UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to ______
Commission file number 0-13020
WESTWOOD ONE, INC.
(Exact name of registrant as specified in its charter)
Delaware 95-3980449
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
40 West 57th Street 10019
New York, NY (Zip Code
(Address of principal executive offices)
Registrant's telephone number, including area code: (212) 641-2000
Securities Registered Pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
Common Stock, par value $0.01 per share New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes X No ___
The aggregate market value of Common Stock held by non-affiliates of the
registrant was approximately $1.91 billion based on the last reported sales
price of the registrant's Common Stock on June 30, 2004 (the last business day
of the most recently completed second quarter) and assuming solely for the
purpose of this calculation that all directors and officers of the registrant
are "affiliates." The determination of affiliate status is not necessarily a
conclusive determination for other purposes.
As of March 1, 2005, 94,355,915 shares (excluding treasury shares) of
Common Stock, par value $0.01 per share, were outstanding and 291,796 shares of
Class B Stock, par value $0.01 per share, were outstanding.
Documents Incorporated By Reference
Portions of the registrant's definitive proxy statement for its 2005 annual
meeting of shareholders (which will be filed with the Commission within 120 days
of the registrant's 2004 fiscal year end) are incorporated by reference in Part
III of this Form 10-K.
PART I
Item 1. Business
In this report, "Westwood One," "Company," "registrant," "we," "us" and "our"
refer to Westwood One, Inc.
General
Westwood One supplies radio and television stations with information services
and programming. The Company is the largest domestic outsource provider of
traffic reporting services and the nation's largest radio network, 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 Company derives substantially all of its revenues from the sale of :10
second, :30 second and :60 second commercial airtime to advertisers. The Company
obtains the commercial airtime it sells to advertisers from radio and television
affiliates in exchange for the programming or information services it provides
to them. In some cases, the Company supplements the commercial airtime it
receives 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 the Company, advertisers are able to have
their commercial messages broadcast on radio and television stations throughout
the United States, reaching demographically defined listening audiences.
The Company provides local traffic and information broadcast reports in over 95
of the top 100 Metro Survey Area markets (referred to herein as "MSA markets")
in the United States. The Company also offers radio stations traditional news
services, including CBS Radio news and CNN Radio news, in addition to seven
24-hour satellite-delivered continuous play music formats ("24/7 Formats") and
weekday and weekend news and entertainment features and programs. These programs
include: major sporting events, including the National Football League, Notre
Dame football and other college 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.
Westwood One is managed by Infinity Broadcasting Corporation ("Infinity"), a
wholly-owned subsidiary of Viacom Inc., pursuant to a management agreement
between the Company and Infinity which expires on March 31, 2009 (the
"Agreement" or "Management Agreement").
Industry Background
Radio Broadcasting
There are approximately 11,000 commercial radio stations in the United States.
A radio station selects a style of programming ("format") 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 revenues.
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 Westwood One, 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.
Radio Advertising
Radio advertising time can be purchased on a local, regional or national basis.
Local and regional purchases allow an advertiser to select specific radio
stations in chosen geographic markets 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 network audience delivery and demographic composition, specific
measurement information is available to advertisers from independent rating
services such as Arbitron and their RADAR rating service. The rating service
provides demographic information such as the age and gender composition of the
listening audiences. Consequently, advertisers can verify that their
advertisements are being heard by their target listening audience.
Business Strategy/Services
The Company's 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. The
Company offers radio stations traffic and news information as well as a wide
selection of regularly scheduled and special event syndicated programming and
24/7 Formats. The information, programs and formats are produced by the Company
and, therefore, the stations typically have virtually no production costs. With
respect to the Company's programs and formats, each program or format is offered
for broadcast by the Company 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, Westwood One's programs
contain available commercial airtime that the stations may sell to local
advertisers. Westwood One typically distributes promotional announcements to the
stations and occasionally places advertisements in trade and consumer
publications to further promote the upcoming broadcast of its programs.
In 1996, the Company expanded its product offerings 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 the
Company's advertisers the ability to easily supplement their national purchases
with local and regional purchases from the Company. It also allowed the Company
to develop relationships with local and regional advertisers. In 1996 and 1998,
the Company acquired the operating assets of Shadow Traffic in a total of 14
major metropolitan markets (4 in 1996 and 10 in 1998). In 1999, Westwood One
significantly expanded its local and regional reach through its merger with the
country's largest traffic service provider, Metro Networks, Inc., which
broadcast information reports in 67 of the 75 largest MSA markets in the United
States. Since then, the Company has expanded its reach to more than 95 of the
top 100 MSA markets. In late 2000, the Company continued its expansion of
products with its acquisition of the operating assets of SmartRoute Systems,
Inc. ("SmartRoute"), a company which collects, organizes and distributes a
database of advanced traveller information through various electronic media and
telecommunications.
Westwood One enters into affiliation arrangements with radio stations which
require the affiliate to provide the Company 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 the Company's programs and to use a portion of the program's
commercial slots to air national advertisements and any related promotional
spots. With respect to 24/7 Formats, the Company typically receives a portion of
the commercial airtime and a cash fee from the affiliated stations in exchange
for the stations receiving the right to broadcast the formats.
Affiliation arrangements specify the number of times and the approximate daypart
each program and advertisement may be broadcast. Westwood One requires that each
station complete and promptly return to the Company 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. The Company has agreements with over 5,000
radio stations, many of which have more than one arrangement.
The Company has personnel responsible for station sales and marketing its
programs to radio stations. The Company's staff develops and maintains close,
professional relationships with radio station personnel to provide them with
quick programming assistance.
Local Traffic and Information Programming
The Company, through its Traffic and Information Division, provides traffic
reports and local news, weather and sports information programming to radio and
television affiliates.
The Company gathers traffic and other data utilizing the Company's
information-gathering infrastructure, which includes aircraft (helicopters and
-2-
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. The Company also
gathers information from various third-party news and information services. The
information is processed, converted into broadcast copy and entered into the
Company's computer systems by the Company's local writers and producers. This
permits the Company to easily resell the information to third parties for
distribution through the internet, wireless devices or personal digital
assistants ("PDAs") and various other distribution channels. The Company's
professional announcers read the customized reports on the air. The Company's
information reports (including the length of report, content of report, specific
geographic coverage area, time of broadcast, number of reports aired per day,
broadcaster's style, etc.) are customized to meet each individual affiliate's
requirements. The Company typically works closely with the program directors,
news directors and general managers of its affiliates to ensure that the
Company's services meet its affiliates' goals and standards. The Company and its
affiliates jointly select the on-air talent to ensure that each on-air talent's
style is appropriate for the station's format. The Company's on-air talent often
become integral "personalities" on such affiliate stations as a result of their
significant on-air presence and interaction with the stations' on-air personnel.
In order to realize operating efficiencies, the Company endeavors to utilize its
professional on-air talent on multiple affiliate stations within a particular
market.
The Company believes that its extensive fleet of aircraft and other
information-gathering technology and broadcast equipment have allowed the
Company to provide high quality programming, enabling it to retain and expand
its affiliate base. In the aggregate, the Company utilizes approximately: 125
helicopters and fixed-wing aircraft; 39 mobile units; 32 airborne camera
systems; 125 fixed-position camera systems; 70 broadcast studios; and 1,400
broadcasters and producers. The Company also maintains a staff of computer
programmers and graphics experts to supply customized graphics and other visual
programming elements to television station affiliates. In addition, the
Company's operations centers and broadcast studios have sophisticated computer
technology, video and broadcast equipment and cellular and wireless technology,
which enables the Company's on-air talent to deliver reports to its affiliates.
The infrastructure and resources dedicated to a specific market by the Company
are determined by the size of the market, the number of affiliates the Company
serves in the market and the type of services being provided.
The Company generally does not require its affiliates to identify the Company as
the supplier of its information reports. This provides the Company's affiliates
with a high degree of customization and flexibility, as each affiliate has the
right to present the information reports provided by the Company as if the
affiliate had generated the reports with its own resources.
As a result of its extensive network of operations and talent, the Company
regularly reports breaking and important news stories and provides its
affiliates with live coverage of these stories. The Company is able to customize
and personalize its reports of breaking stories using its individual affiliates'
call letters from the scene of news events. Past examples have included, among
others, providing live airborne coverage of the September 11 terrorist attack on
the World Trade Center and the Seattle earthquake. By using our news
helicopters, the Company feeds live video to television affiliates around the
country. Moreover, by leveraging our infrastructure, the same reporters provide
live customized airborne reports for the Company's radio affiliates via the
Company's Metro Source service, which is described below. The Company believes
that it is the only radio network news organization that has local studio
operations that cover in excess of 95 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 the Company's news
affiliates to receive via satellite and view, write, edit and report the latest
news, features and show preparation material. With this product, the Company
provides continuously updated and breaking news, weather, sports, business and
entertainment information to its affiliate stations which have subscribed to the
service. Information and content for Metro Source is primarily generated from
the Company's staff of news bureau chiefs, state correspondents and professional
news writers and reporters.
