10-Q 1 sbsa-10q_20130930.htm 10-Q

      

   

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 September 30, 2013

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 000-27823

      

LOGO   

Spanish Broadcasting System, Inc.

(Exact name of registrant as specified in its charter)

      

   

 

Delaware

   

13-3827791

(State or other jurisdiction of

incorporation or organization)

   

(I.R.S. Employer

Identification No.)

   

 

7007 NW 77th Ave.

Miami, Florida 33166

(Address of principal executive offices) (Zip Code)

   

(305) 441-6901

(Registrant’s telephone number, including area code)

      

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

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

   

 

Large accelerated filer

   

¨

      

Accelerated filer

      

¨

Non-accelerated filer

   

¨ (Do not check if a smaller reporting company)

      

Smaller reporting company

      

x

Indicate by a 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, 2013, 4,166,991 shares of Class A common stock, par value $0.0001 per share, 2,340,353 shares of Class B common stock, par value $0.0001 per share and 380,000 shares of Series C convertible preferred stock, $0.01 par value per share, which are convertible into 760,000 shares of Class A common stock, were outstanding.

      

   

   

   


SPANISH BROADCASTING SYSTEM, INC.

INDEX

   

 

   

   

   

Page

PART I. FINANCIAL INFORMATION

      

   

   

   

ITEM 1.  

Financial Statements—Unaudited  

 

 4

   

   

   

   

Unaudited Condensed Consolidated Balance Sheets as of September 30, 2013 and December 31, 2012  

 

 4

   

   

   

   

Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the Three- and Nine-Months Ended September 30, 2013 and 2012  

 

 5

   

   

   

   

Unaudited Condensed Consolidated Statement of Changes in Stockholders’ Deficit for the Nine-Months Ended September 30, 2013  

 

 6

   

   

   

   

Unaudited Condensed Consolidated Statements of Cash Flows for the Nine-Months Ended September 30, 2013 and 2012  

 

 7

   

   

   

   

Notes to Unaudited Condensed Consolidated Financial Statements  

 

 8

   

   

   

ITEM 2.  

Management’s Discussion and Analysis of Financial Condition and Results of Operations  

 

 18

   

   

   

ITEM 4.  

Controls and Procedures  

 

 29

   

   

PART II. OTHER INFORMATION

   

   

   

   

ITEM 1.  

Legal Proceedings  

 

 30

   

   

   

ITEM 1A.  

Risk Factors  

 

 31

   

   

   

ITEM 6.  

Exhibits  

 

 35

   

   

   

Signature  

      

 

 36

   

   

   

 

 2 


Special Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q contains both historical and forward-looking statements. All statements other than statements of historical fact are, or may be deemed to be, forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These forward-looking statements are not based on historical facts, but rather reflect our current expectations concerning future results and events. These forward-looking statements generally can be identified by the use of statements that include phrases such as “believe”, “expect”, “anticipate”, “intend”, “estimate”, “plan”, “project”, “foresee”, “likely”, “will” or other words or phrases with similar meanings. Similarly, statements that describe our objectives, plans or goals are, or may be, forward-looking statements. These forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be different from any future results, performance and anticipated achievements expressed or implied by these statements. We do not intend to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. In addition, forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from our historical experience and our present expectations or projections. These risks and uncertainties include, but are not limited to those described in our Annual Report on Form 10-K (as amended by our Amendment No. 1 on Form 10-K/A) for the year ended December 31, 2012, and those described from time to time in our future reports filed with the Securities and Exchange Commission (the “SEC”).

   

   

   

 

 3 


PART I. FINANCIAL INFORMATION

Item 1. Financial Statements—Unaudited

   

SPANISH BROADCASTING SYSTEM, INC. AND SUBSIDIARIES

Unaudited Condensed Consolidated Balance Sheets

   

 

      

September 30,

2013

   

      

December 31,
2012

   

      

(In thousands, except share data)

   

Assets

   

   

   

      

   

   

   

Current assets:

   

   

   

      

   

   

   

Cash and cash equivalents

$

33,737

   

      

   

26,660

   

Receivables, net of allowance for doubtful accounts of $1,674 in 2013 and $1,592 in 2012

   

29,660

   

      

   

26,423

   

Prepaid expenses and other current assets

   

3,650

   

      

   

2,161

   

Total current assets

   

67,047

   

      

   

55,244

   

Property and equipment, net of accumulated depreciation of $64,320 in 2013 and $61,089 in 2012

   

35,708

   

      

   

38,014

   

FCC broadcasting licenses

   

323,055

   

      

   

323,055

   

Goodwill

   

32,806

   

      

   

32,806

   

Other intangible assets, net of accumulated amortization of $803 in 2013 and $642 in 2012

   

