any offer is made with respect to the Station, the Assets or Seller, in each case together with the identity of the Person making such inquiry or offer and the material terms thereof.

(h) Financial Statements. Until Closing, (i) Seller shall furnish Buyer with the quarterly unaudited balance sheet, statement of income and statement of cash flow of the business as of the end of each calendar quarter no later than forty-five (45) days after the end of such quarterly period, (ii) if Closing occurs after April 30, 2009, Seller shall furnish Buyer no later than April 30, 2009 an audited balance sheet, statement of income and statement of cash flow of the business as of the end of the 12-month period ended December 31, 2008, which financial statements shall, in the case of clause (i) and (ii) above, comply with the representations and warranties set forth in Section 3.12 (except for the date and period covered by such financial statements).

(i) Notice. Notwithstanding any other provision of this Agreement to the contrary, Seller shall give prompt notice, including a copy of any related correspondence or documentation, to Buyer of the following events (in no event later than two (2) Business Days after such event has occurred):

(1) extension of an offer of employment to or hiring of any person to provide services to the Station as an employee, or the termination of any Employee;

(2) receipt by Seller of notice from any Employee regarding such Employee’s intent to terminate his or her employment relationship with Seller, or regarding an actual or potential violation of any Law or policy of Seller by any Employee;

(3) receipt by Seller of notice from any third party regarding the cancellation, or potential cancellation, of any Advertising Contract;

(4) to the extent available, weekly pacing reports and monthly ratings books for the Station; and

(5) any adverse change in any material Asset.

(j) Real Property Matters. Seller further agrees to reasonably cooperate with Buyer in connection with obtaining and delivering such consents, approvals and memoranda as may be reasonably requested by Buyer or any title insurer in order to confirm the status of the real property interests to be acquired by Buyer in connection with its acquisition of the Station, including, without limitation, documents confirming the terms and status of the Tower Leases.

5.2 Covenants of Buyer. Buyer covenants and agrees that from and after the execution and delivery of this Agreement to and including the Closing Date as follows:

(a) Commercially Reasonable Efforts. Buyer shall use commercially reasonable efforts to cause the transactions contemplated by this Agreement to be consummated in accordance with the terms hereof, and, without limiting the generality of the foregoing, use commercially reasonable efforts to obtain all necessary Consents, including FCC Consents, and

 

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any other consents of any other Governmental Authorities with lawful jurisdiction over Buyer and other authorizations required in connection with this Agreement and the transactions contemplated hereby. Buyer shall make all filings with and give all notices to third parties that may be necessary or reasonably required in order to consummate the transactions contemplated hereby. Notwithstanding any provision contained in this Agreement to the contrary, Buyer shall not be required to make any payments to persons who are not parties to the Assumed Contracts in order to obtain their consents.

(b) No Control. Notwithstanding any provision of this Agreement to the contrary, pending the Closing, Buyer shall do nothing to interfere with Seller’s actual and legal control over the FCC Licenses and the Station. Buyer acknowledges and agrees that the responsibility for the operation of the Station shall, pending the Closing, reside with Seller, including responsibility for those matters set forth in Section 5.1(b).

SECTION 6: JOINT COVENANTS

6.1 Consultations regarding Consents of Governmental Authorities. The Parties shall consult with one another as to the approach to be taken with any Governmental Authority with respect to obtaining any necessary Consent of such Governmental Authority to the transactions contemplated hereby, including the FCC Consent, and each Party shall keep the other Party reasonably informed as to the status of any communications by it with any Governmental Authority. No Party hereto shall make any material commitments relating to any Consent of any Governmental Authority, including the FCC Consent, that would alter in any material way any application or request filed jointly by the Parties with respect to the transactions contemplated hereby without the other Party’s prior written consent.

6.2 Joint Filings. Seller and Buyer shall cooperate in the preparation and joint filing of the Assignment Application with the FCC no later than five (5) Business Days following the date hereof, and with any other applicable Governmental Authority as soon as practicable following the date hereof, requesting the approval of the assignment and transfer of the Licenses (as appropriate) and the other Assets to Buyer. Each of the Parties hereto shall diligently take or cooperate in the taking of all steps that are reasonably necessary or appropriate to expedite the prosecution and favorable consideration of such applications. The Parties shall undertake all actions and file such materials as shall be reasonably necessary or required to obtain any necessary waivers or other authority in connection with the foregoing applications.

6.3 Notice of Breach. Buyer and Seller shall give prompt notice to one another of (i) the occurrence or nonoccurrence of any event that has caused or would be likely to cause any representation or warranty contained in this Agreement to be untrue or inaccurate in any material respect at or prior to the Closing Date, and (ii) any material failure of Buyer or Seller, as the case may be, to comply with or satisfy in any material respect any covenant, condition or agreement to be complied with or satisfied by it hereunder. The delivery of any notice pursuant to this Section 6.3 shall not cure such breach or non-compliance or limit or otherwise affect the remedies available hereunder to the Party receiving such notice.