Local, regional and national news and information stories are fed to the
Company's national news operations center in Phoenix, Arizona where the
information is verified, edited, produced and disseminated via satellite to the
Company's internal Metro Source workstations located in each of its 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.
-3-
Television Programming Services
The Company supplies Television Traffic Services ("MetroTV Services") to over
200 television stations. Similar to its radio programming services, with its
MetroTV Services the Company supplies customized information reports which are
generally delivered on air by its reporters to its television station
affiliates. In addition, the Company supplies customized graphics and other
visual programming elements to its television station affiliates.
The Company utilizes live studio cameras in order to enable its traffic
reporters to provide its Video News Services on television from the Company's
local broadcast studios. In addition, the Company provides its Video News
Services from its 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 the Company's
aircraft; and (iii) full-service, 24 hours per day/7 days per week video
coverage from the Company's camera crews using broadcast quality camera
equipment and news vehicles.
SmartRoute Systems
In 2000 the Company acquired the operating assets of SmartRoute ("SRS") which
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. The Company believes
that in order to remain competitive and to continue to provide an information
product of the highest quality to its affiliates, it is necessary to invest in
and participate in the development of new technology. The Company is currently
working with several public and private entities across the United States to
improve dissemination of traffic and transportation information. SRS revenues
are not presently a significant source of revenues to the Company.
The Company, through SmartRoute, collects, organizes and distributes a database
of advanced traveler information to automobiles, homes and offices through
various electronic media and telecommunications. The Company delivers its
information under the SRS brand name. In addition, the Company has participated
in a number of Federal and State funded Intelligent Transportation System
projects, including various operational, 511 Interactive Voice Response ("IVR"),
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.
The Company has 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.
National Radio Programming
The Company produces and distributes 24/7 Formats, 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.
The Company controls most aspects of the production of its programs, thereby
being able to tailor its programs to respond to current and changing listening
preferences. The Company produces regularly scheduled short-form programs
(typically five minutes or less), long-form programs (typically 60 minutes or
longer) and 24/7 Formats. Typically, the short-form programs are produced at the
Company's in-house facilities located in Culver City, California, and New York,
New York. The long-form programs include shows produced primarily at the
Company's in-house production facilities and recordings of live concert
performances and sports events made on location. The 24/7 Formats are produced
at the Company's facilities in Valencia, California.
Westwood One also produces and distributes special event syndicated programs. In
2004, the Company 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.
Westwood One obtains most of the programming for its 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
-4-
worldwide over the radio (whether live or pre-recorded) for a specified period
of time. The Company may also obtain interviews with the recording artist and
retain a copy of the recording of the concert and the interview for use in its
radio programs and as additions to its extensive tape library. The agreements
provide the artist with master recordings of their concerts and nationwide
exposure on affiliated radio stations. In certain cases, the artists may receive
compensation.
Westwood One's syndicated programs are primarily produced at its in-house
production facilities. The Company determines the content and style of a program
based on the target audience it wishes to reach. The Company assigns a producer,
writer, narrator or host, interviewer and other personnel to record and produce
the programs. Because Westwood One controls the production process, it can
refine the programs' content to respond to the needs of its affiliated stations
and national advertisers. In addition, the Company can alter program content in
response to current and anticipated audience demand.
The Company produces and distributes seven 24/7 Formats providing music, news
and talk programming for Country, Hot Country, Adult Contemporary, Soft Adult
Contemporary, Oldies, Adult Standards, and the Adult Rock and Roll formats.
Using its production facilities in Valencia, California, the Company provides
all the programming for stations affiliated with each of these formats.
Affiliates compensate the Company for these formats by providing the Company
with a portion of their commercial air time and, in most cases, cash fees.
The Company believes that its tape library is a valuable asset for its future
programming and revenue generating capabilities. The library contains previously
broadcast programs, live concert performances, 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
The Company packages its 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 the Company generally sells its commercial airtime on
a network basis rather than station-by-station, the Company does not compete for
advertising dollars with its local radio station affiliates. The Company
believes that this is a key factor in maintaining its affiliate relationships.
The Company packages its television commercial airtime on a local, regional and
national network basis. The Company has developed a separate sales force to sell
its television commercial airtime and to optimize the efforts of the Company's
national internal structure of sales representatives. The Company's advertising
sales force is comprised of approximately 260 sales representatives and sales
managers.
In most of the markets in which the Traffic and Information Division conducts
operations, the Company maintains an advertising sales office as part of its
operations center. The Company's advertising sales force is able to sell
available commercial airtime in any and all of the Company's markets in addition
to selling such airtime in each local market, which the Company believes affords
its sales representatives an advantage over certain of its competitors. For
example, an airline advertiser can purchase sponsorship advertising packages in
multiple markets from the Company's local sales representative in the city in
which the airline is headquartered.
The Company's 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 the Company has
numerous radio station affiliates in each of its markets (averaging
approximately 25 affiliates per market in our top 50 markets), the Company
believes that its traffic and information broadcasts reach more people, more
often, in a higher impact manner than can be achieved using any other
advertising medium. The Company combines its commercial airtime into multiple
"sponsorship" packages which it then sells as an information sponsorship package
to advertisers throughout its networks on a local, regional or national basis,
primarily during morning and afternoon drive periods. The Company generally does
not allow an advertiser to select individual stations from its networks on which
to run its advertising campaign.
The Company believes that the positioning of advertisements within or adjacent
to its information reports appeals to advertisers because the advertisers'
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 the Company demonstrate that
because the Company's customized information reports are related to topics of
significant interest to listeners, listeners often seek out the Company's
information reports. Since advertisers' messages are embedded in the Company's
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information reports, such messages have a high degree of impact on listeners and
generally will not be "pre-empted" (i.e., moved by the radio station to another
time slot). Most of the Company's advertisements are read live by the Company's
on-air talent, providing the Company's advertisers with the added benefit of an
implied endorsement for their product.
Westwood One's 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 its 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 the Company. 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. The Company,
on occasion, supports its national sponsors with promotional announcements and
advertisements in trade and consumer publications. This support promotes the
upcoming broadcasts of Company programs and is designed to increase the
advertisers' target listening audience.
Generally, the Company provides its MetroTV Services to television stations in
exchange for thirty-second commercial airtime that the Company packages and
sells on a national basis. The amount and placement of the commercial airtime
that the Company receives from television stations varies by market and the type
of service provided by the Company. As the Company has provided enhanced
television video services, it has been able to acquire more valuable commercial
airtime. The Company believes that it offers advertisers significant benefits
because, unlike traditional television networks, the Company often delivers more
than one station in major markets and advertisers may select specific markets.
The Company has established a morning TV news network for its advertisers'
commercials to air during local news programming and local news breaks from 5:30
a.m. to 9:00 a.m. Because the Company has affiliated a large number of network
television stations in major markets, its morning news network delivers a
significant national household rating in an efficient and compelling local news
environment. As the Company continues to expand its service offerings for local
television affiliates, it plans to create additional news networks to leverage
its television news gathering infrastructure.
Competition
In the MSA markets in which it operates, the Company competes for advertising
revenue with local print and other forms of communications media including
magazines, 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 the
Company is 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. In addition,
the consolidation of the radio industry has created opportunities for large
radio groups, such as Clear Channel Communications, to gather information on
their own.
In marketing its programs to national advertisers, the Company directly competes
with other radio networks as well as with independent radio syndication
producers and distributors. More recently, 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 network
radio advertising expenditures. In addition, the Company competes for
advertising revenue with network television, cable television, print and other
forms of communications media. The Company believes that the quality of its
programming and the strength of its station relations and advertising sales
forces enable it to compete effectively with other forms of communication media.
Westwood One markets its programs to radio stations, including affiliates of
other radio networks, that it believes will have the largest and most desirable
listening audience for each of its programs. The Company often has different
programs airing on a number of stations in the same geographic market at the
same time. The Company believes that in comparison with any other independent
radio syndication producer and distributor or radio network it has a more
diversified selection of programming from which national advertisers and radio
stations may choose. In addition, the Company both produces and distributes
programs, thereby enabling it 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.
-6-
Government Regulation
Radio broadcasting and station ownership are regulated by the Federal
Communications Commission (the "FCC"). Westwood One, as a producer and
distributor of radio programs and information services, is 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.
Employees
On February 1, 2005, Westwood One had approximately 2,547 employees, including
an advertising sales force of approximately 260 people and 846 part-time
employees. In addition, the Company maintains continuing relationships with
numerous independent writers, program hosts, technical personnel and producers.
Approximately 689 of the Company's employees are covered by collective
bargaining agreements. The Company believes relations with its employees,
unions, and independent contractors are satisfactory.
Available Information
The Company is a Delaware corporation, having re-incorporated in Delaware on
June 21, 1985. Our current and periodic reports filed with the Securities and
Exchange Commission ("SEC"), including amendments to those reports, may be
obtained through our internet website at www.westwoodone.com free of charge as
soon as reasonably practicable after we file these reports with the SEC.
