The Daily Magic Formula Stock for 03/29/2008 is Westwood One Inc. According to the Magic Formula Investing Web Site, the ebit yield is 16% and the EBIT ROIC is >100 %.
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We supply radio and television stations with information services and programming. We are one of the largest domestic outsource provider of traffic reporting services and one of the nationâ€™s largest radio networks, producing and distributing national news, sports, talk, music and special event programs, in addition to local news, sports, weather, video news and other information programming.
We derive substantially all of our revenue from the sale of :10 second, :30 second and :60 second commercial airtime to advertisers. We obtain the commercial airtime we sell to advertisers from radio and television affiliates, or other distribution partners, in exchange for the programming or information services it provides to them. We often supplement the commercial airtime we receive from programming and information services by providing affiliates with compensation to obtain additional commercial airtime. That commercial airtime is sold to local/regional advertisers (typically :10 second commercial airtime) and to national advertisers (typically :30 or :60 second commercial airtime). By purchasing commercial airtime from us, advertisers are able to have their commercial messages broadcast on radio and television stations throughout the United States, reaching demographically defined listening audiences.
We provide local traffic and information broadcast reports in over 95 of the top 100 Metro Survey Area markets (referred to herein as â€śMSA marketsâ€ť) in the United States. We also offer radio stations traditional news services, including CBS Radio news and CNN Radio news, in addition to weekday and weekend news and entertainment features and programs. These programs include: major sporting events, including the National Football League, NCAA football and basketball games, the National Hockey League, the Masters and the Olympics, live personality intensive talk shows, live concert broadcasts, countdown shows, music and interview programs and exclusive satellite simulcasts with cable networks.
We continue to develop alternative revenue streams generally by leveraging our existing resources and creating new distribution channels for our extensive content. We provide programming to satellite radio services, services to complimentary distribution channels, data for digital map and automotive navigation systems, and for distribution into all electronic mediums.
Until recently, we were managed for fourteen years by CBS Radio Inc. (â€śCBS Radioâ€ť; previously known as Infinity Broadcasting Corporation (â€śInfinityâ€ť)), a wholly-owned subsidiary of CBS Corporation, pursuant to a management agreement between CBS Radio (then Infinity) and us which was scheduled to expire on March 31, 2009 (the â€śManagement Agreementâ€ť). On October 2, 2007, we entered into a definitive agreement with CBS Radio documenting a long-term arrangement through March 31, 2017. The closing under such agreement occurred on March 3, 2008 and on such date, the Management Agreement and CBS Representation Agreement terminated. As part of the new arrangement, CBS Radio agreed to broadcast our commercial inventory for our Network and Traffic and Information divisions through March 31, 2017 in exchange for certain programming and/or cash compensation. In addition, certain existing agreements between CBS Radio and us, including the News Programming Agreement, the Technical Services Agreement and the Trademark License Agreement were amended and restated through March 31, 2017.
There are approximately 11,000 commercial radio stations in the United States.
A radio station selects a style of programming (â€śformatâ€ť) to attract a target listening audience and thereby attracts advertisers that are targeting that audience demographic. There are many formats from which a station may select, including news, talk, sports and various types of music and entertainment programming.
A radio station has two principal ways of effectively competing for revenue. First, it can differentiate itself in its local market by selecting and successfully executing a format targeted at a particular audience thus enabling advertisers to place their commercial messages on stations aimed at audiences with certain demographic characteristics. A station can also broadcast special programming, syndicated shows, sporting events or national news products, such as those supplied by us, not available to its competitors within its format. National programming broadcast on an exclusive geographic basis can help differentiate a station within its market, and thereby enable a station to increase its audience and advertising revenue.
In addition to the traditional â€śterrestrialâ€ť radio stations, new technologies and services have entered the marketplace. Currently, there are a number of satellite-based broadcasters with programming very similar to traditional radio. Additionally, the radio industry has begun to roll out HD â€śHigh Definitionâ€ť channels which may effectively increase the number of radio stations in the United States.
Radio advertising time can be purchased on a local, regional or national basis. Local and regional purchases allow an advertiser to choose a geographic market for the broadcast of commercial messages. Local and regional purchases are typically best suited for an advertiser whose business or ad campaign is in a specific geographic area. Advertising purchased from a national radio network allows an advertiser to target its commercial messages to a specific demographic audience, nationally, on a cost-efficient basis. In addition, an advertiser can choose to emphasize its message in a certain market or markets by supplementing a national purchase with local and/or regional purchases.
To plan its estimated network audience delivery and demographic composition, specific historical measurement information is available to advertisers from independent rating services such as Arbitron and their RADAR rating service. The rating service provides historical demographic information such as the age and gender composition of the listening audiences. Consequently, advertisers can predict that their advertisements are being heard by their target listening audience.
In addition to targeting and reaching defined audiences, our products provide creative marketing opportunities, including endorsements by trusted personalities, product integration, association with high quality and desirable blue chip programming and on-location sponsorship opportunities at cost effective rates.
Our business strategy is to provide for the programming needs of radio stations by supplying to radio stations programs and services that individual stations may not be able to produce on their own on a cost effective basis. We offer radio stations traffic and news information, as well as a wide selection of regularly scheduled and special event syndicated programming. The information and programs are produced by us and, therefore, the stations typically have virtually no production costs. With respect to our programs, each program is offered for broadcast by us exclusively to one station in its geographic market, which assists the station in competing for audience share in its local marketplace. In addition, except for news programming, our programs contain available commercial airtime that the stations may sell to local advertisers. We typically distribute promotional announcements to the stations and occasionally places advertisements in trade and consumer publications to further promote the upcoming broadcast of its programs.
We expanded our product offerings in 1996 to include providing local traffic, news, sports and weather programming to radio stations and other media outlets in selected cities across the United States. This expansion gave our advertisers the ability to easily supplement their national purchases with local and regional purchases from us. It also allowed us to develop relationships with local and regional advertisers.
We enter into affiliation arrangements with radio stations which require the affiliate to provide us with a specific number of commercial positions which it aggregates by similar day and time periods and resells to its advertisers. Some affiliation agreements also require a station to broadcast our programs and to use a portion of the programâ€™s commercial slots to air national advertisements and any related promotional spots.
Affiliation arrangements specify the number of times and the approximate daypart each program and advertisement may be broadcast. We require that each station complete and promptly return to us an affidavit (proof-of-performance) that verifies the time of each broadcast. Affiliation agreements generally run for a period of at least one year and are automatically renewable for subsequent periods. We have agreements with over 5,000 radio stations, many of which have more than one arrangement.
We have personnel responsible for station sales and marketing its programs to radio stations. Our staff develops and maintains close, professional relationships with radio station personnel to provide them with quick programming assistance.
Local Traffic and Information Programming
Through our Traffic and Information Division, we provide traffic reports and local news, weather and sports information programming to radio and television affiliates.
We gather traffic and other data utilizing our information-gathering infrastructure, which includes aircraft (helicopters and airplanes), broadcast-quality remote camera systems positioned at strategically located fixed positions and on aircraft, mobile units and wireless systems, and by accessing various government-based traffic tracking systems. We also gather information from various third-party news and information services. The information is processed, converted into broadcast copy and entered into our computer systems by our local writers and producers. This permits us to easily re-sell the information to third parties for distribution through the internet, wireless devices or personal digital assistants (â€śPDAsâ€ť) and various other distribution channels. Our professional announcers read the customized reports on the air. Our information reports (including the length of report, content of report, specific geographic coverage area, time of broadcast, number of reports aired per day, broadcasterâ€™s style, etc.) are customized to meet each individual affiliateâ€™s requirements. We typically work closely with the program directors, news directors and general managers of our affiliates to ensure that our services meet the affiliatesâ€™ goals and standards. We and the affiliates jointly select the on-air talent to ensure that each on-air talentâ€™s style is appropriate for the stationâ€™s format. Our on-air talent often becomes integral â€śpersonalitiesâ€ť on such affiliate stations as a result of their significant on-air presence and interaction with the stationsâ€™ on-air personnel. In order to realize operating efficiencies, we endeavor to utilize our professional on-air talent on multiple affiliate stations within a particular market.
