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EX-32.2 - EX-32.2 - SPANISH BROADCASTING SYSTEM INCsbsaa-ex322_6.htm
EX-32.1 - EX-32.1 - SPANISH BROADCASTING SYSTEM INCsbsaa-ex321_11.htm
EX-31.2 - EX-31.2 - SPANISH BROADCASTING SYSTEM INCsbsaa-ex312_10.htm
EX-31.1 - EX-31.1 - SPANISH BROADCASTING SYSTEM INCsbsaa-ex311_7.htm
EX-23.1 - EX-23.1 - SPANISH BROADCASTING SYSTEM INCsbsaa-ex231_9.htm
EX-21.1 - EX-21.1 - SPANISH BROADCASTING SYSTEM INCsbsaa-ex211_8.htm
EX-10.37 - EX-10.37 - SPANISH BROADCASTING SYSTEM INCsbsaa-ex1037_1604.htm
EX-10.36 - EX-10.36 - SPANISH BROADCASTING SYSTEM INCsbsaa-ex1036_1603.htm
EX-10.35 - EX-10.35 - SPANISH BROADCASTING SYSTEM INCsbsaa-ex1035_1605.htm
EX-10.34 - EX-10.34 - SPANISH BROADCASTING SYSTEM INCsbsaa-ex1034_1606.htm
EX-10.33 - EX-10.33 - SPANISH BROADCASTING SYSTEM INCsbsaa-ex1033_1607.htm
EX-10.32 - EX-10.32 - SPANISH BROADCASTING SYSTEM INCsbsaa-ex1032_1608.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-K

 

(Mark One)

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

For the fiscal year ended December 31, 2016

or

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

For the transition period from                      to                     

Commission file number 000-27823

 

Spanish Broadcasting System, Inc.

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

13-3827791

(State or other jurisdiction or

incorporation of organization)

 

(I.R.S. Employer

Identification No.)

7007 NW 77th Avenue

Miami, Florida 33166

(Address of principal executive offices) (Zip Code)

Registrant’s telephone number, including area code: (305) 441-6901

Former name, former address and former fiscal year, if changed since last report: None

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:

 

 

Class A common stock, par value $0.0001 per share

 Title of Each Class

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.     Yes        No   

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act Yes      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       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 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.    

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

 

Large accelerated filer

 

 

  

Accelerated filer

 

 

 

 

 

 

Non-accelerated filer

 

  

   (Do not check if a small reporting company)

  

Small reporting company

 

 

 

 

 

 

 

 

 

Emerging growth company

 

 

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  

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

As of June 30, 2016, the last business day of the registrant’s most recently completed second fiscal quarter, the registrant had 4,166,991 shares of Class A common stock, par value $0.0001 per share (“Class A common stock”), and 2,340,353 shares of Class B common stock, par value $0.0001 per share (“Class B common stock”), outstanding. As of June 30, 2016, the aggregate market value of the Class A common stock held by nonaffiliates of the registrant was approximately $14.7 million and the aggregate market value of the Class B common stock held by nonaffiliates of the registrant was approximately $1,246. We calculated the aggregate market value based upon the closing price of our Class A common stock reported on the NASDAQ Global Market on June 30, 2016 (the exchange on which our Class A common stock then traded) of $3.56 per share, and we have assumed that our shares of Class B common stock would trade at the same price per share as our shares of Class A common stock. (For purposes of this paragraph, directors and executive officers have been deemed affiliates.)

As of April 5, 2017, 4,166,991 shares of Class A common stock, 2,340,353 shares of Class B common stock and 380,000 shares of Series C convertible preferred stock, $0.01 par value per share (“Series C preferred stock”), which are convertible into 760,000 shares of Class A common stock, were outstanding.

Documents Incorporated by Reference:

Certain information required by Part III of this Annual Report on Form 10-K is incorporated by reference from the registrant’s definitive proxy statement (the “Proxy Statement”) to be filed pursuant to Regulation 14A with respect to the registrant’s 2017 annual meeting of stockholders. Except with respect to information specifically incorporated by reference in this Annual Report on Form 10-K, the Proxy Statement is not deemed to be filed as part hereof.

 

 

 

 

 

 

 


Table of Contents

 

 

  

 

  

Page

PART I

  

 

  

 

Item 1.

  

Business

  

2

Item 1A.

 

Risk Factors

 

24

Item 1B.

 

Unresolved Staff Comments

 

35

Item 2.

  

Properties

  

36

Item 3.

  

Legal Proceedings

  

36

Item 4.

  

Mine Safety Disclosures

  

37

 

 

 

PART II

  

 

  

 

Item 5.

  

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

  

37

Item 6.

  

Selected Financial Data

  

38

Item 7.

  

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

  

38

Item 7A.

 

Quantitative and Qualitative Disclosures About Market Risk

 

52

Item 8.

  

Financial Statements and Supplementary Data

  

52

Item 9.

  

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

  

52

Item 9A.

 

Controls and Procedures

 

53

Item 9B.

 

Other Information

 

53

 

 

 

PART III

  

 

  

 

Item 10.

  

Directors, Executive Officers and Corporate Governance

  

54

Item 11.

  

Executive Compensation

  

54

Item 12.

  

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

  

54

Item 13.

  

Certain Relationships and Related Transactions, and Director Independence

  

54

Item 14.

  

Principal Accountant Fees and Services

  

54

 

 

 

PART IV

  

 

  

 

Item 15.

  

Exhibits and Financial Statement Schedules

  

55

 

 

 

 


Special Note Regarding Forward-Looking Statements

This annual report on Form 10-K contains both historical and forward-looking statements. All statements other than statements of historical fact are, or may be deemed to be, forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).

Spanish Broadcasting System, Inc. intends such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, and includes this statement for purposes of such safe harbor provisions.

“Forward-looking” statements, as such term is defined by the Securities Exchange Commission (the “Commission”) in its rules, regulations and releases, represent our expectations or beliefs, including, but not limited to, statements concerning our operations, economic performance, financial condition, our recapitalization plan, growth and acquisition strategies, investments and future operational plans. Without limiting the generality of the foregoing, words such as “may,” “will,” “expect,” “believe,” “anticipate,” “intend,” “forecast,” “seek,” “plan,” “predict,” “project,” “could,” “estimate,” “might,” “continue,” “seeking” or the negative or other variations thereof or comparable terminology are intended to identify forward-looking statements.   These statements, by their nature, involve substantial risks and uncertainties, certain of which are beyond our control, and actual results may differ materially depending on a variety of important factors, including, but not limited to, those identified in “Item 1A. Risk Factors” in this annual report on Form 10-K. All forward-looking statements made herein are qualified by these cautionary statements and risk factors and there can be no assurance that the actual results, events or developments referenced herein will occur or be realized. These risks and uncertainties include the following factors:  

 

The failure to repay our Notes;  

 

Risks relating to the existence of the Voting Rights Triggering Event;  

 

The maturity of our Notes and our obligations under our Series B preferred stock adversely affects our financial condition and raises substantial doubt about our ability to continue as a going concern;

 

Our ability to repurchase all of the Notes and our Series B preferred stock upon a change in control;  

 

Our ability to generate sufficient cash from operations or the sale of assets to repay our Notes and our liabilities under our Series B preferred stock, which may force us to take other actions to satisfy our obligations under our Notes and Series B preferred stock;  

 

Our high leverage and substantial level of indebtedness;  

 

Restrictions on our current and future operations pursuant to the terms of the Indenture governing the Notes and the terms of the Series B preferred stock;  

 

We have experienced net losses in the past and, to the extent that we experience net losses in the future, our ability to raise capital may be adversely affected;

 

Our industry is highly competitive, and we compete for advertising revenue with other broadcast stations, as well as other media, many operators of which have greater resources than we do;  

 

The large portion of our net revenue and operating income that currently comes from our New York, Los Angeles and Miami markets;

 

Possible cancellations, reductions, delays and seasonality in advertising could adversely affect our net revenues;  

 

Our inability to pursue and successfully execute our expansion strategy which may impact our growth;  

 

Our cost-cutting measures may impact our ability to pursue our expansion strategy;

 

The success of our radio stations depends on the popularity and appeal of our content, which is difficult to predict;  

 

The success of our television operation depends upon our ability  to attract viewers and advertisers to our broadcast television operation;  

 

The loss of distribution agreements could materially adversely affect our results of operations;

 

The failure or destruction of satellites and transmitter facilities that we depend upon to distribute our programming could materially adversely affect our business and results of operation;    

 

Our ability to respond to rapidly changing technology, services and standards which characterize our industry in order to remain competitive;  

 

Our ability to retain key employees, on-air talent and program hosts;  

 


 

Impairment of our goodwill and other intangible assets deemed to have indefinite useful lives can cause our net income or net loss to fluctuate significantly;

 

Piracy of our programming and other content, including digital and internet piracy, may decrease revenue received from the exploitation of our programming and other content and adversely affect our business and profitability;

 

Damage to our brands or reputation;  

 

Our business may be adversely affected by legal or governmental proceedings brought by or on behalf of our employees;  

 

Raúl Alarcón, the Chairman of our Board of Directors, Chief Executive Officer and President, has majority voting control of our common stock and 100% voting control of our Series C preferred stock and this control may discourage or influence certain types of transactions or strategic initiatives;  Changes in government regulation; and

 

Other risk factors discussed under “Item 1A. Risk Factors.”.

We do not have any obligation to publicly update any forward-looking statements to reflect subsequent events or circumstances.

 

 

 

 

 


 

PART I

 

Item 1. Business

Our Company

All references to “we”, “us”, “our”, “SBS”, “our company” or “the Company” in this annual report on Form 10-K mean Spanish Broadcasting System, Inc., a Delaware corporation formed in 1994, and all entities owned or controlled by Spanish Broadcasting System, Inc. and, if prior to 1994, mean our predecessor parent company Spanish Broadcasting System, Inc., a New Jersey corporation, and its subsidiaries. Our executive offices are located at 7007 N.W. 77th Avenue, Miami, Florida 33166, our telephone number is (305) 441-6901, and our corporate website is www.spanishbroadcasting.com.

We are a leading Spanish-language media and entertainment company with radio and/or television stations in the top U.S. Hispanic markets, including Puerto Rico. Our owned and operated radio stations serve markets representing approximately 35% of the U.S. Hispanic population, and our television operations serve markets representing over 3.5 million Hispanic households. We produce and distribute Spanish-language content, including radio programs, television shows, music and live entertainment through our radio stations and our television group, MegaTV, which produces over 70 hours of original programming per week. MegaTV broadcasts via our owned and operated stations in South Florida, Houston, and Puerto Rico and through programming and/or distribution agreements with other stations, as well as various cable and satellite providers.

We operate WSKQ in New York City which is the top Spanish-language radio station in the United States based on the average number of listeners per quarter-hour. WSKQ delivered the highest listenership among all Spanish-language radio stations in the United States, according to the 2016 Hispanic Fact Pack. Our other radio stations are located in Los Angeles, New York, Puerto Rico, Miami, Chicago and San Francisco. In addition to our owned and operated radio stations, we operate AIRE Radio Networks, with over 250 affiliate radio stations servicing over 75 of the top U.S. Hispanic markets, including all of the top 30 Hispanic markets.  AIRE Radio Networks currently covers 93% of the coveted U.S. Hispanic market and reaches over 14.0 million listeners in an average week.  

