10-Q 1 e10-q.txt SPANISH BROADCASTING SYSTEM 6/25/00 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (MARK ONE) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 25, 2000 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number 33-82114 SPANISH BROADCASTING SYSTEM, INC. (Exact name of registrant as specified in its charter) SEE TABLE OF ADDITIONAL REGISTRANTS DELAWARE 13-3827791 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 3191 Coral Way, Suite 805, Miami, Florida 33145 (Address of principal executive offices) (Zip Code) (305) 441-6901 (Registrant's telephone number, including area code) 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. [X] YES [ ] NO APPLICABLE ONLY TO CORPORATE ISSUERS: Number of shares of Registrant's Common Stock, par value $.0001 per share, outstanding as of July 27, 2000: 32,399,760 shares of Class A Common Stock and 27,816,900 shares of Class B Common Stock. 2 TABLE OF ADDITIONAL REGISTRANTS
PRIMARY STANDARD STATE OR OTHER INDUSTRIAL I.R.S. EMPLOYER JURISDICTION OF CLASSIFICATION IDENTIFICATION NAME INCORPORATION NUMBER NUMBER ---- ------------------- ------------------ ------------ Spanish Broadcasting System, Inc. New Jersey 4832 13-3181941 Spanish Broadcasting System of California, Inc. California 4832 92-3952357 Spanish Broadcasting System of Florida, Inc. Florida 4832 58-1700848 Spanish Broadcasting System Network, Inc. New York 4899 13-3511101 SBS Promotions, Inc. New York 7999 13-3456128 Alarcon Holdings, Inc. New York 6512 13-3475833 SBS of Greater New York, Inc. New York 4832 13-3888732 Spanish Broadcasting System of Illinois, Inc. Delaware 4832 36-4174296 Spanish Broadcasting System of Greater Miami, Delaware 4832 65-0774450 Inc. Spanish Broadcasting System of San Antonio, Inc. Delaware 4832 65-0820776 Spanish Broadcasting System of Puerto Rico, Inc. Delaware 4832 52-2139546 Spanish Broadcasting System of Puerto Rico, Inc. Puerto Rico 4832 66-0564244 SBS Funding, Inc. Delaware 4832 52-6999475 Spanish Broadcasting System Finance Corporation Delaware 4832 Applied for
3 SPANISH BROADCASTING SYSTEM, INC. INDEX
PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS - UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS AS OF SEPTEMBER 26, 1999 AND JUNE 25, 2000 3 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED JUNE 27, 1999 AND JUNE 25, 2000 4 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED JUNE 27, 1999 AND JUNE 25, 2000 5 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 6 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 8 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 11 PART II. OTHER INFORMATION 11 ITEM 1. LEGAL PROCEEDINGS 11 ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 11 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 12
2 4 SPANISH BROADCASTING SYSTEM, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
SEPTEMBER 26, 1999 JUNE 25, 2000 ------------------ ------------- ASSETS CURRENT ASSETS: CASH AND CASH EQUIVALENTS $ 16,974,650 $ 73,075,592 RECEIVABLES: TRADE 26,006,007 32,229,312 LESS ALLOWANCE FOR DOUBTFUL ACCOUNTS 4,110,499 5,082,332 ------------ ------------- NET RECEIVABLES - TRADE 21,895,508 27,146,980 BARTER (NET OF ALLOWANCE FOR DOUBTFUL ACCOUNTS OF $2,255,460 AT SEPT. 26, 1999 AND $3,253,894 AT JUNE 25, 2000) 4,757 19,737 ------------ ------------- NET RECEIVABLES 21,900,265 27,166,717 OTHER CURRENT ASSETS 2,194,387 4,068,045 ------------ ------------- TOTAL CURRENT ASSETS 41,069,302 104,310,354 PROPERTY AND EQUIPMENT, NET 14,777,703 21,339,540 INTANGIBLE ASSETS, NET 301,454,059 426,758,340 DEFERRED FINANCING COSTS, NET 6,228,716 7,993,864 DEFERRED OFFERING COSTS 1,965,551 -- OTHER ASSETS 185,190 191,932 ------------ ------------- TOTAL ASSETS $365,680,521 $ 560,594,030 ============ ============= LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY) CURRENT LIABILITIES: CURRENT PORTION OF LONG-TERM DEBT $ 1,800,572 $ 1,050,572 ACCOUNTS PAYABLE AND ACCRUED EXPENSES 11,831,145 13,477,862 ACCRUED INTEREST 3,941,088 3,581,371 DEFERRED COMMITMENT FEE 2,348,931 2,334,197 DIVIDENDS PAYABLE 1,323,018 -- ------------ ------------- TOTAL CURRENT LIABILITIES 21,244,754 20,444,002 12.5% SENIOR UNSECURED NOTES, NET OF UNAMORTIZED DISCOUNT 92,262,924 100,000 11% SENIOR UNSECURED NOTES 75,000,000 -- 9.625% SENIOR SUBORDINATED NOTES -- 235,000,000 OTHER LONG-TERM DEBT, LESS CURRENT PORTION 3,422,341 4,552,920 DEFERRED INCOME TAXES 12,954,515 27,878,975 14.25% SENIOR EXCHANGABLE PREFERRED STOCK, $.01 PAR VALUE. AUTHORIZED 1,000,000 SHARES; ISSUED AND OUTSTANDING 245,815 SHARES AT SEPT. 26, 1999; NONE AT JUNE 25, 2000 235,918,055 -- STOCKHOLDERS' EQUITY (DEFICIENCY): CLASS A COMMON STOCK, $.0001 PAR VALUE. AUTHORIZED 100,000,000 SHARES; NONE ISSUED AND OUTSTANDING AT SEPT. 26, 1999; 32,399,760 ISSUED AND OUTSTANDING AT JUNE 25, 2000 -- 3,240 CLASS B COMMON STOCK, $.0001 PAR VALUE. AUTHORIZED 50,000,000 SHARES; 39,448,550 SHARES ISSUED AND OUTSTANDING AT SEPT. 26, 1999; 27,816,900 SHARES AT JUNE 25, 2000 3,945 2,782 ADDITIONAL PAID IN CAPITAL 6,869,241 392,973,853 ACCUMULATED DEFICIT (79,535,846) (120,361,742) ------------ ------------- (72,662,660) 272,618,133 LESS: LOANS RECEIVABLE FROM STOCKHOLDERS (2,459,408) -- ------------ ------------- TOTAL STOCKHOLDERS' EQUITY (DEFICIENCY) (75,122,068) 272,618,133 ------------ ------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY) $365,680,521 $ 560,594,030 ============ =============
