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.
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 March 31, 2016 and December 31, 2015 and for the three-month periods ended March 31, 2016 and 2015 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, 2015, included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2015. 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 March 31, 2016 through the financial statements issuance date. The results of operations for the three-months ended March 31, 2016 are not necessarily indicative of the results for the entire year ending December 31, 2016, or for any other future interim or annual periods.
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 March 31, 2016, 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, based on provisions in the 12.5% Senior Secured Notes Indenture and Delaware law, have legal remedies that would require such repurchases (see note 10).
As discussed in Note 9, the 12.5% Senior Secured Notes have a maturity date of April 15, 2017. During the first quarter of 2016, we have engaged financial advisors to assist us in developing a comprehensive refinancing strategy that considers all of the Company’s obligations under its debt and capital structure. Additionally, we are participating in the Broadcast Incentive Auction and evaluating the potential monetization of our spectrum and other assets to generate cash proceeds that would be used to repay our outstanding notes in accordance with the Indenture. The inability of the Company to repay or refinance its obligations so as to restructure its capital structure in a manner that ensures its short and long term liquidity could result in significant liquidity requirements on the Company. As there can be no assurance that we will be able to successfully implement our strategy, this condition raises substantial doubt about the Company’s ability to continue as a going-concern. The financial statements do not include adjustments, if any, that might arise from the outcome of this uncertainty.
Recently Issued Accounting Pronouncements
In March 2016, the FASB issued ASU No. 2016-09, Compensation
– Stock Compensation (Topic 718).
This new standard’s objective is to simplify certain aspects of the accounting for share-based payment award transactions, including (i) income tax consequences, (ii) classification of awards as either equity or liabilities, and (iii) classification on the statement of cash flows. This update is effective on a prospective, retrospective, and modified retrospective basis for annual and interim periods beginning after December 15, 2016 with early adoption permitted. We are currently evaluating the impact, if any, that this new standard will have on our financial position and results of operations.
In February 2016, the FASB issued ASU No. 2016-02,
Leases (Topic 842).
This new standard requires organizations that lease assets to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases and disclose key information about the leasing agreements. The new guidance is effective for financial statements issued for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted as of the beginning of an interim or annual reporting period. We are currently evaluating the impact, if any, that this new standard will have on our financial position and results of operations.
In January 2016, the FASB issued ASU No. 2016-01,
Accounting for Financial Instruments – Recognition and Measurement.
The new guidance changes how entities measure equity investments and present changes in the fair value of financial liabilities. The new guidance requires entities to measure equity investments that do not result in consolidation and are not accounted under the equity method at fair value and recognize any changes in fair value in net income unless the investments qualify for the new practicality exception. A practicality exception will apply to those equity investments that do not have a readily determinable fair value and do
8
not qualify for the practical expedient to estimate fair value and as such these investments may
be measured at cost. The new guidance is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years.
We are currently evaluating the impact, if any, that this new standard will have on our financial
position and results of operations.
In November 2015, the FASB issued ASU No. 2015-17,
Income Taxes (Topic 740) Balance Sheet Classification of Deferred Taxes.
This new standard provides guidance to simplify the presentation of deferred taxes in a classified statement of financial position. The guidance requires deferred tax liabilities and assets to be classified as noncurrent in a classified statement of financial position. The new guidance is effective for financial statements issued for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Early adoption is permitted as of the beginning of an interim or annual reporting period. The Company elected to retroactively adopt the accounting standard in the beginning of the fourth quarter of 2015, and the adoption had no material impact on the consolidated financial position of the Company.
In April 2015, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2015-03,
Simplifying the Presentation of Debt Issuance Costs.
ASU No. 2015-03 requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts, and not recorded as separate assets. This update is effective for reporting periods beginning after December 15, 2015, and is to be applied on a retrospective basis. The Company has adopted the accounting standard and presented its debt issuance costs as a deduction from the long-term debt in the balance sheet. Debt issuance costs totaled $3.7 million and $4.5 million at March 31, 2016 and December 31, 2015, respectively.
In August 2014, the FASB issued ASU No. 2014-15,
Presentation of Financial Statements- Going Concern.
This new standard defines management’s responsibility to evaluate whether there is substantial doubt about an organization’s ability to continue as a going concern and to provide related footnote disclosures. The standard is effective for annual reporting periods ending after December 15, 2016 and interim periods thereafter. The Company has elected to early adopt the accounting standard during the first quarter of 2016.
In May 2014, the FASB issued ASU No. 2014-09,
Revenue from Contracts with Customers (Topic 606).
