Attached files
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
| x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2009
OR
| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 333-110122
LBI MEDIA HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
| Delaware | 05-0584918 | |
| (State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
| 1845 West Empire Avenue, Burbank, CA | 91504 | |
| (Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code: (818) 563-5722
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes x No ¨
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 ¨ No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K x
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. (Check one):
| Large accelerated filer | ¨ | Accelerated filer | ¨ | |||
| Non-accelerated filer | x (Do not check if a smaller reporting company) | Smaller reporting company | ¨ | |||
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
As of April 9, 2010, no shares of LBI Media Holdings, Inc.’s voting stock were held by non-affiliates.
As of April 9, 2010, there were 100 shares of common stock, $0.01 par value per share, of LBI Media Holdings, Inc. issued and outstanding.
Documents Incorporated by Reference: None.
Table of Contents
Table of Contents
EXPLANATORY NOTE
On March 26, 2010, our board of directors upon the identification and recommendation of management, concluded that our previously issued consolidated financial statements for (i) the fiscal years ended December 31, 2008, 2007 and 2006 included in our annual reports on Form 10-K that include those fiscal years, and (ii) the interim periods within the fiscal years ended December 31, 2009, 2008, 2007 and 2006 included in our quarterly reports on Form 10- Q that include those interim periods should no longer be relied upon because of errors in those financial statements.
Included in this Annual Report on Form 10-K is the amendment and restatement of the previously issued consolidated financial statements for the fiscal year ended December 31, 2008 and the previously issued consolidated statements of operations, consolidated statements of cash flows and consolidated statements of stockholder’s equity for the fiscal year ended December 31, 2007. We will restate the previously issued condensed consolidated statements of operations and condensed consolidated statements of cash flows for the interim periods within the fiscal year ended December 31, 2009 in our quarterly reports on Form 10-Q for the interim periods within the fiscal year ended December 31, 2010 (the “2010 10-Qs”).
The restatement relates to accounting errors in (i) the treatment of certain temporary state tax credits and (ii) the classification and valuation of certain deferred tax accounts relating to our indefinite-lived intangible assets.
In May 2006, the State of Texas enacted a bill replacing its prior franchise tax regime with one that imposes a new tax on our Texas gross margin. The new business tax is assessed at 1% of Texas sourced “taxable margin” per period year. The bill also provides for a temporary margin tax credit that can be claimed against future margin taxes due. Under the initial bill (which was later amended in May 2007), an entity was allowed to take a credit based on unexpired Texas business losses, multiplied by the appropriate margin tax rate in each year, for ten years. The credit was originally scheduled to expire in September 2016. Based on the guidance provided under Accounting Standards Codification 740 “Income Taxes” (“ASC 740”), we have concluded that a deferred tax asset for the temporary margin tax credit provided under the new tax regime should have been established as of December 31, 2006. The impact of this error on our consolidated financial statements, including our consolidated statements of cash flows, is income tax expense of $0.1 million for the year ended December 31, 2008, and income tax benefit of $4.7 million and $1.3 million for the years ended December 31, 2007 and 2006, respectively. The greater impact for the year ended December 31, 2007 reflects new legislation passed by the State of Texas in May 2007, which amended the calculation of the temporary credit and extended the carryforward period to 20 years. No valuation allowance has been established against this deferred tax asset as of December 31, 2008, 2007 and 2006, based on management’s belief that it is more-likely-than not that the full credit will be realized in accordance with ASC 740, given the extent of our exposure and projected future taxable gross margin in Texas.
We also noted errors in the classification and valuation of certain deferred tax accounts relating to our Federal Communications Commission broadcast licenses. Deferred income taxes arise from temporary differences between the tax basis of assets and liabilities and their “book” amounts recorded in the consolidated financial statements. Prior to September 30, 2007, for substantially all of our broadcast licenses, the book basis of those intangible assets exceeded their respective tax basis, and accordingly, was combined to reflect a deferred tax liability in our consolidated financial statements. However, as a result of the $91.7 million and $8.1 million impairment charges recognized during the years ended December 31, 2008 and 2007, respectively, certain of those deferred tax liabilities relating to our broadcast licenses reversed and resulted in an increase in the gross deferred tax assets relating to those intangibles. We did not separate the deferred tax assets relating to certain of these broadcast licenses from the deferred tax liabilities relating to other broadcast licenses. Included in our reported net deferred tax liabilities as of December 31, 2008 and 2007, was a total of $19.6 million and $0.7 million, respectively, in deferred tax assets relating to certain broadcast licenses which reversed from liability to asset positions during the respective years, as a result of the aforementioned impairment charges. The impact of these errors on our consolidated financial statements, including our consolidated statements of cash flows, was a reduction in income tax benefit (and an increase in income tax expense) of $18.9 million and $0.7 million for the years ended December 31, 2008 and 2007, respectively, as we recorded an offsetting increase in our valuation allowance against the deferred tax assets relating to these broadcast licenses.
See Note 1 of our accompanying consolidated financial statements for additional details relating to this restatement.
We have also determined that a material weakness exists as it relates to the financial reporting of the income tax provision. We are currently evaluating our remediation options.
1
Table of Contents
| ITEM 1. | BUSINESS |
Market data and other statistical information included in this Business section are based on industry publications, government publications and reports by market research firms or other published independent sources, including the United States Census Bureau, Arbitron and Nielsen surveys, Television Bureau Advertising (TVB) and Geoscape American Marketspace DataStream.
Overview
We are one of the largest owners and operators of Spanish-language radio and television stations in the United States based on revenues and number of stations. We own 21 radio stations (fifteen FM and six AM) and seven television stations in the greater Los Angeles (including Riverside, San Bernardino and Orange Counties), New York, Houston, Dallas-Fort Worth, Phoenix, San Diego and Salt Lake City markets, the first, second, fourth, fifth, seventh, fourteenth and thirtieth largest Hispanic markets in the United States, respectively, based on Hispanic television households. We are also affiliated with twenty-one television stations in various states serving specific market areas, including seven in Texas, four in Florida, five in California, and one each in Arizona, Nevada, New Mexico, New York and Oregon. Upon consummation of our pending television asset acquisitions, our EstrellaTV network will broadcast in 18 of the top 20 Hispanic designated markets covering approximately 75% of U.S. Hispanic television households.
Our Los Angeles cluster (including Riverside, San Bernardino and Orange Counties) consists of six Spanish-language radio stations, one AM radio station with time-brokered programming and a television station. In New York, we own a low-power television station which is currently operated under a time brokerage agreement by a third party. Our Houston cluster consists of seven Spanish-language radio stations, one radio station with time-brokered programming and a television station. Our Dallas-Fort Worth cluster consists of four Spanish-language radio stations, two radio stations with time-brokered programming and one television station. We also own three television stations that service the Salt Lake City, Phoenix and San Diego markets, respectively. In addition, we operate a television production facility, Empire Burbank Studios, in Burbank, California that we use to produce over 60 hours of television programming each week. We also own television production facilities in Houston and Dallas-Fort Worth, Texas that allow us to produce programming in those markets as well.
We seek to own and operate radio and television stations in the nation’s largest and most densely populated Hispanic markets. Our strategy is to increase revenue and cash flow in our markets by reformatting acquired stations with programming that is focused on the demographic composition of the market, providing creative advertising solutions and value-added services for our clients, utilizing our own television and radio stations to cross-promote and execute marketing campaigns to develop listenership and viewership and implementing strict cost controls.
We were incorporated in Delaware on June 23, 2003. We are a wholly owned subsidiary of Liberman Broadcasting, Inc., a Delaware corporation (successor in interest to LBI Holdings I, Inc.).
We are highly leveraged. As of December 31, 2009, we had total indebtedness of $422.2 million.
Operating Strategy
The principal components of our operating strategy are set forth below:
Develop popular stations by creating compelling programming
In order to attract the largest audience, we seek to create radio and television programming that resonates with Hispanics of different cultural and ethnic backgrounds. We believe that we are particularly adept at programming to the tastes and preferences of the Hispanics of Mexican heritage, and seek to expand our programming to appeal to the broader Hispanic audience. We have generally been able to achieve and maintain strong station ratings in our markets.
Our television programming is designed and created to compete with the novellas, or soap operas, which we believe composes the majority of the programming for our primary competitors, Univision Communications, Inc. and Telemundo Communications Group, Inc. By offering an alternative to these novellas with programming that resonates with Hispanic viewers, we are able to generate competitive ratings and attract a large television audience.
Cross-promote our radio and television stations
We utilize a portion of our commercial inventory time at both our radio and television stations to run advertisements promoting our other stations and programming, which helps us capitalize on the strong ratings and targeted audience of our stations with no incremental cash outlay. In addition, we benefit from our knowledge in operating successful music oriented radio stations by obtaining valuable insights into the trends in the Hispanic market. With this experienced knowledge, we produce musical variety television shows that feature music industry news, interviews and live performances of artists featured and created on our popular radio stations.
2
Table of Contents
Capitalize on our complementary radio and television stations to capture a greater share of advertising revenue
We create cross-selling opportunities by offering our advertisers customized marketing programs that allows them to cross-advertise on radio and television, as well as to cross-merchandise through product integration in our programming. This allows us to effectively compete for a significant portion of an advertiser’s Hispanic budget since advertisers have historically spent over 80% of their Hispanic advertising budgets on radio and television. We believe that we are able to capture a larger share of advertising revenues in our markets through our ability to cross-sell and cross-promote our radio and television stations.
Offer cost-effective advertising and value-added services to our advertisers
We believe that we differentiate ourselves from other Spanish-language broadcasters by offering advertisers the greatest value for their advertising dollar. By supporting advertisers’ media campaigns with creative promotions and offering our studio facilities to provide value-added services, such as free production of television commercials, we are able to cross-sell our broadcasting properties and attract new customers currently not advertising on radio or television.
Provide product integration that allows us to differentiate ourselves from our competition
Because we produce over 60 hours of internal programming for our television stations each week, we are able to integrate the products of our advertisers into our television shows. The ability to provide product integration to our advertisers in our television programming is a competitive advantage given the growing popularity of imbedding advertisers’ products and services in television shows and the inability of many of our competitors, who do not internally produce their own programs, to provide such services.
Form exclusive talent relationships
Many of the television shows that we produce at our studios feature actors and musical talent that we develop. Many of our television shows also feature, on a regular basis, famous actors from Latin America. Both the actors we develop and the established Latin American actors that appear in our internally produced programming are available to endorse the products or services of our advertisers, which we believe is one of our competitive advantages.
Develop a diverse local advertising base
Our sales strategy focuses on establishing direct relationships with the local advertising community. Local advertising accounted for approximately 74% of our gross advertising revenue in 2009. Other advantages of our locally focused sales strategy include the following:
| • | our cash flows have been generally less vulnerable to ratings fluctuations as a result of our strong relationships with our advertisers; and |
| • | our large and diverse client base has resulted in no single advertiser accounting for more than 3% of our gross advertising revenues in 2009. |
Utilize cost-effective television programming to drive cash flow growth
Currently we produce over 60 hours of television programming each week. Our weekday programming generally consists primarily of internally produced shows between the hours of 7:00 AM and 11:00 PM (in Los Angeles) and between the local hours of 6:00 AM and 12:00 AM (for our EstrellaTV network), which creates a compelling programming line-up for our television stations. Our in-house television production facilities provide us with an efficient cost structure to create programming, such as our musical variety shows Estudio 2 and El Show de Lagrimita y Costel, our entertainment game show A Que No Puedes, our news programs Alarma TV and Noticieros STN, our comedy show, Los Chuperamigos, our talent show Tengo Talento, Mucho Talento, our celebrity gossip show Estrellas Hoy, our dramatic series based on psychological thrillers Historias Delirantes, and our popular daily talk show Jose Luis Sin Censura.
We realize programming synergies between our radio and television assets by leveraging our market presence in Spanish radio by creating music-based variety programs such as Estudio 2. Estudio 2 was the number two Hispanic television program in its time slot in prime time in the Los Angeles market for adults in the aged 18 to 34, 18 to 49 and 25 to 54 demographics during the November 2009 sweeps. Furthermore, we supplement our internally produced programming with purchased programs, primarily Spanish-language movies, which we obtain from producers in Latin America. If we acquire additional television stations or enter into additional affiliation agreements, we will be able to further leverage our programming library across a broader base of stations, thereby potentially increasing our profitability.
3
Table of Contents
Capitalize on our valuable programming library
Our internal production of television programming allows us to assemble a valuable programming library that can be exploited at limited additional cost through forming the EstrellaTV television network, syndication and by use on our other stations, DVDs, video on demand, the internet and other formats.
In the third quarter of 2009, we began distributing our original programming through our “EstrellaTV” network to our affiliated stations. Currently, this affiliate network consists of twenty-one television stations in various states serving specific market areas, including seven in Texas, four in Florida, five in California, and one each in Arizona, Nevada, New Mexico, New York and Oregon. Collectively, these stations operate in markets that comprise over 67% of the U.S. Hispanic population. We have also recently entered into agreements to acquire selected assets of two television stations serving the Chicago, Illinois and Denver, Colorado markets. Upon consummation of the acquisition of these assets, our U.S. Hispanic population coverage will increase to approximately 75% of Hispanic television households. We expect that our percentage of gross advertising revenue from national advertising will increase as a result of our entry into these markets and into new markets through additional affiliation agreements.
Capitalize on our talent relationships
We also broadcast the programming of our nationally recognized radio personality, Don Cheto, through a network of nine syndicate stations, including four in California, and one each in Colorado, Oregon, Texas, New Mexico and Mexico. In Los Angeles, the largest Hispanic market in the U.S., our Don Cheto morning show is the number 1 ranked program from 6 a.m. to 10 a.m. among Hispanic adults 18 to 34 years old, and held this position in every Arbitron ratings book in 2009. We expect to leverage this popular radio personality and the strong ratings our morning show has generated to further increase penetration into new markets through additional radio syndication agreements.
Acquisition Strategy
Our acquisition strategy focuses on identifying and acquiring selected assets of radio and television stations in the largest, most densely populated and fastest growing U.S. Hispanic markets to build market-leading Hispanic radio and television clusters. While our previous acquisitions have been concentrated in California and Texas, we have recently acquired certain assets of a television station in New York. We also have signed agreements to acquire certain assets of television stations in Illinois and Colorado. We may also acquire assets of radio and television stations in other U.S. markets that we have yet to enter. Although these stations often do not target the local Hispanic market at the time of acquisition, we believe they can be successfully reformatted to capture this audience. In analyzing our acquisition opportunities, we consider the following criteria for a station:
| • | the size and density of the Hispanic population and general economic conditions in the market; |
| • | our ability to expand coverage in an existing cluster or develop a new cluster in a market where we believe we can acquire a meaningful share of the Hispanic audience, particularly where we can own both radio and television stations in a market as a result of such acquisition and create the opportunity to cross-promote our new, existing and/or affiliate stations; |
| • | our ability to acquire underdeveloped properties that offer the potential for significant improvement in revenues and cash flow through the application of our operating, administrative and programming expertise; and |
| • | the power and quality of the station’s broadcasting signal. |
We have built a long-term track record of acquiring and developing underperforming radio and television stations that has enabled us to achieve significant increases in our net revenue over the past decade. Since our inception in 1987, we have acquired and programmed 19 radio stations and 6 television stations. By reformatting these 25 stations with our own original Spanish language programming, implementing strict cost controls and providing creative marketing programs to our clients, we believe we have successfully developed and grown our stations in each of our markets. We believe that our record of successfully executing our acquisition strategy in new Hispanic markets will position us to continue creating top-ranked Hispanic station clusters in other Hispanic markets.
Hispanic Market Opportunity
We believe the Hispanic community represents an attractive market for future growth. In 2007 according to the U.S. Census Bureau, the U.S. Hispanic population was the largest and fastest-growing minority group in the United States. According to a survey conducted by Geoscape International, the U.S. Hispanic population grew 34% from 2000 through 2008, accounting for about one-half of all U.S. population growth during that period. By 2013, the U.S. Hispanic population is expected to reach approximately 54.4 million people, or 17% of the total U.S. population. According to the 2008 Geoscape International survey, California had the largest Hispanic population of any state in 2008, followed by Texas, the two states in which we primarily operate.
4
Table of Contents
In addition, advertisers have been directing more advertising dollars towards U.S. Hispanics. The Nielsen Company reported that $4.0 billion was invested in the Spanish language media it tracked during the first three quarters of 2009. According to a 2007 study performed by Kagan Research, “Economics of Hispanic TV and Radio in the U.S.”, Hispanic advertising growth is expected to outpace that of the general market, reaching $5.5 billion in gross advertising revenue by 2010.
Spanish-language advertising rates have been rising faster in recent years when compared to the general media, yet these rates are still lower than those for English-language media. As advertisers continue to recognize the buying power of the U.S. Hispanic population, especially in areas where the concentration of Hispanics is very high and where a growing percentage of the retail purchases are made by Hispanic customers, we expect the gap in advertising rates between Spanish-language and English-language media to narrow. As U.S. Hispanic consumer spending continues to grow relative to overall consumer spending, industry analysts expect that advertising expenditures targeted to Hispanics will increase significantly, eventually closing the gap between the current level of advertising targeted to Hispanic stations and the current level of advertising targeted to general market stations.
We believe we are well positioned to capitalize on the growing Hispanic advertising market given the concentration of the Hispanic population in certain markets in the United States and our attractive position in five of the ten largest Hispanic markets in the United States based on Hispanic television households, Los Angeles, New York, Houston, Dallas-Fort Worth and Phoenix, as well as our record of successfully executing our acquisition strategy in new Hispanic markets.
Our Markets
The following table sets forth certain demographic information about the markets in which our radio and television stations operate. The table excludes markets in which we broadcast our EstrellaTV programming through affiliate television stations.
| Market |
Total Population |
Hispanic Population |
% Hispanic Population |
% Hispanic Population of Mexican Descent |
Hispanic Population Growth (8) |
||||||||
| Los Angeles(1) |
17,786,419 | 7,901,495 | 44 | % | 82 | % | 65 | % | |||||
| New York(2) |
19,006,798 | 4,111,528 | 22 | % | 13 | % | 86 | % | |||||
| Houston(3) |
5,824,278 | 1,966,276 | 34 | % | 78 | % | 155 | % | |||||
| Dallas(4) |
6,650,206 | 1,769,285 | 27 | % | 86 | % | 237 | % | |||||
| Phoenix(5) |
4,281,899 | 1,321,712 | 31 | % | 91 | % | 283 | % | |||||
| San Diego(6) |
3,001,072 | 926,926 | 31 | % | 90 | % | 81 | % | |||||
| Salt Lake City(7) |
1,644,446 | 233,745 | 14 | % | 77 | % | 277 | % | |||||
| Total U.S. (for comparison) |
304,059,728 | 46,891,456 | 15 | % | 66 | % | 110 | % |
Source: American Community Survey Profile 2008 by the U.S. Census Bureau
| (1) | Represents the Los Angeles-Long Beach-Riverside, CA combined statistical area. |
| (2) | Represents the New York-Northern New Jersey-Long Island, NY-NJ-PA combined statistical area. |
| (3) | Represents the Houston-Baytown-Huntsville, TX combined statistical area. |
| (4) | Represents the Dallas-Fort Worth, TX combined statistical area. |
| (5) | Represents the Phoenix-Mesa-Scottsdale, AZ combined statistical area. |
| (6) | Represents the San Diego-Carlsbad-San Marcos, CA metropolitan statistical area. |
| (7) | Represents the Salt Lake City-Ogden-Clearfield, Utah metropolitan statistical areas. |
| (8) | Represents growth from 1990 to 2008. |
Our Radio and Television Stations
The following tables set forth certain information about our radio and television stations and their broadcast markets. For financial information on our radio and television segments, refer to the information in Note 10 to the Consolidated Financial Statements included in Item 15.
5
Table of Contents
Radio Stations
| Market/Station(1) |
Market Rank (2) |
Hispanic Market Rank (3) |
Frequency | Format | ||||
| Los Angeles | 2 | 1 | ||||||
| KBUE-FM/KBUA-FM/KEBN-FM(4) |
105.5/94.3/94.3 | Regional Mexican | ||||||
| KRQB-FM |
96.1 | Regional Mexican | ||||||
| KHJ-AM |
930 | Ranchera/Sports | ||||||
| KWIZ-FM |
96.7 | Regional Mexican | ||||||
| KVNR-AM(5) |
1480 | Time Brokered | ||||||
| Houston | 10 | 4 | ||||||
| KQQK-FM/KXGJ-FM(6) |
107.9/101.7 | Norteña | ||||||
| KTJM-FM/KJOJ-FM(7) |
98.5/103.3 | Regional Mexican | ||||||
| KNTE-FM/KJOJ-AM(8) |
96.9/880 | Spanish Soft Hits | ||||||
| KEYH-AM |
850 | Ranchera/Sports | ||||||
| KQUE-AM |
1230 | Time Brokered | ||||||
| Dallas-Fort Worth | 5 | 5 | ||||||
| KNOR-FM |
93.7 | Regional Mexican | ||||||
| KBOC-FM |
98.3 | Norteña | ||||||
| KTCY-FM |
101.7 | Spanish Pop | ||||||
| KZZA-FM |
106.7 | Spanish Soft Hits | ||||||
| KZMP-AM(5) |
1540 | Time Brokered | ||||||
| KZMP-FM(5) |
104.9 | Time Brokered | ||||||
| (1) | Our radio stations are in some instances licensed to communities other than the named principal community for the market. |
| (2) | Represents rank among U.S. designated market areas by television households. Designated market areas are geographic markets as defined by A.C. Nielsen Company based on historical television viewing patterns and are updated annually. |
| (3) | Represents rank among U.S. Hispanic markets by Hispanic television households. A ranking of 1, for example, means that Los Angeles has the most Hispanic television households in the United States. |
| (4) | KBUA-FM and KEBN-FM simulcast the signal of KBUE-FM in the San Fernando Valley and Orange County, respectively. We have upgraded the signals of KBUA-FM and KEBN-FM from 3kW to 6kW, thereby improving our coverage of the Los Angeles market and enabling us to use the stations for purposes other than to simulcast with KBUE-FM, if we so choose. |
| (5) | Four of our stations, KVNR-AM, KQUE-AM, KZMP-AM and KZMP-FM, are operated by third parties under time brokerage agreements. We receive a monthly fee from the third parties for the air time and the third parties receive revenues from their sale of advertising spots. |
| (6) | KXGJ-FM simulcasts the signal of KQQK-FM. |
| (7) | KJOJ-FM simulcasts the signal of KTJM-FM. |
| (8) | KNTE-FM is simulcast with KJOJ-AM. |
Television Stations (1)
| Station |
Channel | Market |
DMA Rank(2) |
Hispanic Market Rank (3) |
Number of Hispanic TV Households | |||||
| KRCA |
62 | Los Angeles | 2 | 1 | 1,868,200 | |||||
| WASA(4) |
25 | New York | 1 | 2 | 1,251,460 | |||||
| KZJL |
61 | Houston | 10 | 4 | 561,390 | |||||
| KMPX |
29 | Dallas-Fort Worth | 5 | 5 | 506,020 | |||||
| KVPA |
42 | Phoenix | 12 | 7 | 391,770 | |||||
| KSDX |
29 | San Diego | 28 | 14 | 239,520 | |||||
| KPNZ |
24 | Salt Lake City | 31 | 30 | 89,410 |
Source: Nielsen Media Research-NSI, January, 2010
| (1) | Excludes affiliate television stations which broadcast our EstrellaTV network programming. |
6
Table of Contents
| (2) | Represents rank among U.S. designated market areas by television households. Designated market areas are geographic markets as defined by A.C. Nielsen Company based on historical television viewing patterns and are updated annually. |
| (3) | Represents rank among U.S. Hispanic markets by number of persons in Hispanic TV households. A ranking of 1, for example, means that Los Angeles has the most Hispanic television households in the United States. |
| (4) | We acquired the selected assets of WASA-LP in January 2010. WASA is currently operated by a third party under a time brokerage agreement. We receive a monthly fee from the third party for the air time and the third party receives revenues from their sale of advertising spots. |
Programming
Radio. Our Spanish-language radio stations are targeted to the Spanish-speaking portion of the Hispanic population that is dominant in the local markets in which we operate. We tailor the format of each of our radio stations to appeal to a specific target demographic in order to maximize our overall listener base without causing direct format competition among our stations. We determine the optimal format for each of our stations based upon local market research. To create brand awareness and loyalty in the local community, we seek to enhance our market positions by sending on-air talent to participate in local promotional activities, such as concerts and live special events or promotions at client locations and other street level activities. These types of events also provide attractive promotional and advertising opportunities for our clients. We also promote our radio stations during our television programming airing in these markets.
The following provides a brief description of our Spanish-language radio station formats:
| • | KBUE-FM/KBUA-FM/KEBN-FM (Que Buena) plays contemporary, up-tempo, regional Mexican music that includes Norteña, Banda, Corrido and Ranchera music. The target audience for these stations is adult listeners aged 18 to 34. The station features morning programming with our nationally recognized radio personality, Don Cheto. |
| • | KHJ-AM (La Ranchera) plays traditional Ranchera, also known as Mariachi music, and is the official station of the Los Angeles Dodgers Major League Baseball team. The target audience for this station is adult listeners aged 25 to 54. |
| • | KWIZ-FM (La Rockola) plays regional Mexican music that includes Banda, Ranchera and Norteña music. The target audience for this station is adult listeners aged 18 to 49. |
| • | KRQB-FM (Que Buena) plays contemporary, up-tempo, regional Mexican music that includes Norteña, Banda, Corrido and Ranchera music. The target audience for this station is adult listeners 18 to 34. The station features morning programming with our nationally recognized radio personality, Don Cheto. |
| • | KTJM-FM/KJOJ-FM (La Raza) plays contemporary, up-tempo, regional Mexican music, similar to the music played on Que Buena, which includes Norteña, Banda, Corrido and Ranchera music. The target audience for these stations is adult listeners aged 18 to 34 and the station adjusts its music to the preferences of Hispanics in the Houston market. |
| • | KQQK-FM/KXGJ-FM (El Norte) plays Norteña music from the northern portion of Mexico. The target audience for these stations is adult listeners aged 18 to 49. The station features morning programming with our nationally recognized radio personality, Don Cheto. |
| • | KEYH-AM (La Ranchera) plays traditional Ranchera music, which is also known as Mariachi, and carries various soccer tournaments, the Houston Rockets National Basketball Association team and the Houston Dynamos Major League Soccer team. The target audience for this station is adult listeners aged 25 to 54. |
| • | KNTE-FM/KJOJ-AM (La Bonita) plays the most popular Spanish hit music of the 70’s, 80’s and 90’s. The target audience for these stations is adult listeners aged 25 to 54. |
| • | KNOR-FM (La Raza) plays contemporary, up-tempo, regional Mexican music, similar to the music played on Que Buena and La Raza in Houston, which includes Norteña, Banda, Corrido and Ranchera music. The station adjusts its music to the preferences of Hispanics in the Dallas market. The target audience for this station is adult listeners 18 to 34. The station features morning programming with our nationally recognized radio personality, Don Cheto. |
| • | KTCY-FM (XO) plays adult contemporary, Spanish pop music. The target audience for this station is adult listeners 18 to 49. |
| • | KZZA-FM (La Bonita) plays hit music of the 70’s, 80’s and 90’s. The target audience for this station is adult listeners 25 to 54. |
| • | KBOC-FM (La Zeta) plays top 40 regional Mexican music. The target audience for this station is adult listeners 18 to 49. |
7
Table of Contents
Four of our radio stations, KVNR-AM, KZMP-AM and KZMP-FM, are currently operated by third parties under time brokerage agreements. Currently, KVNR-AM, which operates in the greater Los Angeles market, broadcasts Vietnamese-language programming. KZMP-AM in Dallas broadcasts talk sports programming and KZMP-FM in Dallas-Fort Worth broadcasts South Asian and Hindi-language programming.
In April 2009, we began broadcasting the morning show of our nationally recognized radio personality, Don Cheto, through a network of nine syndicate stations, including four in California, and one each in Colorado, Texas, Oregon, New Mexico and Mexico. We have already begun generating advertising revenue through these agreements (in addition to the monthly fees we collect) and expect to further increase penetration into new markets through additional radio syndication agreements.
Television. Our programming content consists primarily of internally produced programs such as comedy programs, news, procedural dramas, musical variety shows, a talent show, a celebrity gossip show and a talk show, as well as purchased programs including Spanish-language movies. We own or have the rights to a library of more than 5,000 hours of Spanish-language movies, children’s shows and other programming content available for broadcast on our television stations. Currently we produce over 60 hours of television programming each week.
In the third quarter of 2009, we began distributing our original EstrellaTV programming through a network of affiliated stations, which allows us to broadcast on their digital multicast channels. Currently, this affiliate network consists of twenty-one television stations in various states serving specific market areas, including seven in Texas, four in Florida, five in California, and one each in Arizona, Nevada, New Mexico, New York and Oregon.
We seek to maximize our television group’s profitability by broadcasting internally produced Spanish-language programming to stations we own and to our affiliated stations, marketing commercial time to advertisers and selling infomercial advertising.
Production Facilities
We own Empire Burbank Studios, a fully equipped television production complex next to our corporate offices in Burbank, California. We also own studios and production facilities in Houston and Dallas, enabling us to produce local programming in those markets. The studios generally provide us with all of the physical facilities needed to produce our own Spanish-language television programming. We currently rent facility space and equipment to produce one of our newer shows, Tengo Talento Mucho Talento. However, in February 2010, we entered into an agreement to purchase a 25,000 square foot warehouse, within close proximity to our corporate offices and existing studio facility in Burbank, California, which we intend to convert into a television production facility. Upon consummation of this purchase and subsequent build-out, this facility will allow us to produce Tengo Talento Mucho Talento (and other shows that we may begin production on) without having to incur this variable rental expense. Overall, we believe this strategy has enabled us to produce our programming at a low cost relative to our competitors. By owning our production facilities, we are able to control the content of the programs we produce and air. We currently produce the following Spanish-language programs at our Burbank facilities:
| • | Noticias 62 En Vivo: three local newscasts airing on KRCA-TV, Channel 62, in Los Angeles; |
| • | Los Angeles En Vivo: a half-hour live mid-day show featuring two hosts and a team of reporters covering current topics and events, including on-air contests and live product integration from sponsors; |
| • | Alarma TV: a fast-paced news program featuring lifestyle stories taken from around the world; |
| • | El Show de Lagrimita y Costel: a musical variety and comedy show hosted by famous father and son comedy/clown team; |
| • | Jose Luis Sin Censura: a fast-paced talk show hosted by well-known Spanish television personality Jose Luis Gonzales; |
| • | Estudio 2: a musical variety show that features live performances by hit musical artists, a talent search and the performances of famous comedians; |
| • | Noticiero STN: a half-hour national newscast hosted by Emmy Award winner, Jesus Javier, which includes daily stories from STN reporters stationed in various locations throughout Mexico and Central and South America; |
| • | A Que No Puedes: an hour-long entertainment game show featuring famous personalities competing for charities by performing challenging physical activities presented by famous actors and who are judged by some of the top celebrities in Latin America; |
| • | Estrellas Hoy: an entertainment newscast that keeps viewers up-to-date with today’s hottest stars from telenovela headliners to movie magnets and musicians; |
8
Table of Contents
| • | Tengo Talento Mucho Talento: a reality talent show that features singers, dancers, magicians, comedians and other performers of all ages, competing for a large cash prize and the launch of a career in the entertainment industry. The judges are top celebrities within the Hispanic entertainment industry; and |
| • | Historias Delirantes: a dramatic series based on psychological thrillers. |
Throughout the year, we also program musical specials based on some of our bigger premier events from different markets. Premios de la Radio is a live, televised special of our musical awards show, which was held at the Nokia Theater in Los Angeles last November. The awards show features some of the top artists in the Hispanic music industry performing and presenting awards. Our popular special features programs, the Cinco de Mayo and Fiestas Patrias concerts, are produced and recorded in each of our radio markets. These are daytime music festivals that have drawn crowds in excess of 60,000 and usually feature eight to ten bands.
Sales and Advertising
The majority of our net revenues are generated from the sale of local, regional and national advertising for broadcast on our radio and television stations. For the year ended December 31, 2009, approximately 74% of our gross advertising revenues were generated from the sale of local advertising and approximately 26% of our gross advertising revenues were generated from the sale of regional and national advertising (including network sales). Local sales are made by our sales staffs located in Los Angeles, Riverside/San Bernardino and Santa Ana, California, Houston and Dallas, Texas and Salt Lake City, Utah. Our national sales are made by our sales staffs in Los Angeles, California, Atlanta, Georgia, Chicago, Illinois, Miami, Florida, New York, New York and Dallas, Texas. Through December 31, 2009, we had entered into a total of seventeen affiliation agreements with television stations in Texas, Florida, California, Arizona, Nevada, New Mexico, New York and Oregon. In the first quarter of 2010, we entered into four additional affiliation agreements, of which three are in California and one in Texas, and plan on entering into other affiliation agreements in the future. We expect that the majority of advertising revenues we will generate from the affiliate stations will be from national advertisers. As such, we expect that our percentage of advertising revenue from national advertisers will continue to increase.
We believe that advertisers can reach the Hispanic community more cost effectively through radio and television broadcasting than through outdoor advertising and printed advertisements. Advertising rates charged by radio and television stations are based primarily on:
| • | A station’s audience share within the demographic groups targeted by the advertisers; |
| • | The number of radio and television stations in the market competing for the same demographic groups; and |
| • | The supply and demand for radio and television advertising time. |
A radio or television station’s listenership or viewership is reflected in ratings surveys that estimate the number of listeners or viewers tuned to the station. Each station’s ratings are used by its advertisers to consider advertising with the radio or television station and are used by us to, among other things, chart audience growth, set advertising rates and adjust programming.
Competition
Radio and television broadcasting are highly competitive businesses. The financial success of each of our radio and television stations depends in large part on our ability to increase our market share of the available advertising revenue, the economic health of the market and our audience ratings. In addition, our advertising revenue depends upon the desire of advertisers to reach our audience demographic.
Our Spanish-language radio stations compete against other Spanish-language radio stations in their markets for audiences and advertising revenue. In Los Angeles (including Riverside and San Bernardino Counties), our radio stations compete primarily against Univision Radio, Spanish Broadcasting System, Inc. and Entravision Communications Corporation, three of the largest Hispanic group radio station operators in the United States. In both our Houston and Dallas-Fort Worth markets, our radio stations compete primarily against Univision Radio.
Our television stations primarily compete against Univision Communications, Inc. and Telemundo Communications Group, Inc. for audiences and advertising revenue in our Los Angeles, San Diego, Salt Lake City, Houston, Dallas-Fort Worth, Phoenix and New York markets.
9
Table of Contents
Employees
As of December 31, 2009, we had approximately 827 employees, of which approximately 455 were full-time employees. Of the full-time employees, approximately 254 were in television, approximately 175 were in radio and approximately 26 were corporate employees. None of our employees are represented by labor unions, and we have not entered into any collective bargaining agreements. We believe that we maintain good relations with our employees.
REGULATION OF TELEVISION AND RADIO BROADCASTING
General
The Federal Communications Commission (“FCC”) regulates television and radio broadcast stations pursuant to the Communications Act of 1934, as amended (“Communications Act” or “Communications Act of 1934”). Among other things, the FCC:
| • | determines the particular frequencies, locations and operating power of stations; |
| • | issues, renews, revokes and modifies station licenses; |
| • | regulates equipment used by stations; and |
| • | adopts and implements regulations and policies that directly or indirectly affect the ownership, changes in ownership, control, operation and employment practices of stations. |
A licensee’s failure to observe the requirements of the Communications Act or FCC rules and policies may result in the imposition of various sanctions, including admonishment, fines, the grant of renewal terms of less than eight years, the grant of a license with conditions or, in the case of particularly egregious violations, the denial of a license renewal application, the revocation of an FCC license or the denial of FCC consent to acquire additional broadcast properties.
Congress and the FCC have had under consideration or reconsideration, and may in the future consider and adopt, new laws, regulations and policies regarding a wide variety of matters that could, directly or indirectly, affect the operation, ownership and profitability of our television and radio stations, result in the loss of audience share and advertising revenue for our television and radio broadcast stations or affect our ability to acquire additional television and radio broadcast stations or finance such acquisitions. These matters may include:
| • | changes to the license authorization and renewal process; |
| • | proposals to impose spectrum use or other fees on FCC licensees; |
| • | changes to the FCC’s equal employment opportunity regulations and other matters relating to involvement of minorities and women in the broadcasting industry; |
| • | proposals to change rules relating to political broadcasting including proposals to grant free air time to candidates; |
| • | changes regarding enforcement of the FCC’s rules on broadcasting indecent or obscene material, including increases in fines and changes in procedures for revocation of licenses; |
| • | proposals to require broadcasters to air certain types and quantities of “local” programming; |
| • | proposals to ban the broadcast of “violent” material; |
| • | new, expanded obligations regarding children’s television programming on digital television channels; |
| • | proposals to adopt new public interest obligations on television broadcasters during and after the transition to digital television; |
| • | proposals to restrict or prohibit the advertising of beer, wine and other alcoholic beverages; |
| • | changes in broadcast multiple ownership, foreign ownership, cross-ownership and ownership attribution policies; |
| • | proposals to alter provisions of the tax laws affecting broadcast operations and acquisitions; |
| • | proposals to reallocate spectrum associated with TV channels 5 and 6 for FM radio broadcasting. |
| • | proposals to reallocate spectrum associated with TV operations for wireless broadband applications. |
10
Table of Contents
We cannot predict what changes, if any, might be adopted, nor can we predict what other matters might be considered in the future, nor can we judge in advance what impact, if any, the implementation of any particular proposal or change might have on our business.
FCC Licenses
Television and radio stations operate pursuant to licenses that are granted by the FCC for a term of eight years, subject to renewal upon application to the FCC. During the periods when renewal applications are pending, petitions to deny license renewal applications may be filed by interested parties, including members of the public. The FCC may hold hearings on renewal applications if it is unable to determine that renewal of a license would serve the public interest, convenience and necessity, or if a petition to deny raises a “substantial and material question of fact” as to whether the grant of the renewal applications would be consistent with the public interest, convenience and necessity. However, the FCC is prohibited from considering competing applications for a renewal applicant’s frequency, and is required to grant the renewal application if it finds:
| • | that the station has served the public interest, convenience and necessity; |
| • | that there have been no serious violations by the licensee of the Communications Act or the rules and regulations of the FCC; and |
| • | that there have been no other violations by the licensee of the Communications Act or the rules and regulations of the FCC that, when taken together, would constitute a pattern of abuse. |
If as a result of an evidentiary hearing, the FCC determines that the licensee has failed to meet the requirements for renewal and that no mitigating factors justify the imposition of a lesser sanction, the FCC may deny a license renewal application. Historically, FCC licenses have generally been renewed. We have no reason to believe that our licenses will not be renewed in the ordinary course, although there can be no assurance to that effect. The non-renewal of one or more of our stations’ licenses could have a material adverse effect on our business.
The FCC licenses some television stations as low power television stations. Low power television stations generally operate at lower power and cover a smaller geographic area than full-service television stations, are not entitled to carriage by cable television and direct broadcast satellite operators and must accept interference from, and eliminate interference to, full-service television stations. Our stations in Phoenix (KVPA), San Diego (KSDX) and New York (WASA) are low power television stations.
Transfer and Assignment of Licenses
The Communications Act requires prior consent of the FCC for the assignment of a broadcast license or the transfer of control of a corporation or other entity holding a license. In determining whether to approve an assignment of a television or radio broadcast license or a transfer of control of a broadcast licensee, the FCC considers a number of factors pertaining to the licensee including compliance with various rules limiting common ownership of media properties, the “character” of the licensee and those persons holding “attributable” interests therein, the Communications Act’s limitations on foreign ownership and compliance with the FCC rules and regulations.
To obtain the FCC’s prior consent to assign or transfer a broadcast license, appropriate applications must be filed with the FCC. If the application to assign or transfer the license involves a substantial change in ownership or control of the licensee, for example, the transfer or acquisition of more than 50% of the voting equity, the application must be placed on public notice for a period of 30 days during which petitions to deny the application may be filed by interested parties, including members of the public. If an assignment application does not involve new parties, or if a transfer of control application does not involve a “substantial” change in ownership or control, it is a pro forma application, which is not subject to the public notice and 30-day petition to deny procedure. The regular and pro forma applications are nevertheless subject to informal objections that may be filed any time until the FCC acts on the application. If the FCC grants an assignment or transfer application, interested parties have 30 days from public notice of the grant to seek reconsideration of that grant. The FCC has an additional ten days to set aside such grant on its own motion. When ruling on an assignment or transfer application, the FCC is prohibited from considering whether the public interest might be served by an assignment or transfer to any party other than the assignee or transferee specified in the application. We have filed an assignment application in connection with the acquisition of a low power television station serving the Chicago, Illinois television market. As of March 31, 2010, the assignment application remains pending with the FCC.
11
Table of Contents
Foreign Ownership Rules
Under the Communications Act, a broadcast license may not be granted to or held by persons who are not U.S. citizens, by any corporation that has more than 20% of its capital stock owned or voted by non-U.S. citizens or entities or their representatives, by foreign governments or their representatives or by non-U.S. corporations. Furthermore, the Communications Act provides that no FCC broadcast license may be granted to or held by any corporation directly or indirectly controlled by any other corporation of which more than 25% of its capital stock is owned of record or voted by non-U.S. citizens or entities or their representatives, foreign governments or their representatives or by non-U.S. corporations, if the FCC finds the public interest will be served by the refusal or revocation of such license. These restrictions apply similarly to partnerships, limited liability companies and other business organizations. Thus, the licenses for our stations could be revoked if more than 25% of our outstanding capital stock is issued to or for the benefit of non-U.S. citizens in excess of these limitations.
Multiple Ownership and Cross-Ownership Rules
The FCC generally applies its other broadcast ownership limits, as described below, to “attributable” interests held by an individual, corporation or other association or entity. In the case of a corporation holding broadcast licenses, the interests of officers, directors and those who, directly or indirectly, have the right to vote 5% or more of the stock of a licensee corporation are generally deemed attributable interests, as are positions as an officer or director of a corporate parent of a broadcast licensee.
Stock interests held by insurance companies, mutual funds, bank trust departments and certain other passive investors that hold stock for investment purposes only become attributable with the ownership of 20% or more of the voting stock of the corporation holding broadcast licenses.
A time brokerage agreement with another television or radio station in the same market creates an attributable interest in the brokered television or radio station as well for purposes of the FCC’s local television or radio station ownership rules, if the agreement affects more than 15% of the brokered television or radio station’s weekly broadcast hours.
Debt instruments, non-voting stock, options and warrants for voting stock that have not yet been exercised, insulated limited partnership interests where the limited partner is not “materially involved” in the media-related activities of the partnership and minority voting stock interests in corporations where there is a single holder of more than 50% of the outstanding voting stock whose vote is sufficient to affirmatively direct the affairs of the corporation generally do not subject their holders to attribution.
However, the FCC now applies a rule, known as the equity-debt-plus rule, that causes certain creditors or investors to be attributable owners of a station, regardless of whether there is a single majority shareholder or other applicable exception to the FCC’s attribution rules. Under this rule, a major programming supplier (any programming supplier that provides more than 15% of the station’s weekly programming hours) or a same-market media entity will be an attributable owner of a station if the supplier or same-market media entity holds debt or equity, or both, in the station that is greater than 33% of the value of the station’s total debt plus equity. For purposes of the equity-debt-plus rule, equity includes all stock, whether voting or nonvoting, and, equity held by insulated limited partners in limited partnerships. Debt includes all liabilities, whether long-term or short-term. If a party were to purchase stock which, in combination with other of our debt or equity interests, amounts to more than 33% of the value of one or more of our station’s total debt plus equity and such party were a major programming supplier or held an attributable interest in a same-market media entity, such interest could result in a violation of one of the ownership rules. As a result of such violation, we may be unable to obtain from the FCC one or more authorizations needed to conduct our broadcast business and may be unable to obtain FCC consents for certain future acquisitions unless either we or the investor were to remedy the violation.
The FCC’s ownership rules affect the number, type, and location of broadcast and newspaper properties that we might acquire in the future. The ownership rules now in effect limit the aggregate audience reach of television stations that may be under common ownership, operation and control, or in which a single person or entity may hold office or have more than a specified interest or percentage of voting power, to 39% of the total national audience. FCC rules also place certain limits on common ownership, operation, and control of, or cognizable or “attributable” interests or voting power in:
| • | television stations serving the same area (the so-called television “duopoly” rule); |
| • | radio stations serving the same area; |
| • | television stations and radio stations serving the same area (the radio/television cross ownership rule); and |
| • | television and/or radio stations and daily newspapers serving the same area (the newspaper/broadcast cross-ownership ban). |
12
Table of Contents
In 2003, the FCC relaxed many of its ownership restrictions. In 2004, the United States Court of Appeals for the Third Circuit rejected many of the Commission’s 2003 rule changes. The court remanded the rules to the Commission for further proceedings and extended a stay on the implementation of the new rules that the court had imposed in 2003. In 2007 the FCC adopted a Report and Order that left most of the Commission’s pre-2003 ownership restrictions in place, but made modifications to the newspaper/broadcast cross-ownership restriction. That Order is now the subject of federal court appeals by parties urging more restrictive ownership rules, as well as by parties arguing that the FCC did not go far enough in deregulating. The Third Circuit has stayed implementation of the 2007 changes to the newspaper/broadcast cross-ownership ban and, accordingly, the pre-existing version of the rule remains in place. In 2010, the FCC again will be required to undertake a comprehensive review of its broadcast ownership rules pursuant to its statutory quadrennial review obligation to determine whether the rules remain necessary in the public interest.
Local Television Ownership Rule
The FCC’s 2007 action left in place the Commission’s current local television ownership rules. Under those rules, one entity may own two commercial television stations in a Designated Market Area (“DMA”) as long as no more than one of those stations is ranked among the top four stations in the DMA and eight independently owned, full-power stations will remain in the DMA.
Local Radio Ownership
The Communications Act and the FCC’s rules impose specific limits on the number of commercial radio stations an entity can own in a single market. The FCC’s 2007 action left in place the Commission’s current local radio ownership rules. Under those rules:
| • | in a radio market with 45 or more commercial radio stations, a party may own, operate or control up to eight commercial radio stations, not more than five of which are in the same service (AM or FM). |
| • | in a radio market with between 30 and 44 (inclusive) commercial radio stations, a party may own, operate or control up to seven commercial radio stations, not more than four of which are in the same service (AM or FM). |
| • | in a radio market with between 15 and 29 (inclusive) commercial radio stations, a party may own, operate or control up to six commercial radio stations, not more than four of which are in the same service (AM or FM). |
| • | in a radio market with 14 or fewer commercial radio stations, a party may own, operate or control up to five commercial radio stations, not more than three of which are in the same service (AM or FM), except that a party may not own, operate, or control more than 50% of the radio stations in such market. |
In contrast to the other local media ownership rules, the FCC did not attempt to significantly relax its radio rules in 2003. The agency decided to retain these numerical caps, which were set by Congress in the Telecommunications Act of 1996 (“1996 Act”). The FCC did adjust certain aspects of the radio rules, however, by adopting a new definition of a “radio market,” deciding to take noncommercial radio stations into account in its determination of market size and limiting the transferability of existing radio clusters that would not comply with the new regulations. The rule that changes the way in which a radio “market” is defined is now in effect. This rule defines local radio markets using a geographic market approach assigned by Arbitron rather than a signal contour method. Because of the change in market definition, our Houston radio cluster does not comply with the new rules, but the “grandfathering” provisions of the FCC’s new rules permit us to retain it. Consequently, we may not be able to sell our entire Houston radio cluster to a single party in the future. In addition, the radio market definition under the new rules could limit the number of additional radio stations that we can acquire in the Houston market.
Cross-Ownership Restrictions
The newspaper/broadcast cross-ownership rule generally prohibits one entity from owning both a commercial broadcast station and a daily newspaper in the same community as it is not viewed by the FCC to be in the public interest. The radio/television cross-ownership rule allows a party to own one or two TV stations and a varying number of radio stations within a single market. The FCC’s 2007 decision leaves the newspaper/broadcast and radio/television cross-ownership prohibitions in place, but provides that the Commission will evaluate newly proposed newspaper/broadcast combinations under a non-exhaustive list of four public interest factors. The Commission will apply a presumption that the combination is in the public interest if it is located in a top 20 DMA and involves the combination of a newspaper and only one television station or radio station. If the combination involves a television station, the presumption will only apply where the station is not among the top 4 in the DMA and at least eight independently owned and operated newspapers and/or full-power commercial television stations remain in the DMA. All other combinations will be presumed not in the public interest. That negative presumption can be reversed if the combination will result in a new local news source that provides at least seven hours of local news programming or if the property being acquired has failed or is failing.
13
Table of Contents
National TV Ownership Limit
The maximum percentage of U.S. households that a single owner can reach through commonly owned television stations is 39 percent and is not affected by the FCC’s 2007 decision.
The FCC’s latest actions concerning media ownership have been challenged in court, and we cannot predict the outcome of this litigation or of threatened Congressional intervention that would void the FCC’s new ownership rules. Our ability to acquire additional television and radio stations, our acquisition strategy and our business may be significantly affected by changes to the multiple ownership and cross-ownership rules, ongoing FCC or Congressional review or amendment to the rules, as well as litigation challenging and possible court action upon the rules.
