See accompanying notes to the unaudited condensed consolidated financial statements.
See accompanying notes to the unaudited condensed consolidated financial statements.
See accompanying notes to the unaudited condensed consolidated financial statements
See accompanying notes to the unaudited condensed consolidated financial statements.
SPANISH BROADCASTING SYSTEM, INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The unaudited condensed consolidated financial statements include the accounts of Spanish Broadcasting System, Inc. and its subsidiaries (the Company, we, us, our or SBS). All intercompany balances and transactions have been eliminated in consolidation. The accompanying unaudited condensed consolidated financial statements as of June 30, 2014 and December 31, 2013 and for the three- and six-month periods ended June 30, 2014 and 2013 have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 8-03 of Regulation S-X. They do not include all information and notes required by U.S. GAAP for complete financial statements. These unaudited condensed consolidated financial statements should be read in conjunction with our consolidated financial statements as of, and for the fiscal year ended December 31, 2013, included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2013. In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments, which are all of a normal and recurring nature, necessary for a fair presentation of the results of the interim periods. Additionally, we evaluated subsequent events after the balance sheet date of June 30, 2014 through the financial statements issuance date. The results of operations for the six-months ended June 30, 2014 are not necessarily indicative of the results for a full year.
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions about future events that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities at the date of the financial statements. Significant items subject to such estimates and assumptions include the allowance for doubtful accounts, the realization of deferred tax assets, the useful lives and future cash flows used for testing the recoverability of property and equipment, the recoverability of FCC broadcasting licenses, goodwill and other intangible assets, the fair value of Level 2 and Level 3 financial instruments, contingencies and litigation. These estimates and assumptions are based on management’s best judgments. Management evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors, including the current economic environment, which management believes to be reasonable under the circumstances. Management adjusts such estimates and assumptions as facts and circumstances dictate. Illiquid credit markets, volatile equity markets and changes in advertising spending levels have combined to increase the uncertainty inherent in such estimates and assumptions. Actual results could differ from these estimates.
Our consolidated financial statements have been prepared on a going-concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As of June 30, 2014, we had a working capital deficit due to the reclassification of our Series B preferred stock as a current liability, although under Delaware law, our state of incorporation, the Series B preferred stock is deemed equity. Because the holders of the Series B preferred stock are not creditors, they do not have rights of, or remedies available to, creditors. Delaware law does not recognize a right of preferred stockholders to force redemptions or repurchases where the corporation does not have funds legally available. Currently, we do not have sufficient funds legally available to be able to repurchase the Series B preferred stock and its accumulated unpaid dividends and management does not expect to be required to make any such repurchases during the next twelve months. Management does not believe that the Series B preferred stockholders have legal remedies that would require such repurchases (see note 10).
Recently Issued Accounting Pronouncements
In May 2014, the FASB issued ASU No. 2014-09,
Revenue from Contracts with Customers.
This new standard provides guidance for the recognition, measurement and disclosure of revenue resulting from contracts with customers and will supersede virtually all of the current revenue recognition guidance under U.S. GAAP. The standard is effective for the first interim period within annual reporting periods beginning after December 15, 2016. We are currently evaluating the impact, if any, that this new standard will have on our financial position and results of operations.
2. Stockholders’ Deficit
(a) Series C Convertible Preferred Stock
On December 23, 2004, in connection with the closing of the merger agreement, dated October 5, 2004, with CBS Radio (formerly known as Infinity Media Corporation, CBS Radio), a division of CBS Corporation, Infinity Broadcasting Corporation of San Francisco (“Infinity SF”) and SBS Bay Area, LLC, a wholly-owned subsidiary of SBS, pursuant to which SBS acquired the FCC license of Infinity SF (the “CBS Radio Merger”), we issued to CBS Radio an aggregate of 380,000 shares of Series C convertible preferred stock, $0.01 par value per share (the “Series C preferred stock”). Each share of Series C preferred stock is convertible at the
8
option of the holder into two fully paid and non-assessable shares of the Class A common stock. The shares of Series C preferred stock issued at the closing of the CBS Radio Merger are convertible into 760,000 shares of Class A common stock, subject to certain adjustments. In connection with the CBS Radio Merger, we also entered into a registration rights agreement with CBS Radio, pursuant to which CBS Radio may instruct us to file up to three registration statements, on a best efforts basis, with the SEC, providing for the registration for resale of the Class A common stock issuable upon conversion of the Series C preferred stock.
We are required to pay holders of Series C preferred stock dividends on parity with our Class A common stock and Class B common stock, and each other class or series of our capital stock created after December 23, 2004.