6.4 Confidentiality. Except as necessary for the consummation of the transactions contemplated by this Agreement, and except as and to the extent required by applicable Laws,

 

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each Party will keep confidential all information obtained from the other Party in connection with the transactions contemplated by this Agreement (unless such information thereafter becomes generally available to the public, is otherwise available to it on a non-confidential basis from another source, or has been developed independently by it). If this Agreement is terminated, each Party will, upon request, return to the other Party all information obtained by the first Party from the other Party in connection with the transactions contemplated by this Agreement.

6.5 Press Releases. No press release or any other public announcements concerning this Agreement or the transactions contemplated hereby shall be issued except by Buyer in its sole discretion; provided that any Party hereto may make any disclosure that it in good faith determines to be necessary to comply with applicable Laws so long as such Party shall give prior written notice to the other Party of such disclosure.

6.6 Allocation of Purchase Price. Buyer and Seller shall use good faith efforts to agree on the allocation of the Purchase Price in accordance with the rules under Section 1060 of the Code; provided, however, that if the Parties are unable to agree to such allocation within sixty (60) days after the final determination of the Purchase Price pursuant to Section 2.3, the Parties shall submit such disagreements to the Auditor to determine the appropriate allocation, which determination shall be final and binding on the Parties. The fees and expenses of the Auditor shall be shared equally by Buyer and Seller. Subject to such agreement on the allocation of the Purchase Price, no filings made by either Party with any taxing or other authority shall reflect an allocation other than in the manner agreed upon and each Party shall timely make all filings required by any taxing authority, including the filing of Internal Revenue Service Form 8594; provided, however, that nothing contained herein shall prevent Buyer and Seller from settling any proposed deficiency or adjustment by any taxing authority based upon or arising out of the allocation of the Purchase Price, and neither Buyer nor Seller shall be required to litigate before any court, any proposed deficiency or adjustment by any taxing authority challenging such allocation of the Purchase Price.

6.7 Bulk Sales. Seller and Buyer hereby waive compliance by the other with bulk sales Laws applicable to the transactions contemplated hereby.

6.8 Risk of Loss.

(a) Without limiting Buyer’s right to indemnification under Section 10 herein, the risk of any loss, damage, impairment, confiscation or condemnation of any of the tangible Assets shall be borne by Seller at all times prior to the Closing Date and by Buyer at all times from and after the Closing Date. In the event of any such loss or damage to the Assets occurring prior to the Closing Date, Seller shall use commercially reasonable efforts to repair, replace and restore the Assets. It is understood and agreed that all insurance proceeds with respect thereto will be applied to such repair, replacement or restoration. If Seller reasonably concludes that such repair, replacement and restoration is sufficiently substantial so that any condition precedent to Buyer’s obligation to close shall not be satisfied at the Closing Date (after giving consideration to any repairs, restoration or replacement to occur prior to the Closing Date), Seller shall promptly notify Buyer in writing of the circumstances, and Buyer, at any time within ten days after receipt of such notice, may elect by written notice to Seller either to (i) waive such

 

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defect and proceed toward consummation of the transactions contemplated by this Agreement in accordance with the terms hereof (provided that Seller will promptly remit to Buyer any insurance proceeds received by Seller following the Closing with respect to such defect), (ii) terminate this Agreement, or (iii) postpone the Closing Date until such time as those Assets which are the subject of the loss, damage, impairment, confiscation or condemnation have been repaired, replaced and restored.

(b) Seller shall give prompt written notice to Buyer if the regular broadcast transmission of the Station is interrupted or discontinued, including the operation of the Station at a power level less than 80% of its maximum authorized facilities. If any such interruption persists for more than 72 consecutive hours, or for more than an aggregate of 72 hours within any consecutive 30-day period, then Buyer shall have the option to terminate this Agreement. If Buyer elects to so terminate this Agreement, Buyer and Seller shall stand fully released and discharged of any and all obligations hereunder.

6.9 Further Assurances. On and after the Closing Date, the Parties will take all appropriate and commercially reasonable actions and execute all documents, instruments or conveyances of any kind that may be reasonably necessary or advisable to put Buyer in possession and operating control of the Assets and the Station, or to otherwise carry out any of the provisions hereof.

6.10 Cooperation with Financings. Seller agrees to reasonably cooperate with Buyer and its Affiliates, at Buyer’s expense, in connection with any financings undertaken by Buyer or reporting requirements to which Buyer may become subject in connection with the transactions contemplated by this Agreement (including any filings, registration statements or reports of Buyer or any of its Affiliates under the Securities Act of 1933, as amended, or the Securities and Exchange Act of 1934, as amended, and any rules and regulations promulgated thereunder). At Buyer’s request, such cooperation shall include making available such financial information with respect to the Station as may reasonably be required in connection with any such financing, filing, registration statement or report, including using commercially reasonable efforts to facilitate Buyer’s access to Seller’s independent accountants with respect to the Station and the ability to request that Seller’s independent accountants complete an audit of the Station for any pre-Closing period. The cost of preparation of any such financial information or audit shall be borne by Buyer.