As part of our operating business, we also maintain multiple Spanish and bilingual websites that provide content related to Latin music, entertainment, news and culture, as well as the LaMusica mobile app.  The LaMusica mobile app is a music and entertainment video and audio app that programs an extensive series of short form videos, simultaneous live streams our radio stations, hundreds of curated playlists and has tools that enable users to personalize their mobile radio streaming experience.  The new video additions to our mobile app significantly enhance the audience’s engagement level and increase the reach of our mobile offering.  In addition, we produce live concerts and events in the United States and Puerto Rico. Concerts generate revenue from ticket sales, sponsorship and promotions, raise awareness of our brands in the surrounding communities and provide our advertising partners additional opportunities to reach their target audience.

Our Strategy

We focus on maximizing the revenue and profitability of our broadcast portfolio by strengthening the performance of our existing broadcast stations. Historically, we have evaluated strategic media acquisitions and/or dispositions and strived to expand our media content through distribution and affiliations in order to achieve a significant presence with clusters of stations in the top U.S. Hispanic markets. Historically, we have considered acquisitions and the expansion of the number of broadcast stations in markets where we can maximize our revenue through aggressive sales and programming efforts directed at U.S. Hispanic and general market advertisers. The potential acquisitions and expansion may include broadcast stations which do not currently target the U.S. Hispanic market, but which we believe can successfully be reformatted and programmed. From time to time, we have explored investment opportunities in related media outlets targeting the U.S. Hispanic market. Our acquisition and investment strategy is subject to having sufficient cash consistent with our recapitalization plan, which we summarize below under “—Recent Developments” and “Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources.   

Our operating strategy focuses on maximizing our broadcast stations’ appeal to our targeted audiences and advertisers in order to increase revenue and cash flow, while simultaneously controlling operating expenses. To achieve these goals, we focus on a number of key factors.

Develop Market Leading Station Clusters in High Growth Hispanic Markets. We believe Hispanic media will gain revenue share as a result of the growing U.S. Hispanic population and its growing buying power. Given our knowledge of, and experience with, the U.S. Hispanic marketplace and our established position in the top U.S. Hispanic markets, including Puerto Rico, we will continue to focus on reaching and maximizing revenue in high growth Hispanic markets. We believe that operating multiple stations in the same markets enables us to achieve operating efficiencies and cost savings. We pursue a strategy of creating broadcast station

2


 

clusters that reach a critical mass of our target audience and marketing resources necessary to aggressively pursue incremental advertising revenue.

Leverage Our Proprietary Content Across Our Media Platforms. We will continue to monetize our content across multiple platforms, including radio, broadcast and pay television and live events, as well as emerging media technologies. We use our media platforms and relationships with Hispanic celebrities and talent to produce unique programming and content for our television and radio stations. Concerts and special promotional appearances form an important part of our marketing strategy and provide us with significant local market exposure. We also develop content from these events and create opportunities to sell, market and distribute that content through our websites and other media, providing our advertising partners with attractive advertising solutions. In addition, the events allow us to promote our brands to increase our radio audience and advertising revenue. As the media landscape evolves, we are developing our key broadcast programs, on-air personalities and brands for consumption as downloadable video and interactive content.

Maintain Cost Discipline and Reduce Our Costs. We employ a regimented managerial approach to operating our media outlets. We emphasize control of our operating costs through detailed budgeting, continuous review of staffing levels and expenses and vendor analysis.  We are highly focused on reducing our costs and believe we have streamlined our cost structure to provide a foundation for growth.

Maintain Strong Community Involvement. We have been, and will continue to be, actively involved in the local communities that we serve. Our broadcast stations participate in numerous community programs, fundraisers and activities benefiting the local community and Hispanics abroad. Examples of our community involvement include free public service announcements, free events designed to promote family values within the local Hispanic communities, extensive coverage of world events that have an impact on the U.S. Hispanic population as well as charitable contributions to organizations that benefit the local Hispanic communities in which we operate. Our community involvement also allows us to keep abreast of shifting audience preferences, to further tailor our content and to enhance broadcast station loyalty.

Sell Non-Core Assets and Recapitalization Plan. We have been pursuing the sale of certain non-core assets, including certain of our television stations and real estate assets.  We expect to use the net proceeds of these asset sales to repay a portion of our 12.5% Senior Secured Notes due 2017 (the “Notes”) and, thereby to deleverage our balance sheet. The strategy to sell these assets is part of our broader recapitalization plan. For more information about our recapitalization plan, see below under “Recent Developments” and “Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources.”

 

Hispanic Market Opportunity

The U.S. Hispanic population is the largest ethnic minority group and is projected to be the fastest growing segment of the population. We believe that we are well positioned to benefit from the projected growth in population and buying power of the U.S. Hispanic population and the expected shift of advertising dollars to Hispanic media. We believe that targeting the Hispanic market is attractive for the following reasons:

Hispanic Population Growth. Between the years 2000 and 2016, the U.S. Hispanic population increased by 62.3% compared to 7.9% for the non-Hispanic population. In 2016, Hispanics comprised 17.9% of the U.S. population and more than one out of every six individuals living in the United States was of Hispanic origin, according to the Selig Center for Economic Growth, The Multicultural Economy, 2016. The U.S. Hispanic population grew at more than seven times the rate of the general population from 2000 to 2015 and is projected to grow to 31% of the U.S. population by 2060, according to the U.S. Census Bureau. Hispanics have accounted for nearly half of the U.S. population growth since the 2010 Census.

Growth in Hispanic Buying Power. The U.S. Hispanic population accounted for over $1.4 trillion of total buying power in 2016, up from $1.0 trillion in 2010 and is estimated to grow to $1.8 trillion by 2021, according to the Selig Center for Economic Growth, The Multicultural Economy, 2016. U.S. Hispanic buying power accounted for 10% of all U.S. buying power in 2016. By 2021, Hispanics will account for 10.9% of total U.S. buying power.  

Spanish-Language Advertising Spending. Advertisers spent an estimated $7.8 billion on Spanish-language media advertising in 2015, according to the 2016 Hispanic Fact Pack. This amount has almost quadrupled since 2000 when Hispanic advertising expenditures totaled $2.1 billion according to Hispanic Business Magazine, December 2001. As advertisers increasingly recognize the buying power of the U.S. Hispanic population, especially in markets with high Hispanic concentration, we believe that Spanish-language advertising will continue to increase.

3


 

The above market opportunity information is based on data provided by the 2016 Hispanic Fact Pack, the BIA/Kelsey’s Investing in Television/Radio Market Report 2016 and the Selig Center for Economic Growth publication, The Multicultural Economy, 2016.

Our Strengths

Strong Presence in Largest U.S. Hispanic Markets. We operate in six of the eight largest U.S. Hispanic markets: Los Angeles, New York, Miami, San Francisco, Chicago and Houston, as well as also operating in Puerto Rico. We operate three of the top six Spanish-language radio stations in the United States. Our New York station (WSKQ-FM) ranks first among Spanish-language radio stations in terms of highest listenership. The Los Angeles and New York markets, where we consistently have a top-three-rated Spanish-language radio station, have the largest and second largest U.S. Hispanic populations, respectively. New York and Los Angeles are also the largest and second largest overall radio markets in the United States as measured by advertising revenue. In addition, MegaTV serves markets representing over 3.5 million Hispanic households.

Strong Portfolio of Branded Media Franchises. Because of our history with Hispanic-focused media, we believe that we have been able to develop strong relationships with the Hispanic audiences in our markets and create strong brand loyalty. Our listeners enjoy music from popular and emerging artists as well as updated local information on weather, news and general entertainment. Our live concerts and events provide our advertisers additional opportunities to reach their target audiences as well as allow us to cross-promote our brands and diversify our revenue base.

Diversification across Media Platforms, Geography and Customers. Our programming reaches audiences across U.S. Hispanic communities and across various media distribution platforms. We sell our advertising time both nationally and locally and generate substantially all of our revenue from the sale of advertising time to a broad and geographically diverse customer base. The diversification of our stations across several local markets helps to mitigate any revenue decline in a specific geographic area. Additionally, in 2016, no single advertiser generated more than 5% of our consolidated revenue. Our customer base includes advertisers in the automotive, retail, telecommunications and healthcare industries, among others. In addition to advertising revenue, we also generate subscription and retransmission fee revenue from MegaTV.

Attractive Business Model. Our strong margins and low levels of capital expenditures enable us to generate high levels of station operating cash flows. We also benefit from an attractive operating cost structure that provides significant operating leverage while allowing us ongoing operating flexibility in light of the limits to our financial flexibility.  

Experienced Management Team. Led by Raúl Alarcón, our Chairman, Chief Executive Officer and President, our senior management team has, on average, over 20 years of experience in the broadcasting sector. Importantly, the Alarcón family has been involved in Spanish-language radio broadcasting since the 1950s, when the late Mr. Pablo Raúl Alarcón, our former Chairman Emeritus, established his first radio station in Camagüey, Cuba. We believe that our experienced management team gives us a unique understanding of the various Hispanic ethnic and cultural subgroups and allows us to effectively tailor our broadcast programming, websites and concerts accordingly.

4


 

Recent Developments

Recapitalization

We are working with a team of financial and legal advisors in evaluating all options available to us in executing on a comprehensive recapitalization plan. These options include, but are not limited to, selling certain non-core assets (whose net proceeds would be used to repay a portion of outstanding Notes) as summarized above under “—Our Strategy—Sell Non-Core Assets and Recapitalization Plan,” new financings (including debt, equity-linked securities and equity offerings), an exchange offer with the holders of our Notes (the “Noteholders”), with or without exit consents to amend the terms of the indenture under which the Notes were issued (the “Indenture”), use of cash on hand, and a combination of these options.  In connection with our recapitalization plan, we have initiated conversations with representatives of the Noteholders and holders of our 10¾% Series B Cumulative Exchangeable Redeemable Preferred Stock (the “Series B preferred stock”) regarding these matters. We cannot assure you that we will be successful in our recapitalization efforts. We did not repay the Notes at their maturity, as a result of which there was an event of default under the Indenture on April 17, 2017 (April 17, 2017 being the payment date following the Saturday, April 15, 2017 maturity date). In addition, we are in default under the Indenture for the reasons described under “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Notes.” The Notes will continue to earn interest after the maturity date. We face various risks regarding these matters.  See “Special Note Regarding Forward-Looking Statements” and “Risk Factors—Risks Related to Our Indebtedness and Preferred Stock.”  

FCC Broadcast Incentive Auction

In January 2016, we filed applications to participate in the Federal Communications Commission (the “FCC”) Broadcast TV spectrum auction (the “Broadcast Incentive Auction”) with respect to our television stations in Miami, Houston, and Puerto Rico to potentially generate cash proceeds. As part of our strategy, we also entered into a channel sharing agreement for one of our television stations in Puerto Rico. Due to below market pricing levels in the Broadcast Incentive Auction that concluded in January 2017 we will relinquish our spectrum for one of our Puerto Rico stations and will retain our other television stations in Miami, Houston and our other two stations in Puerto Rico. The net cash proceeds from the Puerto Rico station sale will not be material.  See “Special Note Regarding Forward-Looking Statements” and “Risk Factors—Risks Related to Our Indebtedness and Preferred Stock.”     

NASDAQ Delisting – OTCQX® Best Market Trading

Trading in our Class A Common Stock on NASDAQ was suspended on January 19, 2017, and trading in our Class A Common Stock on the OTCQX® Best Market (U.S. Tier) (“OTCQX”) began on the same day.  Our Class A Common Stock currently trades on the OTCQX under the stock ticker “SBSAA”.