(b) Class A and B Common Stock
The rights of the Class A common stockholders and Class B common stockholders are identical except with respect to their voting rights and conversion provisions. The Class A common stock is entitled to one vote per share and the Class B common stock is entitled to ten votes per share. The Class B common stock is convertible to Class A common stock on a share-for-share basis at the option of the holder at any time, or automatically upon a transfer of the Class B common stock to a person or entity which is not a permitted transferee (as described in our Certificate of Incorporation). Holders of each class of common stock are entitled to receive dividends and, upon liquidation or dissolution, are entitled to receive all assets available for distribution to stockholders. Neither the holders of the Class A common stock nor the holders of the Class B common stock have preemptive or other subscription rights, and there are no redemption or sinking fund provisions with respect to such shares. Each class of common stock is subordinate to our 10
3
/
4
% Series B cumulative exchangeable redeemable preferred stock, par value $0.01 per share (the “Series B preferred stock”). The Series B preferred stock has a liquidation preference of $1,000 per share and is on parity with the Series C preferred stock with respect to dividend rights and rights upon liquidation, winding up and dissolution of SBS.
(c) Share-Based Compensation Plans
2006 Omnibus Equity Compensation Plan
In July 2006, we adopted an omnibus equity compensation plan (the “Omnibus Plan”) in which grants of Class A common stock can be made to participants in any of the following forms: (i) incentive stock options, (ii) nonqualified stock options, (iii) stock appreciation rights, (iv) stock units, (v) stock awards, (vi) dividend equivalents, and (vii) other stock-based awards. The Omnibus Plan authorizes up to 350,000 shares of our Class A common stock for issuance, subject to adjustment in certain circumstances. The Omnibus Plan provides that the maximum aggregate number of shares of Class A common stock units, stock awards and other stock-based awards that may be granted, other than dividend equivalents, to any individual during any calendar year is 100,000 shares, subject to adjustments.
Stock Options Activity
Stock options have only been granted to employees and directors. Our stock options have various vesting schedules and are subject to the employees and directors continuing their service to SBS. We recognize compensation expense based on the estimated grant date fair value using the Black-Scholes option pricing model and recognize the compensation expense using a straight-line amortization method. When estimating forfeitures, we consider voluntary termination behaviors, as well as trends of actual option forfeitures. Ultimately, our stock-based compensation expense is based on awards that vest. Our stock-based compensation has been reduced for estimated forfeitures.
A summary of the status of our stock options, as of December 31, 2013 and June 30, 2014, and changes during the six-months ended June 30, 2014, is presented below (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Average
|
|
|
Aggregate
|
|
|
Remaining
|
|
|
|
|
|
|
Exercise
|
|
|
Intrinsic
|
|
|
Contractual
|
|
|
Shares
|
|
|
Price
|
|
|
Value
|
|
|
Life (Years)
|
|
Outstanding at December 31, 2013
|
|
142
|
|
|
$
|
34.77
|
|
|
|
|
|
|
|
|
|
Granted
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
(10
|
)
|
|
|
105.55
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2014
|
|
132
|
|
|
$
|
29.42
|
|
|
$
|
140
|
|
|
|
4.4
|
|
Exercisable at June 30, 2014
|
|
132
|
|
|
$
|
29.42
|
|
|
$
|
140
|
|
|
|
4.4
|
|
9
During the six-months ended June 30, 2014 and 2013, no stock options were exercised; therefore, no cash payments were received. In addition, we did not recognize a tax benefit on our stock-based compensation expense due to our valuation allowance on substantially all of our deferred tax assets.
The following table summarizes information about stock options outstanding and exercisable at June 30, 2014 (in thousands, except per share data):
|
Outstanding
|
|
|
|
|
|
|
Exercisable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
|
|
|
|
Average
|
|
|
Vested
|
|
|
Unvested
|
|
|
Exercise
|
|
|
Contractual
|
|
|
Number
|
|
|
Exercise
|
|
Range of Exercise Prices
|
Options
|
|
|
Options
|
|
|
Price
|
|
|
Life (Years)
|
|
|
Exercisable
|
|
|
Price
|
|
$1.03 - 49.99
|
|
102
|
|
|
|
-
|
|
|
$
|
12.41
|
|
|
|
5.5
|
|
|
|
102
|
|
|
$
|
12.41
|
|
50.00 - 99.99
|
|
21
|
|
|
|
-
|
|
|
|
80.98
|
|
|
|
0.8
|
|
|
|
21
|
|
|
|
80.98
|
|
100.00 - 117.80
|
|
9
|
|
|
|
-
|
|
|
|
107.09
|
|
|
|
0.6
|
|
|
|
9
|
|
|
|
107.09
|
|
|
|
132
|
|
|
|
-
|
|
|
|
29.42
|
|
|
|
4.4
|
|
|
|
132
|
|
|
|
29.42
|
|
(d) Accumulated Other Comprehensive (Loss) Income
Our accumulated other comprehensive (loss) income is comprised of accumulated gains and losses on a derivative instrument (interest rate swap) that qualifies for cash flow hedge treatment. Our total comprehensive (loss) income consists of our net loss and a gain (loss) on our interest rate swap for the respective periods. The gain on the interest rate swap is shown net of taxes; however, there is no tax effect as a result of a full deferred tax asset valuation allowance related to the interest rate swap.