Item 2. Properties
The Company owns a 7,300 square-foot building in Culver City, California, which
houses the syndicated program production facilities and a 14,000 square-foot
building in Culver City, California, which contains administrative, and sales
and marketing, as well as its two traffic and news reporting divisions, Metro
Networks and Shadow Broadcast Services. The Company also owns a 7,900
square-foot building adjacent to its administrative and sales and marketing
offices in Culver City, California, which it subleases. In addition, the Company
leases operation centers/broadcast studios and marketing and administrative
offices across the United States consisting of over 365,000 square feet in the
aggregate, pursuant to the terms of various lease agreements.
The Company believes that its facilities are adequate for its current level of
operations.
Item 3. Legal Proceedings
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
-7-
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
On March 1, 2005 there were approximately 211 holders of record of the Company's
Common Stock, several of which represent "street accounts" of securities
brokers. Based upon the number of proxies requested by brokers in conjunction
with its 2004 shareholders' meeting, the Company estimates that the total number
of beneficial holders of the Company's Common Stock exceeds 5,000.
Since December 15, 1998, the Company's Common Stock has been traded on the New
York Stock Exchange ("NYSE") under the symbol "WON". The following table sets
forth the range of high and low last sales prices on the NYSE for the Common
Stock for the calendar quarters indicated.
2004 High Low
---- ---- ---
First Quarter $34.66 $27.82
Second Quarter 32.40 22.76
Third Quarter 24.36 19.21
Fourth Quarter 26.95 20.12
2003
----
First Quarter $39.15 $29.60
Second Quarter 35.56 31.05
Third Quarter 33.73 29.30
Fourth Quarter 34.40 29.60
The last sales price for the Company's Common Stock on the NYSE on March 1, 2005
was $22.00.
The Company does not intend to pay cash dividends. No cash dividend was paid on
the Company's stock during 2004 or 2003, and the payment of dividends is
restricted by the terms of its loan agreements, to the extent that such a
payment would cause an event of default.
There is no established public trading market for our Class B Stock. However,
the Class B Stock is convertible to Common Stock on a share-for-share basis. On
March 1, 2005 there were 3 holders of record of the Company's Class B Stock.
Equity Compensation Plan Information
The following table contains information regarding equity compensation plans and
warrants issued to Infinity under the Management Agreement as of December 31,
2004:
Number of securities to be
issued upon exercise of Weighted average exercise Number of securities
outstanding options, price of outstanding remaining available for
Plan Category warrants and rights options, warrants and rights future issuance
------------- ------------------- ---------------------------- ---------------
Equity compensation plans
approved by security holders
Options (1) 7,996,018 $24.90 600,345
Warrants (2) 4,500,000 49.44 N/A
Equity compensation plans not
approved by security holders - - -
---------- -------
Total 12,496,018 600,345
========== =======
(1) Options included herein were granted or are available for grant as part of
the Company's 1989 and/or 1999 stock option plans that were approved by
shareholders of the Company. The Company's 1999 stock option plan provides
for mandatory grants of options to members of the Company's Board of
Directors on an annual basis. The Compensation Committee of the Board of
Directors approves periodic option grants to Executive Officers and other
employees based on their contributions to the operations of the Company.
-8-
(2) Warrants included herein were granted to Infinity in conjunction with the
Infinity Management Agreement, and were approved by shareholders of the
Company on May 29, 2002. Of the seven warrants issued, two warrants to
purchase an aggregate of 2,000,000 shares of Common Stock each have an
exercise price of $43.11 and $48.36, respectively, and become exercisable
only if the average price of the Company's Common Stock reaches a price of
$64.67 and $77.38, respectively, for at least 20 out of 30 consecutive
trading days for any period throughout the ten year term of the warrants.
Of the remaining five warrants to purchase an aggregate of 2,500,000 shares
of Common Stock, the exercise price for each of the five warrants is equal
to $38.87, $44.70, $51.40, $59.11, and $67.98, respectively. The five
warrants have a term of 10 years (only if they become exercisable) and
become exercisable on January 2, 2005, 2006, 2007, 2008, and 2009,
respectively. However, in order for the warrants to become exercisable, the
average price of the Company's Common Stock for each of the 15 trading days
prior to January 2 of such year (commencing on January 2, 2005 with respect
to the first 500,000 warrant tranche and each January 2 thereafter for each
of the remaining four warrants) must be at least equal to both the exercise
price of the warrant and 120% of the corresponding prior year 15 day
trading average. In the case of the $38.87 warrants, the Company's average
stock price for the 15 trading days prior to January 2, 2005 must equal or
exceed $40.56 for the warrants to become exercisable. The average stock
price for the 15 trading days prior to January 2, 2005 did not equal or
exceed $40.56, and therefore, the warrants did not become exercisable.
Issuer Purchases of Equity Securities
Approximate Dollar
Total Number Value of Shares that
Shares Purchased as May Yet Be Purchased
Part of Publicly Under the Plans ors
Number of Shares Average Price Paid Announced Plans or Programs
Period Purchased in Period Per Share Programs (A)
------ ------------------- --------- -------- --------
October 2004 475,000 $20.93 11,191,224 $186,460,000
November 2004 860,000 22.84 12,051,224 166,819,000
December 2004 185,000 25.31 12,236,224 162,138,000
-------
1,520,000 $22.54
=========
(A) Represents remaining authorization from the $250 million repurchase
authorization approved on September 25, 2002 and the additional $250
million repurchase authorization approved by the Company's Board of
Directors on February 24, 2004.
Item 6. Selected Financial Data
(In thousands except per share data)
2004 (1) 2003 (1) 2002 (1) 2001 2000
---- ---- ---- ---- ----
OPERATING RESULTS FOR YEAR ENDED DECEMBER 31:
Net Revenues $562,246 $539,226 $550,751 $515,940 $553,693
Operating and Corporate Costs, Excluding
Depreciation and Amortization 378,240 357,688 360,390 349,936 388,095
Depreciation and Amortization 18,429 11,513 11,464 67,611 62,104
Operating Income 165,577 170,025 178,897 98,393 103,494
Net Income $95,490 $100,039 $109,115 $43,195 $42,283
Income Per Basic Share $.98 $.99 $ 1.03 $.40 $.38
Income Per Diluted Share $.97 $.97 $ 1.00 $.38 $.36
BALANCE SHEET DATA AT DECEMBER 31:
Current Assets $174,346 $165,495 $153,628 $140,527 $ 153,881
Working Capital 93,005 81,433 63,542 35,012 15,679
Total Assets 1,246,279 1,262,034 1,266,312 1,210,017 1,285,556
Long-Term Debt 359,439 300,366 232,135 152,000 168,000
Total Shareholders' Equity 784,493 835,950 903,040 915,371 949,892
-9-
(1) Results for the years ended December 31, 2004, 2003, and 2002 include the
effects of adopting Statement of Financial Accounting Standards No. 142
"Goodwill and Other Intangible Assets" ("SFAS 142"). Retroactive
application prior to January 1, 2002 was prohibited.
-- No cash dividend was paid on the Company's Common Stock during the periods
presented above.
-10-
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
(In thousands except for share and per share amounts)
EXECUTIVE OVERVIEW
Westwood One supplies radio and television stations with content, information
services, and programming. The Company is the largest domestic outsource
provider of traffic reporting services and the nation's largest radio network,
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.
The radio broadcasting industry has experienced a significant amount of
consolidation in recent years. As a result, certain major radio station groups,
including Infinity and Clear Channel Communications, have emerged as powerful
forces in the industry. Westwood One is managed by Infinity under a Management
Agreement, which expires on March 31, 2009. While Westwood One provides
programming to all major radio station groups, the Company has affiliation
agreements with most of Infinity's owned and operated radio stations, which in
the aggregate, provide the Company with a significant portion of the audience
that it sells to advertisers. Accordingly, the Company's operating performance
could be materially adversely impacted by its inability to continue to renew its
affiliate agreements with Infinity stations.
The Company derives substantially all of its revenues 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. Generally, the
greater amount of programming we provide our affiliates the greater amount of
commercial airtime becomes available for the Company to sell. Additionally, over
an extended period of time an increase in the listening audience results in our
ability to generate more revenues. Our goal is to maximize the yield of our
available commercial airtime to optimize revenues.
In managing our business, we develop programming and exploit the 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 the aforementioned factors in a cost
effective manner. 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 the Company's revenues 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
and (v) competitive and alternative programs and advertising mediums.
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 the Company closely
monitors advertiser commitments for the current calendar year, with particular
emphasis placed on a prospective three month period. Factors impacting the
pricing of commercial airtime include, but are not limited to: (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 revenues are significantly impacted by the
commercial airtime available at the time we enter into an arrangement with an
advertiser.
The principal critical components of our operating expenses are programming,
production and distribution costs (including affiliate compensation and
broadcast rights fees), selling expenses (including bad debt expenses,
commissions and promotional expenses), depreciation and amortization, and
-11-
corporate, general and administrative expenses. Corporate general and
administrative expenses are primarily comprised of costs associated with the
Infinity Management Agreement, personnel costs and other administrative
expenses, including those associated with corporate governance matters.