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. In July 2015, the FASB postponed the effective date of this standard. The standard is now effective for the first interim period within annual reporting periods beginning after December 15, 2017. 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 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
9
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 th
e Series C preferred stock with respect to dividend rights and rights upon liquidation, winding up and dissolution of SBS.
(c) 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.
(d) Stock Options and Nonvested Share Activity
Stock options have only been granted to employees or directors. Our stock options have various vesting schedules and are subject to the employees’ continuing service. A summary of the status of our stock options, as of March 31, 2016 and December 31, 2015, and changes during the quarter ended March 31, 2016, is presented below (in thousands, except per share data and contractual life):
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Average
|
|
|
Aggregate
|
|
|
Remaining
|
|
|
|
|
|
|
Exercise
|
|
|
Intrinsic
|
|
|
Contractual
|
|
|
Shares
|
|
|
Price
|
|
|
Value
|
|
|
Life (Years)
|
|
Outstanding at December 31, 2015
|
|
128
|
|
|
$
|
11.25
|
|
|
|
|
|
|
|
|
|
Granted
|
|
315
|
|
|
|
3.07
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2016
|
|
443
|
|
|
$
|
5.42
|
|
|
$
|
126,100
|
|
|
|
8.8
|
|
Exercisable at March 31, 2016
|
|
223
|
|
|
$
|
7.38
|
|
|
$
|
67,900
|
|
|
|
7.1
|
|
The following table summarizes information about our stock options outstanding and exercisable at March 31, 2016 (in thousands, except per share data and contractual life):
|
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
|
|
223
|
|
|
|
220
|
|
|
$
|
5.42
|
|
|
|
8.8
|
|
|
|
223
|
|
|
$
|
7.38
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
223
|
|
|
|
220
|
|
|
|
5.42
|
|
|
|
8.8
|
|
|
|
223
|
|
|
|
7.38
|
|
As of March 31, 2016, there was $0.6 million of total unrecognized compensation costs related to nonvested stock-based compensation arrangements granted under all of our plans. The cost is expected to be recognized over a weighted average period of approximately 1.9 years.
(e) Accumulated Other Comprehensive Loss
Our accumulated other comprehensive loss is comprised of accumulated gains and losses on a derivative instrument (interest rate swap) that qualifies for cash flow hedge treatment. Our total comprehensive loss consists of our net loss and a gain 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.
10
For the
three-months ended March 31, 2016
and
2015
, we reclassified from other comprehensive loss to interest expense $0.
1
million. During the
three-months ended March 31, 2016
and
2015
, we recognized in other comprehensive
income
, net of taxes- an
unrealized gain on derivative instrument of approximately $
4
5
thousand and $
32
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-month periods ended March 31, 2016 and 2015 (in thousands):
|
Three-Months Ended
|
|
|
March 31,
|
|
|
2016
|
|
|
2015
|
|
Basic weighted average shares outstanding
|
|
7,267
|
|
|
|
7,267
|
|
Effect of dilutive equity instruments
|
|
—
|
|
|
|
—
|
|
Dilutive weighted average shares outstanding
|
|
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
|
|
433
|
|
|
|
104
|
|
11
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
|
|
|
March 31,
|
|
|
2016
|
|
|
2015
|
|
Net revenue:
|
|
|
|
|
|
|
|
Radio
|
$
|
28,525
|
|
|
|
29,227
|
|
Television
|
|
3,088
|
|
|
|
2,915
|
|
Consolidated
|
$
|
31,613
|
|
|
|
32,142
|
|
Engineering and programming expenses:
|
|
|
|
|
|
|
|
Radio
|
$
|
6,032
|
|
|
|
5,399
|
|
Television
|
|
2,130
|
|
|
|
2,265
|
|
Consolidated
|
$
|
8,162
|
|
|
|
7,664
|
|
Selling, general and administrative expenses:
|
|
|
|
|
|
|
|
Radio
|
$
|
13,476
|
|
|
|
13,648
|
|
Television
|
|
1,979
|
|
|
|
1,614
|
|
Consolidated
|
$
|
15,455
|
|
|
|
15,262
|
|
Corporate expenses:
|
$
|
2,993
|
|
|
|
2,148
|
|
Depreciation and amortization:
|
|
|
|
|
|
|
|
Radio
|
$
|
488
|
|
|
|
507
|
|
Television
|
|
663
|
|
|
|
684
|
|
Corporate
|
|
99
|
|
|
|
96
|
|
Consolidated
|
$
|
1,250
|
|
|
|
1,287
|
|
(Gain) loss on the disposal of assets, net:
|
|
|
|
|
|
|
|
Radio
|
$
|
(3
|
)
|
|
|
(6
|
)
|
Television
|
|
—
|
|
|
|
—
|
|
Corporate
|
|
—
|
|
|
|
—
|
|
Consolidated
|
$
|
(3
|
)
|
|
|
(6
|
)
|
Operating income (loss):
|
|
|
|
|
|
|
|
Radio
|
$
|
8,532
|
|
|
|
9,679
|
|
Television
|
|
(1,684
|
)
|
|
|
(1,648
|
)
|
Corporate
|
|
(3,092
|
)
|
|
|
(2,244
|
)
|
Consolidated
|
$
|
3,756
|
|
|
|
5,787
|
|