SEE ACCOMPANYING NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS. 3 5 SPANISH BROADCASTING SYSTEM,INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED ------------------------------- ------------------------------- JUNE 27, 1999 JUNE 25, 2000 JUNE 27, 1999 JUNE 25, 2000 GROSS BROADCASTING REVENUES $ 31,256,172 $ 40,450,167 $ 80,437,296 $ 102,382,066 LESS: AGENCY COMMISSIONS 3,997,395 5,639,303 10,082,341 13,709,657 ------------- ------------- ------------- ------------- NET BROADCASTING REVENUES 27,258,777 34,810,864 70,354,955 88,672,409 ------------- ------------- ------------- ------------- OPERATING EXPENSES ENGINEERING 534,377 649,206 1,547,904 1,861,309 PROGRAMMING 2,623,607 4,158,356 7,435,754 10,362,769 SELLING 5,541,856 7,145,083 16,055,795 18,599,679 GENERAL AND ADMINISTRATIVE 2,166,675 3,932,247 6,742,324 9,817,334 CORPORATE EXPENSES 3,324,146 2,646,058 7,658,456 18,100,572 DEPRECIATION & AMORTIZATION 2,554,903 3,507,284 7,222,573 9,354,917 ------------- ------------- ------------- ------------- 16,745,564 22,038,234 46,662,806 68,096,580 ------------- ------------- ------------- ------------- OPERATING INCOME 10,513,213 12,772,630 23,692,149 20,575,829 OTHER EXPENSES: INTEREST EXPENSE, NET 5,291,746 4,875,179 15,735,550 12,369,852 OTHER, NET 421,490 -- 485,018 356,215 ------------- ------------- ------------- ------------- INCOME BEFORE INCOME TAXES AND EXTRAORDINARY ITEM 4,799,977 7,897,451 7,471,581 7,849,762 INCOME TAX EXPENSE 2,055,888 3,458,369 3,177,482 3,438,196 ------------- ------------- ------------- ------------- INCOME BEFORE EXTRAORDINARY ITEM 2,744,089 4,439,082 4,294,099 4,411,566 EXTRAORDINARY ITEM, NET OF INCOME TAXES -- -- -- (16,865,069) ------------- ------------- ------------- ------------- NET INCOME (LOSS) 2,744,089 4,439,082 4,294,099 (12,453,503) DIVIDENDS ON PREFERRED STOCK (9,111,451) -- (25,951,573) (28,372,393) ------------- ------------- ------------- ------------- NET INCOME (LOSS) APPLICABLE TO COMMON STOCKHOLDERS (6,367,362) 4,439,082 (21,657,474) (40,825,896) ------------- ------------- ------------- ------------- NET INCOME (LOSS) PER COMMON SHARE BEFORE EXTRAORDINARY ITEM: BASIC AND DILUTED (0.19) 0.07 (0.68) (0.42) NET LOSS PER COMMON SHARE FOR EXTRAORDINARY ITEM: BASIC AND DILUTED -- -- -- (0.29) NET INCOME (LOSS) PER COMMON SHARE: BASIC AND DILUTED (0.19) 0.07 (0.68) (0.71) WEIGHTED AVERAGE COMMON SHARES OUTSTANDING: BASIC AND DILUTED 34,323,121 60,216,660 31,629,918 57,478,008
SEE ACCOMPANYING NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS. 4 6 SPANISH BROADCASTING SYSTEM, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED -------------------------------- JUNE 27, 1999 JUNE 25, 2000 ------------- ------------- CASH FLOWS FROM OPERATING ACTIVITIES: NET INCOME (LOSS) $ 4,294,099 $ (12,453,503) ------------- ------------- ADJUSTMENTS TO RECONCILE NET INCOME (LOSS) TO NET CASH PROVIDED BY OPERATING ACTIVITIES: LOSS ON RETIREMENT OF DEBT -- 28,584,862 DEPRECIATION AND AMORTIZATION 7,222,573 9,354,917 GAIN ON SALE OF RADIO STATIONS -- (54,963) PROVISION FOR DOUBTFUL ACCOUNTS (1,739,373) 2,483,253 AMORTIZATION OF DEBT DISCOUNT 445,362 61,295 WRITE DOWN OF FIXED ASSETS 451,048 -- AMORTIZATION OF DEFERRED FINANCING COSTS 1,211,012 726,078 ACCRETION OF INTEREST TO PRINCIPAL ON OTHER LONG-TERM DEBT 230,400 151,441 DEFERRED INCOME TAXES 2,927,482 (7,275,540) CHANGES IN OPERATING ASSETS AND LIABILITIES: INCREASE IN RECEIVABLES (2,161,916) (5,249,705) INCREASE IN OTHER CURRENT ASSETS (852,946) (3,002,658) DECREASE (INCREASE) IN OTHER ASSETS 23,635 (6,742) INCREASE (DECREASE) IN ACCOUNTS PAYABLE AND ACCRUED EXPENSES 83,551 (744,853) DECREASE IN ACCRUED INTEREST (871,656) (359,717) INCREASE (DECREASE) IN DEFERRED COMMITMENT FEE 391,854 (14,734) ------------- ------------- TOTAL ADJUSTMENTS 7,361,026 24,652,934 ------------- ------------- NET CASH PROVIDED BY OPERATING ACTIVITIES 11,655,125 12,199,431 ------------- ------------- CASH FLOWS FROM INVESTING ACTIVITIES: ACQUISITIONS OF RADIO STATIONS, NET OF CASH ACQUIRED (26,280,067) (112,375,202) PROCEEDS FROM SALE OF STATIONS -- 690,304 ADDITIONS TO PROPERTY AND EQUIPMENT (1,684,292) (2,560,604) ------------- ------------- NET CASH USED IN INVESTING ACTIVITIES (27,964,359) (114,245,502) ------------- ------------- CASH FLOWS FROM FINANCING ACTIVITIES: EXERCISE OF WARRANTS 2,819 -- INCREASE IN DEFERRED OFFERING COSTS (403,334) -- RETIREMENT OF 14.25% SENIOR EXCHANGEABLE PREFERRED STOCK -- (265,613,466) RETIREMENT OF SENIOR NOTES -- (190,295,268) DECREASE IN LOANS RECEIVABLE FROM STOCKHOLDERS -- 2,459,408 PROCEEDS FROM SENIOR SUBORDINATED NOTES -- 226,994,961 PROCEEDS FROM CLASS A COMMON STOCK -- 388,072,240 REPAYMENT OF OTHER LONG-TERM DEBT (37,258) (3,470,862) ------------- ------------- NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (437,773) 158,147,013 ------------- ------------- NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (16,747,007) 56,100,942 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 37,642,227 16,974,650 ------------- ------------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 20,895,220 $ 73,075,592 ============= ============= SUPPLEMENTAL CASH FLOW INFORMATION: INTEREST PAID $ 15,861,624 $ 17,209,497 ============= ============= INCOME TAXES PAID $ 1,253,915 $ 2,170,597 ============= =============
SEE ACCOMPANYING NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 5 7 SPANISH BROADCASTING SYSTEM, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS JUNE 27,1999 AND JUNE 25, 2000 (UNAUDITED) (1) BASIS OF PRESENTATION The condensed consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. The accompanying unaudited condensed consolidated financial statements as of September 26, 1999 and June 25, 2000, and for the three- and nine-month periods ended June 27, 1999 and June 25, 2000 do not contain all disclosures required by generally accepted accounting principles. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements of the Company as of and for the fiscal year ended September 26, 1999 included in the Company's 1999 Form 10-K. In the opinion of management of the Company, the accompanying unaudited condensed consolidated financial statements contain all adjustments, which are all of a normal, recurring nature, necessary for a fair presentation of the results of the interim periods. The results of operations for the nine-month period ended June 25, 2000 are not necessarily indicative of the results for a full year. (2) NEW ACCOUNTING PRONOUNCEMENTS In June 1998, the FASB issued Statement of Financial Accounting Standards No. 133 "Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133"). SFAS No. 