Because of these multiple and cross-ownership rules, if a shareholder, officer or director of Liberman Broadcasting, Inc. or one of its subsidiaries holds an “attributable” interest in one or more of our stations, that shareholder, officer or director may violate the FCC’s rules if that person or entity also holds or acquires an attributable interest in other television or radio stations or daily newspapers, depending on their number and location. If an attributable shareholder, officer or director of Liberman Broadcasting, Inc. or one of its subsidiaries violates any of these ownership rules, we may be unable to obtain from the FCC one or more authorizations needed to conduct our broadcast business, and may be unable to obtain FCC consents for certain future acquisitions.
Programming and Operation
The Communications Act requires broadcasters to serve the “public interest.” Since 1981, the FCC has gradually relaxed or eliminated many of the more formalized procedures it developed to promote the broadcast of certain types of programming responsive to the needs of a broadcast station’s community of license. Nevertheless, a broadcast licensee continues to be required to present programming in response to community problems, needs and interests and to maintain certain records demonstrating its responsiveness. The FCC will consider complaints from the public about a broadcast station’s programming when it evaluates the licensee’s renewal application, but complaints also may be filed and considered at any time. Stations also must follow various FCC rules that regulate, among other things, political broadcasting, children’s programming, the broadcast of obscene or indecent programming, sponsorship identification, the broadcast of contests and lotteries, certain types of advertising such as for out-of-state lotteries and gambling casinos, and technical operation.
The FCC requires that licensees must not discriminate in hiring practices. In light of a 2001 court ruling that vacated FCC requirements that licensees follow certain specific practices with respect to minority hiring, the FCC has adopted employment-related rules that require licensees to engage in certain recruiting and “outreach” efforts, among other things, and to make several new filings to the FCC. In late 2004, the FCC began monitoring broadcasters’ compliance with equal employment requirements through random audits and targeted investigations.
The FCC rules also prohibit a broadcast licensee from simulcasting more than 25% of its programming on another radio station in the same broadcast service (that is, AM/AM or FM/FM). The simulcasting restriction applies if the licensee owns both radio broadcast stations or owns one and programs the other through a local marketing agreement, provided that the contours of the radio stations overlap in a certain manner.
Cable and Satellite Transmission of Local Television Signals
Under FCC regulations, cable systems must devote a specified portion of their channel capacity to the carriage of the signals of local television stations. Television stations may elect between “must-carry rights” or a right to restrict or prevent cable systems from carrying the station’s signal without the station’s permission (retransmission consent). Stations must make this election once every three years, and did so most recently on October 1, 2008. All broadcast stations that made carriage decisions on October 1, 2008 will be bound by their decisions throughout the 2009-2011 cycle and will not be allowed to change their carriage decisions at the end of the digital television transition. The FCC has established a market-specific requirement for mandatory carriage of local television stations by direct broadcast satellite, or DBS, operators, similar to that applicable to cable systems, for those markets in which a DBS carrier provides any local signal. In addition, the FCC has adopted rules relating to station eligibility for DBS carriage and subscriber eligibility for receiving signals. There are also specific statutory requirements relating to satellite distribution of distant network signals to “unserved households” (that is, households that do not receive at least a Grade B analog signal from a local network affiliate).
We have elected “must carry” status for our Los Angeles, Houston, Dallas-Fort Worth and Salt Lake City stations on cable systems in those designated market areas. These elections will entitle our stations to carriage on those systems until December 31, 2011. We may also enter into retransmission consent agreements for carriage of our stations on certain cable systems.
14
Table of Contents
We have also secured DBS carriage for full-service television stations in the Los Angeles, Houston, Dallas-Fort Worth and Salt Lake City markets through 2011.
In November 2007, the Commission decided that after the digital television transition, cable operators will have two options to ensure that all analog cable subscribers will continue to be able to receive the signals of stations electing must-carry status. Cable operators can choose to either broadcast the signal in digital format for digital customers and “down-convert” the signal to analog format for analog customers, or the cable operator may deliver the signal in digital format to all subscribers as long as the cable operator has ensured that all subscribers with analog service have set-top boxes that will convert the digital signal to analog format.
Time Brokerage Agreements
We have, from time to time, entered into time brokerage agreements giving third parties the right to broker time on our stations. We may also enter into agreements to broker time on stations owned by third parties. Historically, we have only purchased time on stations owned by third parties prior to purchasing selected assets of that station. By using time brokerage agreements, we can provide programming and other services to a station we expect to acquire before we receive all applicable FCC and other governmental approvals. We may also enter into agreements to broker time on stations owned by third parties outside of the acquisition context.
FCC rules and policies generally permit time brokerage agreements if the station licensee retains ultimate responsibility for and control of the applicable station. As a part of that requirement, the licensee of a time-brokered station is required to maintain certain personnel at the time-brokered station. We may not be able to air all of our scheduled programming on a station with which we have time brokerage agreements and we may not receive the anticipated revenue from the sale of advertising for that programming. Likewise, we may not receive the payments from the time brokers to whom we have sold time on our stations.
Stations may enter into cooperative arrangements known as joint sales agreements. Under the typical joint sales agreement, a station licensee obtains, for a fee, the right to sell substantially all of the commercial advertising on a separately owned and licensed station in the same market. It also involves the provision by the selling party of certain sales, accounting and services to the station whose advertising is being sold. Unlike a time brokerage agreement, the typical joint sales agreement does not involve programming. The Third Circuit, however, upheld the FCC’s 2003 decision to make radio joint sales agreements attributable for multiple ownership purposes, and the new rule took effect in September 2004. The FCC has also initiated a rulemaking proceeding to consider whether television joint sales agreements should be attributable for purposes of its media ownership rules.
As part of its increased scrutiny of television and radio station acquisitions, the Department of Justice has stated publicly that it believes that time brokerage agreements and joint sales agreements could violate the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, if such agreements take effect prior to the expiration of the waiting period under that act. Furthermore, the Department of Justice has noted that joint sales agreements may raise antitrust concerns under Section 1 of the Sherman Antitrust Act and has challenged them in certain locations. The Department of Justice also has stated publicly that it has established certain revenue and audience share concentration benchmarks with respect to television and radio station acquisitions, above which a transaction may receive additional antitrust scrutiny.
Digital Television Services
The FCC has adopted rules for implementing digital television service in the U.S. Implementation of digital television improves the technical quality of television signals and provides broadcasters the flexibility to offer new services, including, but not limited to, high-definition television and data broadcasting. Each of our full-service television stations has completed the transition to digital broadcasting.
Broadcasters may either provide a single DTV signal or “multicast” several lower resolution DTV program streams. Broadcasters also may use some of their digital spectrum to provide non-broadcast “ancillary” services (i.e., subscription video, data transfer or audio signals), provided broadcasters pay the government a fee of five percent of gross revenues received from such services. The potential also exists for new sources of revenue to be derived from digital television. We cannot predict the overall effect the transition to digital television might have on our business.
Under the FCC’s rules relating to must-carry rights of digital broadcasters, which apply to cable and certain DBS systems: (1) broadcasters are not entitled to carriage of both their analog and their digital streams during the transition; (2) digital-only stations are entitled to must-carry rights; and (3) a digital-only station asserting must-carry rights is entitled to carriage of only a single programming stream and other “program related” content, even if the digital-only station multicasts. In November 2007, the FCC decided that after the transition, cable operators must ensure that all analog cable subscribers will continue to be able to receive the
15
Table of Contents
signals of stations electing must-carry status. Cable operators can choose either to deliver the signal in digital format for digital customers and “down convert” the signal to analog format for analog customers, or to deliver the signal in digital format to all subscribers but ensure that all subscribers with analog sets have set-top boxes that will convert the digital signal to analog format.
The FCC currently is considering issues such as whether a licensee’s public interest obligations attach to digital television service as a whole or to individual program streams and the expansion of political candidates’ access to television. We cannot predict the outcome of these proceedings.
Broadcast Spectrum
In December 2009, in conjunction with the development of a “National Broadband Plan,” the FCC released a Public Notice seeking comment on a broad range of information on television broadcasters’ current use of spectrum. As stated in the Public Notice, the Commission is reviewing spectrum bands, including the spectrum currently allocated to television broadcasting, “to understand if all or a portion of the spectrum within these bands could be repurposed for wireless broadband services.” We cannot predict the outcome of any FCC regulatory action in this regard, nor can we predict the effect that such a spectrum reallocation might have on our DTV operations, including the ability of our stations and Estrella affiliate stations to continue to multicast several DTV program streams.
Indecency
Provisions of federal law regulate the broadcast of obscene, indecent or profane material. The FCC has increased its enforcement efforts regarding broadcast indecency and profanity over the past few years. In June 2006, the statutory maximum fine for broadcast indecency material increased from $32,500 to $325,000 per incident. Several judicial appeals of FCC indecency enforcement actions are currently pending, and their outcomes could affect future Commission policies in this area.
Public Interest Programming
Broadcasters are required to air programming addressing the needs and interests of their communities of license, and to place “issues/programs lists” in their public inspection files to provide their communities with information on the level of “public interest” programming they air.
In November 2007, the FCC adopted an Order imposing new public file and public interest reporting requirements on broadcasters. These new requirements must be approved by the Office of Management and Budget, or the OMB, before they become effective, and the OMB has not yet approved them. Therefore, it is unclear when, if ever, these rules will be implemented. Pursuant to these new requirements, stations with Web sites will be obligated to make certain portions of their public inspection files available online and broadcast notifications on how to access the public file. Stations also will be required to file quarterly a new, standardized form that will track various types and quantities of local programming. The form will require, among other things, information about programming related to local civic affairs, local electoral affairs, public service announcements, and independently-produced programming. The new standardized form will significantly increase recordkeeping requirements for television broadcasters. Several station owners and other interested parties have asked the FCC to reconsider the new reporting requirements and have sought to postpone their implementation. In addition, the Order imposing the new rules is currently on appeal in the U.S. Court of Appeals for the District of Columbia Circuit.
In December 2007, the FCC issued a Report on Broadcast Localism and a Notice of Proposed Rulemaking. The Report tentatively concluded that broadcast licensees should be required to have regular meetings with permanent local advisory boards to ascertain the needs and interests of communities. The Report also tentatively adopted specific renewal application processing guidelines that would require broadcasters to air a minimum amount of local programming. The Report sought comment on a variety of other issues concerning localism including potential changes to the main studio rule, network affiliation rules, and sponsorship identification rules. The period for submitting comments on the rules proposed in this Report closed in June 2008, but the FCC has not yet issued a final Order on the matter. We cannot predict whether the FCC will codify some or all of the specific localism initiatives discussed in the Report.
Equal Employment Opportunity
The FCC’s equal employment opportunity rules generally require broadcasters to engage in broad and inclusive recruitment efforts to fill job vacancies, keep a considerable amount of recruitment data and report much of this data to the FCC and to the public via stations’ public files and websites. The FCC is still considering whether to apply these rules to part-time employment positions. Broadcasters are also obligated not to engage in employment discrimination based on race, color, religion, national origin or sex.
16
Table of Contents
Digital Radio Services
The FCC has approved a technical standard for the provision of In-Band On-Channel™ terrestrial digital radio broadcasting by existing radio broadcasters and has allowed radio broadcasters to convert to a hybrid mode of digital/analog operation on their existing frequencies. We and other broadcasters have intensified efforts to roll out terrestrial digital radio service, which provides multi-channel, multi-format digital radio services in the same bandwidth currently occupied by traditional AM and FM radio services. We may not, however, have the resources to acquire new digital radio technologies or to introduce new services that could compete with other new technologies.
The FCC has also adopted spectrum allocation, licensing and service rules for satellite digital audio radio service. Satellite digital audio radio service systems can provide regional or nationwide distribution of radio programming with fidelity comparable to compact discs. Two companies—Sirius Satellite Radio Inc. and XM Radio—which launched satellite digital audio radio service systems, have merged and are currently providing nationwide service. The FCC also has approved a technical standard for the provision of “in band, on channel” terrestrial digital radio broadcasting by existing radio broadcasters and has allowed radio broadcasters to convert to a hybrid mode of digital/analog operation on their existing frequencies.
We cannot predict the impact of either satellite or terrestrial digital audio radio service on our business.
Radio Frequency Radiation
The FCC has adopted rules limiting human exposure to levels of radio frequency radiation. These rules require applicants for renewal of broadcast licenses or modification of existing licenses to inform the FCC whether the applicant’s broadcast facility would expose people or employees to excessive radio frequency radiation. We believe that all of our stations are in compliance with the FCC’s current rules regarding radio frequency radiation exposure.
Low-Power Radio Broadcast Service
The Commission has adopted rules implementing a new low power FM, or LPFM, service and approximately 800 such stations are in operation. In November 2007, the FCC adopted rules that, among other things, enhance LPFM’s interference protection from subsequently authorized full-service stations. The FCC has also proposed to reduce interference protection to FM stations from LPFM stations operating on certain adjacent frequencies. We cannot predict whether any LPFM stations will interfere with the coverage of our radio stations.
Other Regulations Affecting Broadcast Stations
The FCC has adopted rules on children’s television programming pursuant to the Children’s Television Act of 1990 and rules requiring closed captioning of television programming. Furthermore, the 1996 Act contains a number of provisions related to television violence and the FCC has issued a report to Congress recommending that the government assume a greater role in regulating violent program content. We cannot predict the effect of the FCC’s present rules or future actions on our television broadcasting operations.
In October 2009, the FCC issued a Notice of Inquiry (“NOI”) seeking comment on a broad range of issues related to children’s usage of electronic media and the current regulatory landscape that governs the availability of electronic media to children. The NOI remains pending, and we cannot predict what recommendations or further action, if any, will result from it.
Finally, Congress and the FCC from time to time consider, and may in the future adopt, new laws, regulations and policies regarding a wide variety of other matters that could affect, directly or indirectly, the operation and ownership of our broadcast properties. In addition to the changes and proposed changes noted above, such matters have included, for example, spectrum use fees, political advertising rates, and potential restrictions on the advertising of certain products such as prescription drugs, beer and wine. Other matters that could affect our broadcast properties include technological innovations and developments generally affecting competition in the mass communications industry, such as direct broadcast satellite service, the continued establishment of wireless cable systems and low power television stations, “streaming” of audio and video programming via the Internet, digital television and radio technologies, the establishment of a low power FM radio service, and telephone company participation in the provision of video programming service.
17
Table of Contents
The foregoing does not purport to be a complete summary of the Communications Act, other applicable statutes or the FCC’s rules, regulations and policies. Proposals for additional or revised regulations and requirements are pending before, and are considered by, Congress and federal regulatory agencies from time to time. We cannot predict the effect of existing and proposed federal legislation, regulations and policies on our business. Also, several of the foregoing matters are now, or may become, the subject of litigation and we cannot predict the outcome of any such litigation or the effect on our business.
| ITEM 1A. | RISK FACTORS |
Risks Related to Our Business
Our television and radio stations have been impacted by the general downturn in the U.S. economy and the local economies of the regions in which we operate and our stations could be adversely affected by other changes in the advertising market as well.
Revenue generated by our television and radio stations depends primarily upon the sale of advertising and is, therefore, subject to various factors that influence the advertising market for the broadcasting industry as a whole. Because advertising is largely a discretionary business expense, advertising expenditures generally tend to decline during an economic recession or downturn, such as the one that started in the second half of 2007 in the U.S. The recession has had an adverse effect on the advertising market, the industry of the advertisers that advertise on our stations and the fundamentals of our business, results of operations and/or financial position. As a result, in part, of the general economic downturn and the expected lower net revenue growth projections for the broadcast industry, we incurred non-cash broadcast license impairment charges of $126.8 million and $91.7 million for the years ended December 31, 2009 and 2008, respectively. There can be no assurance that we will not experience any further material adverse effect on our business as a result of the current economic conditions or that the actions of the United States Government, Federal Reserve or other governmental and regulatory bodies for the reported purpose of stabilizing the economy or financial markets will achieve their intended effect. Additionally, some of these actions, including changes in tax laws applicable to advertisers, may adversely affect financial institutions, capital providers, advertisers or other consumers and our financial condition, results of operations or the trading price of our securities. Potential consequences of a continuing current global financial crisis and general downturn in the U.S. economy include:
| • | the financial condition of companies that advertise on our stations, which may file for bankruptcy protection or face severe cash flow issues, may deteriorate and may result in a significant decline in our advertising revenue; |
| • | our ability to borrow capital on terms and conditions that we find acceptable, or at all, may be limited, which could limit our ability to refinance our existing debt; |
| • | our ability to pursue the acquisition or divestiture of television or radio assets may be limited, as a result of these factors; |
| • | the possibility that our business partners and our ability to maintain these business relationships could be negatively impacted; |
| • | the possible further impairment of some or all of the value of our broadcast licenses; and |
| • | the possibility that one or more of the lenders under our bank credit facility could refuse to fund its commitment to us or could fail, and we may not be able to replace the financing commitment of any such lenders on favorable terms, or at all. |
Furthermore, because a substantial portion of our revenue is derived from local advertisers, our ability to generate advertising revenue in specific markets is directly affected by local or regional economic conditions. A concentration of stations in any particular market intensifies our exposure to regional economic declines.
In addition, shifts in populations and demographics could adversely affect advertising expenditures. Consequently, our television and radio station revenues are likely to be adversely affected by shifts in Hispanic populations and demographics, a recession or downturn in the economies of Southern California, New York, Phoenix, Houston, Dallas, Salt Lake City or other events or circumstances that adversely affect advertising activity.
Our debt service obligations will require a significant amount of cash and could adversely affect our ability to operate our company successfully and achieve growth through acquisitions.
We currently have a substantial amount of debt. At December 31, 2009, we had total indebtedness of approximately $422.2 million, representing approximately 141% of our total assets.
18
Table of Contents
Based on interest rates as of December 31, 2009 and assuming no additional borrowings or principal payments on LBI Media’s senior revolving credit facility until its maturity on March 31, 2012 or on our other indebtedness, as of December 31, 2009, we would have needed approximately $319.8 million over the next five years to meet our principal and interest payments under our debt agreements, of which approximately $28.3 million would be due in 2010.
Because we are highly leveraged, we will need to dedicate a substantial portion of our cash flow from operations to pay principal and interest on our debt, which may reduce our ability to fund working capital and to expand our business through capital expenditures, acquisitions and other means. As a result of our principal and interest payments on our debt and the debt of our subsidiaries, we may not be able to expand our business or increase our net revenues.
In addition, if we are not able to pay our debts as they become due, we will be required to pursue one or more alternative strategies, such as, refinancing or restructuring our indebtedness, selling additional debt or equity securities or selling assets. A meltdown in the global credit markets, similar to the one we experienced in 2007, 2008 and 2009, and the disruption in the normal flow of credit among financial institutions may adversely impact the availability and cost of credit, which could adversely affect our ability to refinance or restructure our debt or obtain any additional financing. There can be no assurances that government responses to the disruptions in the financial and credit markets will restore consumer confidence, stabilize the markets or increase liquidity and the availability of credit. As a result, we may not be able to refinance our debt or issue additional debt or equity securities on favorable terms, if at all, and if we must sell our assets, it may negatively affect our ability to generate net revenues.
Cancellations or reductions of advertising could adversely affect our results of operations.
We do not generally obtain long-term commitments from our advertisers. As a result, our advertisers may cancel, reduce or postpone orders without penalty, which is more likely in a recessionary period like the one we are currently experiencing. Cancellations, reductions or delays in purchases of advertising could adversely affect our results of operations, especially if we are unable to replace these purchases. While a portion of our expenses are variable, the majority of our operating expenses are relatively fixed. Therefore, unforeseen decreases in advertising sales could have a material adverse impact on our results of operations.
We may suffer a decrease in advertising revenues due to competitive forces.
The success of our radio and television stations is primarily dependent upon their share of overall advertising revenues within their markets. Our stations compete for audiences and advertising revenue directly with other Spanish-language radio and television stations, and many of the owners of those competing stations have greater resources than we do. When two of our largest competitors merged with each other in 2003, the resulting company, with resources greater than ours, became our first competitor to operate both radio and television stations in Los Angeles, Houston and Dallas, markets in which we currently derive the majority of our total revenues. As the Hispanic population grows in the United States, more stations may begin competing with us by converting to a format similar to that of our stations.
In addition, our stations have experienced increased competition for audiences and advertising revenue with other media, including cable television and to a lesser extent, satellite television, newspapers, magazines, the Internet, portable digital music players and outdoor advertising. Our radio stations also compete with satellite-based radio services. Our failure to offer advertisers efficient and effective advertising could cause them to allocate more of their advertising budgets to our competitors, which could cause a decrease in our net revenues.
The loss of key personnel could disrupt our business and result in a loss of advertising revenues.
Our success depends in large part on the continued efforts, abilities and expertise of our officers and key employees and our ability to hire and retain qualified personnel. The loss of any member of our management team, particularly either of our founders, Jose and Lenard Liberman, could disrupt our operations and hinder or prevent implementation of our business plan, which could have a material and adverse effect on our business, financial condition and results of operations.
Our growth depends on successfully executing our acquisition strategy.
As we have done in the past, we intend to continue to supplement our internal growth by acquiring media properties that complement or augment our existing markets. We may be unable to identify or complete acquisitions for many reasons, including:
| • | competition among buyers; |
| • | the need for regulatory approvals, including FCC and antitrust approvals; |
19
Table of Contents
| • | revisions to the FCC’s restrictions on cross-ownership and on the number of stations or the market share that a particular company may own or control, locally or nationally; and |
| • | the need to raise additional financing, which may be limited by the terms of our debt instruments, including LBI Media’s senior credit facilities and the indentures governing LBI Media’s senior subordinated notes and our senior discount notes. |
If we are unable to successfully execute our acquisition strategy, our growth may be impaired.
In addition, future acquisitions by us could also result in the following consequences:
| • | issuances of equity securities; |
| • | incurrence of debt and contingent liabilities; |
| • | impairment of our broadcast licenses; and |
| • | other acquisition-related expenses. |
Furthermore, after we have completed an acquisition, our management must be able to assume significantly greater responsibilities, which may cause them to divert their attention from our existing operations. We believe that these challenges are more pronounced when we enter new markets rather than expand further in existing markets.
If we cannot successfully develop and integrate our recent and future acquisitions, our financial results could be adversely affected.
To develop and integrate our recent and future acquisitions, we may need to:
| • | reformat stations with Spanish-language programming and build advertiser, listener and/or viewer support; |
| • | integrate and improve operations and systems and the management of a station or group of stations; |
| • | retain or recruit key personnel to manage acquired assets; |
| • | realize sales efficiencies and cost reduction benefits from acquired assets; and |
| • | operate successfully in markets in which we may have little or no prior experience. |
In addition, there is a risk that the stations we have acquired or may acquire in the future may not enhance our financial performance or yield other anticipated benefits. If we are unable to completely integrate into our business the operations of the properties that we have recently acquired or that we may acquire in the future, our costs could increase. Also, in the event that the operations of a new station do not meet our expectations, we may restructure or write off the value of some portion of the assets of the new station.
If we are unable to convert acquired stations successfully to a Spanish-language format, anticipated revenues from these acquisitions may not be realized.
Our acquisition strategy has often involved acquiring non-Spanish language stations and converting them to a Spanish-language format. We intend to continue this strategy with our future acquisitions. This conversion process may require a heavy initial investment of both financial and management resources. We may incur losses for a period of time after a format change due to the time required to build up ratings and station loyalty. These format conversions may be unsuccessful in any given market, and we may incur substantial costs and losses in implementing this strategy.
The restrictive covenants in our debt instruments may affect our ability to operate our business successfully.
The indentures governing LBI Media’s senior subordinated notes and our senior discount notes and the terms of LBI Media’s senior credit facilities contain various provisions that limit our ability to, among other things:
| • | incur or guarantee additional debt and issue preferred stock; |
| • | receive dividends or distributions from our subsidiaries; |
| • | make investments and other restricted payments; |
| • | issue or sell capital stock of restricted subsidiaries; |
20
Table of Contents
| • | grant liens; |
| • | transfer or sell assets; |
| • | engage in different lines of business; |
| • | consolidate, merge or transfer all or substantially all of our assets; and |
| • | enter into transactions with affiliates. |
These covenants may affect our ability to operate and finance our business as we deem appropriate. In addition, we are dependent on our subsidiaries for cash, and the covenants in our debt instruments restrict the ability of our subsidiaries to make cash distributions which could affect our ability to meet our cash obligations, including obligations under our indebtedness. If we are unable to meet our obligations as they become due or to comply with various financial covenants contained in the instruments governing our current or future indebtedness, this could constitute an event of default under the instruments governing our indebtedness.
If there were an event of default under the instruments governing our indebtedness, the holders of the affected indebtedness could declare all of that indebtedness immediately due and payable, which, in turn, could cause the acceleration of the maturity of all of our other indebtedness. We may not have sufficient funds available, or we may not have access to sufficient capital from other sources, to repay any accelerated debt. Even if we could obtain additional financing, the terms of the financing may not be favorable to us. In addition, substantially all of LBI Media’s assets are subject to liens securing its senior credit facilities. If amounts outstanding under LBI Media’s senior credit facilities are accelerated, its lenders could foreclose on these liens. Our assets may not be sufficient to repay borrowings under LBI Media’s senior credit facilities and the amounts due under LBI Media’s and our notes in full. Any event of default under the instruments governing our indebtedness could have a material adverse effect on our business, financial condition and results of operations.
We have identified material weaknesses in our internal control over financing reporting as of December 31, 2009, which if not remedied effectively, could cause us to not be able to provide reasonable assurance around our internal controls over financial reporting. As a result, our business and reputation may be adversely affected.
Beginning with the year ending December 31, 2007, we have been required to evaluate internal controls over financial reporting in order to allow management to report on the effectiveness of our internal controls over financial reporting as required by Section 404 of the Sarbanes-Oxley Act of 2002, which we refer to as Section 404. Our independent registered public accounting firm will also be required to attest to the effectiveness of our internal controls over financial reporting beginning with the year ending December 31, 2010. Section 404 requires us to, among other things, annually review and disclose the effectiveness of our internal controls over financial reporting, and evaluate and disclose changes in our internal controls over financial reporting quarterly. Internal control over financial reporting is a process to provide reasonable assurance regarding the reliability of financial reporting for external purposes in accordance with accounting principles generally accepted in the U.S. Internal control over financial reporting includes: (i) maintaining reasonably detailed records that accurately and fairly reflect our transactions; and (ii) providing reasonable assurance that we (a) record transactions as necessary to prepare the financial statements, (b) make receipts and expenditures in accordance with management authorizations, and (c) will timely prevent or detect any unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting is not intended to provide absolute assurance that we could prevent or detect a misstatement of our financial statements or fraud.
As of December 31, 2009, 2008 and 2007, our management, through documentation, testing and assessment of our internal control over financial reporting concluded that we had material weaknesses and concluded that we did not maintain effective internal control over financial reporting as of December 31, 2009, 2008 and 2007. The material weakness, as of December 31, 2009 and 2008, related to our improper treatment of certain temporary state tax credits and the classification and valuation of certain deferred tax accounts relating to our indefinite-lived intangible assets (see “Item 9A(T). Controls and Procedures” for more information). Although we are in the process of addressing and remediating the deficiencies that gave rise to this material weakness, the deficiencies have not been remediated as of the date of this filing. The material weaknesses will not be fully remediated until, in the opinion of our management, the revised control procedures have been operating for a sufficient period of time to provide reasonable assurances as to their effectiveness. Previously, in 2007, we had a material weakness, which was remediated as of December 31, 2008, relating to our improper implementation and maintenance of logical security or access controls with respect to our critical information technology systems, including our general ledger system, payroll system and traffic/revenue application.
21
Table of Contents
In future periods, if the process required by Section 404 of the Sarbanes-Oxley Act reveals material weaknesses or significant deficiencies, the correction of any such material weakness or significant deficiency could require additional remedial measures including additional personnel which could be costly and time-consuming. If a material weakness exists as of a future period year-end (including a material weakness identified prior to year-end for which there is an insufficient period of time to evaluate and confirm the effectiveness of the corrections or related new procedures), our management will be unable to report favorably as of such future period year-end to the effectiveness of our control over financing reporting. If we fail to remedy our material weaknesses or should we, or our independent registered public accounting firm, determine in future fiscal periods that we have additional material weaknesses in our internal control over financial reporting, the reliability of our financial reports may be impacted, and our results of operations or financial condition may be harmed.
Some of our future actions may require the consent of minority stockholders of our parent.
In connection with the sale of Liberman Broadcasting’s Class A common stock, our parent, Liberman Broadcasting, and stockholders of Liberman Broadcasting entered into an investor rights agreement on March 30, 2007. Pursuant to this investor rights agreement, some of the minority stockholders of Liberman Broadcasting have the right to consent, in their sole discretion, to certain transactions involving us, Liberman Broadcasting, and our subsidiaries, including, among other things, certain acquisitions or dispositions of assets by us, our parent, or our subsidiaries. As a result, we may not be able to complete certain desired transactions if we are unable to obtain the consent of the required stockholders.
Certain of our parent’s minority stockholders have rights under the investor rights agreements that may require our parent to register the resale of common stock held by those investors and list our parent’s common stock on an exchange and the obligations associated with being a publicly traded company will require significant resources, which may divert from our business operations.
Certain of the minority stockholders of our parent, Liberman Broadcasting, have the right to demand the registration of the resale of their shares of common stock of Liberman Broadcasting and the listing of the common stock on an exchange. Because our parent is a holding company with substantially no assets, operations or cash flows other than its investment in its subsidiaries, we may be required to incur substantial costs and expend significant resources in connection with such registration and listing that do not apply to us currently as a voluntary filer. We cannot predict or estimate the amounts of additional costs that we may incur in order to comply with the requirements of our parent being a publicly traded company. We anticipate that these costs will significantly increase Liberman Broadcasting’s and our general and administrative expenses.
We may be adversely affected by disruptions in our ability to receive or transmit programming.
The transmission of programming is subject to risks of equipment failure, including those failures caused by radio or television tower defects and destruction, natural disasters, power losses, low-flying aircraft, software errors or telecommunications errors. Disruption of our programming transmissions may occur in the future and other comparable transmission equipment may not be available. Any natural disaster or extreme climatic event, such as fire, could result in the loss of our ability to broadcast. In September 2008, for example, Hurricane Ike caused substantial damage to several of our broadcast facilities in Texas, and resulted in many advertising cancellations and lost revenue from our inability to broadcast during that period. Also in October 2007, wildfires burned down our San Diego television station’s broadcasting facility, causing a disruption to service in that market until we resumed broadcasting in January 2008.
Further, we own or lease antenna and transmitter space for each of our radio and television stations. If we were to lose any of our antenna tower leases or if any of our towers or transmitters were damaged, we may not be able to secure replacement leases on commercially reasonable terms, or at all, which could also prevent us from transmitting our signals. Disruptions in our ability to receive or transmit our broadcast signals could have a material adverse effect on our audience levels, advertising revenues and future results of operations.
If we are unable to maintain our FCC license for any station, we would have to cease operations at that station.
The success of our television and radio operations depends on acquiring and maintaining broadcast licenses issued by the FCC, which are typically issued for a maximum term of eight years and are subject to renewal. The license renewal applications for our radio stations have been granted by the FCC, and the licenses have been extended through 2013. The license renewal applications for our television stations are pending before the FCC. Any renewal applications submitted by us may not be approved, and the FCC may impose conditions or qualifications that could restrict our television and radio operations. In addition, third parties may challenge our renewal applications.
If we violate the Communications Act of 1934, or the rules and regulations of the FCC, the FCC may issue cease-and-desist orders or admonishments, impose fines, renew a license for less than eight years or revoke our licenses. The FCC has been aggressively enforcing its rules on broadcasting indecent or obscene material, and has stated that, in addition to increased fines, the FCC may initiate license revocation procedures against licensees that broadcast material the FCC considers to be indecent. The FCC has the right to revoke a license before the end of its term for acts committed by the licensee or its officers, directors or stockholders. If the FCC were to issue an order denying a license renewal application or revoking a license, we would be required to cease operating the radio or television station covered by the license, which could have a material adverse effect on our financial condition and results of operations. In addition, Congress, from time to time, considers legislation that addresses the FCC’s enforcement of its rules concerning the broadcast of obscene, indecent, or profane material. Potential changes to enhance the FCC’s authority in this area include the ability to impose additional monetary penalties, consider violations to be “serious” offenses in the context of license renewal applications, and, under certain circumstances, designate a license for hearing to determine whether such license should be revoked. In the event that such legislation is enacted into law, we could face increased costs in the form of fines and a greater risk that we could lose one or more of our broadcasting licenses.
22
Table of Contents
Our failure to maintain our FCC broadcast licenses could cause a default under LBI Media’s senior credit facilities and cause an acceleration of our indebtedness.
LBI Media’s senior credit facilities require us to maintain all of our material FCC licenses. If the FCC were to revoke any of our material licenses, our lenders could declare all amounts outstanding under the senior credit facilities to be immediately due and payable, which would cause a cross-default under the indentures governing LBI Media’s senior subordinated notes and our senior discount notes. If our indebtedness is accelerated, we may not have sufficient funds to pay the amounts owed.
We have a significant amount of intangible assets and we may never realize the full value of our intangible assets. We have recently recorded impairments of our television and radio assets.
Broadcast licenses totaled approximately $161.7 million and $292.3 million at December 31, 2009 and 2008, respectively, which was primarily attributable to historical asset acquisitions, partially offset by substantial broadcast license impairment charges in recent years. At the date of these acquisitions, the fair value of the acquired broadcast licenses equaled its book value. At least annually, we test our broadcast licenses for impairment. Impairment may result from, among other things, deterioration in our performance, adverse market conditions, adverse changes in applicable laws and regulations, including changes that restrict the activities of or affect the products or services sold by our businesses and a variety of other factors.
In the third quarter of 2008, we determined that the carrying values of certain radio and television FCC licenses exceeded their fair values and we recorded impairment charges of $34.0 million and $12.7 million, respectively. In the fourth quarter of 2008, we had additional impairment charges of $26.3 million for our radio broadcast licenses, and $18.7 million for our television broadcast licenses, for a total of $91.7 million for the year ended December 31, 2008. In the first quarter of 2009, we recorded impairment charges of $32.3 million for our radio broadcast licenses and $19.6 million for our television broadcast licenses. In the third quarter of 2009, we recorded impairment charges of $47.3 million and $27.9 million for our radio and television broadcast licenses, for a total of $126.8 million for the year ended December 31, 2009. Appraisals of any of our reporting units or changes in estimates of our future cash flows could affect our impairment analysis in future periods and cause us to record either an additional expense for impairment of assets previously determined to be impaired or record an expense for impairment of other assets. Depending on future circumstances, we may never realize the full value of our intangible assets. Any determination of impairment of our broadcast licenses could have an adverse effect on our financial condition and results of operations.
Our broadcast licenses could be revoked if more than 25% of our outstanding capital stock is owned of record or voted by non-U.S. citizens, foreign governments or non-U.S. corporations.
Under the Communications Act of 1934, a broadcast license may not be granted to or held by any corporation that has more than 20% of its capital stock owned or voted by non-U.S. citizens or their representatives, by foreign governments or their representatives or by non-U.S. corporations. Furthermore, the Communications Act provides that no FCC broadcast license may be granted to or held by any corporation directly or indirectly controlled by any other corporation of which more than 25% of its capital stock is owned of record or voted by non-U.S. citizens or entities or their representatives, by foreign governments or their representatives or by non-U.S. corporations, if the FCC finds the public interest will be served by the refusal or revocation of such license. Because of these restrictions, the licenses for our television and radio stations could be revoked if more than 25% of our outstanding capital stock is issued to or for the benefit of non-U.S. citizens in excess of these limitations.
The FCC’s National Broadband Plan may reduce the digital broadcast spectrum currently allocated to television broadcasters.
The FCC is reviewing the spectrum currently allocated to television broadcasting to understand if all or a portion of the spectrum could be repurposed for wireless broadband services. Our EstrellaTV network operates primarily on the secondary digital spectrum on most of our affiliate stations. While, we cannot predict the outcome of the National Broadband Plan, a reduction in the spectrum currently allocated to television broadcasters could adversely impact our ability to capitalize on the network, as a reduction could cause our affiliates to reduce the spectrum available to EstrellaTV or to altogether terminate its affiliation with EstrellaTV. This could have an adverse impact on our ratings and our ability to attract Spanish network advertising budgets.
23
Table of Contents
Risks Related to the Television and Radio Industries
Changes in the rules and regulations of the FCC could result in increased competition for our broadcast stations that could lead to increased competition in our markets.
Certain actions by the FCC could cause us to face increased competition in the future. These actions currently include or may include:
| • | relaxation of restrictions on the participation by regional telephone operating companies in cable television and other direct-to-home audio and video technologies; |
| • | establishment of a Class A television service for low-power stations that makes those stations primary stations and gives them protection against full-service stations; |
| • | licensing of low-power FM radio stations designed to serve small localized areas and niche audiences; |
| • | competition from direct broadcast satellite television providing the programming of traditional over-the-air stations, including local and out-of-market network stations; |
| • | competition from satellite radio companies providing continuous, nationwide digital radio services; and |
| • | revision of restrictions on cross-ownership (that is, ownership of both television and radio stations in combination with newspapers in the same market) and caps on the number of stations or market share that a particular company may own or control, locally or nationally. |
The required conversion to digital television has imposed significant costs that might not be balanced by consumer demand.
The FCC adopted rules for implementing a digital television service in the U.S. Under these rules, stations are required to build out and begin broadcasting a digital television signal. Federal legislation specified June 12, 2009 as the date by which stations would be required to operate as a single digital television channel and to surrender any other channels on which they previously operated. Our final costs to convert our television stations to full-service digital television have been significant, and there may not be sufficient consumer demand for digital television services to recover our investment in digital television facilities.
Any change in current laws or regulations that eliminate or limit our ability to require cable systems to carry our full power television stations could result in the loss of coverage in those markets, which could result in a decrease in our market ratings and a potential loss of advertising revenues.
Pursuant to the Cable Television Consumer Protection and Competition Act of 1992, or the 1992 Cable Act, we currently may demand carriage of our full power television stations on a specific channel on cable systems within our local markets. Alternatively, television stations may be carried on cable systems pursuant to retransmission consent agreements negotiated between the television station and the cable operator. Our television stations in Los Angeles, Houston, Dallas-Fort Worth and Salt Lake City currently rely on “must carry” rights to gain access to the local cable. We may acquire other full power television stations that secure cable carriage through retransmission consent agreements. If the current laws or regulations were changed or new laws were adopted that eliminate or limit our ability to require cable systems to carry our full power television stations and/or if we are unable to successfully negotiate for carriage through retransmission consent agreements, this could result in the loss of market coverage of our television stations, which would decrease our market ratings in those cities and potentially result in a decrease in our net advertising revenues or an increase in our operating expenses to maintain the same coverage.
Direct broadcast satellite companies may not continue to carry our local television stations, which could result in a decrease in our market ratings and a potential loss of advertising revenues.
Similar to the 1992 Cable Act, the 1999 Satellite Act requires direct broadcast satellite companies that elect to transmit local television stations to offer all other qualified local television stations in that market. This is known as the “carry one/carry all” rule. We have qualified our television stations in Los Angeles, Houston, Dallas-Fort Worth and Salt Lake City under this rule, and these stations are currently being broadcast on the satellite systems electing to carry local television stations in those markets. Because we rely on the carry one/carry all rule in these markets, if the satellite providers in Los Angeles, Houston, Dallas-Fort Worth or Salt Lake City elect to discontinue transmitting local television stations or if the current laws or regulations were changed or new laws were adopted, this could result in the loss of market coverage of our television stations, which would decrease our market ratings in those cities and potentially result in a decrease in our net advertising revenues or an increase in our operating expenses to maintain the same coverage.
24
Table of Contents
We may have difficulty obtaining regulatory approval for acquisitions in our existing markets and, potentially, new markets.
We have acquired in the past, and may continue to acquire in the future, additional television and radio stations. Revisions to the FCC’s restrictions on the number of stations or market share that a particular company may own or control, locally or nationally, and to its restrictions on cross-ownership (that is, ownership of both television and radio stations in the same market) may limit our ability to acquire additional broadcast properties. The agencies responsible for enforcing the federal antitrust laws, the Federal Trade Commission, or FTC, and the Department of Justice, may investigate certain acquisitions. These agencies have, in certain cases, examined proposed acquisitions or combinations of broadcasters, and in certain cases, required divestiture of one or more stations to complete a transaction.
Any decision by the Department of Justice or FTC to challenge a proposed acquisition could affect our ability to consummate an acquisition or to consummate it on the proposed terms. The FTC or Department of Justice could seek to bar us from acquiring additional television or radio stations in any market where our existing stations already have a significant market share.
We must respond to the rapid changes in technology, services and standards which characterize our industry in order to remain competitive.
The television and radio broadcasting industry is subject to technological change, evolving industry standards and the emergence of new media technologies. Several new media technologies are being employed or developed, including the following:
| • | audio programming by cable television systems, direct broadcast satellite systems, Internet content providers and Internet-based audio radio services; |
| • | satellite digital audio radio service with numerous channels and sound quality equivalent to that of compact discs; |
| • | In-Band On-Channel ™ digital radio, which provides multi-channel, multi-format digital radio services in the same bandwidth currently occupied by traditional AM and FM radio services; |
| • | low-power FM radio, with additional FM radio broadcast outlets that are designed to serve local interests; |
| • | streaming video programming delivered via the Internet; |
| • | video-on-demand programming offered by cable television and telephone companies; and |
| • | digital video recorders with hard-drive storage capacity that offer time-shifting of programming and the capability of deleting advertisements when playing back the recorded programs. |
We may not have the resources to acquire new technologies or to introduce new services that could compete with other new technologies. We may encounter increased competition arising from new technologies. If we are unable to keep pace with and adapt our television and radio stations to these developments, our competitive position could be harmed, which could result in a decrease in our market ratings and a potential decrease in net advertising revenues.
Cautionary Statement Regarding Forward-Looking Statements
This Annual Report on Form 10-K contains forward-looking statements, as defined in the Private Securities Litigation Reform Act of 1995. You can identify these statements by the use of words like “may,” “will,” “could,” “continue,” “expect” and variations of these words or comparable words. Actual results could differ substantially from the results that the forward-looking statements suggest for various reasons. The risks and uncertainties include but are not limited to:
| • | general economic conditions in the United States and in the regions in which operate; |
| • | sufficient cash to meet our debt service obligations; |
| • | our dependence on advertising revenues; |
| • | changes in rules and regulations of the FCC; |
| • | our ability to attract, motivate and retain salespeople and other key personnel; |
| • | our ability to successfully convert acquired radio and television stations to a Spanish-language format; |
| • | our ability to maintain FCC licenses for our radio and television stations; |
| • | successful integration of acquired radio and television stations; |
| • | strong competition in the radio and television broadcasting industries; |
25
Table of Contents
| • | potential disruption from natural hazards, equipment failure, power loss and other events or occurrences; |
| • | our ability to remediate or otherwise mitigate any material weaknesses in internal control over financial reporting or significant deficiencies that may be identified in the future; |
| • | compliance with our restrictive covenants on our debt instruments; and |
| • | our ability to obtain regulatory approval for future acquisitions. |
The foregoing factors are not exhaustive, and new factors may emerge or changes to the foregoing factors may occur that could impact our business. The forward-looking statements in this Annual Report, as well as subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf, are hereby expressly qualified in their entirety by the cautionary statements in this report, including the risk factors noted elsewhere in this Annual Report or other documents that we file from time to time with the Securities and Exchange Commission, particularly Quarterly Reports on Form 10-Q and any Current Reports on Form 8-K. We are not obligated to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
| ITEM 1B. | UNRESOLVED STAFF COMMENTS |
Not applicable.
| ITEM 2. | PROPERTIES |
The types of properties required to support our radio and television stations include offices, studios and transmitter and antenna sites. Through our indirect, wholly owned subsidiary, we own studio and office space at 1845 West Empire Avenue, Burbank, California 91504. This property is subject to a mortgage in favor of Jefferson Pilot Financial, with whom one of our indirect subsidiaries has entered into a loan agreement. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Empire Burbank Studios’ Mortgage Note.” We also own studio and office space at 1813 Victory Place, Burbank, California 91504. In addition, we own offices, studio and production facilities in Houston and Dallas, Texas for our operations there. We own a number of our transmitter and antenna sites and lease or license the remainder from third parties. We generally select our tower and antenna sites to provide maximum market coverage. In general, we do not anticipate difficulties in renewing these site leases. We believe our facilities are generally in good condition and suitable for our operations.
| ITEM 3. | LEGAL PROCEEDINGS |
In 2008, we began negotiations with Broadcast Music, Inc. (“BMI”) related to disputes over royalties owed to BMI. In October 2009, we settled all royalty disputes relating to our television stations as well as royalties owed for the period ending December 31, 2006 for our radio stations. The remaining outstanding dispute relates to our radio stations for the period commencing January 1, 2007, for which we have filed an application for a reasonable license under BMI’s antitrust consent decree (the “post-court period”). As of December 31, 2009, we had reserved a total of approximately $0.9 million relating to the BMI dispute, of which $0.5 million represents check disbursements we have made to BMI, but remain outstanding as of December 31, 2009. We believe this reserve, all of which relates to the post-court period, is adequate as of December 31, 2009.
We are subject to pending litigation arising in the normal course of business. While it is not possible to predict the results of such litigation, we do not believe the ultimate outcome of these matters will have a materially adverse effect on our financial positions or results of operations.
| ITEM 4. | RESERVED |
Not applicable.
26
Table of Contents
| ITEM 5. | MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
Market Information and Holders
There is currently no established public trading market for the common stock of LBI Media Holdings, Inc. LBI Media Holdings, Inc. is a wholly owned subsidiary of Liberman Broadcasting, Inc., a Delaware corporation.
Dividends
LBI Media Holdings paid distributions to its parent of $0.1 million and $0.3 million for the years ended December 31, 2009 and 2008, respectively. LBI Media’s senior credit facilities, the indentures governing its senior subordinated notes and LBI Media Holdings’ senior discount notes impose restrictions on the payment of cash dividends or payments on account of or on redemption, retirement or purchase of its common stock or other distributions. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources.”
Securities Authorized for Issuance under Equity Compensation Plans
Not applicable.
Performance Graph
Not applicable.
Recent Sales of Unregistered Securities
LBI Media Holdings did not sell any securities during the fourth quarter of the fiscal year ended December 31, 2009.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
LBI Media Holdings has not reacquired any of its equity securities during the fourth quarter of the fiscal year ended December 31, 2009.