Capital expenditures:
|
|
|
|
|
|
|
|
Radio
|
$
|
382
|
|
|
|
173
|
|
Television
|
|
94
|
|
|
|
84
|
|
Corporate
|
|
101
|
|
|
|
28
|
|
Consolidated
|
$
|
577
|
|
|
|
285
|
|
|
March 31,
|
|
|
December 31,
|
|
|
2016
|
|
|
2015
|
|
Total Assets:
|
|
|
|
|
|
|
|
Radio
|
$
|
392,341
|
|
|
$
|
392,926
|
|
Television
|
|
55,433
|
|
|
|
51,388
|
|
Corporate
|
|
3,748
|
|
|
|
2,895
|
|
Consolidated
|
$
|
451,522
|
|
|
$
|
447,209
|
|
5. Income Taxes
We are calculating our effective income tax rate using a year-to-date income tax calculation, due to the full valuation allowance on the SBS companies, other than the U.S. Licensing companies and the U.S. AMT tax credits. In assessing the realizability of the
12
deferred tax assets, management considers whether it is more likely than not that some portion or the entire deferred tax assets will not be realized. The ultimate realization of the deferred tax assets is dependant upon the generation of future taxable i
ncome during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax assets, projected future taxable income, and tax planning strategies in making this assessment. Due to the continue
d operating losses reported through Q1 2016, management has not changed its position on valuation allowance
as of
March 31, 2016
.
Our income tax expense differs from the statutory federal tax rate of 35% and related statutory state tax rates primarily due to the tax amortization on some of our indefinite-lived intangible assets that do not have any valuation allowance and the currently generated losses that cannot be benefited due to the full valuation allowance.
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 2012 through 2015. The tax years that remain subject to assessment of additional liabilities by state, local, and Puerto Rico tax authorities are 2010 through 2015.
From time to time, we continue to be subject to state income tax audits, including an audit by a State tax authority (the “State”) for the income tax years from December 31, 2010 through 2013. The audit is in the preliminary stages; however, based on the company’s history of audits with the state, we do not anticipate any material tax impact, and thus have not set up a reserve.
Based on our evaluation, we have concluded that there are no significant uncertain tax positions requiring recognition in our consolidated financial statements as of March 31, 2016 and December 31, 2015.
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-
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 Delaware Court of Chancery (the “Court”) seeking a declaratory judgment that a “Voting Rights Triggering Event” had occurred (as of April 15, 2010) under our certificate of designations for the Series B preferred stock (the “Certificate of Designations”) as a result of our non-payment of dividends. The claim alleges 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 12.5% Senior Secured Notes due 2017 (the “Notes”) under the Indenture governing the Notes, among other things, 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 injunction requiring us to repurchase the Series B preferred stock and 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 (collectively with Visium Catalyst Credit Master Fund, Ltd., “Plaintiffs”) as additional plaintiffs. We filed an Opening Brief in support of our Motion to Dismiss on March 31, 2014. 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 Voting Rights Triggering Event 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 amended complaint. The stay has since been lifted. 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 amended complaint. A hearing on our motion to dismiss Counts I, II and IV of the amended complaint was held on February 10, 2015. On May 19, 2015, the Court of Chancery granted our motion to dismiss Counts I, II and IV of the amended complaint. An order dismissing those Counts with prejudice was entered on May 22, 2015.
At present, Count III of the amended complaint remains outstanding. Court of Chancery Rule 41 (e) permits any party (or the Court
sua sponte
) to move for a dismissal for failure to prosecute in any case wherein no action has been taken for a period of one
13
year. Given that the last action in this case was taken on May 22, 2015, such a motion may be filed on or after May 22, 2016.
We note, however, that such a motion could be denied if “good reason for the inaction is given”, as provided by Court of Chancery Rule 41 (e)
. In addition, on April 21, 2016
,
the Court requested a status update from the parties regarding proceedings on Cou
nt III of the amended complaint
.