For the three-months ended June 30, 2014 and 2013, we reclassified from other comprehensive loss to interest expense $0.1 million. During the three-months ended June 30, 2014 and 2013, we recognized in other comprehensive loss, net of taxes- an unrealized gain on derivative instrument of approximately $36 thousand and $89 thousand, respectively.
For the six-months ended June 30, 2014 and 2013, we reclassified from other comprehensive loss to interest expense $0.2 million. During the six-months ended June 30, 2014 and 2013, we recognized in other comprehensive loss, net of taxes- an unrealized gain on derivative instrument of approximately $75 thousand and $138 thousand, respectively.
3. Basic and Diluted Net Loss Per Common Share
Basic net loss per common share was computed by dividing net loss applicable to common stockholders by the weighted average number of shares of common stock and convertible preferred stock outstanding for each period presented, using the “if converted” method. Diluted net loss per common share is computed by giving effect to common stock equivalents as if they were outstanding for the entire period.
The following is a reconciliation of the shares used in the computation of basic and diluted net loss per share for the three- and six-month periods ended June 30, 2014 and 2013 (in thousands):
|
Three-Months Ended
|
|
|
Six-Months Ended
|
|
|
June 30,
|
|
|
June 30,
|
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
Basic weighted average shares outstanding
|
|
7,267
|
|
|
|
7,267
|
|
|
|
7,267
|
|
|
|
7,267
|
|
Effect of dilutive equity instruments
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Dilutive weighted average shares outstanding
|
|
7,267
|
|
|
|
7,267
|
|
|
|
7,267
|
|
|
|
7,267
|
|
Options to purchase shares of common stock and other stock-based
awards outstanding which are not included in the calculation of
diluted net income per share because their impact is anti-dilutive
|
|
105
|
|
|
|
133
|
|
|
|
102
|
|
|
|
132
|
|
10
4. Operating Segments
We have two reportable segments: radio and television.
The following summary table presents separate financial data for each of our operating segments (in thousands):
|
Three-Months Ended
|
|
|
Six-Months Ended
|
|
|
June 30,
|
|
|
June 30,
|
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
Net revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Radio
|
$
|
36,019
|
|
|
|
32,247
|
|
|
$
|
65,464
|
|
|
|
65,206
|
|
Television
|
|
4,868
|
|
|
|
3,820
|
|
|
|
8,202
|
|
|
|
9,964
|
|
Consolidated
|
$
|
40,887
|
|
|
|
36,067
|
|
|
$
|
73,666
|
|
|
|
75,170
|
|
Engineering and programming expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Radio
|
$
|
5,357
|
|
|
|
4,605
|
|
|
$
|
10,430
|
|
|
|
9,709
|
|
Television
|
|
2,217
|
|
|
|
1,639
|
|
|
|
4,656
|
|
|
|
4,038
|
|
Consolidated
|
$
|
7,574
|
|
|
|
6,244
|
|
|
$
|
15,086
|
|
|
|
13,747
|
|
Selling, general and administrative expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Radio
|
$
|
17,004
|
|
|
|
12,453
|
|
|
$
|
31,091
|
|
|
|
28,039
|
|
Television
|
|
2,700
|
|
|
|
2,051
|
|
|
|
4,367
|
|
|
|
5,975
|
|
Consolidated
|
$
|
19,704
|
|
|
|
14,504
|
|
|
$
|
35,458
|
|
|
|
34,014
|
|
Corporate expenses:
|
$
|
3,744
|
|
|
|
2,612
|
|
|
$
|
5,448
|
|
|
|
5,042
|
|
Depreciation and amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Radio
|
$
|
480
|
|
|
|
481
|
|
|
$
|
981
|
|
|
|
992
|
|
Television
|
|
691
|
|
|
|
761
|
|
|
|
1,382
|
|
|
|
1,535
|
|
Corporate
|
|
88
|
|
|
|
74
|
|
|
|
171
|
|
|
|
147
|
|
Consolidated
|
$
|
1,259
|
|
|
|
1,316
|
|
|
$
|
2,534
|
|
|
|
2,674
|
|
(Gain) loss on the disposal of assets, net:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Radio
|
$
|
(1,250
|
)
|
|
|
(9
|
)
|
|
$
|
(1,204
|
)
|
|
|
(9
|
)
|
Television
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Corporate
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(13
|
)
|
Consolidated
|
$
|
(1,250
|
)
|
|
|
(9
|
)
|
|
$
|
(1,204
|
)
|
|
|
(22
|
)
|
Impairment charges and restructuring costs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Radio
|
$
|
—
|
|
|
|
86
|
|
|
$
|
—
|
|
|
|
86
|
|
Television
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,000
|
|
Corporate
|
|
(73
|
)
|
|
|
(61
|
)
|
|
|
(73
|
)
|
|
|
(61
|
)
|
Consolidated
|
$
|
(73
|
)
|
|
|
25
|
|
|
$
|
(73
|
)
|
|
|
1,025
|
|
Operating income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Radio
|
$
|
14,428
|
|
|
|
14,631
|
|
|
$
|
24,166
|
|
|
|
26,389
|
|
Television
|
|
(740
|
)
|
|
|
(631
|
)
|
|
|
(2,203
|
)
|
|
|
(2,584
|
)
|
Corporate
|
|
(3,759
|
)
|
|
|
(2,625
|
)
