Filed with the SEC from June 12 to June 18:
Spanish Broadcasting System (SBSA)
Discovery Group I said that it wants to examine the results of the stockholder voting for director nominees at the company's 2008 annual meeting. Discovery Group said the company has refused to disclose the results of the voting despite requests from Discovery and other shareholders.
Discovery previously had requested that Spanish Broadcasting's shareholders
withhold their votes from all director nominees at the company's 2008 annual meeting. It said it wanted stockholders to "demonstrate their discontent with the management," and show their support for the investor's recommendation that the board form a special committee to evaluate strategic alternatives. Discovery previously had said that it wanted Spanish Broadcasting to hire an investment bank to look at a going-private transaction or sale to a strategic party. Discovery Group holds 3,999,029 shares (9.7%).
All references to â€śweâ€ť, â€śusâ€ť, â€śourâ€ť, â€śSBSâ€ť, â€śour companyâ€ť or â€śthe Companyâ€ť in this report mean Spanish Broadcasting System, Inc., a Delaware corporation, and all entities owned or controlled by Spanish Broadcasting System, Inc. and, if prior to 1994, mean our predecessor parent company Spanish Broadcasting System, Inc., a New Jersey corporation. Our executive offices are located at 2601 South Bayshore Drive, PH II, Coconut Grove, Florida 33133, our telephone number is (305) 441-6901, and our corporate website is www.spanishbroadcasting.com.
We are the largest publicly traded Hispanic-controlled media and entertainment company in the United States. We own and/or operate 21 radio stations in markets that reach approximately 48% of the U.S. Hispanic population, and two television stations, which reach approximately 2.0 million households in the South Florida market, and nationally throughout the U.S. on DirecTV MĂˇs. Our radio stations are located in six of the top-ten Hispanic markets of Los Angeles, New York, Puerto Rico, Chicago, Miami and San Francisco. The Los Angeles and New York markets have the largest and second largest Hispanic populations, and are also the largest and second largest radio markets in the United States in terms of advertising revenue, respectively. Our two television stations operate as one television operation, branded â€śMegaTVâ€ť. As part of our operating business, we also operate LaMusica.com, Mega.tv, and our radio station websites which are bilingual (Spanish â€“ English) websites providing content related to Latin music, entertainment, news and culture. We also occasionally produce live concerts and events throughout the United States and Puerto Rico.
Mr. RaĂşl AlarcĂłn, Jr. became our Chairman of the board of directors when we completed our initial public offering on November 2, 1999 and has been our Chief Executive Officer since June 1994 and our President and a member of the board of directors since October 1985. The AlarcĂłn family has been involved in Spanish-language radio broadcasting since the 1950â€™s, when Mr. Pablo RaĂşl AlarcĂłn, Sr., our Chairman Emeritus and a member of our board of directors, established his first radio station in CamagĂĽey, Cuba. Members of our senior management team, on average, have over 20 years of experience in radio broadcasting.
We focus on maximizing the revenue and profitability of our broadcast portfolio by strengthening the performance of our existing broadcast stations and making additional strategic media acquisitions in both our existing markets and in other U.S. markets that have a significant Hispanic population. We also focus on long-term growth by investing in advertising, programming research and on-air talent.
Our growth strategy includes evaluating strategic acquisitions and divestitures in order to achieve a significant presence with clusters of stations in the top U.S. Hispanic markets. We generally consider acquisitions of broadcast stations in markets where we can maximize our revenue through aggressive sales and programming efforts directed at U.S. Hispanic and general market advertisers. These acquisitions may include broadcast stations which do not currently target the U.S. Hispanic market, but which we believe can successfully be reformatted and programmed. Additionally, from time to time we explore investment opportunities in related media outlets targeting the U.S. Hispanic market.
Hispanic Market Opportunity
We believe that our focus on media formats targeting U.S. Hispanic audiences in the largest Hispanic media markets, together with our experience in programming and marketing to these audiences, provide us with significant opportunities for the following reasons:
â€˘ Hispanic Population Growth. The U.S. Hispanic population is the largest ethnic minority group and the fastest growing consumer market and demographic group of the U.S. population. Between 1990 and 2007, the Hispanic population growth surged by 100% compared to 13% for the non-Hispanic population and a 21% gain for the total population. The Hispanic population has grown 26.6% since 2000. By 2012, it is estimated that nearly one out of every six individuals living in the U.S. will be of Hispanic origin.
â€˘ Hispanic Buying Power. The U.S. Hispanic population accounted for an estimated buying power of $862 billion in 2007 and Hispanic buying power is growing at nearly twice the annual rate of non-Hispanic buying power. Hispanic buying power is expected to increase by 39.2% to $1.2 trillion by 2012, positioning the Hispanic demographic as an extremely attractive group for advertisers.
â€˘ Growth in Spanish Language Advertising Spending. In 2007, advertisers spent an estimated $3.8 billion on Spanish-language media advertising, compared to $3.3 billion in 2006, representing a 10.8% increase from the previous year.
The above market opportunity information is based on data provided by The Selig Center for Economic Growth, University of Georgia, July 2007 and Advertising Age, Hispanic Fact Pack, Annual Guide to Hispanic Marketing & Media, 2007 Edition.