1,745

   

      

   

1,906

   

Deferred financing costs, net of accumulated amortization of $5,516 in 2013 and $3,015 in 2012

   

12,100

   

      

   

14,601

   

Other assets

   

1,329

   

      

   

1,792

   

Total assets

$

473,790

   

      

   

467,418

   

Liabilities and Stockholders’ Deficit

   

   

   

      

   

   

   

Current liabilities:

   

   

   

      

   

   

   

Accounts payable and accrued expenses

$

19,642

   

      

   

16,275

   

Accrued interest

   

15,824

   

      

   

7,339

   

Unearned revenue

   

793

   

      

   

527

   

Other liabilities

   

528

   

      

   

669

   

Current portion of other long-term debt

   

3,006

   

      

   

3,009

   

Series B cumulative exchangeable redeemable preferred stock dividends payable

   

34,332

   

      

   

29,369

   

Total current liabilities

   

74,125

   

      

   

57,188

   

Other liabilities, less current portion

   

549

   

      

   

802

   

Derivative instrument

   

660

   

      

   

816

   

12.5% senior secured notes due 2017, net of unamortized discount of $6,212 in 2013 and $7,194 in 2012

   

268,788

   

      

   

267,806

   

Other long-term debt, less current portion

   

5,342

   

      

   

8,262

   

Deferred income taxes

   

86,477

   

      

   

86,049

   

Total liabilities

   

435,941

   

      

   

420,923

   

Commitments and contingencies (note 6)

   

   

   

      

   

   

   

Cumulative exchangeable redeemable preferred stock:

   

   

   

      

   

   

   

10 3/4% Series B cumulative exchangeable redeemable preferred stock, $0.01 par value, liquidation value $1,000 per share. Authorized 280,000 shares; 92,349 shares issued and outstanding at September 30, 2013 and December 31, 2012

   

92,349

   

      

   

92,349

   

Stockholders’ deficit:

   

   

   

      

   

   

   

Series C convertible preferred stock, $0.01 par value and liquidation value. Authorized 600,000 shares; 380,000 shares issued and outstanding at September 30, 2013 and December 31, 2012

   

4

   

      

   

4

   

Class A common stock, $0.0001 par value. Authorized 100,000,000 shares; 4,166,991 shares issued and outstanding at September 30, 2013 and December 31, 2012

   

—  

   

      

   

—  

   

Class B common stock, $0.0001 par value. Authorized 50,000,000 shares; 2,340,353 shares issued and outstanding at September 30, 2013 and December 31, 2012

   

—  

   

      

   

—  

   

Additional paid-in capital

   

525,322

   

      

   

525,281

   

Accumulated other comprehensive loss

   

(660

)

      

   

(816

)

Accumulated deficit

   

(579,166

)

      

   

(570,323

)

Total stockholders’ deficit

   

(54,500

)

      

   

(45,854

)

Total liabilities and stockholders’ deficit

$

473,790

   

      

   

467,418

   

See accompanying notes to the unaudited condensed consolidated financial statements.

   

   

   

   

 

 4 


SPANISH BROADCASTING SYSTEM, INC. AND SUBSIDIARIES

Unaudited Condensed Consolidated Statements of Operations

and Comprehensive Income (Loss)

   

 

   

Three-Months Ended
September 30,

   

   

Nine-Months Ended
September 30

   

   

2013

   

   

2012

   

   

2013

   

   

2012

   

   

(In thousands, except per share data)

   

Net revenue

$

41,082

   

   

   

35,881

   

   

   

116,252

   

   

   

102,586

   

Operating expenses:

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Engineering and programming

   

8,441

   

   

   

8,184

   

   

   

22,188

   

   

   

24,203

   

Selling, general and administrative

   

18,953

   

   

   

14,389

   

   

   

52,967

   

   

   

43,289

   

Corporate expenses

   

2,371

   

   

   

1,564

   

   

   

7,413

   

   

   

5,552

   

Depreciation and amortization

   

1,237

   

   

   

1,365

   

   

   

3,911

   

   

   

4,122

   

   

   

31,002

   

   

   

25,502

   

   

   

86,479

   

   

   

77,166

   

(Gain) loss on the disposal of assets, net

   

(3

)

   

   

(3

)

   

   

(25

)

   

   

(8

)

Impairment charges and restructuring costs

   

(136

)

   

   

148

   

   

   

889

   

   

   

572

   

Operating income

   

10,219

   

   

   

10,234

   

   

   

28,909

   

   

   

24,856

   

Other (expense) income:

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Interest expense, net

   

(9,924

)

   

   

(9,931

)

   

   

(29,794

)

   

   

(26,613

)

Loss on early extinguishment of debt

   

—  

   

   

   