6.11 Accounts Receivable.

(a) Between the date of this Agreement and the Closing Date, Seller shall collect Accounts Receivable only in the ordinary course of business and consistent with its past practices. In particular, without limiting the generality of the foregoing, Seller shall not take any action to accelerate the collection of Accounts Receivable, such as offering discounts for early payment, or any other action that may lead to the collection of Accounts Receivable on a faster pace than during the six months prior to the date of this Agreement.

(b) As soon as practicable after the Closing Date, Seller shall deliver to Buyer a reasonably detailed list of all Accounts Receivable remaining uncollected as of the Closing Date.

 

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(c) After the Closing Date, Buyer will retain all Accounts Receivable remaining uncollected as of the Closing Date, and neither Seller nor any of its representatives or agents, shall make any direct solicitation of the account debtors for collection purposes with respect to the Accounts Receivable or other attempts to collect such Accounts Receivable from account debtors.

(d) In the event that any Accounts Receivable are received by Seller after the Closing, Seller shall promptly remit any such amounts to Buyer.

SECTION 7: CONDITIONS PRECEDENT TO OBLIGATION OF SELLER TO CLOSE

The obligations of Seller to sell the Assets and to otherwise consummate the transactions contemplated by this Agreement are subject to the satisfaction or waiver, on or prior to the Closing Date, of each of the following conditions:

7.1 Representations, Warranties and Covenants. All representations and warranties of Buyer contained in this Agreement shall be true and complete at and as of the Closing Date as if such representations and warranties were made at and as of the Closing Date except for (i) any representation or warranty that is expressly stated only as of a specified earlier date, in which case such representation or warranty shall be true as of such earlier date, or (ii) changes in any representation or warranty that are specifically permitted by this Agreement; and Buyer shall have performed all agreements and covenants required hereby to be performed by Buyer prior to or on the Closing Date in all material respects.

7.2 Closing Deliveries. Seller shall have received from Buyer the documents and other items to be delivered to Seller by Buyer pursuant to Section 9.3 of this Agreement.

7.3 FCC Consent. The FCC Consent shall have been issued.

7.4 No Injunction. No material Law shall have been promulgated, enacted, entered or enforced, and no other action in any court proceeding shall have been taken, by any Governmental Authority that has the effect of making illegal or of restraining or prohibiting the consummation of the transactions contemplated hereby.

SECTION 8: CONDITIONS PRECEDENT TO OBLIGATION OF BUYER TO CLOSE

The obligations of Buyer to purchase the Assets and to otherwise consummate the transactions contemplated by this Agreement are subject to the satisfaction or waiver, on or prior to the Closing Date, of each of the following conditions:

8.1 Representations, Warranties and Covenants. All representations and warranties of Seller contained in this Agreement shall be true and complete at and as of the Closing Date as if such representations and warranties were made at and as of the Closing Date except for (i) any inaccuracies that could not reasonably be expected to have a Material Adverse Effect, (ii) any representation or warranty that is expressly stated only as of a specified earlier date, in which case such representation or warranty shall be true as of such earlier date or (iii) changes in any representation or warranty that are specifically permitted by this Agreement, and Seller shall

 

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have performed all agreements and covenants required hereby to be performed by Seller prior to or on the Closing Date in all material respects.

8.2 Closing Deliveries. Buyer shall have received from Seller the documents and other items to be delivered by Seller pursuant to Section 9.2 of this Agreement.

8.3 FCC Consent. The FCC Consent shall have been issued, and (except as otherwise agreed by Buyer in its sole discretion prior to Closing) shall have become a Final Order, without the imposition of any condition that is reasonably likely to adversely affect, in any material respect, the financial condition of the Station’s operation, other than any such condition that arises due to any failure by Buyer or its Affiliates to have complied with FCC Laws; provided, however, that Buyer shall have no obligation to close if (i) the FCC Consent is conditioned upon the divestiture by Buyer or its Affiliates of any broadcasting station owned thereby due to the application of the FCC’s ownership rules and policies or (ii) the FCC Consent is conditioned on any other action by or restriction on Buyer that is or may reasonably be expected to be materially adverse to Buyer or any of its Affiliates at or after Closing.

8.4 Material Consents. Each Consent that is designated by Buyer and Seller on Schedule 3.3 as being a “required consent” shall have been obtained without any material adverse change in the terms or conditions of each License or Contract (including Real Property Leases) to which such Consent relates from those in effect on the date hereof.

8.5 Estoppels. Each lessor or licensor under the Real Property Leases (where any Seller is the lessee) and each subtenant or licensee under the Subleases (where any Seller is the sublessor or licensor) shall have executed and delivered to Buyer estoppels in commercially reasonable form, confirming the basic terms of such Real Property Leases, including the term, rent, security deposits or letters of credit (if any), whether any options exist, and providing that no default currently exists under such Real Property Leases.

8.6 No Injunction. No Law shall have been promulgated, enacted, entered or enforced, and no other action in any court proceeding shall have been taken, by any Governmental Authority that has the effect of making illegal or of restraining, prohibiting or materially delaying the consummation of the transactions contemplated hereby.