We believe that our extensive fleet of aircraft and other information-gathering technology and broadcast equipment have allowed us to provide high quality programming, enabling us to retain and expand our affiliate base. In the aggregate, we utilize approximately: 77 helicopters and fixed-wing aircraft; 20 mobile units; 30 airborne camera systems; 182 fixed-position proprietary cameras; 65 broadcast studios and approximately 1,500 broadcasters and producers. We also maintain a staff of computer programmers and graphics experts to supply customized graphics and other visual programming elements to television station affiliates. In addition, our operation centers and broadcast studios have sophisticated computer technology, video and broadcast equipment and cellular and wireless technology, which enables our on-air talent to deliver reports to our affiliates. The infrastructure and resources dedicated to a specific market by us are determined by the size of the market, the number of affiliates we serve in the market and the type of services being provided. We believe our long-standing and continued investment in incident data and traffic gathering infrastructure differentiates us from our competitors.
We generally do not require our affiliates to identify us as the supplier of our information reports. This provides our affiliates with a high degree of customization and flexibility, as each affiliate has the right to present the information reports provided by us as if the affiliate had generated the reports with its own resources.
As a result of our extensive network of operations and talent, we regularly report breaking and important news stories and provide our affiliates with live coverage of these stories. We are able to customize and personalize our reports of breaking stories using our individual affiliatesâ€™ call letters from the scene of news events as we did when providing live airborne coverage of the September 11 th terrorist attack on the World Trade Center and Hurricane Katrina. By using our news helicopters, we feed live video to television affiliates around the country. Moreover, by leveraging our infrastructure, the same reporters provide live customized airborne reports for our radio affiliates via our Metro Source service, which is described below. We believe that we are the only radio network news organization that has local studio operations that cover in excess of 90 markets and that is able to provide customized reports to these markets.
Metro Source, an information service available to subscribing affiliates, is an information system and digital audio workstation that allows our news affiliates to receive via satellite and view, write, edit and report the latest news, features and show preparation material. With this product, we provide continuously updated and breaking news, weather, sports, business and entertainment information to our affiliate stations which have subscribed to the service. Information and content for Metro Source is primarily generated from our staff of news bureau chiefs, state correspondents and professional news writers and reporters.
Local, regional and national news and information stories are fed to our national news operations center in Phoenix, Arizona where the information is verified, edited, produced and disseminated via satellite to our internal Metro Source workstations located in each of our operations centers and to workstations located at affiliate radio stations nationwide. Metro Source includes proprietary software that allows for customizing reports and editing in both audio and text formats. The benefit to stations is that Metro Source allows them to substantially reduce time and cost from the news gathering and editing process at the station level, while providing greater volume and quality news and information coverage from a single source.
Television Programming Services
We supply Television Traffic Services (â€śMetroTV Servicesâ€ť) to over 190 television stations. Similar to our radio programming services, we supply our MetroTV Services customized information reports which are generally delivered on air by our reporters to our television station affiliates. In addition, we supply customized graphics and other visual programming elements to our television station affiliates.
We utilize live studio cameras in order to enable our traffic reporters to provide our Video News Services on television from our local broadcast studios. In addition, we provide Video News Services from our aircraft and fixed-position based camera systems. The Video News Services include: (i) live video coverage from strategically located fixed-position camera systems; (ii) live video news feeds from our aircraft; and (iii) full-service, 24 hours per day/7 days per week video coverage from our camera crews using broadcast quality camera equipment and news vehicles.
SmartRoute (â€śSRSâ€ť), whose operating assets were acquired by us in 2000, develops non-broadcast traffic information. SRS develops innovative techniques for gathering local traffic and transportation information, as well as new methods of distributing such information to the public. We are currently working with several public and private entities across the United States to improve dissemination of traffic and transportation information. SRS revenue is not presently a significant source of revenue to us.
Through SRS, we collect, organize and distribute a database of advanced traveler information to automobiles, homes and offices through various electronic media and telecommunications. We deliver our information under the SRS brand name. In addition, we have participated in a number of Federal and State funded Intelligent Transportation System projects, including various operational 511 Interactive Voice Response (â€śIVRâ€ť), advanced web sites, and combined advanced traveler and transit information systems for Massachusetts, Florida, North Carolina, Virginia, Missouri and New Jersey Departments of Transportation. SRS also operates Traffic Management Centers for Jacksonville, Florida; Massachusetts; South East Florida; and New Jersey Departments of Transportation.
We have been working with a variety of private companies to deploy commercial products and services involving traveler information. These relationships allow for the provision of information on a personalized basis through numerous delivery mechanisms, including the internet, paging, FM subcarrier, traditional cellular and newly-developed and evolving wireless systems. Information can be delivered to a wide array of devices including pagers, computers, and in-vehicle navigation and information systems. In particular, we have been aggressively working to expand our â€śReal-Trafficâ€ť product line primarily by adding real-time traffic information on the internet.
National Radio Programming
We produce and distribute regularly scheduled and special syndicated programs, including exclusive live concerts, music and interview shows, national music countdowns, lifestyle short features, news broadcasts, talk programs, sporting events and sports features.
We control most aspects of the production of our programs, and accordingly, are able to customize our programs to respond to current and/or changing listening preferences. We produce regularly scheduled short-form programs (typically five minutes or less) and long-form programs (typically 60 minutes or longer). Typically, the short-form programs are produced at our in-house facilities located in Culver City, California, and New York, New York. The long-form programs include shows produced primarily at our in-house production facilities and recordings of live concert performances and sports events made on location.
We also produce and distribute special event syndicated programs. In 2007, we produced and distributed numerous special event programs, including exclusive radio broadcasts of The GRAMMY Awards, the Academy of Country Music Awards, MTV Music Awards and the BET Awards, among others.
We obtain most of the programming for our concert series by recording live concert performances of prominent recording artists. The agreements with these artists often provide the exclusive right to broadcast the concerts worldwide over the radio (whether live or pre-recorded) for a specified period of time. We may also obtain interviews with the recording artist and retain a copy of the recording of the concert and the interview for use in our radio programs and as additions to our extensive tape library. The agreements provide the artist with master recordings of their concerts and nationwide exposure on affiliated radio stations. In certain of these cases, the artists may receive compensation.
Our syndicated programs are primarily produced at our in-house production facilities. We determine the content and style of a program based on the target audience we wish to reach. We assign a producer, writer, narrator or host, interviewer and other personnel to record and produce the programs. Because we control the production process, we can refine the programsâ€™ content to respond to the needs of our affiliated stations and national advertisers. In addition, we can tailor program content in response to current and anticipated audience demand.
We believe that our tape library is a valuable resource for use in future programming and revenue generating capabilities. The library contains previously broadcast programs, thousands of live concert performances; over 16,000 artist interviews; daily news programs; sports and entertainment features; Capitol Hill hearings and other special events. New programs can be created and developed at a low cost by excerpting material from the library.
Advertising Sales and Marketing
We package our radio commercial airtime on a network basis, covering all affiliates in relevant markets, either locally, regionally or nationally. This packaged airtime typically appeals to advertisers seeking a broad demographic reach. Because we generally sell our commercial airtime on a network basis rather than station-by-station, we do not compete for advertising dollars with individual local radio station affiliates. We believe that this is a key factor in maintaining our affiliate relationships. We package our television commercial airtime on a local, regional and national network basis. We have developed a separate sales force to sell our television commercial airtime and to optimize the efforts of our national internal structure of sales representatives. Our advertising sales force is comprised of approximately 130 sales representatives and sales managers, who are part of a larger sales workforce.
In most of the markets in which the Traffic and Information Division conducts operations, we maintain an advertising sales office as part of our operations center. Our advertising sales force is able to sell available commercial airtime in any and all of our markets in addition to selling such airtime in each local market, which we believe affords our sales representatives an advantage over certain competitors. For example, an airline advertiser can purchase sponsorship advertising packages in multiple markets from our local sales representative in the city in which the airline is headquartered.
Our typical radio advertisement for traffic and information programming consists of an opening announcement and a ten-second commercial message presented immediately prior to, in the middle of, or immediately following a regularly scheduled information report. Because we have numerous radio station affiliates in each of our markets (averaging approximately 25 affiliates per market in our top 50 markets), we believe that our traffic and information broadcasts reach more people, more often, in a higher impact manner than can be achieved using any other advertising medium. We combine our commercial airtime into multiple â€śsponsorshipâ€ť packages which we sell as an information sponsorship package to advertisers throughout our networks on a local, regional or national basis, primarily during morning and afternoon drive periods.