We consider the Company's operating cost structure to be predominantly fixed in
nature, and as a result, the Company needs at least several months lead-time to
make modifications to its cost structure to react to what it believes are more
than temporary increases or decreases in advertiser demand. This factor is
important in predicting the Company's performance in periods when advertiser
revenues are increasing or decreasing. In periods where advertiser revenues are
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 revenues Operating Income will decrease by
a greater percentage than the decline in revenue because of the lead-time needed
to reduce the Company's operating cost structure. Furthermore, if the Company
perceives a decline in revenue to be temporary, it may choose not to reduce its
fixed costs, or may even increase its fixed costs, so as to not limit its future
growth potential when the advertising marketplace rebounds.
Revenues
Revenues presented by type of commercial advertisements are as follows for the
years ending December 31,:
2004 2003 2002
---- ---- ----
$ % of Total $ % of Total $ % of Total
-------- ---------- -------- ---------- -------- ----------
Local/Regional $299,307 53% $283,687 53% $302,554 55%
National 262,939 47% 255,539 47% 248,197 45%
------- ---- -------- ---- -------- ----
Total (1) $562,246 100% $539,226 100% $550,751 100%
======== ==== ======== ==== ======== ====
(1) As described above, the Company currently aggregates revenue data based on
the type of commercial airtime sold. A number of advertisers purchase both
local/regional and national commercial airtime. Accordingly, this factor
should be considered in evaluating the relative revenues generated on a
local/regional versus national basis. Our objective is to optimize total
revenues from those advertisers.
Revenues for the year ended December 31, 2004 increased $23,020, or 4.3%,
compared with the year ended December 31, 2003. The increase in revenues is
attributable to an increase in demand for the Company's local/regional
commercial airtime, coupled with non-comparable revenues associated with the
Company's exclusive 2004 Summer Olympic broadcast. During the year ended
December 31, 2004, revenues aggregated from the sale of local/regional airtime
increased approximately 5.5%, or approximately $15,620, while national based
revenues increased approximately 2.9%, or $7,400.
The increase in local/regional revenues was facilitated by a combination of an
overall increase in demand for our :10 second commercial airtime, an increase in
the quantity of commercial airtime available for sale, improved inventory
utilization and management resulting from a centralization of sales management
functions, and the increased demand for information services and data by
terrestrial and non-terrestrial users. Further, the increase in demand for our
local/regional commercial airtime was greatest in the Western and Mid-Western
regions.
In 2004, the increase in our aggregated national based revenues was primarily in
the news and sports programming categories as a result of an estimated $6.0
million of revenue associated with the Company's exclusive 2004 Summer Olympics
radio broadcast and a better radio advertising climate.
Revenues for the year ended December 31, 2003 decreased $11,525, or 2.0%,
compared with the year ended December 31, 2002. The decrease was due principally
to the absence of approximately $6,000 of revenues recorded in the prior year
from the Company's exclusive 2002 Winter Olympics radio broadcast, an overall
reduction in advertiser demand for our commercial airtime immediately prior to
and concurrent with the commencement of the war with Iraq, weaker relative
demand in certain local/regional markets, reduced fee based traffic information
revenues of approximately $1,000 due to the expiration of certain contracts,
partially offset by approximately $7,000 of incremental revenues attributable to
new programming developed to reach national audiences.
During the year ended December 31, 2003, revenues aggregated from the sale of
local/regional airtime declined approximately 6.2%, or approximately $18,867,
while national based revenues increased approximately 3.0%, or $7,342. The
decrease in local/regional revenue was greatest in the northeast and Texas
regions, while revenue in the western region increased. Despite the decrease in
local/regional revenues, the Company continued to invest in new traffic and
information markets.
-12-
In 2003, the increase in our aggregated national based revenues was accomplished
through attaining higher revenues in the news and sports programming categories
through adding new sports programming and effective management of our commercial
airtime partially offset by the absence of revenues from the 2002 Winter
Olympics.
We expect our revenues in 2005 to increase compared with 2004, resulting
primarily from an anticipated overall increase in demand for our commercial
airtime offerings due to the implementation of sales strategies to optimize
network audience delivery, new programming, inventory management initiatives,
and the development of new distribution alternatives for our content.
Operating Costs
Operating costs for the years ended December 31, 2004, 2003 and 2002 were as
follows:
2004 2003 2002
---- ---- ----
$ % of total $ % of total $ % of total
-------- ---------- -------- --------- -------- ---------
Programming,
production and
distribution expenses $278,232 75% $261,754 75% $254,779 72%
Selling expenses 53,246 15% 53,264 15% 59,725 17%
Other operating expenses 38,156 10% 35,564 10% 37,881 11%
-------- --- ------- ---- -------- ----
$369,634 100% $350,582 100% $352,385 100%
======== ==== ======== ==== ======== ====
Operating costs increased 5.4% to $369,634 in 2004 from $350,582 in 2003, and
decreased 1.0% in 2003 from $352,385 in 2002. The increase in 2004 was
principally attributable to an estimated $6.0 million of costs associated with
our exclusive broadcast of the 2004 Summer Olympic games, increases in
programming, production and distribution expenses resulting from the investment
in national audiences as a result of adding station affiliations, expanding into
approximately four new traffic and information markets, the development of new
program offerings and normal recurring contractual rate increases with respect
to existing programming. In addition, during the year ended December 31, 2003
the Company received proceeds of $3.2 million from an insurance settlement
related to claims attributable to the September 11, 2001 terrorist attacks which
offset reported operating expenses for the year ended December 31, 2003.
The 2003 decrease was principally attributable to approximately $3,200 of
proceeds from an insurance settlement related to claims resulting from the
September 11, 2001 terrorist attacks (included in Other operating expenses in
the table above). Excluding this item, operating costs increased approximately
$1,400, or 0.4% in 2003. The net increase is primarily attributable to: (i)
increases in programming, production and distribution expenses resulting from
costs related to the development of new or expanded program offerings, new
traffic and information markets, higher sports rights fees resulting from both
new programming and contractual rate increases with respect to existing program
commitments and additional news costs to cover the war with Iraq, partially
offset by the absence of costs associated with the Company's broadcast of the
2002 Winter Olympics, (ii) lower Selling expenses including lower bad debt
expense (approximately $2,800), resulting from the absence of a significant
customer's bankruptcy in 2002, and lower employee related expenses, principally
resulting from lower commissions earned by the Company's sales personnel due to
lower revenues and (iii) lower Other operating expenses due principally to the
insurance settlement discussed above.
We currently anticipate that operating costs will increase in 2005 compared with
2004 due to expenses resulting from planned additional investments in our
national network audiences and programs and normal recurring contractual cost
increases. In addition, we expect to make certain continued investments in our
sales support functions to support our planned growth in revenues.
Depreciation and Amortization
Depreciation and amortization increased 60.1% to $18,429 in 2004 from $11,513 in
2003, and increased nominally to $11,513 in 2003 from $11,464 in 2002. The
increase in 2004 was principally attributable to higher amortization resulting
from an increase in the fair market value of the warrants issued to Infinity as
a part of the extension of the Management Agreement which was effective in the
second quarter of 2004.
Corporate General and Administrative Expenses
Corporate general and administrative expenses increased 21.1% to $8,606 in 2004
from $7,106 in 2003, and decreased 11.2% in 2003 from $8,005 in 2002. The 2004
-13-
increase was principally attributable to higher expenses associated with our
corporate governance activities, including fees incurred for professional
services and increased severance amounts. The 2003 decrease was principally
attributable to lower compensation expense to Infinity as no incentive bonus was
earned, partially offset by higher expenses associated with our corporate
governance activities, including fees incurred for professional services.
We expect our corporate general and administrative costs to increase in 2005
compared with 2004. We expect to incur increased expenses relating to our
compliance and corporate governance activities. Further, we note that our
incentive bonus arrangement with Infinity is variable, contingent upon our
performance.
Operating Income
Operating income decreased 2.6% to $165,577 in 2004 from $170,025 in 2003, and
decreased 5.0% in 2003 from $178,897 in 2002. The 2004 decrease was principally
attributable to higher depreciation and amortization expense and operating costs
partially offset by increased net revenues. The 2003 decrease was principally
attributable to the decline in revenues.
Interest Expense
Interest expense was $11,911, $10,132 and $6,955 in 2004, 2003 and 2002,
respectively. The 2004 increase was attributable to higher outstanding debt and
the accelerated amortization of previously capitalized deferred debt issuance
costs in connection with the refinancing of our bank credit facility. The 2003
increase was attributable to higher outstanding debt in 2003 as a result of the
Company's issuance of $200,000 in a combination of 7 and 10-year fixed rate
Senior Unsecured Notes in the fourth quarter of 2002 and higher average interest
rates. Our average effective interest rate for 2004, 2003 and 2002 was 3.1%,
3.1% and 2.9%, respectively. The increase in the 2004 and 2003 debt levels
result from share repurchases pursuant to the Company's stock repurchase
program, which is further described below.
We expect that our interest expense will increase in 2005 commensurate with our
anticipated higher average debt levels.