8.7 No Material Adverse Effect. Between the date hereof and the Closing Date, there shall not have occurred any event that results, or would reasonably be expected to result, in a Material Adverse Effect.

8.8 Agreement with Prime Lease Lessee. The current lessee (the “Prime Lease Lessee”) under that certain “United States Department of Agriculture Forest Service Communications Use Lease” (the “Prime Lease”), originally entered into between MCI Telecommunications Corporation and the United States of America, acting through the Forest Service, Department of Agriculture (the “Prime Lease Lessor”) dated September 23, 1996, as it may be amended from time to time, shall have entered into an agreement with Buyer, in form and substance reasonably acceptable to Buyer (the “Side Letter”), pursuant to which the Prime Lease Lessee agrees that (i) in the event that the Prime Lease Lessee receives notice from the Prime Lease Lessor of any pending or threatened Revocation or Suspension (as such terms are

 

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defined in the Prime Lease) of the Prime Lease or receives notice of any proceeding, rulemaking, investigation or inquiry by the Prime Lease Lessor that could reasonably be expected to lead to a Revocation or Suspension of the Prime Lease (in each case, a “Change in Circumstance”), the Prime Lease Lessee will provide prompt written notice to Buyer describing in reasonable detail any information available to it about such Change in Circumstance, and (ii) in the event of any Change in Circumstance, the Prime Lease Lessee shall consult with Buyer concerning Prime Lease Lessee’s proposed course of conduct. In the event that Prime Lease Lessee does not itself wish to take action to prevent or appeal such Revocation, Termination or Suspension then it shall take such action as Buyer reasonably requests, and shall permit Buyer to select counsel of its choosing to guide such actions, so long as Buyer pays or reimburses the Prime Lease Lessee for all reasonable costs associated with any such actions undertaken by the Prime Lease Lessee at Buyer’s request.

8.9 Prime Lease. No officer, employee, or agent of the Prime Lease Lessor shall have given any notice, written or oral, to the Prime Lease Lessee of any pending or threatened Revocation or Suspension of the Prime Lease or the initiation of any proceeding, rulemaking, investigation or inquiry that could reasonably be expected to lead to a Revocation or Suspension of the Prime Lease. In addition, the Prime Lease Lessor shall not have taken any action or made any finding, or initiated any proceeding, rulemaking, investigation or inquiry that could reasonably be expected to lead to a finding, that Revocation or Suspension of the Prime Lease is in the public interest or is justified by the Prime Lease Lessee’s noncompliance with the terms of the Prime Lease.

SECTION 9: THE CLOSING

9.1 The Closing. At Closing, Seller shall make such deliveries as are set forth in Section 9.2, and Buyer shall make such deliveries as are set forth in Section 9.3. All transactions at Closing shall be deemed to have taken place simultaneously and no transaction shall be deemed to have been completed, nor shall any document be deemed to have been delivered, until all transactions shall have been completed and all documents, delivered.

9.2 Deliveries by Seller to Buyer. Seller shall deliver to Buyer:

(a) One or more deeds, bills of sale, assignments and other appropriate instruments of conveyance duly executed by Seller, transferring to Buyer all of the Assets in form and substance reasonably satisfactory to Buyer, including, without limitation, a warranty deed reasonably acceptable to the parties, signed and notarized by Seller (in form suitable for recordation) with respect to the transfer of Owned Real Property to Seller;

(b) A copy of each instrument evidencing any Consent that shall have been obtained prior to Closing;

(c) A certificate of Seller attesting to its fulfillment of the conditions set forth in Section 8.1;

 

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(d) A copy of the resolutions of Seller, approving the transactions contemplated by this Agreement;

(e) An affidavit signed by Seller and certifying that Seller is not a “foreign person” within the meaning of Section 1445(f)(3) of the Internal Revenue Code of 1986; and

(f) Such other documents reasonably requested by Buyer to give effect to the transactions contemplated by this Agreement.

9.3 Deliveries by Buyer to Seller. Buyer shall deliver to Seller:

(a) The Closing Cash Payment in accordance with the provisions of Section 2.2 hereof;

(b) One or more appropriate assumption agreements duly executed by Buyer, whereby Buyer assumes and agrees to perform the Assumed Liabilities in form and substance reasonably satisfactory to Seller;

(c) A certificate of Buyer attesting to its fulfillment of the conditions set forth in Section 7.1;

(d) A copy of the resolutions of Buyer approving the transactions contemplated by this Agreement; and

(e) Such other documents reasonably requested by Seller to give effect to the transactions contemplated by this Agreement.

SECTION 10: INDEMNIFICATION

10.1 Survival. The representations, warranties, covenants and agreements of either Party contained in this Agreement (or in any document delivered in connection herewith) shall (i) be deemed to have been made on the date of this Agreement, and on the Closing Date subject to any changes in any representation or warranty that are contemplated by this Agreement, and (ii) survive the Closing and remain operative and in full force and effect for a period of eighteen (18) months following the Closing Date, provided, however, that the representations and warranties set forth in (a) Sections 3.1 (Organization and Authority), 3.2 (Authorization and Binding Obligations), 3.4 (Title to Assets), 4.1 (Organization and Authority) and 4.2 (Authorization and Binding Obligations) shall survive without any time limitation and (b) Sections 3.13 (Taxes) and 3.17 (Environmental Matters) shall survive until thirty (30) days after the expiration of the applicable statute of limitations. The applicable period of such survival subsequent to Closing is referred to as the “Indemnity Period.