We believe that the positioning of advertisements within or adjacent to our information reports appeals to advertisers because the advertisersâ€™ messages are broadcast along with regularly scheduled programming during peak morning and afternoon drive times when a majority of the radio audience is listening. Radio advertisements broadcast during these times typically generate premium rates. Moreover, surveys commissioned by us demonstrate that because our customized information reports are related to topics of significant interest to listeners, listeners often seek out our information reports. Since advertisersâ€™ messages are embedded in our information reports, such messages have a high degree of impact on listeners and generally will not be â€śpre-emptedâ€ť (i.e., moved by the radio station to another time slot). Most of our advertisements are read live by our on-air talent, providing our advertisers with the added benefit of an implied endorsement for their product.
Our Network Division provides national advertisers with a cost-effective way to communicate their commercial messages to large listening audiences nationwide through purchases of commercial airtime in our national radio networks and programs. An advertiser can obtain both frequency (number of exposures to the target audience) and reach (size of listening audience) by purchasing advertising time from us. By purchasing time in networks or programs directed to different formats, advertisers can be assured of obtaining high market penetration and visibility as their commercial messages will be broadcast on several stations in the same market at the same time. On occasion, we support our national sponsors with promotional announcements and advertisements in trade and consumer publications. This support promotes the upcoming broadcasts of our programs and is designed to increase the advertisersâ€™ target listening audience.
In most cases, we provide our MetroTV Services to television stations in exchange for thirty-second commercial airtime that we package and sell on a national basis. The amount and placement of the commercial airtime that we receive from television stations varies by market and the type of service provided by us. As we have provided enhanced television video services, we have been able to acquire more valuable commercial airtime. We believe that it offers advertisers significant benefits because, unlike traditional television networks, we often deliver more than one station in major markets and advertisers may select specific markets.
We have established a morning TV news network for our advertisersâ€™ commercials to air during local news programming and local news breaks in most dayparts. Because we have affiliated a large number of network television stations in major markets, our morning news network delivers a significant national household rating in an efficient and compelling local news environment. As we continue to expand our service offerings for local television affiliates, we plan to create additional news networks to leverage our television news gathering infrastructure.
In the MSA markets in which we operate, we compete for advertising revenue with local print and other forms of communications media, including magazines, local radio, outdoor advertising, network radio and network television advertising, transit advertising, direct response advertising, yellow page directories, internet/new media and point-of-sale advertising. Although we are significantly larger than the next largest provider of traffic and local information services, there are several multi-market operations providing local radio and television programming services in various markets. Furthermore, in recent history, the radio industry has experienced a significant increase in the number of shorter-duration commercial inventory. Also, the consolidation of the radio industry has created opportunities for large radio groups, such as Clear Channel Communications, CBS Radio, ABC and Citadel and other station owners to gather information on their own.
In marketing our programs to national advertisers, we directly compete with other radio networks as well as with independent radio syndication producers and distributors. As a result of consolidation in the radio industry, companies owning large groups of stations have begun to create competing networks that have resulted in additional competition for local, regional and network radio advertising expenditures. In addition, we compete for advertising revenue with network television, cable television, print and other forms of communications media. We believe that the quality of our programming and the strength of our station relations and advertising sales forces enable us to compete effectively with other forms of communication media. We market our programs to radio stations, including affiliates of other radio networks that we believe will have the largest and most desirable listening audience for each of our programs. We often have different programs airing on a number of stations in the same geographic market at the same time. We believe that in comparison with any other independent radio syndication producer and distributor or radio network we have a more diversified selection of programming from which national advertisers and radio stations may choose. In addition, we both produce and distribute programs, thereby enabling us to respond more effectively to the demands of advertisers and radio stations.
The increase in the number of program formats has led to increased competition among local radio stations for audience. As stations attempt to differentiate themselves in an increasingly competitive environment, their demand for quality programming available from outside programming sources increases. This demand has been intensified by high operating and production costs at local radio stations and increased competition for local advertising revenue.
Radio broadcasting and station ownership are regulated by the Federal Communications Commission (the â€śFCCâ€ť). As a producer and distributor of radio programs and information services, we are generally not subject to regulation by the FCC. The Traffic and Information Division utilizes FCC regulated two-way radio frequencies pursuant to licenses issued by the FCC.
On December 31, 2007, we had approximately 2,000 employees, including 672 part-time employees. In addition, we maintain continuing relationships with numerous independent writers, program hosts, technical personnel and producers. Approximately 570 of our employees are covered by collective bargaining agreements. We believe relations with our employees, unions and independent contractors are satisfactory.
Mr. Berger â€“ has been a director of the Company since April 4, 2006. Mr. Berger was the Executive Vice President and Chief Financial Officer of CBS Radio from January 2006 to November 2007. Mr. Berger was the Executive Vice President, Chief Financial Officer, and a member of the Board of Directors of Emmis Communications Corporation from 1999 to 2005. Prior to Emmis, Mr. Berger served as Group President of the Energy Marketing Division for LG&E Energy Corporation, where he previously served as Executive Vice President and Chief Financial Officer. Mr. Berger is a cum laude graduate of the University of Massachusetts, Amherst, with a degree in business administration. He is also a CPA who serves on numerous civic boards and committees.
Dr. Carnesale â€“ has been a director of the Company since August 3, 2005. Dr. Carnesale is Chancellor Emeritus and Professor at the University of California, Los Angeles (UCLA). He served as Chancellor of UCLA from July 1, 1997 through June 20, 2006. Prior to joining UCLA, Dr. Carnesale served for 23 years as Professor of Public Policy and Administration at Harvard Universityâ€™s John F. Kennedy School of Government. During that period, Dr. Carnesale also served as Provost of the University (October 1994 â€“ June 1997) and Dean of the Kennedy School (November 1991 â€“ December 1995). Dr. Carnesale is a director of Teradyne, Inc.
Mr. Dennis â€“ has been a director of the Company since May 24, 1994. Mr. Dennis has been a Managing Director of Pacific Venture Group, a healthcare venture capital firm, since November 2004. Mr. Dennis was a private investor and consultant from December 2002 to November 2004. Mr. Dennis served as Vice Chairman, Co-President, Chief Corporate Officer and Chief Financial Officer of Tenet Healthcare, a hospital owner and healthcare provider, from March 2000 through November 2002. Mr. Dennis served as Managing Director, Investment Banking for Donaldson, Lufkin & Jenrette Securities Corporation from April 1989 to February 2000.
Mr. Greenberg â€“ has been a director of the Company since May 24, 1994. Since February 2001, Mr. Greenberg has been President of Mirage Music Entertainment, a company which owns the Mirage Record label. From April 1993 to January 2001, Mr. Greenberg served as President of MJJ Music, a Michael Jackson/Sony owned record label.
Mr. Kosann â€“ was appointed to the Board of Directors of the Company on January 1, 2006, when he became President and Chief Executive Officer of the Company. Prior to such time, Mr. Kosann was President, Sales of the Company since May 2003 and Co-Chief Operating Officer since April 2005. Mr. Kosann was the Companyâ€™s Executive Vice President â€“ Network Advertising Sales from January 2001 to May 2003; Senior Vice President â€“ Affiliate Sales and New Media from December 1999 to January 2001 and Vice President â€“ Affiliate Sales from May 1999 to December 1999. Mr. Kosann was employed by Bloomberg Financial Markets from November 1992 to May 1999 in several media sales and business development capacities.
Mr. Little â€“ has been a director of the Company since March 14, 2006. Mr. Little is the Chief Executive Officer and Founder of Hudson Advisory Partners (â€śHudsonâ€ť). Founded in August 2005, Hudson assists companies and entrepreneurs on business and capital strategy with a long-term orientation and alignment of interests. Prior to Hudson, Mr. Little spent thirteen years (1987-2000) with Donaldson, Lufkin & Jenrette Securities Corporation in its investment banking division, until it was acquired by Credit Suisse First Boston (â€śCSFBâ€ť) in late 2000. Mr. Little was a Managing Director in the Investment Banking Division of CSFB based in Los Angeles from late 2000 to August 2005. He served as a consultant to CSFB until December 2005. During his investment banking career, Mr. Little worked with companies in various stages of development (start-up, high-growth, mature and restructuring), executed a multitude of products (e.g., capital raising including debt and equity in public and private markets, buy and sell-side M&A and restructurings) and worked with companies in a variety of industries (e.g., retail, manufacturing, healthcare, real estate, gaming and media) in executing their capital strategies.