We deny the allegations contained in the amended 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.
The estimated fair values of our financial instruments are as follows (in millions):
|
|
|
March 31, 2016
|
|
|
December 31, 2015
|
|
|
Fair Value
|
|
Carrying
|
|
|
Fair
|
|
|
Carrying
|
|
|
Fair
|
|
Description
|
Hierarchy
|
|
Amount
|
|
|
Value
|
|
|
Amount
|
|
|
Value
|
|
12.5% senior secured notes due 2017
|
Level 2
|
|
$
|
275.0
|
|
|
|
276.4
|
|
|
$
|
275.0
|
|
|
|
281.2
|
|
10
3
/
4
% Series B cumulative exchangeable
redeemable preferred stock
|
Level 3
|
|
|
148.5
|
|
|
|
57.3
|
|
|
|
146.1
|
|
|
|
60.1
|
|
Promissory note payable, included in other long-
term debt
|
Level 3
|
|
|
4.8
|
|
|
|
4.3
|
|
|
|
4.9
|
|
|
|
4.2
|
|
Fair Value of Derivative Instruments
The following table represents required quantitative disclosures regarding fair values of our derivative instruments (in thousands).
|
|
|
|
|
Fair value measurements at March 31, 2016
|
|
|
|
|
|
|
Liabilities
|
|
Description
|
March 31, 2016
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
|
$
|
175
|
|
|
|
—
|
|
|
|
175
|
|
|
|
—
|
|
14
|
|
|
|
|
Fair value measurements at December 31, 2015
|
|
|
|
|
|
|
Liabilities
|
|
Description
|
December 31, 2015
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
|
$
|
220
|
|
|
|
—
|
|
|
|
220
|
|
|
|
—
|
|
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-month periods ended March 31, 2016 and 2015, respectively.
|
|
Three-Months Ended
|
|
|
|
March 31,
|
|
Interest rate swaps
|
|
2016
|
|
|
2015
|
|
Gain recognized in other comprehensive loss
(effective portion)
|
|
|
45
|
|
|
|
32
|
|
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 agreed to 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 March 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
$
|
175
|
|
|
|
—
|
|
|
|
175
|
|
|
|
175
|
|
|
|
—
|
|
|
|
—
|
|
|
As of December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
$
|
220
|
|
|
|
—
|
|
|
|
220
|
|
|
|
220
|
|
|
|
—
|
|
|
|
—
|
|
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”), due April 15, 2017, 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
15
offering, together with some ca
sh on hand, to repay and terminate the senior credit facility term loan, and to pay the transaction costs related to the offering.
The Notes mature in April of 2017
. Cash from operating activities will not be sufficient to repay the Notes.
During the first
quarter of 2016, w
e have engaged financial advisors to assist us in developing a
comprehensive
refinancing strategy
that considers all of the Company’s obligations under its debt and capital structure. Additionally,
we are participating in the Broadcast
Incentive Auction and evaluating the potential monetization of our spectrum and other assets to generate cash proceeds that would be used to repay our outstanding notes in accordance with the Indenture. T
he inability of the Comp
any to repay or refinance it
s obligations so as
to restructure its capital structure in
a
manner that ensures its short and long term liquidity
could result in significant liquidity requirements on the Company.
As
there can be no assurance that we will be able to successfully impleme
nt our strategy, this condition raises substantial doubt about the Company’s ability to continue as a going-concern.
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 (the “Interest Payment Date”), 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 measurement periods that determine if Additional Interest is applicable for the respective Interest Payment Dates are as follows:
(1)
|
Six-months ended December 31, 2012 or as of December 31, 2012 for the Interest Payment Date of April 15, 2013
|
(2)
|
Last twelve months ended June 30, 2013 or as of June 30, 2013 for the Interest Payment Date of October 15, 2013
|
(3)
|
Last twelve months ended December 31, 2013 or as of December 31, 2013 for the Interest Payment Date of April 15, 2014
|
(4)
|
Last twelve months ended June 30, 2014 or as of June 30, 2014 for the Interest Payment Date of October 15, 2014
|
(5)
|
Last twelve months ended December 31, 2014 or as of December 31, 2014 for the Interest Payment Date of April 15, 2015
|
(6)
|
Last twelve months ended June 30, 2015 or as of June 30, 2015 for the Interest Payment Date of October 15, 2015
|
(7)
|
Last twelve months ended December 31, 2015 or as of December 31, 2015 for the Interest Payment Date of April 15, 2016
|
(8)
|
Last twelve months ended June 30, 2016 or as of June 30, 2016 for the Interest Payment Date of October 15, 2016
|
(9)
|
Last twelve months ended December 31, 2016 or as of December 31, 2016 for the Interest Payment Date of April 15, 2017
|
Additional Interest during any given interest period, shall not be deemed to “accrue”. Rather, Additional Interest becomes payable on a given Interest Payment Date (April 15 or October 15) unless the condition in either clause (a) or (b) above has been met as of that Interest Payment Date or unless the Television Segment has been divested or the Notes redeemed prior to that Interest Payment Date.