27
Table of Contents
| ITEM 6. | SELECTED FINANCIAL DATA |
The following selected financial data is derived from our audited consolidated financial statements. The financial data set forth below should be read in conjunction with, and is qualified in its entirety by, the corresponding audited consolidated financial statements, related notes and Management’s Discussion and Analysis of Financial Condition and Results of Operations included under Item 7 in this annual report.
| Year Ended December 31, | ||||||||||||||||||||
| 2009 | 2008(5) | 2007(5) | 2006(5) | 2005 | ||||||||||||||||
| (in thousands) | ||||||||||||||||||||
| Consolidated Statement of Operations Data: |
||||||||||||||||||||
| Net revenues: |
||||||||||||||||||||
| Radio |
$ | 59,120 | $ | 65,301 | $ | 59,846 | $ | 50,105 | $ | 48,695 | ||||||||||
| Television |
43,801 | 51,011 | 54,428 | 56,572 | 47,620 | |||||||||||||||
| Total net revenues |
102,921 | 116,312 | 114,274 | 106,677 | 96,315 | |||||||||||||||
| Operating expenses (exclusive of deferred (benefit) compensation, depreciation and amortization, loss on sale and disposal of property and equipment and impairment of broadcast licenses shown below) |
68,303 | 73,092 | 66,788 | 58,799 | 51,366 | |||||||||||||||
| Deferred (benefit) compensation |
— | — | (3,952 | ) | 948 | (2,422 | ) | |||||||||||||
| Depreciation and amortization |
9,703 | 9,943 | 8,936 | 7,009 | 7,095 | |||||||||||||||
| Loss on sale and disposal of property and equipment |
1,807 | 3,506 | — | — | — | |||||||||||||||
| Impairment of broadcast licenses |
126,543 | 91,740 | 8,143 | 2,844 | 10,282 | |||||||||||||||
| Offering costs (1) |
— | — | — | — | 287 | |||||||||||||||
| Total operating expenses |
206,356 | 178,281 | 79,915 | 69,600 | 66,608 | |||||||||||||||
| Operating (loss) income |
(103,435 | ) | (61,969 | ) | 34,359 | 37,077 | 29,707 | |||||||||||||
| Gain (loss) on note purchases and redemptions |
520 | 12,495 | (8,776 | ) | — | — | ||||||||||||||
| Interest expense and other income, net |
(33,669 | ) | (36,993 | ) | (36,286 | ) | (31,297 | ) | (29,122 | ) | ||||||||||
| Interest rate swap income (expense) |
2,393 | (3,433 | ) | (2,410 | ) | (1,784 | ) | — | ||||||||||||
| Equity in losses of equity method investment |
(112 | ) | (280 | ) | — | — | — | |||||||||||||
| Impairment of equity method investment |
— | (160 | ) | — | — | — | ||||||||||||||
| Gain on sale of investments |
— | — | — | — | 13 | |||||||||||||||
| Loss on sale of property and equipment |
— | — | — | — | (3 | ) | ||||||||||||||
| (Loss) income from continuing operations before benefit from (provision for) income taxes |
(134,303 | ) | (90,340 | ) | (13,113 | ) | 3,996 | 595 | ||||||||||||
| Benefit from (provision for) income taxes |
20,261 | 7,191 | (44,561 | ) | 1,263 | (158 | ) | |||||||||||||
| (Loss) income from continuing operations |
(114,042 | ) | (83,149 | ) | (57,674 | ) | 5,259 | 437 | ||||||||||||
| Discontinued operations, net of income taxes (including gain on sale of assets of $1,245 in 2009) |
1,398 | 1,156 | 1,161 | 1,163 | 1,064 | |||||||||||||||
| Net (loss) income |
$ | (112,644 | ) | $ | (81,993 | ) | $ | (56,513 | ) | $ | 6,422 | $ | 1,501 | |||||||
| Other Data: |
||||||||||||||||||||
| Adjusted EBITDA (2) |
$ | 34,646 | $ | 43,220 | $ | 43,844 | $ | 46,930 | $ | 47,084 | ||||||||||
| Cash interest expense (3) |
$ | 31,789 | $ | 28,929 | $ | 29,653 | $ | 24,050 | $ | 22,950 | ||||||||||
| Cash flows (used in) provided by operating activities |
$ | (2,108 | ) | $ | 15,775 | $ | 7,099 | $ | 25,422 | $ | 23,255 | |||||||||
| Cash flows used in investing activities |
$ | (3,181 | ) | $ | (17,537 | ) | $ | (50,288 | ) | $ | (109,617 | ) | $ | (13,458 | ) | |||||
| Cash flows provided by (used in) financing activities |
$ | 5,017 | $ | 515 | $ | 43,385 | $ | 83,899 | $ | (13,742 | ) | |||||||||
| Year Ended December 31, | ||||||||||||||||||
| 2009 | 2008(5) | 2007(5) | 2006(5) | 2005 | ||||||||||||||
| (in thousands) | ||||||||||||||||||
| Balance Sheet Data: |
||||||||||||||||||
| Cash and cash equivalents |
$ | 178 | $ | 450 | $ | 1,697 | $ | 1,501 | $ | 1,797 | ||||||||
| Working capital (deficit) |
$ | 2,801 | $ | 2,798 | $ | 4,456 | $ | (7,206 | ) | $ | 2,190 | |||||||
| Broadcast licenses, net |
$ | 161,660 | $ | 292,343 | $ | 382,574 | $ | 357,870 | $ | 278,536 | ||||||||
| Total assets |
$ | 298,844 | $ | 428,187 | $ | 516,691 | $ | 482,196 | $ | 378,285 | ||||||||
| Total debt (4) |
$ | 422,224 | $ | 417,345 | $ | 422,761 | $ | 413,827 | $ | 319,314 | ||||||||
| Total stockholder’s (deficiency) equity |
$ | (167,242 | ) | $ | (54,519 | ) | $ | 27,716 | $ | 38,583 | $ | 33,995 | ||||||
28
Table of Contents
| (1) | In February 2004, our parent, Liberman Broadcasting, filed a registration statement on Form S-1 with the Securities and Exchange Commission for a proposed initial public offering of its Class A common stock. The offering was subsequently withdrawn and, as a result, approximately $0.3 million of costs initially deferred in connection with the registration process were written-off during the year ended December 31, 2005. The offering costs were expensed by us, because we advanced the funds used by Liberman Broadcasting to pay the offering costs and a portion of the net proceeds from the offering were to be used to repay borrowings under LBI Media’s senior revolving credit facility. |
| (2) | We define Adjusted EBITDA as net income or loss less discontinued operations, net of income taxes, plus income tax expense or benefit, gain or loss on sale and disposal of property and equipment, gain or loss on sale of investments, net interest expense, interest rate swap expense or income, impairment of broadcast licenses, depreciation and amortization, stock-based compensation expense and other non-cash gains and losses. Management considers this measure an important indicator of our liquidity relating to our operations because it eliminates the effects of our discontinued operations, certain non-cash items and our capital structure. This measure should be considered in addition to, but not as a substitute for or superior to, other measures of liquidity and financial performance prepared in accordance with U.S. generally accepted accounting principles, such as cash flows from operating activities, operating income or loss and net income or loss. In addition, our definition of Adjusted EBITDA may differ from those of many companies reporting similarly named measures. |
In determining our Adjusted EBITDA in past years, we treated deferred (benefit) compensation as a non-cash item, because we had the option and the intention to pay such amounts in the common stock of our parent after our parent’s initial public offering. Our first payment became due in 2006, and we had additional payments due in 2007. We determined that we no longer met the conditions necessary to pay the deferred compensation in stock upon our first payment in 2006. Accordingly, we settled our deferred compensation amounts in cash in 2006 and 2007. We have presented prior years’ Adjusted EBITDA to conform to this current treatment. As a result, Adjusted EBITDA for prior years may appear as a different amount from what we have reported in prior years.
We discuss Adjusted EBITDA and the limitations of this financial measure in more detail under “Item 7. Management’s Discussion and Analysis of Finance Condition and Results of Operations—Non-GAAP Financial Measure.”
The table set forth below reconciles net cash (used in) provided by operating activities, calculated and presented in accordance with U.S. generally accepted accounting principles, to Adjusted EBITDA:
| Year Ended December 31, | ||||||||||||||||||||
| 2009 | 2008(5) | 2007(5) | 2006(5) | 2005 | ||||||||||||||||
| (in thousands) | ||||||||||||||||||||
| Net cash (used in) provided by operating activities |
$ | (2,108 | ) | $ | 15,775 | $ | 7,099 | $ | 25,422 | $ | 23,255 | |||||||||
| Add: |
||||||||||||||||||||
| Income tax (benefit) expense |
(20,261 | ) | (7,191 | ) | 44,561 | (1,263 | ) | 158 | ||||||||||||
| Interest expense and other income, net |
33,669 | 36,993 | 36,286 | 31,297 | 29,122 | |||||||||||||||
| Less: |
||||||||||||||||||||
| Effect of discontinued operations |
(485 | ) | (1,232 | ) | (1,231 | ) | (1,232 | ) | (1,133 | ) | ||||||||||
| Provision for doubtful accounts |
(2,401 | ) | (1,906 | ) | (1,376 | ) | (1,330 | ) | (959 | ) | ||||||||||
| Accretion on discount notes |
— | (5,542 | ) | (6,386 | ) | (5,738 | ) | (5,155 | ) | |||||||||||
| Amortization of discount on subordinated notes |
(275 | ) | (251 | ) | (105 | ) | — | — | ||||||||||||
| Amortization of deferred financing costs |
(1,468 | ) | (1,413 | ) | (1,260 | ) | (1,091 | ) | (994 | ) | ||||||||||
| Amortization of program rights |
(5,231 | ) | (593 | ) | (565 | ) | (781 | ) | (912 | ) | ||||||||||
| Write-off of deferred financing costs |
(250 | ) | — | — | — | — | ||||||||||||||
| Deferred compensation benefit (expense) |
— | — | 3,952 | (948 | ) | 2,422 | ||||||||||||||
| Offering costs |
— | — | — | — | (287 | ) | ||||||||||||||
| Changes in operating assets and liabilities: |
||||||||||||||||||||
| Cash overdraft |
(99 | ) | (395 | ) | — | — | — | |||||||||||||
| Accounts receivable |
2,572 | 2,370 | 1,660 | 2,800 | 2,648 | |||||||||||||||
| Deferred compensation payments |
— | — | 4,377 | 1,627 | — | |||||||||||||||
| Program rights |
11,277 | 705 | — | (13 | ) | 325 | ||||||||||||||
| Amounts due from related parties |
24 | 61 | (11 | ) | (221 | ) | (460 | ) | ||||||||||||
| Prepaid expenses and other current assets |
(734 | ) | 696 | (197 | ) | 166 | 49 | |||||||||||||
| Employee advances |
138 | 424 | (59 | ) | — | 353 | ||||||||||||||
| Accounts payable and accrued liabilities |
(531 | ) | (1,086 | ) | 1,206 | (2,172 | ) | (954 | ) | |||||||||||
| Accrued interest |
(31 | ) | (932 | ) | (195 | ) | (537 | ) | (105 | ) | ||||||||||
| Program rights payable |
— | — | — | — | 33 | |||||||||||||||
| Deferred income taxes |
19,191 | 6,796 | (44,790 | ) | 1,187 | (100 | ) | |||||||||||||
| Other assets and liabilities |
1,649 | (59 | ) | 878 | (243 | ) | (222 | ) | ||||||||||||
| Adjusted EBITDA |
$ | 34,646 | $ | 43,220 | $ | 43,844 | $ | 46,930 | $ | 47,084 | ||||||||||
29
Table of Contents
Excluding the one-time charge of $7.6 million related to the early redemption premium paid on LBI Media’s 101/8% senior subordinated notes in 2007, Adjusted EBITDA for the year ended December 31, 2007 was $51.4 million. The following is a reconciliation of our Adjusted EBITDA, as reported, to our Adjusted EBITDA excluding this one-time redemption charge for the year ended December 31, 2007:
| 2007(5) | |||
| Adjusted EBITDA, as reported |
$ | 43,844 | |
| Early redemption premium on 10 1 /8% senior subordinated notes |
7,594 | ||
| Adjusted EBITDA, excluding one-time redemption charge |
$ | 51,438 | |
| (3) | Represents cash paid for interest. Does not include accrued but unpaid interest expense. |
| (4) | Total debt does not include the 9% subordinated notes issued by Liberman Broadcasting, Inc., our parent, for the years ended December 31, 2006, 2005 and 2004. These notes were repaid in March 2007 with a portion of the proceeds from the sale of Liberman Broadcasting, Inc.’s Class A common stock. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Sale and Issuance of Liberman Broadcasting’s Class A Common Stock.” |
| (5) | Amounts have been adjusted to reflect the restatement of our consolidated statements of operations and consolidated statements of cash flows for the years ended December 31, 2008, 2007 and 2006, and selected balance sheet data as of December 31, 2008, 2007 and 2006 for the restatement as described in Note 1 of our accompanying consolidated financial statements. |
The impact of the restatement on our consolidated balance sheet as of December 31, 2007, after adjusting for the effects of the restatement on our December 31, 2006 balance sheet, is as follows:
| (i) | a $0.1 million decrease in accrued liabilities and total current liabilities; |
| (ii) | a $3.9 million decrease in deferred income tax liability and total long-term liabilities; |
| (iii) | a $4.0 million decrease in total liabilities; and |
| (iv) | a $4.0 million decrease in retained deficit (and corresponding increase in stockholder’s equity). |
| ITEM 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
As discussed in the Explanatory Note immediately preceding Item 1 of Part I and Note 1, “Summary of Significant Accounting Policies—Restatement” in Notes to Consolidated Financial Statements in Part II, Item 8, we are restating our consolidated balance sheet as of December 31, 2008 and the related consolidated statements of operations, cash flows and stockholder’s equity for the years ended December 31, 2008 and 2007. The following discussion and analysis of our financial condition and results of operations incorporates the restated amounts. For this reason the data set forth in this section may not be comparable to discussions and data in our previously filed Annual Reports of Form 10-K.
Overview
We own and operate radio and television stations in Los Angeles (including Riverside and San Bernardino counties), California, Houston, Texas and Dallas, Texas and television stations in San Diego, California, Salt Lake City, Utah, Phoenix, Arizona and New York, New York. Our radio stations consist of five FM and two AM stations serving Los Angeles, California and its surrounding areas, five FM and three AM stations serving Houston, Texas and its surrounding areas, and five FM stations and one AM station serving Dallas-Fort Worth, Texas and its surrounding areas. Our seven television stations consist of four full-power stations serving Los Angeles, California, Houston, Texas, Dallas-Fort Worth, Texas and Salt Lake City, Utah. We also own three low-power television stations serving the San Diego, California, Phoenix, Arizona and New York, New York markets.
In addition, we operate a television production facility, Empire Burbank Studios, in Burbank, California that we use to produce our core programming for all of our television stations, and we have television production facilities in Houston and Dallas-Fort Worth, Texas, that allow us to produce programming in those markets as well. We have entered into time brokerage agreements with third parties for four of our radio stations and one of our low-power television stations.
We are also affiliated with twenty-one television stations in various states serving specific market areas, including seven in Texas, four in Florida, five in California, and one each in Arizona, Nevada, New Mexico, New York and Oregon.
30
Table of Contents
We operate in two reportable segments, radio and television. We generate revenue from sales of local, regional and national advertising time on our radio and television stations and the sale of time to brokered or infomercial customers on our radio and television stations. Beginning in the third quarter of 2009, we also began generating advertising sales on our affiliated stations that broadcast our “EstrellaTV” network programming. Upon consummation of our two pending television asset acquisitions (as described below under “—Acquisitions”), our EstrellaTV network will broadcast in 18 of the top 20 Hispanic designated market areas, covering approximately 75% of U.S. Hispanic television households.
Advertising rates are, in large part, based on each station’s ability to attract audiences in demographic groups targeted by advertisers. Our stations compete for audiences and advertising revenue directly with other Spanish-language radio and television stations, and we generally do not obtain long-term commitments from our advertisers. As a result, our management team focuses on creating a diverse advertiser base, providing cost-effective advertising solutions for clients, executing targeted marketing campaigns to develop a local audience and implementing strict cost controls. We recognize revenues when the commercials are broadcast or the brokered time is made available to the customer. We incur commissions from agencies on local, regional and national (including network) advertising, and our net revenue reflects deductions from gross revenue for commissions to these agencies.
Our primary expenses are employee compensation, including commissions paid to our local and national sales staffs, promotion, selling, programming and engineering expenses, general and administrative expenses, and interest expense. Our programming expenses for television consist of amortization of capitalized costs related to the production of original programming content, production of local newscasts and, to a lesser extent, the amortization of programming content acquired from other sources. Because we are highly leveraged, we will need to dedicate a substantial portion of our cash flow from operations to pay interest on our debt. We may need to pursue one or more alternative strategies in the future to meet our debt obligations, such as refinancing or restructuring our indebtedness, selling equity securities or selling assets.
We are organized as a Delaware corporation. Prior to March 30, 2007, we were a qualified subchapter S subsidiary as we were deemed for tax purposes to be part of our parent, an S corporation under federal and state tax laws. Accordingly, our taxable income was reported by the stockholders of our parent on their respective federal and state income tax returns. As a result of the sale of Class A common stock of our parent (as described below under “—Sale and Issuance of Liberman Broadcasting’s Class A Common Stock”), Liberman Broadcasting, Inc., a Delaware corporation and successor in interest to LBI Holdings I, Inc., no longer qualified as an S Corporation, and none of its subsidiaries, including us, are able to qualify as qualified subchapter S subsidiaries. Thus, we have been taxed at regular corporate rates since March 30, 2007.
Dispositions
In December 2009, two of our indirect, wholly owned subsidiaries, Liberman Broadcasting of Houston LLC and Liberman Broadcasting of Houston License LLC, completed the sale of selected assets of radio station KSEV-AM, 700AM, licensed to Tomball, Texas, to Patrick Broadcasting, LP, pursuant to an asset purchase agreement entered into by the parties in October 2009. Those assets included, among other things, (i) licenses and permits authorized by the Federal Communications Commission, or FCC, for or in connection with the operation of the station, (ii) the antenna and transmission facility, and (iii) broadcast and other studio equipment used to operate the station. The total aggregate sale price of approximately $6.5 million (excluding adjustments) was paid in cash. We used the net proceeds from the sale to repay outstanding borrowings under LBI Media’s senior revolving credit facility. The accompanying consolidated financial statements reflect the operating results of radio station KSEV-AM as discontinued operations for all periods presented.
Acquisitions
In February 2010, two of our indirect, wholly owned subsidiaries, KRCA Television LLC and KRCA License LLC, consummated the acquisition of selected assets of low-power television station WASA-LP, Channel 25, licensed to Port Jervis, New York, from Venture Technologies, Group, LLC, pursuant to an asset purchase agreement entered into by the parties in November 2008. The total purchase price of approximately $6.0 million was paid primarily through borrowings under LBI Media’s senior revolving credit facility. The selected assets primarily included licenses and permits authorized by the FCC for or in connection with the operation of the station. The purchase of these assets represents the first television station we have owned in the New York market.
In February 2010, KRCA Television LLC and KRCA License LLC entered into an asset purchase agreement with Trinity Broadcasting Network, as seller, pursuant to which we have agreed to acquire selected assets of low-power television station W40BY, licensed to Palatine, Illiniois, from the seller. The selected assets will include, among other things, (i) licenses and permits authorized by the FCC for or in connection with the operation of the station and (ii) broadcast and other equipment used to operate the station.
31
Table of Contents
The total purchase price will be approximately $1.3 million in cash, subject to certain adjustments, of which $0.1 million has been deposited into escrow. Consummation of the acquisition is currently subject to customary closing conditions, including regulatory approval from the FCC. We expect to close this acquisition in the third quarter of 2010.
In January 2010, KRCA Television LLC and KRCA License LLC entered into an asset purchase agreement with Lesea Broadcasting Corporation, as seller, pursuant to which we have agreed to acquire selected assets of television station KWHD-TV, licensed to Castle Rock, Colorado, from the seller. The selected assets will include, among other things, (i) licenses and permits authorized by the FCC for or in connection with the operation of the station (ii) antenna and transmitter facilities and (ii) broadcast and other studio equipment used to operate the station. The total purchase price will be approximately $6.5 million in cash, subject to certain adjustments, of which $0.3 million has been deposited into escrow. Consummation of the acquisition is currently subject to customary closing conditions, including regulatory approval from the FCC. We expect to close this acquisition in the third quarter of 2010.
In December 2008, KRCA Television LLC and KRCA License LLC consummated the acquisition of selected assets of low-power television station KVPA-LP, Channel 42, licensed to Phoenix, Arizona, from Latin America Broadcasting of Arizona, Inc., pursuant to an asset purchase agreement entered into by the parties in August 2008. The total purchase price of approximately $1.4 million (including acquisition costs of approximately $0.1 million) was primarily paid for in cash. The assets acquired included, among other things, (i) licenses and permits authorized by the FCC for or in connection with the operation of the station and (ii) transmission and other broadcast equipment used to operate the station. The purchase of these assets marked our first entry into the Phoenix market.
In September 2008, two of our indirect, wholly owned subsidiaries, Liberman Broadcasting of California LLC and LBI Radio License LLC, as buyers, entered into an asset purchase agreement with Sun City Communications, LLC and Sun City Licenses, LLC, as sellers, or together, Sun City, pursuant to which we agreed to acquire certain assets of radio station KVIB-FM, 95.1 FM, licensed to Phoenix, Arizona, from Sun City. Those assets were to include, among other things, (i) licenses and permits authorized by the FCC for or in connection with the operation of the station, (ii) antenna and transmitter facilities, (iii) broadcast and other studio equipment used to operate the station, and (iv) contract rights and other intangible assets. The total purchase price was to be approximately $15.0 million in cash, subject to certain adjustments, of which $0.8 million had been deposited into escrow as of December 31, 2008 and 2009. In December 2008, we submitted a formal notice to Sun City to terminate the asset purchase agreement as a result of a material adverse event that we believe occurred since entering into the agreement. However, in order to avoid significant legal fees, other expenses and management time that would have been devoted to the litigation matter, in January 2010, we entered into a settlement agreement and release with Sun City, whereby we agreed to allow Sun City to retain 50 percent of the escrow funds. As such, in January 2010, we received approximately $0.4 million of the $0.8 million escrow amount initially deposited. The charge related to the write-off of the remaining $0.4 million that we did not recoup is included in selling, general and administrative expenses in the accompanying consolidated financial statements for the year ended December 31, 2009.
In November 2007, Liberman Broadcasting of California LLC and LBI Radio License LLC, entered into an asset purchase agreement with R&R Radio Corporation, as the seller, pursuant to which we had agreed to acquire selected assets of radio station KDES-FM, located in Palm Springs, California, from the seller. The selected assets were to include, among other things, (i) licenses and permits authorized by the FCC for or in connection with the operation of the station, (ii) transmitter and other broadcast equipment used to operate the station, and (iii) other related assets. We intended to change the programming format and the location of KDES-FM from Palm Springs, California to Redlands, California. The aggregate purchase price was to be approximately $17.5 million in cash, subject to certain adjustments, of which $0.5 million had been deposited in escrow as of December 31, 2008 and 2007. We would have paid $10.5 million of the aggregate purchase price to the seller and $7.0 million to Spectrum Scan-Idyllwild, LLC, or Spectrum Scan. As a condition to our then pending purchase of the assets from the seller, Liberman Broadcasting of California had entered into an agreement relating to the relocation and purchase of KDES-FM with Spectrum Scan whereby it would have paid $7.0 million to Spectrum Scan in exchange for Spectrum Scan’s agreement to terminate its option to purchase KWXY-FM, located in Cathedral City, California, and Spectrum Scan’s assistance in the relocation of KDES-FM from Palm Springs, California to Redlands, California. Payment to Spectrum Scan was conditioned on the completion of the purchase of the assets from the seller. However, if we had received final FCC approval and the purchase of KDES-FM was not completed, we would have been required to pay a $500,000 fee to Spectrum Scan.
In July 2009, Liberman Broadcasting of California LLC and LBI Radio License LLC entered into an assignment and assumption agreement with LC Media LP and R&R Radio Corporation, pursuant to which Liberman Broadcasting of California LLC and LBI Radio License LLC assigned all of their rights, benefits, obligations and duties in and to such asset purchase agreement to purchase the selected assets of radio station KDES-FM to LC Media and LC Media assumed all of the rights, benefits, obligations and duties
32
Table of Contents
under such asset purchase agreement, including payment of the purchase price to R&R Radio Corporation and the entry into a substitute escrow agreement with R&R Radio Corporation. As a result, the $0.5 million escrow deposit that had been previously paid by our subsidiaries was returned to us in August 2009.
In connection with the assignment and assumption agreement, Liberman Broadcasting of California LLC and Spectrum Scan entered into an amendment to the agreement relating to the relocation and purchase of KDES-FM pursuant to which Liberman Broadcasting of California LLC agreed to pay, subject to certain exceptions, approximately $4.2 million to Spectrum Scan (instead of the $7.0 million that had been previously agreed upon) in exchange for Spectrum Scan’s agreement to terminate its option to purchase KWXY-FM, located in Cathedral City, California, and Spectrum Scan’s assistance in the relocation of KDES-FM from Palm Springs, California to Redlands, California when LC Media and R&R Radio Corporation consummated the acquisition of the selected assets.
As consideration for the assignment and assumption agreement and the amendment to the agreement with Spectrum Scan, LC Media agreed to pay, subject to and upon consummation of the purchase of KDES-FM from R&R Radio by LC Media, $5.9 million to us. We, in turn, agreed to pay $4.2 million to Spectrum Scan as described above. In February 2010, the purchase of KDES-FM was consummated by LC Media, and we received $5.9 million from LC Media, and we, in turn, paid $4.2 million to Spectrum Scan in accordance with the amendment described above.
We generally experience lower operating margins for several quarters following the acquisition of radio and television stations. This is primarily due to the time it takes to fully implement our format changes, build our advertiser base and gain viewer or listener support.
From time to time, we engage in discussions with third parties concerning the possible acquisition of additional radio or television stations and their related assets. Any such discussions may or may not lead to our acquisition of additional broadcasting assets.
Sale and Issuance of Liberman Broadcasting’s Class A Common Stock
In March 2007, our parent, Liberman Broadcasting, sold shares of its Class A common stock to affiliates of Oaktree Capital Management, LLC, or Oaktree, and Tinicum Capital Partners II, L.P., or Tinicum. The sale resulted in net proceeds to Liberman Broadcasting at closing of approximately $117.3 million, after deducting approximately $7.7 million in closing and transaction costs. A portion of these net proceeds were used to repay Liberman Broadcasting’s 9% subordinated notes due 2014 and to redeem related warrants to purchase shares of common stock of the predecessor of Liberman Broadcasting. Liberman Broadcasting contributed approximately $47.9 million of the net proceeds to us, and we, in turn, contributed $47.9 million to LBI Media. LBI Media used the proceeds contributed to it to repay outstanding amounts borrowed under its senior revolving credit facility.
In connection with the sale of Liberman Broadcasting’s Class A common stock, Liberman Broadcasting and its stockholders entered into an investor rights agreement that defines certain rights and obligations of Liberman Broadcasting and the stockholders of Liberman Broadcasting. Pursuant to this investor rights agreement, certain investors have the right to consent to certain transactions involving us, Liberman Broadcasting, and our subsidiaries, including:
| • | certain acquisitions or dispositions of assets by us, Liberman Broadcasting and our subsidiaries that are consummated on or after September 30, 2009; |
| • | certain transactions between us, Liberman Broadcasting and our subsidiaries, on the one hand, and Jose Liberman, our chairman and LBI Media’s chairman, Lenard Liberman, our chief executive officer, president and secretary and LBI Media’s chief executive officer, president and secretary, or certain of their respective family members, on the other hand; |
| • | certain issuances of equity securities to employees or consultants of ours, Liberman Broadcasting, and our subsidiaries; |
| • | certain changes in the compensation arrangements with Jose Liberman, Lenard Liberman or certain of their respective family members; |
| • | material modifications in our business strategy and the business strategy of Liberman Broadcasting and our subsidiaries; |
| • | commencement of a bankruptcy proceeding related to us, Liberman Broadcasting, and our subsidiaries; |
| • | certain changes in Liberman Broadcasting’s corporate form of to an entity other than a Delaware corporation; |
| • | any change in Liberman Broadcasting’s auditors to a firm that is not a big four accounting firm; and |
| • | certain change of control transactions. |
Under the investor rights agreement, our parent has granted the investors and other holders of Liberman Broadcasting’s common stock the right to require Liberman Broadcasting in certain circumstances to use its best efforts to register the resale of their shares of Liberman Broadcasting’s common stock under the Securities Act of 1933, as amended, or Securities Act. Among other registration rights, Liberman Broadcasting has granted the investors the right to require the registration of the resale of their shares and the listing of our parent’s common stock on an exchange, so long as the holders of a majority of Liberman Broadcasting’s common stock that are held by either Oaktree or Tinicum or their permitted transferees request such registration and listing.
Liberman Broadcasting is responsible for paying all registration expenses in connection with any demand registration pursuant to the investors rights agreement, including the reasonable fees of one counsel chosen by the investors participating in such demand registration, but excluding any underwriters’ discounts and commissions. If after the termination of two best efforts attempts to consummate a demand registration, the investors request another demand registration, the investors that elect to participate in the demand registration will be responsible for paying all above referenced registration expenses in connection with any additional attempt to consummate such demand registration.
Liberman Broadcasting has agreed to indemnify each of the investors party to the investors rights agreement against certain liabilities under the Securities Act in connection with any registration of their registrable shares.
33
Table of Contents
Refinancing of LBI Media’s Senior Subordinated Notes
In July 2007, LBI Media issued approximately $228.8 million aggregate principal amount of 8 1 /2% Senior Subordinated Notes that mature in 2017, resulting in gross proceeds of approximately $225.0 million and net proceeds of approximately $221.6 million after certain transaction costs. The net proceeds of the 8 1 /2% senior subordinated notes were used to redeem LBI Media’s 10 1/8% senior subordinated notes due 2012, to repay a portion of the borrowings under LBI Media’s senior revolving credit facility and for general corporate purposes. The 10 1/ 8% senior subordinated notes were redeemed in full in August 2007. See “—Liquidity and Capital Resources” for more information on the 8 1 /2% senior subordinated notes.
Results of Operations
Separate financial data for each of our operating segments is provided below. We evaluate the performance of our operating segments based on the following:
| Year Ended December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
| (in thousands) | ||||||||||||
| Net revenues: |
||||||||||||
| Radio |
$ | 59,120 | $ | 65,301 | $ | 59,846 | ||||||
| Television |
43,801 | 51,011 | 54,428 | |||||||||
| Total |
$ | 102,921 | $ | 116,312 | $ | 114,274 | ||||||
| Total operating expenses before depreciation and amortization, loss on sale and disposal of property and equipment, impairment of broadcast licenses, deferred benefit and stock-based compensation expense: |
||||||||||||
| Radio |
$ | 34,597 | $ | 34,570 | $ | 30,718 | ||||||
| Television |
33,678 | 38,522 | 36,070 | |||||||||
| Total |
$ | 68,275 | $ | 73,092 | $ | 66,788 | ||||||
| Depreciation and amortization: |
||||||||||||
| Radio |
$ | 4,841 | $ | 5,029 | $ | 3,987 | ||||||
| Television |
4,862 | 4,914 | 4,949 | |||||||||
| Total |
$ | 9,703 | $ | 9,943 | $ | 8,936 | ||||||
| Loss on sale and disposal of property and equipment: |
||||||||||||
| Radio |
$ | 182 | $ | 1,355 | $ | — | ||||||
| Television |
1,625 | 2,151 | — | |||||||||
| Total |
$ | 1,807 | $ | 3,506 | $ | — | ||||||
| Impairment of broadcast licenses: |
||||||||||||
| Radio |
$ | 79,040 | $ | 60,340 | $ | 8,143 | ||||||
| Television |
47,503 | 31,400 | — | |||||||||
| Total |
$ | 126,543 | $ | 91,740 | $ | 8,143 | ||||||
| Deferred benefit: |
||||||||||||
| Radio |
$ | — | $ | — | $ | (3,952 | ) | |||||
| Television |
— | — | — | |||||||||
| Total |
$ | — | $ | — | $ | (3,952 | ) | |||||
| Stock-based compensation expense: |
||||||||||||
| Corporate |
$ | 28 | $ | — | $ | — | ||||||
| Total |
$ | 28 | $ | — | $ | — | ||||||
| Operating (loss) income: |
||||||||||||
| Radio |
$ | (59,540 | ) | $ | (35,993 | ) | $ | 20,950 | ||||
| Television |
(43,867 | ) | (25,976 | ) | 13,409 | |||||||
| Corporate |
(28 | ) | — | — | ||||||||
| Total |
$ | (103,435 | ) | $ | (61,969 | ) | $ | 34,359 | ||||
| Adjusted EBITDA (1): |
||||||||||||
| Radio |
$ | 24,523 | $ | 30,731 | $ | 33,080 | ||||||
| Television |
10,123 | 12,489 | 18,358 | |||||||||
| Corporate |
— | — | (7,594 | ) | ||||||||
| Total |
$ | 34,646 | $ | 43,220 | $ | 43,844 | ||||||
| Total assets: |
||||||||||||
| Radio |
$ | 182,242 | $ | 266,040 | $ | 318,554 | ||||||
| Television |
101,450 | 134,771 | 172,542 | |||||||||
| Corporate |
15,152 | 27,376 | 25,595 | |||||||||
| Total |
$ | 298,844 | $ | 428,187 | $ | 516,691 | ||||||
34
Table of Contents
| (1) | We define Adjusted EBITDA as net income or loss less discontinued operations, net of income taxes, plus income tax expense or benefit, gain or loss on sale and disposal of property and equipment, gain or loss on sale of investments, net interest expense, interest rate swap expense or income, impairment of broadcast licenses, depreciation and amortization, stock-based compensation expense and other non-cash gains and losses. For the year ended December 31, 2007, other non-cash losses includes a $1.2 million charge related to the write off of unamortized deferred financing costs associated with LBI Media’s former 10 1/8% senior subordinated notes, which were redeemed in August 2007. See footnote (2) under “Item 6. Selected Financial Data” for a reconciliation of Adjusted EBITDA to net cash provided by operating activities. We discuss Adjusted EBITDA and the limitations of this financial measure in more detail under “—Non-GAAP Financial Measures.” |
Year Ended December 31, 2009 Compared to Year Ended December 31, 2008
Net Revenues. Net revenues decreased by $13.4 million, or 11.5%, to $102.9 million for the year ended December 31, 2009, from $116.3 million in 2008. The change was primarily attributable to decreased advertising revenue in both our radio and television segments, reflecting the general decline in the advertising industry due to the downturn in the local and U.S. economies. However, these declines were partially offset by incremental revenue from our EstrellaTV national television network.
Net revenues for our radio segment decreased by $6.2 million, or 9.5%, to $59.1 million for the year ended December 31, 2009, from $65.3 million for the same period in 2008. This change was primarily attributable to a decline in advertising revenue in our Los Angeles market as a result of the downturn in the Southern California local economy. However, this decrease was partially offset by increased advertising revenue in our Texas market.
Net revenues for our television segment decreased by $7.2 million, or 14.1%, to $43.8 million for the year ended December 31, 2009, from $51.0 million in 2008. The decrease was attributable to lower advertising revenue in all of our markets, reflecting the downturn in the local and U.S. economies. This decrease was partially offset by incremental revenue from our EstrellaTV national television network.
We currently anticipate full year net revenue to increase in 2010 as compared to 2009 in both our radio and television segments, primarily due to projected improvements in the U.S. national and local economies, which we expect to result in increased advertising time sold and higher rates. We also expect our net revenues to benefit incrementally from the first full year of operations for our EstrellaTV national television network, incremental revenues from the leasing of our digital multicast television channels and to a lesser extent, the expansion of our Don Cheto radio network.
Total operating expenses. Total operating expenses increased by $28.0 million, or 15.7%, to $206.3 million for the year ended December 31, 2009 from $178.3 million for the same period in 2008. The increase was primarily attributable to a $34.8 million increase in broadcast license impairment charges, primarily due to additional charges recorded in 2009 in our Southern California radio and television markets. These increases were partially offset by:
| (1) | a $3.2 million decrease in selling, general and administrative expenses, primarily due to (a) lower sales commissions expenses, reflecting lower net revenues and commission rates, and (b) a reduction in employee benefit costs; |
| (2) | a $1.7 million decline in loss on disposal of property and equipment, primarily resulting from (a) a reduction in obsolete transmission equipment disposals in 2009 and (b) the absence of asset disposals in 2009 related to the Hurricane Ike natural disaster in 2008; |
| (3) | a $1.6 million decrease in programming and technical expenses, primarily resulting from an increase in management’s estimate of the period over which certain of our internally produced programs contribute to our revenues. Prior to January 1, 2009, television production costs for all programs were charged to operating expense as incurred, because we had estimated that the useful lives of these programs did not exceed beyond the initial airing or did not have revenue directly attributable to the production. Beginning January 1, 2009, we determined, based on an evaluation of our historical programming data, that certain of our television programs have demonstrated the ability to generate gross revenues beyond initial airing, and therefore, television production costs for these programs are charged to operating expense based on the ratio of the current period’s gross revenues to estimated remaining total gross revenues from all sources on an individual program basis. If we had not made this change and continued to expense television production costs for these programs as incurred as we had in the prior fiscal year, our program and technical expenses would have been approximately $5.5 million higher for the year ended December 31, 2009. The decline in program and technical expenses was also due to lower payroll expenses resulting from staff reductions. However, the overall decrease in program and technical expenses was partially offset by higher ratings service costs and music license fees; |
35
Table of Contents
| (4) | a $0.2 million decrease in depreciation and amortization; and |
| (5) | a $0.1 million decrease in promotional expenses. |
We expect that our total operating expenses, before consideration of any impairment charges, will increase in 2010 as compared to 2009. We anticipate higher programming costs for our television segment primarily reflecting (a) the absence of the benefit we realized in 2009 relating to the capitalization of certain television production costs and (b) higher satellite, ratings service, personnel and promotional expenses relating to the expansion of our EstrellaTV network. This expectation could be negatively impacted by the number and size of additional radio and television assets that we acquire, if any, during 2010.
Total operating expenses for our radio segment increased by $17.3 million, or 17.2%, to $118.6 million for the year ended December 31, 2009, from $101.3 million in 2008. This change was primarily attributable to (a) an $18.7 million increase in broadcast license impairment charges primarily due to additional impairments realized in 2009 relating to our Southern California stations, and (b) a $0.2 million increase in programming and technical expenses. These increases were partially offset by:
| (1) | a $1.2 million decline in loss on disposal of property and equipment primarily resulting from (a) a reduction in obsolete transmission equipment disposals in 2009 and (b) the absence of asset disposals in 2009 related to Hurricane Ike; |
| (2) | a $0.2 million decrease in depreciation and amortization; |
| (3) | a $0.1 million decrease in selling, general and administrative expenses; and |
| (4) | a $0.1 million decrease in promotional expenses. |
Total operating expenses for our television segment increased by $10.7 million, or 13.9%, to $87.7 million for the year ended December 31, 2009, from $77.0 million for the same period in 2008. This change was primarily attributable to a $16.1 million increase in broadcast license impairment charges, partially offset by:
| (1) | a $3.1 million decrease in selling, general and administrative expenses, primarily due to (a) lower sales commissions expenses, reflecting lower net revenues and payout rates, and (b) a reduction in employee benefit costs; |
| (2) | a $1.8 million decrease in programming and technical expenses, primarily reflecting the increase in the period over which certain in-house television productions cost are amortized and lower payroll expenses resulting from staff reductions. However, the overall decrease was partially offset by higher ratings service costs and music license fees; and |
| (3) | a $0.5 million decline in loss on disposal of property and equipment, primarily reflecting the absence of asset disposals in 2009 related to Hurricane Ike. |
Gain (loss) on note purchases and redemptions. In the fourth quarter of 2008, we purchased in various open market transactions, approximately $22.0 million aggregate principal amount of our outstanding 11% senior discount notes at a weighted average redemption price of 43.321% of face value. These purchases resulted in a combined pre-tax gain of approximately $12.5 million. In the second quarter of 2009, we purchased an additional $1.0 million aggregate principal of our outstanding 11% senior discount notes on the open market at a purchase price of 48.0% of the principal amount. The purchase resulted in a pre-tax gain of approximately $0.5 million (see “Liquidity and Capital Resources—Senior Discount Notes”).
Interest expense and interest and other income, net. Interest expense and interest and other income, net, decreased by $3.6 million, or 9.0%, to $33.7 million for the year ended December 31, 2009, from $37.0 million for the corresponding period in 2008. Although the average debt balance under LBI Media’s senior secured credit facilities was higher in 2009, as compared to 2008, the average interest rates were lower during 2009, which more than offset the higher debt balances. In addition, our senior discount notes began accruing cash interest at 11% in October 2008, which was lower than the effective yield at which the notes had been previously accreting. As a result, interest expense related to our senior discount notes decreased by $2.0 million during the year ended December 31, 2009, as compared to the same period in 2008.
Our interest expense may increase in 2010 if we borrow additional amounts under LBI Media’s senior revolving credit facility to fund operations or acquire additional radio or television station assets, including the pending acquisitions of television stations KWHD-TV from Lasea Broadcasting Corporation and W40BY from Trinity Broadcasting Network. See “—Acquisitions.”
Interest rate swap income (expense). Interest rate swap income (expense) was income of $2.4 million for the year ended December 31, 2009, as compared to an expense of $3.4 million for 2008, a change of $5.8 million. Interest rate swap income (or expense) reflects changes in the estimated fair market value of our interest rate swap during the respective period.
36
Table of Contents
Equity in losses of equity method investment. In April 2008, one of our indirect, wholly owned subsidiaries purchased a 30% interest in PortalUno, Inc., or PortalUno, a development stage, online search engine for the Hispanic community. Equity in losses of equity method investment of $0.1 million and $0.3 million for the years ended December 31, 2009 and December 31, 2008, respectively, represents our share of PortalUno’s losses during the periods.
Impairment of equity method investment. In the third quarter of 2008, we tested our equity investment in PortalUno for impairment. Based on this analysis, including the overall decline in market conditions facing the U.S. economy, we determined that an other-than-temporary decline in the estimated fair value of the investment had occurred. As such, during the year ended December 31, 2008, we recorded a $0.2 million impairment charge to reduce the carrying value of the investment to its estimated fair value. No such charge was recorded in 2009.
Benefit from (provision for) income taxes. During the year ended December 31, 2009, we recognized an income tax benefit of $20.3 million as compared to a benefit of $7.2 million for the same period in 2008. The $13.1 million increase in our income tax benefit primarily reflects changes in our deferred tax (and related valuation allowance) account balances associated with our indefinite-lived assets, resulting from higher broadcast license impairment charges recorded in 2009 as compared to 2008.
Discontinued operations, net of income taxes. In December 2009, we completed the sale of radio station KSEV-AM in our Texas market for approximately $6.5 million in cash. In accordance with Accounting Standards Codification 360-10 “Discontinued Operations”, or ASC 360-10, we have reported the operating results KSEV-AM in discontinued operations within the accompanying consolidated statements of operations for all periods presented. Discontinued operations, net of income taxes, was $1.4 million for the year ended December 31, 2009, as compared to $1.2 million for the same period in 2008, an increase of $0.2 million. The increase was primarily attributable to a $1.2 million gain realized on the sale of the station, partially offset by a $0.7 million increase in the income tax provision resulting from the sale and a $0.3 million impairment charge recognized in 2009. No impairment charge was recorded in 2008.
Net loss. We recognized a net loss of $112.6 million for the year ended December 31, 2009, as compared to a net loss of $82.0 million for the same period of 2008, a change of $30.6 million. The change was primarily attributable to (a) a $34.8 million increase in broadcast license impairment charges and (b) a $13.4 million decrease in net revenue. These increases were partially offset by a $13.1 million increase in income tax benefit and other factors noted above.
Adjusted EBITDA. Adjusted EBITDA decreased by $8.6 million, or 19.8%, to $34.6 million for the year ended December 31, 2009, as compared to $43.2 million for the same period in 2008. This change was primarily the result of the overall decline in radio and television advertising revenues, partially offset by the decrease in program and technical expenses and selling, general and administrative expenses, as discussed above.
Adjusted EBITDA for our radio segment decreased by $6.2 million, or 20.2%, to $24.5 million for the year ended December 31, 2009, as compared to $30.7 million in 2008. The decrease was primarily the result of the decline in advertising revenues in our Southern California market, as discussed above.
Adjusted EBITDA for our television segment decreased by $2.4 million, or 18.9%, to $10.1 million for the year ended December 31, 2009, from $12.5 million for the same period in 2008. This decrease was primarily the result of lower advertising revenue, partially offset by declines in program and technical expenses and selling, general and administrative expenses, as discussed above.
For a reconciliation of Adjusted EBITDA to net cash (used in) provided by operating activities, see footnote (2) under “Item 6. Selected Financial Data.”
Year Ended December 31, 2008 Compared to Year Ended December 31, 2007
Net Revenues. Net revenues increased by $2.0 million, or 1.8%, to $116.3 million for the year ended December 31, 2008, from $114.3 million in 2007. This increase was primarily attributable to increased advertising revenue in all of our radio markets and incremental revenue from our Salt Lake City television station, which we acquired in November 2007. These gains were partially offset by declines in our California and Texas television markets, primarily resulting from lower infomercial advertising, cancellations in Texas resulting from the impact of Hurricane Ike and the general decline in the advertising industry due to the downturn in the U.S. economy.
37
Table of Contents
Net revenues for our radio segment increased by $5.5 million, or 9.1%, to $65.3 million for the year ended December 31, 2008, from $59.8 million for the same period in 2007. This increase was attributable to growth in all of our radio markets—Los Angeles, Dallas and Houston—reflecting improved station ratings and increased national advertiser acceptance of our station formats.
Net revenues for our television segment decreased by $3.4 million, or 6.3%, to $51.0 million for the year ended December 31, 2008, from $54.4 million in 2007. This decrease was attributable to lower advertising revenue in our California and Texas markets, due to the downturn in the local and U.S. economies, partially offset by incremental advertising revenue in our Utah market.
Total operating expenses. Total operating expenses increased by $98.4 million, or 123.1%, to $178.3 million for the year ended December 31, 2008 from $79.9 million for the same period in 2007. This increase was primarily attributable to:
| (1) | an $83.6 million increase in non-cash broadcast license impairment charges, primarily due to (a) lower net revenue growth projections for the broadcast industry, (b) an increase in discount rates and (c) a decline in cash flow multiples for recent station sales; |
| (2) | a $4.0 million decrease in deferred compensation benefit, reflecting the impact of an accrual reduction that we recorded in 2007; |
| (3) | a $3.5 million increase in loss on sale and disposal of property and equipment of which (a) $2.8 million related to the write-off of obsolete property and equipment primarily in our Texas market and (b) $0.6 million reflects the damage caused by Hurricane Ike in September 2008; |
| (4) | a $3.2 million increase in selling, general and administrative expenses primarily reflecting (a) higher corporate expenses, including increases in salaries, professional fees and pre-acquisition costs, (b) additional expenses related to our radio station in the Riverside and San Bernardino region of our Los Angeles market and our television station in Salt Lake City, each acquired in the second half of 2007 and (c) higher selling expenses associated with the overall increase in net revenues; |
| (5) | a $2.7 million increase in programming and technical expenses primarily related to (a) increased production of new in-house television programs, (b) higher music license fees, including charges associated with the settlement of a royalty dispute with ASCAP, and (c) incremental expenses related to our Salt Lake City television station that we acquired in November 2007; |
| (6) | a $1.0 million increase in depreciation and amortization primarily due to incremental depreciation relating to our 2007 asset acquisitions and two radio tower sites in Texas that we completed construction on in the fourth quarter of 2007; and |
| (7) | a $0.4 million increase in promotional expenses, primarily reflecting new events that our radio stations conducted in 2008. |
As noted in (2) above, the increase in total operating expenses was partially attributable to a $4.0 million decrease in deferred compensation benefit because the amounts that were ultimately paid to two employees in 2007 were less than the amounts that had been accrued at December 31, 2006. As of December 31, 2009, all of our deferred compensation agreements had expired and we had estimated that no amounts were due under an agreement with a December 31, 2009 “net value” determination date. However, prior thereto, our deferred compensation liability could increase in future periods based on changes in an employee’s vesting percentage, which was based on time and performance measures, and could increase or decrease in future periods based on changes in the net value of our parent, Liberman Broadcasting, Inc. See “—Critical Accounting Policies—Deferred Compensation”.
Total operating expenses for our radio segment increased by $62.4 million, or 160.4%, to $101.3 million for the year ended December 31, 2008, from $38.9 million in 2007. This increase was primarily attributable to:
| (1) | a $52.2 million increase in non-cash broadcast license impairment charges, primarily due to (a) lower net revenue growth projections for the broadcast industry, (b) an increase in discount rates and (c) a decline in cash flow multiples for recent station sales; |
| (2) | a $4.0 million decrease in deferred compensation benefit, reflecting the impact of the accrual reduction that we recorded in 2007; |
| (3) | a $2.5 million increase in selling, general and administrative expenses, primarily due to (a) higher corporate expenses, including increases in salaries, professional fees and pre-acquisition costs, (b) additional expenses related to our radio station in the Riverside and San Bernardino region of our Los Angeles market, that we acquired in the second half of 2007 and (c) additional selling expenses incurred for our Texas radio stations, reflecting the overall growth in net revenue in that market; |
38
Table of Contents
| (4) | a $1.3 million increase in loss on sale and disposal of property and equipment of which (a) $0.7 million relates to the write-off of obsolete transmission equipment and (b) $0.6 million reflects the damage caused by Hurricane Ike in September 2008; |
| (5) | a $1.1 million increase in programming and technical expenses primarily related to (a) higher music license fees, including charges associated with the settlement of a royalty dispute with ASCAP, (b) additional expenses related to our radio station in the Riverside and San Bernardino region of our Los Angeles market acquired in September 2007, and (c) an increase in market research costs; |
| (6) | a $1.0 million increase in depreciation and amortization primarily due to incremental expenses relating to our 2007 asset acquisitions and two radio tower sites in Texas that we completed construction on in the fourth quarter of 2007; and |
| (7) | a $0.3 million increase in promotional expenses, primarily reflecting new events that our radio stations conducted in 2008. |
Total operating expenses for our television segment increased by $36.0 million, or 87.7%, to $77.0 million for the year ended December 31, 2008, from $41.0 million for the same period in 2007. This increase was primarily due to:
| (1) | a $31.4 million increase in non-cash broadcast license impairment charges, primarily due to (a) lower net revenue growth projections for the broadcast industry, (b) an increase in discount rates and (c) a decline in cash flow multiples for recent station sales; |
| (2) | a $2.2 million loss on disposal of property and equipment, primarily related to the write-off of obsolete transmission equipment in our Texas market; |
| (3) | a $1.6 million increase in programming and technical expenses primarily related to (a) an increase in the production of new in-house television programs, (b) higher music license fees, including charges associated with the settlement of a royalty dispute with ASCAP, and (c) incremental expenses for our Salt Lake City television station acquired in November 2007; |
| (4) | a $0.7 million increase in selling, general and administrative expenses, primarily reflecting higher corporate expenses, including increases in salaries, professional fees and pre-acquisition costs; and |
| (5) | a $0.1 million increase in promotional expenses. |
Gain (loss) on note purchases and redemptions. In the fourth quarter of 2008, we purchased in various open market transactions, approximately $22.0 million aggregate principal amount of our outstanding 11% senior discount notes at a weighted average redemption price of 43.321% of face value. These purchases resulted in a combined pre-tax gain of approximately $12.5 million (see “Liquidity and Capital Resources—Senior Discount Notes”). No such purchases occurred in 2007.