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities. It requires an entity to recognize all derivatives as either assets or liabilities in the balance sheet and measure those instruments at fair value. SFAS No. 133, as amended by SFAS No. 137, is expected to be effective for the Company's fiscal year ending September 30, 2001. Management does not believe that the adoption of SFAS No. 133 will have a significant impact on the Company's consolidated financial statements. In December 1999, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin No. 101 (SAB 101), "Revenue Recognition", which provides guidance on the recognition, presentation and disclosure of revenue in financial statements filed with the SEC. SAB 101 outlines the basic criteria that must be met in order to recognize revenue and provides guidance for disclosures related to revenue recognition policies. In June 2000, the SEC issued SAB 101B, "Second Amendment: Revenue Recognition in Financial Statements" which extends the effective date of SAB 101 to the fourth fiscal quarter of fiscal years commencing after December 15, 1999. At this time, management is still assessing the impact of SAB 101 on the Company's financial position and results of operations. (3) ACQUISITIONS AND DISPOSITIONS On September 22, 1999, Spanish Broadcasting System of Puerto Rico, Inc., a Delaware corporation, a wholly owned subsidiary of the Company, entered into a stock purchase agreement to purchase all of the outstanding capital stock of the following nine subsidiaries of AMFM Operating Inc., a Delaware corporation (formerly known as Chancellor Media Corporation of Los Angeles) ("AMFM"): Primedia Broadcast Group, Inc., WIO, Inc., Cadena Estereotempo, Inc., Portorican American Broadcasting, Inc., WLDI, Inc., WRPC, Inc., WOYE, Inc., WZNT, Inc., WOQI, Inc. (the "Primedia Station Group"). The Primedia Station Group owns and operates eight radio stations in Puerto Rico: WIOA-FM, WIOB-FM, WIOC-FM, WCOM-FM, WZMT-FM, WZNT-FM, WOYE-FM, and WCTA-FM. On January 14, 2000, the Company completed the purchase from AMFM of all of the outstanding capital stock of the Primedia Station Group for total cash consideration of $91.3 million, including a $10.0 million deposit that was made on September 22, 1999 and closing costs of $0.7 million. This acquisition was financed from cash on hand. On February 2, 2000, the Company completed the sale of WVMQ-FM in Key West and WZMQ-FM in Key Largo to South Broadcasting System, Inc., a company owned by Mr. Pablo Raul Alarcon, Sr., for total cash consideration of $0.7 million. On May 8, 2000, we entered into agreements to acquire all of the outstanding capital stock of Rodriguez Communications, Inc. ("RCI") and certain holdings of its affiliate, New World Broadcasters Corp. ("New World"), for total consideration of $165.2 million, consisting of $43.5 million of our Class A common stock and $121.7 million in cash, subject to certain conditions and adjustments. The purchase of RCI includes the rights to acquire the following radio stations -- KFOX-FM and KREA-FM broadcasting, on a co-channeled basis, at 93.5 MHz serving the Los Angeles, California market; KXJO-FM broadcasting at 92.7 MHz serving the San Francisco, California market; and KSAH-AM broadcasting at 720 kHz serving the San Antonio, Texas market. We will acquire Dallas radio stations KTCY-FM broadcasting at 104.9 MHz and KXEB-AM broadcasting at 910 kHz from New World. Once acquired by RCI we intend to broadcast our programming on each of RCI's stations we have agreed to acquire under a time brokerage agreement until closing. Until closing, we are broadcasting our programming on New World's stations in the Dallas market under a time brokerage agreement that commenced on May 8. The closing of these acquisitions is targeted for November of this year and each of these transactions is subject to numerous conditions and approvals, including receipt of regulatory approvals under the federal communications laws and review by federal antitrust authorities. Additionally, the acquisition of KXJO-FM is subject to the completion of Clear Channel, Inc.'s merger with AMFM, Inc. We cannot assure you that the acquisition described above will occur during the expected time frame, under the terms described, or at all. 6 8 The Company and the subsidiaries listed as additional registrants have guaranteed the Senior Notes on a full, unconditional, and joint and several basis. Condensed consolidating unaudited financial information for the Company and its guarantor and non-guarantor subsidiaries is as follows:
PARENT AND GUARANTOR NON-GUARANTOR SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL ------------ ------------ ------------ ----- AS OF JUNE 25, 2000 ------------------------------------------------------------------- CONDENSED CONSOLIDATING BALANCE SHEET Cash and cash equivalents 71,646,396 1,429,196 -- 73,075,592 Receivables, net 25,081,737 2,084,980 -- 27,166,717 Other current assets 3,497,351 570,694 -- 4,068,045 ------------ ------------ ------------ ------------ Current assets 100,225,484 4,084,870 -- 104,310,354 Property and equipment, net 13,974,986 7,364,554 -- 21,339,540 Intangible assets, net 313,915,009 112,843,331 -- 426,758,340 Deferred financing costs, net 7,993,864 -- -- 7,993,864 Investment in subsidiaries and intercompany 91,817,102 (3,705,522) (88,111,580) -- Other assets 191,932 -- -- 191,932 ------------ ------------ ------------ ------------ Total assets 528,118,377 120,587,233 (88,111,580) 560,594,030 ============ ============ ============ ============ Current portion of long-term debt 1,050,572 -- -- 