—  

   

   

   

—  

   

   

   

(391

)

Income (loss) before income taxes

   

295

   

   

   

303

   

   

   

(885

)

   

   

(2,148

)

Income tax expense

   

189

   

   

   

248

   

   

   

512

   

   

   

1,761

   

Net income (loss)

   

106

   

   

   

55

   

   

   

(1,397

)

   

   

(3,909

)

Dividends on Series B preferred stock

   

(2,482

)

   

   

(2,482

)

   

   

(7,446

)

   

   

(7,466

)

Net loss applicable to common stockholders

$

(2,376

)

   

   

(2,427

)

   

   

(8,843

)

   

   

(11,355

)

Basic and Diluted net loss per common share

$

(0.33

)

   

   

(0.33

)

   

   

(1.22

)

   

   

(1.56

)

Weighted average common shares outstanding:

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Basic and Diluted

   

7,267

   

   

   

7,267

   

   

   

7,267

   

   

   

7,267

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Net income (loss)

$

106

   

   

   

55

   

   

   

(1,397

)

   

   

(3,909

)

Other comprehensive income (loss), net of taxes-unrealized gain (loss) on derivative instrument

   

18

   

   

   

19

   

   

   

156

   

   

   

(98

)

Total comprehensive income (loss)

$

124

   

   

   

74

   

   

   

(1,241

)

   

   

(4,007

)

   

   

   

   

   

   

   

   

   

See accompanying notes to the unaudited condensed consolidated financial statements.

   

   

   

   

 

 5 


SPANISH BROADCASTING SYSTEM, INC. AND SUBSIDIARIES

Unaudited Condensed Consolidated Statement of Changes in Stockholders’ Deficit

for the Nine-Months Ended September 30, 2013

   

 

   

Class C

preferred stock

   

   

Class A

common stock

   

   

Class B

common stock

   

   

Additional
paid-in
capital

   

   

Accumulated

other
comprehensive
loss

   

   

   

   

   

Total

stockholders’
deficit

   

   

Number
of shares

   

   

Par
value

   

   

Number
of shares

   

   

Par
value

   

   

Number
of shares

   

   

Par
value

   

   

   

   

   

   

Accumulated
deficit

   

   

   

   

   

(In thousands, except share data)

   

Balance at December 31, 2012

   

380,000

   

   

$

4

   

   

   

4,166,991

   

   

$

—  

   

   

   

2,340,353

   

   

$

—  

   

   

$

525,281

   

   

$

(816

)

   

$

(570,323

)

   

$

(45,854

)

Stock-based compensation

   

—  

   

   

   

—  

   

   

   

—  

   

   

   

—  

   

   

   

—  

   

   

   

—  

   

   

   

41

   

   

   

—  

   

   

   

—  

   

   

   

41

   

Series B preferred stock dividends

   

—  

   

   

   

—  

   

   

   

—  

   

   

   

—  

   

   

   

—  

   

   

   

—  

   

   

   

—  

   

   

   

—  

   

   

   

(7,446

)

   

   

(7,446

)

Net loss

   

—  

   

   

   

—  

   

   

   

—  

   

   

   

—  

   

   

   

—  

   

   

   

—  

   

   

   

—  

   

   

   

—  

   

   

   

(1,397

)

   

   

(1,397

)

Other comprehensive income

   

—  

   

   

   

—  

   

   

   

—  

   

   

   

—  

   

   

   

—  

   

   

   

—  

   

   

   

—  

   

   

   

156

   

   

   

—  

   

   

   

156

   

Balance at September 30, 2013

   

380,000

   

   

$

4

   

   

   

4,166,991

   

   

$

—  

   

   

   

2,340,353

   

   

$

—  

   

   

$

525,322

   

   

$

(660

)

   

$

(579,166

)

   

$

(54,500

)

   

   

   

   

   

   

   

   

   

   

   

   

   

See accompanying notes to the unaudited condensed consolidated financial statements

   

   

   

   

 

 6 


SPANISH BROADCASTING SYSTEM, INC. AND SUBSIDIARIES

Unaudited Condensed Consolidated Statements of Cash Flows

   

 

   

Nine-Months Ended
September 30,

   

   

2013

   

   

2012

   

   

(In thousands)

   

Cash flows from operating activities:

   

   

   

      

   

   

   

Net loss

$

(1,397

)

   

   

(3,909

)

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

   

   

   

   

   

   

   

(Gain) loss on the disposal of assets

   

(25

)

   

   

(8

)

Impairment charges

   

1,025

   

   

   

509

   

Stock-based compensation

   

41

   

   

   

34

   

Depreciation and amortization

   

3,911

   

   

   

4,122

   

Net barter (income) loss

   

(182

)

   