Other (Income) Expense
The Company owned 450,000 shares of common stock in SportsLine.com, Inc.
("SportsLine," previously known as SportsLine USA, Inc.). In December of 2004,
SportsLine was acquired by Viacom Inc. and the terms of the acquisition provided
that all public shareholders' of SportsLine were entitled to receive cash upon
closing of the transaction. Included in Other Income for the period ending
December 31, 2004, is a net gain of $787,500 resulting from the sale of the
Company's interest in SportsLine.
Provision for income taxes
The income tax provisions for 2004, 2003 and 2002 are based on annual effective
tax rates of 38.2%, 37.5% and 36.6%, respectively, resulting in income tax
expense of $59,124, $59,906 and $62,937 in 2004, 2003 and 2002, respectively.
The Company's effective income tax rate in 2004 was higher than in 2003
principally as a result of higher state taxes resulting from recent tax
developments in the states in which we operate. The Company's effective rate
increased in 2003 from 2002 as a result of similar state changes. For the years
ended December 31, 2004, 2003 and 2002 a portion of the Company's income tax
expense is non-cash as a result of tax deductions related to stock option
exercises and warrant purchases of $18,182, $3,911 and $39,245 respectively,
which are credited directly to additional paid in capital.
Net income
Net income in 2004 decreased 4.5% to $95,490 ($.98 per basic share and $.97 per
diluted share) from $100,039 ($.99 per basic share and $.97 per diluted share)
in 2003 and decreased 8.3% in 2003 from $109,115 ($1.03 per basic share and
$1.00 per diluted share) in 2002.
Earnings per share
Weighted averages shares outstanding for purposes of computing basic earnings
per share were 97,177,000, 101,243,000 and 105,992,000 in 2004, 2003 and 2002,
respectively. The decreases in each of the previous two periods were primarily
attributable to Common Stock repurchases under the Company's stock repurchase
program partially offset by additional share issuances as a result of stock
option exercises. Weighted average shares outstanding for purposes of computing
diluted earnings per share were 98,454,000, 103,625,000 and 109,101,000 in 2004,
2003 and 2002, respectively. The changes in weighted average diluted shares are
due principally to the decrease in basic shares and the effect of the decrease
in the Company's share price, partially offset by the effect of stock option
grants.
-14-
Liquidity and Capital Resources
The Company continually projects anticipated cash requirements, which include
share repurchases, acquisitions, capital expenditures, and principal and
interest payments on its outstanding indebtedness. Funding requirements are
financed through cash flow from operations and the issuance of short-term
borrowings and/or long-term debt.
At December 31, 2004, the Company's principal sources of liquidity were its cash
and cash equivalents of $10,932 and available borrowings under its bank facility
which is further described below.
The Company has and continues to expect to generate significant cash flows from
operating activities. For the years ended December 31, 2004, 2003 and 2002, net
cash provided by operating activities were $127,974, $107,870 and $147,618,
respectively. For 2004, net cash from operating activities increased $20,104
from 2003. The increase is primarily attributable to a decrease in cash taxes
paid resulting from higher tax benefits from the exercise of stock options. For
2003, net cash from operating activities decreased $39,748 from 2002. The
reduction is primarily attributable to an increase in cash taxes paid resulting
from lower tax benefits from the exercise of stock options and warrants. Upon
the adoption of Statement of Financial Accounting Standards 123R, the tax
benefit from the exercise of stock options will be classified as a financing
activity.
At December 31, 2004, the Company has an unsecured five-year $120,000 term loan,
and a five-year $180,000 revolving credit facility (collectively the "New
Facility"), both of which mature in 2009. This new facility was entered into
with a syndicate of banks led by JP Morgan Chase Bank and Bank of America on
March 3, 2004 when the Company refinanced its existing senior loan agreement. In
connection with the closing of the facility, the Company borrowed the full
amount of the term loan, the proceeds of which were used to repay the
outstanding borrowing under the existing facility. As of December 31, 2004, the
Company had available borrowings of $140,000 under its New Facility. Interest on
the New Facility is payable at the prime rate plus an applicable margin of up to
.25% or LIBOR plus an applicable margin of up to 1.25%, at the Company's option.
In addition, the Company has entered into fixed to floating interest rate swap
agreements for 50% of the notional amount of its two senior unsecured Notes. The
New Facility and/or Notes contain covenants relating to dividends, liens,
indebtedness, capital expenditures, and interest coverage and leverage ratios.
None of these covenants are expected to have an impact on the Company's ability
to operate and manage its business.
In conjunction with the Company's objective of enhancing shareholder value, the
Company's Board of Directors has authorized a stock repurchase program. In 2004,
the Company purchased 8,456,000 shares of the Company's Common Stock for a total
cost of $216,503. In 2003, the Company purchased approximately 5,534,000 shares
of the Company's Common Stock for a total cost of $180,412 and in 2002,
purchased approximately 7,414,000 shares of the Company's Common Stock and
warrants for a total cost of $239,407. In 2005 (through January 2005), the
Company repurchased an additional 635,000 shares of Common Stock at a cost of
$15,893. The Company expects to continue to use its cash flow and credit
facilities to repurchase its Common Stock. At the end of January 2005, the
Company had authorization to repurchase up to an additional $146,245 of its
Common Stock.
The Company's business does not require, and is not expected to require,
significant cash outlays for capital expenditures.
The Company believes that its cash, other liquid assets, operating cash flows
and available bank borrowings, taken together, provide adequate resources to
fund ongoing operating requirements.
Contractual Obligations and Commitments
The following table lists the Company's future contractual obligations and
commitments as of December 31, 2004:
Payments due by Period
------------------------
Contractual Obligations Total <1 year 1 - 3 years 3 - 5 years >5 years
----------------------- ----- ------- ----------- ----------- --------
Long-term Debt (1) $443,944 $13,931 $27,861 $23,511 $378,641
Capital Lease Obligations 6,400 $ 960 $1,920 $1,920 1,600
Operating Leases 36,465 7,039 12,635 10,387 6,404
Other Long-term Obligations 241,320 61,534 106,389 59,396 14,001
-------- ------- ------- ------- --------
Total Contractual Obligations $728,129 $83,464 $148,805 $95,214 $400,646
======== ======= ======== ======= ========
(1) Includes the estimated net interest payments on fixed and variable rate
debt and related interest rate swaps. Estimated interest payments on
floating rate instruments are computed using the Company's interest rate as
of December 31, 2004, and borrowings outstanding are assumed to remain at
current levels.
-15-
The Company has long-term noncancelable operating lease commitments for office
space and equipment. The Company has also entered into capital leases for
satellite transponders.
Included in Other Long-term Obligations enumerated in the table above, are
various contractual agreements to pay for talent, broadcast rights, research and
various related party arrangements, including $126,830 of payments due under the
Management and Representation Agreements. See Related Parties below and Note 2
to the consolidated financial statements for further discussion.
Related Parties
Infinity holds a common equity position in the Company and provides ongoing
management services to the Company under the terms of the Management Agreement.
In return for receiving services under the Management Agreement, the Company
compensates Infinity via an annual base fee and provides Infinity the
opportunity to earn an incentive bonus if the Company exceeds pre-determined
targeted cash flows. For the year ended December 31, 2004, 2003 and 2002,
Infinity earned cash compensation of $2,959, $2,793 and $5,012, respectively.
In addition to the base fee and incentive compensation described above, the
Company granted to Infinity two fully vested and non-forfeitable warrants to
purchase 4,000,000 shares of the Company's Common Stock in the aggregate
(comprised of one warrant to purchase 2,000,000 shares at an exercise price of
$10.00 per share and another warrant to purchase 2,000,000 shares at an exercise
price of $12.50 per share) in connection with extending the term of the
Management Agreement in March 1999 for an additional term of five years
commencing April 1, 1999. Such warrants were only exercisable to the extent the
Company's Common Stock reached certain market prices, which have subsequently
been achieved. In 2002 Infinity sold its $12.50 warrant, representing 2,000,000
shares of Common Stock, to the Company for cash consideration of $51,070. In
2001, Infinity sold its $10.00 warrant, representing 2,000,000 shares of Common
Stock, to the Company for cash consideration of $41,350. The repurchase of the
Infinity warrants for cash consideration has been reflected as a reduction to
Additional Paid in Capital during 2002 and 2001.
On May 29, 2002, the Company's shareholders ratified an extension of the
Management Agreement for an additional five-year term, which commenced April 1,
2004 and expires on March 31, 2009. In return for receiving services under the
Management Agreement, the Company will continue to compensate Infinity via an
annual base fee and an opportunity to earn an annual incentive bonus provided
certain performance objectives are met. Additionally, the Company granted to
Infinity seven fully vested and nonforfeitable warrants to purchase 4,500,000
shares of the Company's Common Stock (comprised of two warrants to purchase
1,000,000 Common shares per warrant and five warrants to purchase 500,000 Common
shares per warrant). For additional information on these warrants see Note 2 to
our consolidated financial statements.