1,050,572 Accounts payable and accrued expenses 11,222,728 2,255,134 -- 13,477,862 Accrued interest 3,581,371 -- -- 3,581,371 Deferred commitment fee 2,334,197 -- -- 2,334,197 ------------ ------------ ------------ ------------ Current liabilities 18,188,868 2,255,134 -- 20,444,002 Long-term debt 235,952,920 3,700,000 -- 239,652,920 Deferred income taxes 5,678,975 22,200,000 -- 27,878,975 ------------ ------------ ------------ ------------ Total liabilities 259,820,763 28,155,134 -- 287,975,897 Common stock 6,022 1,000 (1,000) 6,022 Additional paid-in capital 392,973,853 94,713,602 (94,713,602) 392,973,853 Accumulated deficit (118,079,239) (2,282,503) -- (120,361,742) ------------ ------------ ------------ ------------ Stockholders' equity 274,900,636 92,432,099 (94,714,602) 272,618,133 ------------ ------------ ------------ ------------ Total liabilities and stockholders' equity 534,721,399 120,587,233 (94,714,602) 560,594,030 ============ ============ ============ ============ PARENT AND GUARANTOR NON-GUARANTOR SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL ------------ ------------- ------------ ----- FOR THE THREE MONTHS ENDED JUNE 25, 2000 ------------------------------------------------------------------ CONDENSED CONSOLIDATING INCOME STATEMENT Net broadcasting revenues 31,464,184 3,346,680 -- 34,810,864 Station operating expenses 13,095,770 2,789,122 -- 15,884,892 Corporate expenses 2,646,058 -- 2,646,058 Depreciation and amortization 2,497,824 1,009,460 -- 3,507,284 ------------ ------------ ------------ ------------ Operating income 13,224,532 (451,902) -- 12,772,630 Interest income (expense), net (4,889,937) 14,758 -- (4,875,179) Other income (expense), net -- -- Income tax expense (benefit) 3,649,799 (191,430) -- 3,458,369 Extraordinary item, net of income taxes -- -- -- -- ------------ ------------ ------------ ------------ Net income (loss) 4,684,796 (245,714) -- 4,439,082 ============ ============ ============ ============ PARENT AND GUARANTOR NON-GUARANTOR SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL ------------ ------------- ------------ ----- FOR THE NINE MONTHS ENDED JUNE 25, 2000 ------------------------------------------------------------------ CONDENSED CONSOLIDATING INCOME STATEMENT Net broadcasting revenues 83,181,494 5,490,915 -- 88,672,409 Station operating expenses 35,534,427 5,106,664 -- 40,641,091 Corporate expenses 18,100,572 -- -- 18,100,572 Depreciation and amortization 7,395,659 1,959,258 -- 9,354,917 ------------ ------------ ------------ ------------ Operating income (loss) 22,150,836 (1,575,007) -- 20,575,829 Interest income (expense), net (12,390,419) 20,567 -- (12,369,852) Other income (expense), net (239,155) (117,060) -- (356,215) Income tax expense (benefit) 4,170,313 (732,117) -- 3,438,196 Extraordinary item, net of income taxes (16,865,069) -- -- (16,865,069) ------------ ------------ ------------ ------------ Net loss (11,514,120) (939,383) -- (12,453,503) ============ ============ ============ ============ CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS Cash flows from operating activities 10,097,378 2,102,053 -- 12,199,431 ============ ============ ============ ============ Cash flows from investing activities (112,558,049) (1,687,453) -- (114,245,502) ============ ============ ============ ============ Cash flows from financing activities 157,141,299 1,005,714 -- 158,147,013 ============ ============ ============ ============
Parent-only financial information has not been provided since the parent has no operations or assets separate from its investments in its subsidiaries. 7 9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS THREE MONTHS ENDED JUNE 25, 2000 COMPARED TO THE THREE MONTHS ENDED JUNE 27, 1999 NET REVENUES. Our net revenues were $34.8 million for the three months ended June 25, 2000, compared to $27.3 million for the three months ended June 27, 1999, an increase of $7.5 million or 27.5%. Most of the increase was generated by the inclusion of operating results of certain of our Puerto Rico stations, which we purchased from AMFM in January, that had not yet been acquired during the same period in fiscal year 1999. Additionally, our net revenues increased due to higher advertising rates, as advertisers continued to be attracted to the Spanish-language market as an important advertising choice. STATION OPERATING EXPENSES. Total station operating expenses were $15.9 million for the three months ended June 25, 2000, compared to $10.9 million for the three months ended June 27, 1999, an increase of $5.0 million or 45.9%. The increase was primarily attributable to the inclusion of operating results for certain of our Puerto Rico stations, which we purchased from AMFM in January, that had not yet been acquired during the same period in fiscal year 1999. In addition, on a same station basis, we experienced higher music license fees and commissions associated with increased sales. BROADCAST CASH FLOW. Broadcast cash flow was $18.9 million for the three months ended June 25, 2000, compared to $16.4 million for the three months ended June 27, 1999, an increase of $2.5 million or 15.2%. Our broadcast cash flow margin decreased to 54.3% for the three months ended June 25, 2000 compared to 60.1% for the three months ended June 27, 1999. Excluding net internet operating costs of $0.3 million for the three months ended June 25, 2000 and $0.2 million for the three months ended June 27, 1999, broadcast cash flow would have increased $2.6 million to $19.2 million, a 15.7% increase, and our broadcast cash flow margin would have reached 55.2% for the three months ended June 25, 2000. CORPORATE EXPENSES. Total corporate expenses were $2.6 million for the three months ended June 25, 2000, compared to $3.3 million for the three months ended June 27, 1999, a decrease of $0.7 million or 21.2%. The decrease in corporate expenses resulted mainly