Our operating strategy focuses on maximizing our broadcast stationsâ€™ appeal to our targeted audiences and advertisers in order to increase revenue and cash flow while controlling operating expenses. To achieve these goals, we focus on the following:
Format high quality programming. We format the programming of each of our broadcast stations to capture a significant share of the Spanish-language audience. We use market research, including third-party consultants, in-house research, periodic music testing and focus groups to assess audience preferences among the diverse groups in the Hispanic population in each broadcast stationâ€™s target demographic audience. We then refine our programming to reflect the results of this research and testing. Because the U.S. Hispanic population is so diverse, consisting of numerous identifiable groups from many different countries of origin, each with its own culture and heritage, we strive to become very familiar with the tastes and preferences of each of the various Hispanic ethnic groups, and we customize our broadcast programming accordingly.
Attract and retain strong local management teams. We employ local management teams in each of our markets that are responsible for the day to day operations of our broadcast stations. The teams typically consist of a general manager, a general sales manager and a programming director. Broadcast stations are staffed with managers who have experience in, and knowledge of, the local market and/or the local Hispanic market because of the cultural diversity of the Hispanic population from market to market in the United States. We believe this approach improves our flexibility and responsiveness to changing conditions in each of the media markets we serve.
Utilize focused sales efforts and sales bundling. To capture greater market share, our sales force focuses on converting audience share into rate and revenue increases. We strategically hire sales professionals who are experts at Hispanic and general market advertising. We also value knowledgeable account managers skilled at dealing directly with clients in the local market. The Spanish-language consumer market is uniquely positioned for national campaigns, regional marketing plans and local promotions in our diverse markets. We believe that our focused sales efforts are working to increase media spending targeted at the Hispanic consumer market and will enable us to continue to achieve rate and revenue growth, and to narrow the gap between the level of advertising currently targeted towards U.S. Hispanics and the actual and potential buying power of their communities.
We utilize various sales strategies to sell and market our stations on a stand-alone basis, in combination with our other media properties within a given market, and across markets, where appropriate. We cross-promote, bundle, and sell our media properties to advertisers, thereby enhancing our revenue generating opportunities. We engage in joint sales and promotional activities across our various media properties in order to provide additional value to our advertisers and audience by creating a more efficient medium to reach and expand our Hispanic audience.
Control broadcast station operating costs. We employ a disciplined approach to operating our broadcast stations. We emphasize the control of each radio stationâ€™s operating costs through detailed budgeting, tight control over staffing levels and constant expense analysis. While local management is responsible for the day to day operation of each broadcast station, corporate management is responsible for long-term and strategic planning, establishing policies and procedures, maximizing cost savings through centralized processes where appropriate, allocating corporate resources and maintaining overall control of our broadcast stations.
Effective use of promotions and special events. We rely on our expertise in marketing to the Hispanic consumer in each of the media markets in which we operate to maximize our share of advertising revenue. We believe that our on-air talent combined with effective promotional efforts play a significant role in both adding new listeners and viewers and increasing listener and viewer loyalty. We organize special promotional appearances, such as station van appearances at client events, concerts and tie-ins to special events, which form an important part of our marketing strategy. Many of these events build advertiser loyalty because they enable us to offer advertisers an additional method of reaching the Hispanic consumer. In some instances, these events are co-sponsored by local television stations, newspapers, promoters and advertisers, allowing our mutual advertisers to reach a larger combined Hispanic audience.
Maintain strong community involvement. We have been, and will continue to be, actively involved in the local communities that we serve. Our broadcast stations participate in numerous community programs, fund-raisers and activities benefiting the local community and Hispanics abroad. Examples of our community involvement include free public service announcements, free equal-opportunity employment announcements, tours and discussions held by station personalities with school and community groups designed to deter drug and gang involvement, free concerts and events designed to promote family values within the local Hispanic communities, charitable contributions to organizations which benefit the Hispanic community, and extended coverage, when necessary, of significant events which have an impact on the U.S. Hispanic population. Our broadcast stations and members of our management have received numerous community service awards and acknowledgments from governmental entities and community and philanthropic organizations for their service. We believe that this involvement helps build and maintain broadcast station awareness and loyalty.
Expand branded content across multiple media platforms. We have found that our brands and the content that we have developed are well-positioned for expansion in other media outlets. As part of our long-term strategy, it is essential that we find ways to monetize our content and investments across multiple platforms such as the Internet, television and other new media alternatives, such as personal music and video recording devices, cellular telephones and other new media technology. Since our content is unique to our brands and talent, expansion allows us to capture other advertising and sponsorship revenue. In addition, our key broadcast programs, on-air personalities and brands are being developed for downloadable video, ring-tone and interactive content use. We are also developing content from our production of musical events to create opportunities to sell, market and distribute such content through our websites and other media.
Local Marketing Agreement
On January 1, 2008, we entered into a local marketing agreement with South Broadcasting System, Inc. (South Broadcasting), a company owned by our Chairman Emeritus and a member of our board of directors. Pursuant to the local marketing agreement, we are permitted to broadcast our Mexican Regional programming on radio station 106.3 FM (the LMA Station). We are required to pay the operating costs of the LMA Station and, in exchange, we will retain all revenues from the sale of the advertising within the programming we provide. The local marketing agreement will terminate, among other things, upon the first anniversary of the effective date, unless we provide 120 days written notice to South Broadcasting of our election to renew for a period of three years. Under the terms of the local marketing agreement, we have the right of first negotiation and the right of first refusal to match a competing offer. However, after the first anniversary of the effective date, if we do not agree to match the terms of the competing offer or fail to notify South Broadcasting of our intent to match the competing offer, then South Broadcasting has the right to accept such offer, provided South Broadcasting pays us the early termination fee equal to the lesser of 5% of the aggregate purchase price of the LMA Station or $1,000,000.