   

(184

)

Provision for trade doubtful accounts

   

585

   

   

   

701

   

Loss on early extinguishment of debt

   

—  

   

   

   

391

   

Amortization of deferred financing costs

   

2,501

   

   

   

2,292

   

Amortization of original issued discount

   

982

   

   

   

750

   

Deferred income taxes

   

428

   

   

   

1,685

   

Unearned revenue

   

370

   

   

   

138

   

Changes in operating assets and liabilities:

   

   

   

   

   

   

   

Trade receivables

   

(3,744

)

   

   

(4,107

)

Prepaid expenses and other current assets

   

(1,489

)

   

   

1,877

   

Other assets

   

(537

)

   

   

(15

)

Accounts payable and accrued expenses

   

3,295

   

   

   

15

   

Accrued interest

   

8,485

   

   

   

15,573

   

Other liabilities

   

(333

)

   

   

(137

)

Net cash provided by operating activities

   

13,916

   

   

   

19,727

   

Cash flows from investing activities:

   

   

   

   

   

   

   

Purchases of property and equipment

   

(1,469

)

   

   

(1,408

)

Proceeds from the sale of property and equipment and/or insurance proceeds received

   

36

   

   

   

8

   

Net cash used in investing activities

   

(1,433

)

   

   

(1,400

)

Cash flows from financing activities:

   

   

   

   

   

   

   

Proceeds from 12.5% senior secured notes due 2017

   

—  

   

   

   

266,750

   

Payment of financing costs

   

—  

   

   

   

(17,549

)

Payment of senior secured credit facility term loan due 2012

   

—  

   

   

   

(303,063

)

Payment of Series B preferred stock cash dividends

   

(2,483

)

   

   

(2,482

)

Payments of other long-term debt

   

(2,923

)

   

   

(2,954

)

Net cash used in financing activities

   

(5,406

)

   

   

(59,298

)

Net increase (decrease) in cash and cash equivalents

   

7,077

   

   

   

(40,971

)

Cash and cash equivalents at beginning of period

   

26,660

   

   

   

71,266

   

Cash and cash equivalents at end of period

$

33,737

   

   

   

30,295

   

Supplemental cash flows information:

   

   

   

   

   

   

   

Interest paid

$

17,795

   

   

   

7,951

   

Income taxes paid, net

$

—  

   

   

   

23

   

Noncash investing and financing activities:

   

   

   

   

   

   

   

Accrual of Series B preferred stock cash dividends not declared

$

4,963

   

   

   

4,964

   

Unrealized gain (loss) on derivative instruments

$

156

   

   

   

(98

)

See accompanying notes to the unaudited condensed consolidated financial statements.

   

   

   

       

 

 7 


SPANISH BROADCASTING SYSTEM, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. Basis of Presentation

The unaudited condensed consolidated financial statements include the accounts of Spanish Broadcasting System, Inc. and its subsidiaries (the Company, we, us, our or SBS). All intercompany balances and transactions have been eliminated in consolidation. The accompanying unaudited condensed consolidated financial statements as of September 30, 2013 and December 31, 2012 and for the three- and nine-month periods ended September 30, 2013 and 2012 have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 8-03 of Regulation S-X. They do not include all information and notes required by U.S. GAAP for complete financial statements. These unaudited condensed consolidated financial statements should be read in conjunction with our consolidated financial statements as of, and for the fiscal year ended December 31, 2012, included in our Annual Report on Form 10-K (as amended by our Amendment No. 1 on Form 10-K/A) for the fiscal year ended December 31, 2012. In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments, which are all of a normal and recurring nature, necessary for a fair presentation of the results of the interim periods. Additionally, we evaluated subsequent events after the balance sheet date of September 30, 2013 through the financial statements issuance date. The results of operations for the nine-months ended September 30, 2013 are not necessarily indicative of the results for a full year.

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions about future events that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities at the date of the financial statements. Significant items subject to such estimates and assumptions include the allowance for doubtful accounts, the realization of deferred tax assets, the useful lives and future cash flows used for testing the recoverability of property and equipment, the recoverability of FCC broadcasting licenses, goodwill and other intangible assets, the fair value of Level 2 and Level 3 financial instruments, contingencies and litigation. These estimates and assumptions are based on management’s best judgments. Management evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors, including the current economic environment, which management believes to be reasonable under the circumstances. Management adjusts such estimates and assumptions as facts and circumstances dictate. Illiquid credit markets, volatile equity markets and changes in advertising spending levels have combined to increase the uncertainty inherent in such estimates and assumptions. Actual results could differ from these estimates.