On April 3, 2017, we received a written notice from OTC Markets ("OTC"), advising us that our market capitalization had stayed below $5 million for more than 30 consecutive calendar days and that it no longer met the Standards for Continued Qualification for the OTCQX as per the OTCQX Rules for U.S. Companies. OTC further notified us that a cure period of 180 calendar days to regain compliance had begun, during which the minimum criteria must be met for 10 consecutive trading days.

The 180-calendar day grace period expires September 30, 2017. If our market capitalization has not been at or above $5 million for 10 consecutive trading days by that time, our Class A common stock will be moved from OTCQX to OTC Pink, which may result in further reduced liquidity for our Class A common stock. See Part II, Item 7. “Management's Discussion and Analysis of Financial Condition and Results of Operations—Recent Developments— NASDAQ Delisting – OTCQX® Best Market Trading.”

 

For more information regarding Recent Developments, see Part II, Item 7. “Management's Discussion and Analysis of Financial Condition and Results of Operations—Recent Developments.”

 

5


 

Operating Segments

We report two operating segments: radio and television.

See Part II, Item 8. Financial Statements and Supplementary Data below.

Radio Overview

We operate radio stations in some of the top Hispanic markets in the United States, including Puerto Rico. We own and operate radio stations in Los Angeles, New York, Puerto Rico, Chicago, Miami and San Francisco. The following table sets forth certain statistical and demographic information relating to our radio markets:

 

 

 

 

 

2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

market radio

 

 

 

 

 

 

 

 

 

 

Percentage of

 

 

 

 

 

Radio

 

 

 

over-the-air

 

 

2015 Hispanic

 

 

2015  total

 

 

total market

 

 

Percentage of

 

market

 

Our radio

 

estimated

 

 

population

 

 

population in

 

 

population

 

 

total U.S.

 

revenue

 

Designated Market

 

gross revenues

 

 

in market

 

 

radio market

 

 

that is

 

 

Hispanic

 

rank

 

Area (DMA)

 

(in millions)

 

 

(in millions)

 

 

(in millions)

 

 

Hispanic

 

 

population

 

1

 

Los Angeles

 

$

711.9

 

 

 

6.1

 

 

 

13.3

 

 

 

45.7

%

 

 

10.1

%

2

 

New York

 

 

551.0

 

 

 

4.7

 

 

 

18.9

 

 

 

25.1

%

 

 

7.9

%

3

 

Chicago

 

 

421.5

 

 

 

2.1

 

 

 

9.5

 

 

 

22.1

%

 

 

3.5

%

6

 

San Francisco

 

 

273.0

 

 

 

1.8

 

 

 

7.5

 

 

 

24.4

%

 

 

3.1

%

11

 

Miami-Ft. Lauderdale

 

 

214.9

 

 

 

2.3

 

 

 

4.5

 

 

 

50.4

%

 

 

3.8

%

31

 

Puerto Rico

 

 

75.8

 

 

 

3.4

 

 

 

3.5

 

 

 

99.0

%

 

 

5.7

%

 

 

Total in our markets

 

$

2,248.1

 

 

 

20.5

 

 

 

57.2

 

 

 

35.8

%

 

 

34.1

%

 

Source:

BIA/Kelsey’s Investing in Radio Market Report 2016, 4th edition

In addition to our owned and operated radio stations, we have our AIRE Radio Networks with over 250 affiliate radio stations serving over 75 of the top U.S. Hispanic markets, including all the top 30 Hispanic markets.  AIRE Radio Networks currently covers 93% of the coveted U.S. Hispanic market.  Our AIRE Radio Networks reach over 14.0 million listeners in an average week with our targeted networks.  

Owned and Operated Radio Station Market Information

The following is a general description of each of our markets. The market revenue information is based on data provided by BIA/Kelsey’s Investing in Radio Market Report 2016, 4th edition, and covers only over-the-air estimated gross revenues.

Los Angeles. In 2015, the Los Angeles market was the largest U.S. radio market in terms of advertising revenue. In 2016, advertising revenues were projected to be approximately $711.9 million. The Los Angeles market experienced an annual radio revenue decrease of 2.0% between 2014 and 2015 and is expected to increase at an annual rate of 0.8% between 2015 and 2020.

New York. In 2015, the New York market was the second largest U.S. radio market in terms of advertising revenue.  In 2016, advertising revenues were projected to be approximately $551.0 million. The New York market experienced an annual decrease of 4.6% in annual radio revenue between 2014 and 2015 and is expected to decrease at an annual rate of 0.6% between 2015 and 2020.

Chicago. In 2015, the Chicago market was the third largest U.S. radio market in terms of advertising revenue.  In 2016, advertising revenues were projected to be approximately $421.5 million. The Chicago market experienced an annual radio revenue decrease of 0.9% between 2014 and 2015 and is expected to increase at an annual rate of 0.6% between 2015 and 2020.

San Francisco. In 2015, the San Francisco market was the sixth largest U.S. radio market in terms of advertising revenue.  In 2016, advertising revenues were projected to be approximately $273.0 million. The San Francisco market experienced an annual radio revenue decrease of 4.0% between 2014 and 2015 and is expected to increase at an annual rate of 0.9% between 2015 and 2020.

Miami-Ft. Lauderdale. In 2015, the Miami-Ft. Lauderdale market was the eleventh largest U.S. radio market in terms of advertising revenue.  In 2016, advertising revenues were projected to be approximately $214.9 million. The Miami market experienced an annual radio revenue decrease of 4.0% between 2014 and 2015 and is expected to increase at an annual rate of 1.3% between 2015 and 2020.

6


 

Puerto Rico. In 2015, the Puerto Rico market was the thirty-first largest U.S. radio market in terms of advertising revenue.  In 2016, advertising revenues were projected to be approximately $75.8 million. The Puerto Rico market experienced an annual radio revenue increase of 0.5% between 2014 and 2015 and is expected to increase at an annual rate of 0.3% between 2015 and 2020.

Owned and Operated Radio Station Programming

We format the programming of each of our radio stations to target a substantial share of the U.S. Hispanic audience in its respective market. The U.S. Hispanic population is diverse, consisting of numerous identifiable groups from many different countries of origin and each with its own musical and cultural heritage. The music, culture, customs and Spanish dialects vary from one radio market to another. We strive to become very familiar with the musical tastes and preferences of each of the various Hispanic ethnic groups and customize our programming to match the local preferences of our target demographic audience in each market we serve. By employing listener study groups and surveys, we can respond immediately, if necessary, to any changing preferences of listeners and/or trends by refining our programming to reflect the results of our research and testing. Each of our programming formats is described below.

Spanish Tropical. The Spanish Tropical format primarily consists of salsa, merengue, bachata and Latin Rhythmic music. Salsa is dance music combining Latin Caribbean rhythms with jazz originating from Puerto Rico, Cuba and the Dominican Republic, which is popular with the Hispanics whom we target in New York, Miami and Puerto Rico. Merengue music is up-tempo dance music originating in the Dominican Republic. Bachata is a softer tempo dance music also originating in the Dominican Republic. Latin Rhythmic is a modern dance genre that has evolved into a mix of Spanish- and English-language dance hall, traditional reggae, Latin pop and Spanish hip-hop and Cubaton.

Regional Mexican. The Regional Mexican format consists of various types of music played in different regions of Mexico such as ranchera, norteña, banda and cumbia. Ranchera music, originating from Jalisco, Mexico, is a traditional folkloric sound commonly referred to as mariachi music. Mariachi music features acoustical instruments and is considered the music indigenous to Mexicans who live in country towns. Norteña means northern, and is representative of Northern Mexico. Featuring an accordion, norteña has a polka sound with a distinct Mexican flavor. Banda is a regional format from the state of Sinalóa, Mexico and is popular in California. Banda resembles up-tempo marching band music with synthesizers.

Spanish Adult Contemporary. The Spanish Adult Contemporary format includes soft romantic ballads and Spanish pop music as well as international hits from Puerto Rico, Mexico, Latin America and Spain.

Top 40. The Top 40 format consists of the most popular current Latin and English chart hits.

Latin Rhythmic. The Latin Rhythmic format consists of Tropi-Pop, which is a mix of upbeat pop and tropical music.

7


 

The following table lists the programming formats of our radio stations and the target demographic group of each station:

 

Owned and Operated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Target buying

 

 

# of

 

 

# of

 

 

 

 

 

 

 

 

 

 

 

 

demographic

Market

 

stations

 

 

formats

 

 

FM Station ID

 

Frequency

 

 

Station Name

 

Format

 

group by age

Los Angeles

 

 

2

 

 

 

2

 

 

KLAX

 

 

97.9

 

 

La Raza

 

Regional Mexican

 

18 – 49

 

 

 

 

 

 

 

 

 

 

KXOL

 

 

96.3

 

 

Mega

 

Latin Rhythmic

 

18 – 34

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

New York

 

 

2

 

 

 

2

 

 

WSKQ

 

 

97.9

 

 

Mega

 

Spanish Tropical

 

18 – 49

 

 

 

 

 

 

 

 

 

 

WPAT

 

 

93.1

 

 

Amor

 

Spanish Adult Contemporary

 

25 – 54

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Puerto Rico

 

 

8

 

 

 

4

 

 

WMEG

 

 

106.9

 

 

Mega

 

Top 40

 

18 – 49

 

 

 

 

 

 

 

 

 

 

WEGM

 

 

95.1

 

 

Mega

 

Top 40

 

18 – 49

 

 

 

 

 

 

 

 

 

 

WRXD

 

 

96.5

 

 

Esterotempo

 

Spanish Adult Contemporary

 

25 – 54

 

 

 

 

 

 

 

 

 

 

WIOB

 

 

97.5

 

 

Esterotempo

 

Spanish Adult Contemporary

 

25 – 54

 

 

 

 

 

 

 

 

 

 

WZNT

 

 

93.7

 

 

Zeta 93

 

Spanish Tropical

 

25 – 54

 

 

 

 

 

 

 

 

 

 

WZMT

 

 

93.3

 

 

Zeta 93

 

Spanish Tropical

 

25 – 54

 

 

 

 

 

 

 

 

 

 

WODA

 

 

94.7

 

 

La Nueva 94

 

Latin Rhythmic

 

18 – 34

 

 

 

 

 

 

 

 

 

 

WNOD

 

 

94.1

 

 

La Nueva 94

 

Latin Rhythmic

 

18 – 34

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Chicago

 

 

1

 

 

 

1

 

 

WLEY

 

 

107.9

 

 

La Ley

 

Regional Mexican

 

18 – 49

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Miami

 

 

3

 

 

 

3

 

 

WXDJ

 

 

106.7

 

 

El Zol

 

Spanish Tropical

 

18 – 49

 

 

 

 

 

 

 

 

 

 

WCMQ

 

 

92.3

 

 

Z 92.3

 

Spanish Adult Contemporary

 

25 – 54

 

 

 

 

 

 

 

 

 

 

WRMA

 

 

95.7

 

 

I-95

 

Spanish Tropical

 

18 – 34

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

San Francisco

 

 

1

 

 

 

1

 

 

KRZZ

 

 

93.3

 

 

La Raza

 

Regional Mexican

 

18 – 49

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operated but not Owned

 

 

 

 

 

 

 

 

 

 

 

 

 

Puerto Rico

 

 

1

 

 

 

1

 

 

WZET

 

 

92.1

 

 

Zeta 93

 

Spanish Tropical

 

25 – 54

 

Our radio programming capabilities benefit from the integration and synergies of production of programming across the Company. For example, successful programming in one market can be syndicated to another market.