In addition to the Management Agreement described above, the Company also enters
into other transactions with Infinity in the normal course of business. Such
arrangements include a representation agreement (including a related news
programming agreement, a license agreement and a technical services agreement
with an affiliate of Infinity - the "Representation Agreement") to operate the
CBS Radio Networks, affiliation agreements with many of Infinity's radio
stations and the purchase of programming rights from Infinity and affiliates of
Infinity. The Management Agreement provides that all transactions, other than
the Management Agreement and Representation Agreement to operate the CBS Radio
Networks which were ratified by the Company's shareholders, between the Company
and Infinity or its affiliates must be on a basis that is at least as favorable
to the Company as if the transaction were entered into with an independent third
party. In addition, subject to specified exceptions, all agreements between the
Company and Infinity or any of its affiliates must be approved by the Company's
Board of Directors. During 2004, the Company incurred expenses aggregating
approximately $84,338 for the Representation Agreement, affiliation agreements
and the purchase of programming rights from Infinity and affiliates ($80,659 in
2003 and $77,566 in 2002).
Critical Accounting Policies and Estimates
Westwood One's financial statements are prepared in accordance with accounting
principles that are generally accepted in the United States. The preparation of
these financial statements requires management to make estimates and assumptions
that affect the reported amounts of assets, liabilities, revenue and expenses as
well as the disclosure of contingent assets and liabilities. Management
continually evaluates its estimates and judgments including those related to
allowances for doubtful accounts, useful lives of property, plant and equipment
and intangible assets, and other contingencies. Management bases its estimates
and judgments on historical experience and other factors that are believed to be
reasonable under the circumstances. Actual results may differ from these
estimates under different assumptions or conditions. We believe that of our
significant accounting policies, the following may involve a higher degree of
judgment or complexity.
Allowances for doubtful accounts - we maintain allowances for doubtful accounts
-16-
for estimated losses which may result from the inability of our customers to
make required payments. We base our allowances on the likelihood of
recoverability of accounts receivable by aging category, based on past
experience and taking into account current collection trends that are expected
to continue. If economic or specific industry trends worsen beyond our
estimates, we would be required to increase our allowances for doubtful
accounts. Alternatively, if trends improve beyond our estimates, we would be
required to decrease our allowance for doubtful accounts. Our estimates are
reviewed periodically, and adjustments are reflected through bad debt expense in
the period they become known. Our bad debt expense approximated $874, or 0.2% of
revenue, in 2004, $3,624, or 0.7% of revenue, in 2003, and $6,379, or 1.2% of
revenue, in 2002. Changes in our bad debt experience can materially affect our
results of operations. Our allowance for bad debts requires us to consider
anticipated collection trends and requires a high degree of judgment. In
addition, as fully described herein, our results in any reporting period could
be impacted by relatively few significant bad debts.
Estimated useful lives of property, plant and equipment, and intangible assets -
we estimate the useful lives of property, plant and equipment and intangible
assets in order to determine the amount of depreciation and amortization expense
to be recorded during any reporting period. The useful lives, which are
disclosed in Note 1 of the consolidated financial statements, are estimated at
the time the asset is acquired and are based on historical experience with
similar assets as well as taking into account anticipated technological or other
changes. If technological changes were to occur more rapidly than anticipated or
in a different form than anticipated, the useful lives assigned to these assets
may need to be shortened, resulting in the recognition of increased depreciation
and amortization expense in future periods. During 2002, the Company changed the
useful lives of certain studio and broadcasting equipment. Alternately, these
types of technological changes could result in the recognition of an impairment
charge to reflect the write-down in value of the asset.
Westwood evaluates its intangible assets for impairment annually or more
frequently if impairment indicators arise in accordance with Statement of
Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible
Assets. Westwood's intangible asset balance is material ($988 million at
December 31, 2004), and the evaluation of intangible assets requires that the
Company make important assumptions and judgments about future operating results
and cash flows as well as discount rates. In estimating future operating results
and cash flows, the Company considers internal budgets and strategic plans,
expected long term growth rates, and the effects of external factors and market
conditions. If actual future operating results and cash flows or external
conditions differ from the Company's judgments, or if changes in assumed
discount rates are made, an impairment charge may be necessary to reduce the
carrying value of intangible assets, which charge could be material to the
Company's operations.
Valuation of stock options and warrants and barter transactions -- For purposes
of computing the value of stock options and warrants, various valuation methods
and assumptions can be used. The selection of a different valuation method or
use of different assumptions may result in a value that is significantly
different from that computed by the Company. In certain circumstances, usually
depending on the complexity of the calculation, we may employ the services of a
valuation expert.
Barter transactions represent the exchange of commercial announcements for
merchandise or services. These transactions are recorded at the fair market
value of the commercial announcements relinquished, or the fair value of the
merchandise and services received. A wide range of factors could materially
affect the fair market value of commercial airtime sold in future periods (See
Section on "Forward-Looking Statements and Factors Affecting Forward-Looking
Statements" on page 18), which would require the Company to increase or decrease
the amount of assets and liabilities and related revenue and expenses recorded
from prospective barter transactions.
Recent Accounting Pronouncements Affecting Future Results
In December 2004, the FASB issued SFAS No. 123 (revised 2004), "Share-Based
Payment" ("SFAS 123R"), which replaces SFAS No. 123, "Accounting for Stock-Based
Compensation," ("SFAS 123") and supercedes APB Opinion No. 25, "Accounting for
Stock Issued to Employees." SFAS 123R requires all share-based payments to
employees, including grants of employee stock options, to be recognized in the
financial statements based on their fair values beginning with the first interim
or annual period after June 15, 2005, with early adoption encouraged. The pro
forma disclosures previously permitted under SFAS 123 no longer will be an
alternative to financial statement recognition. The Company is required to adopt
SFAS 123R in the second quarter of fiscal 2005. Under SFAS 123R, the Company
must determine the appropriate fair value model to be used for valuing
share-based payments, the amortization method for compensation cost and the
transition method to be used at date of adoption. The transition methods include
prospective and retroactive adoption options. Under the retroactive option,
prior periods may be restated either as of the beginning of the year of adoption
or for all periods presented. The prospective method requires that compensation
expense be recorded for all unvested stock options and restricted stock at the
beginning of the first quarter of adoption of SFAS 123R, while the retroactive
methods would record compensation expense for all unvested stock options and
restricted stock beginning with the first period restated. The Company is
evaluating the requirements of SFAS 123R and expects that the adoption of SFAS
-17-
123R will have a material impact on the Company's consolidated results of
operations and earnings per share. The Company has not yet determined the method
of adoption or the effect of adopting SFAS 123R. The Company believes the pro
forma disclosures in Note 1, "Significant Accounting Policies," on page F-8
under "Stock-Based Compensation" provide an appropriate short-term indicator of
the level of expense that will be recognized in accordance with SFAS No. 123R.
However, the total expense recorded in future periods will depend on several
variables, including the number of shared-based awards that vest and the fair
value of those vested awards.
In October 2004, the American Jobs Creation Act of 2004 (the "AJCA") was passed.
The AJCA provides a deduction for income from qualified domestic production
activities which will be phased in from 2005 through 2010. In return, the AJCA
also provides for a two-year phase-out of the existing extra-territorial income
exclusion for foreign sales that was viewed to be inconsistent with
international trade protocols by the European Union. In December 2004, the FASB
issued FASB Staff Position ("FSP") No. 109-1, "Application of FASB Statement
No.109, Accounting for Income Taxes, to the Tax Deduction on Qualified
Production Activities by the American Jobs Creation Act of 2004." FSP 109-1
treats the deduction as a "special deduction" as described in FAS No. 109. As
such, the special deduction has no effect on deferred tax assets and liabilities
existing at the enactment date. Rather, the impact of this deduction will be
reported in the same period in which the deduction is claimed in the tax return.
We are currently evaluating the impact the AJCA will have on our results of
operations and financial position.
The AJCA also creates a temporary incentive for U.S. corporations to repatriate
accumulated income earned abroad by providing an 85% dividends received
deduction for certain dividends from controlled foreign corporations. This
aspect of the AJCA legislation will not have an impact on the Company's results
of operations and financial position as the Company does not have foreign
operations.
In December 2004, the FASB issued SFAS No.153, "Exchanges of Nonmonetary
Assets--an Amendment of APB No. 29" (SFAS 153). The amendments made by SFAS 153
are based on the principle that exchanges of nonmonetary assets should be
measured based on the fair value of the assets exchanged. Further, the
amendments eliminate the narrow exception for nonmonetary exchanges of similar
productive assets and replace it with a broader exception for exchanges of
nonmonetary assets that do not have "commercial substance." This standard is
effective for nonmonetary asset exchanges occurring after July 1, 2005. The
adoption of this standard is not expected to impact the Company's Consolidated
Financial Statements.
Forward-Looking Statements and Factors Affecting Forward-Looking Statements
The Private Securities Litigation Reform Act of 1995 provides a safe harbor for
forward-looking statements made by or on the behalf of the Company.