Due to the recent commencement of our television operation, we are now reporting two operating segments, radio and television.
See â€śItem 8. Financial Statements and Supplementary Dataâ€ť below.
We operate stations in some of the top Hispanic radio markets in the United States, including Puerto Rico. We own radio stations in Los Angeles, New York, Puerto Rico, Chicago, Miami and San Francisco.
Radio Station Portfolio
The following is a general description of each of our markets. The market revenue information is based on data provided by BIA Financial Network, Inc.â€™s 2007 Investing in Radio Market Report, Synovate 2008 Diversity Markets Report and the U.S. Census Bureau Population Estimates for Puerto Rico â€“ 2007.
The Los Angeles market is the largest radio market in terms of advertising revenue which was projected to be approximately $1.1 billion in 2007. In 2007, the Los Angeles market was projected to have the largest U.S. Hispanic population with approximately 8.5 million Hispanics, which is approximately 48% of the Los Angeles marketâ€™s total estimated population. The Los Angeles market experienced an annual radio revenue growth of 3.7% between 2001 and 2006. Radio revenue in the Los Angeles market is expected to grow at an annual rate of 1.8% between 2006 and 2011.
The New York market is the second largest radio market in terms of advertising revenue which was projected to be approximately $791.0 million in 2007. In 2007, the New York market was projected to have the second largest U.S. Hispanic population, with approximately 4.4 million Hispanics, which is approximately 21% of the New York marketâ€™s total estimated population. We believe that we own the strongest franchise in our target demographic group, with two of the four FM Spanish-language radio stations in the New York market, WSKQ-FM and WPAT-FM. The New York market experienced an annual radio revenue increase of 1.4% between 2001 and 2006. Radio revenue in the New York market is expected to grow at an annual rate of 1.5% between 2006 and 2011.
The Puerto Rico market is the twenty-eighth largest radio market in terms of advertising revenue, which was projected to be approximately $119.1 million in 2007. In 2007, the Puerto Rico market was projected to have approximately 3.9 million Hispanics, which is estimated to be approximately 99% of the Puerto Rico marketâ€™s total estimated population. The Puerto Rico market experienced an annual radio revenue growth of 5.8% between 2001 and 2006. Radio revenue in the Puerto Rico market is expected to grow at an annual rate of 2.4% between 2006 and 2011.
The Miami market is the eleventh largest radio market in terms of advertising revenue which was projected to be approximately $315.2 million in 2007. In 2007, the Miami market was projected to have the third largest U.S. Hispanic population, with approximately 2.1 million Hispanics, which is approximately 49% of the Miami marketâ€™s total estimated population. The Miami market experienced an annual radio revenue growth of 3.2% between 2001 and 2006. Radio revenue in the Miami market is expected to grow at an annual rate of 3.2% between 2006 and 2011.
The Chicago market is the third largest radio market in terms of advertising revenue which was projected to be approximately $586.1 million in 2007. In 2007, the Chicago market was projected to have the fourth largest U.S. Hispanic population, with approximately 1.9 million Hispanics, which is approximately 20% of the Chicago marketâ€™s total estimated population. The Chicago market experienced an annual radio revenue increase of 1.8% between 2001 and 2006. Radio revenue in the Chicago market is expected to grow at an annual rate of 1.3% between 2006 and 2011.
The San Francisco market is the fifth largest radio market in terms of advertising revenue which was projected to be approximately $419.8 million in 2007. In 2007, the San Francisco market had the sixth largest U.S. Hispanic population, with approximately 1.7 million Hispanics, which is approximately 24% of the San Francisco marketâ€™s total estimated population. The San Francisco market experienced an annual radio revenue increase of 0.8% between 2001 and 2006. Radio revenue in the San Francisco market is expected to grow at an annual rate of 1.1% between 2006 and 2011.
Radio Station Programming
We format the programming of each of our radio stations to capture a substantial share of the U.S. Hispanic audience in its respective market. The U.S. Hispanic population is diverse, consisting of numerous identifiable groups from many different countries of origin and each with its own musical and cultural heritage. The music, culture, customs and Spanish dialects vary from one radio market to another. We strive to become very familiar with the musical tastes and preferences of each of the various Hispanic ethnic groups and customize our programming to match the local preferences of our target demographic audience in each market we serve. We have in-house research departments located in Miami and Los Angeles, which conduct extensive market research on a recurring basis. By employing listener study groups and telephone surveys modeled after Arbitron Â® written survey methodology, we are able to assess listener preferences, track trends and gauge our success on a daily basis, well before Arbitron Â® quarterly results are published. In this manner, we can respond immediately, if necessary, to any changing preferences of listeners and/or trends by refining our programming to reflect the results of our research and testing. Each of our programming formats is described below.