|
|
|
(5,546
|
)
|
|
|
(5,115
|
)
|
Consolidated
|
$
|
9,929
|
|
|
|
11,375
|
|
|
$
|
16,417
|
|
|
|
18,690
|
|
Capital expenditures:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Radio
|
$
|
382
|
|
|
|
537
|
|
|
$
|
782
|
|
|
|
610
|
|
Television
|
|
111
|
|
|
|
155
|
|
|
|
225
|
|
|
|
271
|
|
Corporate
|
|
93
|
|
|
|
83
|
|
|
|
190
|
|
|
|
111
|
|
Consolidated
|
$
|
586
|
|
|
|
775
|
|
|
$
|
1,197
|
|
|
|
992
|
|
11
|
June 30,
|
|
|
December 31,
|
|
|
2014
|
|
|
2013
|
|
Total Assets:
|
|
|
|
|
|
|
|
Radio
|
$
|
390,801
|
|
|
$
|
391,134
|
|
Television
|
|
54,330
|
|
|
|
56,909
|
|
Corporate
|
|
12,044
|
|
|
|
13,705
|
|
Consolidated
|
$
|
457,175
|
|
|
$
|
461,748
|
|
5. Income Taxes
We are calculating our effective income tax rate using a year-to-date income tax calculation. Our income tax expense differs from the statutory federal tax rate of 35% and related statutory state tax rates, primarily due to the change in the valuation allowance on substantially all of our deferred tax assets with the exception of one of our Puerto Rico subsidiaries.
We file federal, state and local income tax returns in the United States and Puerto Rico. The tax years that remain subject to assessment of additional liabilities by the United States federal tax authorities are 2010 through 2013 and state and local tax authorities are 2007 through 2013. The tax years that remain subject to assessment of additional liabilities by the Puerto Rico tax authority are 2010 through 2013.
Based on our evaluation, we have concluded that there are no significant uncertain tax positions requiring recognition in our consolidated financial statements as of June 30, 2014 and December 31, 2013.
6. Commitments and Contingencies
We are subject to certain legal proceedings and claims that have arisen in the ordinary course of business and have not been fully adjudicated. In our opinion, we do not have a potential liability related to any current legal proceedings and claims that would individually or in the aggregate have a material adverse effect on our financial condition or operating results. However, the results of legal proceedings cannot be predicted with certainty. Should we fail to prevail in any of these legal matters or should all of these legal matters be resolved against us in the same reporting period, the operating results of a particular reporting period could be materially adversely affected.
Litigation-Lehman and T. Rowe Price Complaint
On February 14, 2013, Lehman Brothers Holdings Inc. (“LBHI”) brought a claim against us in the Delaware Court of Chancery (the “Court”) seeking, among other things, a declaratory judgment that as a result of non-payment of dividends, a Voting Rights Triggering Event had occurred pursuant to the certificate of designations for the Series B preferred stock (the “Certificate of Designations”) no later than July 15, 2010. LBHI alleged that as a
result, we were prohibited from incurring
indebtedness but did so for the purposes of purchasing assets relating to our Houston television station and the issuance of our 12.5% Senior Secured Notes due 2017 (the “Notes”). LBHI also sought an award of unspecified contract damages.
We filed a motion to dismiss the LBHI complaint on March
11, 2013.
On April 25, 2013, LBHI filed an opposition to our motion to dismiss and a motion for partial summary judgment. We filed a reply in further support of our motion to dismiss and in opposition to LBHI’s motion for partial summary judgment on May 10, 2013. A hearing on the parties’ motions was held on May 20, 2013, at which the Court requested further briefing on cross-motions for summary judgment.
Additionally, on June 17, 2013, T. Rowe Price High Yield Fund, Inc., T. Rowe Price Institutional High Yield Fund, T. Rowe Price Funds SICAV-Global High Yield Bond Fund and T. Rowe Price Small-Cap Value Fund, Inc. (collectively “T. Rowe Price” and with LBHI, the “Plaintiffs”) brought a claim against us making allegations substantially similar to those made by LBHI previously, except with an additional claim for breach of the implied covenant of good faith and fair dealing.
On July 3, 2013, the Court granted the Plaintiffs’ motion to consolidate their lawsuits; and on October 3, 2013, LBHI moved to amend its original complaint by adding a claim for breach of the implied covenant of good faith and fair dealing. We moved for judgment on the pleadings as to both T. Rowe Price’s and LBHI’s good faith and fair dealing claims. In addition, we and the Plaintiffs submitted cross-motions for summary judgment on October 31, 2013.