10.2 Seller’s Indemnity. During the Indemnity Period (or thereafter, solely with respect to any claim for indemnification for which a Claim Notice has been given prior to the expiration of the Indemnity Period), Seller shall indemnify and hold harmless Buyer, its Affiliates and their respective directors, officers, members, stockholders, employees and representatives (collectively, the “Buyer Indemnified Parties”) from and against any and all demands, losses, Liabilities, Actions, obligations, assessments, damages, fines, Taxes, penalties,

 

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reasonable costs and expenses (including reasonable expenses of investigation, and reasonable fees and disbursements of counsel, accountants and other experts), absolute or contingent, of any nature whatsoever (collectively, “Losses”) incurred or suffered by any Buyer Indemnified Party, arising out of, resulting from or relating to:

(a) Any breach of any of the representations or warranties made by Seller in this Agreement;

(b) Any failure by Seller to perform any of its covenants or agreements contained in this Agreement; or

(c) The Non-Assumed Liabilities and any Liabilities arising from Seller’s ownership and control of the Assets or the operation of the Station prior to the Closing.

10.3 Buyer’s Indemnity. During the Indemnity Period (or thereafter, solely with respect to any claim for indemnification for which a Claim Notice has been given prior to the expiration of the Indemnity Period), Buyer shall indemnify and hold harmless Seller, its Affiliates and their respective directors, officers, members, stockholders and representatives (collectively, the “Seller Indemnified Parties”) from and against any and all Losses incurred or suffered by any Seller Indemnified Party, arising out of, resulting from or relating to:

(a) Any breach of any of the representations or warranties made by Buyer in this Agreement;

(b) Any failure by Buyer to perform any of its covenants or agreements contained in this Agreement; or

(c) The Assumed Liabilities and any Liabilities arising from Buyer’s ownership and control of the Assets or Buyer’s operation of the Station from and after the Closing.

10.4 Procedures. In the event that any Party hereto shall sustain or incur any Losses in respect of which indemnification may be sought by such Party pursuant to this Section 10, the Party seeking such indemnification (the “Claimant”) shall assert a claim for indemnification by giving prompt written notice thereof (a “Claim Notice”) which shall describe in reasonable detail the facts and circumstances upon which the asserted claim for indemnification is based, along with a copy of the claim or complaint, to the Party providing indemnification (the “Indemnitor”). For purposes of this paragraph, any Claim Notice that is sent within fifteen (15) days of the date upon which the Claimant learned of such Loss shall be deemed to have been “prompt notice;” provided that the failure of the Claimant to give the Indemnitor prompt notice as provided herein shall not relieve the Indemnitor of any of its obligations hereunder except to the extent that the Indemnitor is materially prejudiced by such failure.

(a) Upon the receipt of such Claim Notice, the Indemnitor shall have the right to undertake (at its own expense), by counsel or representatives of its own choosing, the good faith defense, compromise or settlement to be undertaken on behalf of the Claimant and shall keep the Claimant reasonably informed with respect thereto. Indemnity for such Losses shall not be deemed an admission of liability on the part of the Indemnitor as against any such third party.

 

30


If the Indemnitor elects to undertake such defense by its own counsel or representatives, the Indemnitor shall give notice to the Claimant within ten (10) Business Days of its receipt of the Claim Notice. Notwithstanding the foregoing, the Indemnitor may not assume or control the defense if the named parties to the action giving rise to the Claim Notice (including any impleaded parties) include both the Indemnitor and the Claimant and representation of both Parties by the same counsel would be inappropriate (based on a written opinion of outside counsel) due to actual or potential differing interests between them, in which case the Claimant shall have the right to defend the action and to employ counsel reasonably approved by the Indemnitor, and, to the extent the matter is determined to be subject to indemnification hereunder, the Indemnitor shall reimburse the Claimant for all reasonable costs associated with such defense.

(b) The Claimant shall cooperate with the Indemnitor in such defense and provide the Indemnitor with all information and assistance reasonably necessary to permit the Indemnitor to settle and/or defend any such claim. Except as otherwise provided in the last sentence of Section 10.4(a), the Claimant may retain counsel (at the Claimant’s expense) to monitor or participate in the defense of such claim, but the Indemnitor shall be entitled to control the defense unless the Claimant unconditionally agrees in writing to relieve the Indemnitor from liability with respect to the particular matter. The Indemnitor shall have the right in good faith to settle or compromise any such claim, provided that (i) at least ten (10) Business Days prior notice of such settlement or compromise is given to the Claimant and (ii) such settlement or compromise must not require the Claimant to take or refrain from taking any action, contain any admission by or on behalf of the Claimant, or otherwise fail to constitute a full release of the Claimant. Notwithstanding the foregoing, in connection with any such settlement or compromise negotiated by the Indemnitor, no Claimant shall be required by an Indemnitor to (i) enter into any settlement that does not include as an unconditional term thereof the delivery by the Claimant or plaintiff to the Claimant of a release from all liability in respect of such claim or litigation, or (ii) enter into any settlement that attributes by its terms any non-indemnified liability to the Claimant.