2. Stockholders’ Deficit

(a) Series C Convertible Preferred Stock

On December 23, 2004, in connection with the closing of the merger agreement, dated October 5, 2004, with CBS Radio (formerly known as Infinity Media Corporation, CBS Radio), a division of CBS Corporation, Infinity Broadcasting Corporation of San Francisco (“Infinity SF”) and SBS Bay Area, LLC, a wholly-owned subsidiary of SBS, pursuant to which SBS acquired the FCC license of Infinity SF (the “CBS Radio Merger”), we issued to CBS Radio an aggregate of 380,000 shares of Series C convertible preferred stock, $0.01 par value per share (the “Series C preferred stock”). Each share of Series C preferred stock is convertible at the option of the holder into two fully paid and non-assessable shares of the Class A common stock. The shares of Series C preferred stock issued at the closing of the CBS Radio Merger are convertible into 760,000 shares of Class A common stock, subject to certain adjustments. The number of Class A common stock shares reflects a 1-for-10 reverse stock split effectuated by the Company on July 11, 2011. In connection with the CBS Radio Merger, we also entered into a registration rights agreement with CBS Radio, pursuant to which CBS Radio may instruct us to file up to three registration statements, on a best efforts basis, with the SEC, providing for the registration for resale of the Class A common stock issuable upon conversion of the Series C preferred stock.

We are required to pay holders of Series C preferred stock dividends on parity with our Class A common stock and Class B common stock, and each other class or series of our capital stock created after December 23, 2004.

 

 8 

   


(b) Class A and B Common Stock

The rights of the Class A common stock holders and Class B common stock holders are identical except with respect to their voting rights and conversion provisions. The Class A common stock is entitled to one vote per share and the Class B common stock is entitled to ten votes per share. The Class B common stock is convertible to Class A common stock on a share-for-share basis at the option of the holder at any time, or automatically upon a transfer of the Class B common stock to a person or entity which is not a permitted transferee (as described in our Certificate of Incorporation). Holders of each class of common stock are entitled to receive dividends and, upon liquidation or dissolution, are entitled to receive all assets available for distribution to stockholders. Neither the holders of the Class A common stock nor the holders of the Class B common stock have preemptive or other subscription rights, and there are no redemption or sinking fund provisions with respect to such shares. Each class of common stock is subordinate to our 10 3/4% Series B cumulative exchangeable redeemable preferred stock, par value $0.01 per share (the “Series B preferred stock”). The Series B preferred stock has a liquidation preference of $1,000 per share and is on parity with the Series C preferred stock with respect to dividend rights and rights upon liquidation, winding up and dissolution of SBS.

 (c) Share-Based Compensation Plans

2006 Omnibus Equity Compensation Plan

In July 2006, we adopted an omnibus equity compensation plan (the “Omnibus Plan”) in which grants of Class A common stock can be made to participants in any of the following forms: (i) incentive stock options, (ii) non-qualified stock options, (iii) stock appreciation rights, (iv) stock units, (v) stock awards, (vi) dividend equivalents, and (vii) other stock-based awards. The Omnibus Plan authorizes up to 350,000 shares of our Class A common stock for issuance, subject to adjustment in certain circumstances. The Omnibus Plan provides that the maximum aggregate number of shares of Class A common stock units, stock awards and other stock-based awards that may be granted, other than dividend equivalents, to any individual during any calendar year is 100,000 shares, subject to adjustments.

Stock Options Activity

Stock options have only been granted to employees and directors. Our stock options have various vesting schedules and are subject to the employees and directors continuing their service to SBS. We recognize compensation expense based on the estimated grant date fair value using the Black-Scholes option pricing model and recognize the compensation expense using a straight-line amortization method. When estimating forfeitures, we consider voluntary termination behaviors, as well as trends of actual option forfeitures. Ultimately, our stock-based compensation expense is based on awards that vest. Our stock-based compensation has been reduced for estimated forfeitures.

A summary of the status of our stock options, as of December 31, 2012 and September 30, 2013, and changes during the nine-months ended September 30, 2013, is presented below (in thousands, except per share data):

   

 

   

Shares

   

      

Weighted
Average
Exercise
Price

   

      

Aggregate
Intrinsic
Value

   

      

Weighted
Average
Remaining
Contractual
Life (Years)

   

Outstanding at December 31, 2012

   

142

      

      

$

40.61

      

   

   

—  

   

   

   

—  

   

Granted

   

—  

   

      

   

—  

   

   

   

—  

   

   

   

—  

   

Exercised

   

—  

   

      

   

—  

   

   

   

—  

   

   

   

—  

   

Forfeited

   

—  

   

      

   

—  

   

   

   

—  

   

   

   

—  

   

Outstanding at September 30, 2013

   

142

      

      

$

40.61

      

      

$

57

      

      

   

4.2

      

Exercisable at September 30, 2013

   

141

      

      

$

40.77

      

      

$

57

      

      

   

4.1

      

During the nine-months ended September 30, 2013 and 2012, no stock options were exercised; therefore, no cash payments were received. In addition, we did not recognize a tax benefit on our stock-based compensation expense due to our valuation allowance on substantially all of our deferred tax assets.