Mr. Ming â€“ has been a director of the Company since July 7, 2006. Since October 2002, Mr. Ming has been the Chief Operating Officer of Sesame Workshop, the producers of Sesame Street and other childrenâ€™s educational media. Mr. Ming joined Sesame Workshop in 1999 as the Chief Financial Officer. Prior to joining Sesame Workshop, Mr. Ming was the Chief Financial Officer of the Museum of Television and Radio in New York from 1997 to 1999; Chief Operating Officer at WQED in Pittsburgh from 1994-1996; and Chief Financial Officer and Chief Administrative Officer at Thirteen/WNET New York from 1984 to 1994. Mr. Ming is a CPA and graduated from Temple University in Philadelphia, PA.
Mr. Pattiz â€“ founded the Company in 1974 and has held the position of Chairman of the Board since that time. He also was the Companyâ€™s Chief Executive Officer until February 3, 1994. From May 2000 to March 2006, Mr. Pattiz served on the Broadcasting Board of Governors (BBG) of the United States of America, which oversees all U.S. non-military international broadcast services. As chairman of BBGâ€™s Middle East Committee, Mr. Pattiz was the driving force behind the creation of Radio Sawa and Alhurra Television, the U.S. Governmentâ€™s Arabic-language radio and TV services to the 22 countries of the Middle East. Mr. Pattiz has served as a Regent of the University of California since September 2001, and chairs the Regents Oversight Committee of the Department of Energy Laboratories. He also serves on the Board of the Annenberg School of Communication at the University of Southern California, the Board of Trustees of the Museum of Television & Radio and is past president of the Broadcast Education Association. He is a member of the Council on Foreign Relations and the Pacific Council on International Policy.
Mr. Smith â€“ has been a director of the Company since May 24, 1994. He was previously a director of the Company from February 1984 until February 3, 1994. Since April 1993, Mr. Smith has been the President of Unison Productions, Inc., through which he serves as an industry consultant involved in a number of projects in the entertainment business.
In determining base salary, the Committee considers an individualâ€™s performance, experience and responsibilities, as well as the base salary levels of similarly-situated employees at comparable companies in the media industry. A base salary is meant to create a secure base of cash compensation, which is competitive in the industry. The Company relies to a large extent on the CEOâ€™s evaluation and recommendation based on his assessment of the NEOâ€™s performance.
Salaries generally are reviewed at the time a NEO enters into a new or amended employment agreement, which typically occurs upon the assumption of a new position and/or new responsibilities or the termination of the agreement. Any increase in salary is based on a review of the factors set forth above.
As stated in the â€śOverviewâ€ť the Committee customarily is not involved in the structuring of employment agreements which set forth a NEOâ€™s base salary. Two recent exceptions were the amendments to the employment agreements for the Companyâ€™s Chairman and the CFO. The Committee took an active role, along with its compensation adviser, in structuring the amendments to Mr. Pattizâ€™s employment agreement in 2005 based on the recommendation of the Board to the Committee. The Committee, along with its adviser, similarly took an active role in structuring the amendment to Mr. Zarefâ€™s employment agreement in 2006, based on the CEOâ€™s recommendation to the Committee and the input of CBS Radio.
The employment agreements of the General Counsel and EVP, Network Sales were negotiated by the Companyâ€™s CEO. Both individuals have been employed by the Company for several years (since 2000 and 1999, respectively) and the base salaries negotiated for them increased annually.
Discretionary Annual Compensation Bonus
In 2006, with the exception of the Companyâ€™s Chairman, NEOs were eligible to receive â€śdiscretionary annual bonusesâ€ť and their employment agreements provide a target amount for which they are eligible (Mr. Pattizâ€™s employment agreement does not provide for such a bonus). While the bonus amounts differ from agreement to agreement, all such bonuses are in the sole and absolute discretion of the Board of Directors or its Committee or their designee.
Each year, management makes a recommendation regarding discretionary bonuses and equity compensation for key employees to the Committee. Upon receipt of managementâ€™s recommendations, the Committee reviews with management its suggestions about the management team, and then confers with its compensation adviser and with CBS Radio. After reviewing its decisions with the full Board and taking into account the views expressed by members of the Board, the Committee makes its final determination. The Committee also takes into account a NEOâ€™s base salary and views cash compensation as a whole when making its bonus determinations.
While the Committee does not have a written policy regarding bonuses payable upon attaining certain financial metrics, all members of management were judged on the basis of the Companyâ€™s overall performance and to the extent applicable, on the performance of departments over which they exercise substantial control. The Committee took into account the Companyâ€™s revenues, net income, cash flow and stock price when analyzing Company performance, while simultaneously recognizing the current challenges in the radio industry and the ongoing discussions with CBS Radio to modify and extend the various agreements between CBS Radio and the Company. In the case of Mr. Hillman, the Committee also took into account the increased responsibilities assumed by Mr. Hillman in 2006 in connection with his promotion to Executive Vice President.
Equity is a critical component of the Companyâ€™s compensation plan. Equity compensation awards are made under the Westwood One, Inc. 2005 Equity Compensation Plan (referred to herein as the â€ś2005 Planâ€ť), customarily on an annual basis. The Company and the Committee believe that equity compensation provides the greatest long-term value potential to both the Company and its employees in creating long-term growth and success for employees and shareholders alike. Aside from promoting retention and incentivizing management, the Company, where appropriate, uses equity rather than cash as a â€śsigning bonusâ€ť to management-level individuals hired by the Company. The Company believes that equity compensation serves as a critical tool for attracting and retaining key talent. A total of 9.2 million shares are available for issuance under the 2005 Plan. As of December 31, 2006 (which does not include the shares awarded in March 2007), approximately 2,438,589 of such shares have been issued by the Company under the 2005 Plan.
In 2007 (for services rendered in 2006), the Committee determined that retaining key employees below the NEO level was important to the future success of the Company, and agreed to make equity grants for the non-NEOs solely in restricted stock this year, and not all or part in stock options as has historically been the case. For exclusively NEOs, the Committee chose to incentivize core management by tying a significant portion of their equity compensation to stock options over restricted stock. In general, the Committee felt each of the CEO, CFO and GC is more able to affect the Companyâ€™s performance and stock price and believed it was appropriate to tie a roughly equivalent value of each individualâ€™s equity compensation between stock options and restricted stock. In March 2007, Mr. Kosann received 41,667 shares of restricted stock and 125,000 stock options and Mr. Zaref received 25,000 shares of restricted stock and 75,000 stock options. While each of Mr. Kosann and Mr. Zaref received the same number of shares of stock options and restricted stock in March 2007 as they had received in the first quarter of 2006 (with the exception that they received restricted stock, not RSUs, in 2007), the value of such awards was approximately $899,587 less in the case of Mr. Kosann and $427,500 less in the case of Mr. Zaref than the value of the awards made to such individuals in February 2006, as the Companyâ€™s stock price (at which price the awards were granted) declined from $14.27 to $6.17 during such time period.
In December 2006, Mr. Pattiz received 8,333 RSUs and 25,000 stock options pursuant to his employment agreement. In March 2007, Mr. Hillman received 20,000 shares of restricted stock and 40,000 stock options and Mr. Gregrey received 39,000 shares of restricted stock. Notwithstanding the increased amount of shares awarded to Mr. Hillman and Mr. Gregrey, the value of the March 2007 awards to such individuals also was approximately $205,778 less in the case of Mr. Hillman and $84,020 less in the case of Mr. Gregrey than the value of the awards made to them in February 2006 as a result of the decline in the Companyâ€™s stock price as described above. The value of Mr. Pattizâ€™s December 1, 2006 award, when compared to his December 1, 2005 award, was $117,246 less.
Payments Upon Termination
Certain NEOs are entitled to cash payments upon their Termination, including upon a Change in Control and in the case of Messrs. Pattiz and Zaref, upon their death or disability. These payments are more particularly described under the headings entitled â€śEmployment Agreementsâ€ť; â€śPotential Payments upon Change in Controlâ€ť and â€śPayments upon Disability or Death.â€ť The Company does not have any arrangements with its NEOs, written or otherwise, for 280G â€śgross-upâ€ť or similar type payments.