12
On February 25, 2014, Vice Chancellor Glasscock rendered the opinion of the Court granting our motions for summary judgment and judgment on the pleadings, and denying the Plaintiffs’ motion for summary judgment. Accordingly, the Plaintiffs’ claims were dismissed. On April 8, 2014, LBHI filed a Notice of Appeal to the Delaware Supreme Court. T. Rowe Price did not file a Notice of Appeal, and the appeal deadline has now passed. LBHI's Opening Brief on appeal was filed on May 27, 2014, and our Answering Brief on appeal and Opening Brief on cross-appeal was filed on June 26, 2014. Scheduling of subsequent briefing will depend on the date on which LBHI files its Reply Brief on appeal and Answering Brief on cross-appeal.
Brevan Howard and Others Complaint
On December 27, 2013, River Birch Master Fund, L.P., P River Birch Ltd. (together, “River Birch”) and Visium Catalyst Credit Master Fund, Ltd. (collectively with River Birch, “Initial Plaintiffs”) brought a claim against us in the Court seeking a declaratory judgment that a Voting Rights Triggering Event had occurred (as of April 15, 2010) under our Certificate of Designations as a result of our non-payment of dividends. The claim states that as a result of such Voting Rights Triggering Event, the incurrence of indebtedness for the purpose of purchasing our Houston television station and the issuance of our Notes under the Indenture governing the Notes were prohibited incurrences of indebtedness under the Certificate of Designations.
The Initial Plaintiffs further claim that we violated the Certificate of Designations by failing to take any actions or explore any options that would have given us legally available funds with which to repurchase the outstanding Series B preferred stock on October 15, 2013. In connection with their claims, Initial Plaintiffs also seek an award of contract damages. On January 17, 2014, we filed a motion to dismiss the complaint. On March 3, 2014, the complaint was amended to remove River Birch and add Brevan Howard Credit Catalyst Master Fund Ltd., Brevan Howard Master Fund, ALJ Capital I, LP, ALJ Capital II, LP, LJR Capital, LP, and Cedarview Opportunities Master Fund, LP as additional plaintiffs. Plaintiffs filed an answering brief to our Motion to Dismiss on April 30, 2014. Our reply brief was filed on May 16, 2014, and a hearing was held on our Motion to Dismiss on June 10, 2014. Following the hearing, the parties agreed to stay all proceedings relating to Count I (which seeks a declaration that a VRTE was in effect at all times after April 15, 2010), Count II (which alleges that SBS breached the Certificate of Designations by incurring indebtedness in 2011 and 2012) and Count IV (which alleges that SBS breached the implied covenant of good faith and fair dealing by deferring certain dividends) of the complaint. On June 27, 2014, the Court denied our motion to dismiss Count III (which alleges that SBS breached the Certificate of Designations by failing to redeem all of the Series B Preferred Stock on October 15, 2013) of the complaint. We deny the allegations contained in the complaint and, to the contrary, assert that we have been and continue to be in full and complete compliance with all of our obligations under the Certificate of Designations, as fully disclosed in our public filings dating back to 2009. Accordingly, we believe that the complaint’s allegations are frivolous and wholly without merit and intend to contest such allegations vigorously.
7. Fair Value Measurement Disclosures
Fair Value of Financial Instruments
Cash and cash equivalents, receivables, as well as accounts payable and accrued expenses, and other current liabilities, as reflected in the consolidated financial statements, approximate fair value because of the short-term maturity of these instruments. The estimated fair value of our other long-term debt instruments, approximate their carrying amounts as the interest rates approximate our current borrowing rate for similar debt instruments of comparable maturity, or have variable interest rates.
Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.
The fair value of the senior secured notes are estimated using market quotes from a major financial institution taking into consideration the most recent activity and are considered Level 2 measurements within the fair value hierarchy. The fair value of the Series B cumulative exchangeable redeemable preferred stock and the promissory notes payable were based upon either: (a) unobservable market quotes from a major financial institution taking into consideration the most recent activity or (b) discounted cash flow analyses based on the current borrowing rates for similar types of borrowing arrangements resulting in a Level 3 classification.
13
The estimated fair values of our financial instruments are as follows (in millions):
|
|
|
June 30, 2014
|
|
|
December 31, 2013
|
|
|
Fair Value
|
|
Carrying
|
|
|
Fair
|
|
|
Carrying
|
|
|
Fair
|
|
Description
|
Hierarchy
|
|
Amount
|
|
|
Value
|
|
|
Amount
|
|
|
Value
|
|
12.5% senior secured notes due 2017
|
Level 2
|
|
$
|
275.0
|
|
|
|
307.1
|
|
|
$
|
275.0
|
|
|
|
297.7
|
|
10
3
/
4
% Series B cumulative exchangeable
redeemable preferred stock
|
Level 3
|
|
|
131.5
|
|
|
|
45.2
|
|
|
|
126.6
|
|
|
|
37.8
|
|
Promissory note payable, included in other long-
term debt
|
Level 3
|
|
|
5.4
|
|
|
|
4.7
|
|
|
|
5.5
|
|
|
|
4.5
|
|
Promissory note payable, included in other long-
term debt
|
Level 3
|
|
|
2.7
|
|
|
|
2.8
|
|
|
|
2.7
|
|
|
|
2.7
|
|
Fair Value of Derivative Instruments
The following table represents required quantitative disclosures regarding fair values of our derivative instruments (in thousands).