In July 2007, LBI Media deposited amounts in trust to redeem all of its outstanding 10 1/8% senior subordinated notes at a redemption price of 105.0625% of the outstanding principal amount, plus accrued and unpaid interest to August 22, 2007, the redemption date. In connection with the redemption of these notes, we recorded a loss of $8.8 million, which represents the early redemption premium on the notes of $7.6 million, and the write-off of the unamortized deferred financing costs related to these notes of $1.2 million (see “—Refinancing of LBI Media’s Senior Subordinated Notes”). No such redemption occurred in 2008.
Interest expense and interest and other income, net. Interest expense and interest and other income, net, increased by $0.7 million, or 1.9%, to $37.0 million for the year ended December 31, 2008, from $36.3 million for the corresponding period in 2007. Excluding $0.6 million of interest earned on amounts deposited in escrow prior to redeeming LBI Media’s former 10 1/8% senior subordinated notes, interest expense and other income, net, increased by $0.1 million. As a result of the asset acquisitions we completed in 2007 and the $10.0 incremental borrowing under LBI Media’s term loan facility in January 2008, our average debt balance increased in 2008 as compared to 2007. Although our average interest rates in 2008 were lower than the 2007 rates, they did not offset the higher average debt balance.
Interest rate swap income (expense). Interest rate swap expense increased by $1.0 million, or 42.4%, to $3.4 million for the year ended December 31, 2008, from $2.4 million for the same period of 2007. This increase reflects the change in the fair market value of our interest rate swap during the year.
Equity in losses of equity method investment. In April 2008, one of our indirect, wholly owned subsidiaries purchased a 30% interest in PortalUno, Inc., or PortalUno, a development stage, online search engine for the Hispanic community. Equity in losses of equity method investment of $0.3 million for the year ended December 31, 2008 represents our share of PortalUno’s loss during the period.
39
Table of Contents
Impairment of equity method investment. In the third quarter of 2008, we tested our equity investment in PortalUno for impairment. Based on this analysis, including the overall decline in market conditions facing the U.S. economy, we determined that an other-than-temporary decline in the estimated fair value of the investment had occurred. As such, during the year ended December 31, 2008, we recorded a $0.2 million impairment charge to reduce the carrying value of the investment to its estimated fair value.
Benefit from (provision for) income taxes. During the year ended December 31, 2008, we recognized an income tax benefit of $7.2 million as compared to an income tax provision of $44.6 million for the same period in 2007. As described above under “—Sale and Issuance of Liberman Broadcasting’s Class A Common Stock,” certain investors purchased shares of our parent’s Class A common stock in March 2007. As a result, our parent no longer qualified as an S corporation and we and our subsidiaries no longer qualified as qualified subchapter S corporations. Accordingly, we recorded a one-time non-cash charge of $46.8 million to adjust our deferred tax accounts during the year ended December 31, 2007. The change in our income tax benefit (provision) also resulted from the impact of the $83.6 million increase in broadcast license impairment charges, as described above.
Discontinued operations, net of income taxes. In December 2009, we completed the sale of radio station KSEV-AM in our Texas market for approximately $6.5 million in cash. In accordance with ASC 360-10, we have reported the operating results KSEV-AM in discontinued operations within the accompanying consolidated statements of operations for all periods presented. Income from discontinued operations, net of income taxes, was $1.2 million for the years ended December 31, 2008 and 2007.
Net loss. We recognized a net loss of $82.0 million for the year ended December 31, 2008, as compared to a net loss of $56.5 million for the same period of 2007, a change of $25.4 million. The change was primarily attributable to the $83.6 million increase in broadcast license impairment charges, partially offset by (a) the $51.8 million change in income tax benefit (provision) and (b) the $21.3 million change in gain (loss) on note purchases and redemptions, as described above.
Adjusted EBITDA. Adjusted EBITDA decreased by $0.6 million, or 1.4%, to $43.2 million for the year ended December 31, 2008, as compared to $43.8 million for the same period in 2007. This change primarily reflects increases in programming and technical, selling, general and administrative expenses and a decrease in deferred compensation benefit, partially offset by increased advertising revenue. However, excluding the one-time $7.6 million charge related to the early redemption premium paid on LBI Media’s former 10 1/8% senior subordinated notes in 2007, Adjusted EBITDA decreased 16.0% to $43.2 million, as compared to $51.4 million in 2007. The following is a reconciliation of our Adjusted EBITDA, as reported, to our Adjusted EBITDA excluding this one-time redemption charge:
| Twelve Months Ended December 31, | ||||||
| 2008 | 2007 | |||||
| Adjusted EBITDA, as reported |
$ | 43,220 | $ | 43,844 | ||
| Early redemption premium on 10 1 /8% senior subordinated notes |
— | 7,594 | ||||
| Adjusted EBITDA, excluding one-time redemption charge |
$ | 43,220 | $ | 51,438 | ||
Adjusted EBITDA for our radio segment decreased by $2.3 million, or 7.1%, to $30.7 million for the year ended December 31, 2008, as compared to $33.0 million in 2007. The decrease was primarily the result of (a) the decrease in deferred compensation benefit and (b) the increase programming and technical and selling, general and administrative expenses, partially offset by increased advertising revenue, as discussed above.
Adjusted EBITDA for our television segment decreased by $5.9 million, or 32.0%, to $12.5 million for the year ended December 31, 2008, from $18.4 million for the same period in 2007. This decrease was primarily the result of lower advertising revenue and increased programming and technical expenses, as discussed above.
Liquidity and Capital Resources
LBI Media’s Senior Credit Facilities. Our primary sources of liquidity are cash provided by operations and available borrowings under LBI Media’s $150.0 million senior revolving credit facility. In May 2006, LBI Media refinanced its prior $220.0 million senior revolving credit facility with a $150.0 million senior revolving credit facility and a $110.0 million senior term loan facility. In January 2008, LBI Media entered into a commitment increase agreement pursuant to which its senior term loan facility increased by $10.0 million from $108.4 million (net of principal repayments from May 2006 through January 2008) to $118.4 million. LBI Media borrowed the full amount of the increase in the commitment.
40
Table of Contents
LBI Media has the option to request its existing or new lenders under its senior secured term loan facility and under its $150.0 million senior secured revolving credit facility to increase the aggregate amount of its senior credit facilities by an additional $40.0 million; however, its existing and new lenders are not obligated to do so. The increases under the senior secured revolving credit facility and the senior secured term loan credit facility, taken together, cannot exceed $50.0 million in the aggregate (including the $10.0 million increase in January 2008).
Under the senior revolving credit facility, LBI Media has a swing line sub-facility equal to an amount of not more than $5.0 million. Letters of credit are also available to LBI Media under the senior revolving credit facility and may not exceed the lesser of $5.0 million or the available revolving commitment amount. There are no scheduled reductions of commitments under the senior revolving credit facility. Under the senior term loan facility, each quarter, LBI Media must pay 0.25% of the original principal amount of the term loans (repayment of $275,000 per quarter as of December 31, 2009), plus 0.25% of the additional amount borrowed in January 2008 (repayment of $25,000 per quarter as of December 31, 2009) and 0.25% of any additional principal amount incurred in the future under the senior term loan facility. The senior credit facilities mature on March 31, 2012.
As of December 31, 2009, LBI Media had approximately $33.6 million aggregate principal amount outstanding under the senior revolving credit facility and $115.7 million aggregate principal amount of outstanding senior term loans. Since December 31, 2009, LBI Media has borrowed, net of repayments, approximately $9.4 million under its senior secured revolving credit facility.
Borrowings under the senior credit facilities bear interest based on either, at LBI Media’s option, the base rate for base rate loans or the LIBOR rate for LIBOR loans, in each case plus the applicable margin stipulated in the senior credit agreements. The base rate is the higher of (i) Credit Suisse’s prime rate and (ii) the Federal Funds Effective Rate (as published by the Federal Reserve Bank of New York) plus 0.50%. The applicable margin for revolving loans, which is based on LBI Media’s total leverage ratio, ranges from 0% to 1.00% per annum for base rate loans and from 1.00% to 2.00% per annum for LIBOR loans. Including the $10.0 million increase to LBI Media’s senior secured term loan facility in January 2008, the applicable margin for term loans ranges from 0.50% to 0.75% for base rate loans and from 1.50% to 1.75% for LIBOR loans. The applicable margin for any future term loans will be agreed upon at the time those loans are incurred. Interest on base rate loans is payable quarterly in arrears, and interest on LIBOR loans is payable either monthly, bimonthly or quarterly depending on the interest period elected by LBI Media. All amounts that are not paid when due under either the senior revolving credit facility or the senior term loan facility will accrue interest at the rate otherwise applicable plus 2.00% until such amounts are paid in full. In addition, LBI Media pays a quarterly unused commitment fee ranging from 0.25% to 0.50% depending on the level of facility usage. At December 31, 2009, borrowings under LBI Media’s senior credit facilities bore interest at rates between 1.73% and 4.25%, including the applicable margin.
Under the indentures governing LBI Media’s 8 1 /2% senior subordinated notes and our senior discount notes (described below), LBI Media is limited in its ability to borrow under the senior revolving credit facility and to borrow additional amounts under the senior term loan facility. LBI Media may borrow up to an aggregate of $260.0 million under the senior credit facilities (subject to certain reductions under certain circumstances) without having to comply with specified leverage ratios under the indentures governing its 8 1 /2% senior subordinated notes and our senior discount notes, but any amount over such $260.0 million that LBI Media may borrow under the senior credit facilities (subject to certain reductions under certain circumstances) will be subject to LBI Media’s and our compliance with specified leverage ratios (as defined in the indentures governing LBI Media’s 8 1 /2% senior subordinated notes and our senior discount notes). Also, the indenture governing LBI Media’s 8 1 /2% senior subordinated notes prohibits borrowings under LBI Media’s senior credit facilities, the proceeds of which would be used to repay, redeem, repurchase or refinance any of our senior discount notes earlier than one year prior to their stated maturity.
LBI Media’s senior credit facilities contain customary restrictive covenants that, among other things, limit its ability to incur additional indebtedness and liens in connection therewith and pay dividends. Under the senior revolving credit facility, LBI Media must also maintain a maximum senior secured leverage ratio (as defined in the senior credit agreement). LBI Media was in violation of certain reporting covenants under its senior credit facilities as of April 5, 2010. These violations will be cured by LBI Media upon its issuance of its consolidated financial statements and the delivery of certain certificates and other items related to such consolidated financial statements to the administrative agent.
LBI Media’s 8 1 /2% Senior Subordinated Notes. In July 2007, LBI Media issued approximately $228.8 million aggregate principal amount of 8 1 /2% Senior Subordinated Notes that mature in 2017, resulting in gross proceeds of approximately $225.0 million and net proceeds of approximately $221.6 million after deducting certain transaction costs. Under the terms of LBI Media’s 8 1 /2% senior subordinated notes, it pays semi-annual interest payments of approximately $9.7 million each February 1 and August 1, which commenced on February 1, 2008. LBI Media may redeem the 8 1 /2% senior subordinated notes at any time on or after August 1, 2012 at redemption prices specified in the indenture governing its 8 1 /2% senior subordinated notes, plus accrued and unpaid interest. At any time prior to August 1, 2012, LBI Media may redeem some or all of its 8 1 /2% senior subordinated notes at a
41
Table of Contents
redemption price equal to a “make whole” amount as set forth in the indenture governing such senior subordinated notes. Also, LBI Media may redeem up to 35% of the aggregate principal amount of the notes with the net proceeds of certain equity offerings completed on or prior to August 1, 2010 at a redemption price of 108.5% of the principal amount of the notes, plus accrued and unpaid interest, if any, thereon to the applicable redemption date.
The indenture governing these notes contains restrictive covenants that limit, among other things, LBI Media’s and its subsidiaries’ ability to incur additional indebtedness, issue certain kinds of equity, and make particular kinds of investments. The indenture governing LBI Media’s 8 1 /2% senior subordinated notes also prohibits the incurrence of indebtedness, the proceeds of which would be used to repay, redeem, repurchase or refinance any of our senior discount notes earlier than one year prior to the stated maturity of the senior discount notes unless such indebtedness is (i) unsecured, (ii) pari passu or junior in right of payment to the 8 1 /2% senior subordinated notes of LBI Media, and (iii) otherwise permitted to be incurred under the indenture governing LBI Media’s 8 1 /2% senior subordinated notes. LBI Media was in violation of certain of its reporting covenants under its indenture governing its 8 1 /2% senior subordinated notes as of March 31, 2010. These violations will be cured upon the issuance of its consolidated financial statements to the trustee.
The indenture governing these notes also provides for customary events of default, which include (subject in certain instances to cure periods and dollar thresholds): nonpayment of principal, interest and premium, if any, on the notes, breach of covenants specified in the indenture, payment defaults or acceleration of other indebtedness, a failure to pay certain judgments and certain events of bankruptcy, insolvency and reorganization. The notes will become due and payable immediately without further action or notice upon an event of default arising from certain events of bankruptcy or insolvency with respect to us and certain of its subsidiaries. If any other event of default occurs and is continuing, the trustee or the holders of at least 25% in principal amount of the then outstanding notes may declare all the notes to be due and payable immediately.
Senior Discount Notes. In October 2003, we issued $68.4 million aggregate principal amount at maturity of senior discount notes that mature in 2013. Under the terms of the senior discount notes, cash interest did not accrue and was not payable on the senior discount notes prior to October 15, 2008, and instead the accreted value of the senior discount notes increased until such date. Since October 15, 2008, cash interest began to accrue on the senior discount notes at a rate of 11% per year payable semi-annually on each April 15 and October 15, with the first cash payment made on April 15, 2009. We may redeem the senior discount notes at any time at redemption prices specified in the indenture governing our senior discount notes, plus accrued and unpaid interest.
In the fourth quarter of 2008, we purchased approximately $22.0 million aggregate principal amount of our senior discount notes in various open market transactions at a weighted average purchase price of 43.321% of the principal amount. In the second quarter of 2009, we purchased an additional $1.0 million aggregate principal amount of our senior discount notes on the open market at a purchase price of 48.0% of the principal amount.
The indenture governing the senior discount notes contains certain restrictive covenants that, among other things, limit our ability to incur additional indebtedness and pay dividends to Liberman Broadcasting. Our senior discount notes are structurally subordinated to LBI Media’s senior credit facilities and LBI Media’s 8 1 /2% senior subordinated notes.
Empire Burbank Studios’ Mortgage Note. In July 2004, one of our indirect, wholly owned subsidiaries, Empire Burbank Studios, issued an installment note for approximately $2.6 million. The loan is secured by Empire Burbank Studios’ real property and bears interest at 5.52% per annum. The loan is payable in monthly principal and interest payments of approximately $21,000 through maturity in July 2019.
42
Table of Contents
The following table summarizes our various levels of indebtedness at December 31, 2009:
| Issuer |
Form of Debt |
Principal Amount |
Scheduled Maturity Date |
Interest Rate | ||||
| LBI Media, Inc. | $150.0 million senior secured revolving credit facility | $33.6 million(1) | March 31, 2012 | LIBOR or base rate, plus an applicable margin dependent on LBI Media’s leverage ratio (2.3% weighted average at December 31, 2009) | ||||
| LBI Media, Inc. | Senior secured term loan facility | $115.7 million | March 31, 2012 | LIBOR or base rate, plus an applicable margin dependent on LBI Media’s leverage ratio (1.8% weighted average at December 31, 2009) | ||||
| LBI Media, Inc. | 8 1/2% senior subordinated notes | $228.8 million aggregate principal amount at maturity | August 1, 2017 | 8.5% | ||||
| LBI Media Holdings, Inc. | Senior discount notes | $68.4 million(2) | October 15, 2013 | 11% | ||||
| Empire Burbank Studios, Inc. | Mortgage note | $1.9 million | July 1, 2019 | 5.52% | ||||
| (1) | LBI Media has borrowed, net of repayments, approximately $9.4 million under its senior secured revolving credit facility since December 31, 2009. |
| (2) | In the fourth quarter of 2008 and the second quarter of 2009, we purchased approximately $22.0 million and $1.0 million, respectively, aggregate principal amount of our senior discount notes in various open market transactions. As such, the total principal amount outstanding and due to third party noteholders was $45.4 million as of December 31, 2009. |
Cash Flows. Cash and cash equivalents were $0.2 million, $0.5 million and $1.7 million at December 31, 2009, 2008 and 2007, respectively.
Net cash flow used by operating activities was $2.1 million for the year ended December 31, 2009. Net cash flow provided by operating activities was $15.8 million and $7.1 million for the years ended December 31, 2008 and 2007, respectively.
The decrease in our net cash flow provided by operating activities during the year ended December 31, 2009 as compared to 2008 was primarily attributable to a decline in advertising revenues and higher television programming payments, partially offset by lower operating costs.
The increase in our net cash flow provided by operating activities during the year ended December 31, 2008 as compared to 2007 was primarily the result of (a) a decrease in deferred compensation payments because no payments were due under our outstanding employment agreements in 2008 and (b) increases in accrued liabilities (including accrued interest) and other assets and liabilities due to the timing of payments.
Net cash flow used in investing activities was $3.2 million, $17.5 million and $50.3 million for the years ended December 31, 2009, 2008 and 2007, respectively. Net cash flow used in investing activities in 2009 primarily included $9.5 million in capital expenditures for property and equipment, primarily related to completion of construction on our new Dallas office building and studio facility and purchases of new digital transmission equipment for our television stations. Net cash flow used in investing activities in 2009 also reflects $6.4 million of net proceeds related to the sale of radio station KSEV-AM in our Houston, Texas market in December 2009.
Net cash flow used in investing activities in 2008 primarily included $12.8 million in capital expenditures for property and equipment, of which $4.7 million related to the construction of our new corporate offices in Dallas, Texas, $1.6 million in costs incurred (including amounts deposited into escrow) for the then pending acquisitions of selected assets of KVIB-FM in Phoenix and
43
Table of Contents
WASA-LP in New York, $1.5 million (including acquisition costs) paid for the acquisition of selected assets of television station KVPA-LP in the Phoenix, Arizona market, and a $1.5 million deposit made in connection with the then pending purchase of a tower site in Victoria, Texas.
Net cash flow used in investing activities in 2007 included $35.4 million (including acquisition costs) paid for the acquisitions of selected assets of KRQB-FM in the Riverside/San Bernardino area of our Los Angeles market and KPNZ-TV in the Salt Lake City, Utah market and $13.7 million in capital expenditures for property and equipment, primarily related to the construction of new towers and transmitter sites for our Dallas-Fort Worth and Houston, Texas radio stations and additional studio equipment for our Los Angeles television station.
Net cash flow provided by financing activities was $5.0 million, $0.5 million and $43.4 million for the years ended December 31, 2009, 2008 and 2007, respectively. Net cash flow provided by financing activities in 2009 primarily resulted from net bank borrowings of $5.6 million.
Net cash flow provided by financing activities in 2008 primarily resulted from net bank borrowings of $10.8 million, offset by the purchase of our senior discount notes for $9.6 million in various open market transactions in the fourth quarter of 2008, and payment of deferred financing costs of $0.5 million.
Net cash flow provided by financing activities in 2007 primarily reflects a capital contribution from our parent of $47.9 million, and, in turn, from us to LBI Media, which LBI Media used to repay outstanding borrowings under its senior credit facilities. See “—Sale and Issuance of Liberman Broadcasting’s Class A Common Stock”. Net cash flow provided by financing activities in 2007 also reflected the issuance of LBI Media’s 8 1 /2% senior subordinated notes, partially offset by the redemption of LBI Media’s 101/8% notes. See “—Refinancing of LBI Media Senior Subordinated Notes.”
Contractual Obligations. We have certain cash obligations and other commercial commitments, which will impact our short- and long-term liquidity. At December 31, 2009, such obligations and commitments were LBI Media’s senior revolving credit facility, senior term loan facility and 8 1 /2% senior subordinated notes, our senior discount notes, certain non-recourse debt of one of our indirect, wholly owned subsidiaries, our operating leases and our Nielsen network ratings contract (for a description of this contract, see Note 6 “Commitments and Contingencies – Ratings Services” in our accompanying consolidated financial statements) as follows:
| Payments Due by Period from December 31, 2009 (in millions) | |||||||||||||||
| Contractual Obligations |
Total | Less than 1 Year |
1-3 Years | 3-5 Years | More than 5 Years | ||||||||||
| Long-term debt |
$ | 608.3 | $ | 28.3 | $ | 56.3 | $ | 235.2 | $ | 288.5 | |||||
| Operating leases |
17.4 | 2.0 | 3.3 | 2.4 | 9.7 | ||||||||||
| Nielsen network ratings contract |
16.7 | 2.8 | 9.7 | 4.2 | — | ||||||||||
| Total contractual cash obligations |
$ | 642.4 | $ | 33.1 | $ | 69.3 | $ | 241.8 | $ | 298.2 | |||||
The above table includes principal and interest payments under our debt agreements based on our interest rates and principal balances as of December 31, 2009 and assumes no additional borrowings or unscheduled principal payments on LBI Media’s senior secured revolving credit facility or senior secured term loan facility until the facilities mature in March 2012.
Expected Use of Cash Flows. We believe that our cash on hand, cash provided by operating activities and borrowings under LBI Media’s senior revolving credit facility will be sufficient to permit us to fund our contractual obligations and operations for at least the next twelve months. For both our radio and television segments, we have historically funded, and will continue to fund, expenditures for operations, administrative expenses, capital expenditures and debt service from our operating cash flow and borrowings under LBI Media’s senior revolving credit facility. For our television segment, our material planned uses of liquidity during the next twelve months will include the purchase and build out of a 25,000 square foot warehouse in Burbank, California, which we intend to convert into a television production facility, at an estimated cost of approximately $10.0 million. We believe that the purchase of this facility will further enhance our ability to produce cost-effective programming, and also allow for the expansion of our internal production capabilities. In addition, our senior discount notes began accruing cash interest at a rate of 11% per year on October 15, 2008, with the first payment made on April 15, 2009. The interest payments are payable on April 15 and October 15 of each year until the notes mature on October 15, 2013. We also expect to use cash to fund the purchase prices for the selected assets of television stations KWHD-TV and W40BY, respectively, in the Denver, Colorado, and Chicago, Illinois markets, within the next twelve months, primarily through borrowings under LBI Media’s senior revolving credit facility.
44
Table of Contents
We have used, and expect to continue to use, a significant portion of our capital resources to fund acquisitions. Future acquisitions will be funded from amounts available under LBI Media’s senior revolving credit facility, the proceeds of future equity or debt offerings and our internally generated cash flows. However, our ability to pursue future acquisitions may be impaired if we or our parent are unable to obtain funding from other capital sources. As a result, we may not be able to increase our revenues at the same rate as we have in recent years.
Inflation
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 December 31, 2009. However, there can be no assurance that future inflation would not have an adverse impact on our operating results and financial condition.
Seasonality
Seasonal net revenue fluctuations are common in the television and radio broadcasting industry and result primarily from fluctuations in advertising expenditures by local and national advertisers. Our first fiscal quarter generally produces the lowest net broadcast revenue for the year.
Non-GAAP Financial Measures
We use the term “Adjusted EBITDA” throughout this report. Adjusted EBITDA consists of net income or loss less discontinued operations, net of income taxes, plus income tax expense or benefit, gain or loss on sale and disposal of property and equipment, gain or loss on the sale of investments, net interest expense, interest rate swap expense or income, impairment of broadcast licenses, depreciation and amortization, stock-based compensation expense and other non-cash gains and losses.
This term, as we define it, may not be comparable to a similarly titled measure employed by other companies and is not a measure of performance calculated in accordance with U.S. generally accepted accounting principles, or GAAP.
Management considers this measure an important indicator of our liquidity relating to our operations, as it eliminates the effects of our discontinued operations, certain non-cash items and our capital structure. Management believes liquidity is an important measure for our company because it reflects our ability to meet our interest payments under our substantial indebtedness and is a measure of the amount of cash available to grow our company through our acquisition strategy. This measure should be considered in addition to, but not as a substitute for or superior to, other measures of liquidity and financial performance prepared in accordance with GAAP, such as cash flows from operating activities, operating income and net income.
We believe Adjusted EBITDA is useful to an investor in evaluating our liquidity and cash flow because:
| • | it is widely used in the broadcasting industry to measure a company’s liquidity and cash flow without regard to items such as depreciation and amortization, loss on disposal of property and equipment, and impairment of broadcast licenses. The broadcast industry uses liquidity to determine whether a company will be able to cover its capital expenditures and whether a company will be able to acquire additional assets and broadcast licenses if the company has an acquisition strategy. We believe that by eliminating the effect of certain non-cash items, Adjusted EBITDA provides a meaningful measure of liquidity; |
| • | it gives investors another measure to evaluate and compare the results of our operations from period to period by removing the impact of non-cash expense items, such as impairment of broadcast licenses. By removing the non-cash items, it allows our investors to better determine whether we will be able to meet our debt obligations as they become due; and |
| • | it provides a liquidity measure before the impact of a company’s capital structure by removing net interest expense items and interest rate swap expenses. |
Our management uses Adjusted EBITDA:
| • | as a measure to assist us in planning our acquisition strategy; |
| • | in presentations to our board of directors to enable them to have the same consistent measurement basis of liquidity and cash flow used by management; |
| • | as a measure for determining our operating budget and our ability to fund working capital; and |
| • | as a measure for planning and forecasting capital expenditures. |
45
Table of Contents
The Securities and Exchange Commission, or SEC, has adopted rules regulating the use of non-GAAP financial measures, such as Adjusted EBITDA, in filings with the SEC and in disclosures and press releases. These rules require non-GAAP financial measures to be presented with and reconciled to the most nearly comparable financial measure calculated and presented in accordance with GAAP. We have included a presentation of net cash (used in) provided by operating activities and a reconciliation to Adjusted EBITDA on a consolidated basis under “Item 6. Selected Financial Data.”
Critical Accounting Policies
The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to allowance for doubtful accounts, program rights, acquisitions of radio station and television station assets, intangible assets, deferred compensation and commitments and contingencies. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
We believe the following accounting policies and the related judgments and estimates affect the preparation of our consolidated financial statements.
Acquisitions of radio station and television assets
Our radio and television station acquisitions have consisted primarily of FCC licenses to broadcast in a particular market (broadcast licenses). We generally acquire the existing format and change it upon acquisition. As a result, a substantial portion of the purchase price for the assets of a radio or television station is allocated to its broadcast license. The allocations assigned to acquired broadcast licenses and other assets are subjective by their nature and require our careful consideration and judgment. We believe the allocations represent appropriate estimates of the fair value of the assets acquired.
Allowance for doubtful accounts
We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. A considerable amount of judgment is required in assessing the likelihood of ultimate realization of these receivables including our history of write offs, relationships with our customers and the current creditworthiness of each advertiser. Our historical estimates have been a reliable method to estimate future allowances, with historical reserves averaging approximately 8.5% of our outstanding receivables. However, our allowances for doubtful accounts have increased over the past several years from this historical average due to expansion in new markets and, most recently, the current downturn in the U.S. national and local economies. If the financial condition of our advertisers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. The effect of an increase in our allowance of 3.0% of our outstanding receivables as of December 31, 2009, from 14.5% to 17.5% or $3.2 million to $3.8 million, would result in a decrease in pre-tax income of $0.6 million for the year ended December 31, 2009.
Program Rights
Costs incurred for the production of our original television programs are expensed based on the ratio of the current period’s gross revenues to estimated remaining total gross revenues from all sources (“Ultimate Revenues”) on an individual program basis. Costs of television productions are subject to regular recovery assessments which compare the estimated fair values with the unamortized costs. The amount by which the unamortized costs of television productions exceed their estimated fair values is written off. Generally accepted accounting principles (in the United States) set forth the requirements that must be met before capitalization of program costs is appropriate, including the ability to reasonably estimate Ultimate Revenues generated from television programming and the period in which those revenues would be realized. Beginning January 1, 2009, we determined, based on an evaluation of historical programming data, that certain of its television programs have demonstrated the ability to generate gross revenues beyond the initial airing, and accordingly, began capitalizing television production costs for certain of their programming, and amortizing those costs to operating expense based on the ratio of the current period’s gross revenues to Ultimate Revenues as described above. Costs related to the production of all other television programs for which we do not believe have a useful life beyond the initial airing, or do not have revenue directly attributed to production, are expensed as incurred. For episodic television series, costs are expensed for each episode as it recognizes the related revenue for the episode. Approximately $5.5 million of program and technical expenses were capitalized as of December 31, 2009.
46
Table of Contents
With respect to television programs intended for broadcast, the most sensitive factors affecting estimates of Ultimate Revenues is the program’s rating (which directly impacts the number of times the show is expected to air) and the strength of the advertising market. Program ratings, which are an indication of market acceptance, directly affect our ability to generate advertising revenues during the airing of the program. Poor ratings may result in the cancellation of a television program, which would require the immediate write-off of any unamortized production costs. A significant decline in the advertising market could also negatively impact our estimates.
Intangible assets
Our indefinite-lived assets consist of our FCC broadcast licenses. We believe that our broadcast licenses have indefinite useful lives given that they are expected to indefinitely contribute to our future cash flows and that they may be continually renewed without substantial cost to us.
In accordance Accounting Standards Codification (“ASC”) 350-30 “General Intangibles Other Than Goodwill”, we do not amortize our broadcast licenses. We test our broadcast licenses for impairment at least annually or when indicators of impairment are identified. Our valuations principally use the discounted cash flow methodology, an income approach based on market revenue projections and not company-specific projections, which assumes broadcast licenses are acquired and operated by a third party. This approach incorporates several variables including, but not limited to, types of signals, media competition, audience share, market advertising revenue projections, anticipated operating margins, capital expenditures and discount rates that are based on the weighted average costs of capital for the broadcasting markets in which we operate, without taking into consideration the station’s format or management capabilities. This method calculates the estimated present value that would be paid by a prudent buyer for our FCC licenses as new radio or television stations as of the annual valuation date (September 30 of each year). If the discounted cash flows estimated to be generated from these assets are less than the carrying value, an adjustment to reduce the carrying value to the fair market value of the assets is recorded.
We generally test our broadcast licenses for impairment at the individual license level. However, we aggregate broadcast licenses for impairment testing if their signals are simulcast and are operating as one revenue-producing asset.
In the third quarter of 2009, we completed our annual impairment review and concluded that several of our broadcast licenses were impaired. As such, we recorded a non-cash impairment loss of approximately $75.1 million to reduce the book value of these broadcast licenses to their estimated fair values. We also recorded a $0.3 million impairment charge in 2009 relating to radio station KSEV-AM, which was sold in December 2009, and whose operations are included in discontinued operations in the accompanying consolidated statements of operations (see Note 1 to our accompanying consolidated financial statements). During the third quarter of 2008, we recorded a non-cash impairment loss of $46.7 million resulting from our 2008 annual impairment review. The impairment charges recorded in both 2009 and 2008 resulted from market changes in estimates and assumptions that were attributable to lower advertising revenue growth projections for the broadcasting industry, increased discount rates and a decline in cash flow multiples for recent station sales. The increase in the impairment loss for the year ended December 31, 2009, as compared to 2008, was primarily due to increased write-downs relating to our Southern California radio and television stations.
In the first quarter of 2009, we conducted an interim review of the fair value of some of our broadcast licenses. This review primarily resulted from the continued slowdown in the U.S. advertising industry, which reduced advertising revenue projections for the markets in which we operate beyond levels assumed in our 2008 annual and year end impairment testing. Based on this evaluation, we determined that several of our radio and television broadcast licenses were impaired and recorded an impairment charge of approximately $51.5 million to reduce the net book value of these broadcast licenses to their estimated fair market values.
During the third quarters of 2008 and 2007, we completed our annual impairment review and concluded that several of our broadcast licenses were impaired. As a result of the downturn in the U.S. economy, which caused a general slowdown in the advertising environment, we also recorded impairments in the fourth quarters of 2008 and 2007. The decrease in the fair value of certain individual station broadcast licenses in our California, Texas and Utah markets resulted in impairment write-downs of approximately $46.7 and $45.0 million for the third and fourth quarters of 2008, respectively, and $3.0 million and $5.1 million for the third and fourth quarters of 2007, respectively. The impairment charges were due to market changes such as lower advertising revenue growth projections for the broadcasting industry, higher discount rates and a decline in cash flow multiples for recent station sales.
In assessing the recoverability of our indefinite-lived intangible assets, we must make assumptions about the estimated future cash flows and other factors to determine the fair value of these assets. Assumptions about future revenue and cash flows require significant judgment because of the current state of the economy and the fluctuation of actual revenue and the timing of expenses. We develop future revenue estimates based on projected ratings increases, planned timing of signal strength upgrades, planned timing of
47
Table of Contents
promotional events, customer commitments and available advertising time. Estimates of future cash flows assume that expenses will grow at rates consistent with historical rates. Alternatively, some stations under evaluation have had limited relevant cash flow history due to planned conversion of format or upgrade of station signal. The assumptions about cash flows after conversion reflect estimates of how these stations are expected to perform based on similar stations and markets and possible proceeds from the sale of the assets. If the expected cash flows are not realized, impairment losses may be recorded in the future.
Deferred compensation
Our parent, Liberman Broadcasting, has entered into employment agreements with certain employees. In addition to annual compensation and other benefits, one agreement provided an employee with the ability to participate in the increase of the “net value” of Liberman Broadcasting over certain base amounts. This agreement expired effective December 31, 2009 and no incentive compensation had been earned under the employment agreement.
In prior years, our deferred compensation liability could have increased based on changes in the employee’s vesting percentage and could have increased or decreased based on changes in the “net value” of Liberman Broadcasting. We had two deferred compensation components that comprised such employee’s vesting percentage: (i) a component that vested in varying amounts over time; and (ii) a component that vested upon the attainment of certain performance measures. We accounted for the time vesting component over the vesting period specified in the employment agreement and accounted for the performance-based component when we considered it probable that the performance measures would be attained.
As part of the calculation of the deferred compensation liability, we used the income and market valuation approaches to determine the “net value” of Liberman Broadcasting. The income approach analyzed future cash flows and discounted them to arrive at a current estimated fair value. The market approach used recent sales and offering prices of similar properties to determine estimated fair value. Based on the “net value” of Liberman Broadcasting as determined in these analyses, and based on the percentage of incentive compensation that had vested (as specified in the employment agreement), we recorded deferred compensation expense or benefit (and a corresponding credit or charge to deferred compensation liability). As such, estimation of the “net value” of Liberman Broadcasting required considerable management judgment and the amounts recorded as periodic deferred compensation expense or benefit were dependent on that judgment.
Commitments and contingencies
We periodically record the estimated impacts of various conditions, situations or circumstances involving uncertain outcomes. These events are called “contingencies,” and our accounting for these events is prescribed by ASC 450 “Contingencies”.
The accrual of a contingency involves considerable judgment on the part of our management. We use our internal expertise, and outside experts (such as lawyers), as necessary, to help estimate the probability that a loss has been incurred and the amount (or range) of the loss. We currently do not have any material contingencies that we believe require loss accruals; however, we refer you to Note 6 of our accompanying consolidated financial statements for a discussion of other known contingencies.
Recent Accounting Pronouncements
In June 2009, the FASB issued SFAS No. 168, “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles”, (“FAS 168”) “—a replacement of FASB Statement No. 162”. FAS 168 is the new source of authoritative GAAP recognized by the FASB to be applied by nongovernmental entities. Rules and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. This statement was incorporated into ASC 105 “Generally Accepted Accounting Principles” under the new FASB codification which became effective on July 1, 2009. The new codification supersedes all then-existing non-SEC accounting and reporting standards. All other non-grandfathered non-SEC accounting literature not included in the codification will become non-authoritative. We adopted this statement on July 1, 2009. We have included the references to the codification, as appropriate, in the accompanying consolidated financial statements. Adoption of this statement did not have an impact on our consolidated results of operations, cash flows or financial condition.
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“FAS 157”). FAS 157 provides a single definition of fair value, together with a framework for measuring it, and requires additional disclosure about the use of fair value to measure assets and liabilities. Under the new codification, FAS 157 was incorporated into ASC 820 “Fair Value Measurements and Disclosures” (“ASC 820”). Adoption of ASC 820 did not have a material impact on the disclosures required in our consolidated financial statements.
48
Table of Contents
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities-including an amendment of FASB Statement No. 115” (“FAS 159”). FAS 159 expands the use of fair value accounting but does not affect existing standards that require assets or liabilities to be carried at fair value. FAS 159 was incorporated into ASC 825 “The Fair Value Option for Financial Assets and Liabilities” (“ASC 825”) under the new FASB codification. Under ASC 825, a company may elect to use fair value to measure certain financial assets and liabilities and any changes in fair value are recognized in earnings. This statement was effective on January 1, 2008. We did not elect the fair value option upon adoption of ASC 825.
In December 2007, the FASB issued SFAS No. 141R, “Business Combinations” (“FAS 141R”), which requires an acquirer to measure the identifiable assets acquired, the liabilities assumed and any noncontrolling interest in the acquiree at their fair values on the acquisition date, with goodwill being the excess value over the net identifiable assets acquired. FAS 141R also changed the accounting for the treatment of acquisition related transaction costs. FAS 141R was incorporated into ASC 805 “Business Combinations” (“ASC 805”), under the new FASB codification. This ASC 805 update became effective, and we adopted the provisions of this ASC 805 update on January 1, 2009. As such, the accompanying consolidated statements of operations for the year ended December 31, 2009 include a charge of approximately $0.4 million, which relates to the write-off of pre-acquisition costs for certain asset purchases that did not close prior to December 31, 2008.
In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements” (“FAS 160”), which clarifies that a noncontrolling interest in a subsidiary should be reported as equity in the consolidated financial statements. FAS 160 was incorporated into ASC 810 “Consolidation” (“ASC 810”). ASC 810 became effective on January 1, 2009. The adoption of ASC 810 did not have a material effect on our consolidated results of operations, cash flows or financial condition.
In February 2008, the FASB issued FASB Staff Position (“FSP”) FAS 157-2, “Effective Date of FASB Statement No. 157” (“FSP 157-2”), which delayed the effective date of FAS 157 for nonfinancial assets and liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually), to fiscal years beginning after November 15, 2008. Under the new codification, FSP 157-2 was incorporated into ASC 820. We adopted this ASC update on January 1, 2009, and it did not have a material impact on our consolidated results of operations, cash flows or financial condition, and did not require additional disclosures.
In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133” (“FAS 161”), which requires enhanced disclosures for derivative and hedging activities. FAS 161 was incorporated into ASC 815 “Derivatives and Hedging” (“ASC 815”). The objective of the guidance is to provide users of financial statements with an enhanced understanding of how and why an entity uses derivative instruments, how derivative instruments and related hedged items are accounted for, and how derivative instruments and related hedged items effect and entity’s financial position, financial performance and cash flows. ASC 815 was adopted on January 1, 2009. The adoption of this ASC update did not have a material impact on the disclosures required in our consolidated financial statements.
In April 2008, the FASB issued FSP FAS 142-3, “Determination of the Useful Lives of Intangible Assets”, which amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of an intangible asset. Under the new codification this FSP was incorporated into two different ASC’s, ASC 275 “Risks and Uncertainties” (“ASC 275”) and ASC 350 “Intangibles—Goodwill and Other” (“ASC 350”). This interpretation was effective for financial statements issued for fiscal years beginning after December 15, 2008 and interim periods within those years. We adopted these ASC’s on January 1, 2009, and they did not have a material impact on our consolidated results of operations, cash flows or financial condition, and did not require additional disclosures related to existing intangible assets.
In October 2008, the FASB issued FSP FAS 157-3, “Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active” (“FSP 157-3”) which clarifies the application of FAS 157 in a market that is not active. FSP 157-3 was incorporated unto ASC 820. This ASC update became effective upon issuance, including prior periods for which financial statements have not been issued. The adoption of this ASC update did not have a material impact on our consolidated results of operations, cash flows or financial condition.
In April 2009, the FASB issued FASB Staff Position (“FSP”) No. 115-2 and No. 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments” (“FSP 115-2 and FSP 124-2”), which changes the method for determining whether an other-than-temporary impairment exists for debt securities and the amount of an impairment charge to be recorded in earnings. FSP 115-2 and FSP 124-2 were incorporated into ASC 320 “Investments—Debt and Equity Securities” under the new FASB codification. This ASC update became effective for interim periods ending after June 15, 2009. We adopted this update during the second quarter of 2009, and it did not have a material impact on our consolidated results of operations, cash flows or financial condition, and did not require additional disclosures.
49
Table of Contents
In April 2009, the FASB issued FSP FAS 157-4, “Determining Whether a Market is Not Active and a Transaction is Not Distressed,” (“FSP 157-4”). FSP 157-4 provides additional guidance to highlight and expand on the factors that should be considered in estimating fair value when there has been a significant decrease in market activity for a financial asset. Under the new codification, FSP 157-4 was incorporated into ASC 820. This update became effective for our financial statements as of June 30, 2009, and it did not have a material impact on our consolidated results of operations, cash flows or financial condition and did not require additional disclosures.
In April 2009, the FASB issued FSP FAS 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments” (“FSP FAS 107-1 and APB 28-1”), which increases the frequency of fair value disclosures from annual only to quarterly. Under the new codification, FSP 107-1 and APB 28-1 were incorporated into ASC 825. This ASC update became effective for our financial statements as of June 30, 2009.
In May 2009, the FASB issued SFAS No. 165, “Subsequent Events” (“FAS 165”), which requires disclosure of the date through which a company evaluated the need to disclose events that occurred subsequent to the balance sheet date and whether that date represents the date the financial statements were issued or were available to be issued. This statement was incorporated into ASC 855 “Subsequent Events” (“ASC 855”). We adopted ASC 855 for the period ended June 30, 2009. The adoption of ASC 855 did not have a material effect on the disclosures required in our consolidated financial statements. We considered subsequent events through April 9, 2010 for disclosure in this Annual Report on Form 10-K, which is the date the financial statements were available to be issued.
In June 2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation No. 46 (R)” (“FAS 167”), which amended the consolidation guidance for variable-interest entities. The amendments include: (1) the elimination of the exemption for qualifying special purpose entities, (2) a new approach for determining who should consolidate a variable-interest entity, and (3) changes to when it is necessary to reassess who should consolidate a variable-interest entity. FAS 167 was incorporated into ASC 810 “Consolidation”. ASC 810 is effective for financial statements issued for fiscal years periods beginning after November 15, 2009, for interim periods within that first annual reporting period and for interim and annual reporting periods thereafter. Earlier application is prohibited. We adopted ASC 810 on January 1, 2010 and are still assessing the impact the pronouncement will have on our consolidated results of operations, cash flows and financial condition.
| ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Our exposure to market risk is currently confined to our cash and cash equivalents, changes in interest rates related to borrowings under LBI Media’s senior credit facilities and changes in the fair value of LBI Media’s 8 1/2% senior subordinated notes and our senior discount notes. Because of the short-term maturities of our cash and cash equivalents, we do not believe that an increase in market rates would have any significant impact on the realized value of our investments.
In July 2006, we entered into a fixed-for-floating interest rate swap to hedge the underlying interest rate risk on the expected outstanding balance of our term loan facility over time. Pursuant to the terms of this interest rate swap, we were paying a fixed rate of 5.56% on the $80.0 million notional amount and receive payments based on LIBOR. In November 2009, the notional amount of the swap was reduced to $60.0 million and will remain at that level for the remainder of the swap contract. This swap fixes the interest rate at 7.56% (including the applicable margin) and terminates in November 2011.
We account for our interest rate swap in accordance with ASC 815, “Derivatives and Hedging” (“ASC 815”). As noted above, the effect of the interest rate swap is to fix the interest rate at 7.56% on our variable rate borrowings (including the applicable margin). However, changes in the fair value of the interest rate swap for each reporting period have been recorded in interest rate swap income (expense) in the accompanying consolidated statements of operations because the interest rate swap does not qualify for hedge accounting.
We measure the fair value of our interest rate swap on a recurring basis pursuant to ASC 820. ASC 820 establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. The three tiers are: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions. We categorize this swap contract as Level 2.
50
Table of Contents
The fair value of our interest rate swap was a liability of $5.2 million and $7.6 million at December 31, 2009 and 2008, respectively. The fair value of the interest rate swap represents the present value of the expected future cash flows estimated to be received from or paid to a marketplace participant of the instrument. It is valued using inputs including broker dealer quotes, adjusted for non-performance risk, based on valuation models that incorporate observable market information and are classified within Level 2 of the fair value hierarchy. We are not exposed to the impact of foreign currency or commodity price fluctuations.
We are exposed to changes in interest rates on the portion of LBI Media’s variable rate senior credit facilities that is not hedged with the interest rate swap. A hypothetical 10% increase in the interest rates applicable to the year ended December 31, 2009 would have increased interest expense by approximately $0.3 million. Conversely, a hypothetical 10% decrease in the interest rates applicable to the year ended December 31, 2009 would have decreased interest expense by approximately $0.3 million. At December 31, 2009, we believe that the carrying value of amounts payable under LBI Media’s senior credit facilities that are not hedged by our interest rate swap approximates the fair value based upon current yields for debt issues of similar quality and terms.
The fair value of our fixed rate long-term debt is sensitive to changes in interest rates. Based upon a hypothetical 10% increase in the interest rate, assuming all other conditions affecting market risk remain constant, the market value of our fixed rate debt would have decreased by approximately $12.0 million at December 31, 2009. Conversely, a hypothetical 10% decrease in the interest rate, assuming all other conditions affecting market risk remain constant, would have resulted in an increase in market value of approximately $12.8 million at December 31, 2009. Management does not foresee nor expect any significant change in our exposure to interest rate fluctuations or in how such exposure is managed in the future.
| ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
The financial statements and related financial information, as listed under Item 15, appear in a separate section of this annual report beginning on page F-1.
| ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
None.
| ITEM 9A(T). | CONTROLS AND PROCEDURES |
Evaluation of Disclosure Controls and Procedures
The term “disclosure controls and procedures” is defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). We maintain disclosure controls and procedures that are designed to ensure that: (i) information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms; and (ii) such information is accumulated and communicated to our management, including our Chief Executive Officer and President, and our Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, our management, including our Chief Executive Officer and President, and our Chief Financial Officer, recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and our management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
As required by SEC Rule 15d-15(b), we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and President, and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 2009. Based on the foregoing, our Chief Executive Officer and President, and our Chief Financial Officer have concluded that, as of the end of the annual period covered by this report, our disclosure controls and procedures were not effective at the reasonable assurance level due to a material weakness in internal controls as identified and discussed below.
Report of Management on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is a process to provide reasonable assurance regarding the reliability of our financial reporting for external purposes in accordance with accounting principles generally accepted in the United States. Internal control over financial reporting includes (i) maintaining records that in reasonable detail accurately and fairly reflect our transactions; (ii) providing
51
Table of Contents
reasonable assurance that transactions are recorded as necessary for preparation of our financial statements; (iii) providing reasonable assurance that receipts and expenditures are made in accordance with management authorization; and (iv) providing reasonable assurance that unauthorized acquisition, use or disposition of company assets that could have a material effect on our financial statements would be prevented or detected on a timely basis. Because of its inherent limitations, internal control over financial reporting is not intended to provide absolute assurance that a misstatement of our financial statements would be prevented or detected.
Management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework and criteria established in Internal Control—Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission. This evaluation included review of the documentation of controls, evaluation of the design effectiveness of controls, testing of the operating effectiveness of controls and a conclusion on this evaluation. Based on this evaluation, management concluded that the Company’s internal control over financial reporting was not effective as of December 31, 2009 due to a material weakness in internal controls as identified and discussed below.
A material weakness is “a deficiency, or a combination of deficiencies (within the meaning of PCAOB Auditing Standard No. 5), in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.” Our management concluded that, as of December 31, 2009, the following material weakness existed:
As of December 31, 2009, we identified a material weakness in our internal control over financial reporting because we did not maintain effective controls over the accounting for income taxes, including the determination and reporting of deferred income taxes and the related income tax provision. Specifically, we did not have adequate personnel and other resources to enable us to (i) properly consider and apply U.S. generally accepted accounting principles providing guidance over accounting for income taxes, (ii) review and monitor the accuracy and completeness of the components of the income tax provision calculations and the related deferred taxes and (iii) ensure that effective oversight of the work performed by our outside tax advisors was exercised. In addition, until remediated, this material weakness could result in a misstatement in the tax-related accounts described above that would result in a material misstatement to our interim or annual consolidated financial statements and disclosures that would not be prevented or detected.
The material weakness resulted in accounting errors in the treatment of certain temporary state tax credits and the classification of certain deferred tax accounts relating to the Company’s indefinite-lived intangible assets that were not prevented or detected on a timely basis. As a result, (a) our board of director’s concluded that our previously issued consolidated financial statements for (i) the fiscal years ended December 31, 2008, 2007 and 2006 included in our annual reports on Form 10-K that include those fiscal years, and (ii) the interim periods within the fiscal years ended December 31, 2009, 2008, 2007 and 2006 included in our quarterly reports on Form 10- Q that include those fiscal periods, should not be relied upon and (b) we restated our previously issued consolidated financial statements for the fiscal year ended December 31, 2008 and the previously issued consolidated statements of operations, consolidated statements of cash flows and consolidated statements of stockholder’s equity for the fiscal year ended December 31, 2007 in this annual report on Form 10-K and the restatement of our previously issued condensed consolidated statements of operations and condensed consolidated statements of cash flows for the interim periods within the fiscal year ended December 31, 2009, and prospectively, in our quarterly reports on Form 10-Q for the interim periods within the fiscal year ending December 31, 2010.