All equity compensation awarded to employees in 2006 was subject to a four-year vesting period. In March 2007, the Committee made a decision for the 2007 awards only, to shorten the vesting period to three years, in large part to help retain critical talent, recognizing that our key employees have experienced a significant decline in the value of their equity compensation as the Companyâ€™s stock price has declined and have received low annual bonuses in the last two years. Once granted, an employee is entitled to the benefits of such award upon vesting, provided, such employee remains employed by the Company for the duration of the vesting period.
Stock options only have value if the Companyâ€™s stock price increases after the date the stock options are granted, and their value is measured only by the increase in the stock price. Under the 2005 Plan, various forms of full value share equity compensation awards are available, including restricted stock, restricted stock units, performance shares and deferred stock. For all such full value shares, each share granted is worth more than an option share, since the value of such share is measured by the actual stock price, not just the increase in the stock price. For this reason, the 2005 Plan calls for the share authorization to be reduced by three option shares for every full value share issued. The Committee believes that stock options remain a useful management incentive tool, but for the annual 2007 grant, the Committee limited their use to NEOs, so that more retention-oriented restricted stock would be the primary component of other employeesâ€™ grants. Unvested stock options generally are forfeited upon an employeeâ€™s Termination, including by death or disability. By the terms of the awards, all outstanding options vest upon a participantâ€™s Termination within a 24-month period after a Change in Control (as such term is defined in the 2005 Plan) has occurred.
Restricted Stock, RSUs
As mentioned above, the Company began to include restricted stock and RSUs in its equity compensation awards in May 2005, after the 2005 Plan was approved by Company shareholders. In general, only NEOs and the directors have received RSUs which gives the recipient the right to defer the receipt/payment of the stock; all other key employees, including NEOs, have received restricted stock. Generally speaking, restricted stock and RSUs are substantially similar awards, except that while a participant receives full voting and economic rights of the shares of restricted stock upon receipt of the grant, a participant does not receive such rights upon the grant of a RSU because the payment of shares underlying a RSU is deferred until vesting. While dividends, if any, begin to accrue on the date a RSU is granted, a participantâ€™s right to the underlying restricted shares and dividend equivalents are not received by a participant until the related RSU is distributed. Furthermore, if a participant elects to â€śdeferâ€ť receipt of RSUs, the shares and accumulated dividends thereon, if any, are not distributed until the date of deferment. A decision to defer must be made a minimum of twelve (12) months prior to the initial vesting date and a participant generally may choose to defer his award until the last vesting date applicable to such award or his date of Termination.
Awards of restricted stock and RSUs are valued at the closing market price of the Companyâ€™s Common stock on the date of the grant of the award.
Any unvested awards generally are forfeited upon an employeeâ€™s Termination, including by death or disability. By the terms of the awards, all outstanding RSUs and restricted stock shares vest upon a participantâ€™s Termination within a 24-month period after a Change in Control (as such term is defined in the 2005 Plan) has occurred. In Mr. Pattizâ€™s case only, all of his outstanding RSUs vest automatically upon a Change in Control or his Retirement (as such term is defined in the 2005 Plan). Mr. Pattiz is entitled to certain rights under the terms of his employment agreement as described in more detail below under the heading â€śChange of Control Provisions.â€ť In addition, if Mr. Pattizâ€™s employment agreement is not renewed, Mr. Pattiz shall become a part-time employee and/or consultant of the Company for six years through November 30, 2015 and his option shares will continue to vest throughout such term.
How does the Committee determine the allocation between the elements of compensation?
In certain circumstances, the Company awards â€śretention bonusesâ€ť to retain the services of NEOs for multi-year periods. Discretionary annual bonuses may be used to reward a NEOâ€™s outstanding individual performance. The Committee believes NEOs are more appropriately compensated, motivated and rewarded (and more likely to remain at the Company) when bonuses are paid in cash in a lump sum after the year has ended. Equity compensation awards, on the other hand, are intended to provide a potential for upside should the Companyâ€™s performance improve over the long-term. In recent years, a large portion of NEOâ€™s compensation has been their salary.
MANAGEMENT DISCUSSION FROM LATEST 10K
Westwood One is a provider of analog and digital content, including news, sports, weather, traffic, video news services and other information to the radio, TV and on-line industries. We are one of the largest domestic outsource providers of traffic reporting services and one of the nationâ€™s largest radio networks, producing and distributing national news, sports, talk, music and special event programs, in addition to local news, sports, weather, video news and other information programming. The commercial airtime that we sell to our advertisers is acquired from radio and television affiliates in exchange for our programming, content, information, and in certain circumstances, cash compensation.
In November 2006, we announced that our Board of Directors established a Strategic Review Committee comprised of independent directors to evaluate means by which we might be able to enhance shareholder value. The Committeeâ€™s principal task was to modify and extend our various agreements with CBS Radio and its affiliates, including the Management Agreement and programming and distribution agreements with CBS Radio. On October 2, 2007, we entered into a definitive agreement with CBS Radio (the Master Agreement) documenting a long-term arrangement through March 31, 2017. As part of the new arrangement which was approved by our shareholders on February 12, 2008, certain CBS Radio stations will broadcast our local/regional and national commercial inventory through March 31, 2017 in exchange for certain programming and/or cash compensation. As part of the new arrangement, the News Programming Agreement, the Technical Services Agreement and the Trademark License Agreement were amended and extended through March 31, 2017. The new arrangement became effective on March 3, 2008.
The new arrangement with CBS Radio is particularly important to us, as in recent years, the radio broadcasting industry has experienced a significant amount of consolidation. As a result, certain major radio station groups, including Clear Channel Communications and CBS Radio, have emerged as powerful forces in the industry. While we provide programming to all major radio station groups, our extended affiliation agreements with most of CBS Radioâ€™s owned and operated radio stations provides us with a significant portion of the audience that we sell to advertisers.
We derive substantially all of our revenue from the sale of :10 second, :30 second and :60 second commercial airtime to advertisers. Our advertisers who target local/regional audiences generally find the most effective method is to purchase shorter duration :10 second advertisements, which are principally correlated to traffic and information related programming and content. Our advertisers who target national audiences generally find the most cost effective method is to purchase longer :30 or :60 second advertisements, which are principally correlated to news, talk, sports and music and entertainment related programming and content. A growing number of advertisers purchase both local/regional and national airtime. Our goal is to maximize the yield of our available commercial airtime to optimize revenue.
In managing our business, we develop programming and exploit our commercial airtime by concurrently taking into consideration the demands of our advertisers on both a market specific and national basis, the demands of the owners and management of our radio station affiliates, and the demands of our programming partners and talent. Our continued success and prospects for growth are dependent upon our ability to manage these factors in a cost effective manner and to adapt our information and entertainment programming to different distribution platforms. Our results may also be impacted by overall economic conditions, trends in demand for radio related advertising, competition, and risks inherent in our customer base, including customer attrition and our ability to generate new business opportunities to offset any attrition.
There are a variety of factors that influence our revenue on a periodic basis including but not limited to: (i) economic conditions and the relative strength or weakness in the United States economy; (ii) advertiser spending patterns and the timing of the broadcasting of our programming, principally the seasonal nature of sports programming; (iii) advertiser demand on a local/regional or national basis for radio related advertising products; (iv) increases or decreases in our portfolio of program offerings and related audiences, including changes in the demographic composition of our audience base; (v) increases or decreases in the size of our advertiser sales force; and (vi) competitive and alternative programs and advertising mediums, including, but not limited to, radio.
Our ability to specifically isolate the relative historical aggregate impact of price and volume is not practical as commercial airtime is sold and managed on an order-by-order basis. It should be noted, however, that we closely monitor advertiser commitments for the current calendar year, with particular emphasis placed on a prospective three-month period. We take the following factors, among others, into account when pricing commercial airtime: (i) the dollar value, length and breadth of the order; (ii) the desired reach and audience demographic; (iii) the quantity of commercial airtime available for the desired demographic requested by the advertiser for sale at the time their order is negotiated; and (iv) the proximity of the date of the order placement to the desired broadcast date of the commercial airtime. Our commercial airtime is perishable, and accordingly, our revenue is significantly impacted by the commercial airtime available at the time we enter into an arrangement with an advertiser. Our national revenue has been trending downward for the last several years due principally to reductions in national audience levels as part of planned cost reductions and lower clearance and audience levels of our affiliated stations. Our local/regional revenue has been trending downward due principally to reductions in our local/regional sales force, combined with an increase in the amount of :10 second inventory being sold by radio stations.