â€˘ Spanish Tropical. The Spanish Tropical format primarily consists of salsa, merengue, bachata and reggaeton music. Salsa is dance music combining Latin Caribbean rhythms with jazz originating from Puerto Rico, Cuba and the Dominican Republic, which is popular with the Hispanics whom we target in New York, Miami and Puerto Rico. Merengue music is up-tempo dance music originating in the Dominican Republic. Bachata is a softer tempo dance music also originating in the Dominican Republic. Reggaeton is a modern rhythmic dance genre that incorporates certain elements of hip-hop music.
â€˘ Regional Mexican. The Regional Mexican format consists of various types of music played in different regions of Mexico such as ranchera, nortena, banda and cumbia. Ranchera music, originating from Jalisco, Mexico, is a traditional folkloric sound commonly referred to as mariachi music. Mariachi music features acoustical instruments and is considered the music indigenous to Mexicans who live in country towns. Nortena means northern, and is representative of Northern Mexico. Featuring an accordion, nortena has a polka sound with a distinct Mexican flavor. Banda is a regional format from the state of SinalĂła, Mexico and is popular in California. Banda resembles up-tempo marching band music with synthesizers.
â€˘ Spanish Adult Contemporary. The Spanish Adult Contemporary format includes soft romantic ballads and Spanish pop music, international hits from Puerto Rico, Mexico, Latin America and Spain.
â€˘ Spanish Oldies. The Spanish Oldies format includes a variety of Latin and English classics mainly from the 1960â€™s, 1970â€™s and 1980â€™s.
â€˘ Top 40. The Top 40 format consists of the most popular current chart hits.
â€˘ News Talk. Top local, national and world news along with local traffic and weather information. Moment by moment monitoring of breaking news as it happens along with compelling hard hitting topics that shape our world.
â€˘ Hurban. The Hispanic Urban (Hurban) format consists of â€śreggaetonâ€ť, which is dance music that originated in Panama and Puerto Rico more than a decade ago and has evolved into a mix of Spanish- and English-language dance hall, traditional reggae, Latin pop and Spanish hip-hop.
On-Line Properties (LaMusica.com)
As part of our operating business, we also operate LaMusica.com, Mega.tv , and our radio station websites which are bilingual (Spanish â€“ English) websites providing content related to Latin music, entertainment, news and culture. LaMusica.com and our network of station websites generate revenue primarily from advertising and sponsorship. In addition, the majority of our station websites simultaneously streams our stations content, which has broadened our audience reach. In addition, we hope to generate revenue from our key radio programs, on-air personalities and brands, which are being developed for downloadable video, ring-tone and interactive content use through our network website, LaMusica.com. We are also developing content from our production of musical events to create opportunities to sell, market and distribute this content through our websites and other media.
We believe that LaMusica.com , together with our broadcast portfolio, enables our audience to enjoy targeted and culturally specific entertainment options, such as concert listings, music reviews, local entertainment calendars, and interactive content on popular Latin artists and entertainers. At the same time, our online properties enable our advertisers to reach their targeted Hispanic consumers through an additional and dynamic medium.
Television Overview and Programming
On March 1, 2006, we launched MegaTV, our general entertainment Spanish-language television operation serving the South Florida market. We created a unique television format which focuses on entertainment, events and variety with high-quality production. Our programming is formatted to capture shares of the marketâ€™s young U.S. Hispanic audience by focusing on our core strengths as an â€śentertainmentâ€ť company, thus offering a new alternative compared to the traditional Latino channels. MegaTVâ€™s programming is based on a strategy designed to showcase a combination of programs, ranging from televised radio-branded shows to general entertainment programs, such as music, celebrity, debate, interviews and personality based shows. As part of our strategy, we have incorporated certain of our on-air personalities into our programming, as well as including interactive elements to compliment our Internet websites. We have developed approximately 70% of our programming and have commissioned other content from capable Spanish-language production partners. Our television revenue is generated primarily from the sale of local advertising and paid programming. Advertising rates depend primarily on our ability to attract an audience in the demographic groups targeted by our advertisers, the number of stations in the market we compete with for the same audience, the supply of and demand for television advertising time, as well as other qualitative factors. We also generate revenue from the sale of integrated sponsorships and program syndication.
The vast majority of our revenue is derived from cash advertising sales. Advertising revenue is usually classified by two categories â€” â€śnationalâ€ť and â€ślocalâ€ť. â€śNationalâ€ť generally refers to advertising that is solicited by a representative firm for national advertisers. A subset category of National advertising revenue is network advertising revenue, which is advertising purchased by our other strategic alliance agreements. Our national sales representative for our radio stations is SBS/Interep LLC, a division of Interep National Radio Sales, Inc. and Hispanic Independent Television Sales, Inc. for our television stations. â€śLocalâ€ť refers to advertising purchased by advertisers and agencies in the local market served by a particular station.
Current trends in the media advertising market have changed the long-established model for categorizing advertising revenue. In the past, media advertising was usually classified into two categories â€” â€śnationalâ€ť or â€ślocalâ€ť spot sales. We have expanded the conventional model by offering â€śintegrated sponsorshipâ€ť opportunities, which are highly sought after and command a higher investment from agencies, in order to maximize our advertisersâ€™ opportunities. We expect that our primary source of revenue from our broadcast stations will be generated from the sale of national, local and integrated sponsorship advertising. In addition, we are anticipating that the television, radio and internet offerings will generate more advertising opportunities by offering multi-media packages.