As a result of the material weakness described above, our management has concluded that, as of December 31, 2009, our internal control over financial reporting was not effective.
This annual report does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the company’s independent registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the company to provide only management’s report in this annual report.
Notwithstanding the existence of this material weakness in internal controls, we believe that the consolidated financial statements in this Annual Report on Form 10-K present fairly, in all material respects, our consolidated balance sheets as of December 31, 2009 and 2008 and the related consolidated statements of operations, stockholder’s equity, and cash flows for the years ended December 31, 2009, 2008 and 2007 in conformity with U.S. generally accepted accounting principles.
52
Table of Contents
Remediation Actions Undertaken by Management
We are in the process of addressing and remediating the deficiencies that gave rise to this material weakness. Since the above material weakness was identified, we have undertaken an evaluation of our available resources and personnel deployed for accounting for income taxes, and are in the process of identifying necessary changes to our processes and addition of personnel as required. However, all of the deficiencies have not been remediated as of the date of this filing. The material weaknesses will not be fully remediated until, in the opinion of our management, the revised control procedures have been operating for a sufficient period of time to provide reasonable assurances as to their effectiveness.
Changes in Internal Controls
As of December 31, 2009, we have begun, but have not completely remediated the material weakness in our internal control over financial reporting with respect to our processes to accurately report our income tax provision as discussed above. Based on our evaluation carried out in accordance with SEC Rule 15d-15(b) under the supervision and with the participation of our management, including our Chief Executive Officer and President, and Chief Financial Officer, the remediation actions described above under “—Remediation Actions Undertaken by Management” are the only changes during the fourth quarter of 2009 in our internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
| ITEM 9B. | OTHER INFORMATION |
None.
| ITEM 10. | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE |
The following sets forth information about our current directors and executive officers:
| Name |
Position(s) |
Age* | ||
| Jose Liberman | Co-Founder, Chairman, and Director | 84 | ||
| Lenard D. Liberman | Co-Founder, Chief Executive Officer, President, Secretary and Director | 48 | ||
| Wisdom Lu | Chief Financial Officer | 43 | ||
| Winter Horton | Chief Operating Officer and Director | 44 | ||
| William G. Adams | Director | 70 | ||
| Bruce A. Karsh | Director | 54 | ||
| Terence M. O’Toole | Director | 51 |
| * | All ages are as of December 31, 2009 |
Jose Liberman co-founded our company in 1987 together with his son, Lenard, and has served as a member on our board of directors since our formation. He also serves on the boards of directors of our parent, Liberman Broadcasting, Inc., and our wholly owned subsidiary, LBI Media, Inc. Mr. Liberman has been the Chairman of our board of directors since March 2007 and served as our President from 1987 to October 2009. Mr. Liberman started his career in radio broadcasting in 1957 with the purchase of XERZ in Mexico and the establishment of a radio advertising representative firm in Mexico. In 1976, he acquired KLVE-FM, the first Los Angeles FM station to utilize a Hispanic format. In 1979, he purchased KTNQ-AM and combined it with KLVE to create the first Hispanic AM/FM combination in Los Angeles. Under Mr. Liberman’s leadership, our company has become one of the largest Hispanic owners and operators of Spanish-language radio and television stations in the United States, based on revenue and number of stations. We believe that his leadership and strategic vision has been and will continue to be critical to our success. In addition, Mr. Liberman brings to the board his extensive knowledge of the broadcasting industry and the demographics of our company’s listeners and viewers. Mr. Liberman is the father of our Chief Executive Officer, President, Secretary and Director, Lenard D. Liberman.
Lenard D. Liberman has been a member of our board of directors since our formation in 1987. He also serves on the boards of directors of Liberman Broadcasting, Inc. and LBI Media, Inc. Mr. Liberman has served as our Chief Executive Officer and President since October 2009 and as our Secretary since 1987. Previously, he was our Executive Vice President from 1987 to October 2009 and our Chief Financial Officer from April 1999 to April 2000, April 2002 to April 2003, April 2005 to May 2006 and January 2007 to
53
Table of Contents
March 2008. Mr. Liberman manages all day-to-day operations, including acquisitions and financings. He received his juris doctorate degree and masters of business administration degree from Stanford University in 1987. Mr. Liberman’s executive leadership of our company, as well as his executive, financial, managerial and operational skills, have been and are instrumental in our company’s success. These skills position him well to serve as a member of our board of directors. Mr. Liberman is the son of our Chairman and Director, Jose Liberman.
Wisdom Lu joined us as our Chief Financial Officer in March 2008. Prior to joining us, Ms. Lu served as Treasurer and Chief Investment Officer of Health Net, Inc., one of the nation’s largest publicly traded managed health care companies, from 1996 until her departure in 2008. While at Health Net, Ms. Lu was responsible for, among other things, capital structure planning and management of cash, investment, debt and equity. Ms. Lu has also served as Treasury Officer, Fixed Income Sales & Trading with National Westminster Bank, USA from 1995 to 1996 and as Management Associate, Fixed Income Sales & Trading with Citicorp Securities, Inc. from 1993 to 1995. Ms. Lu received her Bachelor of Science degree in Civil Engineering, with a minor in Economics, from Rensselear Polytechnic Institute and her Master of Business Administration (Finance & International Business) from the Leonard N. Stern School of Business at New York University. Ms. Lu holds professional designations of Chartered Financial Analyst and Professional Engineer (New York).
Winter Horton has served as our Chief Operating Officer since January 2010 and was designated as a member of our board of directors in March 2007. He also serves on the boards of directors of Liberman Broadcasting, Inc. and LBI Media, Inc. Mr. Horton joined us in 1997 as Vice President of Programming for KRCA and was our Corporate Vice President from 2001 to 2009. In 2001, as Corporate Vice President, Mr. Horton launched our four radio stations and one television station in Houston. He was also responsible for the launch of our Dallas stations, including KMPX-TV, KNOR-FM, KTCY-FM, KZMP-AM, KZZA-FM and KBOC-FM. He manages all of our Texas radio and television operations and oversees our production facilities in Burbank, Houston and Dallas. We believe that Mr. Horton’s executive, managerial, and operational experience at our company, in particular his programming experience, provide him with a unique perspective that positions him well to serve as a member of board of directors.
William G. Adams was designated as a member of our board of directors in March 2007. He also serves on the boards of directors of Liberman Broadcasting, Inc. and LBI Media, Inc. In addition, Mr. Adams has served on the board of directors of Valentine Enterprises, Inc., a manufacturer of powder products, since 1979. He was Of Counsel to O’Melveny & Myers LLP, a global law firm, from February 2000 to February 2004, where had been a partner from October 1979 to February 2000. We believe that Mr. Adams’ experience as a corporate attorney at O’Melveny & Myers LLP for more than 20 years makes him a valuable resource on our board of directors.
Bruce A. Karsh was designated as a member of our board of directors in March 2007. He also serves on the boards of directors of Liberman Broadcasting, Inc. and LBI Media, Inc. Mr. Karsh has served on the board of directors of Oaktree Capital Group, LLC, a global investment management company, since 2007. In addition, he has served on the board of directors of Charter Communications, Inc., a telephone, cable television and internet service provider, since 2009. Previously, he served on the board of directors of Littlefuse, Inc., a developer of circuit protection products, from 1991 to 2007. He has served as a trustee on Duke University’s board of trustees since 2003 and as the chairman of the board of directors of Duke University’s investment management company, Duke Management Company, since 2002. He has also served on the board of directors of The Painted Turtle, a non-profit organization that focuses on helping children with serious illnesses, since 2004. Mr. Karsh co-founded Oaktree Capital Management, L.P., formerly Oaktree Capital Management, LLC, in 1995, and since that time has served as its President and as portfolio manager for Oaktree’s distressed debt funds. Prior to co-founding Oaktree Capital, Mr. Karsh was a managing director of Trust Company of the West (“TCW”), an investment management company, and its affiliate, TCW Asset Management Company, and the portfolio manager of TCW Special Credits Funds. Prior to joining TCW, Mr. Karsh worked as assistant to the chairman of Sun Life Insurance Company of America, a life insurance company, and of SunAmerica, Inc., its parent. Mr. Karsh was also an attorney with the law firm of O’Melveny & Myers LLP. We believe that Mr. Karsh’s diverse work experience, as well as service on the boards of various entities, makes him an important contributor to our board of directors.
Terence M. O’Toole was designated as a member of our board of directors in March 2007. He also serves on the boards of directors of Liberman Broadcasting, Inc. and LBI Media, Inc. He has been a member of the board of managers of Skyway Towers Holding LLC, a wireless communications tower developer, since 2005. In addition, Mr. O’Toole has been a member of the board of managers of Enesco LLC, a manufacturer and distributor of home and garden products, since 2007. He has also been a member the board of managers of EGI Holdings LLC, an investment holding company, since 2007. Since 2000, Mr. O’Toole has been a member of the Board of Trustees of Villanova University. He has been a member of the Board of Trustees of the Pingry School since 2005. Mr. O’Toole currently serves and has served as the Executive Vice President of Tinicum Incorporated, a private investment company,
54
Table of Contents
since 2006, and is a co-managing member of Tinicum Lantern II LLC and its affiliated funds. Mr. O’Toole was a partner and managing director of Goldman, Sachs & Co. from 1992 until 2005. We believe that Mr. O’Toole’s experience, in particular at Goldman, Sachs & Co., provides a unique perspective and useful insight to our board with respect to our growth strategy and strategic initiatives.
Board Composition
Our board of directors is currently composed of six directors. We have one vacant board member seat that may be filled solely by the holders of Class B common stock of Liberman Broadcasting as described below. Prior to March 30, 2007, our board of directors was comprised of two directors, Jose Liberman and Lenard Liberman.
In connection with the sale of Liberman Broadcasting’s Class A common stock on March 30, 2007, Liberman Broadcasting and the stockholders of Liberman Broadcasting entered into an investor rights agreement. Pursuant to that investor rights agreement, Liberman Broadcasting, our sole shareholder, must elect the directors that have been designated as board members of Liberman Broadcasting to our board of directors. Affiliates of Oaktree Capital Management LLC that hold Class A common stock of Liberman Broadcasting have the right to designate one director to Liberman Broadcasting’s board of directors. Tinicum Capital Partners II, L.P. and its affiliates that hold Class A common stock of Liberman Broadcasting have the right to designate one director to Liberman Broadcasting’s board of directors. The holders of Class B common stock of Liberman Broadcasting have the right to designate up to five directors to Liberman Broadcasting’s board of directors. As a result, Liberman Broadcasting must elect these seven designees as members of our board of directors. On March 30, 2007, Bruce A. Karsh and Terence M. O’Toole were designated by affiliates of Oaktree Capital Management and Tinicum Capital Partners II, respectively. The holders of our parent’s Class B common stock designated Jose Liberman, Lenard Liberman, Winter Horton and William G. Adams.
Director Nominees
Because members of our board of directors are designated by our parent pursuant to the investor rights agreement discussed above, we do not have a formal policy with regard to the consideration of diversity in identifying candidates for election to the board. See “Board Composition”.
Director Independence
Our board of directors has analyzed the independence of each director under Nasdaq listing standards and determined that each of our non-employee directors, Mr. Adams, Mr. Karsh and Mr. O’Toole, are independent directors. Because our common stock is not listed on a national securities exchange, we are not required to maintain a board consisting of a majority of independent directors or to maintain an audit committee, nominating committee or compensation committee consisting solely of independent directors.
Director Leadership Structure
Our company is led by Mr. Jose Liberman, as Chairman, and Mr. Lenard D. Liberman, as President and Chief Executive Officer. Each has been with us in executive leadership positions since our founding in 1987. While we have historically combined the roles of chairman and president, Mr. Lenard Liberman began serving as our President and Chief Executive Officer when Mr. Jose Liberman retired from such role in October 2009.
Because we have had the same leaders of our company for over 20 years and each is seen by our customers, business partners, investors and other stakeholders as providing strong leadership for our company and in our industry, we believe that our leadership structure has been effective for our company, whether the chairman and principal executive officer position is combined or separate.
Oversight of Risk
Our board of directors oversees our risk framework and controls. The board of directors reviews the risks associated with our compensation incentives, as well as our policies and procedures related to management succession and transition. The board of directors also reviews the risks associated with:
| • | our financial statements, financial and liquidity risk exposures, including any material and pending legal proceedings and significant transactions; |
| • | fraud; |
| • | security of and risks related to information technology systems and procedures; and |
55
Table of Contents
| • | related party transactions and actual and potential conflicts of interests. |
In carrying out its responsibilities in overseeing our policies with respect to risk, the board of directors discusses the issues with internal personnel and third parties that it deems appropriate. After such review and discussions, the board of directors evaluates the findings and adopts necessary measures accordingly.
Board Committees
Nominating Committee and Compensation Committee. We are not a “listed issuer” as defined under Section 10A-3 of the Exchange Act. We are therefore not required to have a nominating or compensation committee comprised of independent directors. We currently do not have a standing nominating or compensation committee and accordingly, there are no charters for such committees. We believe that standing committees are not necessary and the directors collectively have the requisite background, experience, and knowledge to fulfill any limited duties and obligations that a nominating committee and a compensation committee may have.
Audit Committee and Audit Committee Financial Expert. We are not a “listed issuer” as defined under Section 10A-3 of the Exchange Act. We are therefore not required to have an audit committee comprised of independent directors. We currently do not have an audit committee and accordingly, there is no charter for such committee. The board of directors performs the functions of an audit committee. We believe that the directors collectively have the requisite financial background, experience, and knowledge to fulfill the duties and obligations that an audit committee would have, including overseeing our accounting and financial reporting practices. Therefore we do not believe that it is necessary at this time to search for a person who would qualify as an audit committee financial expert.
Section 16(a) Beneficial Ownership Reporting Compliance
We do not have a class of equity securities registered pursuant to Section 12 of the Securities Exchange Act of 1934, as amended.
Code of Ethics
We are not required to have a code of ethics because we do not have a class of equity securities listed on a national securities exchange.
| ITEM 11. | EXECUTIVE COMPENSATION |
COMPENSATION DISCUSSION AND ANALYSIS
Overview of Compensation Philosophy and Program
Our board of directors, with the assistance of management, determines our compensation objectives, philosophy and forms of compensation and benefits for our executive officers.
Our compensation philosophy centers on the principle of aligning pay and performance. We attempt to design a total compensation package for our named executive officers that help to recruit, retain and motivate qualified executives that are critical to our current and future success.
We use various elements of compensation to reward performance. Our named executive officers are provided with a basic level of compensation for assuming and performing their responsibilities. We consider long-term and equity incentives on a case by case basis. As discussed below, we have employment agreements, but not with all of our named executive officers. We have not offered employment agreements to Jose Liberman or Lenard Liberman because each of them has a substantial equity stake in our parent company; thus their short- and long-term interests are aligned with those of our company.
Because we do not have equity securities listed on a national securities exchange, we are not required to have a compensation committee and our board of directors has the responsibility for establishing, implementing and monitoring adherence with our compensation philosophy.
56
Table of Contents
Role of Named Executive Officers in Compensation Decisions
At December 31, 2009, our four named executive officers were Jose Liberman, Lenard Liberman, Wisdom Lu and Winter Horton. Except for Wisdom Lu, all of our named executive officers also serve as members of our board of directors.
Our board of directors is responsible for determining the compensation of our executive officers. Because Jose Liberman, Lenard Liberman and Winter Horton are also members of our board of directors, each of them participated in the decisions concerning their own compensation for the year ended December 31, 2009.
Goals of the Compensation Program and Setting Executive Compensation
We attempt to align compensation paid to our named executive officers with the value that they achieve for our stockholders. While we offer all five elements of our compensation program described below under “Elements of our Compensation Program”, we focus primarily on the base salary and long-term incentives because we believe these elements are the most critical and influential to attract, retain, and motivate executives with the skill sets necessary to maximize stockholder value.
When making compensation decisions, our board of directors informally considers competitive market practices with respect to the salaries and total compensation of our named executive officers. In doing so, the board reviews the overall compensation of executive officers of companies that are in the Hispanic radio and television industry and are located within our general geographic market areas. Specifically, the board considers the following companies our peers for executive compensation purposes: Beasley Broadcast Group Inc., Citadel Broadcasting Corp., Cox Radio Inc., Crown Media Holdings Inc., Cumulus Media Inc., Emmis Communications Corp., Entercom Communications Corp., Entravision Communications Corp., and Saga Communications Inc. However, while the board reviews the compensation practices of our peers, it is only one factor they consider in establishing compensation, and they have not made use of any formula incorporating such data.
In setting compensation for 2009, the board used a strategy that employed both a subjective and a formulaic approach. In determining whether to increase or decrease compensation for our named executive officers, the board of directors generally considers the performance of the named executive officer, any increases or decreases in responsibilities, roles of the named executive officer, and our business needs for the named executive officer.
Neither we have, nor the board of directors has, hired a compensation consultant, and neither we have, nor the board of directors has, made a decision to do so.
Risk Considerations
Our board of directors believes the elements of our executive compensation program effectively link performance-based compensation to financial goals and shareholder interests without encouraging executives to take unnecessary or excessive risks in the pursuit of those objectives Our board of directors believes that the overall mix of compensation elements is appropriately balanced and does not encourage the taking of short-term risks at the expense of long-term results.
Elements of our Compensation Program
For the year ended December 31, 2009, our total compensation package for our named executive officers consisted of the following components:
| • | base salary; |
| • | bonus; |
| • | long-term incentive compensation for Wisdom Lu and Winter Horton; |
| • | perquisites and other personal benefits; and |
| • | retirement benefits. |
Each element of compensation is considered separately and we do not generally take into account amounts realized from prior periods. Our goal is to provide a total compensation package that we believe our named executive officers and our stockholders will view as fair and equitable. The form and amount for each element of compensation is determined on a case-by-case basis. Accordingly, our determination of compensation for each named executive officer is not a mechanical process, and our board of directors has used its judgment and experience to determine the appropriate mix of compensation for each individual named executive officer.
57
Table of Contents
In December 2009, our parent, Liberman Broadcasting, Inc., entered into a new employment agreement with Winter Horton, our Chief Operating Officer, in connection with the expiration of his existing employment agreement on December 31, 2009 (the “Prior Horton Employment Agreement”). The term of Mr. Horton’s new employment agreement (the “New Horton Employment Agreement”) commenced on January 1, 2010 and will end on December 31, 2014, unless earlier terminated. Because the terms of the Prior Horton Employment Agreement were effective through December 31, 2009 and governed compensation paid to Mr. Horton with respect to 2009, the descriptions throughout this Item 10 reflect the terms of the Prior Horton Employment Agreement rather than the New Horton Employment Agreement, unless otherwise indicated. For a summary of the key terms of the New Horton Employment Agreement, which became effective as of January 1, 2010, see “—Description of Employment Agreements” and “Potential Payments Upon Termination or Change in Control” below.
Base Salary — We provide each named executive officers and other employees with a base salary that we believe is both competitive for their role and compensates them for services rendered during the fiscal year. Subject to the terms of any employment agreement, the board of directors reviews the base salary for the named executive officers on an annual basis and at the time of a change in responsibilities. Increases in salary, if any, are based on a subjective evaluation of such factors as the level of responsibility, individual performance during the prior year, relevant peer data, the salaries of our other named executive officers, and the named executive officer’s experience and expertise.
Jose Liberman and Lenard Liberman. We do not have employment agreements with Jose Liberman, our Chairman and President, or Lenard Liberman, our Executive Vice President and Secretary. Prior to March 30, 2007, both were beneficial owners to all of the common stock of our parent. In connection with the sale of our parent’s Class A common stock to third party investors, the annual base salary for each of Jose Liberman and Lenard Liberman was increased to $750,000 to better reflect compensation levels paid to similarly positioned executives of our peers. The base salaries for 2009 remained at the same levels as 2008.
Wisdom Lu. In March 2008, Wisdom Lu joined us as our Chief Financial Officer. Pursuant to her employment agreement, Ms. Lu received an annual base salary of $420,000 for 2009, which reflects a 5% increase to her base salary effective on April 1, 2009 pursuant to the terms of her employment agreement. Pursuant to the terms of her employment agreement, assuming her continued employment, Wisdom Lu’s salary will increase by 5% on April 1, 2010 and on each April 1 thereafter until March 31, 2013, the date her employment agreement expires.
Winter Horton. Pursuant to the Prior Horton Employment Agreement, Mr. Horton received a base salary of $400,000 for 2009, which was the same as his base salary level in 2008. Under the terms of the New Horton Employment Agreement, Mr. Horton will receive a base salary of $450,000 for 2010, and assuming his continued employment, Mr. Horton’s salary will increase by 5% on January 1, 2011 and on each January 1 thereafter during the term of the New Horton Employment Agreement.
Bonus — Generally, bonus compensation to our named executive officers has been entirely discretionary. By providing discretionary bonuses, we believe that we align our executive compensation with individual performance on a short-term basis.
Jose Liberman and Lenard Liberman. Historically, Jose and Lenard Liberman have received minimal or no bonuses because each has a substantial equity stake in our parent. Jose Liberman and Lenard Liberman did not receive a bonus in 2009.
Winter Horton. Under the Prior Horton Employment Agreement, Mr. Horton was eligible for an annual discretionary bonus that was based on the performance of his duties and responsibilities. The amount and timing of the bonus was within our sole discretion. In 2009, the board of directors, upon Lenard Liberman’s recommendation, determined that Winter Horton satisfactorily performed his duties as our Chief Operating Officer, including his supervision of the integration of the assets of stations that we acquired in 2007 and 2008, and overall management of the Company’s operations. Accordingly, Mr. Horton was awarded a discretionary bonus of $100,000. For each calendar year during the term of the New Horton Employment Agreement, the first such period having commenced on January 1, 2010, our parent may, in its discretion, pay to Mr. Horton a bonus of up to $75,000 if Mr. Horton remains in the position of Chief Operating Officer as of December 31 of such calendar year and has performed fully all material obligations under the New Horton Employment Agreement. The amount of each such bonus, if any, will be determined by our parent’s board of directors in its sole discretion according to Mr. Horton’s achievement of annual objectives set by the board of directors for that year. If, however, during the term of the New Horton Employment Agreement, our parent consummates an initial public offering of its Class A common stock, Mr. Horton’s bonus will be determined by a compensation committee or in such other manner as our parent determines satisfies applicable stock exchange rules or laws.
Wisdom Lu. In accordance with her employment agreement, Wisdom Lu was eligible to receive a bonus of $100,000 if she remained the Chief Financial Officer until March 31, 2009 and fully performed all material obligations under the employment agreement. The board of directors determined that Ms. Lu satisfied the foregoing requirements and she received the $100,000 bonus
58
Table of Contents
in April 2009. For each twelve-month period starting April 1, 2009 and ending March 31, 2013, Ms. Lu will be eligible to receive a bonus of up to 25% of her then-current annual salary if she remains Chief Financial Officer during the applicable twelve-month period and fully performs all material obligations under the employment agreement. The amount of any bonus for periods commencing on or after April 1, 2009 will be determined by our parent’s board of directors in its sole discretion according to Ms. Lu’s achievement of annual objectives set by the board for that year. If, however, during the term of the employment agreement, our parent consummates an initial public offering of its Class A common stock, Ms. Lu’s bonus will be determined by a compensation committee or in such other manner as our parent determines satisfies applicable stock exchange rules or laws.
Long-Term Incentive Compensation — We may offer long-term incentive compensation to align executive compensation with our stockholder interests by placing a significant amount of total direct compensation “at risk”. “At risk” means the named executive officer will not realize value unless performance goals directly tied to our performance and that of our consolidated parent are achieved. During our fiscal year ending December 31, 2009, we offered two types of long-term incentive compensation arrangements: (1) a long-term incentive plan in which Winter Horton participated in the increase in the net value of our parent over a threshold amount on a single determination date (see “Winter Horton—Participation in Net Value Increase in Our Parent” below for a description of the plan) and (2) the Liberman Broadcasting, Inc.’s Stock Incentive Plan, or Stock Incentive Plan, through which equity compensation may be granted by our parent’s board of directors.
In December 2008, the stockholders of our parent approved Stock Incentive Plan, which reserves an aggregate of 14.568461 shares of our parent’s Class A common stock for issuance under this plan. The Stock Incentive Plan provides that our parent may grant any of the following: (i) incentive stock options, (ii) nonqualified stock options, (iii) restricted stock awards, and (iv) stock awards. All employees, members of our board of directors, members of the board of directors of our parent and subsidiaries, and certain consultants and advisors are eligible to participate. The board of directors of our parent will approve those individuals who will participate in the Stock Incentive Plan. No incentive awards were granted under the Stock Incentive Plan in 2009.
Jose Liberman and Lenard Liberman. Because Jose Liberman and Lenard Liberman, together, beneficially own 61.1% of the aggregate common stock of our parent, their compensation package does not contain additional long-term incentive compensation as we believe their motivation and financial interests are well aligned with that of our own.
Wisdom Lu—Stock Options in Our Parent. In accordance with Ms. Lu’s employment agreement, in December 2008, we granted her an option to purchase 2.18527 shares of Liberman Broadcasting’s Class A common stock at an exercise price of $1,368,083 per share under the Stock Incentive Plan. The options represent, on a fully diluted basis as of the date of grant, 0.75% of the outstanding shares of our parent and vest and become exercisable in five equal annual installments on March 31 of each year, commencing on March 31, 2009. The options expire ten years from the date of grant.
The option and any other rights of Ms. Lu under the Stock Incentive Plan are generally nontransferable and exercisable only by Ms. Lu. Any shares of common stock issued on exercise of the option are subject to substantial restrictions on transfer and are subject to certain rights in favor of our parent.
Also, the number and amount of our parent’s shares underlying Ms. Lu’s options will be proportionally adjusted for any recapitalization, reclassification, stock split, merger, consolidation or unusual or extraordinary corporate transactions in respect of our parent’s common stock.
Winter Horton—Participation in Net Value Increase in Our Parent. Pursuant to the Prior Horton Employment Agreement., Mr. Horton participated in an incentive compensation program that allowed him to participate in the increase of the “net value” of our parent, Liberman Broadcasting, over a specified threshold amount on December 31, 2009, the determination date, unless a change in control occurs prior to that date. If a change in control had occurred prior to December 31, 2009, the determination date would have been the date of such change in control. See “Employment, Change in Control and Termination Arrangements — Change in Control”.
In general, the “net value” was determined by an independent appraiser based on our parent’s consolidated cash flow as a going concern, reducing such amount for our parent’s consolidated liabilities (in each case, as determined under generally accepted accounting principles) on December 31, 2009.
If certain conditions were met, Mr. Horton was entitled to receive up to a maximum percentage of the amount by which the “net value” of our parent exceeded a specified threshold amount, which may have been reduced if the ownership of our parent by certain persons or entities related to Jose Liberman and/or Lenard Liberman was also reduced. The maximum possible payment comprised
59
Table of Contents
two portions: a time vesting portion and a performance vesting portion. For the time vesting portion, half of the maximum possible payment vested in seven equal annual installments as long as Mr. Horton remained employed with us. The other half of the maximum possible payment, the performance vesting portion, also vested in seven equal annual installments if our parent determined, in its sole discretion, that the annual performance goals had been met for the relevant year.
This incentive compensation was payable to Mr. Horton in cash within 30 days after the determination date (December 31, 2009 or earlier, if a change in control occurs), unless such payment would have violated the terms of any loan agreement that was in effect at the time. If our parent’s common stock was traded on an established stock market at the time a payment, if any, was due to Mr. Horton, we could have chosen to pay the amount in our parent’s common stock in lieu of cash. As of December 31, 2009, our parent’s “net value” did not reach the threshold amount, and therefore, no incentive compensation was paid to Mr. Horton.
Pursuant to the New Horton Employment Agreement, our parent agreed to grant Mr. Horton an option to purchase 6.55581 shares of its Class A common stock pursuant to the Stock Incentive Plan, which will represent, on a fully diluted basis as of the date of grant, 2.25% of the outstanding shares of our parent’s common stock. The option, when granted, will vest and become exercisable in five equal annual installments of 0.45% on December 31 of each year, commencing on December 31, 2010, provided that Mr. Horton remains employed by our parent on each such date. The option, when granted, will be subject to the terms and conditions of the Stock Incentive Plan, including the terms and conditions with respect to adjustments to the options in the event of changes in our parent’s capital structure. We expect that the option will be granted by our board of directors before December 31, 2010.
Perquisites and Other Benefits — We provide our named executive officers with perquisites and other personal benefits that we believe are reasonable. We do not view perquisites as a significant element of our comprehensive compensation structure, but we do believe they can be useful in attracting, motivating and retaining executive talent.
The named executive officers may be provided with cellular phone service plans, personal travel, tickets to sporting events, personal use of company automobiles, and estate and financial planning and tax assistance. See “Summary Executive Compensation Table for 2009” for the aggregate amount of such perquisites. We also pay the medical and dental insurance plan premiums on behalf of our named executive employees and their legal dependents. In addition, we have provided whole life insurance and term life insurance policies for Lenard Liberman to provide for a death benefit of an aggregate of $2.5 million to beneficiaries designated by Mr. Liberman.
In addition, we provide the same or comparable health and welfare benefits to our named executive officers as are available for all other full-time employees. We believe that the perquisites and other personal benefits that we offer are typical employee benefits for high-level executives working in our industry and in our geographic area. We believe that these benefits enhance employee morale and performance, and are not excessively costly to the company. We provide these benefits in our discretion. Our perquisite and personal benefit programs may change over time as the board of directors determines is appropriate.
Attributed costs of the perquisites and personal benefits described above for the named executive officers for the fiscal year ended December 31, 2009, are included in the column “All Other Compensation” of the “Summary Executive Compensation Table for 2009” below.
Retirement Benefits — Our named executive officers are permitted to contribute to a 401(k) plan up to the maximum amount allowed under the Internal Revenue Code. We do not provide any matching contributions. The 401(k) plan is available to all eligible employees. Our named executive officers do not participate in any deferred benefit retirement plans such as a pension plan. We also do not have any deferred compensation programs for any named executive officer.
Employment, Change in Control and Termination Arrangements
Employment Agreements — As stated above, we do not have employment agreements with Jose Liberman, our Chairman, or Lenard Liberman, our Chief Executive Officer, President and Secretary. Our only named executive officers with employment agreements during 2009 were Wisdom Lu, our Chief Financial Officer, and Winter Horton, our Chief Operating Officer.
Change in Control — Of our named executive officers, during 2009 only Wisdom Lu and Winter Horton were entitled to an accelerated benefit in connection with a change in control of our company. The occurrence, or potential occurrence, of a change in control of our company may create uncertainty regarding the continued employment of Ms. Lu and Mr. Horton because many change in control transactions result in significant organizational changes, particularly at the executive officer level. In order to encourage Ms. Lu and Mr. Horton to remain employed with us during a critical time, we provided Ms. Lu and Mr. Horton with certain benefits in the event, or potential occurrence, of a change in control.
60
Table of Contents
Wisdom Lu. Ms. Lu’s employment agreement provides that if, after a change in control event has occurred, (a) she is demoted or (b) we (or our successor) change her primary employment location more than 50 miles from Burbank, California, Ms. Lu will have 90 days to notify us (or our successor) that she intends to resign for “good reason.” If Ms. Lu resigns for “good reason” following a change in control event before March 31, 2013, the expiration of her employment agreement, Ms. Lu will be entitled to salary and bonuses earned at the time of such termination plus her base salary for a period of twelve months following termination. She will also be entitled to exercise the then vested portion of her options, as provided under the Stock Incentive Plan. Under the terms of the Stock Incentive Plan and Ms. Lu’s option award agreement, in the event of a change of control, the administrator may provide for a cash payment in settlement of, or for the assumption, substitution or exchange of, any or all of the outstanding options. Further, and unless the administrator provides otherwise prior to the change of control event, any outstanding and unvested portion of the option award will accelerate upon the change in control event such that 100% of each unvested and outstanding vesting installment of the option award will become immediately exercisable.
A “change in control” under Ms. Lu’s employment agreement and the Stock Incentive Plan would occur if:
| (1) | our parent’s stockholders or board of directors approve of a dissolution or liquidation of our parent, other the events described in paragraph (3) below; |
| (2) | except in certain circumstances, any individual or group acquires 50% or more of either (i) our parent’s outstanding common stock or (ii) the combined voting power of our parent’s outstanding common stock entitled to vote for the board of directors; or |
| (3) | our parent consummates a merger, a sale of all or substantially all of its assets, or our parent acquires the assets or stock of another individual or group, in each case unless, following such transaction, (i) all or substantially all of the owners of our parent’s outstanding common stock will own more than 50% of the same securities after the transaction and (ii) no person (other than certain persons specified in the employment agreement) owns, directly or indirectly, more than 50% of the outstanding common stock or the combined voting power after the transaction. |
Winter Horton. Pursuant to the Prior Horton Employment Agreement, upon a change in control, the next installment of his time vesting portion (that is, 1/7 of his maximum payment relating to the time vesting portion) of his Incentive Compensation benefit would have vested immediately. Further, as described under “Elements of Our Compensation Program — Long-Term Incentive Compensation”, if a change in control had occurred prior to December 31, 2009, the determination date used to calculate Winter Horton’s incentive compensation would have been the date of such change in control and any long-term incentive payment that had vested would have been due within 30 days after such date. A change in control did not occur during 2009. The New Horton Employment Agreement does not provide for benefits or payments to Mr. Horton upon a change in control.
Termination Arrangements — We believe that severance and other post-termination benefits can play a valuable role in attracting and retaining key executive officers. Accordingly, we provide certain of these protections to Wisdom Lu and Winter Horton pursuant to their respective employment agreements. Other than pursuant to those employment agreements, we are not obligated to make any severance or other payments upon termination to our named executive officers.
Wisdom Lu. If Ms. Lu resigns (for “good reason” or otherwise), dies, becomes disabled, or is terminated (for cause or without cause) before her employment agreement terminates on March 31, 2013, we would be required to pay her earned and accrued salary and bonus. In addition, Ms. Lu would be entitled to payments equal to 12 months of base salary and to exercise the then-vested portion of her options to purchase shares in Liberman Broadcasting’s Class A common stock if we terminate Ms. Lu’s employment for a reason other than for cause or disability. See “Change in Control—Wisdom Lu” for termination benefits if Ms. Lu resigns for “good reason” following a change in control event.
Further, if Ms. Lu is terminated for cause, any outstanding portion of her option under the Stock Incentive Plan will be immediately forfeited, regardless of whether it was then exercisable. “Cause,” which will be determined by our parent’s board of directors, generally means any of the following:
| (1) | Ms. Lu’s willful refusal to comply with reasonable requests made by our Chief Executive Officer, President or Executive Vice President, |
| (2) | personal dishonesty involving our business, or breach of fiduciary duty to us or our parent involving personal profit, |
| (3) | use of any illegal drug, narcotic, or excessive amounts of alcohol (as determined by the company in its discretion) on our property or at a function where she is working on our behalf, |
| (3) | commission of a felony, which has, or in the reasonable judgment of our parent’s board of directors, may have a material adverse effect on our business or reputation, |
61
Table of Contents
| (4) | a breach by Ms. Lu of any material provision of the employment agreement, or |
| (5) | any breach by Ms. Lu of the public morals provision of the employment agreement. |
Winter Horton. Under the Prior Horton Employment Agreement, if Winter Horton was terminated without “cause,” or if he terminated his employment with us because of a material breach of his employment agreement by us, we would have been required to pay (1) accrued salary or bonus for services rendered, (2) any amounts previously vested under the long-term incentive plan, and (3) severance payments equal to 180 days of base salary. If Winter Horton was terminated for death, disability or “cause” before December 31, 2009, we would not have been obligated to make any payments under the employment agreement except for any accrued salary or bonuses for services rendered and/ or amounts vested under the long-term incentive plan at the time of termination.
Under the New Horton Employment Agreement, in the event Mr. Horton’s employment is terminated for “cause” (as defined below) or as a result of Mr. Horton’s disability, death or resignation during the term of the New Horton Employment Agreement, Mr. Horton will only be entitled to salary and bonuses earned at the time of such termination. In addition, if Mr. Horton is terminated by our parent for cause, any then-outstanding portion of his option to purchase share of our parent’s Class A common stock or any other equity award will be immediately forfeited, regardless of whether it was then exercisable. If Mr. Horton is terminated for a reason other than for cause or disability during the term of the New Horton Employment Agreement, Mr. Horton will be entitled to (i) salary and bonuses earned at the time of such termination, (ii) continued payment of his base salary for one year following such termination, and (iii) exercise the then-vested and outstanding portion of his options in accordance with the terms of the Stock Incentive Plan. “Cause,” which will be determined by our parent’s board of directors, means any of the following:
| (1) | consistent failure of the employee to perform his duties pursuant to the employment agreement after having been warned at least once in writing by the board of directors of our parent, |
| (2) | personal dishonesty involving our business, or breach of fiduciary duty to us or our parent involving personal profit, |
| (3) | commission of a felony, which has, or in the reasonable judgment of our parent’s, may have an adverse effect on our business or reputation, |
| (4) | Mr. Horton’s use of any illegal drug, narcotic or excessive amounts of alcohol, be determined by our parent’s board of directors, on company property or at a function where Mr. Horton is working on behalf of the company, |
| (5) | Mr. Horton’s willful refusal to copy with reasonable requests by the board, the Chief Executive officer, President or Chairman, or |
| (6) | Mr. Horton’s breach of any material provision of the employment agreement or breach or certain acts involving public morals. |
See “Potential Payments Upon Termination or Change of Control” for amounts we would have been required to pay had a change of control event occurred at December 31, 2009.
Internal Revenue Code Section 162(m)
We do not have any common equity securities required to be registered under the Securities Exchange Act of 1934. Therefore, the limitation on tax deductibility of executive compensation under Section 162(m) of the Internal Revenue Code does not apply to us.
Compensation Committee Report
As we do not have a compensation committee, our board of directors reviews and determines the compensation of our named executive officers. The board of directors has reviewed and discussed with management the information under the Compensation Discussion and Analysis above. Based on such review and discussion, the board of directors has approved the inclusion of the Compensation Discussion and Analysis in this report.
| The Board of Directors: |
| Jose Liberman |
| William G. Adams |
| Winter Horton |
| Bruce A. Karsh |
| Lenard D. Liberman |
| Terence M. O’Toole |
62
Table of Contents
Summary Executive Compensation Table for 2009
The following table describes the compensation we paid to our named executive officers during the fiscal years ended December 31, 2009, 2008 and 2007.
| Name and Principal Position(s) |
Year | Salary | Bonus | Option Awards(5) |
All Other Compensation |
Total | |||||||||||
| Jose Liberman (1) |
2009 | $ | 750,000 | $ | — | $ | — | $ | 84,431 | $ | 834,431 | ||||||
| 2008 | $ | 750,000 | $ | — | $ | — | $ | 108,174 | $ | 858,174 | |||||||
| 2007 | $ | 687,500 | $ | — | $ | — | $ | 55,835 | $ | 743,335 | |||||||
| Lenard Liberman (2) |
2009 | $ | 750,000 | $ | — | $ | — | $ | 112,700 | $ | 862,700 | ||||||
| 2008 | $ | 750,000 | $ | — | $ | — | $ | 91,615 | $ | 841,615 | |||||||
| 2007 | $ | 687,500 | $ | — | $ | — | $ | 85,946 | $ | 773,446 | |||||||
| Wisdom Lu (3) |
2009 | $ | 415,000 | $ | 100,000 | $ | — | $ | — | $ | 515,000 | ||||||
| 2008 | $ | 309,231 | $ | — | $ | 196,298 | $ | — | $ | 505,529 | |||||||
| Winter Horton (4) |
2009 | $ | 400,000 | $ | 100,000 | $ | — | $ | — | $ | 500,000 | ||||||
| 2008 | $ | 400,000 | $ | 50,000 | $ | — | $ | — | $ | 450,000 | |||||||
| 2007 | $ | 400,000 | $ | 35,000 | $ | — | $ | — | $ | 435,000 | |||||||
| (1) | Jose Liberman’s annual base salary was increased from $500,000 to $750,000 on March 30, 2007. All other compensation includes aggregate payments by us for Mr. Liberman’s leasing of personal vehicles of $35,722, personal travel of $43,186, and other personal expenses. |
| (2) | Lenard Liberman’s annual base salary was increased from $500,000 to $750,000 on March 30, 2007. All other compensation includes payments by us for Mr. Liberman’s leasing of personal vehicles of $35,927, personal travel of $53,085, other personal expenses, and whole and term life insurance premiums. |
| (3) | Wisdom Lu was appointed our Chief Financial Officer in March 2008. We granted Ms. Lu an option to purchase 2.18527 shares of our parent’s Class A common stock at an exercise price of $1,368,083 per share, pursuant to the Stock Incentive Plan. See “Compensation Discussion and Analysis—Long-Term Incentive Compensation”. |
| (4) | Winter Horton has not yet accrued any non-equity incentive plan compensation under his employment agreement. See “Compensation Discussion and Analysis—Long-Term Incentive Compensation”. |
| (5) | In accordance with recent changes in the SEC’s disclosure rules, the amounts reported in the Option Awards column of the table above for 2009 reflect the fair value on the grant date of the option awards granted to our named executive officers during 2009. These values have been determined under the principles used to calculate the value of equity awards for purposes of the Company’s financial statements. For a discussion of the assumptions and methodologies used to value the awards reported in the Option Awards column, please see the discussion of stock-based compensation contained in Notes 1 and 9 of the Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K. Under U.S. generally accepted accounting principles, compensation expense with respect to stock awards and option awards granted to our employees and directors is generally recognized over the vesting periods applicable to the awards. The SEC’s disclosure rules previously required that we present stock award and option award information for 2008 and 2007 based on the amount recognized during the corresponding year for financial statement reporting purposes with respect to these awards (which meant, in effect, that in any given year we could recognize for financial statement reporting purposes amounts with respect to grants made in that year as well as with respect to grants from past years that vested in or were still vesting during that year). However, the recent changes in the SEC’s disclosure rules require that we now present the option award amounts in the column of the table above with respect to 2008 and 2007 on a similar basis as the 2009 presentation using the grant date fair value of the awards granted during the corresponding year (regardless of the period over which the awards are scheduled to vest). Since this requirement differs from the SEC’s past disclosure rules, the amounts reported in the table above for option awards in 2008 and 2007 differ from the amounts previously reported in our Summary Compensation Table for these years. As a result, each named executive officer’s total compensation amounts for 2008 and 2007 also differ from the amounts previously reported in our Summary Compensation Table for these years. |
63
Table of Contents
Outstanding Equity Awards at December 31, 2009
| Name |
Number of Securities Underlying Unexercised Options (#) Exercisable |
Number of Securities Underlying Unexercised Options (#) Unexercisable |
Equity Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned Options (#) |
Option Exercise Price ($) |
Option Expiration Date | |||||
| Jose Liberman |
— | — | — | — | — | |||||
| Lenard Liberman |
— | — | — | — | — | |||||
| Wisdom Lu(1) |
0.437054 | 1.748216 | 1.748216 | 1,368,083 | 12/2018 | |||||
| Winter Horton |
— | — | — | — | — |
| (1) | Wisdom Lu was granted options to purchase the Class A common stock of our parent, Liberman Broadcasting, Inc., on December 12, 2008 pursuant to the Stock Incentive Plan. The option expires ten years from the date of the grant and vests over five years. The option grant to Wisdom Lu represents, on a fully diluted basis as of the date of grant, 0.75% of the outstanding shares of our parent’s common stock and vests and become exercisable in five equal annual installments on March 31 of each year, commencing on March 31, 2009. |
Narrative Disclosure to Summary Compensation Table and Outstanding Equity Awards Table
In February 2008, our parent, Liberman Broadcasting, Inc., entered into an employment agreement with Wisdom Lu, our Chief Financial Officer. A description of the material terms of the employment agreement with Ms. Lu can be found above under “Compensation Discussion and Analysis—Elements of our Compensation Program and –Employment, Change in Control and Termination Arrangements.”
In December 2002 (and amended in May 2004), our parent entered into an employment agreement with Winter Horton, our Chief Operating Officer, which expired on December 31, 2009. In December 2009, in connection with the expiration of his existing employment agreement, our parent entered into a new employment agreement with Mr. Horton. A description of the material terms of the prior employment agreement and new employment agreement with Mr. Horton can be found above under “Compensation Discussion and Analysis—Elements of our Compensation Program and –Employment, Change in Control and Termination Arrangements.”
No plan based awards were granted in 2009.
Potential Payments Upon Termination or Change of Control
As described above under “Compensation Discussion and Analysis—Employment, Change in Control and Termination Arrangements”, Wisdom Lu’s and Winter Horton’s employment agreements would require us to make termination and/or severance payments and change in control benefits.
Wisdom Lu. If Ms. Lu resigns (for “good reason” or otherwise), dies, becomes disabled, or is terminated (for cause or without cause) before her employment agreement terminates on March 31, 2013, we would be required to pay her accrued salary and bonus. In addition, Ms. Lu would be entitled to payments equal to 12 months of base salary and to exercise the then-vested portion of her options to purchase shares in Liberman Broadcasting’s Class A common stock if either of the following events occurred: (1) we terminate Ms. Lu’s employment for a reason other than for cause or disability or (2) Ms. Lu resigns for “good reason” following a change in control event. Under the terms of the Stock Incentive Plan and Ms. Lu’s option award agreement, in the event of a change of control, the administrator may provide for a cash payment in settlement of, or for the assumption, substitution or exchange of, any or all of the outstanding options. Further, and unless the administrator provides otherwise prior to the change of control event, any outstanding and unvested portion of the option award will accelerate upon the change in control event such that 100% of each unvested and outstanding vesting installment of the option award will become immediately exercisable.
Had we terminated Ms. Lu on December 31, 2009 for a reason other than for cause or disability, we would have been required to pay Ms. Lu’s accrued salary and severance of $420,000, an amount representing 12 months of her base salary. As of December 31, 2009, 0.437054 of Ms. Lu’s options to purchase our parent’s Class A common shares had vested.
64
Table of Contents
If Ms. Lu resigned for good reason after a change of control event on December 31, 2009, we would have been required to pay her accrued salary and severance of $420,000. As noted above, and unless otherwise provided by the administrator of the Stock Incentive Plan, had Ms. Lu’s employment terminated under the circumstances described above in connection with a change of control event on December 31, 2009, Ms. Lu would have also been entitled to the accelerated vesting of 100% of any outstanding and unvested portion of the option award. We estimated that her outstanding and unvested option that would have accelerated as of December 31, 2009 had no value. This was determined based on an analysis we performed as of December 31, 2009, whereby we estimated that the fair market value of an underlying share of our parent’s common stock on December 31, 2009 was less than the exercise price of the option by the number of shares subject to the accelerated portion of the option.
If Ms. Lu is terminated for death, disability or “cause,” or resigns for any reason other than a “good reason,” before March 31, 2013, we would not be obligated to make any payments under the employment agreement except for any accrued salary or bonuses for services rendered. In addition, if Ms. Lu is terminated for cause, any outstanding portion of her option under the Stock Incentive Plan will be immediately forfeited, regardless of whether it was then exercisable.
Winter Horton. Pursuant to the Prior Horton Employment Agreement, if Mr. Horton was terminated or resigned for any reason prior to December 31, 2009, we would have been required to pay his accrued salary and bonus and any amounts vested under the incentive plan in his employment agreement. In addition, if Mr. Horton was terminated without “cause” or if he terminated his employment with us because of a material breach of his employment agreement by us, we would also have been required to pay Mr. Horton a severance payment equal to 180 days of his base salary. If we had terminated Winter Horton’s employment without “cause” on December 31, 2009, we would have been required to pay Mr. Horton’s accrued salary and severance of $197,260. If a change in control had occurred prior to December 31, 2009, Mr. Horton would have automatically vested in the next 1/7 installment of his time vesting portion of his long-term incentive compensation and the “net value” determination date used to calculate his maximum possible payment will become the date of such change in control. However, given the significant downturn in the U.S. national and local economies which negatively affected our advertising revenues and overall performance, we agreed, along with Mr. Horton, that as of December 31, 2009, no incentive compensation had been earned under his employment agreement.
As noted above, Mr. Horton entered into the New Horton Employment Agreement with our parent on December 28, 2009, which became effective on January 1, 2010. Effective beginning January 1, 2010, the New Horton Employment Agreement provides for certain severance benefits in the event Mr. Horton’s employment with our parent is terminated for reasons other than cause or disability.
Director Compensation
We do not pay a retainer or director fees to our directors for their services, except for William G. Adams. We also did not provide any perquisites or other benefits to any non-employee director in 2009 which aggregated $10,000 or more. We do, however, reimburse each of our directors for expenses incurred in the performance of his duties as a director.