The principal components of our operating expenses are programming, production and distribution costs (including affiliate compensation and broadcast rights fees), selling expenses including commissions, promotional expenses and bad debt expenses, depreciation and amortization, and corporate general and administrative expenses. Corporate general and administrative expenses are primarily comprised of costs associated with the Management Agreement (which terminated on March 3, 2008), corporate accounting, legal and administrative personnel costs, and other administrative expenses, including those associated with corporate governance matters. Special charges include one-time expenses associated with the renegotiation of the CBS agreements and severance associated with senior management changes (i.e. our CEO and CFO).
We consider our operating cost structure to be predominately fixed in nature, and as a result, we believe we need several months lead time to make significant modification to our cost structure to react to what we view are more than temporary increases or decreases in advertiser demand. This point is important in predicting our performance in periods when advertiser revenue is increasing or decreasing. In periods where advertiser revenue is increasing, the fixed nature of a substantial portion of our costs means that operating income will grow faster than the related growth in revenue. Conversely, in a period of declining revenue, operating income will decrease by a greater percentage than the decline in revenue because of the lead time needed to reduce our operating cost structure. Furthermore, if we perceive a decline in revenue to be temporary, we may choose not to reduce our fixed costs, or may even increase our fixed costs, so as to not limit our future growth potential when the advertising marketplace rebounds. We carefully consider matters such as credit and commercial inventory risks, among others, in assessing arrangements with our programming and distribution partners. In those circumstances where we function as the principal in the transaction, the revenue and associated operating costs are presented on a gross basis in the Consolidated Statement of Operations. In those circumstances where we function as an agent or sales representative, our effective commission is presented within revenue with no corresponding operating expenses. Although no individual relationship is significant, you should consider the relative mix of such arrangements when evaluating operating margin and/or increases and decreases in operating expenses.
When CBS Radio discontinued Howard Sternâ€™s radio program, the audience delivered by the stations that used to broadcast the program declined significantly. Some of our affiliation agreements with CBS Radio did not allow us to reduce the compensation those stations were paid as a result of delivering a lower audience. Additionally, certain CBS Radio stations broadcast fewer commercials than in prior periods. These items contributed to a significant decline in our national audience delivery to advertisers. Our new arrangement with CBS (which became effective on March 3, 2008), mitigates both of these circumstances going forward by adjusting affiliate compensation up and/or down as a result of changes in audience levels. In addition, the arrangement provides CBS Radio with financial incentives to clear substantially all of our commercial inventory in accordance with their contract terms and with significant penalties for not complying with the contractual terms of our arrangement. We believe that CBS Radio will take the necessary steps to stabilize and increase the audience reached by its stations. It should be noted however, as CBS takes steps to increase its compliance with our affiliation agreements, our operating costs will increase before we will be able to increase prices for the larger audience we will deliver, which may result in a short-term decline in our operating income.
Results of Operations and Financial Condition
Revenue for the year ended December 31, 2007 (â€ś2007â€ť) decreased $60,701, or 11.9%, to $451,384 from $512,085 for the year ended December 31, 2006 (â€ś2006â€ť), and decreased $45,745, or 8.2%, from $557,830 for the year ended December 31, 2005 (â€ś2005â€ť). The decreases were principally attributable to lower audience levels, a reduction in our sales force and increased competition.
Local/Regional revenue in 2007 decreased $33,322, or 12.5%, to $232,446 from $265,768 in 2006, and decreased $34,792, or 11.6%, in 2006 from $300,560 in 2005. The 2007 decrease was principally attributable to a 15% reduction in our sales force from 2006, a reduction in :10 second inventory units to sell as a result of the closure of several second-tier traffic markets in mid to late 2006 and canceling several representation and affiliation agreements (representing an approximately 18% decrease in inventory units from June 30, 2006 to December 31, 2007), and increased :10 second inventory being sold by radio stations. The decrease in 2006 was principally attributable to reduced demand for our :10 second commercial airtime, increased competition, and a 23% reduction in our sales force. The reduced demand was experienced in virtually all markets and all advertiser categories.
National revenue in 2007 decreased $27,379, or 11.1%, to $218,938 from $246,317 in 2006, and decreased $10,953, or 4.3%, in 2006 from $257,270 in 2005. The decrease in 2007 national revenue was principally attributable to an approximate 23% reduction in our quarterly gross impressions from RADAR rated network inventory (news programming inventory) resulting from our affiliates experiencing audience declines, lower clearance levels by certain CBS Radio stations and planned reductions in affiliate compensation, the cancellation of certain programs (approximately $5,500), and the non-recurrence of revenue attributable to the 2006 Winter Olympic games (approximately $5,700), partially offset by revenue generated from new program launches (approximately $6,000). Excluding the effect of the non-recurrence of revenue attributable to the 2006 Winter Olympics, national revenue would have declined approximately 8.9%. The decrease in 2006 was primarily a result of decreases in revenue attributable to news, talk and music programming, partially offset by non-recurring revenue attributable to the broadcast of the 2006 Winter Olympic games and higher revenue from sports programs (approximately $6,900). Excluding the effect of the revenue from the 2006 Winter Olympics, national revenue in 2006 would have decreased approximately 6.6%.
We expect our revenue for the year ending December 31, 2008 (â€ś2008â€ť) to increase compared with 2007, primarily as a result of launching new programs, making select investments to increase our RADAR audiences, investing in a new distribution system that will allow us to split advertiser commercial copy, and the hiring of additional sales persons and management personnel.
Operating costs in 2007 decreased $44,756, or 11.3%, to $350,440 from $395,196 in 2006, and increased $16,198, or 4.3%, in 2006 from $378,998 in 2005. Programming, production and distribution expenses in 2007 decreased $26,917 or 8.9% to $274,645 from $301,562 in 2006 and increased $22,198 or 7.9% in 2006 from $279,364 in 2005. The 2007 decrease is principally attributable to the cancellation of certain programming contracts (approximately $15,000), the non-recurrence of costs associated with the 2006 Winter Olympics and lower payroll and rent costs associated with closing certain traffic information gathering markets (approximately $9,000). The 2006 increase in programming, production and distribution expenses are principally attributable to increases in existing and new program offerings, and as a result of costs associated with the 2006 Winter Olympics.
Selling expenses in 2007 decreased $12,577 or 26.9%, to $34,237 from $46,814 in 2006 and decreased $5,275, or 10.1%, in 2006 from $52,089 in 2005. The 2007 decrease was principally attributable to a reduction in sales staff and commissions ($7,800) and in bad debt expense approximately ($2,200). The 2006 decrease was principally attributable to a reduction in sales staff and commissions.
Other operating expenses in 2007 decreased $4,303, or 10.6%, to $36,172 from $40,475 in 2006 and decreased $349, or 0.9%, in 2006 from $40,824 in 2005. The 2007 decrease was principally attributable to reduction in personnel costs.
We currently anticipate that operating costs will increase in 2008 compared with 2007 due to increased clearance levels by CBS Radio as part of the new arrangement that became effective March 3, 2008, additional investments in new program offerings, increasing RADAR audience levels, hiring additional sales and management personnel, and increases in personnel compensation.
Depreciation and Amortization
Depreciation and amortization in 2007 decreased $916, or 4.4%, to $19,840 from $20,756 in 2006, and decreased nominally in 2006 from $20,826 in 2005. The 2007 decrease is principally attributable to certain assets becoming fully depreciated.
We anticipate that depreciation and amortization will decrease in 2008 compared with 2007, principally as a result of canceling the warrants issued to CBS Radio as part of the Management Agreement.