AIRE Radio Networks Programming

AIRE Radio Networks is comprised of top-rated stations and shows attracting a broad range of quality listeners allowing advertisers to efficiently reach their target audience.  AIRE Radio Networks currently covers 93% of the coveted U.S. Hispanic market with over 250 affiliate radio stations, which serve over 75 of the top U.S. Hispanic markets, including all the top 30 Hispanic markets.  Each of our targeted networks and syndicated network shows are described below:

Advantage Radio Network (Hispanic Men 25-54, M-F 6am-7pm). The Advantage Radio Network is a full service music network with strong national coverage and an impressive station lineup delivering high-quality programming of the most popular regional bands and artists.  The Advantage Network features a variety of music styles like Regional Mexican, TropiBanda, Ranchera, Mariachi, Grupero and Norteña reaching Hispanic Americans.  

AIRE Select Network (Hispanic Adults 18-49, M-Sun 6am-12mid).  The AIRE Select Network targets active young Hispanic adults in fast growing Hispanic metro markets. Its concentrated coverage in the Top 10 Hispanic demographic market areas provide advertisers with a multicultural outreach effort targeting the young and growing Hispanic population. Hispanic Select is a day specific, as well as a daypartable network.

Young Adult Network (Hispanic Adults 18-49, M-F 6am-12mid). The Young Adult Network consists of highly-rated Spanish-language radio stations in major markets and provides flexible scheduling options to reach the fastest growing population in the U.S.  The Young Adult Network is the ideal vehicle with music, entertainment, sports and news formats in Los Angeles, New York, Miami, Houston and Chicago to reach advertisers’ business goals.

8


 

Millennial Network (Hispanic Adults 18-34, M-F 6am-3pm). The Millennial Network is a complete lineup of young-adult stations with creative customized options for advertisers to reach this highly desirable demographic: affluent and professional singles and families.  The Millennial Network consists of Spanish CHR and Hits, Tropical/AC and Regional Mexican formats, attractive to a wide range of advertisers.

Prime Family Weekend Network (Hispanic Adults 18-49, Sat & Sun 6am-12mid). The Prime Family Weekend Network targets Hispanic families in the top markets with disposable incomes and a full range of programming services including hourly news, sports and entertainment features.  The Prime Family Weekend Network dominates with Tropical/AC, Regional Mexican, Spanish CHR/Hits formats, and is concentrated in top markets reaching families during the busy weekend.

Entertainment Weekend Network (Hispanic Adults 18-49, Sat & Sun 6am-12mid).  The Entertainment Weekend Network delivers the coveted 18-49 Demographic, reaching Hispanic Adults through entertainment features, celebrity interviews, music countdowns and specialty segments, which include fitness and financial tips amongst others.  The Entertainment Weekend Network dominates with Regional Mexican, Spanish CHR/Hits formats, and is concentrated in top markets.

Por El Placer De Vivir con Cesar Lozano Show. The “Por El Placer De Vivir con Cesar Lozano Show” (The Joy of Living) is our daily syndicated show with celebrated self-renovation expert Dr. Cesar Lozano who specializes in helping and training people to find and enjoy life’s balance.  As the host of Por El Placer De Vivir, Dr. Lozano puts to practice years of experience and provides advice on how to live better, learn life-changing habits, and be surrounded by positive thinking.

La Mezcla con DJ Alex Sensation Show.  The “La Mezcla con DJ Alex Sensation Show”(The Mix) is a seamless mix of our listeners’ favorite songs including the Top 40 Latin tracks of the moment.

In addition to these networks and shows, we offer broadcasters two 24 hours / 7 days a week programming formats:  our Regional Mexican and Tropical formats.   Each of our programming formats produce a music format that is simultaneously distributed via XDS with a High Definition quality sound to our affiliate stations.  Technology allows our affiliate stations to offer the necessary local feel and to be responsive to local clients and community needs.  The audience gets the benefit of a national radio station sound along with local content.    

Television Overview and Programming

On March 1, 2006, we launched MegaTV, our general entertainment Spanish-language television operation. We created a unique television format which focuses on entertainment, events and variety with high-quality production. Our programming is formatted to capture shares of the Hispanic audience by focusing on our core strengths as an entertainment company, thus offering a new alternative compared to the traditional Latino channels. The following table sets forth demographic and statistical information with respect to our television markets, excluding cable and satellite providers, such as DirecTV, DirecTV Puerto Rico, AT&T U-Verse and Verizon Fios:

 

 

 

 

 

2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

market TV

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

over-the-air

 

 

 

 

 

 

 

 

 

 

Percentage of

 

 

 

 

 

TV

 

 

 

estimated

 

 

2015 Hispanic

 

 

2015  total

 

 

total market

 

 

Percentage of

 

market

 

Our TV

 

gross

 

 

population

 

 

population in

 

 

population

 

 

total U.S.

 

revenue

 

Designated Market

 

revenues

 

 

in market

 

 

TV market

 

 

that is

 

 

Hispanic

 

rank

 

Area (DMA)

 

(in millions)

 

 

(in millions)

 

 

(in millions)

 

 

Hispanic

 

 

population

 

5

 

Houston

 

$

554.0

 

 

 

2.5

 

 

 

6.9

 

 

 

36.5

%

 

 

4.2

%

6

 

Miami-Ft. Lauderdale

 

 

555.9

 

 

 

2.3

 

 

 

4.6

 

 

 

49.9

%

 

 

3.8

%

14

 

Orlando-Daytona Beach-Melbourne

 

 

338.5

 

 

 

0.8

 

 

 

4.0

 

 

 

21.0

%

 

 

1.4

%

16

 

Tampa-St. Petersburg-Sarasota

 

 

297.0

 

 

 

0.8

 

 

 

4.6

 

 

 

17.1

%

 

 

1.3

%

25

 

San Juan, Puerto Rico

 

 

171.4

 

 

 

3.4

 

 

 

3.5

 

 

 

99.0

%

 

 

5.7

%

56

 

Fresno-Visalia

 

 

85.3

 

 

 

1.1

 

 

 

2.0

 

 

 

55.4

%

 

 

1.9

%

 

 

Total in our markets

 

$

2,002.1

 

 

 

10.9

 

 

 

25.6

 

 

 

43.0

%

 

 

18.3

%

 

Source:

BIA/Kelsey’s Investing in Television Market Report 2016, 4th edition

9


 

Television Station Portfolio

The following is a general description of each of our markets. The market revenue information is based on data provided by BIA/Kelsey’s Investing in Television 2016, 4th edition.

Houston. In 2015, the Houston market was the fifth largest U.S. television market in terms of advertising revenue.  In 2016, advertising revenues were projected to be approximately $554.0 million. The Houston market experienced an annual television revenue increase of 3.0% between 2014 and 2015. Television revenue in the Houston market is expected to increase at an annual rate of 3.7% between 2015 and 2020.

Miami. In 2015, the Miami-Ft. Lauderdale market was the sixth largest U.S. television market in terms of advertising revenue.  In 2016, advertising revenues were projected to be approximately $555.9 million. The Miami-Ft. Lauderdale market experienced an annual television revenue decrease of 2.0% between 2014 and 2015. Television revenue in the Miami-Ft. Lauderdale market is expected to increase at an annual rate of 4.3% between 2015 and 2020.

Orlando. In 2015, the Orlando-Daytona Beach-Melbourne market was the fourteenth largest U.S. television market in terms of advertising revenue.  In 2016, advertising revenues were projected to be approximately $338.5million. The Orlando-Daytona Beach-Melbourne market experienced an annual television revenue decrease of 4.2% between 2014 and 2015. Television revenue in this market is expected to increase at an annual rate of 5.9% between 2015 and 2020.

Tampa. In 2015, the Tampa-St. Petersburg-Sarasota market was the sixteenth largest U.S. television market in terms of advertising revenue.  In 2016, advertising revenues were projected to be approximately $297.0 million. The Tampa-St. Petersburg-Sarasota market experienced an annual television revenue decrease of 13.4% between 2014 and 2015. Television revenue in this market is expected to increase at an annual rate of 5.0% between 2015 and 2020.

San Juan, Puerto Rico. In 2015, the San Juan, Puerto Rico market was the twenty-fifth largest U.S. television market in terms of advertising revenue.  In 2016, advertising revenues were projected to be approximately $171.4 million. The San Juan, Puerto Rico market experienced an annual television revenue increase of 1.0% between 2014 and 2015. Television revenue in this market is expected to increase at an annual rate of 2.6% between 2015 and 2020.

Fresno. In 2015, the Fresno-Visalia market was the fifty-sixth largest U.S. television market in terms of advertising revenue.  In 2016, advertising revenues were projected to be approximately $85.3 million. The Fresno-Visalia market experienced an annual television revenue decrease of 7.2% between 2014 and 2015. Television revenue in the Fresno-Visalia market is expected to increase at an annual rate of 3.4% between 2015 and 2020.

The following table lists the distribution outlets of our MegaTV programming:

 

Market

 

Station ID

 

Virtual Channel

 

 

Programming type

Houston, Texas

 

KTBU

 

 

55

 

 

Owned & Operated

Miami, Florida

 

WSBS

 

 

22

 

 

Owned & Operated

San Juan, Puerto Rico

 

WTCV

 

 

18

 

 

Owned & Operated

Ponce, Puerto Rico

 

WVOZ

 

 

48

 

 

Owned & Operated

Aguadilla, Puerto Rico

 

WVEO

 

 

44

 

 

Owned & Operated

Orlando, Florida

 

WATV

 

 

47

 

 

Affiliation Agreement

Tampa, Florida

 

WTAM

 

 

30

 

 

Affiliation Agreement

Fresno, California

 

KSDI

 

 

44

 

 

Affiliation Agreement

DIRECTV

 

Satellite

 

 

405

 

 

Distribution Agreement

DIRECTV-Puerto Rico

 

Satellite

 

 

169

 

 

Distribution Agreement

AT&T U-Verse-Nationwide

 

ADS/Cable

 

 

3008

 

 

Distribution Agreement

Frontier Communications

 

ADS/Cable

 

See Footnote

 

(1)

Distribution Agreement

Verizon Fios

 

ADS/Cable

 

See Footnote

 

(2)

Distribution Agreement

 

(1)

MegaTV is distributed by Frontier Communications in Connecticut (on channel 3008).

(2)

MegaTV is distributed by Verizon Fios in Dallas/Fort Worth, TX (on channel 25), in Tampa, FL (on channel 466), in New York (on channel 466) and in Los Angeles, CA (on channel 473).

10


 

Television Strategy

Mega TV’s programming is based on a strategy designed to showcase a combination of programs, ranging from televised radio-branded shows to general entertainment programs, such as music, celebrity, debate, interviews and personality-based shows. On the forefront of digital platforms, we were the first Spanish-language programmer to broadcast in 100% native High Definition (HD) in the United States and one of the first Spanish-language programmers in the United States to launch content on Video On Demand, known as VOD.

As part of our strategy, we have incorporated certain of our radio on-air personalities into our television programming, as well as including interactive elements to complement our Internet websites. We produce over 70 hours of original programming per week. Our television revenue is generated primarily from the sale of local advertising and paid programming. Advertising rates depend primarily on our ability to attract an audience in the demographic groups targeted by our advertisers, the number of stations in the market we compete with for the same audience, and the supply of and demand for television advertising time, as well as other qualitative factors. We also generate revenue from the sale of integrated sponsorships and program syndication.