DIRECTOR COMPENSATION FOR 2009
| Name |
Fees Paid or Earned in Cash ($) |
Total ($) | |||||
| Jose Liberman(1) |
$ | — | $ | — | |||
| Lenard D. Liberman(1) |
— | — | |||||
| Winter Horton(1) |
— | — | |||||
| William G. Adams |
34,500 | (2) | 34,500 | ||||
| Bruce A. Karsh |
— | — | |||||
| Terence M. O’Toole |
— | — | |||||
| (1) | In 2009, Jose Liberman, Lenard Liberman and Winter Horton served as our executive officers while also serving as our directors. Messrs. J. Liberman, L. Liberman and Horton were not paid any additional compensation for their services as directors in 2009. See “Summary Executive Compensation Table for 2009.” |
65
Table of Contents
| (2) | The stockholders of our parent, Liberman Broadcasting, determined that Mr. Adams should be compensated for his service as a director because he is the only director not to hold, directly or indirectly, any equity in our parent or receive any other type of compensation for his service to us. In addition to serving on our board of directors, Mr. Adams also serves on the board of directors of our parent and our wholly owned subsidiary, LBI Media, Inc. Mr. Adams’ aggregate fees for his services to us, our parent, and LBI Media has been included in this table. Mr. Adams receives an aggregate quarterly fee of $7,500 plus a meeting fee of $1,500 for each board meeting (other than telephonic meetings) he attends. However, Mr. Adams is only entitled to receive one meeting fee if the meetings of our board of directors and the board of directors of our parent and LBI Media are held jointly or consecutively. Mr. Adams attended three board meetings in 2009. |
Compensation Committee Interlocks and Insider Participation
We do not have a compensation committee. Our board of directors is responsible for determining the compensation of our executive officers. Jose Liberman, our Chairman, Lenard Liberman, our Chief Executive Officer, President and Secretary, and Winter Horton, our Chief Operating Officer, were directors for 2009 and participated with the rest of the board in determining the compensation of all executive officers for 2009. Otherwise, no executive officer of our company has served as a member of the board of directors or compensation committee (or other committee serving an equivalent function) of any other entity that has or has had one or more executive officers who served as a member of our board of directors during the year ended December 31, 2009.
| ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED SHAREHOLDER MATTERS |
We are a wholly owned subsidiary of our parent, Liberman Broadcasting, Inc. The following table sets forth information as of April 9, 2010 with respect to the beneficial ownership of Class A common stock and Class B common stock of our parent by (i) our directors, (ii) our named executed officers (as described above under “Item. 11 Executive Compensation—Compensation Discussion and Analysis”) and (iii) our directors and executive officers as a group.
The amounts and percentages of our parent’s Class A and Class B common stock beneficially owned are reported on the basis of regulations of the Securities and Exchange Commission, or SEC, governing the determination of beneficial ownership of securities. Under the rules of the SEC, a person is deemed to be a “beneficial owner” of a security if that person has or shares “voting power,” which includes the power to vote or to direct the voting of such security, or “investment power,” which includes the power to dispose of or to direct the disposition of such security. A person is also deemed to be a beneficial owner of any securities of which that person has a right to acquire beneficial ownership within 60 days. Under these rules, more than one person may be deemed a beneficial owner of the same securities and a person may be deemed a beneficial owner of securities as to which he has no economic interest. Except as otherwise noted by footnote, we believe, based on the information furnished to us, that the persons named in the table below have sole voting and investment power with respect to all shares of common stock reflected as beneficially owned, subject to applicable community property laws.
The Class A common stock and Class B common stock vote together as a single class on all matters submitted to a vote of the stockholders of our parent. Each share of Class A common stock is entitled to one vote per share, and each share of Class B common stock is entitled to ten votes per share. Holders of such shares of our parent’s Class B common stock may elect at any time to convert their shares into an equal number of shares of Class A common stock, provided that any necessary consent by the FCC has been obtained. Our parent had 113.29783 shares and 178.07139 shares of Class A and Class B common stock, respectively, outstanding on April 9, 2010.
| Class A Common Stock |
Class B Common Stock |
% of Total Economic Interest |
% of Total Voting Power |
||||||||||||||
| Name and Address of Stockholder (1) |
Number | % | Number | % | |||||||||||||
| Jose Liberman (2) |
(2 | ) | (2 | ) | 58.51258 | 32.9 | % | 20.1 | % | 30.9 | % | ||||||
| Lenard Liberman (3) |
(3 | ) | (3 | ) | 119.55881 | 67.1 | 41.0 | 63.1 | |||||||||
| Wisdom Lu |
— | — | — | — | — | — | |||||||||||
| Winter Horton |
— | — | — | — | — | — | |||||||||||
| William G. Adams |
— | — | — | — | — | — | |||||||||||
| Bruce A. Karsh (4) |
75.28824 | 66.5 | % | — | — | 25.8 | 4.0 | ||||||||||
| Terence M. O’Toole (5) |
37.27864 | 32.9 | % | — | — | 12.8 | 2.0 | ||||||||||
| All directors and executive officers as a group (7 persons) |
112.5669 | 99.4 | % | 178.07139 | 100.0 | 99.7 | 100.0 | ||||||||||
| (1) | The address of the persons and entities listed on the table is c/o LBI Media Holdings, Inc., 1845 West Empire Avenue, Burbank CA 91504. |
66
Table of Contents
| (2) | Represents shares of Class B common stock held by Mr. Jose Liberman in his capacity as trustee of the Liberman Trust dated 11/07/02. Holders of such shares of our Class B common stock may elect at any time to convert their shares into an equal number of shares of Class A common stock, provided that any necessary consent by the FCC has been obtained. Further, Class B shares will automatically be converted, whether by sale, assignment gift or otherwise, whether voluntarily or involuntarily, to Class A common shares under certain circumstances set forth in Liberman Broadcasting’s Restated Certificate of Incorporation. |
| (3) | Represents shares of Class B common stock held by Mr. Lenard Liberman. Holders of such shares of our Class B common stock may elect at any time to convert their shares into an equal number of shares of Class A common stock, provided that any necessary consent by the FCC has been obtained. Further, Class B shares will automatically be converted, whether by sale, assignment gift or otherwise, whether voluntarily or involuntarily, to Class A common shares under certain circumstances set forth in Liberman Broadcasting’s Restated Certificate of Incorporation. |
| (4) | Represents an aggregate of 75.28824 shares of Class A common stock held by OCM Principal Opportunities Fund III, L.P., OCM Principal Opportunities Fund IIIA, L.P., OCM Principal Opportunities Fund IV AIF (Delaware), L.P. and OCM Opps Broadcasting, LLC (collectively, the “Oaktree Group”). Mr. Karsh has sole voting and dispositive power of the shares held by the Oaktree Group. Mr. Karsh disclaims beneficial ownership of these shares except to the extent of his pecuniary interest therein. |
| (5) | Represents an aggregate of 37.27864 shares of Class A common stock held by Tinicum Capital Partners II, L.P., Tinicum Capital Partners II Parallel Fund, L.P. and Tinicum Capital Partners II Executive Fund L.L.C. (collectively, the “Tinicum Group”). Mr. O’Toole is co-managing member of Tinicum Capital Partners II, L.P. and has sole voting and dispositive power of shares held by the Tinicum Group. Mr. O’Toole disclaims beneficial ownership of these shares except to the extent of his pecuniary interest therein. |
For equity compensation plan information, refer to the information in “Item 11. Executive Compensation”
| ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE |
We are not required to have, and do not have, an audit committee. Accordingly, our board of directors reviews and approves all related person transactions. Our board of directors has not adopted written procedures for review of, or standards for approval of, these transactions, but instead reviews such transactions on a case-by-case basis.
Executive Officer and Director Loans
As of December 31, 2009, we had outstanding loans, including accrued interest, aggregating $267,764 and $2,655,180 to Jose and Lenard Liberman, respectively, each of whom is an executive officer and a director and beneficially owns shares of our stock, and $690,000 to Winter Horton, our Chief Operating Officer and director. The loans were for the personal use of Jose and Lenard Liberman and Winter Horton.
For Jose Liberman, we made loans of $146,590 and $75,000 on December 20, 2001 and July 29, 2002, respectively. During the year ended December 31, 2009 the largest aggregate amount of principal outstanding of these loans was $221,590. Jose Liberman did not pay us any principal or interest for the year ended December 31, 2009.
For Lenard Liberman, we made loans of $243,095, $32,000 and $1,916,563 on December 20, 2001, June 14, 2002 and July 9, 2002, respectively. During the year ended December 31, 2009 the largest aggregate amount of principal outstanding of these loans was $2,191,658. Lenard Liberman did not pay us any principal or interest for the year ended December 31, 2009.
Each of these loans bears interest at the alternative federal short-term rate published by the Internal Revenue Service for the month in which the advance was made, which rate was 2.48%, 2.91% and 2.84% for December 2001, June 2002 and July 2002, respectively. Each loan was scheduled to mature on the seventh anniversary of the date on which the loan was made. However, all loans have been extended and currently mature through December 2010. Although no specific determination has been made, we currently plan to extend these loans beyond their current 2010 maturity dates.
For Winter Horton, we made loans of $30,000, $36,000, $349,000 and $275,000 on November 20, 1998, November 22, 2002, November 29, 2002 and April 8, 2006, respectively. Each of these loans were made prior to Mr. Horton’s election as our director in March 2007. During the year ended December 31, 2009, the largest aggregate principal amount outstanding of these loans was $690,000. Mr. Horton did not repay any principal or interest for the year ended December 31, 2009. The $30,000 loan does not bear interest and does not have a maturity date. Each of the other loans bear interest at 8.0% and the loans made on November 22, 2002, November 29, 2002 and April 8, 2006 were initially scheduled to mature on January 1, 2010, December 31, 2009 and December 31, 2009, respectively. However, all loans have been extended and currently mature through January 2011.
67
Table of Contents
L.D.L. Enterprises, Inc.
Lenard Liberman is the sole shareholder of L.D.L. Enterprises, Inc., a mail order business. From time to time, we allow L.D.L. Enterprises to use, free of charge, unsold advertising time on our radio and television stations.
Stockholder and Officers Note Purchases
Certain of our parent’s stockholders, the chairman of our board, our president, chief executive officer and secretary, and our chief financial officer collectively own an aggregate principal amount of $53.7 million of LBI Media’s senior subordinated notes and $3.0 million of our senior discount notes, which were all purchased in open market transactions. We paid an aggregate of $4.9 million in interest during the fiscal year ended December 31, 2009 to such related persons.
| ITEM 14. | PRINCIPAL ACCOUNTANT FEES AND SERVICES |
Fees related to services performed by Ernst & Young LLP and Deloitte & Touche LLP for the years ended December 31, 2009 and 2008 are as follows:
| Year Ended December 31, | ||||||
| 2009 | 2008 | |||||
| Audit fees |
$ | 435,000 | $ | 443,000 | ||
| Audit-related fees |
— | 28,000 | ||||
| Tax fees |
— | 127,000 | ||||
| Total |
$ | 435,000 | $ | 598,000 | ||
We do not have an audit committee. Our board of directors approved all services performed by Ernst & Young LLP. In December 2008, we dismissed Ernst & Young LLP as our principal accountant and appointed Deloitte & Touche LLP as our new principal accountant. Of the audit fees rendered for the year ended December 31, 2009, $25,000 were billed by Ernst & Young LLP. Such services related to procedures performed for the restatement of the consolidated statement of operations, cash flows, and stockholder’s equity, as well as related financial information for the year ended December 31, 2007. Of the audit fees rendered for the year ended December 31, 2008, $300,000 were billed by Deloitte & Touche LLP.
Fees for audit services include fees associated with the annual audit, the reviews of our quarterly reports on Form 10-Q, the issuance of comfort letters, the issuance of consents, and assistance with and review of documents filed with the Securities and Exchange Commission. Tax fees include tax compliance, tax advice and tax planning services.
| ITEM 15. | EXHIBITS, FINANCIAL STATEMENT SCHEDULES |
| (a) | The following documents are filed as part of this report: |
| 1. | Financial Statements |
The following financial statements of LBI Media Holdings, Inc. and report of independent auditors are included in Item 8 of this annual report and submitted in a separate section beginning on page F-1:
| Page | ||
| F-1 | ||
| F-3 | ||
| F-4 | ||
| Consolidated Statements of Stockholder’s (Deficiency) Equity |
F-5 | |
| F-6 | ||
| F-7 |
| 2. | Financial Statements Schedules |
All required schedules are omitted because they are not applicable or the required information is shown in the financial statements or the accompanying notes.
| 3. | Exhibits |
The exhibits filed as part of this annual report are listed in Item 15(b).
| (b) | Exhibits. |
The following exhibits are filed as a part of this report:
68
Table of Contents
| Exhibit Number |
Exhibit Description | |
| 3.1 | Restated Certificate of Incorporation of LBI Media Holdings, Inc. (4) | |
| 3.2 | Certificate of Ownership of Liberman Broadcasting, Inc. (successor in interest to LBI Holdings I, Inc.), dated July 9, 2002 (1) | |
| 3.3 | Amended and Restated Bylaws of LBI Media Holdings, Inc. (4) | |
| 4.1 | Indenture governing LBI Media Holdings’ 11% Senior Discount Notes due 2013, dated October 10, 2003, by and among LBI Media Holdings, Inc. and U.S. Bank National Association, as Trustee (2) | |
| 4.2 | Form of Exchange Note (included as Exhibit A-1 to Exhibit 4.1) | |
| 4.3 | Indenture, dated as of July 23, 2007, by and among LBI Media, Inc., the subsidiary guarantors party thereto, and U.S. Bank National Association, as trustee (5) | |
| 4.4 | The Company agrees to furnish to the Securities and Exchange Commission upon request a copy of each instrument with respect to issues of long-term debt of LBI Media Holdings, Inc. and its subsidiaries, the authorized principal amount of which does not exceed 10% of the consolidated assets of LBI Media Holdings, Inc. and its subsidiaries. | |
| 10.1 | Promissory Note dated December 20, 2001 by Lenard D. Liberman in favor of LBI Media, Inc. (1) | |
| 10.2 | Promissory Note dated December 20, 2001 by Jose Liberman in favor of LBI Media, Inc. (1) | |
| 10.3 | Promissory Note dated June 14, 2002 issued by Lenard D. Liberman in favor of LBI Media, Inc. (1) | |
| 10.4 | Promissory Note dated July 9, 2002 issued by Lenard Liberman in favor of LBI Media, Inc. (1) | |
| 10.5 | Promissory Note dated July 29, 2002 issued by Jose Liberman in favor of LBI Media, Inc. (1) | |
| 10.6 | Authorization of Loan dated November 20, 1998 by Winter Horton in favor of Liberman Broadcasting of California LLC (successor in interest to Liberman Broadcasting, Inc.) (7) | |
| 10.7 | Unsecured Promissory Note dated November 22, 2002 by Winter Horton in favor of Liberman Broadcasting of California LLC (successor in interest to Liberman Broadcasting, Inc.) (7) | |
| 10.8 | Secured Promissory Note dated November 29, 2002 by Winter Horton in favor of Liberman Broadcasting of California LLC (successor in interest to Liberman Broadcasting, Inc.) (7) | |
| 10.9 | Secured Promissory Note dated April 8, 2006 by Winter Horton in favor of Liberman Broadcasting of California LLC (successor in interest to Liberman Broadcasting, Inc.) (7) | |
| 10.10† | Employment Agreement, dated as of December 28, 2009, by and between Liberman Broadcasting, Inc. and Winter Horton* | |
| 10.11† | Employment Agreement, dated as of February 27, 2008, by and between Liberman Broadcasting, Inc. and Wisdom Lu (7) | |
| 10.12 | Amended and Restated Credit Agreement, dated May 8, 2006, among LBI Media, Inc., the guarantors party thereto, the Lenders party thereto and Credit Suisse, Cayman Islands Branch, as administrative agent (3) | |
| 10.13 | First Amendment and Consent to Amended and Restated Credit Agreement, dated as of March 16, 2007, by and among LBI Media, Inc., the guarantors party thereto, the lenders thereto, Credit Suisse, Cayman Islands Branch, as administrative agent, and Credit Suisse, Cayman Islands Branch, as collateral agent (7) | |
| 10.14 | Second Amendment to Amended and Restated Credit Agreement, dated as of July 23, 2007, by and among LBI Media, Inc., the guarantors party thereto, the lenders party thereto, Credit Suisse, Cayman Islands Branch, as administrative agent, and Credit Suisse, Cayman Islands Branch, as collateral agent (5) | |
| 10.15 | Amended and Restated Term Loan Agreement, dated May 8, 2006, among LBI Media, Inc., the guarantors party thereto, the Lenders party thereto and Credit Suisse, Cayman Islands Branch, as administrative agent (3) | |
| 10.16 | First Amendment and Consent to Amended and Restated Term Loan Agreement, dated as of March 16, 2007, among LBI Media, Inc., the guarantors party thereto, the lenders party thereto, Credit Suisse, Cayman Islands Branch, as administrative agent, and Credit Suisse, Cayman Islands Branch, as collateral agent (7) | |
| 10.17 | Investor Rights Agreement, dated as of March 30, 2007, by and among Liberman Broadcasting, Inc. and each of the stockholders of Liberman Broadcasting, Inc. listed on the signature pages thereto (4) | |
| 10.18 | Amendment No. 1 to Investor Rights Agreement and Waiver, dated as of July 10, 2007, by and among Liberman Broadcasting, Inc., OCM Principal Opportunities Fund III, L.P., OCM Principal Opportunities Fund IIIA, L.P., OCM Opps Broadcasting, LLC, OCM Principal Opportunities Fund IV AIF (Delaware), L.P., Tinicum Capital Partners II, L.P., Tinicum Capital Partners II Parallel Fund, L.P., and the existing shareholders listed on the signature pages thereto (6) | |
| 10.19 | Asset Purchase Agreement, dated August 8, 2008, by and among KRCA Television LLC, KRCA License LLC and Latin America Broadcasting of Arizona, Inc. (8) | |
| 10.20 | Asset Purchase Agreement, dated September 12, 2008, by and among Liberman Broadcasting of California LLC, LBI Radio License LLC, Sun City Communications, LLC and Sun City Licenses, LLC (9) | |
| 10.21† | Liberman Broadcasting, Inc. Stock Incentive Plan, dated December 12, 2008 (10) | |
| 10.22† | Liberman Broadcasting, Inc. Stock Incentive Plan Stock Option Agreement dated December 12, 2008, by and between Liberman Broadcasting, Inc. and Wisdom Lu (10) | |
| 10.23† | Summary of Verbal Agreement for Director Compensation with William G. Adams (10) |
69
Table of Contents
| 16.1 | Letter from Ernst & Young LLP, dated December 18, 2008 (11) | |
| 21.1 | Subsidiaries of LBI Media Holdings, Inc. (7) | |
| 31.1 | Certification of President pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934* | |
| 31.2 | Certification of Chief Financial Officer pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934* |
| * | Filed herewith. |
| † | Indicates compensatory plan, contract or arrangement in which directors or executive officers may participate. |
| (1) | Incorporated by reference to LBI Media’s Registration Statement on Form S-4, filed with the Securities and Exchange Commission on October 4, 2002, as amended (File No. 333-100330). |
| (2) | Incorporated by reference to LBI Media Holdings’ Registration Statement on Form S-4, filed with the Securities and Exchange Commission October 30, 2003, as amended (File No. 333-110122). |
| (3) | Incorporated by reference to LBI Media Holdings’ Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on May 15, 2006 (File No. 333-110122). |
| (4) | Incorporated by reference to LBI Media Holdings’ Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on May 15, 2007 (File No. 333-110122). |
| (5) | Incorporated by reference to LBI Media Holdings, Inc.’s Current Report on Form 8-K filed with the Securities and Exchange Commission on July 23, 2007 (File No. 333-110122). |
| (6) | Incorporated by reference to LBI Media Holdings’ Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on November 14, 2007 (File No. 333-110122). |
| (7) | Incorporated by reference to LBI Media Holdings’ Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 31, 2008 (File No. 333-110122). |
| (8) | Incorporated by reference to LBI Media Holdings’ Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on August 14, 2008 (File No. 333-110122). |
| (9) | Incorporated by reference to LBI Media Holdings’ Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on November 14, 2008 (File No. 333-110122). |
| (10) | Incorporated by reference to LBI Media Holdings’ Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 31, 2009 (File No. 333-110122). |
| (11) | Incorporated by reference to LBI Media Holdings’ Current Report on Form 8-K filed with the Securities and Exchange Commission on December 18, 2008 (File No. 333-110122). |
70
Table of Contents
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Burbank, State of California, on April 9, 2010.
| LBI MEDIA HOLDINGS, INC. |
| /S/ WISDOM LU |
| Wisdom Lu |
| Chief Financial Officer |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
| Signature |
Title |
Date | ||
| /S/ JOSE LIBERMAN Jose Liberman |
Chairman and Director |
April 9, 2010 | ||
| /S/ LENARD D. LIBERMAN Lenard D. Liberman |
Chief Executive Officer, President, Secretary and Director |
April 9, 2010 | ||
| /S/ WISDOM LU Wisdom Lu |
Chief Financial Officer |
April 9, 2010 | ||
| /S/ WINTER HORTON Winter Horton |
Chief Operating Officer and Director |
April 9, 2010 | ||
| /S/ WILLIAM G. ADAMS William G. Adams |
Director |
April 9, 2010 | ||
| /S/ BRUCE A. KARSH Bruce A. Karsh |
Director |
April 9, 2010 | ||
| /S/ TERENCE M. O’TOOLE Terence M. O’Toole |
Director |
April 9, 2010 | ||
71
Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholder of LBI Media Holdings, Inc.
Burbank, California
We have audited the accompanying consolidated balance sheets of LBI Media Holdings, Inc. (the Company, a wholly owned subsidiary of Liberman Broadcasting, Inc.,) as of December 31, 2009 and 2008, and the related consolidated statements of operations, stockholder’s (deficiency) equity, and cash flows for each of the two years in the periods ended December 31, 2009 and 2008. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of LBI Media Holdings, Inc. as of December 31, 2009 and 2008, and the results of their operations and their cash flows for each of the two years in the periods ended December 31, 2009 and 2008, in conformity with accounting principles generally accepted in the United States of America.
As discussed in Note 1 to the consolidated financial statements, the accompanying 2008 consolidated financial statements have been restated.
| /s/ Deloitte & Touche LLP |
Los Angeles, California
April 9, 2010
F-1
Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholder of
LBI Media Holdings, Inc.
We have audited the accompanying consolidated statements of operations, stockholder’s equity, and cash flows of LBI Media Holdings, Inc. (the Company, a wholly owned subsidiary of Liberman Broadcasting, Inc.,) for the year ended December 31, 2007 (as restated). These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated results of LBI Media Holdings, Inc.’s operations and its cash flows for the year ended December 31, 2007 (as restated), in conformity with U.S. generally accepted accounting principles.
As discussed in Notes 1 and 11, the accompanying consolidated financial statements have been restated for the correction of errors in the Company’s income tax provision for the year ended December 31, 2007.
| /s/ Ernst & Young LLP |
Los Angeles, California
March 31, 2008,
except for the effects of the restatement described
in Notes 1 and 11 and the effects of discontinued operations
described in Note 1, as to which the date is April 9, 2010
F-2
Table of Contents
CONSOLIDATED BALANCE SHEETS
| December 31, | ||||||||
| 2009 | 2008 | |||||||
| (As Restated- see Note 1) |
||||||||
| (in thousands) | ||||||||
| Assets |
||||||||
| Current assets: |
||||||||
| Cash and cash equivalents |
$ | 178 | $ | 450 | ||||
| Accounts receivable (less allowances for doubtful accounts of $3,168 and $3,072, respectively) |
18,745 | 18,244 | ||||||
| Current portion of program rights, net |
507 | 457 | ||||||
| Amounts due from related parties |
387 | 175 | ||||||
| Current portion of notes receivable from related parties |
— | 457 | ||||||
| Current portion of employee advances |
241 | 744 | ||||||
| Prepaid expenses and other current assets |
1,262 | 1,996 | ||||||
| Assets held for sale |
1,403 | — | ||||||
| Total current assets |
22,723 | 22,523 | ||||||
| Property and equipment, net |
91,989 | 95,745 | ||||||
| Broadcast licenses, net |
161,660 | 292,343 | ||||||
| Deferred financing costs, net |
6,413 | 8,131 | ||||||
| Notes receivable from related parties, excluding current portion |
3,024 | 2,399 | ||||||
| Employee advances, excluding current portion |
1,529 | 888 | ||||||
| Program rights, excluding current portion |
6,734 | 738 | ||||||
| Other assets |
4,772 | 5,420 | ||||||
| Total assets |
$ | 298,844 | $ | 428,187 | ||||
| Liabilities and stockholder’s deficiency |
||||||||
| Current liabilities: |
||||||||
| Cash overdraft |
$ | 494 | $ | 395 | ||||
| Accounts payable |
2,874 | 4,414 | ||||||
| Accrued liabilities |
5,535 | 3,936 | ||||||
| Accrued interest |
9,664 | 9,633 | ||||||
| Current portion of long-term debt |
1,355 | 1,347 | ||||||
| Total current liabilities |
19,922 | 19,725 | ||||||
| Long-term debt, excluding current portion |
420,869 | 415,998 | ||||||
| Fair value of interest rate swap |
5,234 | 7,627 | ||||||
| Deferred income taxes |
18,482 | 37,673 | ||||||
| Other liabilities |
1,579 | 1,683 | ||||||
| Total liabilities |
466,086 | 482,706 | ||||||
| Commitments and contingencies |
||||||||
| Stockholder’s deficiency: |
||||||||
| Common stock, $0.01 par value: |
||||||||
| Authorized shares—1,000 |
||||||||
| Issued and outstanding shares—100 |
— | — | ||||||
| Additional paid-in capital |
62,977 | 63,056 | ||||||
| Accumulated deficit |
(230,219 | ) | (117,575 | ) | ||||
| Total stockholder’s deficiency |
(167,242 | ) | (54,519 | ) | ||||
| Total liabilities and stockholder’s deficiency |
$ | 298,844 | $ | 428,187 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
F-3
Table of Contents
CONSOLIDATED STATEMENTS OF OPERATIONS
| Year Ended December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
| (As Restated- See Note 1) |
(As Restated- See Note 1) |
|||||||||||
| (in thousands) | ||||||||||||
| Net revenues |
$ | 102,921 | $ | 116,312 | $ | 114,274 | ||||||
| Operating expenses: |
||||||||||||
| Program and technical, exclusive of deferred benefit and depreciation and amortization shown below |
24,848 | 26,427 | 23,713 | |||||||||
| Promotional, exclusive of deferred benefit and depreciation and amortization shown below |
3,323 | 3,426 | 3,033 | |||||||||
| Selling, general and administrative, exclusive of deferred benefit of $0, $0 and $(3,952), respectively, and depreciation and amortization shown below |
40,132 | 43,239 | 40,042 | |||||||||
| Deferred benefit |
— | — | (3,952 | ) | ||||||||
| Depreciation and amortization |
9,703 | 9,943 | 8,936 | |||||||||
| Loss on sale and disposal of property and equipment |
1,807 | 3,506 | — | |||||||||
| Impairment of broadcast licenses |
126,543 | 91,740 | 8,143 | |||||||||
| Total operating expenses |
206,356 | 178,281 | 79,915 | |||||||||
| Operating (loss) income |
(103,435 | ) | (61,969 | ) | 34,359 | |||||||
| Gain (loss) on note purchases and redemptions |
520 | 12,495 | (8,776 | ) | ||||||||
| Interest expense, net of amounts capitalized |
(33,777 | ) | (36,993 | ) | (37,100 | ) | ||||||
| Interest rate swap income (expense) |
2,393 | (3,433 | ) | (2,410 | ) | |||||||
| Equity in losses of equity method investment |
(112 | ) | (280 | ) | — | |||||||
| Impairment of equity method investment |
— | (160 | ) | — | ||||||||
| Interest income and other income |
108 | — | 814 | |||||||||
| Loss from continuing operations before benefit from (provision for) income taxes |
(134,303 | ) | (90,340 | ) | (13,113 | ) | ||||||
| Benefit from (provision for) income taxes |
20,261 | 7,191 | (44,561 | ) | ||||||||
| Loss from continuing operations |
(114,042 | ) | (83,149 | ) | (57,674 | ) | ||||||
| Discontinued operations, net of income taxes (including gain on sale of assets of $1,245, $0 and $0, respectively) |
1,398 | 1,156 | 1,161 | |||||||||
| Net loss |
$ | (112,644 | ) | $ | (81,993 | ) | $ | (56,513 | ) | |||
The accompanying notes are an integral part of these consolidated financial statements.
F-4
Table of Contents
CONSOLIDATED STATEMENTS OF STOCKHOLDER’S (DEFICIENCY) EQUITY
| Common Stock | Retained | ||||||||||||||||
| Number of Shares |
Amount | Additional Paid-in Capital |
Earnings (Accumulated Deficit) |
Total Stockholder’s Equity (Deficiency) |
|||||||||||||
| (dollars in thousands) | |||||||||||||||||
| Balances at December 31, 2006 (as previously reported) |
100 | $ | — | $ | 16,865 | $ | 20,389 | $ | 37,254 | ||||||||
| Prior period adjustments (see Note 1) |
— | — | — | 1,329 | 1,329 | ||||||||||||
| Balances at December 31, 2006 (as restated) |
100 | — | 16,865 | 21,718 | 38,583 | ||||||||||||
| Net loss (as restated) |
— | — | — | (56,513 | ) | (56,513 | ) | ||||||||||
| FIN 48 adjustment |
— | — | — | (787 | ) | (787 | ) | ||||||||||
| Distributions to Parent |
— | — | (1,513 | ) | — | (1,513 | ) | ||||||||||
| Contributions from Parent |
— | — | 47,946 | — | 47,946 | ||||||||||||
| Balances at December 31, 2007 (as restated) |
100 | — | 63,298 | (35,582 | ) | 27,716 | |||||||||||
| Net loss (as restated) |
— | — | — | (81,993 | ) | (81,993 | ) | ||||||||||
| Distributions to Parent |
— | — | (242 | ) | — | (242 | ) | ||||||||||
| Balances at December 31, 2008 (as restated) |
100 | — | 63,056 | (117,575 | ) | (54,519 | ) | ||||||||||
| Net loss |
— | — | — | (112,644 | ) | (112,644 | ) | ||||||||||
| Stock-based compensation |
— | — | 28 | — | 28 | ||||||||||||
| Distributions to Parent |
— | — | (107 | ) | — | (107 | ) | ||||||||||
| Balances at December 31, 2009 |
100 | $ | — | $ | 62,977 | $ | (230,219 | ) | $ | (167,242 | ) | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
F-5
Table of Contents
CONSOLIDATED STATEMENTS OF CASH FLOWS
| Year Ended December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
| (As Restated- see Note 1) |
(As Restated- see Note 1) |
|||||||||||
| (in thousands) | ||||||||||||
| Operating activities |
||||||||||||
| Net loss |
$ | (112,644 | ) | $ | (81,993 | ) | $ | (56,513 | ) | |||
| Adjustments to reconcile net loss to net cash (used in) provided by operating activities: |
||||||||||||
| Depreciation and amortization |
9,761 | 10,013 | 9,006 | |||||||||
| Impairment of broadcast licenses |
126,817 | 91,740 | 8,143 | |||||||||
| Gain on note purchases |
(520 | ) | (12,495 | ) | — | |||||||
| Accretion on senior discount notes |
— | 5,542 | 6,386 | |||||||||
| Amortization of discount on subordinated notes |
275 | 251 | 105 | |||||||||
| Amortization of deferred financing costs |
1,468 | 1,413 | 1,260 | |||||||||
| Write-off of deferred financing costs |
250 | — | 1,182 | |||||||||
| Amortization of program rights |
5,231 | 593 | 565 | |||||||||
| Provision for doubtful accounts |
2,401 | 1,906 | 1,376 | |||||||||
| Deferred benefit |
— | — | (3,952 | ) | ||||||||
| Impairment of equity method investment |
— | 160 | — | |||||||||
| Equity in losses of equity method investment |
112 | 280 | — | |||||||||
| Stock-based compensation |
28 | — | — | |||||||||
| Interest rate swap (income) expense |
(2,393 | ) | 3,433 | 2,410 | ||||||||
| Loss on sale and disposal of property and equipment |
1,807 | 3,512 | — | |||||||||
| Gain on sale of assets |
(1,245 | ) | — | — | ||||||||
| Changes in operating assets and liabilities: |
||||||||||||
| Cash overdraft |
99 | 395 | — | |||||||||
| Accounts receivable |
(2,572 | ) | (2,370 | ) | (1,660 | ) | ||||||
| Deferred compensation payments |
— | — | (4,377 | ) | ||||||||
| Program rights |
(11,277 | ) | (705 | ) | — | |||||||
| Amounts due from related parties |
(24 | ) | (61 | ) | 11 | |||||||
| Prepaid expenses and other current assets |
734 | (696 | ) | 197 | ||||||||
| Employee advances |
(138 | ) | (424 | ) | 59 | |||||||
| Accounts payable |
(460 | ) | 631 | 205 | ||||||||
| Accrued liabilities |
991 | 455 | (1,411 | ) | ||||||||
| Accrued interest |
31 | 932 | 195 | |||||||||
| Deferred income taxes |
(19,191 | ) | (6,796 | ) | 44,790 | |||||||
| Other assets and liabilities |
(1,649 | ) | 59 | (878 | ) | |||||||
| Net cash (used in) provided by operating activities |
(2,108 | ) | 15,775 | 7,099 | ||||||||
| Investing activities |
||||||||||||
| Purchases of property and equipment |
(9,496 | ) | (12,752 | ) | (13,702 | ) | ||||||
| Deposits on purchases of property and equipment (including acquisition costs) |
(340 | ) | (1,627 | ) | — | |||||||
| Acquisition of television and radio station property and equipment |
— | (65 | ) | (2,100 | ) | |||||||
| Acquisition of broadcast licenses |
(4 | ) | (1,534 | ) | (33,320 | ) | ||||||
| Acquisition of other television and radio station assets, net (including amounts deposited into escrow and pre-acquisition costs) |
— | (1,641 | ) | (862 | ) | |||||||
| Return of previously deposited escrow funds |
525 | — | — | |||||||||
| Notes receivable issued |
(299 | ) | (100 | ) | (304 | ) | ||||||
| Repayment on notes receivable from related parties |
9 | — | — | |||||||||
| Net proceeds from sale of radio station assets |
6,424 | — | — | |||||||||
| Net proceeds from sale of property and equipment |
— | 670 | — | |||||||||
| Investment in equity method investment (including acquisition costs) |
— | (488 | ) | — | ||||||||
| Net cash used in investing activities |
(3,181 | ) | (17,537 | ) | (50,288 | ) | ||||||
| Financing activities |
||||||||||||
| Proceeds from issuance of long-term debt and bank borrowings |
54,950 | 60,900 | 279,225 | |||||||||
| Payments of deferred financing costs |
— | (529 | ) | (4,791 | ) | |||||||
| Payments on long-term debt and bank borrowings |
(49,346 | ) | (50,064 | ) | (276,782 | ) | ||||||
| Purchases of senior discount notes |
(480 | ) | (9,550 | ) | — | |||||||
| Contributions from Parent |
— | — | 47,946 | |||||||||
| Distributions to Parent |
(107 | ) | (242 | ) | (2,213 | ) | ||||||
| Net cash provided by financing activities |
5,017 | 515 | 43,385 | |||||||||
| Net (decrease) increase in cash and cash equivalents |
(272 | ) | (1,247 | ) | 196 | |||||||
| Cash and cash equivalents at beginning of year |
450 | 1,697 | 1,501 | |||||||||
| Cash and cash equivalents at end of year |
$ | 178 | $ | 450 | $ | 1,697 | ||||||
| Supplemental disclosure of cash flow information: |
||||||||||||
| Non-cash amounts included in accounts payable and accrued liabilities: |
||||||||||||
| Purchase of property and equipment |
$ | (859 | ) | $ | (1,331 | ) | $ | (1,172 | ) | |||
| Acquisition of broadcast licenses |
$ | — | $ | (27 | ) | $ | (52 | ) | ||||
| Cash paid for interest (net of amounts capitalized of $117, $34 and $578, respectively) |
$ | 31,672 | $ | 28,895 | $ | 29,075 | ||||||
| Cash paid for income taxes |
$ | 266 | $ | 215 | $ | 41 | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
F-6
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009
1. Summary of Significant Accounting Policies
Description of Business and Basis of Presentation
LBI Media Holdings, Inc. (“LBI Media Holdings”) was incorporated in Delaware on June 23, 2003 and is a wholly owned subsidiary of Liberman Broadcasting, Inc., a Delaware corporation (successor in interest to LBI Holdings I, Inc.) (the “Parent” or “Liberman Broadcasting”). Pursuant to an Assignment and Exchange Agreement dated September 29, 2003 between the Parent and LBI Media Holdings, the Parent assigned to LBI Media Holdings all of its right, title and interest in 100 shares of common stock of LBI Media, Inc. (“LBI Media”) (constituting all of the outstanding shares of LBI Media) in exchange for 100 shares of common stock of LBI Media Holdings. Thus, upon consummation of the exchange, LBI Media Holdings became a wholly owned subsidiary of the Parent, and LBI Media became a wholly owned subsidiary of LBI Media Holdings.
LBI Media Holdings is not engaged in any business operations and has not acquired any assets or incurred any liabilities, other than the acquisition of stock of LBI Media, the issuance of senior discount notes (see Note 5) and the operations of its subsidiaries. Accordingly, its only material source of cash is dividends and distributions from its subsidiaries, which are subject to restriction by LBI Media’s senior credit facilities and the indenture governing the senior subordinated notes issued by LBI Media (see Note 5). Parent-only condensed financial information of LBI Media Holdings on a stand-alone basis has been presented in Note 12.
LBI Media Holdings and its wholly owned subsidiaries (collectively referred to as the “Company”) own and operate radio and television stations located in California, Texas, Arizona, Utah and New York. In addition, the Company owns television production facilities that are used to produce programming for Company-owned television stations. The Company sells commercial airtime on its radio and television stations to local, regional and national advertisers. In addition, the Company has entered into time brokerage agreements with third parties for three of its radio stations.
The Company’s KHJ-AM, KVNR-AM, KWIZ-FM, KBUE-FM, KBUA-FM, KEBN-FM and KRQB-FM radio stations serve the greater Los Angeles, California market (including Riverside/San Bernardino), its KQUE-AM, KJOJ-AM, KEYH-AM, KJOJ-FM, KTJM-FM, KQQK-FM, KTNE-FM and KXGJ-FM radio stations serve the Houston, Texas market and its KNOR-FM, KZMP-AM, KTCY-FM, KZZA-FM, KZMP-FM and KBOC-FM radio stations serve the Dallas-Fort Worth, Texas market.
The Company’s television stations, KRCA, KSDX, KVPA, KZJL, KMPX, KPNZ and WASA serve the Los Angeles, California, San Diego, California, Phoenix, Arizona, Houston, Texas, Dallas-Fort Worth, Texas, Salt Lake City, Utah and New York, New York markets, respectively.
The Company’s television studio facilities in Burbank, California, Houston, Texas, and Dallas, Texas, are owned and operated by its wholly owned subsidiaries, Empire Burbank Studios LLC (“Empire”), Liberman Television of Houston LLC and Liberman Television of Dallas LLC, respectively.
In 2009, the Company began entering into affiliation agreements with certain television stations to broadcast its EstrellaTV network programming on their digital multicast channels. Currently, this affiliate network consists of twenty-one television stations in various states serving specific market areas, including seven in Texas, four in Florida, five in California, and one each in Arizona, Nevada, New Mexico, New York and Oregon.
F-7
Table of Contents
LBI MEDIA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
December 31, 2009
Restatement
Subsequent to the issuance of its 2008 consolidated financial statements, the Company identified accounting errors relating to (i) the treatment of certain temporary state tax credits and (ii) the classification and valuation of certain deferred tax accounts relating to the Company’s indefinite-lived intangible assets.
In May 2006, the State of Texas enacted a bill replacing its prior franchise tax regime with one that imposes a new tax on the Company’s Texas gross margin. The new business tax is assessed at 1% of Texas sourced “taxable margin” per period year. The bill also provides for a temporary margin tax credit that can be claimed against future margin taxes due. Under the initial bill (which was later amended in May 2007), an entity was allowed to take a credit based on unexpired Texas business losses, multiplied by the appropriate margin tax rate in each year, for ten years. The credit was originally scheduled to expire in September 2016. Based on the
F-8
Table of Contents
LBI MEDIA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
December 31, 2009
guidance provided under Accounting Standards Codification (“ASC”) 740 “Income Taxes” (“ASC 740”), the Company has concluded that a deferred tax asset for the temporary margin tax credit provided under the new tax regime should have been established as of December 31, 2006. The impact of this error on the Company’s consolidated financial statements, including its consolidated statements of cash flows, is income tax expense of $0.1 million for the year ended December 31, 2008, and income tax benefit of $4.7 million and $1.3 million for the years ended December 31, 2007 and 2006, respectively. The greater impact for the year ended December 31, 2007 reflects new legislation passed by the State of Texas in May 2007, which amended the calculation of the temporary credit and extended the carryforward period to 20 years. No valuation allowance has been established against this deferred tax asset as of December 31, 2008, 2007 and 2006, based on the Company’s belief that it is more-likely-than not that the full credit will be realized in accordance with ASC 740, given the extent of its exposure and projected future taxable gross margin in Texas.
The Company also noted errors in the classification and valuation of certain deferred tax accounts relating to its Federal Communications Commission broadcast licenses. Deferred income taxes arise from temporary differences between the tax basis of assets and liabilities and their “book” amounts recorded in the consolidated financial statements. Prior to September 30, 2007, for substantially all of the Company’s broadcast licenses, the book basis of those intangible assets exceeded their respective tax basis, and accordingly, was combined to reflect a net deferred tax liability in the Company’s consolidated financial statements. However, as a result of the $91.7 million and $8.1 million impairment charges recognized during the years ended December 31, 2008 and 2007, respectively, certain of those deferred tax liabilities relating to the Company’s broadcast licenses reversed and resulted in an increase in the gross deferred tax assets relating to those intangibles. The Company did not separate the deferred tax assets relating to certain of these broadcast licenses from the deferred tax liabilities relating to other broadcast licenses. Included in the Company’s reported deferred tax liabilities as of December 31, 2008 and 2007, was a total of $19.6 million and $0.7 million, respectively, in deferred tax assets relating to certain broadcast licenses which reversed from liability to asset positions during the respective years, as a result of the aforementioned impairment charges. The impact of these errors on the Company’s consolidated financial statements, including its consolidated statements of cash flows, was a reduction in income tax benefit of $18.9 million and $0.7 million for the years ended December 31, 2008 and 2007, respectively, as the Company recorded an offsetting increase in its valuation allowance against the deferred tax assets relating to these broadcast licenses.
The following tables set forth the financial impacts of the restatement on the Company’s consolidated balance sheets as of December 31, 2008, and its consolidated income statements and cash flows for the years ended December 31, 2008 and 2007. The effect of the 2006 accounting error is reflected as an adjustment to retained earnings in the accompanying consolidated statements of stockholder’s equity (deficiency). The discontinued operations reclassification relates to radio station KSEV-AM, which was sold in December 2009. The operating results of this station have been reclassified and are included in discontinued operations in the accompanying consolidated financial statements for all periods presented.
Consolidated Balance Sheet as of December 31, 2008
| As Previously Reported |
Discontinued Operations Reclassification |
Adjustments | As Restated | ||||||||||||
| Prepaid expenses and other current assets |
$ | 1,862 | $ | — | $ | 134 | $ | 1,996 | |||||||
| Total current assets |
22,389 | — | 134 | 22,523 | |||||||||||
| Total assets |
428,053 | — | 134 | 428,187 | |||||||||||
| Accrued liabilities |
4,071 | — | (135 | ) | 3,936 | ||||||||||
| Total current liabilities |
19,860 | — | (135 | ) | 19,725 | ||||||||||
| Deferred income taxes |
23,691 | — | 13,982 | 37,673 | |||||||||||
| Total liabilities |
468,859 | — | 13,847 | 482,706 | |||||||||||
| Accumulated deficit |
(103,862 | ) | — | (13,713 | ) | (117,575 | ) | ||||||||
| Total stockholder’s deficiency |
(40,806 | ) | — | (13,713 | ) | (54,519 | ) | ||||||||
| Total liabilities and stockholder’s deficiency |
428,053 | — | 134 | 428,187 | |||||||||||
F-9
Table of Contents
LBI MEDIA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
December 31, 2009
Consolidated Statement of Operations for the year ended December 31, 2008
| As Previously Reported |
Discontinued Operations Reclassification |
Adjustments | As Restated | |||||||||||||
| Benefit from (provision for) income taxes |
$ | 26,105 | $ | 114 | $ | (19,028 | ) | $ | 7,191 | |||||||
| Loss from continuing operations |
(62,965 | ) | (1,156 | ) | (19,028 | ) | (83,149 | ) | ||||||||
| Net loss |
(62,965 | ) | — | (19,028 | ) | (81,993 | ) | |||||||||
Consolidated Statement of Operations for the year ended December 31, 2007
| As Previously Reported |
Discontinued Operations Reclassification |
Adjustments | As Restated | ||||||||||||
| Benefit from (provision for) income taxes |
$ | (48,661 | ) | $ | 114 | $ | 3,986 | $ | (44,561 | ) | |||||
| Loss from continuing operations |
(60,499 | ) | (1,161 | ) | 3,986 | (57,674 | ) | ||||||||
| Net loss |
(60,499 | ) | — | 3,986 | (56,513 | ) | |||||||||
Consolidated Statement of Cash Flows for the year ended December 31, 2008
| As Previously Reported |
Discontinued Operations Reclassification |
Adjustments | As Restated | ||||||||||||
| Operating Activities: |
|||||||||||||||
| Net loss |
$ | (62,965 | ) | $ | — | $ | (19,028 | ) | $ | (81,993 | ) | ||||
| Adjustments to reconcile net loss to net cash (used in) provided by operating activities: |
|||||||||||||||
| Deferred income taxes |
(25,824 | ) | — | 19,028 | (6,796 | ) | |||||||||
Consolidated Statement of Cash Flows for the year ended December 31, 2007
| As Previously Reported |
Discontinued Operations Reclassification |
Adjustments | As Restated | ||||||||||||
| Operating activities: |
|||||||||||||||
| Net loss |
$ | (60,499 | ) | $ | — | $ | 3,986 | $ | (56,513 | ) | |||||
| Adjustments to reconcile net loss to net cash (used in) provided by operating activities: |
|||||||||||||||
| Changes in operating assets and liabilities: |
|||||||||||||||
| Prepaid expenses and other current assets |
198 | — | (1 | ) | 197 | ||||||||||
| Accrued liabilities |
(1,276 | ) | — | (135 | ) | (1,411 | ) | ||||||||
| Deferred income taxes |
48,640 | — | (3,850 | ) | 44,790 | ||||||||||
The parent-only condensed financial information of LBI Media Holdings, Inc. was also restated, as presented in Note 12.
Principles of Consolidation
The consolidated financial statements include the accounts of LBI Media Holdings and its subsidiaries. All significant intercompany accounts and transactions have been eliminated.
Cash and Cash Equivalents
The Company considers all highly liquid debt instruments purchased with an original maturity of three months or less and investments in money market accounts to be cash equivalents.
Fair Value of Financial Instruments
The carrying value of the Company’s financial instruments included in current assets and current liabilities (such as cash and equivalents, accounts receivable, accounts payable and accrued liabilities, and other similar items) approximate fair value due to the
F-10
Table of Contents
LBI MEDIA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
December 31, 2009
short-term nature of such instruments. The estimated fair value of LBI Media’s 2007 Senior Subordinated Notes (see Note 5), based on quoted market prices, was approximately $189.9 million and $80.1 million at December 31, 2009 and 2008, respectively (carrying value of $225.6 million and $225.4 million as of December 31, 2009 and 2008, respectively). The estimated fair value of LBI Media Holdings’ Senior Discount Notes (see Note 5) was approximately $33.6 million and $18.6 million at December 31, 2009 and 2008, respectively (carrying values of $45.4 million and $46.4 million, respectively). The Company’s other long-term debt has variable interest rates or rates that the Company believes approximate current market rates and, accordingly, the carrying value is a reasonable estimate of its fair value.
Program Rights
Costs incurred for the production of the Company’s original television programs are expensed based on the ratio of the current period’s gross revenues to estimated remaining total gross revenues from all sources (“Ultimate Revenues”) on an individual program basis. Costs of television productions are subject to regular recovery assessments which compare the estimated fair values with the unamortized costs. The amount by which the unamortized costs of television productions exceed their estimated fair values is written off. Generally accepted accounting principles (in the United States) set forth the requirements that must be met before capitalization of program costs is appropriate, including the ability to reasonably estimate Ultimate Revenues generated from television programming and the period in which those revenues would be realized. Beginning January 1, 2009, the Company determined, based on an evaluation of historical programming data, that certain of its television programs have demonstrated the ability to generate gross revenues beyond the initial airing, and accordingly, began capitalizing television production costs for certain of their programming, and amortizing those costs to operating expense based on the ratio of the current period’s gross revenues to Ultimate Revenues as described above. Costs related to the production of all other television programs for which the Company does not believe there is a useful life beyond the initial airing or does not have revenue directly attributed to production are expensed as incurred. For episodic television series, costs are expensed for each episode as it recognizes the related revenue for the episode. Approximately $5.5 million of program and technical expenses were capitalized for the year ended December 31, 2009.