 

 9 

   


The following table summarizes information about stock options outstanding and exercisable at September 30, 2013 (in thousands, except per share data):

   

 

   

Outstanding

   

      

Weighted
Average
Remaining
Contractual
Life (Years)

   

      

Exercisable

   

Range of Exercise Prices

Vested
Options

   

      

Unvested
Options

   

      

Weighted
Average
Exercise
Price

   

      

   

      

Number
Exercisable

   

      

Weighted
Average
Exercise
Price

   

$1.03 – 49.99

   

91

      

      

   

1

      

      

$

13.31

      

      

   

5.8

      

      

   

91

      

      

$

13.26

      

50.00 – 99.99

   

36

      

      

   

—  

   

      

   

84.34

      

      

   

1.0

      

      

   

36

      

      

   

84.34

      

100.00 – 117.80

   

14

      

      

   

—  

   

      

   

111.06

      

      

   

1.0

      

      

   

14

      

      

   

111.06

      

   

   

141

      

      

   

1

      

      

$

40.61

      

      

   

4.2

      

      

   

141

      

      

$

40.77

      

(d) Accumulated Other Comprehensive Loss

Our accumulated other comprehensive loss is comprised of accumulated gains and losses on a derivative instrument (interest rate swap) that qualifies for cash flow hedge treatment. Our total comprehensive income (loss) consists of our net income (loss) and a gain (loss) on our interest rate swap for the respective periods. The gain (loss) on the interest rate swap is shown net of taxes; however, there is no tax effect as a result of a full deferred tax asset valuation allowance related to the interest rate swap. For the respective periods, there has been no other comprehensive (loss) income reclassified to net loss.

   

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

Basic net (loss) income per common share was computed by dividing net (loss) income applicable to common stockholders by the weighted average number of shares of common stock and convertible preferred stock outstanding for each period presented, using the “if converted” method. Diluted net (loss) income per common share is computed by giving effect to common stock equivalents as if they were outstanding for the entire period.

The following is a reconciliation of the shares used in the computation of basic and diluted net income per share for the three- and nine-month periods ended September 30, 2013 and 2012 (in thousands):

   

 

   

Three-Months Ended
September 30,

   

   

Nine-Months Ended
September 30,

   

   

2013

   

   

2012

   

   

2013

   

   

2012

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Basic weighted average shares outstanding

   

7,267

   

   

   

7,267

   

   

   

7,267

   

   

   

7,267

   

Effect of dilutive equity instruments

   

—  

   

   

   

—  

   

   

   

—  

   

   

   

—  

   

Dilutive weighted average shares outstanding

   

7,267

   

   

   

7,267

   

   

   

7,267

   

   

   

7,267

   

Options to purchase shares of common stock and other stock-based awards outstanding which are not included in the calculation of diluted net income per share because their impact is anti-dilutive

   

125

   

   

   

134

   

   

   

133

   

   

   

135

   

   

   

   

 

 10 

   


4. Operating Segments

We have two reportable segments: radio and television.

The following summary table presents separate financial data for each of our operating segments:   

   

 

   

Three-Months Ended
September 30,

   

   

Nine-Months Ended
September 30,

   

   

2013

   

   

2012

   

   

   

2013

   

   

   

2012

   

   

(In thousands)

   

   

(In thousands)

   

Net revenue:

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Radio

$

35,428

   

   

   

31,192

   

   

   

100,634

   

   

   

89,258

   

Television

   

5,654

   

   

   

4,689

   

   

   

15,618

   

   

   

13,328

   

Consolidated

$

41,082

   

   

   

35,881

   

   

   

116,252

   

   

   

102,586

   

Engineering and programming expenses:

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Radio

$

6,086

   

   

   

5,470

   

   

   

15,795

   

   

   

15,199

   

Television

   

2,355

   

   

   

2,714

   

   

   

6,393

   

   

   

9,004

   

Consolidated

$

8,441

   

   

   

8,184

   

   

   

22,188

   

   

   

24,203

   

Selling, general and administrative expenses:

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Radio

$

15,771

   

   

   

12,543

   

   

   

43,810

   

   

   

37,073

   

Television

   

3,182

   

   

   

1,846

   

   

   

9,157

   

   

   

6,216

   

Consolidated

$

18,953

   

   

   

14,389

   

   

   

52,967

   

   

   

43,289

   

Corporate expenses:

$

2,371

   