|
|
|
|
|
Fair value measurements at June 30, 2014
|
|
|
|
|
|
|
Liabilities
|
|
Description
|
June 30, 2014
carrying value and
balance sheet
location of derivative
instruments
|
|
|
Quoted prices in
active markets
for identical
instruments
(Level 1)
|
|
|
Significant
other
observable
inputs
(Level 2)
|
|
|
Significant
unobservable
inputs
(Level 3)
|
|
Derivative designated as a cash flow
hedging instrument:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap liability
|
$
|
527
|
|
|
|
—
|
|
|
|
527
|
|
|
|
—
|
|
|
|
|
|
|
Fair value measurements at December 31, 2013
|
|
|
|
|
|
|
Liabilities
|
|
Description
|
December 31, 2013
carrying value and
balance sheet
location of derivative
instruments
|
|
|
Quoted prices in
active markets
for identical
instruments
(Level 1)
|
|
|
Significant
other
observable
inputs
(Level 2)
|
|
|
Significant
unobservable
inputs
(Level 3)
|
|
Derivative designated as a cash flow
hedging instrument:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap liability
|
$
|
602
|
|
|
|
—
|
|
|
|
602
|
|
|
|
—
|
|
The interest rate swap fair value is derived from the present value of the difference in cash flows based on the forward-looking LIBOR yield curve rates, as compared to our fixed rate applied to the hedged amount through the term of the agreement, less adjustments for credit risk. There were no transfers between Levels during the three- and six-month periods ended June 30, 2014 and 2013, respectively.
|
|
Three-Months Ended
|
|
|
Six-Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
Interest rate swaps
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
Gain recognized in other comprehensive loss
(effective portion)
|
|
$
|
36
|
|
|
|
89
|
|
|
|
75
|
|
|
|
138
|
|
14
8. Derivative Instrument and Hedging Activity
On January 4, 2007, in connection with a promissory note issued for the acquisition of a building, we entered into a ten-year interest rate swap agreement for the original notional principal amount of $7.7 million whereby we will pay a fixed interest rate of 6.31%, as compared to interest at a floating rate equal to one-month LIBOR plus 125 basis points. The interest rate swap amortization schedule is identical to the promissory note amortization schedule, which has an effective date of January 4, 2007, monthly notional reductions and an expiration date of January 4, 2017.
Our interest rate swap is governed by a master netting arrangement, which is required to be disclosed as a balance sheet offsetting item as follows (in thousands):
|
As of June 30, 2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross amounts not offset in
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
the balance sheet
|
|
|
|
|
|
|
Gross amounts of
|
|
|
Gross amounts
|
|
|
Net amounts of
|
|
|
|
|
|
|
Cash
|
|
|
|
|
|
|
recognized
|
|
|
offset in the
|
|
|
liabilities presented
|
|
|
Financial
|
|
|
collateral
|
|
|
|
|
|
Description
|
liabilities
|
|
|
balance sheet
|
|
|
in the balance sheet
|
|
|
Instruments
|
|
|
received
|
|
|
Net amount
|
|
Interest rate swap
|
$
|
527
|
|
|
|
—
|
|
|
|
527
|
|
|
|
527
|
|
|
|
—
|
|
|
|
—
|
|
|
As of December 31, 2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross amounts not offset in
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
the balance sheet
|
|
|
|
|
|
|
Gross amounts of
|
|
|
Gross amounts
|
|
|
Net amounts of
|
|
|
|
|
|
|
Cash
|
|
|
|
|
|
|
recognized
|
|
|
offset in the
|
|
|
liabilities presented
|
|
|
Financial
|
|
|
collateral
|
|
|
|
|
|
Description
|
liabilities
|
|
|
balance sheet
|
|
|
in the balance sheet
|
|
|
Instruments
|
|
|
received
|
|
|
Net amount
|
|
Interest rate swap
|
$
|
602
|
|
|
|
—
|
|
|
|
602
|
|
|
|
602
|
|
|
|
—
|
|
|
|
—
|
|
9. 12.5% Senior Secured Notes due 2017
On February 7, 2012 we closed our offering of $275 million in aggregate principal amount of 12.5% senior secured notes due 2017 (the “Notes”) at an issue price of 97% of the principal amount. The Notes were offered solely by means of a private placement either to qualified institutional buyers in the United States pursuant to Rule 144A under the Securities Act, or to certain persons outside the United States pursuant to Regulation S under the Securities Act. We used the net proceeds from the offering, together with some cash on hand, to repay and terminate the senior credit facility term loan, and to pay the transaction costs related to the offering.