(c) If an Indemnitor fails, within ten (10) Business Days after the date of the Claim Notice to give notice to the Claimant of such Indemnitor’s election to assume the defense thereof, the Indemnitor shall be bound by any determination made in such action or any compromise or settlement thereof effected by the Claimant and shall reimburse the Claimant for all Losses (including reasonable attorney’s fees) incurred by the Claimant; provided, however, that the Claimant shall keep the Indemnitor advised on a timely basis of significant developments with respect to such defense and permit the Indemnitor to participate, at its own election and expense, at any time, in the defense thereof.

10.5 Qualifications and Limitations. Notwithstanding any provision contained in this Agreement to the contrary, the Indemnitor’s obligations to indemnify the Claimant pursuant to Section 10.2 or 10.3 shall be subject to the following qualifications and limitations:

(a) In the determination of whether a breach has occurred with respect to any representation or warranty contained in Section 3 or Section 4 of this Agreement for purposes of the exercise by Buyer or Seller, as the case may be, of its indemnity rights under Section 10.2(a) or 10.3(a) hereof, any exception for “Material Adverse Effect” and any qualification by “in all

 

31


material respects” in any representation or warranty shall be disregarded as if such representation or warranty did not contain such exception or qualification, and the phrase “material breach” or “material default” in any representation or warranty shall be read as if the word “material” were not present therein.

(b) No indemnification shall be required to be made by Seller or Buyer, as Indemnitor, as the case may be, under Section 10.2(a) or 10.3(a), until the aggregate amount of Losses of Buyer or Seller as Claimant exceeds $50,000, at which point the Indemnitor shall be responsible for the full amount of such Losses.

(c) Following the Closing Date, except for claims based on fraud or Losses arising out of, resulting from or relating to circumstances described in Section 10.2(c), the sole and exclusive remedy for either Party for any claim based upon, relating to or arising out of this Agreement or the transactions contemplated hereby shall be a claim for indemnification pursuant to this Section 10.

(d) The maximum aggregate liability of Seller to the Buyer Indemnified Parties pursuant to this Section 10 shall be an amount equal to the Indemnity Fund.

(e) The amount of Losses payable pursuant to this Section 10 shall be reduced by any insurance proceeds or other reimbursement arrangements actually recovered by a Claimant and by the amount of any tax benefit actually recognized by a Claimant arising from the incurrence or payment of any such Losses in the year in which such Losses are incurred or paid.

10.6 Indemnity Escrow. At the Closing, Buyer shall, pursuant to the Escrow Agreement, deposit an amount such that (together with any Escrow Deposit Amount applied to the Indemnity Fund pursuant to Section 2.2(b) hereof) the sum of $1,000,000 in immediately available funds is held in an account with the Escrow Agent (the “Indemnity Fund”) to provide a fund for the payment of any indemnity claims to which any Buyer Indemnified Party is entitled under this Section 10. The Indemnity Fund will be held in escrow by the Escrow Agent for a period of eighteen (18) months following the Closing (with a reserve being retained thereafter equal to the aggregate amount of all claims for indemnification of the Buyer Indemnified Parties under this Section 10 asserted but not resolved by such date). The Indemnity Fund will be administered and disbursed by the Escrow Agent in accordance with the provisions of the Escrow Agreement, the terms of which shall be consistent with this Section 10.6.

SECTION 11: TERMINATION

11.1 Termination by the Parties. This Agreement may be terminated, and the purchase and sale of the Assets abandoned, by mutual written consent of the Parties, or if the terminating Party is not then in material default, by written notice to the non-terminating Party upon the occurrence of any of the following:

(a) Breach by Seller. By Buyer in the event of a material breach of this Agreement by Seller such that if the Closing Date were the date of determination of such breach, the condition in Section 8.1 would not be satisfied; provided that if (x) such Seller’s breach is capable of being cured within thirty (30) days after the date of determination by Buyer of such

 

32


Breach and such Breach is prior to all other applicable conditions to Closing being met, and (y) Seller is diligently seeking to cure such breach, then such termination by Buyer shall be effective only when such other conditions are met and Seller’s breach has not been cured, but in no event later than thirty (30) days after the date of determination by Buyer of such Breach.

(b) Breach by Buyer. By Seller in the event of a material breach of this Agreement by Buyer such that if the Closing Date were the date of determination of such breach, the condition in Section 7.1 would not be satisfied; provided that if (x) such Buyer’s breach is capable of being cured within thirty (30) days after the date of determination by Seller of such Breach and such Breach is prior to all other applicable conditions to Closing being met, and (y) Buyer is diligently seeking to cure such breach, then such termination by Seller shall be effective only when such other conditions are met and Buyer’s breach has not been cured, but in no event later than thirty (30) days after the date of determination by Seller of such Breach; provided that the cure period afforded in this Section 11.1(b) shall not apply to Buyer’s obligation to make the Closing Cash Payment at Closing.