Our Miami facility for our media broadcast programming and production is nearly 70,000 square feet and houses the bulk of MegaTV’s national and local market operations. With over 14,000 square feet of high definition (HD) TV-Studio production space, the building was remodeled to handle the majority of MegaTV’s diverse original HD programming, while also accommodating outside production clients with its wide range of production capabilities, which can include anything from news to late-night variety shows with live band and studio audiences. MegaTV’s long-term technical design criteria for this facility placed an emphasis on streamlined production workflows and digital media management. Key technical features of this facility include:

integrated HD/standard definition (SD) file-based content capabilities throughout our studio, post production and master control areas;

three HD studio production spaces that can be operated independently or combined;

two fully equipped HD control rooms with server, editing and mastering capabilities;

14 HD/SD post production editing suites that include advanced technology in networked solutions;

satellite downlink antenna farm and extensive fiber connectivity for content contribution and distribution; and

multi-path, redundant HD server-based master control system responsible for our distribution feeds.

The Miami facility also includes office space for production and back-office personnel, as well as dressing rooms, make-up rooms and green rooms for our on-air talent and studio guests.

We also have 3,500 square feet of HD TV-Studio production space in Puerto Rico with a fully equipped HD control room and six edit suites.

Special Events and On-Line Properties

As part of our media operating business, we also operate SBS Entertainment and SBS Interactive. SBS Entertainment is a premier producer of unique entertainment, concerts and special events. We generate special events revenue from ticket sales and event sponsorships, as well as profit-sharing arrangements by producing or co-producing live concerts and live experience events with popular artists, which are promoted by our radio, television and digital media assets. SBS Interactive manages LaMusica.com, Mega.tv, various radio station websites, and the LaMusica Mobile App. All of the digital properties offer bilingual (Spanish-English) content related to Latin music, entertainment, cultural & market trends, lifestyle, and news. LaMusica and our multiple social media networks generate revenue primarily from advertising and sponsorships. In addition, the majority of our social media networks and station websites simultaneously stream our radio stations content which has broadened our audience reach. We are developing brand specific digital content strategies for various broadcast programs, on-air personalities and brands, and intend to generate revenue from such strategies. We also leverage many of our special events produced by SBS Entertainment, to produce music based digital content for live streaming and/or taped, on-demand streaming, which can also be developed to generate revenue.

We believe that SBS Entertainment and SBS Interactive, together with our broadcast portfolio, enables our audience to enjoy targeted and culturally relevant entertainment, which include, but are not limited to concert specials, artist interviews, music editorial content, music reviews, and local entertainment calendars, among others. At the same time, our online properties enable our advertisers to reach their targeted Hispanic consumers through an additional, targeted and dynamic medium.

11


 

Advertising Revenue

The vast majority of our revenue is derived from cash advertising sales. Advertising revenue has historically been classified into three categories – “national”, “network” and” local”.  “National” generally refers to advertising that is solicited by a representative firm for advertisers out of the Designated Market Area (DMA).  Our national sales representative for our radio stations is McGavern Guild Media,LLC.   “Network” advertising revenue is advertising revenue sold to network advertisers expecting to reach 70% plus of the U.S. national radio audience in a specific demographic group. The network advertising buys are sold by our AIRE Radio Networks group.  “Local” refers to advertising purchased by advertisers and agencies in the local market served by a particular station.

Current trends in the media advertising market have changed the long-established model for categorizing advertising revenue. We have expanded the conventional model by offering “integrated sponsorship” or “branded entertainment” opportunities, which are highly sought after and command a higher investment from clients, in order to maximize our advertisers’ opportunities. We expect that our primary source of revenue from our broadcast stations will be generated from the sale of national, local and integrated sponsorship advertising. In addition, we are anticipating that our television, radio and interactive offerings will generate more advertising opportunities by offering multi-media packages.

We believe that the broadcasting industry is one of the most efficient and cost-effective means for advertisers to reach targeted demographic groups, primarily Adults 18-49. Advertising rates charged by a station are based primarily on the station’s ability to attract an audience in a given market and on the attractiveness to advertisers of the station’s audience demographics, as well as the demand on available advertising inventory. Rates also vary depending upon a program’s ratings among the listeners/viewers an advertiser is seeking to attract and the availability of alternative media in the market. Radio advertising rates generally are highest during the morning drive-time hours, which are the peak hours for radio audience listening. Television advertising rates are higher during prime time evening viewing periods. A broadcaster that has multiple stations in a market appeals to national advertisers because these advertisers can reach more listeners and viewers, thus enabling the broadcaster to attract a greater share of the advertising revenue in a given market. In light of these factors, we seek to grow our revenue by taking advantage of our presence in major Hispanic markets as new and existing advertisers recognize the increasing desirability of targeting the growing U.S. Hispanic population.

Each station broadcasts a predetermined number of advertisements per hour with the actual number depending upon the format of a particular station and any programming strategy we are utilizing to attract an audience. We also determine the number of advertisements broadcast hourly that can maximize the station’s revenue without negatively impacting its audience listener/viewer levels. While there may be shifts from time to time in the number of advertisements broadcast during a particular time of the day, the total number of advertisements broadcast on a particular station generally does not vary significantly from year to year.

We have short- and long-term contracts with our advertisers, although it is customary in the radio, television, and interactive industry that the majority of advertising contracts are short-term and generally run for less than three months. This affords broadcasters the opportunity to modify advertising rates as dictated by changes in audience ratings, changes in competitive dynamics and changes in the business climate within a particular market. In each of our broadcasting markets, we employ sales personnel to obtain local advertising revenue. Our local sales force is responsible for maintaining relationships with key local advertisers and agencies and identifying new advertisers. We pay commissions to our local sales staff upon receipt of payment for their respective billings which assist in our collection efforts.

Seasonality

Seasonal broadcasting revenue fluctuations are common in the broadcasting industry and are primarily due to fluctuations in advertising expenditures by local, national, and network advertisers. Our net broadcasting revenues vary throughout the year. Historically, our first calendar quarter (January through March) has generally produced the lowest net broadcasting revenue for the year because of routine post-holiday decreases in advertising expenditures.

Competition

The success of our broadcast stations depends significantly upon their audience ratings and their share of the overall advertising revenue within their markets. The radio and television broadcasting industries are highly competitive businesses. Each of our radio stations compete with both Spanish-language and English-language radio stations in their market, as well as other media, such as newspapers, broadcast television, cable television, interactive, magazines, outdoor advertising, satellite radio, and transit advertising. Our television operations compete for viewers and revenue with both Spanish-language and English-language television stations in our local markets, as well as nationally broadcast television operations, cable television, interactive and other video media.

12


 

Several of the broadcast stations with which we compete are subsidiaries of larger national or regional companies that have substantially greater financial resources than we do and may not be undergoing a recapitalization strategy, such as the one we are pursuing. Factors which are material to our competitive position include:

management experience;

talent and popularity of on-air personalities and television show hosts and actors;

audience ratings, impressions, and our broadcast stations’ rank in their markets;

sales talent and experience;

signal strength and frequency; and

audience demographics, including the nature of the Spanish-language market targeted by a particular station.

Although the broadcast industry is highly competitive, some barriers to entry do exist. These barriers can be mitigated to some extent by changing existing broadcast station formats and programming and upgrading power, among other actions. The operation of a broadcast station requires a license or other authorization from the FCC. The number of AM radio stations that can operate in a given market is limited by the availability of AM radio spectrum in the market. The number of FM radio stations and television stations that can operate in a given market is limited by the availability of those frequencies allotted by the FCC to communities in such market. In addition, the FCC’s multiple ownership rules regulate the number of stations that may be owned and controlled by a single entity in a given market. For a discussion of FCC regulation, see “Federal Regulation of Radio and Television Broadcasting” below.

The radio industry is also subject to competition from new media technologies that are being developed or introduced, such as the delivery of audio programming by satellite, cable television systems and Internet-based music streaming services. Some radio broadcast stations, including ours, are utilizing digital technology on their existing terrestrial frequencies to deliver audio programming. The FCC also has begun granting licenses for a new “low power” radio or “microbroadcasting” service to provide low-cost noncommercial neighborhood service on frequencies which would not interfere with existing stations.

The FCC has authorized HD Radio ® technology which permits a station to transmit radio programming in digital formats using the bandwidth that the radio station is currently licensed to use.  HD Radio ® technology is used to (1) improve sound quality, (2) provide spectrum for enhanced data services and multiple program streams and (3) allow radio stations to time broker unused digital bandwidth to third parties, thereby providing new business opportunities for radio broadcasters. We currently utilize HD Radio ® digital technology on some of our stations and will evaluate additional installations over the next few years.

The delivery of information through the presently minimally regulated Internet has also created a new form of competition for both radio and television. Internet broadcasts have no geographic limitations and can provide listeners with programming from around the country and the world. We expect that improvements from higher bandwidths, faster download speeds and wider programming selection may make Internet radio a more significant competitor in the future. The radio broadcasting industry historically has grown despite the introduction of new technologies for the delivery of entertainment and information, such as television broadcasting, cable television, audio tapes, compact discs and portable digital music players.

Recent developments by many companies, including Internet service providers, are expanding the variety and quality of broadcast content on the internet. Internet companies have developed business relationships with companies that have traditionally provided syndicated programming, network television and other content. As a result, additional programming is becoming available through nontraditional methods, which can directly impact the number of TV viewers and thus indirectly impact station rankings, popularity and revenue possibilities from our stations. Like radio, the television broadcasting industry has grown, notwithstanding the increasing popularity of entertainment and media content delivered through personal computers, smartphones, tablets and other portable wireless devices. We cannot assure you, however, that the development or introduction of any new media technology will not have an adverse effect on the radio and television broadcasting industries.

We cannot predict what other matters may be considered in the future by the FCC, nor can we assess in advance what impact, if any, the implementation of any of these proposals or changes may have on our business. See “Federal Regulation of Radio and Television Broadcasting” below.

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Trademarks, Copyrights and Licenses

In the course of our business, we use various trademarks, copyrights, trade names, domain names and service marks, including logos, with our products and services in our programming, advertising and promotions. Trademarks and copyrights are of material importance to our business and are protected by registration or otherwise in the United States, including Puerto Rico. We believe our trademarks, copyrights, trade names, domain names and service marks are important to our business, and we intend to continue to protect and promote them where appropriate and to protect the registration of new trademarks and copyrights, including through legal action. We do not hold or depend upon any material government license, franchise or concession, except that we hold and depend upon the broadcast licenses granted by the FCC and hold certain trademarks granted by the United States Patent and Trademark Office.

Environmental Matters

As the owner, lessee or operator of various real properties and facilities, we are subject to various federal, state and local environmental laws and regulations. Historically, compliance with these laws and regulations has not had a material adverse effect on our business. We cannot assure you; however, that compliance with existing or new environmental laws and regulations will not require us to make significant expenditures of funds.

Employees

As of December 31, 2016, we had 386 full-time employees and 98 part-time employees.  In July 2016, SAG-AFTRA was certified as the exclusive bargaining agent solely for 31 on-air talent employees of our Los Angeles-based stations KXOL and KLAX.  We have been negotiating with representatives of SAG-AFTRA for an initial collective bargaining agreement which would cover those 31 employees.  To date, we have not yet reached an agreement with SAG-AFTRA, and at this juncture, it is too early to state with certainty whether the parties will ever enter into such an agreement.

Our business depends upon the efforts, abilities and expertise of our executive officers and other key employees, including on-air talent, as well as our ability to hire and retain qualified personnel. The loss of any of our executive officers and key employees, particularly Raúl Alarcón, Chairman of our Board of Directors, Chief Executive Officer and President, could have a material adverse effect on our business.