Forward-looking statements involve known and unknown risks, uncertainties and
other factors which may cause the actual results, performance or achievements of
the Company to be materially different from any future results, performance or
achievements expressed or implied by such forward-looking statements. These
statements are based on management's views and assumptions at the time the
statements are made, however no assurances can be given that management's
expectations will come to pass. The forward-looking statements included in this
document, including those related to our revenue, operating costs, general and
administrative costs, interest expense and capital expenditure trend for 2005,
are only made as of the date of this document and the Company does not have any
obligation to publicly update any forward-looking statement to reflect
subsequent events or circumstances.
Factors That May Affect Forward-Looking Statements
A wide range of factors could materially affect future developments and
performance including the following:
-- The Company is managed by Infinity under the terms of the Management
Agreement, which expires in 2009. In addition, the Company has extensive
business dealings with Infinity and its affiliates in its normal course of
business. The Company's business prospects could be adversely affected by
its inability to retain Infinity's services under the Management Agreement
beyond the contractual term.
-- The Company competes in a highly competitive business. Its radio
programming competes for audiences and advertising revenues directly with
radio and television stations and other syndicated programming, as well as
with such other media as newspapers, magazines, cable television, outdoor
advertising and direct mail. Audience ratings and revenue shares are
subject to change and any adverse change in a particular geographic area
could have a material and adverse effect on the Company's ability to
attract not only advertisers in that region, but national advertisers as
well. Future operations are further subject to many factors which could
have an adverse effect upon the Company's financial performance. These
factors include:
-18-
- economic conditions, both generally and relative to the
broadcasting industry;
- shifts in population and other demographics;
- the level of competition for advertising dollars;
- fluctuations in programming costs;
- technological changes and innovations;
- changes in labor conditions; and
- changes in governmental regulations and policies and actions of
federal regulatory bodies.
Although the Company believes that its radio programming will be able to
compete effectively and will continue to attract audiences and advertisers,
there can be no assurance that the Company will be able to maintain or
increase the current audience ratings and advertising revenues.
-- The radio broadcasting industry has experienced a significant amount
of consolidation in recent years. As a result, certain major groups,
including Infinity and Clear Channel Communications ("Clear Channel"),
have emerged as powerful forces in the industry. Given the size and
financial resources of these station groups, they may be able to
develop their own programming as a substitute to that offered by the
Company or, alternatively, they could seek to obtain programming from
the Company's competitors. Any such occurrences, or merely the threat
of such occurrences, could adversely affect the Company's ability to
negotiate favorable terms with its station affiliates, to attract
audiences and to attract advertisers. In addition, a major station
group has recently announced plans to reduce overall amounts of
commercial inventory broadcast on their radio stations. To the extent
similar initiatives are adopted by other major station groups, this
could adversely impact the amount of commercial inventory made
available to the Company or increase the cost of such commercial
inventory at the time of renewal of existing affiliate agreements.
-- Changes in U.S. financial and equity markets, including market
disruptions and significant interest rate fluctuations, could impede
the Company's access to, or increase the cost of, external financing
for its operations and investments.
-- The Company believes relations with its employees and independent
contractors are satisfactory. However, the Company may be adversely
affected by future labor disputes, which may lead to increased costs
or disruption of operations in any of the Company s business units.
This list of factors that may affect future performance and the accuracy of
forward-looking statements is illustrative, but by no means all inclusive.
Accordingly, all forward-looking statements should be evaluated with the
understanding of their inherent uncertainty.
Item 7A. Qualitative and Quantitative Disclosures about Market Risk
In the normal course of business, the Company employs established policies and
procedures to manage its exposure to changes in interest rates using financial
instruments. The Company uses derivative financial instruments
(fixed-to-floating interest rate swap agreements) for the purpose of hedging
specific exposures and holds all derivatives for purposes other than trading.
All derivative financial instruments held reduce the risk of the underlying
hedged item and are designated at inception as hedges with respect to the
underlying hedged item. Hedges of fair value exposure are entered into in order
to hedge the fair value of a recognized asset, liability, or a firm commitment.
In order to achieve a desired proportion of variable and fixed rate debt, in
December 2002, the Company entered into a seven year interest rate swap
agreement covering $25 million notional value of its outstanding borrowing to
effectively float the interest rate at three-month LIBOR plus 74 basis points
and two ten year interest rate swap agreements covering $75 million notional
value of its outstanding borrowing to effectively float the interest rate at
three-month LIBOR plus 80 basis points.
These swap transactions allow the Company to benefit from short-term declines in
interest rates. The instruments meet all of the criteria of a fair-value hedge.
The Company has the appropriate documentation, including the risk management
objective and strategy for undertaking the hedge, identification of the hedging
instrument, the hedged item, the nature of the risk being hedged, and how the
hedging instrument's effectiveness offsets the exposure to changes in the hedged
item's fair value or variability in cash flows attributable to the hedged risk.
With respect to the borrowings pursuant to the Company's revolving credit
facility, the interest rate on the borrowings is based on the prime rate plus an
applicable margin of up to .25%, or LIBOR plus an applicable margin of up to
1.25%, as chosen by the Company. Historically, the Company has typically chosen
the LIBOR option with a three month maturity. Every .25% change in interest
rates has the effect of increasing or decreasing our annual interest expense by
$5,000 for every $2 million of outstanding debt. As of December 31, 2004, the
Company had $160,000 outstanding under the new facility.
-19-
The Company continually monitors its positions with, and the credit quality of,
the financial institutions that are counterparties to its financial instruments,
and does not anticipate nonperformance by the counterparties.
The Company's receivables do not represent a significant concentration of credit
risk due to the wide variety of customers and markets in which the Company
operates.
Item 8. Financial Statements and Supplementary Data
The Consolidated Financial Statements and the related notes and schedules were
prepared by and are the responsibility of management. The financial statements
and related notes were prepared in conformity with generally accepted accounting
principles and include amounts based upon management's best estimates and
judgments. All financial information in this annual report is consistent with
the consolidated financial statements.
The Company maintains internal accounting control systems and related policies
and procedures designed to provide reasonable assurance that assets are
safeguarded, that transactions are executed in accordance with management's
authorization and properly recorded, and that accounting records may be relied
upon for the preparation of consolidated financial statements and other
financial information. The design, monitoring, and revision of internal
accounting control systems involve, among other things, management's judgment
with respect to the relative cost and expected benefits of specific control
measures.
Westwood One's consolidated financial statements have been audited by
PricewaterhouseCoopers LLP, independent registered accountants, who have
expressed their opinion with respect to the presentation of these statements.
The Audit Committee of the Board of Directors, which is comprised solely of
directors who are not employees of the Company, meets periodically with the
independent auditors, as well as with management, to review accounting,
auditing, internal accounting controls and financial reporting matters. The
Audit Committee, pursuant to its Charter, is also responsible for retaining the
Company's independent accountants. The independent accountants have full and
free access to the Audit Committee with and without management's presence.
Further, as a result of changes in the listing standards for the New York Stock
Exchange and as a result of the Sarbanes-Oxley Act of 2002, members of the Audit
Committee will be required to meet stringent independence standards and at least
one member must have financial expertise. The majority of our Audit Committee
members satisfy the new independence standards and the Audit Committee also has
at least one member with financial expertise.
The Consolidated Financial Statements and the related notes and schedules of the
Company are indexed on page F-1 of this Report, and attached hereto as pages F-1
through F-18 and by this reference incorporated herein.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
Item 9A. Controls and Procedures
Disclosure Controls and Procedures
The Company's management, under the supervision and with the participation of
the Company's Chief Executive Officer and Chief Financial Officer, carried out
an evaluation of the effectiveness of the design and operation of the Company's
disclosure controls and procedures as of December 31, 2004 (the "Evaluation").
Based upon the Evaluation, the Company's Chief Executive Officer and Chief
Financial Officer concluded that the Company's disclosure controls and
procedures (as defined in Exchange Act Rule 13a-15(e)) are effective in ensuring
that information required to be disclosed by the Company in the reports that it
files or submits under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified by the SEC's rules and forms.
Management's Report on Internal Control over Financial Reporting
The Company's management is responsible for establishing and maintaining
adequate internal control over financial reporting. The Company's internal
control over financial reporting is a process designed under the supervision of
its Chief Executive Officer and Chief Financial Officer to provide reasonable
assurance regarding the reliability of financial reporting and the preparation
of the Company's financial statements for external purposes in accordance with
accounting principles generally accepted in the United States of America.
-20-
Management evaluated the effectiveness of the Company's internal control over
financial reporting using the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) in Internal Control--Integrated
Framework. Management, under the supervision and with the participation of the
Company's Chief Executive Officer and Chief Financial Officer, assessed the
effectiveness of the Company's internal control over financial reporting as of
December 31, 2004 and concluded that it is effective.
The Company's independent registered public accounting firm,
PricewaterhouseCoopers LLP, has audited the effectiveness of the Company's
internal control over financial reporting and management's assessment of the
effectiveness of the Company's internal control over financial reporting as of
December 31, 2004, and has expressed unqualified opinions in their report which
appears on page F-2.