The following table sets forth the components of the Company’s unamortized programming costs as of December 31, 2009:
| Original programming costs – released |
$ | 5,077 | |
| Original programming costs – in production | 424 | ||
| Acquired programming rights | 1,740 | ||
| $ | 7,241 | ||
Based on current estimates, the Company expects to amortize approximately 63% of the net original programming costs in 2010 and 97% by 2012. The acquired programming rights will be amortized through 2014.
Television program rights acquired by the Company from third-party vendors are stated at the lower of unamortized cost or estimated net realizable value. These program rights, together with the related liabilities, are recorded when the license period begins and the program becomes available for broadcast. Program rights are amortized using the straight-line method over the license term. Program rights expected to be amortized in the succeeding year and program rights payable due within one year are classified as current assets and current liabilities, respectively.
Property and Equipment
Property and equipment are recorded at cost less accumulated depreciation. Maintenance and repairs are charged to expense as incurred. Depreciation is computed using the straight-line method over estimated useful lives as follows:
| Buildings and building improvements |
20 years | |
| Antennae, towers and transmitting equipment |
12 years | |
| Studio and production equipment |
10 years | |
| Record and tape libraries |
10 years | |
| Computer equipment and software |
3 years | |
| Office furnishings and equipment |
5 years | |
| Automobiles |
5 years |
F-11
Table of Contents
LBI MEDIA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
December 31, 2009
The carrying value of property and equipment is evaluated periodically in relation to the operating performance and anticipated future cash flows of the underlying radio and television stations for indicators of impairment. When indicators of impairment are present and the undiscounted cash flows estimated to be generated from these assets are less than the carrying value of these assets, an adjustment to reduce the carrying value to the fair market value of the assets is recorded, if necessary. The fair market value of the assets is determined by using current broadcasting industry equipment prices, solicited current market data from dealers of used broadcast equipment and used equipment price lists, catalogs and listings in trade magazines and publications.
In September 2008, Hurricane Ike caused substantial damage across the state of Texas. As a result of this hurricane, the Company sustained damage to its corporate office and broadcast facility in Houston and several of its tower and transmitter sites and recorded a charge of approximately $585,000 to write off the carrying value of all assets damaged by the hurricane. As such, the write-off of these assets is included in loss on sale and disposal of property and equipment in the accompanying consolidated statements of operations.
As a result of the October 2007 Southern California wildfires, which burned down the Company’s broadcast facility for television station KSDX in San Diego, California, the carrying value of all assets associated with this broadcasting facility were written off (approximately $552,000). As such, the write off of these assets (net of insurance proceeds received) of approximately $302,000 is included in depreciation and amortization expense in the accompanying consolidated statements of operations. For the year ended December 31, 2007, the Company incurred approximately $321,000 in costs related to the restoration of this facility, which is included in property and equipment in the accompanying consolidated balance sheets. During the years ended December 31, 2009 and 2008, the Company received an additional $25,000 and $159,000 in insurance proceeds relating to the damaged broadcast facility, which was recorded as a reduction in depreciation and amortization expense in the accompanying consolidated statements of operations. The Company resumed service for KSDX in January 2008.
Interest cost is capitalized on individually significant projects during construction and approximated $117,000, $34,000 and $578,000 for the years ended December 31, 2009, 2008 and 2007, respectively. Capitalized interest in 2009 and 2008 related to the construction of a new corporate office building and studio facility in Dallas, which was completed in November 2009. Capitalized interest in 2007 related to the construction of several new radio tower and transmitter sites in Texas.
Broadcast Licenses
The Company’s indefinite-lived assets consist of its Federal Communications Commission (“FCC”) broadcast licenses. The Company believes its broadcast licenses have indefinite useful lives given that they are expected to indefinitely contribute to the future cash flows of the Company and that they may be continually renewed without substantial cost to the Company. In certain prior years, the licenses were considered to have finite lives and were subject to amortization. Accumulated amortization of broadcast licenses totaled approximately $17.5 million and $17.7 million at December 31, 2009 and 2008, respectively.
In accordance with ASC 350-30 “General Intangibles Other Than Goodwill” (“ASC 350-30”), the Company no longer amortizes its broadcast licenses. The Company tests its broadcast licenses for impairment at least annually or when indicators of impairment are identified. The Company’s valuations principally use the discounted cash flow methodology, an income approach based on market revenue projections, and not company-specific projections, which assumes broadcast licenses are acquired and operated by a third party. This approach incorporates variables such as types of signals, media competition, audience share, market advertising revenue projections, anticipated operating margins and discount rates, without taking into consideration the station’s format or management capabilities. This method calculates the estimated present value that would be paid by a prudent buyer for the Company’s FCC licenses as new radio or television stations. If the discounted cash flows estimated to be generated from these assets are less than the carrying value, an adjustment to reduce the carrying value to the fair market value of the assets is recorded.
The Company generally tests its broadcast licenses for impairment at the individual license level. However, the Company has applied the guidance of Emerging Issues Task Force Issue No. 02-07, “Unit of Accounting for Testing Impairment of Indefinite-Lived Intangible Assets” (“EITF 02-07”), to certain of its broadcast licenses. EITF 02-07 was incorporated into ASC 350-30 under the FASB codification. ASC 350-30 states that separately recorded indefinite-lived intangible assets should be combined into a single unit of accounting for purposes of testing impairment if they are operated as a single asset and, as such, are essentially inseparable from one another. The Company aggregates broadcast licenses for impairment testing if their signals are simulcast and are operating as one revenue-producing asset.
F-12
Table of Contents
LBI MEDIA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
December 31, 2009
The Company completed its 2009 impairment review as of September 30, 2009, and concluded that several of its broadcast licenses were impaired. As such, the Company recorded a non-cash impairment loss of approximately $75.1 million to reduce the net book value of these broadcast licenses to their estimated fair market values. The Company also recorded a $0.3 million impairment charge resulting from its 2009 annual impairment test relating to radio station KSEV-AM, which is included in discontinued operations in the accompanying consolidated statements of operations. The Company completed its 2008 annual impairment review as of September 30, 2008, and recorded a non-cash impairment loss of $46.7 million. The impairment charges in both the 2009 and 2008 periods, resulted from market changes in estimates and assumptions that were attributable to lower advertising revenue growth projections for the broadcasting industry, increased discount rates and a decline in cash flow multiples for recent station sales.
The Company also conducted interim impairment reviews as of March 31, 2009 and December 31, 2008 of the fair value of certain of its broadcast licenses. These reviews primarily resulted from the continued slowdown in the U.S. advertising industry, which reduced advertising revenue projections for the markets in which the Company operates beyond levels assumed in its 2008 annual testing (conducted as of September 30, 2008). Based on its evaluation, the Company determined that several of its radio and television broadcast licenses were impaired and recorded impairment charges of approximately $51.5 million and $45.0 million relating to the impairment reviews conducted as of March 31, 2009 and December 31, 2008, respectively, to reduce the net book value of these broadcast licenses to their estimated fair market values.
Below are key assumptions used in the income approach model for estimating asset fair values for the annual impairment tests performed as of September 30, 2009 and 2008 and for the interim impairment tests performed as of March 31, 2009 and December 31, 2008. Ranges are included because the Company evaluates each station on an individual basis (or cluster basis for simulcast stations) for impairment and the ranges reflect the range of assumptions for the stations included in the categories below.
| Radio Broadcasting Licenses |
September 30, 2009 |
March 31, 2009 |
December 31, 2008 |
September 30, | ||||
| Discount Rate |
12.7% | 12.1% | 11.6% | 11.4% | ||||
| 2009 Market Growth Rate Range |
(17.6)% - (24.0)% | (10.0)% - (15.0)% | (6.6)% - (10.3)% | (1.0)% - 1.5% | ||||
| Out-year Market Growth Rate Range |
0.8% - 2.0% | 0.4% - 2.2% | 2.6% - 3.2% | 2.2% - 2.8% | ||||
| Market Share Range (1) |
0.2% - 11.8% | 0.1% - 11.8% | 0.1% - 11.4% | 0.1% - 11.5% | ||||
| Operating Profit Margin Range (1) |
(4.3)% - 32.9% | (8.2)% - 36.5% | (5.1)% - 37.8% | 6.9% - 41.8% |
| Television Broadcasting Licenses |
September 30, 2009 |
March 31, 2009 |
December 31, 2008 |
September 30, | ||||
| Discount Rate |
12.6% | 11.9% | 11.2% | 10.2% | ||||
| 2009 Market Growth Rate Range |
(17.0)% - (22.0)% | (8.5)% - (15.0)% | (6.5)% - (7.5)% | (3.0)% - (2.0)% | ||||
| Out-year Market Growth Rate Range |
1.4% - 2.4% | 0.6% - 1.8% | 2.0% - 3.7% | 2.6% - 3.5% | ||||
| Market Share Range (1) |
0.2% - 2.5% | 0.2% - 2.6% | 1.0% - 2.6% | 1.2% - 2.6% | ||||
| Operating Profit Margin Range (1) |
9.8% - 31.3% | 8.5% - 32.2% | 10.3% - 32.2% | 18.3% - 31.8% |
| (1) | Excludes first year of operations. |
F-13
Table of Contents
LBI MEDIA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
December 31, 2009
The Company completed its annual impairment review of its broadcast licenses as of September 30, 2009, 2008 and 2007 and conducted additional impairment reviews of the fair value of certain of its broadcast licenses as of March 31, 2009, December 31, 2008 and December 31, 2007. The impairment charges in 2009, 2008 and 2007 resulted from market changes in estimates and assumptions which resulted in lower advertising revenue growth projections for the broadcasting industry, increased discount rates and a decline in cash flow multiples for recent station sales. The following table sets forth the non-cash impairment charges recorded by the Company for the years ended December 31, 2009, 2008 and 2007:
| Year ended December 31, |
Amount | ||
| (in millions) | |||
| 2007 |
$ | 8.1 | |
| 2008 |
91.7 | ||
| 2009(2) |
126.5 | ||
| (2) | Excludes a $0.3 million impairment relating to radio station KSEV-AM, which was sold in December 2009. As discussed below, the operations of KSEV-AM have been reclassified and are presented in discontinued operations in the accompanying consolidated financial statements. |
Discontinued Operations
In December 2009, two of LBI Media Holdings’ indirect, wholly owned subsidiaries consummated the sale of radio station KSEV-AM, in the Houston, Texas market, to Patrick Broadcasting, LP, for a total aggregate cash purchase price of $6.5 million (excluding adjustments). The sale resulted in a pre-tax gain of approximately $1.2 million. Accordingly, the accompanying consolidated financial statements reflect the operating results of radio station KSEV-AM as discontinued operations for all periods presented.
Summarized financial information in the accompanying consolidated statements of operations for the discontinued KSEV-AM radio operations is as follows (in thousands):
| Twelve Months Ended December 31, |
||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
| Net revenues |
$ | 1,327 | $ | 1,393 | $ | 1,393 | ||||||
| Expenses |
(113 | ) | (123 | ) | (118 | ) | ||||||
| Impairment of broadcast license |
(274 | ) | — | — | ||||||||
| Gain on sale of assets |
1,245 | — | — | |||||||||
| Income before income tax expense |
2,185 | 1,270 | 1,275 | |||||||||
| Income tax expense |
(787 | ) | (114 | ) | (114 | ) | ||||||
| Discontinued operations, net of taxes |
$ | 1,398 | $ | 1,156 | $ | 1,161 | ||||||
Assets Held For Sale
In November 2009, the Company completed construction of its new corporate office building and studio facility in Dallas, Texas. At the same time, the Company moved its entire Dallas operations from its former location to the new building. As of December 31, 2009, the Company had engaged a real estate agent to sell the former operating facility and had entered into a purchase and sale agreement with a buyer. As such, the former Dallas facility has been classified as held for sale as of December 31, 2009, and is included in assets held for sale in the accompanying consolidated balance sheets.
Assets classified as assets held for sale are measured at the lower of their carrying amount or fair value less cost to sell and are not depreciated and amortized while classified as held for sale. The fair value of assets held for sale is based on estimates of future cash flows, which may include expected proceeds to be received or the present value of estimated future cash flows. Costs to sell are the direct incremental costs estimated to transact a sale. A loss is recognized for any initial or subsequent write-down to fair value less costs to sell. A gain is recognized for any subsequent increase in fair value less cost to sell, but not in excess of the cumulative loss previously recognized.
F-14
Table of Contents
LBI MEDIA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
December 31, 2009
Barter Transactions
Included in the accompanying consolidated statements of operations are non-monetary transactions arising from the trading of advertising time for merchandise and services. Barter revenues and expenses are recorded at the fair market value of the goods or services received when the commercial is broadcast. The Company recognizes barter revenues when the commercial is broadcast. Barter expenses are recorded at the same time as barter revenue, which approximates the date the expenses were incurred. Barter revenue and expense, totaled $2.1 million, $0.9 million, and $1.1 million for the years ended December 31, 2009, 2008 and 2007, respectively.
Deferred Financing Costs
Financing costs are amortized using the effective interest rate method over the terms of the related credit facilities. Amortization of such costs is included in interest expense in the accompanying consolidated statements of operations.
In August 2007, LBI Media redeemed its 2002 Senior Subordinated Notes (see Note 5) and wrote off approximately $1.2 million in unamortized deferred financing costs, which is included in interest expense in the accompanying consolidated statements of operations.
Revenue Recognition
Broadcasting revenues from local, regional and national commercial advertising are recognized when the advertisements are broadcast. Revenues from renting airtime are recognized when such time is made available to the customer.
Income Taxes
Third party investors purchased shares of the Parent’s Class A common stock on March 30, 2007. As a result, the Parent no longer qualified as an “S Corporation.” Because LBI Media Holdings was deemed for tax purposes to be part of the Parent, LBI Media Holdings was no longer a “qualified Subchapter S subsidiary.” Therefore, the Company is included with the Parent in the filing of a consolidated federal income tax return and various state income tax returns as a C Corporation, and commencing March 31, 2007, the Company’s taxable income became subject to a combined federal and state income tax rate of approximately 39% for periods after March 30, 2007.
As a result of the loss of S Corporation status, the Company recorded a one-time non-cash charge of $46.8 million to adjust its deferred tax accounts. This charge is included in benefit from (provision for) income taxes for the year ended December 31, 2007 in the accompanying consolidated statements of operations. Accordingly, as a result of the loss of S Corporation status, deferred taxes have become substantially more material than in prior periods.
Prior to March 31, 2007 the Company was a “qualified Subchapter S subsidiary” for federal and California income tax purposes. As such, the Company was deemed to be part of its Parent, an “S Corporation,” for tax purposes, and the taxable income or loss of the Company arising prior to that date was required to be reported by the stockholders of the Parent on their respective federal and state income tax returns. California assesses a 1.5% tax on all “S Corporations” subject to certain minimum taxes. Texas does not recognize Subchapter S status and, prior to January 1, 2007, assessed a tax on individual legal entities in an amount equal to the greater of either (i) 4.5% of earned surplus or (ii) 0.25% of taxable capital. In May 2006, the State of Texas enacted a new business tax that is imposed on the Company’s Texas gross margin to replace the State’s prior tax regime described above. The new legislation became effective date on January 1, 2008, and therefore the Company’s first Texas Margin Tax (“TMT”) return was based on its 2007 operations. The TMT is approximately 1.0% of the gross margin apportioned to Texas. Additionally, as a result of certain asset acquisitions in 2007 and 2008, and the launch of its EstrellaTV national television network in 2009, the Company became subject to Arizona, Utah, Colorado, New Mexico and Oregon state taxes subsequent to the respective acquisition (or launch) dates.
The Company accounts for income taxes under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are
F-15
Table of Contents
LBI MEDIA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
December 31, 2009
expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
In assessing the realizability of deferred tax assets, the Company considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. The Company considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. If the realization of deferred tax assets in the future is considered more likely than not, an adjustment to the deferred tax assets would increase net income in the period such determination is made.
Based upon the level of historical taxable income and projections for future taxable income over the periods which the deferred tax assets are deductible, at this time, the Company believes it is more likely than not that it will not realize the benefits of the majority of these deductible differences. As a result, the Company has established and maintained a valuation allowance for that portion of the deferred tax assets it believes will not be realized.
The Company may be audited by the Internal Revenue service and various state tax authorities. Disputes may arise with these tax authorities involving issues of the timing and amount of deductions and allocations of income and expenses among various tax jurisdictions because of differing interpretations of tax laws and regulations. The Company periodically evaluates its exposures associated with tax filing positions and, while it believes its positions comply with applicable laws, may record liabilities based upon estimates of the ultimate outcome of these matters and the guidance provided in ASC 740.
Advertising Costs
Advertising costs are expensed as incurred. The accompanying consolidated statements of operations include advertising costs (included in promotional expenses) of approximately $10,000 for the year ended December 31, 2009, and $0 for the years ended December 31, 2008 and 2007, respectively.
Stock-Based Compensation
The Company accounts for stock-based compensation according to the provisions of ASC 718 “Compensation – Stock Compensation” (“ASC 718”) which requires the measurement and recognition of compensation expense for all stock-based awards made to employees and directors including employee stock options under the Parent’s, Liberman Broadcasting, Inc.’s, Stock Incentive Plan based on estimated fair values. Services required under a certain employment agreement pursuant to which the options were granted are rendered to the Company. Accordingly, the Company reflects compensation expense related to the options in its financial statements.
ASC 718 requires companies to estimate the fair value of stock-based awards on the date of grant using an option pricing model. The value of the portion of the award that is ultimately expected to vest is reduced for estimated forfeitures and is recognized as expense over the requisite service periods in the consolidated statements of operations. ASC 718 requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.
The Company selected the Black-Scholes option pricing model as the most appropriate method for determining the estimated fair value for stock-based awards. The Black-Scholes option pricing model requires the use of highly subjective and complex assumptions which determine the fair value of stock-based awards, including the option’s expected term, expected volatility of the underlying stock, risk-free rate, and expected dividends.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the U.S. requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
F-16
Table of Contents
LBI MEDIA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
December 31, 2009
Concentration of Credit Risk
The Company sells broadcast time to a diverse customer base including advertising agencies and other direct customers. The Company performs credit evaluations of its customers and generally does not require collateral. The Company maintains allowances for potential losses and such losses have been within management’s expectations.
Derivative Instruments
Since November 2006, the Company has utilized a derivative instrument to hedge its exposure to interest rate risks. The Company records derivative instruments on the balance sheet as either assets or liabilities that are measured at their fair value under the provisions of ASC 815, “Derivatives and Hedging” (“ASC 815”). ASC 815 requires that changes in the fair value of derivative instruments be recognized currently in earnings unless specific hedge accounting criteria are met, in which case, changes in fair value are deferred to accumulated other comprehensive income and reclassified into earnings when the underlying transaction affects earnings. The interest rate swap effective at December 31, 2009 and 2008 did not meet the requirements for hedge accounting treatment at its inception and, accordingly, changes in its fair value are included in current period earnings as interest rate swap income or expense in the accompanying consolidated statement of operations.
Comprehensive Income
The Company reports comprehensive operations in accordance with the provisions of ASC 220 “Comprehensive Income” (“ASC 220”). ASC 220 established standards for the reporting and display of comprehensive income.
Components of comprehensive (loss) income include net (loss) income, foreign currency translation adjustments and gains or losses associated with investments available for sale (if any). As the Company did not have any foreign currency translation adjustments or gains or losses associated with investments in available for sale securities, there were no differences between net (loss) income and comprehensive (loss) income for any of the periods presented.
Recent Accounting Pronouncements
In June 2009, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 168, “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles”, (“FAS 168”) “—a replacement of FASB Statement No. 162”. FAS 168 is the new source of authoritative GAAP recognized by the FASB to be applied by nongovernmental entities. Rules and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. This statement was incorporated into ASC 105 “Generally Accepted Accounting Principles” under the new FASB codification which became effective on July 1, 2009. The new codification supersedes all then-existing non-SEC accounting and reporting standards. All other non-grandfathered non-SEC accounting literature not included in the codification will become non-authoritative. The Company adopted this statement on July 1, 2009. The Company has included the references to the codification, as appropriate, in these consolidated financial statements. Adoption of this statement did not have an impact on the Company’s consolidated results of operations, cash flows or financial condition.
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“FAS 157”). FAS 157 provides a single definition of fair value, together with a framework for measuring it, and requires additional disclosure about the use of fair value to measure assets and liabilities. Under the new codification, FAS 157 was incorporated into ASC 820 “Fair Value Measurements and Disclosures” (“ASC 820”). The adoption of this ASC did not have a material impact on the disclosures required in the Company’s consolidated financial statements.
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities-including an amendment of FASB Statement No. 115” (“FAS 159”). FAS 159 expands the use of fair value accounting but does not affect existing standards that require assets or liabilities to be carried at fair value. FAS 159 was incorporated into ASC 825 “The Fair Value Option for Financial Assets and Liabilities” (“ASC 825”), under the new FASB codification. Under ASC 825, a company may elect to use fair value to measure certain financial assets and liabilities and any changes in fair value are recognized in earnings. This statement was effective on January 1, 2008. The Company did not elect the fair value option upon adoption of ASC 825.
F-17
Table of Contents
LBI MEDIA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
December 31, 2009
In December 2007, the FASB issued SFAS No. 141R, “Business Combinations” (“FAS 141R”), which requires an acquirer to measure the identifiable assets acquired, the liabilities assumed and any noncontrolling interest in the acquiree at their fair values on the acquisition date, with goodwill being the excess value over the net identifiable assets acquired. FAS 141R also changed the accounting for the treatment of acquisition related transaction costs. FAS 141R was incorporated into ASC 805 “Business Combinations” (“ASC 805”), under the new FASB codification. This ASC 805 update became effective and the Company adopted the provisions of this ASC 805 update on January 1, 2009. As such, the accompanying consolidated statements of operations for the year ended December 31, 2009 include a charge of approximately $0.4 million, which relates to the write-off of pre-acquisition costs for certain asset purchases that did not close prior to December 31, 2008 (see Note 2).
In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements” (“FAS 160”), which clarifies that a noncontrolling interest in a subsidiary should be reported as equity in the consolidated financial statements. FAS 160 was incorporated into ASC 810 “Consolidation” (“ASC 810”). ASC 810 became effective on January 1, 2009. The adoption of ASC 810 did not have a material effect on the Company’s consolidated results of operations, cash flows or financial condition.
In February 2008, the FASB issued FASB Staff Position (“FSP”) FAS 157-2, “Effective Date of FASB Statement No. 157” (“FSP 157-2”), which delayed the effective date of FAS 157 for nonfinancial assets and liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually), to fiscal years beginning after November 15, 2008. Under the new codification, FSP 157-2 was incorporated into ASC 820. The Company adopted this ASC update on January 1, 2009, and it did not have a material impact on the Company’s consolidated results of operations, cash flows or financial condition, and did not require additional disclosures.
In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133” (“FAS 161”), which requires enhanced disclosures for derivative and hedging activities. FAS 161 was incorporated into ASC 815 “Derivatives and Hedging” (“ASC 815”). The objective of the guidance is to provide users of financial statements with an enhanced understanding of how and why an entity uses derivative instruments, how derivative instruments and related hedged items are accounted for, and how derivative instruments and related hedged items effect an entity’s financial position, financial performance and cash flows. ASC 815 was adopted on January 1, 2009. The adoption of this ASC update did not have a material impact on the disclosures required in the Company’s consolidated financial statements.
In April 2008, the FASB issued FSP FAS 142-3, “Determination of the Useful Lives of Intangible Assets”, which amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of an intangible asset. Under the new codification this FSP was incorporated into two different ASC’s, ASC 275 “Risks and Uncertainties” (“ASC 275”) and ASC 350 “Intangibles—Goodwill and Other” (“ASC 350”). This interpretation was effective for financial statements issued for fiscal years beginning after December 15, 2008 and interim periods within those years. The Company adopted these ASC’s on January 1, 2009, and they did not have a material impact on the Company’s consolidated results of operations, cash flows or financial condition, and did not require additional disclosures related to existing intangible assets.
In October 2008, the FASB issued FSP FAS 157-3, “Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active” (“FSP 157-3”) which clarifies the application of FAS 157 in a market that is not active. FSP 157-3 was incorporated into ASC 820. This ASC update became effective upon issuance, including prior periods for which financial statements have not been issued. The adoption of this ASC update did not have a material impact on the Company’s consolidated results of operations, cash flows or financial condition.
ASC 820 establishes a new framework for measuring fair value and expands related disclosures. The fair value framework requires the categorization of assets and liabilities into three levels based upon the assumptions (inputs) used to price the assets or liabilities. Level 1 provides the most reliable measure of fair value, whereas Level 3 generally requires significant management judgment. The three levels are defined as follows:
| Level 1: |
Inputs are unadjusted quoted prices in active markets for identical assets and liabilities that can be assessed at a measurement date. | |
| Level 2: |
Observable inputs other than those included in Level 1. For example, quoted prices for similar assets or liabilities in active markets or quoted prices for identical assets or liabilities in inactive markets. | |
| Level 3: |
Unobservable inputs reflecting management’s own assumptions about the inputs used in pricing the asset or liability. | |
F-18
Table of Contents
LBI MEDIA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
December 31, 2009
As of December 31, 2009 and 2008, the fair values of the Company’s financial liabilities are categorized as follows:
| Total | Level 1 | Level 2 | Level 3 | |||||||||
| (In thousands) | ||||||||||||
| As of December 31, 2009 |
||||||||||||
| Liabilities subject to fair value measurement: |
||||||||||||
| Interest rate swap (a) |
$ | 5,234 | $ | — | $ | 5,234 | $ | — | ||||
| Total |
$ | 5,234 | $ | — | $ | 5,234 | $ | — | ||||
| As of December 31, 2008 |
||||||||||||
| Liabilities subject to fair value measurement: |
||||||||||||
| Interest rate swap (a) |
$ | 7,627 | $ | — | $ | 7,627 | $ | — | ||||
| Total |
$ | 7,627 | $ | — | $ | 7,627 | $ | — | ||||
| (a) | Based on London Interbank Offered Rate (“LIBOR”). See “Long-Term Debt” in Note 5. |
Certain assets and liabilities are measured at fair value on a non-recurring basis. This means that certain assets are not measured at fair value on an ongoing basis but are subject to fair value adjustments only in certain circumstances. Included in this category are the Company’s radio and television FCC broadcast licenses that are written down to fair value when they are determined to be impaired.
As of December 31, 2009 and 2008, each major category of assets and liabilities measured at fair value on a non-recurring basis during the period is categorized as follows:
| Total | Level 1 | Level 2 | Level 3 | Total Gains (Losses) |
||||||||||||
| (In thousands) | ||||||||||||||||
| As of December 31, 2009 |
||||||||||||||||
| Non-recurring assets subject to fair market measurement: |
||||||||||||||||
| Broadcast licenses |
$ | 161,660 | $ | — | $ | — | $ | 161,660 | $ | (126,543 | ) | |||||
| Total |
$ | 161,660 | $ | — | $ | — | $ | 161,660 | $ | (126,543 | ) | |||||
| Total | Level 1 | Level 2 | Level 3 | Total Gains (Losses) |
||||||||||||
| (In thousands) | ||||||||||||||||
| As of December 31, 2008 |
||||||||||||||||
| Non-recurring assets subject to fair market measurement: |
||||||||||||||||
| Broadcast licenses |
$ | 292,343 | $ | — | $ | — | $ | 292,343 | $ | (91,740 | ) | |||||
| Total |
$ | 292,343 | $ | — | $ | — | $ | 292,343 | $ | (91,740 | ) | |||||
As of December 31, 2009 and 2008, the total recorded carrying value of the Company’s broadcasting licenses was approximately $161.7 million and $292.3 million, respectively. Pursuant to ASC 350-30, and in connection with an interim impairment test performed for asset values as of March 31, 2009 and its annual impairment test performed as of September 30, 2009, the carrying values for several of the Company’s radio and television broadcasting licenses were written down to their estimated fair values, resulting in a total broadcast license carrying value of approximately $161.7 million as of December 31, 2009. The broadcast license write-downs resulted in a total impairment charge of approximately $126.5 million for the year ended December 31, 2009 (excluding $0.3 million in impairment charges relating to radio station KSEV-AM for the year ended December 31, 2009, which is included in discontinued operations in the accompanying consolidated statements of operations). The Company’s 2008 annual impairment test resulted in broadcast license write downs of approximately $46.7 million, and the Company also incurred additional impairment charges of $45.0 million based on an interim test performed as of December 31, 2008. Such charges are recorded as impairment of broadcast licenses in the accompanying consolidated statements of operations. A description of the Level 3 inputs and the information used to develop the inputs is discussed later in this Note 1.
F-19
Table of Contents
LBI MEDIA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
December 31, 2009
In April 2009, the FASB issued FASB Staff Position (“FSP”) No. 115-2 and No. 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments” (“FSP 115-2 and FSP 124-2”), which changes the method for determining whether an other-than-temporary impairment exists for debt securities and the amount of an impairment charge to be recorded in earnings. FSP 115-2 and FSP 124-2 were incorporated into ASC 320 “Investments—Debt and Equity Securities” under the new FASB codification. This ASC update became effective for interim periods ending after June 15, 2009. The Company adopted this update during the second quarter of 2009, and it did not have a material impact on the Company’s consolidated results of operations, cash flows or financial condition, and did not require additional disclosures.
In April 2009, the FASB issued FSP FAS 157-4, “Determining Whether a Market is Not Active and a Transaction is Not Distressed,” (“FSP 157-4”). FSP 157-4 provides additional guidance to highlight and expand on the factors that should be considered in estimating fair value when there has been a significant decrease in market activity for a financial asset. Under the new codification, FSP 157-4 was incorporated into ASC 820. This update became effective for the Company’s financial statements as of June 30, 2009 and it did not have a material impact on the Company’s consolidated results of operations, cash flows or financial condition and did not require additional disclosures.
In April 2009, the FASB issued FSP FAS 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments” (“FSP FAS 107-1 and APB 28-1”), which increases the frequency of fair value disclosures from annual only to quarterly. Under the new codification, FSP 107-1 and APB 28-1 were incorporated into ASC 825. This ASC update became effective for the Company’s financial statements as of June 30, 2009.
In May 2009, the FASB issued SFAS No. 165, “Subsequent Events” (“FAS 165”), which requires disclosure of the date through which a company evaluated the need to disclose events that occurred subsequent to the balance sheet date and whether that date represents the date the financial statements were issued or were available to be issued. This statement was incorporated into ASC 855 “Subsequent Events” (“ASC 855”). The Company adopted ASC 855 for the period ended June 30, 2009. The adoption of ASC 855 did not have a material effect on the disclosures required in the Company’s consolidated financial statements. The Company considered subsequent events through April 9, 2010 for disclosure in this Annual Report on Form 10-K, which is the date the financial statements were available to be issued.
In June 2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation No. 46 (R)” (“FAS 167”), which amended the consolidation guidance for variable-interest entities. The amendments include: (1) the elimination of the exemption for qualifying special purpose entities, (2) a new approach for determining who should consolidate a variable-interest entity, and (3) changes to when it is necessary to reassess who should consolidate a variable-interest entity. FAS 167 was incorporated into ASC 810 “Consolidation.” ASC 810 is effective for financial statements issued for fiscal years periods beginning after November 15, 2009, for interim periods within that first annual reporting period and for interim and annual reporting periods thereafter. Earlier application is prohibited. The Company adopted ASC 810 on January 1, 2010 and is currently assessing the impact the pronouncement will have on its consolidated results of operations, cash flows and financial condition.
2. Acquisitions
In December 2008, two of LBI Media Holdings’ indirect, wholly owned subsidiaries, KRCA Television LLC (“KRCA TV”) and KRCA License LLC (“KRCA License”), as buyers, consummated the acquisition of selected assets of television station KVPA-LP, licensed to Phoenix, Arizona, from Latin America Broadcasting of Arizona, Inc., as seller, pursuant to an asset purchase agreement entered into by the parties in August 2008. The aggregate purchase price of approximately $1.4 million was paid in cash. The assets acquired included, among other things, (i) licenses and permits authorized by the FCC for or in connection with the operation of the television station and (ii) transmission and other broadcast equipment used to operate the television station. The Company allocated the purchase price as follows:
| (in thousands) | |||
| Broadcast licenses |
$ | 1,329 | |
| Property and equipment |
65 | ||
| $ | 1,394 | ||
F-20
Table of Contents
LBI MEDIA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
December 31, 2009
As described in Note 14, in February 2010, KRCA and KRCA License, consummated the acquisition of low-power television station WASA-LP, licensed to Port Jervis, New York from Venture Technologies Group, LLC, pursuant to an asset purchase agreement entered into by the parties in November 2008. The selected assets primarily included licenses and permits authorized by the FCC for or in connection with the operation of the station. The total purchase price was approximately $6.0 million, of which $0.6 million had been deposited into escrow as of December 31, 2009. In accordance with certain provisions of ASC 805, which became effective on January 1, 2009, the Company wrote-off approximately $0.2 million in pre-acquisition costs related to this acquisition. Such amount is included in selling, general and administrative expenses in the accompanying consolidated statement of operations for the year ended December 31, 2009.
In September 2008, two of LBI Media Holdings’ indirect, wholly owned subsidiaries, Liberman Broadcasting of California LLC (“LBI California”) and LBI Radio License LLC (“LBI Radio”), as buyers, entered into an asset purchase agreement with Sun City Communications, LLC and Sun City Licenses, LLC, as sellers (collectively, “Sun City”), pursuant to which the buyers had agreed to acquire certain assets of radio station KVIB-FM, 95.1 FM, licensed to Phoenix, Arizona, from the sellers. Those assets were to include, among other things, (i) licenses and permits authorized by the FCC for or in connection with the operation of the station, (ii) antenna and transmitter facilities, (iii) broadcast and other studio equipment used to operate the station, and (iv) contract rights and other intangible assets. The total purchase price was to be approximately $15.0 million in cash, subject to certain adjustments, of which $0.8 million had been deposited into escrow as of December 31, 2009 and December 31, 2008. In December 2008, the Company submitted a formal notice to Sun City to terminate the asset purchase agreement as a result of a material adverse event that the Company believes had occurred since entering into the asset purchase agreement. In January 2010, the Company entered into a settlement agreement and release with Sun City, whereby the Company agreed to allow Sun City to retain 50 percent of the escrow funds, and therefore received $0.4 million of the $0.8 million of the escrow amount initially deposited. The charge related to the write-off of the remaining $0.4 million that the Company did not recoup is included in selling, general and administrative expenses in the accompanying consolidated financial statements for the year ended December 31, 2009.
In November 2007, LBI California and LBI Radio, as buyers, entered into an asset purchase agreement with R&R Radio Corporation (“R&R Radio”), as seller, pursuant to which the buyers had agreed to acquire selected assets of radio station KDES-FM, located in Palm Springs, California, from the seller. In accordance with certain provisions of ASC 805, which became effective on January 1, 2009, the Company wrote-off approximately $0.2 million in pre-acquisition costs related to this proposed acquisition. Such amount is included in selling, general and administrative expenses in the accompanying consolidated statements of operations for the year ended December 31, 2009. The selected assets were to include, among other things, (i) licenses and permits authorized by the FCC for or in connection with the operation of the station and (ii) transmitter and other broadcast equipment used to operate the station. The Company intended to change the location of KDES-FM from Palm Springs, California to Redlands, California.
The aggregate purchase price was to be approximately $17.5 million in cash, subject to certain adjustments, of which $0.5 million had been deposited in escrow. Such escrow amount is included in other assets in the accompanying consolidated balance sheet as of December 31, 2008.The Company would have paid $10.5 million of the aggregate purchase price to the seller and $7.0 million to Spectrum Scan-Idyllwild, LLC (“Spectrum Scan”). As a condition to the Company’s then pending purchase of the assets from the seller, LBI California had entered into an agreement relating to the relocation and purchase of KDES-FM with Spectrum Scan whereby it would have paid $7.0 million to Spectrum Scan in exchange for Spectrum Scan’s agreement to terminate its option to purchase KWXY-FM, located in Cathedral City, California, and Spectrum Scan’s assistance in the relocation of KDES-FM from Palm Springs, California to Redlands, California. Payment to Spectrum Scan was conditioned on the completion of the purchase of the assets from the seller. However, if the Company had received final FCC approval and the purchase of KDES-FM was not completed, the Company would have been required to pay a $0.5 million fee to Spectrum Scan.
In July 2009, LBI California and LBI Radio entered into an assignment and assumption agreement with LC Media LP (“LC Media”) and R&R Radio, pursuant to which LBI California and LBI Radio assigned all of their rights, benefits, obligations and duties in and to a certain asset purchase agreement to purchase the selected assets of radio station KDES-FM to LC Media and LC Media assumed all of the rights, benefits, obligations and duties under such asset purchase agreement, including payment of the purchase price to R&R Radio and the entry into a substitute escrow agreement with R&R Radio. As a result, the $0.5 million escrow deposit that had been previously paid by the Company’s indirect, wholly-owned subsidiaries was returned to the Company in August 2009.
F-21
Table of Contents
LBI MEDIA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
December 31, 2009
In connection with the assignment and assumption agreement, LBI California and Spectrum Scan entered into an amendment to the agreement relating to the relocation and purchase of KDES-FM, pursuant to which LBI California agreed to pay, subject to certain exceptions, approximately $4.2 million to Spectrum Scan (instead of the $7.0 million previously agreed upon) in exchange for Spectrum Scan’s agreement to terminate its option to purchase KWXY-FM, located in Cathedral City, California, and Spectrum Scan’s assistance in the relocation of KDES-FM from Palm Springs, California to Redlands, California when LC Media and R&R Radio consummated the acquisition of the selected assets.
As consideration for the assignment and assumption agreement and the amendment to the agreement with Spectrum Scan, LC Media agreed to pay, subject to and upon consummation of the purchase of KDES-FM from R&R Radio by LC Media, $5.9 million to the Company. Upon receipt of this payment, the Company agreed to then pay $4.2 million to Spectrum Scan pursuant to the amendment to the agreement relating to the relocation and purchase of KDES-FM, as described above.
As described in Note 13, in February 2010, the purchase of KDES-FM was consummated by LC Media and the Company received $5.9 million from LC Media. The Company, in turn, paid $4.2 million to Spectrum Scan in accordance with the amendment described above.
3. Dispositions
In December 2009, two of LBI Media Holdings’ indirect, wholly owned subsidiaries, Liberman Broadcasting of Houston LLC and Liberman Broadcasting of Houston License LLC, completed the sale of selected assets of radio station KSEV-AM, 700AM, licensed to Tomball, Texas, to Patrick Broadcasting, LP, pursuant to an asset purchase agreement entered into by the parties in October 2009. Those assets included, among other things, (i) licenses and permits authorized by the FCC, for or in connection with the operation of the station, (ii) the antenna and transmission facility, and (iii) broadcast and other studio equipment used to operate the station. The total aggregate sale price of approximately $6.5 million (excluding adjustments) was paid in cash, which resulted in a pre-tax gain of $1.2 million. Such gain is included in discontinued operations, net of income taxes, in the accompanying consolidated statements of operations (see Note 1). The Company used the net proceeds from the sale to repay outstanding borrowings under LBI Media’s senior revolving credit facility. The accompanying consolidated financial statements reflect radio station KSEV-AM as discontinued operations for all periods presented.
4. Property and Equipment
Property and equipment consist of the following:
| December 31, | ||||||||
| 2009 | 2008 | |||||||
| (in thousands) | ||||||||
| Land |
$ | 14,572 | $ | 15,558 | ||||
| Buildings and building improvements |
34,811 | 30,235 | ||||||
| Antennae, towers and transmitting equipment |
58,811 | 56,722 | ||||||
| Studio and production equipment |
25,450 | 24,558 | ||||||
| Record and tape libraries |
1,344 | 1,198 | ||||||
| Computer equipment and software |
2,680 | 3,476 | ||||||
| Office furnishings and equipment |
3,996 | 3,527 | ||||||
| Automobiles |
1,807 | 1,977 | ||||||
| Leasehold improvements |
250 | — | ||||||
| Construction in progress |
— | 4,727 | ||||||
| Total |
143,721 | 141,978 | ||||||
| Less accumulated depreciation |
(51,732 | ) | (46,233 | ) | ||||
| Total property and equipment |
$ | 91,989 | $ | 95,745 | ||||
F-22
Table of Contents
LBI MEDIA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
December 31, 2009
5. Long-Term Debt
Long-term debt consists of the following:
| December 31, | ||||||||
| 2009 | 2008 | |||||||
| (in thousands) | ||||||||
| 2006 Revolver due 2012 |
$ | 33,600 | $ | 26,650 | ||||
| 2006 Term Loan due 2012 |
115,700 | 116,900 | ||||||
| Senior Subordinated Notes due 2017 |
225,633 | 225,356 | ||||||
| Senior Discount Notes due 2013 |
45,383 | 46,383 | ||||||
| 2004 Empire Note |
1,908 | 2,056 | ||||||
| 422,224 | 417,345 | |||||||
| Less current portion |
(1,355 | ) | (1,347 | ) | ||||
| $ | 420,869 | $ | 415,998 | |||||
LBI Media’s 2006 Revolver and 2006 Term Loan
In May 2006, LBI Media refinanced its then existing senior secured credit facility with a $110.0 million senior term loan credit facility (as amended by the term loan commitment increase in January 2008, the “2006 Term Loan”) and a $150.0 million senior revolving credit facility (the “2006 Revolver”, and together with the 2006 Term Loan, the “2006 Senior Credit Facilities”). The 2006 Revolver includes a $5.0 million swing line subfacility and allows for letters of credit up to the lesser of $5.0 million and the available remaining revolving commitment amount. In January 2008, LBI Media increased its senior term loan facility by $10.0 million. LBI Media has the option to request its existing or new lenders under the 2006 Term Loan and under the 2006 Revolver to increase the aggregate amount of the 2006 Senior Credit Facilities, by an additional $40.0 million; however, its existing and new lenders are not obligated to do so. The increases under the 2006 Senior Credit Facilities, taken together, cannot exceed $50.0 million in the aggregate (including the $10.0 million increase in January 2008).
LBI Media must pay 0.25% of the principal amount of the 2006 Term Loan each quarter (or $275,000 per quarter) plus 0.25% of amounts borrowed in connection with the term loan increase (or $25,000 per quarter), and 0.25% of any additional principal amount incurred in the future under the 2006 Term Loan. There are no scheduled reductions of commitments under the 2006 Revolver.
Borrowings under the 2006 Senior Credit Facilities bear interest based on either, at the option of LBI Media, the base rate for base rate loans or the LIBOR rate for LIBOR loans, in each case plus the applicable margin stipulated in the senior credit agreements. The base rate is the higher of (i) Credit Suisse’s prime rate and (ii) the Federal Funds Effective Rate (as published by the Federal Reserve Bank of New York) plus 0.50%. The applicable margin for loans under the 2006 Revolver, which is based on LBI Media’s total leverage ratio, ranges from 0% to 1.00% per annum for base rate loans and from 1.00% to 2.00% per annum for LIBOR loans. The applicable margin for the 2006 Term Loan is 0.50% for base rate loans and 1.50% for LIBOR loans. The applicable margin for the $10.0 million increase in the Term Loan that occurred in January 2008 ranges from 0.50% to 0.75% for base rate loans and from 1.50% to 1.75% for LIBOR loans. The applicable margin for any future term loans will be agreed upon at the time those term loans are incurred. Interest on base rate loans is payable quarterly in arrears and interest on LIBOR loans is payable either monthly, bimonthly or quarterly depending on the interest period elected by LBI Media. All amounts that are not paid when due under either the 2006 Revolver or 2006 Term Loan will accrue interest at the rate otherwise applicable plus 2.00% until such amounts are paid in full. Borrowings under the 2006 Revolver and 2006 Term Loan bore interest at rates between 1.73% and 4.25%, including the applicable margin, at December 31, 2009.
Borrowings under the 2006 Senior Credit Facilities are secured by substantially all of the tangible and intangible assets of LBI Media and its wholly owned subsidiaries, including a first priority pledge of all capital stock of each of LBI Media’s subsidiaries. The 2006 Senior Credit Facilities also contain customary representations, affirmative and negative covenants and defaults for a senior credit facility, including restrictions on LBI Media’s ability to pay dividends. LBI Media was in violation of certain reporting covenants under its senior credit facilities as of April 5, 2010. These violations will be cured by LBI Media upon its issuance of its consolidated financial statements and the delivery of certain certificates and other items related to such consolidated financial statements to the administrative agent.
F-23
Table of Contents
LBI MEDIA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
December 31, 2009
LBI Media pays quarterly commitment fees on the unused portion of the 2006 Revolver based on its utilization rate of the total borrowing capacity. Under certain circumstances, if LBI Media borrows less than 50% of the revolving credit commitment, it must pay a quarterly commitment fee of 0.50% times the unused portion. If LBI Media borrows 50% or more of the total revolving credit commitment, it must pay a quarterly commitment fee of 0.25% times the unused portion.
LBI Media’s 2002 Senior Subordinated Notes
In July 2002, LBI Media issued $150.0 million of senior subordinated notes due 2012 (the “2002 Senior Subordinated Notes”). The 2002 Senior Subordinated Notes bore interest at the rate of 10.125% per annum, and interest payments were made on a semi-annual basis each January 15 and July 15. All of LBI Media’s subsidiaries are wholly owned and provided full and unconditional joint and several guarantees of the 2002 Senior Subordinated Notes.
LBI Media redeemed all of the outstanding 2002 Senior Subordinated Notes in August 2007 (the “Redemption Date”) at a redemption price of 105.0625% of the outstanding principal amount, plus accrued and unpaid interest to the Redemption Date (the “Redemption”). The Redemption resulted in a loss for the year ended December 31, 2007 of approximately $8.8 million (including the write off of $1.2 million in unamortized deferred financing costs).
LBI Media’s Senior Subordinated Notes due 2017
In July 2007, LBI Media issued approximately $228.8 million aggregate principal amount of 8 1/2% Senior Subordinated Notes due 2017 (the “2007 Senior Subordinated Notes”). The 2007 Senior Subordinated Notes were sold at 98.350% of the principal amount, resulting in gross proceeds of approximately $225.0 million. All of LBI Media’s subsidiaries are wholly owned and provide full and unconditional joint and several guarantees of the 2007 Senior Subordinated Notes.
The 2007 Senior Subordinated Notes bear interest at a rate of 8.5% per annum. Interest payments are made on a semi-annual basis each February 1 and August 1, and commenced on February 1, 2008. The 2007 Senior Subordinated Notes will mature in August 2017.
At any time prior to August 1, 2012, LBI Media may redeem some or all of its 8 1 /2% senior subordinated notes at a redemption price equal to a “make whole” amount as set forth in the indenture governing such senior subordinated notes. Also, LBI Media may redeem up to 35% of the aggregate principal amount of the notes with the net proceeds of certain equity offerings completed on or prior to August 1, 2010 at a redemption price of 108.5% of the principal amount of the notes, plus accrued and unpaid interest, if any, thereon to the applicable redemption date.
The indenture governing the 2007 Senior Subordinated Notes limits, among other things, LBI Media’s ability to borrow under the 2006 Senior Credit Facilities and pay dividends. LBI Media could borrow up to an aggregate of $260.0 million under the 2006 Senior Credit Facilities (subject to certain reductions under certain circumstances) without having to comply with specified leverage ratios contained in the indenture, but any amount over $260.0 million (subject to certain reductions under certain circumstances) would be subject to LBI Media’s compliance with a specified leverage ratio (as defined in the indenture governing the 2007 Senior Subordinated Notes). The indenture governing the 2007 Senior Subordinated Notes also prohibits the incurrence of indebtedness, the proceeds of which would be used to repay, redeem, repurchase or refinance any of LBI Media Holdings’ Senior Discount Notes (defined below) earlier than one year prior to the stated maturity of the Senior Discount Notes unless such indebtedness is (i) unsecured, and (ii) pari passu or junior in right of payment to the 2007 Senior Subordinated Notes, and (iii) otherwise permitted to be incurred under the indenture governing the 2007 Senior Subordinated Notes. LBI Media was in violation of certain of its reporting covenants under its indenture governing its senior subordinated notes as of March 31, 2010. These violations will be cured upon the issuance of its consolidated financial statements to the trustee.
F-24
Table of Contents
LBI MEDIA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
December 31, 2009
The indenture governing the 2007 Senior Subordinated Notes provides for customary events of default, which include (subject in certain instances to cure periods and dollar thresholds): nonpayment of principal, interest and premium, if any, on the 2007 Senior Subordinated Notes, breach of covenants specified in the indenture, payment defaults or acceleration of other indebtedness, a failure to pay certain judgments and certain events of bankruptcy, insolvency and reorganization. The 2007 Senior Subordinated Notes will become due and payable immediately without further action or notice upon an event of default arising from certain events of bankruptcy or insolvency with respect to LBI Media and certain of its subsidiaries. If any other event of default occurs and is continuing, the trustee or the holders of at least 25% in principal amount of the then outstanding 2007 Senior Subordinated Notes may declare all the 2007 Senior Subordinated Notes to be due and payable immediately.