from reduced executive compensation. EBITDA. EBITDA was $16.3 million for the three months ended June 25, 2000, compared to $13.1 million for the three months ended June 27, 1999, an increase of $3.2 million or 24.4%. The increase in EBITDA was mostly attributable to increased revenues and operating efficiencies. DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense was $3.5 million for the three months ended June 25, 2000, compared to $2.6 million for the three months ended June 27, 1999, an increase of $0.9 million or 34.6%. The increase was related to an increase in amortization costs and depreciation resulting from the purchase of the Puerto Rico stations from AMFM. OPERATING INCOME. Operating income was $12.8 million for the three months ended June 25, 2000, compared to $10.5 million for the three months ended June 27, 1999, an increase of $2.3 million or 21.9%. The increase was due primarily to the increase in EBITDA, that was partially offset by the increase in depreciation and amortization. INTEREST EXPENSE, NET. Interest expense was $4.9 million for the three months ended June 25, 2000, compared to $5.3 million for the three months ended June 27, 1999, a decrease of $0.4 million or 7.5%. This decrease was due primarily to interest income earned on higher cash balances. OTHER EXPENSE, NET. We had no meaningful other expenses during the three months ended June 25, 2000 compared to $0.4 million during the three months ended June 27, 1999. NET INCOME. Our net income was $4.4 million for the three months ended June 25, 2000, compared to $2.7 million for the three months ended June 27, 1999, an increase of $1.7 million or 63.0%. The net income was caused by significantly increased operating income and reduced interest expense, net. AFTER-TAX CASH FLOW. After-tax cash flow was $7.9 million for the three months ended June 25, 2000, compared to $5.3 million for the three months ended June 27, 1999, an increase of $2.6 million or 49.1%. This increase was primarily attributable to the increase in EBITDA and the decrease in interest expense, net. 8 10 NINE MONTHS ENDED JUNE 25, 2000 COMPARED TO THE NINE MONTHS ENDED JUNE 27, 1999 NET REVENUES. Our net revenues were $88.7 million for the nine months ended June 25, 2000, compared to $70.4 million for the nine months ended June 27, 1999, an increase of $18.3 million or 26.0%. The increase was primarily attributable to the inclusion of operating results of certain of our Puerto Rico stations, which we purchased from AMFM in January, that had not yet been acquired during the same period in fiscal year 1999. STATION OPERATING EXPENSES. Total station operating expenses were $40.6 million for the nine months ended June 25, 2000, compared to $31.8 million for the nine months ended June 27, 1999, an increase of $8.8 million or 27.7%. The increase was primarily attributable to the inclusion of operating results of certain of our Puerto Rico stations, which we purchased from AMFM in January, that had not yet been acquired during the same period in fiscal year 1999. In addition, on a same station basis, we experienced higher music license fees and commissions associated with increased sales. BROADCAST CASH FLOW. Broadcast cash flow was $48.0 million for the nine months ended June 25, 2000, compared to $38.6 million for the nine months ended June 27, 1999, an increase of $9.4 million or 24.4%. Our broadcast cash flow margin decreased slightly to 54.1% for the nine months ended June 25, 2000 compared to 54.8% for the nine months ended June 27, 1999. Excluding net internet operating costs of $1.0 million for the three months ended June 25, 2000 and $0.2 million for the three months ended June 27, 1999, broadcast cash flow would have increased $10.2 million to $49.0 million, a 26.3% increase, and our broadcast cash flow margin would have reached 55.2% for the nine months ended June 25, 2000. CORPORATE EXPENSES. Total corporate expenses were $18.1 million for the nine months ended June 25, 2000, compared to $7.7 million for the nine months ended June 27, 1999, an increase of $10.4 million or 135.1%. The increase in corporate expenses resulted mainly from a non-recurring severance payment of $10.2 million related to the purchase of an annuity for two of our retired executives. EBITDA. EBITDA was $29.9 million for the nine months ended June 25, 2000, compared to $30.9 million for the nine months ended June 27, 1999, a decrease of $1.0 million or 3.2%. The decrease in EBITDA was mostly attributable to the non-recurring severance payment of $10.2 million, that was mostly offset by increased broadcast cash flow. Excluding the non-recurring severance payment, EBITDA was $40.2 million for the nine months ended June 25, 2000, an increase of $9.3 million or 30.1% compared to the nine months ended June 27, 1999, and our EBITDA margin was 45.3%. DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense was $9.4 million for the nine months ended June 25, 2000, compared to $7.2 million for the nine months ended June 27, 1999, an increase of $2.2 million or 30.6%. The increase was related primarily to an increase in amortization costs resulting from the purchase of the Puerto Rico stations from AMFM. OPERATING INCOME. Operating income was $20.6 million for the nine months ended June 25, 2000, compared to $23.7 million for the nine months ended June 27, 1999, a decrease of $3.1 million or 13.1%. The decrease was due primarily to a non-recurring severance payment of $10.2 million. INTEREST EXPENSE, NET. Interest expense was $12.4 million for the nine months ended June 25, 2000, compared to $15.7 million for the nine months ended June 27, 1999, a decrease of $3.3 million or 21.0%. This decrease was due primarily to interest income earned on the unused proceeds from the initial public offering, partially offset by interest on additional debt related to the refinancing of the 12 1/2% and 11% notes. OTHER EXPENSE, NET. We had other expenses of $0.4 million for the nine months ended June 25, 2000, compared to $0.5 million for the nine months ended June 27, 1999, a decrease of $0.1 million or 20.0%. The other expenses during the nine months ended June 25, 2000 resulted primarily from the write-off of financing costs related to transactions which the Company chose not to complete. EXTRAORDINARY LOSS. The Company incurred an extraordinary loss of $16.9 million, net of an income tax benefit of $11.7 million, in the nine months ended June 25, 2000 related to the early retirement of our 11% and 12 1/2% notes for an amount in excess of our carrying value and the write-off of the related unamortized debt issuance costs. 