The broadcasting industry is one of the most efficient and cost-effective means for advertisers to reach targeted demographic groups. Advertising rates charged by a station are based primarily on the stationâ€™s ability to attract an audience in a given market and on the attractiveness to advertisers of the stationâ€™s audience demographics, as well as the demand on available advertising inventory. Rates also vary depending upon a programâ€™s popularity among the listeners/viewers an advertiser is seeking to attract and the availability of alternative media in the market. Radio advertising rates generally are highest during the morning drive-time hours which are the peak hours for radio audience listening. In general, television advertising rates are higher during prime time evening viewing periods. A broadcaster that has multiple stations in a market appeals to national advertisers because these advertisers can reach more listeners and viewers, thus enabling the broadcaster to attract a greater share of the advertising revenue in a given market. We believe that we will be able to continue increasing our rates as new and existing advertisers recognize the increasing desirability of targeting the growing U.S. Hispanic population.
Each station broadcasts a predetermined number of advertisements per hour with the actual number depending upon the format of a particular station and any programming strategy we are utilizing to attract an audience. We also determine the number of advertisements broadcast hourly that can maximize the stationâ€™s revenue without negatively impacting its audience listener/viewer levels. While there may be shifts from time to time in the number of advertisements broadcast during a particular time of the day, the total number of advertisements broadcast on a particular station generally does not vary significantly from year to year.
We have short and long-term contracts with our advertisers, although it is customary in the radio and television industry that the majority of advertising contracts are short-term and generally run for less than three months. This affords broadcasters the opportunity to modify advertising rates as dictated by changes in viewer ratings, changes in competitive dynamics and changes in the business climate within a particular market. In each of our broadcasting markets, we employ sales personnel to obtain local advertising revenue. Our local sales force is responsible for maintaining relationships with key local advertisers and agencies and identifying new advertisers. We pay commissions to our local sales staff upon receipt of payment for their respective billings which assist in our collection efforts.
Seasonal broadcasting revenue fluctuations are common in the broadcasting industry and are primarily due to fluctuations in advertising expenditures by local and national advertisers. Our net broadcasting revenues vary throughout the year. Historically, our first calendar quarter (January through March) has generally produced the lowest net broadcasting revenue for the year because of routine post-holiday decreases in advertising expenditures.
The success of each of our broadcast stations depends significantly upon their audience ratings and their share of the overall advertising revenue within their markets. The radio and television broadcasting industries are highly competitive businesses. Each of our radio stations competes with both Spanish-language and English-language radio stations in their market, as well as other media, such as newspapers, broadcast television, cable television, the Internet, magazines, outdoor advertising, satellite radio, transit advertising and direct mail marketing. Our television operations compete for viewers and revenue with both Spanish-language and English-language television stations in the South Florida market, as well as nationally broadcast television operations, cable television, the Internet and other video media.
Several of the broadcast stations with which we compete are subsidiaries of larger national or regional companies that may have substantially greater financial resources than we do. Factors which are material to our competitive position include:
â€˘ management experience;
â€˘ talent and popularity of on-air personalities and television show hosts and actors;
â€˘ audience ratings and our broadcast stationsâ€™ rank in their markets;
â€˘ signal strength and frequency; and
â€˘ audience demographics, including the nature of the Spanish-language market targeted by a particular station.
Although the broadcast industry is highly competitive, some barriers to entry do exist. These barriers can be mitigated to some extent by changing existing broadcast station formats and programming and upgrading power, among other actions. The operation of a broadcast station requires a license or other authorization from the FCC. The number of AM radio stations that can operate in a given market is limited by the availability of AM radio frequencies spectrum in a given market. The number of FM radio frequencies and television stations that can operate in a given market is limited by the availability of those allotted by the FCC to communities in such market. In addition, the FCCâ€™s multiple ownership rules regulate the number of stations that may be owned and controlled by a single entity in a given market. However, in recent years, these rules have changed significantly. For a discussion of FCC regulation, see â€śFederal Regulation of Radio and Television Broadcastingâ€ť below.
The radio industry is also subject to competition from new media technologies that are being developed or introduced, such as the delivery of audio programming by cable television systems and by satellite. The FCC has licensed companies for the use of a new technology, satellite digital audio radio services (known as SDARS), to deliver audio programming. SDARS provides a medium for the delivery by satellite of multiple new audio programming formats to local and national audiences. Some radio broadcast stations, including ours, are presently utilizing digital technology on their existing frequencies to deliver audio programming. The FCC also has begun granting licenses for a new â€ślow powerâ€ť radio or â€śmicrobroadcastingâ€ť service to provide low cost neighborhood service on frequencies which would not interfere with existing stations.
The FCC has selected In-Band On-Channel tm , or IBOC, as the exclusive technology for introduction of terrestrial digital operations by AM and FM radio stations. The technology is also known as â€śHD Radio Â® .â€ť The FCC has authorized the commencement of â€śhybridâ€ť IBOC transmissions, that is, simultaneous broadcast in both digital and analog format, pursuant to notification by the station. The advantages of digital audio broadcasting over traditional analog broadcasting technology include improved sound quality and the ability to offer a greater variety of auxiliary services. IBOC technology permits a station to transmit radio programming in both analog and digital formats, and eventually in digital only formats, using the bandwidth that the radio station is currently licensed to use. It is unclear what impact the introduction of digital broadcasting will have on the radio markets in which we compete. The FCC has authorized use of IBOC digital technology developed by iBiquity Digital Corporation, or iBiquity, on AM and FM stations full-time to both improve sound quality and provide spectrum for enhanced data services, multiple program streams and allowing radio stations to time broker unused digital bandwidth to third parties, thereby providing new business opportunities for radio broadcasters. Final digital radio rules, including the imposition of new public interest requirements and appropriate limits to the amount of subscription requirements, remain under consideration by the FCC.