Although for the Additional Interest applicable periods (1), (2), (3), (4), (5), (6) and (7) 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, no Additional Interest was incurred and/or payable for those respective Interest Payment Dates.
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
16
existing and future subsidiaries formed in Puerto Rico (the “Puerto Rican Subsidiarie
s”), (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, principal 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.
As of March 31, 2016, 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
On October 30, 2003, we partially financed the purchase of a radio station with proceeds from the sale, through a private placement, of 75,000 shares of our 10 3/4% Series A cumulative exchangeable redeemable preferred stock, par value $0.01 per share, with a liquidation preference of $1,000 per share (the “Series A preferred stock”), without a specified maturity date. The gross proceeds from the issuance of the Series A preferred stock amounted to $75.0 million.
On February 18, 2004, we commenced an offer to exchange registered shares of our 10 3/4% Series B cumulative exchangeable redeemable preferred stock, par value $0.01 per share and liquidation preference of $1,000 per share for any and all shares of our outstanding unregistered Series A preferred stock. On April 5, 2004, we completed the exchange offer and exchanged 76,702 shares of our Series B preferred stock for all of our then outstanding shares of Series A preferred stock.
We had the option to redeem all or some of the registered Series B preferred stock for cash on or after October 15, 2009 at 103.583%, October 15, 2010 at 101.792% and October 15, 2011 and thereafter at 100%, plus accumulated and unpaid dividends to the redemption date. On October 15, 2013, each holder of Series B preferred stock had the right to request that we repurchase (subject to the legal availability of funds under 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
17
described in more detail below) on those shares to the date of repurchase. Under the terms of our Series B preferred stock, we are required to pay dividends at a rate of 10 3/4% per year o
f the $1,000 liquidation preference per share of Series B preferred stock. From October 30, 2003 to October 15, 2008, we had the option to pay these dividends in either cash or additional shares of Series
B
preferred stock. During October 15, 2003 to Octob
er 30, 2008, we increased the carrying amount of the Series B preferred stock by approximately $17.3 million for stock dividends, which were accreted using the effective interest method. Since October 15, 2008, we have been required to pay the dividends on
our Series B preferred stock in cash.
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 are entitled to elect two directors to newly created positions on our Board of Directors, and we have been 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. At our Annual Meeting of Stockholders in 2014, the holders of the Series B preferred stock nominated and elected Alan Miller and Gary Stone to serve as the Series B preferred stock directors who have remained on the board since then.
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. During the continuation of the Voting Rights Triggering Event, the Indenture governing our Notes 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
.
As of March 31, 2016, the aggregate cumulative unpaid dividends on the outstanding shares of the Series B preferred stock was approximately $58.0 million, which is accrued on our condensed consolidated balance sheet as 10 ¾% Series B cumulative exchangeable redeemable preferred stock.
Redemption Date and Subsequent Accounting Treatment of 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 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”).
11. Asset Exchange
On January 4, 2016, the Company completed an asset exchange with International Broadcasting Corp. under which the Company agreed to exchange certain assets used or useful in the operations of WIOA-FM, WIOC-FM, and WZET-FM in Puerto Rico
18
for certain assets
used or useful in the operations of WTCV (DT), WVEO (DT), and WVOZ (TV) in Puerto Rico previously owned and operated by International Broadcasting Corp.
The asset exchange is being accounted for as a non-monetary exchange in accordance with ASC-845
Nonmonetary Transactions
, as the Company did not acquire any significant processes to meet the definition of a business in accordance with ASC 805
Business Combinations
. As the transaction involved significant monetary consideration, the Company recorded the exchange at fair value. The fair value of the assets received in the asset exchange was $2.9 million, as determined by an independent third party valuation. In addition, the Company paid $1.9 million in cash which we attribute to the value of the acquired television spectrum. Subsequently, we have filed an application to participate in the FCC’s Broadcast Incentive Auction with our Puerto Rico television stations to potentially generate cash proceeds that are expected to be created by the auction process.
19