   

   

1,564

   

   

   

7,413

   

   

   

5,552

   

Depreciation and amortization:

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Radio

$

470

   

   

   

495

   

   

   

1,462

   

   

   

1,572

   

Television

   

692

   

   

   

776

   

   

   

2,227

   

   

   

2,222

   

Corporate

   

75

   

   

   

94

   

   

   

222

   

   

   

328

   

Consolidated

$

1,237

   

   

   

1,365

   

   

   

3,911

   

   

   

4,122

   

(Gain) loss on the disposal of assets, net:

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Radio

$

(3

)

   

   

(3

)

   

   

(12

)

      

   

(8

)

Television

   

—  

   

   

   

—  

   

   

   

—  

   

      

   

—  

   

Corporate

   

—  

   

   

   

—  

   

   

   

(13

)

      

   

—  

   

Consolidated

$

(3

)

   

   

(3

)

   

   

(25

)

      

   

(8

)

Impairment charges and restructuring costs:

   

   

   

   

   

   

   

   

   

   

   

      

   

   

   

Radio

$

—  

   

   

   

(23

)

   

   

86

   

      

   

48

   

Television

   

—  

   

   

   

—  

   

   

   

1,000

   

      

   

11

   

Corporate

   

(136

)

   

   

171

   

   

   

(197

)

      

   

513

   

Consolidated

$

(136

)

   

   

148

   

   

   

889

   

      

   

572

   

Operating income (loss):

   

   

   

   

   

   

   

   

   

   

   

      

   

   

   

Radio

$

13,104

   

   

   

12,710

   

   

   

39,493

   

      

   

35,374

   

Television

   

(575

)

   

   

(647

)

   

   

(3,159

)

      

   

(4,125

)

Corporate

   

(2,310

)

   

   

(1,829

)

   

   

(7,425

)

      

   

(6,393

)

Consolidated

$

10,219

   

   

   

10,234

   

   

   

28,909

   

      

   

24,856

   

Capital expenditures:

   

   

   

   

   

   

   

   

   

   

   

      

   

   

   

Radio

$

198

   

   

   

75

   

   

   

808

   

      

   

342

   

Television

   

49

   

   

   

557

   

   

   

320

   

      

   

913

   

Corporate

   

230

   

   

   

42

   

   

   

341

   

      

   

153

   

Consolidated

$

477

   

   

   

674

   

   

   

1,469

   

      

   

1,408

   

   

 

   

   

 

   

September 30,

2013

   

   

December 31,

2012

   

   

(In thousands)

   

Total Assets:

   

   

   

      

   

   

   

Radio

$

401,453

      

      

   

392,523

      

Television

   

57,756

      

      

   

58,301

      

Corporate

   

14,581

      

      

   

16,594

      

Consolidated

$

473,790

      

      

   

467,418

      

   

 

 11 

   


5. Income Taxes

We are calculating our effective income tax rate using a year-to-date income tax calculation. Our income tax expense differs from the statutory federal tax rate of 35% and related statutory state tax rates, primarily due to the reversal of our deferred tax liabilities related to the tax amortization of our FCC broadcasting licenses and the establishment of a valuation allowance on substantially all of our deferred tax assets.

We file federal, state and local income tax returns in the United States and Puerto Rico. The tax years that remain subject to assessment of additional liabilities by the United States federal, state, and local tax authorities are 2010 through 2013. The tax years that remain subject to assessment of additional liabilities by the Puerto Rico tax authority are 2009 through 2012.

Based on our evaluation, we have concluded that there are no significant uncertain tax positions requiring recognition in our consolidated financial statements as of September 30, 2013 and December 31, 2012.

6. Commitments and Contingencies

We are subject to certain legal proceedings and claims that have arisen in the ordinary course of business and have not been fully adjudicated. In our opinion, we do not have a potential liability related to any current legal proceedings and claims that would individually or in the aggregate have a material adverse effect on our financial condition or operating results. However, the results of legal proceedings cannot be predicted with certainty. Should we fail to prevail in any of these legal matters or should all of these legal matters be resolved against us in the same reporting period, the operating results of a particular reporting period could be materially adversely affected.