Interest
The Notes accrue interest at a rate of 12.5% per year. Interest on the Notes is paid semi-annually on each April 15 and October 15, commencing on April 15, 2012. After April 15, 2013, interest will accrue at a rate of 12.5% per annum on (i) the original amount of the Notes plus (ii) any Additional Interest (as defined below) payable but unpaid in any prior interest period, payable in cash on each interest payment date. Further, beginning on the interest payment date occurring on April 15, 2013, additional interest will be payable at a rate of 2.00% per annum (the “Additional Interest”) on (i) the original principal amount of the Notes plus (ii) any amount of Additional Interest payable but unpaid in any prior interest period, to be paid in cash, at our election, (x) on the applicable interest payment date or (y) on the earliest of the maturity date of the Notes, any acceleration of the Notes and any redemption of the Notes; provided that no Additional Interest will be payable on any interest payment date if, for the applicable fiscal period, either (a) we record positive consolidated station operating income for our television segment or (b) our secured leverage ratio on a consolidated basis is less than 4.75 to 1.00.
The Additional Interest applicable fiscal periods are as follows:
(1)
|
Six-months ended December 31, 2012 or as of December 31, 2012
|
(2)
|
Last twelve months ended June 30, 2013 or as of June 30, 2013
|
(3)
|
Last twelve months ended December 31, 2013 or as of December 31, 2013
|
(4)
|
Last twelve months ended June 30, 2014 or as of June 30, 2014
|
(5)
|
Last twelve months ended December 31, 2014 or as of December 31, 2014
|
(6)
|
Last twelve months ended June 30, 2015 or as of June 30, 2015
|
(7)
|
Last twelve months ended December 31, 2015 or as of December 31, 2015
|
(8)
|
Last twelve months ended June 30, 2016 or as of June 30, 2016
|
15
(9)
|
Last twelve months ended December 31, 2016 or as of December 31, 2016
|
Although for the Additional Interest applicable periods (1), (2), (3) and (4) our secured leverage ratio was greater than 4.75 to 1.00, we recorded positive consolidated station operating income for our television segment for those respective periods (as defined in the Indenture)
.
Therefore, during those respective periods, no Additional Interest was incurred and/or payable.
Collateral and Ranking
The Notes and the guarantees are secured on a first-priority basis by a security interest in certain of the Company’s and the guarantors’ existing and future tangible and intangible assets (other than Excluded Assets (as defined in the Indenture)). The Notes and the guarantees are structurally subordinated to the obligations of our non-guarantor subsidiaries. The Notes and guarantees are senior to all of the Company’s and the guarantors’ existing and future unsecured indebtedness to the extent of the value of the collateral.
The Indenture permits us, under specified circumstances, to incur additional debt; however, the occurrence and continuance of the Voting Rights Triggering Event (as defined in note 10) currently prevents us from incurring any such additional debt.
The Notes are senior secured obligations of the Company that rank equally with all of our existing and future senior indebtedness and senior to all of our existing and future subordinated indebtedness. Subject to certain exceptions, the Notes are fully and unconditionally guaranteed by each of our existing and future wholly owned domestic subsidiaries (which excludes (i) our existing and future subsidiaries formed in Puerto Rico (the “Puerto Rican Subsidiaries”), (ii) our future subsidiaries formed under the laws of foreign jurisdictions and (iii) our existing and future subsidiaries, whether domestic or foreign, of the Puerto Rican Subsidiaries or foreign subsidiaries) and our other domestic subsidiaries that guarantee certain of our other debt. The Notes and guarantees are structurally subordinated to all existing and future liabilities (including trade payables) of our nonguarantor subsidiaries.
Covenants and Other Matters
The Indenture governing the Notes contains covenants that, among other things, limit our ability and the ability of the guarantors to:
·
|
incur or guarantee additional indebtedness;
|
·
|
pay dividends and make other restricted payments;
|
·
|
incur restrictions on the payment of dividends or other distributions from our restricted subsidiaries;
|
·
|
engage in sale-lease back transactions;
|
·
|
enter into new lines of business;
|
·
|
make certain payments to holders of Notes that consent to amendments to the Indenture governing the Notes without paying such amounts to all holders of Notes;
|
·
|
create or incur certain liens;
|
·
|
make certain investments and acquisitions;
|
·
|
transfer or sell assets;
|
·
|
engage in transactions with affiliates; and
|
·
|
merge or consolidate with other companies or transfer all or substantially all of our assets.
|
The Indenture contains certain customary representations and warranties, affirmative covenants and events of default which could, subject to certain conditions, cause the Notes to become immediately due and payable, including, but not limited to, the failure to make premium or interest payments; failure by us to accept and pay for Notes tendered when and as required by the change of control and asset sale provisions of the Indenture; failure to comply with certain covenants in the Indenture; failure to comply with certain agreements in the Indenture for a period of 60 days following notice by the Trustee or the holders of not less than 25% in aggregate principal amount of the Notes then outstanding; failure to pay any debt within any applicable grace period after the final maturity or acceleration of such debt by the holders thereof because of a default, if the total amount of such debt unpaid or accelerated exceeds $15 million; failure to pay final judgments entered by a court or courts of competent jurisdiction aggregating $15 million or more (excluding amounts covered by insurance), which judgments are not paid, discharged or stayed, for a period of 60 days; and certain events of bankruptcy or insolvency.