We currently utilize HD Radio Â® digital technology on two of our stations and will install it on at least four of our stations over the next year. This digital technology, which is not required by the FCC, offers the possibility of multiple audio channels in our assigned frequency.
The delivery of information through the presently unregulated Internet also could create a new form of competition for both radio and television. Internet radio broadcasts have no geographic limitations and can provide listeners with radio programming from around the country and the world. Although we believe that the current sound quality of Internet radio is below standard and may vary depending on factors that can distort or interrupt the broadcast, such as network traffic, we expect that improvements from higher bandwidths, faster modems and wider programming selection may make Internet radio a more significant competitor in the future. The radio broadcasting industry historically has grown despite the introduction of new technologies for the delivery of entertainment and information, such as television broadcasting, cable television, audio tapes, portable digital music players and compact discs. Similarly, the television broadcasting industry has developed, notwithstanding the increasing popularity of portable compact disc players, digital video recorders and entertainment and media content delivered through cell phones and other wireless devices. A growing population and the greater availability of televisions and radios, particularly car and portable radios, have contributed to the growth of the radio and television industries. We cannot assure you, however, that the development or introduction of any new media technology will not have an adverse effect on the radio and television broadcasting industries.
We cannot predict what other matters may be considered in the future by the FCC, nor can we assess in advance what impact, if any, the implementation of any of these proposals or changes may have on our business. See â€śFederal Regulation of Radio and Television Broadcastingâ€ť below.
Trademarks, Copyrights and Licenses
In the course of our business, we use various trademarks, copyrights, trade names, domain names and service marks, including logos, with our products and services and in our programming, advertising and promotions. Trademarks and copyrights are of material importance to our business and are protected by registration or otherwise in the United States and Puerto Rico. We believe our trademarks, copyrights, trade names, domain names and service marks are important to our business and we intend to continue to protect and promote them where appropriate and to protect the registration of new trademarks and copyrights, including through legal action, each of which expires at various times between 2009 and 2017, and which may be extended. We do not hold or depend upon any material government license, franchise or concession, except the broadcast licenses granted by the FCC and the trademarks granted by the United States Patent and Trademark Office.
We have completed, and in the future may complete, strategic acquisitions and divestitures in order to achieve a significant presence with clusters of stations in the top U.S. Hispanic markets. Since the passage of the Telecommunications Act of 1996, the Justice Department has become more aggressive in reviewing proposed acquisitions of broadcast stations and station networks. The Justice Department is particularly aggressive when the proposed buyer already owns one or more broadcast stations in the market of the station it is seeking to buy. Recently, the Justice Department has challenged a number of broadcasting transactions. Some of those challenges ultimately resulted in consent decrees requiring, among other things, divestitures of certain stations. Specifically, the Justice Department has more closely scrutinized broadcasting acquisitions that result in local market shares in excess of 40% of advertising revenue. Similarly, the FCC staff has announced new procedures to review proposed broadcasting transactions even if the proposed acquisitions otherwise comply with the FCCâ€™s ownership limitations. In particular, the FCC may invite public comment on proposed transactions that the FCC believes, based on its initial analysis, may present ownership concentration concerns in a particular local market.
RaĂşl AlarcĂłn, Jr. joined us in 1983 as an account executive and has been our President and a director since October 1985 and our CEO since June 1994. On November 2, 1999, Mr. AlarcĂłn, Jr. became our Chairman of the Board and continues as our CEO and President. Currently, Mr. AlarcĂłn, Jr. is responsible for our long-range strategic planning and operational matters and is instrumental in the acquisition and related financing of each of our stations. Mr. AlarcĂłn, Jr. is the son of Pablo RaĂşl AlarcĂłn, Sr.
Pablo RaĂşl AlarcĂłn, Sr. is our founder and was our Chairman of the Board from March 1983 until November 2, 1999, when he became Chairman Emeritus. Mr. AlarcĂłn, Sr. continues to be one of our directors. Mr. AlarcĂłn, Sr. has been involved in Spanish-language radio broadcasting since the early 1950â€™s when he established his first radio station in CamagĂĽey, Cuba. Upon his arrival in the United States, Mr. AlarcĂłn, Sr. continued his career in radio broadcasting and was an on-air personality for a New York radio station before being promoted to programming director. Mr. AlarcĂłn, Sr. subsequently owned and operated a recording studio and an advertising agency before purchasing our first radio station in 1983. Mr. AlarcĂłn, Sr. is RaĂşl AlarcĂłn, Jr.â€™s father.
Antonio S. Fernandez became one of our directors on June 30, 2004. Mr. Fernandez was the founder and former head of the International Investment Banking Department at Oppenheimer & Co., Inc. Mr. Fernandezâ€™s tenure at Oppenheimer & Co., Inc. from 1979 to 1999 also included terms as Executive Vice President, Director of Operations, Treasurer, Chief Financial Officer and Director. He has been a member of the investment committees for several private equity funds and a director of a closed end fund. Earlier in his career, Mr. Fernandez held management positions at Electronic Data Systems, duPont Glore Forgan and Thomson McKinnon. Mr. Fernandez served on the board of directors of Banco Latinoamericano de Exportaciones from 1992 until 1999 and in September 2003 was elected to the board of directors of Terremark Worldwide Inc.