9 11 NET INCOME (LOSS). Our net loss was $12.5 million for the nine months ended June 25, 2000, compared to net income of $4.3 million for the nine months ended June 27, 1999. The loss was caused primarily by the extraordinary loss and the non-recurring severance payment. AFTER-TAX CASH FLOW. After-tax cash flow was $13.7 million for the nine months ended June 25, 2000, compared to $11.5 million for the nine months ended June 27, 1999, an increase of $2.2 million or 19.1%. This increase was primarily attributable to the increase in EBITDA and the decrease in interest expense, net that exceeded the non-recurring severance payment, net of tax benefit. Excluding the net non-recurring severance payment, after-tax cash flow was $19.5 million for the nine months ended June 25, 2000, an increase of $8.0 million or 69.6% compared to the nine months ended June 27, 1999. LIQUIDITY AND CAPITAL RESOURCES Our primary source of liquidity is cash on hand, cash provided by operations and, to the extent necessary, undrawn commitments that are available under the $150.0 million senior credit facility arranged by Lehman Brothers Inc. in July 2000. The senior credit facility includes a six-year $25.0 million revolving credit facility and $125.0 million multi-draw term loan facility. We intend to use a significant portion of our capital resources to make future acquisitions. These acquisitions will be funded primarily from the senior credit facility, cash on hand and internally generated cash flow, as well as potential equity financing. Our ability to increase our indebtedness is limited by the terms of the credit agreement governing our senior credit facilities and the indenture governing our senior subordinated notes. Additionally, such credit agreement and indenture place restrictions on us with respect to the sale of assets, liens, investments, dividends, debt repayments, capital expenditures, transactions with affiliates and consolidations and mergers, among other things. Net cash flows provided by operating activities were $12.2 million for the nine months ended June 25, 2000, compared to net cash flows provided by operating activities of $11.7 million for the nine months ended June 27, 1999. Changes in our net cash flow from operating activities are primarily a result of changes in advertising revenues and station operating expenses which are affected by the acquisition and disposition of stations during those periods. Net cash flows used in investing activities were $114.2 million for the nine months ended June 25, 2000, compared to net cash flows used in investing activities of $28.0 million for the nine months ended June 27, 1999. Changes in our net cash flow from investing activities are primarily a result of the acquisition and disposition of stations during those periods. Net cash flows provided by financing activities were $158.1 million for the nine months ended June 25, 2000, compared to $0.4 million net cash flows used in financing activities for the nine months ended June 27, 1999. Changes in our net cash flow from financing activities during the nine months ended June 25, 2000 were primarily a result of the initial public offering and related refinancing transactions that were completed during the first quarter of fiscal year 2000. Management believes that cash from operating activities, together with cash on hand, should be sufficient to permit us to meet our obligations in the foreseeable future, including: (1) required significant cash interest payments pursuant to the terms of the senior subordinated notes due 2009, (2) operating obligations and (3) capital expenditures. Assumptions (none of which can be assured) that underlie management's belief, include: o the economic conditions within the radio broadcasting market and economic conditions in general will not deteriorate in any material respect; o we will continue to successfully implement our business strategy; o we will not incur any material unforeseen liabilities, including environmental liabilities; and o no future acquisitions will adversely affect our liquidity. We continuously review, and are currently reviewing, opportunities to acquire additional radio stations, primarily in the largest Hispanic markets in the United States. We engage in discussions regarding potential acquisitions from time to time in the ordinary course of business. On May 8, 2000, we entered into agreements to acquire all of the outstanding capital stock of RCI and certain holdings of its affiliate, New World, for total consideration of $165.2 million, consisting of $43.5 million of our Class A common stock and $121.7 million in cash, subject to certain conditions and adjustments. 