In connection with our annual goodwill impairment testing for 2007, we determined our goodwill was not impaired at December 31, 2007. The conclusion that our fair value was greater than our carrying value at December 31, 2007 was based upon managementâ€™s best estimates including a valuation study that was prepared by an independent firm specializing in valuation services using our operational forecasts. The fair value was calculated on a consistently applied weighted average basis using a discounted cash flow model and the quoted market price of our Common stock. While the analysis at December 31, 2007, on a weighted average basis indicates no impairment, the value based solely on the quoted market price of our Common stock, without consideration of a control premium, was less than our carrying value. While not an element of our valuation approach, we believe that application of a control premium to our quoted market stock value would further support the absence of an impairment. If actual results differ from our operational forecasts, or if the discount rate used in our calculation increases, or if our stock price continues to decline, an impairment may be required to be recorded in the future.
In connection with our annual goodwill impairment testing for 2006, based on a similar approach as applied in 2007, we determined our goodwill was impaired and recorded a non-cash charge of $515,916. The goodwill impairment, the majority of which was not deductible for income tax purposes, was primarily due to our declining operating performance and the reduced valuation multiples in the radio industry.
Corporate General and Administrative Expenses
Corporate general and administrative expenses in 2007 decreased $1,447, or 9.9%, to $13,171 from $14,618 in 2006, and increased $590, or 4.2%, in 2006 from $14,028 in 2005. Exclusive of stock-based compensation expense of $4,220, $5,924, and $4,965 in 2007, 2006, and 2005, respectively, corporate general and administrative expenses in 2007 increased $257, or 3%, to $8,951 from $8,694 in 2006, and decreased $369, or 4.1%, in 2006 from $9,063 in 2005. The 2007 increase was principally attributable to increased personnel costs, partially offset by lower corporate governance costs. The 2006 decrease was primarily attributable to lower personnel costs slightly offset by higher compensation to CBS Radio.
We anticipate that corporate general and administrative expenses in 2008 will increase as a result of planned staffing increases.
We incurred costs aggregating $4,626 and $1,579 in 2007 and 2006, respectively, related to the negotiation of a new long-term arrangement with CBS Radio and for severance obligations related to executive officer changes.
Operating Income (Loss)
Operating income in 2007 increased $499,287 to $63,307 from an operating loss of ($435,980) in 2006, and decreased $579,958 in 2006 from operating income of $143,978 in 2005. Excluding the 2006 impairment charge, operating income decreased $16,629, or 20.8%, to $63,307 from $79,936 in 2006, and decreased $64,042, or 44.5% in 2006 from $143,978 in 2005. The 2007 decrease was attributable to lower revenue, partially offset by a reduction in operating costs. The 2006 decrease was principally attributable to lower revenue and higher operating costs.
We currently anticipate that operating income will increase in 2008 compared to 2007 principally as a result of lower depreciation and amortization and special charges.
Interest expense in 2007 decreased $1,964, or 7.7%, to $23,626 from $25,590 in 2006, and increased $7,275, or 39.7%, in 2006 from $18,315 in 2005. The 2007 decrease was principally attributable to lower average borrowings under our credit facility and partially offset by an increase in interest rates, higher amortization of deferred debt costs as a result of amending the facility in 2006, and a payment to terminate one of our fixed to floating interest rate swap agreements on our $150,000 Note. Our weighted average interest rate was 6.3% in 2007 compared with 5.9% in 2006. The increase in 2006 was attributable to higher outstanding borrowings under our credit facility and higher average interest rates, as our average interest rate increased to 5.9% from 4.3% in 2005.
In January and February 2008, we amended our credit facility to increase our leverage ratio and eliminate a provision that deemed the termination of the CBS Radio management agreement an event of default. As a result, our interest rate under the amended agreement was increased to LIBOR + 175 basis points from LIBOR + 125 basis points. Additionally, since our credit facility matures at the end of February 2009, we will need to refinance the credit facility prior to such date. Based on the significant reduction in our Earnings before interest, taxes, depreciation and amortization (referred to as EBITDA) over the past two years, we expect our interest rate to further increase as part of any new debt arrangement.
Other income was $411, $926, and $1,440 in 2007, 2006, and 2005, respectively. Other income in 2007 was principally attributable to interest earned on our invested cash balances. In 2006, in addition to interest income, we received $529 in connection with a recapitalization transaction of our investee, POP Radio, LP (â€śPOP Radioâ€ť). In 2005, we sold a building in Culver City, California, recognizing a pre-tax gain on sale of $1,022.
Provision for Income Taxes
Income tax expense in 2007 increased $6,915, or 78.5%, to $15,724 from $8,809 in 2006, and decreased $40,408, or 82.1%, in 2006 from $49,217 in 2005. In 2007, our effective income tax rate was 39.2%. The 2007 effective income tax rate benefited from a change in New York State tax law on our deferred tax balance (approximately $100). The 2006 income tax provision was impacted by the 2006 goodwill impairment and related deferred tax attributes. Our effective tax rate in 2005 was 38.7%.
We expect our effective income tax rate in 2008 to be approximately 39%.
Net Income (Loss)
Net income in 2007 increased $493,821 to $24,368 ($0.28 per basic and diluted common share and $0.02 per basic and diluted Class B share) from a net loss of ($469,453) (($5.46) per basic and diluted Common share and $0.26 per basic and diluted Class B share) in 2006, and decreased $547,339 in 2006 from net income of $77,886 ($0.86 per basic Common share and $0.85 per diluted Common share and $0.24 per basic and diluted Class B share) in 2005.
Weighted-average shares outstanding for purposes of computing basic net income (loss) per Common share were 86,112, 86,013, and 90,714 in 2007, 2006 and 2005, respectively. The decrease in 2006 from 2005 was primarily attributable to Common Stock repurchases partially offset by additional share issuances as a result of stock option exercises. Weighted-average shares outstanding for purposes of computing diluted net income (loss) per Common share were 86,426, 86,013, and 91,519 in 2007, 2006, and 2005, respectively. As a result of incurring a net loss in 2006, basis and diluted weighted-average Common shares outstanding are equivalent, as common stock equivalents from stock options, unvested restricted stock and warrants would be anti-dilutive.
Liquidity and Capital Resources
We continually monitor and project our anticipated cash requirements, which include working capital needs, capital expenditures and principal and interest payments on our indebtedness and potential acquisitions. Our recent funding requirements have been financed through cash flow from operations and the issuance of long-term debt.
At December 31, 2007, our principal sources of liquidity were our cash and cash equivalents of $6,187 and available borrowings under our bank credit facility. We believe that our sources of liquidity are adequate to fund ongoing operating requirements in the next twelve months, however, our bank facility matures in February 2009. Accordingly, we must refinance our bank facility, develop new funding sources and/or raise additional capital. While we reasonably believe that we will be able to refinance, identify new funding sources, and/or raise additional capital, if we cannot, we may not be able to repay the facility upon maturity. If we raise additional funds through the issuance of equity securities, our shareholders may experience significant dilution. Furthermore, additional financing may not be available when we need it or, if available, financing may not be on terms favorable to us or to our shareholders. If financing is not available when required or is not available on acceptable terms, we may be unable to develop or enhance our services or programs. In addition, we may be unable to take advantage of business opportunities or respond to competitive pressures. In addition, if our operating results continue to decline more than anticipated, it may cause us to seek a waiver or further amendments to our debt covenants. In these circumstances, if we cannot obtain a waiver or an amendment, our debt would be payable on demand from our lenders. Any of these events could have a material and adverse effect on our business continuity, results of operations, cash flows and financial condition.
At December 31, 2007, we had an unsecured five-year $120,000 term loan and a five-year $125,000 revolving credit facility (referred to in this section as the â€śFacilityâ€ť), both of which mature in February 2009. At December 31, 2007, we had available borrowings of approximately $44,000 under our Facility. Interest on the Facility is payable at the prime rate plus an applicable margin of up to 0.25% or LIBOR plus an applicable margin of up to 1.25%, at our option. The Facility contains covenants, among others, related to dividends, liens, indebtedness, capital expenditures and restricted payments, as defined, interest coverage and leverage ratios. We issued through a private placement $150,000 of ten-year Senior Notes due November 30, 2012 (interest at a fixed rate of 5.26%) and $50,000 of seven-year Senior Notes due November 30, 2009 (interest at a fixed rate of 4.64%) (the foregoing, the â€śSenior Notesâ€ť). In addition, we have a ten-year fixed to floating interest rate swap agreement covering $25,000 notional value of our outstanding $150,000 Senior Notes and a seven-year fixed to floating interest rate swap agreement covering $25,000 notional value of our outstanding $50,000 Senior Notes. Both swaps are at three-month LIBOR plus 0.8%. The Senior Notes contain covenants, among others, relating to dividends, liens, indebtedness, capital expenditures, and interest coverage and leverage ratios.