Legal Proceedings

From time to time, we are involved in various routine legal and administrative proceedings and litigation incidental to the conduct of our business, such as contractual matters and employee-related matters. In recent years, we have been subject to administrative proceedings and lawsuits, including class action lawsuits, alleging violations of federal and state law regarding workplace, wage-hour and employment discrimination matters. In the opinion of management, such litigation is not likely to have a material adverse effect on our business, operating results or financial condition.

Antitrust

We have completed, and in the future may complete, strategic acquisitions and divestitures in order to achieve a significant presence with clusters of stations in the top U.S. Hispanic markets. As a result of the industry consolidation resulting from the passage of the Telecommunications Act of 1996 (the “Act”), the Federal Trade Commission (the “FTC”) and the Department of Justice (the “DOJ”), the federal agencies responsible for enforcing the federal antitrust laws, have reviewed certain proposed acquisitions of broadcast stations and station networks. The DOJ can be particularly aggressive when the proposed buyer already owns one or more broadcast stations in the market of the station it is seeking to buy and, following a proposed acquisition, would garner a substantial portion of the advertising revenues in a market. The DOJ has challenged a number of broadcasting transactions. Some of those challenges ultimately resulted in consent decrees requiring, among other things, divestitures of certain stations. As part of its scrutiny of station acquisitions, the DOJ has stated publicly that it believes that commencement of operations under time brokerage agreements, local marketing agreements and other similar agreements customarily entered into in connection with station transfers prior to the expiration of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the “HSR Act”), could violate the HSR Act. In connection with acquisitions, subject to the waiting period under the HSR Act, so long as the DOJ policy on the issue remains unchanged, we would not expect to commence operation of any affected station under a time brokerage agreement, local marketing agreement or similar agreement until the waiting period has expired or been terminated.

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Federal Regulation of Radio and Television Broadcasting

General

The radio and television broadcasting industry is subject to extensive and changing regulation by the FCC with regard to programming, technical operations, employment, ownership and other business practices. The FCC regulates broadcast stations pursuant to the Communications Act. The Communications Act permits the operation of broadcast stations only in accordance with a license issued by the FCC upon a finding that the grant of a license would serve the public interest, convenience and necessity. The Communications Act provides for the FCC to exercise its licensing authority to provide a fair, efficient and equitable distribution of broadcast service throughout the United States. Among other things, the FCC:

assigns frequency bands for radio and television broadcasting;

determines the particular frequencies, locations and operating power of radio and television broadcast stations;

issues, renews, revokes and modifies radio and television broadcast station licenses;

establishes technical requirements for certain transmitting equipment used by radio and television broadcast stations;

adopts and implements regulations and policies that directly or indirectly affect the ownership, operation, program content and employment and business practices of radio and television broadcast stations;

has the power to impose penalties, including monetary forfeitures and license revocations, for violations of its rules and the Communications Act; and

regulates certain aspects of the operation of cable and direct broadcast satellite systems and certain other electronic media that compete with broadcast stations.

The following is a brief summary of certain provisions of the Communications Act and specific FCC rules and policies. This summary does not purport to be complete and is subject to the text of the Communications Act, the FCC’s rules and regulations, and the rulings of the FCC. You should refer to the Communications Act and these FCC rules, regulations and rulings for further information concerning the nature and extent of federal regulation of broadcast 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, for particularly egregious violations, the denial of a license renewal application, the revocation of an FCC broadcast license or the denial of FCC consent to acquire additional broadcast properties, all of which could have a material adverse impact on our operations.

FCC Licenses

The Communications Act provides that a broadcast station license may be granted to any applicant if the granting of the application would serve the public interest, convenience and necessity, subject to certain limitations. In making licensing determinations, the FCC considers an applicant’s legal, technical, financial and other qualifications. The FCC grants radio and television broadcast station licenses for specific periods of time and, upon application, may renew them for additional terms. Under the Communications Act, radio and television broadcast station licenses may be granted for a maximum term of eight years.

The FCC classifies each AM and FM radio station. The minimum and maximum facilities requirements for an FM station are determined by its class. Some FM class designations depend upon the geographic zone in which the transmitter of the FM station is located. In general, commercial FM stations are classified as Class A, B1, C3, B, C2, C1, C0 and C, in order of increasing power and antenna height. Class C FM stations are subject to involuntary downgrades to Class C0 in various circumstances if they do not meet certain antenna height specifications. We do not operate any AM radio stations.

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The following table sets forth the technical information and license expiration dates of each of our radio and television stations:

 

 

 

 

 

 

 

Date of

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Date of

 

license

 

 

 

Operation

 

FCC

 

 

 

 

 

 

 

 

Broadcast station

 

Market

 

acquisition

 

expiration

 

 

 

frequency

 

class

 

HAAT

 

 

Power

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(In meters)

 

 

(In kilowatts)

 

KLAX-FM

 

Los Angeles, CA

 

2/24/1988

 

12/1/2021

 

 

 

97.9 MHz

 

B

 

 

184

 

 

 

33

 

KXOL-FM

 

Los Angeles, CA

 

10/30/2003

 

12/1/2021

 

 

 

96.3 MHz

 

B

 

 

398

 

 

 

7

 

WSKQ-FM

 

New York, NY

 

1/26/1989

 

6/1/2022

 

(1

)

97.9 MHz

 

B

 

 

415

 

 

 

6

 

WPAT-FM

 

New York, NY

 

3/25/1996

 

6/1/2022

 

 

 

93.1 MHz

 

B

 

 

433

 

 

 

5

 

WMEG-FM

 

Puerto Rico

 

5/13/1999

 

2/1/2020

 

 

 

106.9 MHz

 

B

 

 

594

 

 

 

25

 

WEGM-FM

 

Puerto Rico

 

1/14/2000

 

2/1/2020

 

 

 

95.1 MHz

 

B

 

 

600

 

 

 

25

 

WRXD-FM

 

Puerto Rico

 

12/1/1998

 

2/1/2020

 

 

 

96.5 MHz

 

B

 

 

852

 

 

 

12

 

WIOB-FM

 

Puerto Rico

 

1/14/2000

 

2/1/2020

 

 

 

97.5 MHz

 

B

 

 

302

 

 

 

50

 

WZNT-FM

 

Puerto Rico

 

1/14/2000

 

2/1/2020

 

 

 

93.7 MHz

 

B

 

 

560

 

 

 

28

 

WZMT-FM

 

Puerto Rico

 

1/14/2000

 

2/1/2020

 

 

 

93.3 MHz

 

B1

 

 

(69

)

 

 

15

 

WODA-FM

 

Puerto Rico

 

1/14/2000

 

2/1/2020

 

 

 

94.7 MHz

 

B

 

 

560

 

 

 

31

 

WNOD-FM

 

Puerto Rico

 

1/14/2000

 

2/1/2020

 

 

 

94.1 MHz

 

B

 

 

597

 

 

 

25

 

WLEY-FM

 

Chicago, IL

 

3/27/1997

 

12/1/2020

 

 

 

107.9 MHz

 

B

 

 

232

 

 

 

21

 

WRMA-FM

 

Miami, FL

 

3/28/1997

 

2/1/2020

 

 

 

95.7 MHz

 

C2

 

 

167

 

 

 

40

 

WCMQ-FM

 

Miami, FL

 

12/22/1986

 

2/1/2020

 

 

 

92.3 MHz

 

C2

 

 

188

 

 

 

31

 

WXDJ-FM

 

Miami, FL

 

3/28/1997

 

2/1/2020

 

 

 

106.7 MHz

 

C0

 

 

300

 

 

 

100

 

KRZZ-FM

 

San Francisco, CA

 

12/23/2004

 

12/1/2021

 

 

 

93.3 MHz

 

B

 

 

415

 

 

 

6

 

WSBS-DT

 

Miami, FL(2)

 

3/1/2006

 

2/1/2021

 

 

 

CH. 3

 

DTV

 

 

54

 

 

 

1

 

WSBS-CD

 

Miami, FL

 

3/1/2006

 

2/1/2021

 

 

 

CH. 50

 

CA

 

 

236

 

 

 

150

 

KTBU-DT

 

Houston, TX(3)

 

8/1/2011

 

8/1/2022

 

 

 

CH. 42

 

DTV

 

 

597

 

 

 

1,000

 

WTCV-DT

 

San Juan, PR

 

1/4/2016

 

2/1/2021

 

 

 

CH. 32

 

DTV

 

 

290

 

 

 

4

 

WVEO-DT

 

Aguadilla, PR(4)

 

1/4/2016

 

2/1/2021

 

 

 

CH. 17

 

DTV

 

 

372

 

 

 

42

 

WVOZ-DT

 

Ponce, PR(4)

 

1/4/2016

 

2/1/2021

 

 

 

CH. 47

 

DTV

 

 

247

 

 

 

50

 

 

(1)

Applications to renew the FCC broadcast license for WSKQ-FM were filed on January 31, 2006 and February 3, 2014.  Petitions to deny the applications were filed alleging that WSKQ-FM had broadcast indecent material during the license term. We filed opposition pleadings categorically stating that the allegations made did not raise sufficient questions to warrant nonrenewal of the license. The FCC released a decision on March 9, 2016 denying the allegations and granting the license renewal applications. On April 14, 2016, a Petition for Reconsideration of the grant of the license renewal applications was filed. We filed opposition pleadings and the matter remains pending.

(2)

TV Station WSBS-DT is licensed to Key West and is part of the Miami DMA (designated market area, as defined by Nielsen Media Research).

(3)

TV Station KTBU-DT is licensed to Conroe, Texas and is part of the Houston DMA.

(4)

TV Stations WVEO-DT and WVOZ-DT are operated as satellites of TV Station WTCV-DT pursuant to a satellite waiver.

License Grant and Renewal

Pursuant to the Communications Act, the FCC renews broadcast licenses without a hearing upon a finding that:

the station has served the public interest, convenience and necessity;

there have been no serious violations by the licensee of the Communications Act or FCC rules and regulations; and

there have been no other violations by the licensee of the Communications Act or FCC rules and regulations which, taken together, indicate a pattern of abuse.

After considering these factors, the FCC may grant the license renewal application with or without conditions, including renewal for a term less than the maximum term otherwise permitted by law, or hold an evidentiary hearing.

The Communications Act authorizes the filing of petitions to deny a license renewal application during specific periods of time after a renewal application has been filed. Interested parties, including members of the public, may use these petitions to raise issues concerning a renewal applicant’s qualifications. If a substantial and material question of fact concerning a renewal application is raised by the FCC or other interested parties, or if for any reason the FCC cannot determine that granting a renewal application would

16


 

serve the public interest, convenience and necessity, the FCC will hold an evidentiary hearing on the application. If, as a result of an evidentiary hearing, the FCC determines that the licensee has failed to meet the requirements specified above and that no mitigating factors justify the imposition of a lesser sanction, then the FCC may deny a license renewal application. Generally, our licenses have been renewed without any material conditions or sanctions being imposed, but we cannot assure you that the licenses of each of our stations will continue to be renewed or will continue to be renewed without conditions or sanctions.

Transfers and Assignments of License

The Communications Act requires prior approval by 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 radio broadcast license or a transfer of control of a broadcast licensee, the FCC considers, among other things:

the financial and legal qualifications of the prospective assignee or transferee, including compliance with FCC restrictions on non-U.S. citizens or entity ownership and control;

compliance with FCC rules limiting the common ownership of attributable interests in broadcast and newspaper properties;

the history of compliance with FCC operating rules; and

the character qualifications of the transferee or assignee and the individuals or entities holding attributable interests in them.