(c) Judgments. By Buyer or Seller if there shall be in effect any final and non-appealable Judgment that would prevent or make unlawful the Closing.

(d) Outside Date. By Buyer or Seller if the Closing shall not have occurred prior to the date that is twelve (12) months after the filing of the Assignment Application with the FCC; provided that the right to terminate pursuant to this Section 11.1(d) shall not be available to any party whose failure to fulfill any obligation under this Agreement shall have been the cause of the failure of the Closing to occur prior to such date.

(e) Damage to Assets. If Buyer shall elect to exercise its termination right pursuant to Section 6.8.

11.2 Effect of Termination. Upon termination, this Agreement will forthwith become null and void and there will be no liability or obligation on the part of any party hereto (or any of their respective officers, directors, employees, representatives or Affiliates); provided that (i) if this Agreement is terminated by Buyer pursuant to Section 11.1(a), Sellers will remain liable to Buyer for any breach of this Agreement by Seller existing at the time of termination and (ii) if this Agreement is terminated by Seller pursuant to Section 11.1(b), Buyer’s sole liability to Seller for any breach of this Agreement shall be satisfied by the release of the Escrow Deposit to Seller pursuant to Section 11.4. If this Agreement is terminated for any reason other than pursuant to Section 11.1(b), the Escrow Amount, less any compensation due the Escrow Agent, shall be paid to Buyer.

11.3 Specific Performance. The Parties recognize that if Seller refuses to perform under the provisions of this Agreement or otherwise breaches its obligation to consummate this Agreement, monetary damages alone would not be adequate to compensate Buyer for its injury. Buyer shall therefore be entitled, in addition to any other remedies that may be available, to obtain specific performance of the terms of this Agreement. If any action is brought by Buyer to enforce this Agreement, Seller shall waive the defense that there is an adequate remedy at law, and Buyer shall not be required to pay or post any bond in connection with any such equitable relief.

 

33


11.4 Payment of Escrow Deposit to Seller as Liquidated Damages. If this Agreement is terminated by Seller pursuant to Section 11.1(b), then and in that event Seller shall have the right to receive and retain the Escrow Deposit as liquidated damages, and Buyer shall have the right to receive any interest or other income earned in respect of the Escrow Deposit. The Parties agree that the amount of the actual damages suffered by Seller as a result of a breach by Buyer are likely to be difficult or impractical to ascertain and, therefore, the payment of the Escrow Amount to Seller is fair and reasonable and does not constitute a penalty.

11.5 Surviving Obligations. The rights and obligations of the Parties described in Sections 6.4 (Confidentiality) and 6.5 (Press Releases), Section 12, and this Section 11 shall survive any termination.

SECTION 12: MISCELLANEOUS

12.1 Notices. All notices, demands, and requests required or permitted to be given under the provisions of this Agreement shall be (i) in writing, may be sent by telecopy (with automatic machine confirmation), delivered by personal delivery, or sent by commercial delivery service or certified mail, return receipt requested, (ii) deemed to have been given on the date of actual receipt, which may be conclusively evidenced by the date set forth in the records of any commercial delivery service or on the return receipt, and (iii) addressed to the recipient at the address specified below, or with respect to any party, to any other address that such party may from time to time designate in a writing delivered in accordance with this Section 12.1:

 

If to Buyer:   

c/o Liberman Broadcasting, Inc.

1845 Empire Avenue

Burbank, CA 91504

Attn: Lenard Liberman

Telephone: 818-563-5722

Telecopy: 818-558-4244

with a copy (which shall not constitute notice) to:   

Latham & Watkins LLP

555 Eleventh Street, NW

Washington, DC 20004

Attn: James F. Rogers, Esq.

Telephone: 202-637-2215

Telecopy: 202-637-2201

If to Seller:   

Sun City Communications LLC

c/o Cobalt Communications

4535 Shetland Lane

Houston, TX 77027

Attn: Michael Cutchall, CEO

Telephone: 713-963-0888

Telecopy: 713-807-0230

 

34


with a copy (which shall not constitute notice) to:   

Edwards, Angell, Palmer & Dodge, LLP

111 Huntington Avenue

Boston, MA 02199-7613

Attn: Christopher Nelson, Esq.

Telephone: 617-951-2207

Telecopy: 888-325-9513

12.2 Expenses. Buyer and Seller shall share equally and be responsible for (i) any sales and transfer Taxes and any recording fees arising from the purchase and sale of the Assets pursuant to this Agreement, (ii) any fees associated with filing the Assignment Application for the FCC Consent, and (iii) any fees associated with any other filing or similar fees relating to applications for Consent required from any Governmental Authority. Seller shall be solely responsible for any real estate excise or transfer Taxes or fees triggered by the Closing. Except as otherwise provided in this Agreement, Seller and Buyer shall each be liable for its own fees and expenses incurred in connection with the negotiation, preparation, execution or performance of this Agreement and the consummation of the transactions contemplated herein.