In 2008, we amended the Facility to, among other things: (i) provide security to our lenders (including holders of our Senior Notes), (ii) reduce the amount of the revolving credit facility to $75,000, (iii) increase the applicable margin on LIBOR loans to 1.75% and on prime rate loans to .75%, (iv) change the leverage ratio covenant to 4.0 times Annualized Consolidated Operating Cash Flow through the remaining term of the Facility, (v) eliminate the provision that deemed the termination of the Management Agreement as an event of default and (vi) include covenants prohibiting the payment of dividends and restricted payments. In addition, we and the advisors to the Strategic Review Committee of the Board are actively evaluating options to refinance all or a portion of our existing debt and to obtain additional equity. To that end, we announced that on March 3, 2008, we sold 7,143 shares of Common stock to Gores Radio Holdings LLC (â€śGoresâ€ť) for an aggregate purchase price of $12,500, and we have an option to sell Gores an additional 7,143 shares of Common stock for an aggregate purchase price of $12,500 which we exercised on March 10, 2008 (it is currently anticipated such sale will close on or before March 24, 2008) and to sell between $50,000 and $75,000 of a 7.5% Series A Convertible Preferred Stock with warrants to Gores. The sale and issuance of preferred stock and warrants to Gores is subject to shareholder approval.
Net cash provided by operating activities in 2007 decreased $76,350, or 73.2%, to $27,901 from $104,251 in 2006, and decreased $14,039, or 11.9%, in 2006 from $118,290 in 2005. The decrease in 2007 was principally attributable to a decline in net income (after excluding the 2006 goodwill impairment charge) and changes in working capital. In 2007, we reduced the amount of time payables and accrued expenses were outstanding, while in 2006, the time accounts payable and accrued expenses were outstanding were extended, resulting in a net use of working capital of $62,248.
In 2007, 2006, and 2005, we spent $5,849, $5,880, and $4,524, respectively, for capital expenditures. Our business does not presently require, and we do not expect in the future to require, significant cash outlays for capital expenditures. However, as a result of a planned investment in a new distribution system, our 2008 capital expenditures are expected to be approximately double the amount spent in 2007.
In 2007, 2006 and 2005, we paid dividends to our shareholders in the amount of $1,663, $27,640 and $27,032, respectively. In May 2007, the Board of Directors elected to discontinue the payment of a dividend and does not plan to declare dividends for the foreseeable future. The payment of dividends is also prohibited by the terms of our Facility.
In 2006 and 2005, we purchased approximately 750 (2006) and 8,015 (2005) shares of our Common stock, at a total cost of $11,044 and $160,604, respectively. While we are authorized to repurchase up to $290,490 of our Common stock at December 31, 2007, we do not plan on repurchasing any additional shares for the foreseeable future. Such repurchases are also prohibited by the terms of our Facility.
On March 29, 2006, our cost method investment in The Australia Traffic Network Pty Limited (â€śATNâ€ť) was converted to 1,540 shares of common stock of Global Traffic Network, Inc. (â€śGTNâ€ť) in connection with the initial public offering of GTN on that date. The investment in GTN, valued at $10,042 at December 31, 2007, is classified as an available for sale security and included in other assets in the accompanying Consolidated Balance Sheet. Accordingly, the unrealized gain as of December 31, 2007 is included in unrealized gain on available for sale securities in the accompanying Consolidated Balance Sheet.
GTN is the parent company of ATN, and also of Canadian Traffic Network ULC (â€śCTNâ€ť) from whom we purchased a senior secured note in an aggregate principal amount of $2,000 in November 2005. This note was included in other assets in the accompanying Consolidated Balance Sheet on December 31, 2005. On September 7, 2006, CTN repaid this note in full.
On October 28, 2005, we became a limited partner of POP Radio pursuant to the terms of a subscription agreement dated as of the same date. As part of the transaction, effective January 1, 2006, we became the exclusive sales representative of the majority of advertising on the POP Radio network for five years, until December 31, 2010, unless earlier terminated by the express terms of the sales representative agreement. We hold a 20% limited partnership interest in POP Radio. No additional capital contributions are required by any of the limited partners.
On September 29, 2006, along with the other limited partners of POP Radio, we elected to participate in a recapitalization transaction negotiated by POP Radio with Alta Communications, Inc. (â€śAltaâ€ť), in return for which we received $529 on November 13, 2006. Pursuant to the terms of the transaction, if and when Alta elects to exercise warrants it received in connection with the transaction, our limited partnership interest in POP Radio will decrease from 20% to 6%.
MANAGEMENT DISCUSSION FOR LATEST QUARTER
Results of Operations
Three Months Ended September 30, 2007 Compared With Three Months Ended September 30, 2006
Revenue for the third quarter of 2007 decreased $10,402, or 8.8%, to $108,083 compared with $118,485 in the third quarter of 2006. During the third quarter of 2007, revenue aggregated from the sale of local/regional airtime decreased $8,489, or 12.8%, and national-based revenues decreased $1,913, or 3.7 %, compared with the third quarter of 2006.
The decrease in local/regional revenue was a result of decreased demand for our :10 second commercial airtime, fewer: 10 second commercial units to sell as a result of closing several second-tier traffic markets, canceling several representation and affiliation agreements and increased competition relative to the comparable period of the prior year. The reduced demand was experienced in virtually all markets and all advertiser categories.
The decline in our aggregated national-based revenue was primarily a result of lower demand for our products in the marketplace and lower audience levels resulting from planned reductions in affiliate compensation, partially offset by revenue generated from new program launches.
Operating costs decreased $6,881, or 8.0 %, to $79,351 in the third quarter of 2007 from $86,232 in the third quarter of 2006. The decrease was principally attributable to lower payroll and related benefit costs including sales commissions (approximately $3,200), reduced programming and production costs (approximately $3,700), and higher distribution costs (approximately $700). In addition, the Company has curtailed certain discretionary expenses.
Depreciation and Amortization
Depreciation and amortization decreased $448, or 8.6%, to $4,791 in the third quarter of 2007 from $5,239 in the third quarter of 2006. The decrease was principally attributable to a decrease in depreciation and amortization related to the historical acquisition of certain service agreements and assets.
Corporate General and Administrative Expenses
Corporate general and administrative expenses decreased $240, or 7.7%, to $2,867 in the third quarter of 2007 from $3,107 in the third quarter of 2006. Exclusive of stock-based compensation expense of $681 and $1,440 in the third quarter of 2007 and 2006, respectively, corporate general and administrative expenses increased by $519, or 31.1%. The increase is principally attributable to higher expenses related to personnel and shareholder relations.
The Company incurred costs aggregating $1,388 and $71 in the third quarter of 2007 and 2006, respectively in connection with the negotiation of a new long-term agreement with CBS Radio.
Operating income decreased $4,150, or 17.4%, to $19,686 in the third quarter of 2007 from $23,836 in the third quarter of 2006. The 2007 decrease was principally attributable to a larger reduction in revenues in the third quarter of 2007 compared to the third quarter of 2006, relative to the reduction in operating expenses for the comparable periods.
Interest expense decreased 12.6% in the third quarter of 2007 to $5,790 from $6,625 in the third quarter of 2006. The decrease was principally attributable to lower average borrowings under our credit facility in the third quarter of 2007 compared to the third quarter of 2006, partially offset by higher interest rates.
Provision for Income Taxes
Income tax expense in the third quarter of 2007 was $5,448 compared with a $6,881 in the third quarter of 2006. The Companyâ€™s effective income tax rate was approximately 39.2% in the third quarter of 2007 compared with 39.6% in the third quarter of 2006. The decrease was due to the impact of a change in New York State tax law.
Net income in the third quarter of 2007 decreased $2,032, or 19.4%, to $8,452 compared with $10,484 in the third quarter of 2006. Net income per basic share and diluted share, were $0.10 in the third quarter of 2007 compared with $0.12 in the same period of the prior year, a decrease of $0.02, or 16.7%.
Weighted average shares outstanding used to compute basic and diluted earnings per share increased nominally to 86,137 and 86,481, respectively, in the third quarter of 2007 compared with 85,954 and 86,250 in the third quarter of 2006.