10 12 The purchase of RCI includes the rights to acquire the following radio stations -- KFOX-FM and KREA-FM broadcasting, on a co-channeled basis, at 93.5 MHz serving the Los Angeles, California market; KXJO-FM broadcasting at 92.7 MHz serving the San Francisco, California market; and KSAH-AM broadcasting at 720 kHz serving the San Antonio, Texas market. We will acquire Dallas radio stations KTCY-FM broadcasting at 104.9 MHz and KXEB-AM broadcasting at 910 kHz from New World. Once acquired by RCI we intend to broadcast our programming on each of RCI's stations we have agreed to acquire under a time brokerage agreement until closing. Until closing, we are broadcasting our programming on New World's stations in the Dallas market under a time brokerage agreement that commenced on May 8. The closing of these acquisitions is targeted for November of this year and each of these transactions is subject to numerous conditions and approvals, including receipt of regulatory approvals under the federal communications laws and review by federal antitrust authorities. Additionally, the acquisition of KXJO-FM is subject to the completion of Clear Channel, Inc.'s merger with AMFM, Inc. We cannot assure you that the acquisition described above will occur during the expected time frame, under the terms described, or at all. We have no other written understandings, letters of intent or contracts to acquire radio stations or other companies. We anticipate that any future acquisitions would be financed through funds generated from permitted debt financing, equity financing, operations or a combination of these sources. However, there can be no assurance that financing from any of these sources, if available, can be obtained on favorable terms. YEAR 2000 ISSUE To date, no material interruptions to our operations have occurred as a result of the year 2000 issue. The greatest threat to our ability to continue broadcasting due to year 2000 issues comes from the utilities upon which we are dependent. To date, we are not aware of any external utility vendor with a year 2000 issue that has materially impacted our results of operations, liquidity, or capital resources. While we believe our efforts provide reasonable assurance that material disruptions will not occur due to internal or vendor failure, the possiblity of interrupion still exists. In 1999 we performed various analysis of potential problems related to the year 2000 issue. Internally, we bear some risks in the following areas: computer hardware and software for our accounting and administrative functions, computer-controlled programming of music and the transmission of our signals. Externally, we are at risk, like most companies, of losing power and phone lines. As of June 25, 2000 we had spent $0.1 million to upgrade/replace non-compliant systems and equipment. NEW ACCOUNTING PRONOUNCEMENTS In June 1998, the FASB issued Statement of Financial Accounting Standards No. 133 "Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133"). SFAS No. 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities. It requires an entity to recognize all derivatives as either assets or liabilities in the balance sheet and measure those instruments at fair value. SFAS No. 133, as amended by SFAS No. 137, is expected to be effective for the Company's fiscal year ending September 30, 2001. Management does not believe that the adoption of SFAS No. 133 will have a significant impact on the Company's consolidated financial statements. In December 1999, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin No. 101 (SAB 101), "Revenue Recognition", which provides guidance on the recognition, presentation and disclosure of revenue in financial statements filed with the SEC. SAB 101 outlines the basic criteria that must be met in order to recognize revenue and provides guidance for disclosures related to revenue recognition policies. In June 2000, the SEC issued SAB 101B, "Second Amendment: Revenue Recognition in Financial Statements" which extends the effective date of SAB 101 to the fourth fiscal quarter of fiscal years commencing after December 15, 1999. At this time, management is still assessing the impact of SAB 101 on the Company's financial position and results of operations. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We believe that inflation has not had a material impact on our results of operations for each of our fiscal years in the three-year period ended September 26, 1999 and in the three- and nine-month periods ended June 25, 2000. However, there can be no assurance that future inflation would not have an adverse impact on our operating results and financial condition. We are not subject to currency fluctuations since we do not have any international operations other than Puerto Rico where the currency is the U.S. dollar. We have limited market risk exposure since we do not have any outstanding variable rate debt or derivative financial and commodity instruments as of August 9, 2000. Our financial instruments outstanding at June 25, 2000 with market risk are our senior subordinated notes due 2009. PART II -- OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS From time to time we are involved in litigation incidental to the conduct of our business, such as contract matters and employee-related matters. We are not currently a party to litigation which, in the opinion of management, is likely to have a material adverse effect on our business. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS On August 18, 1999, we filed a registration statement of Form S-1 with the SEC (Registration No. 333-85499) with respect to our initial public offering of 21,787,400 shares of Class A Common Stock, par value $.0001. The SEC declared our registration statement effective on October 27, 1999. The initial public offering closed on November 2, 1999 and we and certain selling shareholders issued and sold 20,768,110 (including over-allotment options of 3,268,110) shares and 4,287,400 shares of Class A Common Stock, 11 13 respectively. All of the 21,787,400 shares of Class A Common Stock registered in the offering were sold at an initial offering price of $20.00 per share, resulting in an aggregate-offering price of $435,748,000. Lehman Brothers, Inc. and Merrill, Lynch, Pierce, Fenner & Smith Incorporated acted as representatives for the underwriters, to whom SBS paid an