12.3 Choice of Law. This Agreement shall be construed, interpreted and the rights of the Parties determined in accordance with the laws of the State of California, without giving effect to the principles of conflicts of law of such state.

12.4 Assignment. Neither this Agreement nor any of the rights or obligations hereunder may be assigned by Seller or Buyer without the prior written consent of the other Party hereto. Subject to the foregoing, this Agreement shall be binding upon and inure to the benefit of the Parties hereto and their respective successors and assigns, and no other person shall have any right, benefit or obligation hereunder.

12.5 Entire Agreement. This Agreement, all schedules and exhibits hereto, and all documents and certificates to be delivered by the Parties pursuant hereto, collectively represent the entire understanding and agreement between the Parties hereto with respect to the subject matter of this Agreement. All schedules and exhibits attached to this Agreement shall be deemed part of this Agreement and are incorporated herein, where applicable, as if fully set forth herein. This Agreement supersedes all prior negotiations, letters of intent or other writings between the Parties and their respective representatives with respect to the subject matter hereof and cannot be amended, supplemented, or modified except by an agreement in writing that makes specific reference to this Agreement or an agreement delivered pursuant hereto, as the case may be, and which is signed by the Party against which enforcement of any such amendment, supplement, or modification is sought.

12.6 Waivers of Compliance; Consents. Except as otherwise provided in this Agreement, any failure of any of the Parties to comply with any obligation, representation, warranty, covenant, agreement, or condition herein may be waived by the Party entitled to the benefits thereof only by a written instrument signed by the Party granting such waiver, but such waiver or failure to insist upon strict compliance with such obligation, representation, warranty, covenant, agreement, or condition shall not operate as a waiver of, or estoppel with respect to, any subsequent or other failure. Whenever this Agreement requires or permits consent by or on

 

35


behalf of any Party hereto, such consent shall be given in writing in a manner consistent with the requirements for a waiver of compliance as set forth in this Section 12.6.

12.7 Severability. In the event that any one or more of the provisions contained in this Agreement or in any other instrument referred to herein, shall, for any reason, be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provision of this Agreement or any other such instrument and this Agreement shall be construed in a manner that, as nearly as possible, reflects the original intent of the Parties.

12.8 Counterparts. This Agreement may be executed in any number of counterparts, each of which, when so executed and delivered, shall be an original, and all of which counterparts together shall constitute one and the same fully executed instrument. Counterpart signature pages executed and delivered via email or facsimile transmission shall be deemed an original for all intents and purposes, and shall be sufficient to make this Agreement legally binding.

[Signature Page Follows]

 

36


IN WITNESS WHEREOF, this Agreement has been executed by the Parties hereto as of the date first above written.

 

LBI:     SUN CITY:
LIBERMAN BROADCASTING OF CALIFORNIA LLC     SUN CITY COMMUNICATIONS, LLC
By:  

/s/ Lenard Liberman

    By:  

/s/ Michael Cutchall

Name:  

Lenard Liberman

    Name:  

Michael Cutchall

Title:  

Executive Vice President and Secretary

    Title:  

Pres / CEO

LICENSE SUB:     LICENSE HOLDER:
LBI RADIO LICENSES LLC     SUN CITY LICENSES, LLC
By:  

/s/ Lenard Liberman

    By:  

/s/ Michael Cutchall

Name:  

Lenard Liberman

    Name:  

Michael Cutchall

Title:  

Executive Vice President and Secretary

    Title:  

Pres / CEO

[Signature Page to Asset Purchase Agreement]

EX-31.1 3 dex311.htm SECTION 302 CERTIFICATION OF PRESIDENT Section 302 Certification of President

Exhibit 31.1

SECTION 302 CERTIFICATION OF PRESIDENT

I, Jose Liberman, certify that:

 

1. I have reviewed this quarterly report on Form 10-Q of LBI Media Holdings, Inc.;

 

2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

 

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

  a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

 

  b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

  c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this quarterly report based on such evaluation; and

 

  d) Disclosed in this quarterly report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

 

  a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

  b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 14, 2008

 

By:  

/s/    Jose Liberman

      Jose Liberman
      President

 

EX-31.2 4 dex312.htm SECTION 302 CERTIFICATION OF CHIEF FINANCIAL OFFICER Section 302 Certification of Chief Financial Officer

Exhibit 31.2

SECTION 302 CERTIFICATION OF CHIEF FINANCIAL OFFICER

I, Wisdom Lu, certify that:

 

1. I have reviewed this quarterly report on Form 10-Q of LBI Media Holdings, Inc.;

 

2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

 

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

  a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

 

  b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

  c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this quarterly report based on such evaluation; and

 

  d) Disclosed in this quarterly report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

 

  a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

  b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 14, 2008

 

By:  

/s/    Wisdom Lu

      Wisdom Lu
      Chief Financial Officer
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