JosĂ© A. Villamil became one of our directors on June 30, 2004. Mr. Villamil has over 25 years of experience as a private business economist and as a senior policymaker of both the federal and State of Florida governments. Mr. Villamil is the Chief Executive Officer of The Washington Economics Group, Inc., serving in such position from 1993 to 1998 and from 2000 to the present. From 1999 to 2000, he was Director for Tourism, Trade and Economic Development of Florida. Mr. Villamil served most recently as Chairman of the Council of Economic Advisors of Florida and a member of the board of directors of Enterprise Florida, Inc. Since April 2003, Mr. Villamil has been director of Mercantil CommerceBank, N.A. and CommerceBank Holding Corp. Most recently, Mr. Villamil was appointed to President George W. Bushâ€™s Advisory Committee on Trade Policy and Negotiations. From 1989 to 1993, Mr. Villamil served as Chief Economist and later as Undersecretary for Economic Affairs at the United States Department of Commerce.
Mitchell A. Yelen became one of our directors on September 28, 2007. Mr. Yelen is currently the Director of tax services at Pinchasik, Strongin, Muskat, Stein & Company, P.A. where he has been employed since 1984 specializing in litigation support, complex tax research and financial planning. Mr. Yelen previously held positions at CPA firms: Kaufman, Rossin & Co., P.A. and Alexander Grant & Co., P.A. Among other degrees, he holds an M.B.A. in Finance from Northwestern University and a J.D. and L.L.M. in taxation from the University of Miami.
Jason L. Shrinsky became one of our directors on November 2, 1999. Mr. Shrinsky is a retired partner from the law firm Kaye Scholer LLP, which he joined as a partner in 1986. Mr. Shrinsky has been a lawyer counseling corporations and high net worth individuals on financings, mergers and acquisitions, other related financial transactions and regulatory procedures since 1964. Kaye Scholer LLP has served as our legal counsel for more than 20 years.
Joseph A. GarcĂa has been our CFO since 1984, Executive Vice President since 1996 and Secretary since November 2, 1999. Mr. GarcĂa is responsible for our financial affairs, operational matters and investor relations, and he has been instrumental in the acquisition and related financing of our stations. Before joining us in 1984, Mr. GarcĂa spent thirteen years in international financial planning positions with Philip Morris Companies, Inc. and Revlon, Inc., where he was manager of financial planning for Revlon â€” Latin America.
Marko Radlovic became our Chief Operating Officer of the Radio Segment on November 7, 2007 and has been our Executive Vice President since July 21, 2005. Previously, Mr. Radlovic was our Chief Operating Officer of the Company from July 21, 2005 through November 6, 2007 and was our Chief Revenue Officer from December 2003 through July 2005. Mr. Radlovic is responsible for day to day operational matters and overseeing the revenue and profit performance of all of our radio stations. Mr. Radlovic was Vice President/General Manager for our Los Angeles radio cluster from January 2002 until November 2003 and previously served as Vice President of Sales for the Los Angeles cluster. Prior to joining us, he was Market Manager for Cumulus Media in Southern California from January 2001 until August 2001 and was Vice President/General Manager for AM/FM Inc. in Los Angeles from October 1998 to October 2000.
Cynthia Hudson became our Chief Creative Officer of MegaTV and Executive Vice President on January 3, 2006. Ms. Hudson is responsible for MegaTV and our bilingual Internet portals. From 1997-2005, Ms. Hudson served as Senior Vice President and Editorial Director of Cosmopolitan Television (a Hearst Entertainment and Syndication Group division), heading up the creation and development of the Cosmopolitan TV Networks. Ms. Hudson led the research, development and creation of Cosmo TV, overseeing design of original programs, on-air packaging, promotions and program acquisitions, as well as the creation and production of original formats. Ms. Hudson is an eight-time Emmy Award winning producer, writer and international television executive with over 20 years experience in both the U.S. broadcast and international cable TV industries.
MANAGEMENT DISCUSSION FROM LATEST 10K
We are the largest publicly traded Hispanic-controlled media and entertainment company in the United States. We own and/or operate 21 radio stations in markets that reach approximately 48% of the U.S. Hispanic population, and two television stations, which reach approximately 2.0 million households in the South Florida market, and nationally throughout the U.S. on DirecTV MĂˇs. Our radio stations are located in six of the top-ten Hispanic markets of Los Angeles, New York, Puerto Rico, Chicago, Miami and San Francisco. Los Angeles and New York have the largest and second largest Hispanic populations, and are also the largest and second largest radio markets in the United States in terms of advertising revenue, respectively. Our two television stations operate as one television operation, branded â€śMegaTVâ€ť. As part of our operating business, we also operate LaMusica.com, Mega.tv , and our radio station websites which are bilingual (Spanish â€” English) websites providing content related to Latin music, entertainment, news and culture. We also occasionally produce live concerts and events throughout the United States and Puerto Rico.