aggregate of $26.0 million and the selling shareholders paid an aggregate of about $5.4 million in underwriting discounts and commissions ($1.25 per share), resulting in net proceeds to SBS of $389.4 million and $80.4 million to the selling shareholders. On August 18, 1999, we also filed a registration statement on Form S-1 with the Commission (Registration No. 333-85519) with respect to an offering of Senior Subordinated Notes. On November 2, 1999, we closed the offering of the 9 5/8% Senior Subordinated Notes due 2009. All of the notes registered in the offering were sold at an aggregate-offering price of $235.0 million. Lehman Brothers Inc. and CIBC World Markets Corp. served as underwriters, to whom SBS paid an aggregate underwriting discount of $7.0 million (3.00%), resulting in net proceeds to SBS of $228.0 million. Other expenses of these two offerings were $4.1 million including SEC registration fees, printing, accounting, legal fees and expenses and miscellaneous expenses. The net proceeds to us after deducting the total expense described above was $613.3 million. We used the net proceeds of our initial public offering and the concurrent senior subordinated notes offering to (1) redeem our preferred stock at 105% of aggregate liquidation preference at a cost of $265.6 million (2) repurchase our 11% notes and 12 1/2% notes at approximately 111% and 114% of their par value, respectively, pursuant to the tender offers and consent solicitations we completed on November 2, 1999 at a cost of $205.0 million (3) purchase an annuity for two of our retiring executives at a cost of $10.2 million (4) repay a promissory note to Infinity Broadcasting Corp., including accrued interest, for a total of $3.4 million, and (5) $129.1 million in excess proceeds remained for use by us for general corporate purposes, including potential acquisitions. In connection with these offerings, we also were paid $3.0 million by Messrs. Alarcon Sr. and Alarcon Jr. for repayment of loans previously made to them and $0.7 million by Mr. Alarcon Sr. for the acquisition of the Keys' stations, WVMQ-FM and WZMQ-FM. None of the expenses or net proceeds of the initial public offering were paid directly or indirectly to any director or officer of SBS or their associates, persons owning 10% or more of the equity position, or an affiliate of SBS. The excess proceeds of such offerings have not been separately allocated and are used by us, together with cash on hand, cash from operations and cash received from the sale of the Keys' stations, for general corporate purposes, including acquisitions. From November 2, 1999 through June 25, 2000, we have used all the excess net proceeds of our initial public offering and the concurrent senior subordinated notes offering to fund our operations and radio station acquisitions, including the Puerto Rico radio stations purchased from AMFM and a portion of the cash required to purchase the radio stations from New World and RCI. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits - 10.1 Stock Purchase Agreement, dated as of May 8, 2000, by and among Rodriguez Communications, Inc., a Delaware corporation, each of the Stockholders identified therein and Spanish Broadcasting System, Inc., a Delaware corporation. 10.2 Asset Purchase Agreement, dated as of May 8, 2000, by and between New World Broadcasters Corp., a Texas corporation, and Spanish Broadcasting System, Inc., a Delaware corporation. 10.3 Stock Purchase Agreement, dated as of May 8, 2000, by and between New World Broadcasters Corp., a Texas corporation, 910 Broadcasting Corp., a Texas corporation, and Spanish Broadcasting System, Inc., a Delaware corporation. 10.4 Time Brokerage Agreement, dated May 8, 2000, by and between, Rodriguez Communications, Inc., a Delaware corporation, Spanish Broadcasting System of California, Inc., a Delaware corporation, and Spanish Broadcasting System, Inc., a Delaware corporation. 10.5 Time Brokerage Agreement, dated May 8, 2000, by and among, New World Broadcasters Corp., a Texas corporation, 910 Broadcasting Corp., a Texas corporation, and Spanish Broadcasting System of San Antonio, Inc., a Delaware corporation and Spanish Broadcasting System, Inc., a Delaware corporation. 10.6 Credit Agreement, dated as of May 8, 2000, by and among, New World Broadcasters Corp., a Texas corporation, Rodriguez Communications, Inc., a Delaware corporation, RCI (Alameda) Acquisition, Inc., a 12 14 Delaware corporation, the Guarantors named therein and Spanish Broadcasting System, Inc., a Delaware corporation. 27 Financial Data Schedule (b) Reports on Form 8-K. A Current Report on Form 8-K was filed by the Company on January 28, 2000, reporting an "Acquisition or Disposition of Assets" pursuant to Item 2 of Form 8-K and Form 8-K/A-1, Amendment No. 1 to the Current Report on Form 8-K, was filed on March 29, 2000. 13 15 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, each of the registrants has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Spanish Broadcasting System, Inc., a Delaware Corporation Spanish Broadcasting System, Inc., a New Jersey Corporation Spanish Broadcasting System of California, Inc. Spanish Broadcasting System of Florida, Inc. Spanish Broadcasting System Network, Inc. SBS Promotions, Inc. Alarcon Holdings, Inc. SBS of Greater New York, Inc. Spanish Broadcasting System of Illinois, Inc. Spanish Broadcasting System of Greater Miami, Inc. Spanish Broadcasting System of San Antonio, Inc. Spanish Broadcasting System of Puerto Rico, Inc., a Delaware Corporation Spanish Broadcasting System of Puerto Rico, Inc., a Puerto Rico Corporation SBS Funding, Inc. Spanish Broadcasting System Finance Corporation By: /s/ JOSEPH A. GARCIA -------------------------------------- Joseph A. Garcia Executive Vice President, Date: August 9, 2000 Chief Financial Officer and Secretary (principal financial and accounting officer) 14