16
As of June 30, 2014, and December 31, 2013 we were in compliance with all of our covenants under our Indenture.
10. 10
3
/
4
% Series B Cumulative Exchangeable Redeemable Preferred Stock
Voting Rights Triggering Event
Pursuant to the Certificate of Designations, each holder of shares of our Series B preferred stock had the right, on October 15, 2013, to request that we repurchase (subject to the legal availability of funds and the Delaware General Corporate Law) all or a portion of such holder’s shares of Series B preferred stock at a purchase price equal to 100% of the liquidation preference of such shares, plus all accumulated and unpaid dividends (as described in more detail below) on those shares to the date of repurchase.
On
October
15, 2013, holders of
shares of
our
Series B preferred stock requested that we repurchase 92,223 shares of
Series B preferred stock
for an aggregate repurchase price of $126.9 million, which included accumulated and unpaid dividends on these shares as of October 15, 2013. We did not have sufficient funds legally available to repurchase all of the
Series B preferred stock
for
which we received requests
and
instead used the limited funds legally available to us to repurchase
1,800
shares for a purchase price of approximately $2.5 million, which included accrued and unpaid dividends. Consequently
, a “voting rights triggering event” occurred
(the “Voting Rights Triggering Event”).
Following the occurrence, and during the continuation
,
of the Voting Rights Triggering Event
, holders of the
outstanding
Series B preferred stock will be entitled to elect two directors to newly created positions on our Board of Directors, and we will be subject to more restrictive
operating
covenants, including a prohibition on our ability to incur any additional indebtedness and restrictions on our ability to pay dividends or make distributions, redeem or repurchase securities, make investments, enter into transactions with affiliates or merge or consolidate with (or sell substantially all of our assets to) any other person. On June 6, 2014, we held our Annual Meeting of Stockholders (“Annual Meeting”). At the Annual Meeting, the holders of the Series B preferred stock nominated and elected Alan Miller and Gary Stone to serve as Series B preferred stock directors.
The Voting Rights Triggering Event shall continue until (i) all dividends in arrears shall have been paid in full and (ii) all other failures, breaches or defaults giving rise to such Voting Rights Triggering Event are remedied or waived by the holders of at least a majority of the shares of the then outstanding Series B preferred stock. We do not currently have sufficient funds legally available to be able to satisfy the conditions for terminating the Voting Rights Triggering Event.
The indenture governing
our
Notes currently prohibits us from paying dividends or from repurchasing the
Series B preferred stock.
Quarterly Dividends
Under the terms of our Series B preferred stock, the holders of the outstanding shares of the Series B preferred stock are entitled to receive, when, as and if declared by the Board of Directors out of funds of the Company legally available therefor, dividends on the Series B preferred stock at a rate of 10 ¾% per year, of the $1,000 liquidation preference per share. All dividends are cumulative, whether or not earned or declared, and are payable quarterly in arrears on specified dividend payment dates. While the Voting Rights Triggering Event continues, we cannot pay dividends on the Series B preferred stock without causing a
breach of covenants
under the
indenture governing our Notes
.
On March 29, 2013, the Board of Directors declared a dividend for the dividends due April 15, 2013 to the holders of our Series B preferred stock of record as of April 1, 2013. The dividends of $26.875 per share were paid in cash on April 15, 2013. Additionally, dividends were paid as part of the repurchase of 1,800 shares of Series B preferred stock on October 15, 2013. As of June 30, 2014, the aggregate cumulative unpaid dividends on the outstanding shares of the Series B preferred stock was approximately $41.0 million, which is accrued on our consolidated balance sheet as 10 ¾% Series B cumulative exchangeable redeemable preferred stock.
Redemption Date and Subsequent Accounting Treatment on the Preferred Stock
Prior to October 15, 2013, the Series B preferred stock was considered “conditionally redeemable” because the redemption of the shares of Series B preferred stock was contingent on the Series B preferred stockholders requesting that their Series B preferred stock be repurchased on October 15, 2013. On October 15, 2013, almost all of the holders of the Series B preferred stock requested that we repurchase their shares of Series B preferred stock. As a result of their request, we assessed and determined that, under applicable accounting principles, the contingency had occurred, and the Series B preferred stock now met the definition of a “mandatorily redeemable” instrument under Accounting Standards Codification 480
“Distinguishing Liabilities from Equity”
(“ASC 480”). Although under Delaware law the Series B preferred stock is deemed equity, under ASC 480, if an instrument changes from being “conditionally redeemable” to “mandatorily redeemable,” then the financial instrument should be reclassified as a liability.
In addition, the Series B preferred stock will be measured at each reporting date as the amount of cash that would be paid pursuant to the contract, had settlement occurred on the reporting date, recognizing the resulting change in that amount from the
17
previous reporting date as interest expense. Therefore, the accruing quarterly dividends of the Series B preferred stock will be recorded as interest expense (i.e. “Dividends on Series B preferred stock classified as interest expense”).