On March 1, 2006, we acquired television stations WSBS-TV (Channel 22, formerly known as WDLP-TV) and its derivative digital television station WSBS-DT (Channel 3, formerly known as WDLP-DT) in Key West, Florida and WSBS-CA (Channel 50, formerly known as WDLP-CA) in Miami, Florida, serving the South Florida market. On March 1, 2006, we also launched MegaTV, our general interest Spanish-language television operation. MegaTVâ€™s programming is based on a strategy designed to showcase a combination of programs, ranging from televised radio-branded shows to general entertainment programs, such as music, celebrity, debate, interviews and personality based shows. As part of our strategy, we have incorporated certain of our on-air personalities into our programming, as well as including interactive elements to complement our Internet websites. We have developed approximately 70% of our programming and have commissioned other content from Spanish-language production partners. Our television revenue is generated primarily from the sale of local advertising and paid programming.
The success of each of our stations depends significantly upon its audience ratings and share of the overall advertising revenue within its market. The broadcasting industry is a highly competitive business, but some barriers to entry do exist. Each of our stations competes with both Spanish-language and English-language stations in its market, as well as with other advertising media, such as newspapers, cable television, the Internet, magazines, outdoor advertising, satellite radio and television, transit advertising and direct mail marketing. Factors which are material to our competitive position include management experience, our stationsâ€™ rank in their markets, signal strength and frequency, and audience demographics, including the nature of the Spanish-language market targeted by a particular station.
Our primary source of revenue is the sale of advertising time on our stations to local and national advertisers. Our revenue is affected primarily by the advertising rates that our stations are able to charge, as well as the overall demand for advertising time in each respective market. Seasonal net broadcasting revenue fluctuations are common in the broadcasting industry and are primarily due to fluctuations in advertising demand from local and national advertisers. Typically for the broadcasting industry, the first calendar quarter generally produces the lowest revenue. Our most significant operating expenses are compensation expenses, programming expenses, professional fees and advertising and promotional expenses. Our senior management strives to control these expenses, as well as other expenses, by working closely with local station management and others, including vendors.
Fiscal Year Ended 2007 Compared to Fiscal Year Ended 2006
The following summary table presents separate financial data for each of our operating segments (in thousands).
The increase in our consolidated net revenue of $2.8 million or 2% was due to the increase in net revenue from our television segment of $5.3 million or 110%, offset by our radio segment net revenue decrease of $2.5 million or 1%. Our television segment growth was primarily due to (a) MegaTV establishing itself within the South Florida advertising community during the past 22 months, which resulted in an ability to increase advertising rates and sell more inventory, and (b) our television results reflecting a full year of revenue compared to the prior periodâ€™s results reflecting only ten-months of revenue. Our radio segment had a decrease in net revenue primarily due to lower local sales. The decrease in local sales occurred primarily in our Los Angeles, Miami, Chicago and Puerto Rico markets, offset by an increase in our New York and San Francisco markets.
Engineering and Programming Expenses
Our consolidated engineering and programming expenses were flat compared to the prior year. Our television segment expenses decreased $2.2 million or 13%, primarily due to a decrease in programming pre-launch costs, original produced programming, and compensation and benefits for our television programming personnel due to a reduction of headcount. Our radio segment expenses increased $2.1 million or 6%, primarily related to an increase in compensation and benefits for our radio programming personnel and higher music license fees.
Selling, General and Administrative Expenses
Our consolidated selling, general and administrative expenses were flat compared to the prior year. Our radio segment expenses increased $0.7 million or 1%, primarily due to an increase in professional fees and legal settlements. These increases in our radio segmentâ€™s expenses were offset by a decrease in local sales commissions related to lower sales. Our television segment expenses decreased $0.4 million or 5%, primarily due to the decrease in cash advertising, promotional and marketing costs related to the prior year launching of MegaTV.
The increase in corporate expenses was mainly a result of an increase in employee compensation and benefits, offset by a decrease in legal and professional fees, and directors and officers insurance.
Loss (Gain) on Sales of Assets, Net
The prior period gain on sale of assets, net, is related to the sale of radio stations KZAB-FM and KZBA-FM, serving the Los Angeles, California market, which was completed on January 31, 2006, at which time we recognized a pre-tax gain of approximately $50.8 million.
The decrease in operating income was primarily attributed to the gain on sale of assets, net, of $50.8 million which was recognized in the prior period, offset by an increase in consolidated net revenue and decreases in operating expenses.
Interest Expense, Net
The decrease in interest expense, net, was primarily due to the elimination of interest expense incurred on our $100.0 million Second Lien Credit Facility, which was repaid on February 17, 2006.
Loss on Early Extinguishment of Debt
The prior period loss on early extinguishment of debt of $3.0 million was due to the prepayment premium and the write-off of unamortized deferred financing costs related to the repayment of our $100.0 million Second Lien Credit Facility.
Other Income (Expense)
The increase in other income relates to the write-off of the unused portion of unearned revenue that expired on March 1, 2007. This unearned revenue relates to the MegaTV acquisition advertising agreement that provides the seller with the opportunity to use $2.0 million of advertising per year, for three years.
The increase in income taxes was primarily due to the income tax benefit recognized in the prior period, which was related to the sale of radio stations KZAB-FM and KZBA-FM. Our effective tax rate continues to be impacted by a valuation allowance on substantially all of our deferred tax assets.
The decrease in net income was primarily due to the gain on sale of assets of $50.8 million and its related income tax benefit of $6.4 million, which were recognized in the prior period.