To obtain the FCC’s prior consent to assign or transfer a broadcast license, appropriate applications must be filed with the FCC. If the assignment or transfer results in a substantial change in ownership or control, 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. Informal objections may be filed any time up until the FCC acts upon 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.

Alien Ownership

Under the Communications Act, 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, whom the FCC refers to as “aliens,” 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 the capital stock is 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, if the FCC finds the public interest will be served by the refusal or revocation of such license. The FCC has interpreted this provision of the Communications Act to require an affirmative public interest finding before a broadcast license may be granted to or held by any such entity, and in the past the FCC has made such an affirmative finding in the broadcast context only in limited circumstances. These restrictions apply in modified form to other forms of business organizations, including partnerships and limited liability companies. 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 November 2013, the FCC confirmed that it will consider on a case-by-case basis petitions for approval of foreign ownership that exceeds the 25% threshold and, in September 2016, the FCC adopted specific rules and procedures for the filing and review of such requests.  In the September 2016 decision, the FCC confirmed that it will allow companies to seek approval of up to 100% foreign ownership.  The FCC also adopted a methodology for determining the citizenship of the beneficial owners of publicly held shares that companies may use to ascertain compliance with the foreign ownership rules.  Our certificate of incorporation provides that the transfer or conversion of our capital stock, whether voluntary or involuntary, shall not be permitted, and shall be ineffective, if such transfer or conversion would violate (or would result in violation of) the Communications Act or any of the rules or regulations promulgated thereunder or require the prior approval of the FCC, unless such prior approval has been obtained.

Ownership Attribution

The FCC generally applies its broadcast ownership limits to “attributable” interests held by an individual, corporation, partnership or other association or entity, including limited liability companies. 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 officer positions and directors of a corporate parent of a broadcast licensee. The FCC treats all partnership interests as attributable, except for those limited partnership interests that under FCC policies are considered insulated from material involvement in the management or operation of the media-related activities of the partnership.

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The FCC currently treats limited liability companies like limited partnerships for purposes of attribution. 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.

To assess whether a voting stock interest in a direct or an indirect parent corporation of a broadcast licensee is attributable, the FCC uses a “multiplier” analysis in which noncontrolling voting stock interests are deemed proportionally reduced at each noncontrolling link in a multi-corporation ownership chain. A time brokerage agreement with another radio or television station in the same market creates an attributable interest in the brokered radio or television station, as well as for purposes of the FCC’s local radio and television station ownership rules, if the agreement affects more than 15% of the brokered radio or television station’s weekly broadcast hours. Similarly, a radio station licensee’s right under a joint sales agreement (JSA) to sell more than 15% per week of the advertising time on another radio station in the same market constitutes an attributable ownership interest in such station for purposes of the FCC’s ownership rules.  In addition, the FCC adopted an Order in March 2014 that makes a television station licensee’s right under a JSA to sell more than 15% per week of the advertising time on another television station in the same market an attributable interest.  An appeal of this Order is pending in Federal circuit court. We are not currently a party to any JSAs, so the FCC’s Order does not affect us at this time.

Debt instruments, nonvoting stock, stock options or other nonvoting interests with rights of conversion to voting interests 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, unless such interests implicate the FCC’s equity-debt-plus (or “EDP”) rule. Under the EDP rule, a major programming supplier or a same-market media entity will have an attributable interest in a station if the supplier or same-market media entity also 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 EDP rule, equity includes all stock, whether voting or nonvoting, and interests held by limited partners or limited liability company members that are not materially involved. A major programming supplier is any supplier that provides more than 15% of the station’s weekly programming hours.

Multiple Ownership

The Communications Act and FCC rules generally restrict ownership, operation or control of, or the common holding of attributable interests in (i) broadcast stations above certain limits serving the same local market, and (ii) broadcast stations and a daily newspaper serving the same local market. The FCC is required to review quadrennially the following media ownership rules and to modify, repeal or retain any rules as it determines to be in the public interest:  the newspaper-broadcast cross-ownership rule; the local radio ownership rule; the radio-television cross-ownership rule; the dual network rule; and the local television ownership rule.  

The FCC’s currently effective multiple ownership rules are briefly summarized below.

Local Radio Ownership

Although current FCC rules allow one entity to own, control or hold attributable interests in an unlimited number of AM and FM radio stations nationwide, the Communications Act and the FCC’s rules limit the number of radio broadcast stations in local markets (generally defined as those counties in the Nielsen® Metro Survey Area, where they exist) in which a single entity may own an attributable interest as follows:

In a radio market with 45 or more full-power commercial and noncommercial 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) full-power commercial and noncommercial 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) full-power commercial and noncommercial 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 full-power commercial and noncommercial 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.

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To apply these tiers, the FCC currently relies on Nielsen Metro Survey Areas, where they exist. In other areas, the FCC relies on an interim contour-overlap methodology. For radio stations located outside Nielsen® Metro Survey Areas, the FCC is undertaking a rulemaking to determine how to define such local radio markets. The market definition used by the FCC in applying its ownership rules may not be the same as that used for purposes of the HSR Act.

Local Television Ownership

Under the ownership rules currently in place, the FCC generally permits an owner to have only one television station per market. A single owner is permitted to have two stations with overlapping signals only if (i) one of the two commonly owned stations is not ranked in the top four based upon audience share, and (ii) there will remain after the transaction eight independently owned, full power noncommercial or commercial operating television stations in the market. The rules also permit the ownership, operation or control of two television stations in a market as long as the stations’ Noise Limited Service contours do not overlap. The FCC will consider waiving these ownership restrictions in certain cases involving failing or failed stations or stations which are not yet built. The FCC also grants satellite waivers when one or more television stations operate as satellites of another station.  We currently operate WTCV as a parent station and WVEO and WVOZ-TV as satellite stations in the Puerto Rico designated market area pursuant to a satellite waiver. Under the rule, the licensee of a television station that provides more than 15% of another in-market station’s weekly programming will be deemed to have an attributable interest in the other station.  Based on an Order adopted by the FCC in March 2014, a television station that is a party to a Joint sales Agreement (‘JSA”) to which it sells more than 15% of the advertising time of another television station in the same market will be deemed to have an attributable interest in the station for which it sells advertising time.  This ruling became effective on June 19, 2014.  Parties to JSA agreements in effect as of June 19, 2014 that do not comply with the FCC’s Local Television Ownership Rule were given two years to bring the JSA into compliance, seek a waiver or eliminate the JSA. Congressional action extended this deadline to October 1, 2025. We are not currently a party to any JSAs, so the FCC’s Order does not affect us at this time.

Television National Audience Reach Limitation

Under the Communications Act, one party may not own TV stations which collectively reach more than 39% of all U.S. TV households. For purposes of calculating the total number of TV households reached by a station, the FCC previously applied a “UHF discount” pursuant to which a UHF TV station was attributed with only 50% of the TV households in its market.  In September 2016 the FCC eliminated the UHF discount.  The FCC provided limited grandfathering for TV station owners that exceed the 39% cap without the UHF discount.  Grandfathering will expire if combinations are assigned or transferred to a third party.  A joint petition for reconsideration has been filed at the FCC of the decision and comments were due in December 2016.  Other parties have filed for judicial review.

Radio-Television Cross-Ownership

The radio-television cross-ownership rule generally allows common ownership of one or two television stations and up to six radio stations, or, in certain circumstances, (i) one television station and seven radio stations, in any market where at least 20 independent voices would remain after the combination; (ii) two television stations and up to four radio stations in a market where at least 10 independent voices would remain after the combination; and (iii) one television and one radio station notwithstanding the number of independent voices in the market. A “voice” includes each independently owned and operated full-power television and radio station and each daily newspaper that has a circulation exceeding 5% of the households in the market, plus one voice for all cable television systems operating in the market.

Newspaper-Broadcast Cross-Ownership

Under the currently effective newspaper broadcast cross-ownership rule, unless grandfathered or subject to waiver, no party can have an attributable interest in both a daily English-language newspaper and either a television or radio station in the same market if specified signal contours of the television station or the radio station encompass the entire community in which the newspaper is published. The FCC’s recent Quadrennial Review Order adopted a waiver standard that would permit a combination if a proponent demonstrates that either the newspaper or broadcast station is failed or failing based on specific criteria the FCC has identified.  The FCC will also consider waivers on a case-by-case basis if the proponent demonstrates that the proposed combination will not unduly harm viewpoint diversity in the market.

19


 

Programming and Operations

The Communications Act requires broadcasters to serve the public interest. A broadcast license is 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 listeners about a broadcast station’s programming when it evaluates the licensee’s renewal application, but listeners’ complaints also may be filed and considered at any time. Stations also must pay regulatory and application fees, and follow various FCC rules that regulate, among other things, political advertising, equal employment opportunity, technical operation, the broadcast of obscene, indecent or profane programming, sponsorship identification, the broadcast of contest and lottery information and the conduct of contests.

The FCC requires that licensees not discriminate in hiring practices on the basis of race, color, religion, national origin or gender. It also requires stations with at least five full-time employees to disseminate information about all fulltime job openings and undertake outreach initiatives from an FCC list of activities such as participation in job fairs, internships or scholarship programs. Stations must retain records of their outreach efforts and keep an annual Equal Employment Opportunity (“EEO”) report in their public inspection files and post an electronic version on their websites.

Certain FCC rules affecting programming and operations are briefly summarized below.

Indecency and Profanity

Provisions of federal law regulate the broadcast of obscene, indecent, or profane material. The FCC’s rules prohibit the broadcast of obscene material at any time and indecent or profane material between the hours of 6 a.m. and 10 p.m. Broadcasters risk violating the prohibition against broadcasting indecent or profane material because the vagueness of the FCC’s indecency/profanity definition makes it difficult to apply, particularly with regard to spontaneous, live programming. In recent years, the FCC has increased its enforcement efforts of these indecency and profanity regulations, and has threatened to initiate license revocation proceedings against broadcast licenses for “serious” indecency or profanity violations. The FCC has substantially increased its monetary penalties for violations of these regulations. Legislation enacted in 2006 provides the FCC with authority to impose fines of up to $389,305 per indecent or profane utterance with a maximum forfeiture exposure of $3.0 million for any continuing violation arising from a single act or failure to act. In the ordinary course of business, we have received complaints or the FCC has initiated inquiries about whether a limited number of our radio stations have broadcast indecent programming. We also have a few outstanding indecency proceedings against our stations.

In July 2010, the United States Court of Appeals for the Second Circuit (“Second Circuit”) issued a decision in which it vacated the FCC’s indecency policy as unconstitutional. In June 2012, the Supreme Court issued a decision which held that the FCC could not fine ABC and FOX for the specific broadcasts at issue in the case because the FCC had not provided them with sufficient notice of its intent to issue fines for the use of fleeting expletives. The Court also held that the FCC’s indecency standards did not violate the First Amendment. In April 2013, the FCC requested comments on its indecency policy, including whether it should ban the use of fleeting expletives or whether it should only impose fines for broadcasts that involve repeated and deliberate use of expletives. The FCC has advised that it will continue to pursue enforcement actions in egregious cases while it conducts its review of its indecency policies generally and issued a Notice of Apparent Liability in 2015 for the maximum forfeiture amount of $389,305 against a television station for violation of its indecency policy. We cannot predict whether Congress will consider or adopt further legislation in this area.

Simulcasting

The FCC rules prohibit a 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.