Litigation-Lehman and T. Rowe Price Complaints

On February 14, 2013, Lehman Brothers Holdings Inc. (“LBHI”) brought a claim against us in the Delaware Court of Chancery (the “Court”) seeking, among other things, a declaratory judgment that as a result of non-payment of dividends, a Voting Rights Triggering Event had occurred pursuant to the certificate of designations for the Series B Preferred Stock (the “Certificate of Designations”) no later than July 15, 2010. LBHI alleges that as a result, we were prohibited from incurring indebtedness but did so for the purposes of purchasing assets relating to our Houston television station and the issuance of our 12.5% Senior Secured Notes due 2017. LBHI also seeks an award of unspecified contract damages. We filed a motion to dismiss the LBHI complaint on March 11, 2013. On April 25, 2013, LBHI filed an opposition to our motion to dismiss and a motion for partial summary judgment. We filed a reply in further support of our motion to dismiss and in opposition to LBHI’s motion for partial summary judgment on May 10, 2013. A hearing on the parties’ motions was held on May 20, 2013, at which the Court requested further briefing on cross-motions for summary judgment. Additionally, on June 17, 2013, T. Rowe Price High Yield Fund, Inc., T. Rowe Price Institutional High Yield Fund, T. Rowe Price Funds SICAV-Global High Yield Bond Fund and T. Rowe Price Small-Cap Value Fund, Inc. (collectively “T. Rowe Price”) brought a claim against us making allegations substantially similar to those made by LBHI previously, except with an additional claim for breach of the implied covenant of good faith and fair dealing. On October 3, 2013, LBHI moved to amend its original complaint by adding a claim for breach of the implied covenant of good faith and fair dealing. We have moved for judgment on the pleadings as to both T. Rowe Price’s and LBHI’s good faith and fair dealing claims.  In addition, the parties submitted cross-motions for summary judgment on October 31, 2013. Answering briefs on the cross-motions are due November 15, 2013.

We deny the allegations contained in the LBHI and T. Rowe Price complaints and, to the contrary, assert that we have been and continue to be in full and complete compliance with all of our obligations under the Certificate of Designations, as fully disclosed in our public filings. Accordingly, we believe that the allegations and claims are frivolous and wholly without merit, and we intend to contest them vigorously.

7. Fair Value Measurement Disclosures

Fair Value of Financial Instruments

Cash and cash equivalents, receivables, as well as accounts payable and accrued expenses, and other current liabilities, as reflected in the consolidated financial statements, approximate fair value because of the short-term maturity of these instruments and are considered Level 1 measurements within the fair value hierarchy.

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

 

 12 

   


The fair value of the senior secured notes are estimated using market quotes from a major financial institution taking into consideration the most recent activity and are considered Level 2 measurements within the fair value hierarchy.  The fair value of the Series B cumulative exchangeable redeemable preferred stock and the promissory notes payable were based upon either: (a)  unobservable market quotes from a major financial institution taking into consideration the most recent activity or (b) discounted cash flow analyses based on the current borrowing rates for similar types of borrowing arrangements resulting in a Level 3 classification.

   

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

   

 

   

   

   

      

September 30, 2013

   

      

December 31, 2012

   

Description

Fair Value
Hierarchy

   

   

Carrying
Amount

   

   

Fair
Value

   

   

Carrying
Amount

   

   

Fair
Value

   

12.5% senior secured notes due 2017

   

Level 2

      

      

$

268.8

      

      

   

300.9

      

      

   

267.8

      

      

   

289.1

      

10 3/4% Series B cumulative exchangeable redeemable preferred stock

   

Level 3

      

      

   

92.3

      

      

   

69.3

      

      

   

92.3

      

      

   

46.2

      

Promissory note payable, included in other long-term debt

   

Level 3

      

      

   

5.6

      

      

   

4.6

      

      

   

5.8

      

      

   

4.4

      

Promissory note payable, included in other long-term debt

   

Level 3

      

      

   

2.7

      

      

   

2.6

      

      

   

5.3

      

      

   

5.2

      

Fair Value of Derivative Instruments

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

   

 

   

   

   

      

Fair value measurements at September 30, 2013

   

   

   

   

      

Liabilities

   

Description

September 30, 2013
carrying value and
balance sheet
location of derivative
instruments

   

      

Quoted prices in
active markets
for identical
instruments
(Level 1)

   

      

Significant
other
observable
inputs
(Level 2)

   

      

Significant
unobservable
inputs

(Level 3)

   

Derivative designated as a cash flow hedging instrument:

   

   

   

      

   

   

   

      

   

   

   

      

   

   

   

Interest rate swap

$

660

      

      

   

—  

   

      

   

660

      

      

   

—  

   

   

 

   

   

   

      

Fair value measurements at December 31, 2012

   

   

   

   

      

Liabilities

   

Description

December 31, 2012
carrying value  and
balance sheet
location of derivative
instruments

   

      

Quoted prices in
active markets
for identical
instruments
(Level 1)

   

      

Significant
other
observable
inputs
(Level 2)

   

      

Significant
unobservable
inputs

(Level 3)

   

Derivative designated as a cash flow hedging instrument:

   

   

   

      

   

   

   

      

   

   

   

      

   

   

   

Interest rate swap

$

816

      

      

   

—