Senior Discount Notes due 2013
In October 2003, LBI Media Holdings issued $68.4 million aggregate principal amount at maturity of senior discount notes that mature in 2013 (the “Senior Discount Notes”). The notes were sold at 58.456% of principal amount at maturity, resulting in gross proceeds of approximately $40.0 million and net proceeds of approximately $38.8 million after certain transaction costs. Under the terms of the notes, cash interest did not accrue and was not payable on the notes prior to October 15, 2008 and instead the value of the notes had been increased each period until it equaled $68.4 million on October 15, 2008; such accretion (approximately $5.5 million, $6.4 million and $5.7 million for the years ended December 31, 2008, 2007 and 2006, respectively) is recorded as additional interest expense by LBI Media Holdings. After October 15, 2008, cash interest began to accrue at a rate of 11% per year payable semi-annually on each April 15 and October 15.
In 2008, LBI Media Holdings purchased approximately $22.0 million aggregate principal amount of its Senior Discount Notes in various open market transactions at a weighted average purchase price of 43.321% of the principal amount. The total consideration paid (including accrued interest) was approximately $9.9 million. In 2009, LBI Media Holdings purchased an additional $1.0 million aggregate principal of its Senior Discount Notes on the open market at a purchase price of 48.0% of the principal amount. As a result of these transactions, the Company recorded a noncash gain of approximately $0.5 million and $12.5 million for the years ended December 31, 2009 and 2008, respectively, which is included in gain (loss) on note purchases and redemptions in the accompanying consolidated financial statements.
The indenture governing the Senior Discount Notes contains certain restrictive covenants that, among other things, limits LBI Media Holdings’ ability to incur additional indebtedness and pay dividends. As of December 31, 2009, LBI Media Holdings was in compliance with all such covenants. The Senior Discount Notes are structurally subordinated to the 2006 Senior Credit Facilities and the 2007 Senior Subordinated Notes.
LBI Media’s 2004 Empire Note
In July 2004, Empire issued an installment note for approximately $2.6 million (the “2004 Empire Note”) and used the proceeds to repay its former mortgage note. The 2004 Empire Note bears interest at the rate of 5.52% per annum and is payable in monthly principal and interest payments of approximately $21,000 through maturity in July 2019. The borrowings under the 2004 Empire Note are secured primarily by all of Empire’s real property.
Scheduled Debt Repayments
As of December 31, 2009, the Company’s long-term debt had scheduled repayments for each of the next five years as follows
| (in thousands) | |||
| 2010 |
$ | 1,355 | |
| 2011 |
1,364 | ||
| 2012 |
147,074 | ||
| 2013 |
45,566 | ||
| 2014 |
194 | ||
| Thereafter |
226,671 | ||
| $ | 422,224 | ||
F-25
Table of Contents
LBI MEDIA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
December 31, 2009
The above table does not include projected interest payments the Company may ultimately pay. Prior to the termination and payoff of the debt of the Parent (including redemption of the warrants) in March 2007, interest payments and scheduled repayments relating to the debt of the Parent (including redemption of the warrants) were not included in the Company’s financial statements pursuant to SEC guidelines. The debt of the Parent, which was repaid in full in March 2007, is described in more detail below.
Parent Subordinated Notes
In March 2001, the Parent entered into an agreement whereby in exchange for $30.0 million, it issued junior subordinated notes (the “Parent Subordinated Notes”) and warrants to the holders of the Parent Subordinated Notes to initially acquire 14.02 shares (approximately 6.55%) of the Parent’s common stock at an initial exercise price of $0.01 per share. Based on the relative fair values at the date of issuance, the Parent allocated $13.6 million to the Parent Subordinated Notes and $16.4 million to the warrants. The Parent Subordinated Notes bore interest at 9% per year and interest was not payable until maturity.
In March 2007, third party investors purchased shares of the Parent’s Class A common stock from the Parent and the stockholders of the Parent. A portion of the net proceeds received by the Parent were used to repay in full the Parent Subordinated Notes and to redeem all of the related warrants to purchase shares of LBI Holdings I’s (predecessor in interest to the Parent) common stock.
The Parent Subordinated Notes were to be accreted through January 2014, up to their $30.0 million redemption value; such accretion (approximately $0.3 million for the year ended December 31, 2007) was recorded as additional interest expense by the Parent. In the financial statements of the Parent, the warrants were stated at fair value each reporting period with subsequent changes in fair value being recorded as interest expense.
Interest Rate Swap
The Company uses an interest rate swap to manage interest rate risk associated with its variable rate borrowings. In connection with the issuance of the 2006 Senior Credit Facilities, in July 2006, the Company entered into a fixed-for-floating interest rate swap to hedge the underlying interest rate risk on the expected outstanding balance of the 2006 Term Loan over time. Pursuant to the terms of this interest rate swap, the Company pays a fixed rate of 5.56% on the notional amount and receives payments based on LIBOR. This swap fixes the interest rate at 7.56% (including the applicable margin) and terminates in November 2011. In November 2009, the notional amount was reduced to $60.0 million (from $80.0 million) and remains at this level through termination of the swap contract in November 2011.
The Company accounts for its interest rate swap in accordance with ASC 815, “Derivatives and Hedging” (“ASC 815”). As noted above, the effect of the interest rate swap is to fix the interest rate at 7.56% on the Company’s variable rate borrowings (including the applicable margin). However, changes in the fair value of the interest rate swap for each reporting period have been recorded in interest rate swap income (expense) in the accompanying consolidated statements of operations because the interest rate swap does not qualify for hedge accounting.
The fair value of the interest rate swap agreement at each balance sheet date was as follows (in millions):
| Derivatives Not Designated As Hedging Instruments |
Balance Sheet Location | December 31, 2009 |
December 31, 2008 | |||||
| Interest rate swap agreement |
Other long-term liabilities | $ | 5.2 | $ | 7.6 | |||
The following table presents the effect of the interest rate swap agreement on the Company’s consolidated statements of operations for the years ended December 31, 2009, 2008 and 2007 (in millions):
| Derivatives Not Designated As Hedging Instruments |
Location of Gain (Loss) |
Year Ended December 31, 2009 |
Year Ended December 31, 2008 |
Year Ended December 31, 2007 |
|||||||||
| Interest rate swap agreement |
Interest rate swap income (expense) |
$ | 2.4 | $ | (3.4 | ) | $ | (2.4 | ) | ||||
F-26
Table of Contents
LBI MEDIA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
December 31, 2009
The Company measures the fair value of its interest rate swap on a recurring basis pursuant to ASC 820. As described in Note 1, ASC 820 establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. The three tiers are: Level 1, defined as inputs such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions. The Company categorizes this swap contract as Level 2.
As a result of the adoption of ASC 820, the Company modified the assumptions used in measuring the fair value of its interest rate swap. Specifically, the Company now includes the impact of its own credit risk on the interest rate swap, which is measured at fair value under ASC 820. Counterparty credit risk adjustments are applied to the valuation of the interest rate swap, if necessary. Because all counterparties do not have the same credit risk, the counterparty’s credit risk is considered in order to estimate the fair value of such an item. In addition, bilateral or “own” credit risk adjustments are applied to the Company’s own credit risk when valuing derivatives measured at fair value. Credit adjustments consider the estimated future cash flows between the Company and its counterparty under the terms of the instruments and affect the credit risk on the valuation of those cash flows.
The fair value of the Company’s interest rate swap was a liability of $5.2 million and $7.6 million at December 31, 2009 and December 31, 2008, respectively. The fair value of the interest rate swap represents the present value of the expected future cash flows that are estimated to be received from or paid to a marketplace participant of the instrument. It is valued using inputs such as broker dealer quotes and adjusted for non-performance risk, which are based on valuation models that incorporate observable market information and are classified within Level 2 of the fair value hierarchy.
6. Commitments and Contingencies
Leases
The Company leases land, tower, studio and/or office space for certain stations under noncancelable operating leases that expire at various times through 2029, with some having renewal options, generally for one to five years. Rental expenses under these agreements totaled approximately $2.4 million, $2.3 million and $2.0 million during the years ended December 31, 2009, 2008 and 2007, respectively.
Future minimum lease payments by year and in the aggregate, under noncancelable operating leases, consist of the following at December 31, 2009:
| (in thousands) | |||
| 2010 |
$ | 2,013 | |
| 2011 |
1,828 | ||
| 2012 |
1,499 | ||
| 2013 |
1,275 | ||
| 2014 |
1,161 | ||
| Thereafter |
9,647 | ||
| $ | 17,423 | ||
Ratings Services
In September 2009, the Company entered into a four-year contract with Nielsen Media Research (“Nielsen”), to provide local market television programming ratings services for the Company’s EstrellaTV network. The aggregate payments remaining under the agreement, at December 31, 2009, is approximately $16.7 million (which includes approximately $0.3 million of fees incurred but not paid), and will be paid through August 2013. However, the Company may terminate the agreement at the end of any calendar month on or prior to August 31, 2011, provided that such notice is submitted 90 days in advance and is accompanied by an early termination fee of $1.0 million.
F-27
Table of Contents
LBI MEDIA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
December 31, 2009
Deferred Compensation
The Parent has entered into employment agreements with certain employees. Services required under the employment agreements were rendered to the Company. Accordingly, the Company had reflected amounts due under the employment agreements in its financial statements. In addition to annual compensation and other benefits, one agreement (the “Deferred Compensation Agreement”) provided the employee with the ability to participate in the increase of the “net value” (as defined in the Deferred Compensation Agreement) of the Parent over a certain base amount (“Incentive Compensation”) that was negotiated at the time the Deferred Compensation Agreement was entered into. There were two components of Incentive Compensation: (i) a component that vested in varying amounts over time; and (ii) a component that vested upon the attainment of certain performance measures. The time vesting component was accounted for over the vesting period specified in the Deferred Compensation Agreement. Performance based amounts were accounted for at the time it was considered probable that the performance measures would be attained. Any Incentive Compensation amounts due were required to be paid within thirty days after the date the “net value” of the Parent was determined.
The Deferred Compensation Agreement contained provisions, however, that allowed for limited accelerated vesting in the event of a change in control of the Parent (as defined in the Deferred Compensation Agreement). Unless there was a change in control of the Parent (as defined in the Deferred Compensation Agreement), the “net value” of the Parent was to be determined as of December 31, 2009.
Until the “net value” of the Parent had been determined by appraisal as of such valuation date, the Company evaluated and estimated the deferred compensation liability under the Deferred Compensation Agreement. As a part of the calculation of this Incentive Compensation, the Company used the income and market valuation approaches to estimate the “net value” of the Parent. The income approach analyzed future cash flows and discounted them to arrive at a current estimated fair value. The market approach used recent sales and offering prices of similar properties to determine estimated fair value.
As of December 31, 2008, the Deferred Compensation Agreement was the only employment agreement which contained an Incentive Compensation component. The Deferred Compensation Agreement terminated effective December 31, 2009, which was the stated “net value” determination date. However, given the significant downturn in the U.S. national and local economies which negatively affected the Company’s advertising revenues and overall performance, both the Company and this employee agreed that as of December 31, 2009, no Incentive Compensation had been earned under the Deferred Compensation Agreement.
During year ended December 31, 2007, the Company satisfied its obligations under certain employment agreements that had December 31, 2006 “net value” determination dates with an aggregate cash payment of approximately $4.4 million, which was approximately $4.0 million less than the amounts accrued as of December 31, 2006.
Litigation
In June 2005, eight former employees of LBI California filed suit in Los Angeles County Superior Court alleging claims on their own behalf and also on behalf of a purported class of former and current employees of LBI California. The complaint alleged, among other things, wage and hour violations relating to overtime pay, and wrongful termination and unfair competition under the California Business and Professions Code. Plaintiffs sought to recover, among other relief, unspecified general, treble and punitive damages, as well as profit disgorgement, restitution and their attorneys’ fees. In June 2007, two former employees of LBI California filed another suit in Los Angeles County Superior Court, alleging claims on their own behalf and also on behalf of a purported class of former and current employees of LBI California. The complaint alleged, among other things, violations of California labor laws with respect to providing meal and rest breaks. Plaintiffs sought, among other relief, unspecified liquidated and general damages, declaratory, equitable and injunctive relief, and attorneys’ fees.
In July 2007, LBI California entered into a settlement agreement with class action representatives to settle these lawsuits. While LBI California denied the allegations in both lawsuits, it agreed to the final settlement of both actions to avoid significant legal fees, other expenses and management time that would have to be devoted to the two litigation matters. The final settlement provided for a payment of $469,000 (including attorneys’ fees and costs and administrative fees) and was approved by the court in January 2008.
In consideration of the settlement payment, the plaintiffs in both cases agreed to dismiss the two class actions with prejudice and to release all known and unknown claims arising out of or relating to such claims. Because the settlement received court approval, the settlement became effective and binding on the parties.
F-28
Table of Contents
LBI MEDIA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
December 31, 2009
In 2008, the Company began negotiations with the American Society of Composers, Authors and Publishers (“ASCAP”) related to royalties owed to ASCAP. In September 2008, the Company submitted a formal offer and paid $0.8 million to ASCAP which represented settlement of all music license fees owed to date. Although no formal settlement agreement was obtained from ASCAP, the Company believes that the matter had been satisfactorily resolved. The settlement resulted in a charge of $0.1 million, which is included in programming and technical expenses in the accompanying consolidated statement of operations for the year ended December 31, 2008.
In 2008, the Company also began negotiations with Broadcast Music, Inc. (“BMI”) related to disputes over royalties owed to BMI. In October 2009, the Company settled all royalty disputes relating to its television stations as well as royalties owed for the period ended December 31, 2006 for the Company’s radio stations. The remaining outstanding dispute relates to the Company’s radio stations for the period commencing January 1, 2007, for which the Company has filed an application for a reasonable license under BMI’s antitrust consent decree (the “post-court period”). As of December 31, 2009, the Company had reserved a total of approximately $0.9 million relating to the BMI dispute, of which $0.5 million represents check disbursements it has made to BMI, but remain outstanding as of December 31, 2009. The Company believes this reserve, all of which relates to the post-court period, is adequate as of December 31, 2009.
The Company is also subject to other pending litigation arising in the normal course of its business. While it is not possible to predict the results of such litigation, management does not believe the ultimate outcome of these matters will have a materially adverse effect on the Company’s financial position or results of operations.
7. Related Party Transactions
The Company had approximately $3.4 million and $3.0 million due from stockholders of the Parent and from affiliated companies at December 31, 2009 and December 31, 2008, respectively. These amounts include a $1.9 million loan the Company made to one of the stockholders of the Parent in July 2002. The loans due from the stockholders of the Parent bear interest at the applicable federal rate and currently mature through December 2010. Although no specific determination has been made, the Company plans to extend these loans to such stockholders beyond their current December 2010 maturity date; therefore, such loans have been classified in notes receivable from related parties, net of current, in the accompanying consolidated balance sheets.
The Company also had approximately $690,000 due from one if its executive officers and directors at December 31, 2009 and December 31, 2008, which is included in employee advances in the accompanying consolidated balance sheets. The Company made these loans in various transactions in 1998, 2002 and 2006. Except for $30,000, which does not bear interest and does not have a maturity date, the remaining loans bear interest at 8.0% and mature through January 2011.
In April 2008, LBI California entered into a Purchase Agreement and an Investor’s Rights Agreement with PortalUno, Inc. (“PortalUno”) and Reivax Technology, Inc. (“Reivax”). Under these agreements, LBI California purchased shares of the Series A Preferred Stock of PortalUno representing 30% of the fully diluted capital stock of PortalUno. The shares were purchased for $450,000, of which $425,000 was paid in cash and the remaining $25,000 of consideration was the cancellation of a $25,000 note in favor of LBI California. An employee of one of LBI Media Holdings’ indirect, wholly owned subsidiaries is an owner of Reivax, which holds the remaining ownership interest in PortalUno.
The Company accounts for its investment in PortalUno using the equity method under Accounting Principles Board Opinion No. 18, “The Equity Method of Accounting for Investments in Common Stock” (“APB 18”). APB was incorporated into ASC 323 under the FASB codification. As such, the Company’s share of PortalUno’s net loss is included in equity in losses of equity method investment in the accompanying consolidated statements of operations.
Condensed financial information has not been provided because the operations are not considered to be significant.
In December 2008, stockholders of the Parent and one of the Company’s executive officers purchased approximately $1.2 million aggregate principal amount of the Senior Discount Notes in various open market transactions. The weighted average price of the notes purchased was 41.250% of principal.
F-29
Table of Contents
LBI MEDIA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
December 31, 2009
One of the Parent’s stockholders is the sole shareholder of L.D.L. Enterprises, Inc. (“LDL”), a mail order business. From time to time, the Company allows LDL to use, free of charge, unsold advertising time on its radio and television stations. The Company had approximately $0.1 million due from LDL as of December 31, 2009 and 2008, which is included in amounts due from related parties in the accompanying consolidated balance sheets. Such amounts are payable upon demand.
8. Defined Contribution Plan
In 1999, the Company established a 401(k) defined contribution plan (the “401(k) Plan”), which covers all eligible employees (as defined in the 401(k) Plan). Participants are allowed to make non-forfeitable contributions of up to 60% of their annual salary, including commissions, up to the maximum IRS allowable amount. The Company is allowed to contribute a discretionary amount to the 401(k) Plan. For the years ended December 31, 2009, 2008 and 2007, the Company made no discretionary contributions to the 401(k) Plan.
9. Equity Incentive Plan
In December 2008, the stockholders of the Parent adopted the Liberman Broadcasting, Inc. Stock Incentive Plan (the “Plan”). Grants of equity under the Plan are made to employees who render services to the Company. Accordingly, the Company reflects compensation expense related to the options in its financial statements. The Plan allows for the award of up to 14.568461 shares of the Parent’s Class A common stock and awards under the Plan may be in the form of incentive stock options, nonqualified stock options, restricted stock awards or stock awards. The Plan is administered by the Board of Directors. The Board of Directors determines the type, number, vesting requirements and other features and conditions of such awards.
As of December 31, 2009, the only option grant under the Plan has been to one of the Company’s executive officers, which was made in December 2008, pursuant to such employee’s employment agreement. The options have a contractual term of ten years from the date of the grant and vest over five years. No new options were granted during the year ended December 31, 2009.
The fair value of each stock option is estimated on the date of grant using the Black-Scholes option pricing model that uses assumptions for expected term, dividends, risk-free interest rate and expected volatility. For the awards, the Company recognizes compensation expense using a straight-line amortization method. Expected volatilities are based on historical volatility of the Company’s publicly traded competitors. The Company uses historical data to estimate option exercise and employee termination, including voluntary termination behavior, within the valuation model. The expected term of the option is estimated using the “simplified” method as provided in SEC Staff Accounting Bulletin No. 107 “Share-Based Payment”. Under this method, the expected life equals the arithmetic average of the vesting term and the original contractual term of the options. The risk-free interest rate for periods within the contractual life of the stock option is based on the U.S. Treasury yield curve in effect at the time of grant.
Valuation Assumptions
The Company calculated the fair value of each option award on the date of grant using the Black-Scholes option pricing model. The following weighted average assumptions were used for each respective period:
| 2008 | |||
| Expected term |
7.5 years | ||
| Dividends to common stockholders |
None | ||
| Risk-free interest rate |
2.60 | % | |
| Expected volatility |
67 | % |
The weighted average grant date fair value using the Black-Scholes option pricing model was approximately $90,000 per share. Unamortized compensation as of December 31, 2009 was approximately $168,000 and is being amortized over the expected term of 7.5 years.
Stock-based compensation expense was approximately $28,000 and $0 for the years ended December 31, 2009 and 2008, respectively.
F-30
Table of Contents
LBI MEDIA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
December 31, 2009
The following is a summary of the Company’s stock options as of December 31, 2009:
| Shares | Weighted Average Exercise Price Per Share |
Aggregate Intrinsic Value |
Weighted Average Remaining Contractual Life (Years) | |||||||
| Outstanding at December 31, 2009 |
2.19 | $ | 1,368,083 | $ | — | 9.0 | ||||
| Vested and exercisable at December 31, 2009 |
0.44 | $ | 1,368,083 | $ | — | 9.0 | ||||
| Vested and expected to vest at December 31, 2009 |
2.19 | $ | 1,368,083 | $ | — | 9.0 | ||||
During the year ended December 31, 2009, options to purchase 0.437054 shares of the Parent’s Class A common stock had vested. However, none of these stock options had been exercised and no stock options expired during the year ended December 31, 2009. Additionally, there was no intrinsic value for the stock options exercisable at December 31, 2009.
10. Segment Data
ASC 280 “Segment Reporting” requires companies to provide certain information about their operating segments. The Company has two reportable segments—radio operations and television operations. Management uses operating income or loss before stock-based compensation expense, deferred benefit, depreciation, loss on disposal of property and equipment and impairment of broadcast licenses as its measure of profitability for purposes of assessing performance and allocating resources.
| Year Ended December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
| (in thousands) | ||||||||||||
| Net revenues: |
||||||||||||
| Radio operations |
$ | 59,120 | $ | 65,301 | $ | 59,846 | ||||||
| Television operations |
43,801 | 51,011 | 54,428 | |||||||||
| Consolidated net revenues |
$ | 102,921 | $ | 116,312 | $ | 114,274 | ||||||
| Operating expenses, excluding stock-based compensation expense, deferred benefit, depreciation and amortization, loss on sale and disposal of property and equipment and impairment of broadcast licenses: |
||||||||||||
| Radio operations |
$ | 34,597 | $ | 34,570 | $ | 30,718 | ||||||
| Television operations |
33,678 | 38,522 | 36,070 | |||||||||
| Consolidated operating expenses, excluding stock-based compensation expense, deferred benefit, depreciation and amortization, loss on sale and disposal of property and equipment and impairment of broadcast licenses |
$ | 68,275 | $ | 73,092 | $ | 66,788 | ||||||
| Operating income before stock-based compensation expense, deferred benefit, depreciation and amortization, loss on sale and disposal of property and equipment and impairment of broadcast licenses: |
||||||||||||
| Radio operations |
$ | 24,523 | $ | 30,731 | $ | 29,128 | ||||||
| Television operations |
10,123 | 12,489 | 18,358 | |||||||||
| Consolidated operating income before stock-based compensation expense, deferred benefit, depreciation and amortization, loss on sale and disposal of property and equipment and impairment of broadcast licenses |
$ | 34,646 | $ | 43,220 | $ | 47,486 | ||||||
| Stock-based compensation expense: |
||||||||||||
| Corporate |
$ | 28 | $ | — | $ | — | ||||||
| Consolidated stock-based compensation expense |
$ | 28 | $ | — | $ | — | ||||||
| Deferred benefit: |
||||||||||||
| Radio operations |
$ | — | $ | — | $ | (3,952 | ) | |||||
| Television operations |
— | — | — | |||||||||
| Consolidated deferred benefit |
$ | — | $ | — | $ | (3,952 | ) | |||||
| Depreciation and amortization expense: |
||||||||||||
| Radio operations |
$ | 4,841 | $ | 5,029 | $ | 3,987 | ||||||
| Television operations |
4,862 | 4,914 | 4,949 | |||||||||
| Consolidated depreciation and amortization expense |
$ | 9,703 | $ | 9,943 | $ | 8,936 | ||||||
| Loss on sale and disposal of property and equipment: |
||||||||||||
| Radio operations |
$ | 182 | $ | 1,355 | $ | — | ||||||
| Television operations |
1,625 | 2,151 | — | |||||||||
| Consolidated loss on sale and disposal of property and equipment |
$ | 1,807 | $ | 3,506 | $ | — | ||||||
| Impairment of broadcast licenses: |
||||||||||||
| Radio operations |
$ | 79,040 | $ | 60,340 | $ | 8,143 | ||||||
| Television operations |
47,503 | 31,400 | — | |||||||||
| Consolidated impairment of broadcast licenses |
$ | 126,543 | $ | 91,740 | $ | 8,143 | ||||||
| Operating (loss) income: |
||||||||||||
| Radio operations |
$ | (59,540 | ) | $ | (35,993 | ) | $ | 20,950 | ||||
| Television operations |
(43,867 | ) | (25,976 | ) | 13,409 | |||||||
| Corporate |
(28 | ) | — | — | ||||||||
| Consolidated operating (loss) income |
$ | (103,435 | ) | $ | (61,969 | ) | $ | 34,359 | ||||
| Total assets: |
||||||||||||
| Radio operations |
$ | 182,242 | $ | 266,040 | $ | 318,554 | ||||||
| Television operations |
101,450 | 134,771 | 172,542 | |||||||||
| Corporate |
15,152 | 27,376 | 25,595 | |||||||||
| Consolidated total assets |
$ | 298,844 | $ | 428,187 | $ | 516,691 | ||||||
| Reconciliation of operating income before stock-based compensation expense, deferred benefit, depreciation and amortization, loss on sale and disposal of property and equipment and impairment of broadcast licenses to loss before benefit from (provision for) income taxes and discontinued operations: |
||||||||||||
| Operating income before stock-based compensation expense, deferred benefit, depreciation and amortization, loss on sale and disposal of property and equipment and impairment of broadcast licenses: |
$ | 34,646 | $ | 43,220 | $ | 47,486 | ||||||
| Stock-based compensation expense |
(28 | ) | — | — | ||||||||
| Deferred benefit |
— | — | 3,952 | |||||||||
| Depreciation and amortization |
(9,703 | ) | (9,943 | ) | (8,936 | ) | ||||||
| Loss on sale and disposal of property and equipment |
(1,807 | ) | (3,506 | ) | — | |||||||
| Impairment of broadcast licenses |
(126,543 | ) | (91,740 | ) | (8,143 | ) | ||||||
| Interest expense, net of amounts capitalized |
(33,777 | ) | (36,993 | ) | (37,100 | ) | ||||||
| Interest rate swap income (expense) |
2,393 | (3,433 | ) | (2,410 | ) | |||||||
| Gain (loss) on note purchases and redemptions |
520 | 12,495 | (8,776 | ) | ||||||||
| Equity in losses of equity method investment |
(112 | ) | (280 | ) | — | |||||||
| Impairment of equity method investment |
— | (160 | ) | — | ||||||||
| Interest income and other income |
108 | — | 814 | |||||||||
| Loss from continuing operations before benefit from (provision for) income taxes |
$ | (134,303 | ) | $ | (90,340 | ) | $ | (13,113 | ) | |||
F-31
Table of Contents
LBI MEDIA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
December 31, 2009
11. Income Taxes
Third party investors purchased shares of the Parent’s Class A common stock from the Parent and the stockholders of the Parent on March 30, 2007. As a result, the Parent no longer qualified as an “S corporation.” Because LBI Media Holdings was deemed for income tax purposes to be part of the Parent, LBI Media Holdings was no longer a “qualified subchapter S subsidiary.” Therefore, the Company files income tax returns as a C Corporation. Accordingly, the Company’s taxable income is subject to a combined federal and state income tax rate of approximately 39% for periods after March 30, 2007.
Commencing March 31, 2007, the Company is included with its Parent in the filing of a consolidated federal income tax return and various state income tax returns. With regard to the consolidated filings, the members of the consolidated group presently allocate tax expenses among the members, as if they were not included in the consolidated return (i.e., “stand alone” basis), to the entity responsible for generating the corresponding tax liability. Accordingly, the amount of federal and state income taxes currently payable is calculated and paid on a “stand alone” basis. Therefore, the Company remits to its Parent only those taxes that would be due if the Parent were the taxing authority (e.g. Internal Revenue Service). Any deferred income taxes are accounted for in the financial statements of the Company.
Deferred income taxes arise from temporary differences between the tax basis of assets and liabilities and their reported amounts in the consolidated financial statements. As a result of the loss of its S corporation status, the Company recorded a one-time non-cash charge of approximately $46.8 million in 2007 to adjust its deferred tax accounts. The charge is included in the benefit from (provision for) income taxes in the accompanying consolidated statements of operations.
As more fully described in Note 1, the Company has restated its consolidated balance sheet as of December 31, 2008 and the related consolidated statements of operations and stockholders’ equity for the years ended December 31, 2008 and 2007, to correct accounting errors relating to (i) the treatment of certain temporary state tax credits and (ii) the classification and valuation of certain deferred tax accounts relating to the Company’s indefinite-lived intangible assets.
With regards to the error relating to the treatment of certain temporary state tax credits, the Company has concluded that a deferred tax asset for the temporary margin tax credit provided under the new tax regime should have been established as of December 31, 2006. The impact of this error on the Company’s consolidated financial statements, including its consolidated statements of cash flows, is income tax expense of $0.1 million for the year ended December 31, 2008, and income tax benefit of $4.7 million and $1.3 million for the years ended December 31, 2007 and 2006, respectively. No valuation allowance has been established against this deferred tax asset as of December 31, 2008, 2007 and 2006, based on the Company’s belief that it is more-likely-than not that the full credit will be realized in accordance with ASC 740, given the extent of its exposure and projected future taxable gross margin in Texas.
The Company also noted errors in the classification and valuation of certain deferred tax accounts relating to its FCC broadcast licenses. As a result of the $91.7 million and $8.1 million impairment charges recognized during the years ended December 31, 2008 and 2007, respectively, certain deferred tax liabilities relating to the Company’s broadcast licenses reversed and resulted in an increase in the gross deferred tax assets relating to those intangibles. The Company did not separate the deferred tax assets relating to certain of these broadcast licenses from the deferred tax liabilities relating to other broadcast licenses. Included in the Company’s reported deferred tax liabilities as of December 31, 2008 and 2007, was a total of $19.6 million and $0.7 million, respectively, in deferred tax assets relating to certain broadcast licenses which reversed from liability to asset positions during the respective years, as a result of the aforementioned impairment charges. The impact of these errors on the consolidated financial statements, including its consolidated statements of cash flows, was a reduction in income tax benefit (and an increase in income tax expense) of $18.9 million and $0.7 million for the years ended December 31, 2008 and 2007, respectively, as the Company recorded an offsetting increase in its valuation allowance against the deferred tax assets relating to these broadcast licenses.
The Company’s net deferred tax liabilities as of December 31, 2009 and 2008 were approximately $18.5 million and $37.7 million, respectively, and result primarily from book and tax basis differences of the Company’s indefinite-lived intangible assets that, for tax purposes, are amortized over fifteen years, as well as state net operating loss carryforward credits.
F-32
Table of Contents
LBI MEDIA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
December 31, 2009
At December 31 of each respective year, the (benefit from) provision for income taxes consisted of the following:
| As of December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
| (in thousands) | ||||||||||||
| Current federal |
$ | — | $ | — | $ | — | ||||||
| Current state |
(157 | ) | (150 | ) | (118 | ) | ||||||
| Total current income tax (benefit) expense |
(157 | ) | (150 | ) | (118 | ) | ||||||
| Deferred federal |
(18,272 | ) | (6,399 | ) | 43,075 | |||||||
| Deferred state |
(1,832 | ) | (642 | ) | 1,604 | |||||||
| Total deferred income tax (benefit) expense |
(20,104 | ) | (7,041 | ) | 44,679 | |||||||
| Total income tax (benefit) expense |
$ | (20,261 | ) | $ | (7,191 | ) | $ | 44,561 | ||||
The following is a reconciliation of income tax benefit to income taxes computed by applying the statutory federal income tax rate of 35% to loss before benefit from (provision for) income taxes and discontinued operations for the years ended December 31, 2009, 2008 and 2007, respectively.
| Year Ended December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
| (in thousands) | ||||||||||||
| Income tax benefit computed at the federal statutory rate |
$ | (47,006 | ) | $ | (31,619 | ) | $ | (4,590 | ) | |||
| Federal deferred taxes upon conversion to a C corporation |
— | — | 41,136 | |||||||||
| Change in valuation allowance |
31,200 | 29,000 | 1,662 | |||||||||
| Post S corporation valuation allowance |
— | — | 3,721 | |||||||||
| Pretax loss as an S Corporation |
— | — | 380 | |||||||||
| State income taxes |
(4,228 | ) | (2,956 | ) | 965 | |||||||
| Other |
(227 | ) | (1,616 | ) | 1,287 | |||||||
| Total income tax benefit |
$ | (20,261 | ) | $ | (7,191 | ) | $ | 44,561 | ||||
As of December 31, 2009, the Company had approximately $62.3 million and $35.0 million, respectively, of accumulated federal and state net operating losses. The federal net operating losses can be carried forward and applied to offset taxable income for 20 years and any unused portion of these net operating losses will expire from 2027 through 2028. With the exception of California, the state net operating losses can be carried forward and applied to offset taxable income for 10 years and any unused portion of these net operating losses will expire in 2018. In 2008, California changed its carryforward period from 10 to 20 years for any net operating losses generated on or after January 1, 2008. As such, unused portion of the accumulated net operating loss as of December 31, 2007 will expire in 2017 and the unused portion of the 2008 and 2009 net operating losses will expire in 2028 and 2029, respectively.
F-33
Table of Contents
LBI MEDIA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
December 31, 2009
The following table outlines the principal components of deferred tax assets and liabilities at December 31 of each respective year:
| As of December 31, | ||||||||
| 2009 | 2008 | |||||||
| (in thousands) | ||||||||
| Current deferred tax assets: |
||||||||
| State net operating loss credits |
$ | 135 | $ | 135 | ||||
| Total current deferred tax assets |
135 | 135 | ||||||
| Long-term deferred tax assets: |
||||||||
| Net operating loss carryforwards |
$ | 23,856 | $ | 13,467 | ||||
| State net operating loss credits |
5,443 | 5,578 | ||||||
| Intangible assets, net |
40,351 | 19,559 | ||||||
| Interest rate swap |
2,006 | 2,924 | ||||||
| Accretion on Senior Discount Notes |
2,646 | 2,705 | ||||||
| Other |
2,840 | 1,880 | ||||||
| Total long-term deferred tax assets |
77,142 | 46,113 | ||||||
| Long-term deferred tax liabilities: |
||||||||
| Intangible assets, net |
(23,925 | ) | (43,251 | ) | ||||
| Property and equipment, net |
(947 | ) | (840 | ) | ||||
| Other |
(1,952 | ) | (1,999 | ) | ||||
| Total long-term deferred tax liabilities |
(26,824 | ) | (46,090 | ) | ||||
| 50,318 | 23 | |||||||
| Valuation allowance |
(68,800 | ) | (37,696 | ) | ||||
| Net long-term deferred tax liabilities |
$ | (18,482 | ) | $ | (37,673 | ) | ||
The net change in the total valuation allowance for the years ended December 31, 2009 and 2008 was an increase of $31.1 million and $28.6 million, respectively. The Company’s total deferred tax assets were approximately $77.3 million and $46.2 million as of December 31, 2009 and 2008, respectively. The valuation allowance as of December 31, 2009 and 2008 was primarily related to net operating loss carryforwards and future deductible amounts related to the excess tax basis over the book basis of certain broadcast licenses. In accordance with ASC 350-30, the Company no longer amortizes its broadcast licenses. However, the impairment of certain broadcast licenses recognized during the years ended December 31, 2009 and 2008, respectively, resulted in the reversal of certain deferred tax liabilities or an increase in the gross deferred tax assets relating to certain of those intangibles, which were accompanied by an offsetting increase in the related valuation allowance.
In assessing the realizability of deferred tax assets, the Company considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. The Company considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. If the realization of deferred tax assets in the future is considered more likely than not, an adjustment to the deferred tax assets would increase net income in the period such determination is made.
Based upon the level of historical taxable income and projections for future taxable income over the periods which the deferred tax assets are deductible, at this time, the Company believes it is more likely than not that it will not realize the benefits of the majority of these deductible differences. As a result, the Company has established and maintained a valuation allowance for that portion of the deferred tax assets it believes will not be realized.
The Company adopted the provisions of Financial Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”) on January 1, 2007. FIN 48 was incorporated into ASC 740-10 “Income Taxes” under the FASB codification. The Company’s policy is to recognize interest related to unrecognized tax benefits (“UTB”) and penalties as additional income tax expense.
F-34
Table of Contents
LBI MEDIA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
December 31, 2009
A reconciliation of the beginning and ending amount of UTB for the years ended December 31, 2009, 2008 and 2007, respectively, is as follows:
| Balance at January 1, 2007 |
$ | 996,000 | ||
| Additions based on tax positions related to the current year |
— | |||
| Additions for tax positions of prior years |
— | |||
| Reductions for tax positions of prior years |
— | |||
| Lapse of statute of limitations |
(303,000 | ) | ||
| Settlements |
— | |||
| Balance at January 1, 2008 |
$ | 693,000 | ||
| Additions based on tax positions related to the current year |
— | |||
| Additions for tax positions of prior years |
— | |||
| Reductions for tax positions of prior years |
— | |||
| Lapse of statute of limitations |
(351,000 | ) | ||
| Settlements |
— | |||
| Balance at January 1, 2009 |
$ | 342,000 | ||
| Additions based on tax positions related to the current year |
— | |||
| Additions for tax positions of prior years |
— | |||
| Reductions for tax positions of prior years |
— | |||
| Lapse of statute of limitations |
(342,000 | ) | ||
| Settlements |
— | |||
| Balance at December 31, 2009 |
$ | — | ||
During 2009, 2008 and 2007, respectively, the Company recognized approximately $342,000, $351,000 and $303,000 of these UTB due to the expiration of the statute of limitations and, accordingly, the effective tax rate was reduced. Accrued interest at December 31, 2009 and 2008, related to UTB was approximately $0 and $101,000, respectively. Approximately $28,000 of accrued interest related to unlapsed UTB is included in benefit from (provision for) income taxes for the year ended December 31, 2008. The Company files income tax returns in the U.S. federal jurisdiction and various state jurisdictions. The Company is no longer subject to federal or state income tax examinations for years prior to 2005 and 2004, respectively. Notwithstanding the adjustments discussed above, the Company believes that it has appropriate support for the income tax positions taken and presently expected to be taken on its tax returns. Additionally, the Company believes that its accruals for tax liabilities are adequate for all years open to income tax examinations based on an assessment of many factors including past experience, past examinations by taxing authorities and interpretations of tax law applied to the facts of each matter.
12. LBI Media Holdings, Inc. (Parent Company Only)
The terms of LBI Media’s 2006 Senior Credit Facilities and the indenture governing LBI Media’s 2007 Senior Subordinated Notes restrict LBI Media’s ability to transfer net assets to LBI Media Holdings in the form of loans, advances, or cash dividends. The following parent-only condensed financial information presents balance sheets and related statements of operations and cash flows of LBI Media Holdings by accounting for the investments in the owned subsidiaries on the equity method of accounting. The accompanying condensed financial information should be read in conjunction with the accompanying consolidated financial statements and notes thereto.
| As of December 31, | ||||||||
| 2009 | 2008 | |||||||
| (As Restated) | ||||||||
| (in thousands) | ||||||||
| Condensed Balance Sheet Information: |
||||||||
| Assets |
||||||||
| Deferred financing costs |
$ | 500 | $ | 947 | ||||
| Investment in subsidiary |
— | 1,932 | ||||||
| Amounts due from subsidiary |
1,956 | — | ||||||
| Other assets |
25 | 3 | ||||||
| Total assets |
$ | 2,481 | $ | 2,882 | ||||
| Liabilities and stockholder’s deficiency |
||||||||
| Accrued interest |
$ | 1,054 | $ | 1,093 | ||||
| Interest due to subsidiary |
412 | 26 | ||||||
| Long term debt |
45,383 | 46,383 | ||||||
| Notes payable to subsidiary |
17,427 | 9,899 | ||||||
| Losses in excess of investment in subsidiary |
105,447 | — | ||||||
| Total liabilities |
169,723 | 57,401 | ||||||
| Stockholder’s deficiency: |
||||||||
| Common stock |
— | — | ||||||
| Additional paid-in capital |
62,977 | 63,056 | ||||||
| Accumulated deficit |
(230,219 | ) | (117,575 | ) | ||||
| Total stockholder’s deficiency |
(167,242 | ) | (54,519 | ) | ||||
| Total liabilities and stockholder’s deficiency |
$ | 2,481 | $ | 2,882 | ||||
F-35
Table of Contents
LBI MEDIA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
December 31, 2009
| Year Ended December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
| (As Restated) | (As Restated) | |||||||||||
| (in thousands) | ||||||||||||
| Condensed Statement of Operations Information: |
||||||||||||
| Income: |
||||||||||||
| Losses in earnings of subsidiaries |
$ | (107,298 | ) | $ | (87,279 | ) | $ | (49,926 | ) | |||
| Gain on note purchases |
520 | 12,495 | — | |||||||||
| Expenses: |
||||||||||||
| Interest expense |
(5,866 | ) | (7,209 | ) | (6,587 | ) | ||||||
| Loss before income taxes |
(112,644 | ) | (81,993 | ) | (56,513 | ) | ||||||
| Provision for income taxes |
— | — | — | |||||||||
| Net loss |
$ | (112,644 | ) | $ | (81,993 | ) | $ | (56,513 | ) | |||
| Year Ended December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
| (As Restated) | (As Restated) | |||||||||||
| (in thousands) | ||||||||||||
| Condensed Statement of Cash Flows Information: |
||||||||||||
| Cash flows (used in) provided by operating activities: |
||||||||||||
| Net loss |
$ | (112,644 | ) | $ | (81,993 | ) | $ | (56,513 | ) | |||
| Adjustments to reconcile net loss to net cash (used in) provided by operating activities: |
||||||||||||
| Losses in earnings of subsidiaries |
107,298 | 87,278 | 49,926 | |||||||||
| Write-off of deferred financing costs |
250 | — | — | |||||||||
| Amortization of deferred financing costs |
197 | 197 | 197 | |||||||||
| Accretion on discount notes |
— | 5,542 | 6,386 | |||||||||
| Gain on note purchases |
(520 | ) | (12,495 | ) | — | |||||||
| Other assets and liabilities, net |
327 | 1,119 | 4 | |||||||||
| Distributions from subsidiary |
107 | 245 | 2,167 | |||||||||
| Net cash (used in) provided by operating activities |
(4,985 | ) | (107 | ) | 2,167 | |||||||
| Cash flows provided by (used in) financing activities: |
||||||||||||
| Contribution to subsidiary |
— | — | (47,900 | ) | ||||||||
| Contribution from Parent |
— | — | 47,946 | |||||||||
| Purchase of senior discount notes |
(480 | ) | (9,550 | ) | — | |||||||
| Amounts due from subsidiary |
(1,956 | ) | — | — | ||||||||
| Loan from subsidiary |
7,528 | 9,899 | — | |||||||||
| Distributions to Parent |
(107 | ) | (242 | ) | (2,213 | ) | ||||||
| Net cash provided by (used in) financing activities |
4,985 | 107 | (2,167 | ) | ||||||||
| Net change in cash and cash equivalents |
— | — | — | |||||||||
| Cash and cash equivalents, beginning of year |
— | — | — | |||||||||
| Cash and cash equivalents, end of year |
$ | — | $ | — | $ | — | ||||||
F-36
Table of Contents
LBI MEDIA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
December 31, 2009
As more fully described in Note 1, the Company has restated its consolidated balance sheet as of December 31, 2008 and the related consolidated statements of operations and stockholder’s equity for the years ended December 31, 2008 and 2007, to correct accounting errors relating to (i) the treatment of certain temporary state tax credits and (ii) the classification and valuation of certain deferred tax accounts relating to the Company’s indefinite-lived intangible assets.
The following tables set forth the financial impacts of the restatement on the parent-only balance sheet of LBI Media Holdings as of December 31, 2008, and the related statements of operations and cash flows for the years ended December 31, 2008 and 2007 (in thousands).
Condensed Consolidated Balance Sheet as of December 31, 2008
| As Previously Reported |
Adjustments | As Restated | ||||||||||
| Investment in subsidiary |
$ | 15,645 | $ | (13,713 | ) | $ | 1,932 | |||||
| Total assets |
16,595 | (13,713 | ) | 2,882 | ||||||||
| Accumulated deficit |
(103,862 | ) | (13,713 | ) | (117,575 | ) | ||||||
| Total stockholder’s deficiency |
(40,806 | ) | (13,713 | ) | (54,519 | ) | ||||||
| Total liabilities and stockholder’s deficiency |
16,595 | (13,713 | ) | 2,882 | ||||||||
Condensed Consolidated Statement of Operations for the year ended December 31, 2008
| As Previously Reported |
Adjustments | As Restated | ||||||||||
| Losses in earnings of subsidiaries |
$ | (68,251 | ) | $ | (19,028 | ) | $ | (87,279 | ) | |||
| Loss before income taxes |
(62,965 | ) | (19,028 | ) | (81,993 | ) | ||||||
| Net loss |
(62,965 | ) | (19,028 | ) | (81,993 | ) | ||||||
Condensed Consolidated Statement of Operations for the year ended December 31, 2007
| As Previously Reported |
Adjustments | As Restated | |||||||||
| Losses in earnings of subsidiaries |
$ | (53,912 | ) | $ | 3,986 | $ | (49,926 | ) | |||
| Loss before income taxes |
(60,499 | ) | 3,986 | (56,513 | ) | ||||||
| Net loss |
(60,499 | ) | 3,986 | (56,513 | ) | ||||||
Condensed Consolidated Statement of Cash Flows for the year ended December 31, 2008
| As Previously Reported |
Adjustments | As Restated | ||||||||||
| Net loss |
$ | (62,965 | ) | $ | (19,028 | ) | $ | (81,993 | ) | |||
| Adjustments to reconcile net loss to net cash (used in) provided by operating activities: |
||||||||||||
| Losses in earnings of subsidiaries |
(68,251 | ) | (19,028 | ) | (87,279 | ) | ||||||
Condensed Consolidated Statement of Cash Flows for the year ended December 31, 2007
| As Previously Reported |
Adjustments | As Restated | |||||||||
| Net loss |
$ | (60,499 | ) | $ | 3,986 | $ | (56,513 | ) | |||
| Adjustments to reconcile net loss to net cash (used in) provided by operating activities: |
|||||||||||
| Losses in earnings of subsidiaries |
(53,912 | ) | 3,986 | (49,926 | ) | ||||||
F-37
Table of Contents
LBI MEDIA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
December 31, 2009
13. Valuation and Qualifying Accounts and Reserves
The following is a summary of the valuation and qualifying accounts and reserves for the years ended December 31, 2009, 2008 and 2007:
| Balance at beginning of year |
Charged to costs and expenses |
Charged to other accounts |
Deductions | Balance at end of year | |||||||||||||
| (in thousands) | |||||||||||||||||
| 2009: |
|||||||||||||||||
| Allowance for doubtful accounts |
$ | 3,072 | $ | 2,401 | $ | (771 | ) | $ | (1,534 | ) | $ | 3,168 | |||||
| 2008: |
|||||||||||||||||
| Allowance for doubtful accounts |
$ | 2,217 | $ | 1,906 | $ | — | $ | (1,051 | ) | $ | 3,072 | ||||||
| 2007: |
|||||||||||||||||
| Allowance for doubtful accounts |
$ | 1,954 | $ | 1,376 | $ | — | $ | (1,113 | ) | $ | 2,217 | ||||||
14. Subsequent Events
As described in Note 2, in February 2010, KRCA TV and KRCA License consummated the acquisition of selected assets of low-power television station WASA-LP, licensed to Port Jervis, New York, from Venture Technologies, Group, LLC, pursuant to an asset purchase agreement entered into by the parties in November 2008. The total purchase price of approximately $6.0 million was paid primarily through borrowings under LBI Media’s senior revolving credit facility. The selected assets primarily included licenses and permits authorized by the FCC for or in connection with the operation of the station.
Also in February 2010, KRCA TV and KRCA License, as buyers, entered into an asset purchase agreement with Trinity Broadcasting Network, as seller, pursuant to which the buyers have agreed to acquire selected assets of low-power television station W40BY, licensed to Palatine, Illiniois, from the seller. The selected assets will include, among other things, (i) licenses and permits authorized by the FCC for or in connection with the operation of the station and (ii) broadcast and other equipment used to operate the station. The total purchase price will be $1.3 million in cash, subject to certain adjustments, of which $0.1 million has been deposited into escrow. Consummation of the acquisition is currently subject to customary closing conditions, including regulatory approval from the FCC. The Company expects to close this acquisition in the third quarter of 2010.
As more fully described in Note 2, in February 2010, the purchase of KDES-FM was consummated and the Company received $5.9 million from LC Media, pursuant to the assignment and assumption agreement entered into in July 2009. The Company, in turn, paid $4.2 million to Spectrum Scan pursuant to the amendment to the amendment to the agreement relating to the relocation and purchase of KDES-FM. As such, in February 2010, the Company realized a pre-tax gain on this transaction of $1.7 million.
In January 2010, KRCA TV and KRCA License, as buyers, entered into an asset purchase agreement with Lesea Broadcasting Corporation, as seller, pursuant to which the buyers have agreed to acquire selected assets of television station KWHD-TV, licensed to Castle Rock, Colorado, from the seller. The selected assets will include, among other things, (i) licenses and permits authorized by the FCC for or in connection with the operation of the station (ii) antenna and transmitter facilities and (iii) broadcast and other studio equipment used to operate the station. The total purchase price will be approximately $6.5 million in cash, subject to certain adjustments, of which $0.3 million has been deposited into escrow. Consummation of the acquisition is currently subject to customary closing conditions, including regulatory approval from the FCC. The Company expects to close this acquisition in the third quarter of 2010.
In December 2009 and January 2010, the Parent entered into certain employment agreements whereby it agreed to grant an aggregate of 10.19792 shares of the Parent’s Class A common stock to certain executive employees. One of these employees is an officer of the Company. The options, when granted, will have contractual term of ten years from the date of the grant and vest in equal installments over five years.
F-38