Time Brokerage and Joint Sales Agreements

Occasionally, stations enter into time brokerage agreements or local marketing agreements. Separately owned and licensed stations may agree to function cooperatively in programming, advertising sales and other matters, subject to compliance with the antitrust laws and the FCC’s rules and policies, including the requirement that the licensee of each station maintain independent control over the programming and other operations of its own station. Over the past few years, a number of stations have entered into cooperative arrangements commonly known as JSAs.  The FCC has determined that where two radio stations are both located in the same market and a party with a cognizable interest in one such station sells more than 15% of the advertising per week of the other station, that party shall be treated as if it has an attributable interest in that brokered station.   As noted in the Section entitled “Local Television Ownership,” above, the FCC adopted an Order in 2014 ruling that a television station that is a party to a JSA to which it sells more than 15% of the advertising time of another television station in the same market also has an attributable interest in the station for which it sells advertising time.  We are not currently a party to any JSAs, so the FCC’s Order does not affect us at this time.

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RF Radiation

In 1985, the FCC adopted rules based on a 1982 American National Standards Institute, or “ANSI,” standard regarding human exposure to levels of radio frequency, or “RF,” radiation. These rules require applicants for renewal of broadcast licenses or modification of existing licenses to inform the FCC at the time of filing such applications whether an existing broadcast facility would expose people to RF radiation in excess of certain limits. In 1992, ANSI adopted a new standard for RF radiation exposure that, in some respects, was more restrictive in the amount of environmental RF radiation exposure permitted. The FCC has since adopted more restrictive radiation limits which became effective October 15, 1997 and which are based in part on the revised ANSI standard.

Terrestrial Digital Radio

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. Digital radio provides additional spectrum segmentation for enhanced data services and additional program streams to complement the existing programming service, which permits new business and multicasting opportunities for radio broadcasters. In January 2010, the FCC adopted procedures that allow FM radio stations to significantly increase their digital power levels above those originally permitted in order to improve the digital service these stations provide.

Low Power Radio Broadcast Service

The FCC has adopted rules establishing two classes of a low power radio service, both of which operate in the existing FM radio band: a primary class with a maximum operating power of 100 watts and a secondary class with a maximum power of 10 watts. These low power radio stations have limited service areas of 3.5 miles and 1 to 2 miles, respectively. Implementation of a low power radio service provides an additional audio programming service that could compete with our radio stations for listeners, but we cannot predict the effect upon us.

Change of Community

The FCC has adopted rules concerning the FM Table of Allotments to allow radio broadcasters to change their community of license more easily. We have evaluated our current licenses to see if a community of license change would be beneficial. We are aware that competitors may use this rule revision to improve their facilities, and other radio operators may use this rule in a way that would make them newly attractive acquisition targets for us.

Cable and Satellite Carriage of Television Broadcast Stations

The Communications Act and implementing FCC regulations govern the retransmission of commercial television stations by cable television systems and direct broadcast satellite, or “DBS,” operators. Every three years, each station must elect, with respect to cable systems and DBS operators within its designated market area, or “DMA,” either “must carry” status, pursuant to which the cable system’s or DBS operator’s carriage of the station is mandatory, or “retransmission consent,” pursuant to which the station gives up its right to mandatory carriage in order to negotiate consideration in return for consenting to carriage. We have elected “must carry” with respect to our full power television stations. These “must carry” rights are not absolute, and under some circumstances, a cable system or DBS operator may be entitled not to carry a given station. For example, DBS operators are required to carry the signals of all local television broadcast stations requesting carriage only in local markets in which the DBS operator carries at least one signal pursuant to the statutory local-to-local compulsory copyright license.

Neither cable systems nor DBS operators are required to carry more than a station’s primary video programming channel. Consequently, the multicast programming streams provided by our Houston television station are not entitled to mandatory carriage pursuant to the digital must-carry rules. In 2011, the FCC released a rulemaking seeking comment on a series of proposals to streamline and clarify the rules concerning retransmission consent negotiations.  This proceeding ended without the adoption of additional rules.   In a separate proceeding, the FCC has requested comment on whether the definition of MVPD should be expanded to include entities that make available multiple channels of video programming to subscribers through Internet connections. This proceeding remains pending.

Digital Television Services

As of June 12, 2009, all full-power broadcast television stations were required to cease broadcasting analog programming and convert to all digital broadcasts. The transition to digital television has improved the technical quality of television signals and provides broadcasters the flexibility to offer new services, including high-definition television, broadband data transmission and additional video streams. Our full-power television and Class A television stations have completed construction of their DTV facilities

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and are currently broadcasting solely on their digital channels. Our full-power television station in Houston also broadcasts several additional video streams. Under current FCC rules, when “must carry” rights apply, cable systems and DBS operators are required to carry only one channel of the digital signal of our television stations, despite the capability of digital broadcasters to broadcast multiple program streams within one station’s digital allotment.

Children’s Television Programming

The FCC has adopted rules on children’s television programming pursuant to the Children’s Television Act of 1990. The rules limit the amount and content of commercial matter that may be shown on television stations during programming designed for children 12 years of age and younger and require stations to broadcast on their main program stream three hours per week of educational and informational programming (“E/I programming”) designed for children 16 years of age and younger. FCC rules also impose E/I programming requirements on each additional digital multicast program stream transmitted by television stations, with the requirement increasing in proportion to the additional hours of free programming offered on multicast channels. These rules also limit the display during children’s programming of Internet addresses of websites that contain or link to commercial material or that use program characters to sell products.

Sponsorship Identification

Both the Communications Act and the FCC rules generally require that, when payment or other consideration has been received or promised to a broadcast licensee for the airing of program material, the station must disclose that fact and identify who paid or promised to provide the consideration at the time of the airing. In the past, the FCC has initiated inquiries against several media companies, including our company, concerning sponsorship identification practices with respect to the music recording industry. The FCC has also initiated inquiries against several dozen television stations seeking to determine whether their broadcast of “video news releases” (each, a “VNR”) violated the sponsorship identification rules by failing to disclose the source and sponsorship of the VNR materials. At least two television broadcast licensees were issued fines by the FCC for violations of the sponsorship ID rules related to VNRs. VNRs are news stories and feature materials produced by government agencies and commercial entities, among others, for use by broadcasters. The FCC also has a long-pending rule-making proceeding concerning sponsorship identification issues, such as product placement. Whether any new regulations are ultimately adopted and, if so, the effect of such rules on our operations cannot currently be determined.

Closed Captioning and Video Description Rules

FCC rules require the majority of programming broadcast by television stations to contain closed captions. The rules allow a video programming owner to file a petition for exemption from the rules. We have filed a petition for exemption from the rules based upon a showing of undue burden. During the pendency of an undue burden determination, the video programming subject to the request for exemption is considered exempt from the closed captioning requirement. In January 2012, the FCC adopted rules to require that television programming broadcast or transmitted with captioning include captioning if subsequently made available online, for example, by streaming content on broadcasters’ websites. In 2014, the FCC adopted an Order expanding the IP captioning rules to brief segments or clips of video programs that are carried on the Internet.  The new rules will phase in between January 1, 2016 and July 1, 2017.  In 2016, the FCC adopted additional rules with respect to the provision and quality of closed captions.

FCC rules also require, in part, that affiliates of the top-four national broadcast networks in the top 60 markets provide a minimum of 50 hours of video-described primetime and/or children’s programming each calendar quarter.

Commercial Advertisement Loudness Mitigation

Rules enacted by the FCC that require our television broadcast stations to transmit commercials and adjacent programming at the same volume went into effect in December 2012.

Recordkeeping

The FCC rules require broadcast stations to maintain various records regarding operations, including equipment performance records and a log of a station’s operating parameters. Broadcast stations must also maintain a public inspection file. Portions of the public inspection files maintained by television stations and radio stations located in the top 50 markets are hosted on an FCC-maintained website.  

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Regulation of the Internet

Internet services including websites of our broadcast stations are subject to regulation relating to the privacy and security of personally identifiable user information and acquisition of personal information from children under 13, including the federal Child Online Privacy Protection Act (“COPPA”) and the federal Controlling the Assault of Non-Solicited Pornography and Marketing Act (“CAN-SPAM”). In addition, a majority of states have enacted laws that impose data security and security breach obligations. Additional federal, state, territorial laws and regulations may be adopted with respect to the Internet or other online services, covering such issues as user privacy, child safety, data security, advertising, pricing, content, copyrights and trademarks, access by persons with disabilities, distribution, taxation and characteristics and quality of products and services.

Repurposing of Broadcast Spectrum for Other Uses by the FCC

Federal legislation was enacted in February 2012 that, among other things, authorized the FCC to conduct voluntary “broadcast incentive auctions” in order to reallocate certain spectrum currently occupied by television broadcast stations to mobile wireless broadband services, to “repack” television stations into a smaller portion of the existing television spectrum band, and to require television stations that do not participate or are not selected in the reverse auction to modify their transmission facilities, subject to reimbursement for reasonable relocation costs up to a nationwide total of $1.75 billion.

The FCC has adopted rules concerning the incentive auction and the repacking of the television band and is concluding its Broadcast Incentive Auction. Under the auction rules implemented by the FCC, television stations were given an opportunity to offer spectrum for sale to the government in a “reverse” auction while wireless providers could bid to acquire spectrum from the government in a related “forward” auction. Applications from television stations to participate in the reverse auction were due on January 12, 2016 and the reverse auction began on March 29, 2016. We filed applications to participate in the auction for stations in Miami, Houston, and multiple stations in Puerto Rico.  

Following completion of the incentive auction, the FCC is “repacking” the remaining television broadcast spectrum, which may require certain television stations that did not participate or were not selected in the reverse auction to modify their transmission facilities, including requiring such stations to operate on other channels. We have been notified by the FCC that our Miami, Houston, and one of our Puerto Rico TV Stations will have their channel designation reassigned. The FCC will reimburse stations for reasonable relocation costs up to a nationwide total of $1.75 billion. We are currently preparing cost estimates related to the repacking of our TV stations and our channel reassignment. When repacking, the FCC will make reasonable efforts to preserve a station’s coverage area and population served. In addition, the FCC is prohibited from requiring a station to move involuntarily from the UHF band, the band in which most of our television broadcast licenses operate, to the VHF band or from the high VHF band to the low VHF band. The impact of the repacking of our broadcast television spectrum on our business cannot be predicted at this time.  

Laws Affecting Intellectual Property

Laws affecting intellectual property are of significant importance to us to protect our brands and copyrights. Protection of brands requires the vigilance and action by the brand owner. We seek trademark registrations for significant brand assets and enforce our brand rights against infringing parties through legal actions, including enforcement actions in the United States Patent and Trademark Office.  Unauthorized distribution or reproduction of content, especially in digital formats such as unlicensed live simultaneous or stored streaming of audio recordings and peer-to-peer file “sharing,” are threats to a copyright owner’s ability to protect and exploit its property. We monitor legal changes that might impact the exclusive rights we have in broadcasts, streams and recorded content. Our digital delivery services and commercial arrangements with digital content providers help reduce the risks associated with unauthorized access to our content. We are also engaged in enforcement and other activities to protect our intellectual property.  

Proposed and Recent Changes

Congress and the FCC continually consider new laws, regulations and policies regarding a wide variety of matters that could, directly or indirectly, affect our operations, ownership and profitability; result in the loss of audience share and advertising revenue; or affect our ability to acquire additional broadcast stations or to finance such acquisitions. We can neither predict what matters might be considered nor judge in advance what impact, if any, the implementation of any of these proposals or changes might have on our business. Such matters may include:

changes to the license authorization and renewal process;

proposals to improve record keeping, including enhanced disclosures of stations’ efforts to serve the public inter