Changes in Internal Control over Financial Reporting
There was no change in the Company's internal control over financial reporting
that occurred during the Company's most recent fiscal quarter that has
materially affected, or is reasonably likely to materially affect, the Company's
internal control over financial reporting.
Item 9B. Other Information
None.
-21-
PART III
Item 10. Directors and Executive Officers of the Registrant
This information is incorporated by reference to the Company's definitive
proxy statement to be filed pursuant to Regulation 14A not later than 120 days
after the end of the Company's fiscal year.
Additionally, the Company has submitted to the NYSE a certification by its
Chief Executive Officer that as of June 1, 2004, he is not aware of any
violation by the Company of the NYSE's Corporate Governance listing standards.
Item 11. Executive Compensation
This information is incorporated by reference to the Company's definitive
proxy statement to be filed pursuant to Regulation 14A not later than 120 days
after the end of the Company's fiscal year.
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
This information is incorporated by reference to the Company's definitive
proxy statement to be filed pursuant to Regulation 14A not later than 120 days
after then end of the Company's fiscal year.
Item 13. Certain Relationships and Related Transactions
This information is incorporated by reference to the Company's definitive
proxy statement to be filed pursuant to Regulation 14A not later than 120 days
after the end of the Company's fiscal year.
Item 14. Principal Accountant Fees and Services
This information is incorporated by reference to the Company's definitive
proxy statement to be filed pursuant to Regulation 14A not later than 120 days
after the end of the Company's fiscal year.
-22-
PART IV
Item 15. Exhibits, Financial Statement Schedules
(a) Documents filed as part of this Report on Form 10-K
1, 2.Financial statements and schedules to be filed hereunder are indexed on
page F-1 hereof.
3. Exhibits
EXHIBIT
NUMBER DESCRIPTION
3.1 Restated Certificate of Incorporation, as filed on October 25, 2002.
(14)
3.2 Bylaws of Registrant as currently in effect. (6)
4.1 Note Purchase Agreement, dated December 3, 2002, between Registrant
and the Purchasers. (15)
*10.1 Employment Agreement, dated April 29, 1998, between Registrant and
Norman J. Pattiz. (8)
*10.2 Amendment to Employment Agreement, dated October 27, 2003, between
Registrant and Norman J. Pattiz. (16)
10.3 Form of Indemnification Agreement between Registrant and its Directors
and Executive Officers. (1)
10.4 Credit Agreement, dated March 2, 2004, between Registrant and The
Lenders and JPMorgan Chase Bank as Administrative Agent. (16)
10.5 Purchase Agreement, dated as of August 24, 1987, between Registrant
and National Broadcasting Company, Inc. (2)
10.6 Agreement and Plan of Merger among Registrant, Copter Acquisition
Corp. and Metro Networks, Inc. dated of June 1, 1999 (9)
10.7 Amendment No. 1 to the Agreement and Plan Merger, dated as of August
20, 1999, by and among Registrant, Copter Acquisition Corp. and Metro
Networks, Inc. (10)
10.8 Management Agreement, dated as of March 30, 1999, and amended on April
15, 2002 between Registrant and Infinity Broadcasting Corporation. (9)
(13)
10.9 Representation Agreement, dated as of March 31, 1997, between
Registrant and CBS, Inc. (7) (13)
*10.10 Westwood One Amended 1999 Stock Incentive Plan. (9)
*10.11 Westwood One, Inc. 1989 Stock Incentive Plan. (3)
*10.12 Amendments to the Westwood One, Inc. Amended 1989 Stock Incentive
Plan. (4) (5)
10.13 Leases, dated August 9, 1999, between Lefrak SBN LP and Westwood One,
Inc. and between Infinity and Westwood One, Inc. relating to New York,
New York offices. (11)
10.14 Form of Stock Option Agreement under Registrant's 1999 Stock
Incentive Plan. (17)
*10.15 Employment Agreement, effective January 1, 2004, between Registrant
and Andrew Zaref.
*10.16 Employment Agreement, effective May 1, 2004, between Registrant and
Peter Kosann.
*10.17 Employment Agreement, dated June 1, 1999, as amended between
Registrant and Charles I. Bortnick.
21. List of Subsidiaries. (16)
22. Consent of Independent Registerd Public Accounting Firm.
31.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
*********************************
*Indicates a management contract or compensatory plan
-23-
(1) Filed as part of Registrant's September 25, 1986 proxy statement and
incorporated herein by reference.
(2) Filed an exhibit to Registrant's current report on Form 8-K dated September
4, 1987 and incorporated herein by reference.
(3) Filed as part of Registrant's March 27, 1992 proxy statement and
incorporated herein by reference.
(4) Filed as an exhibit to Registrant's July 20, 1994 proxy statement and
incorporated herein by reference.
(5) Filed as an exhibit to Registrant's May 17, 1996 proxy statement and
incorporated herein by reference.
(6) Filed as an exhibit to Registrant's Quarterly report on Form 10-Q for the
quarter ended September 30, 1996 and incorporated herein by reference.
(7) Filed as an exhibit to Registrant's Annual Report on Form 10-K for the year
ended December 31, 1997 and incorporated herein by reference.
(8) Filed as an exhibit to Registrant's Annual Report on Form 10-K for the year
ended December 31, 1998 and incorporated herein by reference.
(9) Filed as an exhibit to Registrant's August 24, 1999 proxy statement and
incorporated herein by reference.
(10) Filed as an exhibit to Registrant's current report on Form
8-K dated October 1, 1999 and incorporated herein by reference.
(11) Filed as an exhibit to Registrant's Annual Report on Form 10-K for the year
ended December 31, 1999 and incorporated herein by reference.
(12) Filed as an exhibit to Registrant's Annual Report on Form 10-K for the year
ended December 31, 2000 and incorporated herein by reference.
(13) Filed as an exhibit to Registrant's April 29, 2002 proxy statement and
incorporated herein by reference.
(14) Filed as an exhibit to Registrant's Quarterly report on Form 10-Q for the
quarter ended September 30, 2002 and incorporated herein by reference.
(15) Filed as an exhibit to Registrant's current report on Form 8-K dated
December 3, 2002 and incorporated herein by reference.
(16) Filed as an exhibit to Registrant's Annual Report on Form 10-K for the year
ended December 31, 2003 and incorporated herein by reference.
(17) Filed as an exhibit to Registrant's current report on Form 8-K dated
October 12, 2004 and incorporated herein by reference.
-24-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
WESTWOOD ONE, INC.
Date: March 15, 2005 By /S/ ANDREW ZAREF
------------------
Andrew Zaref
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
/S/ SHANE COPPOLA Director, President and March 15, 2005
------------------ Chief Executive Officer
Shane Coppola (Principal Executive Officer)
/S/ ANDREW ZAREF Chief Financial Officer March 15, 2005
----------------- (Principal Financial Officer and
Andrew Zaref Chief Accounting Officer)
/S/ NORMAN J. PATTIZ Chairman of the Board of March 15, 2005
-------------------- Directors
Norman J. Pattiz
/S/ DAVID L. DENNIS Director March 15, 2005
-------------------
David L. Dennis
/S/ GERALD GREENBERG Director March 15, 2005
---------------------
Gerald Greenberg
/S/ ROBERT K. HERDMAN Director March 15, 2005
---------------------
Robert K. Herdman
/S/ JOEL HOLLANDER Director March 15, 2005
-------------------
Joel Hollander
/S/ DENNIS HOLT Director March 15, 2005
----------------
Dennis Holt
/S/ MARIA D. HUMMER Director March 15, 2005
--------------------
Maria D. Hummer
/S/ STEVEN A. LERMAN Director March 15, 2005
---------------------
Steven A. Lerman
/S/ GEORGE MILES Director March 15, 2005
----------------
George Miles
/S/ LESLIE MOONVES Director March 15, 2005
-------------------
Leslie Moonves
/S/ JOSEPH B. SMITH Director March 15, 2005
--------------------
Joseph B. Smith
/S/ FARID SULEMAN Director March 15, 2005
-----------------
Farid Suleman
-25-
WESTWOOD ONE, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE
1. Consolidated Financial Statements Page
----
--Report of Independent Registered Public Accounting Firm F-2
--Consolidated Balance Sheets at December 31, 2004
and 2003 F-3
--Consolidated Statements of Operations for the years
ended December 31, 2004, 2003 and 2002 F-4
--Consolidated Statements of Shareholders' Equity
for the years ended December 31, 2004, and 2003 F-5
--Consolidated Statements of Cash Flows for the years
ended December 31, 2004, 2003 and 2002 F-6
--Notes to Consolidated Financial Statements F-7 - F-18
2. Financial Statement Schedule:
II. -Valuation and Qualifying Accounts F-18
All other schedules have been omitted because they are not applicable, the
required information is immaterial, or the required information is included in
the consolidated financial statements or notes thereto.
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of Westwood One, Inc.:
We have completed an integrated audit of Westwood One, Inc.'s ("Westwood" or
"the Company") 2004 consolidated financial statements and of its internal
control over financial reporting as of December 31, 2004 and audits of its 2003
and 2002 consolidated financial statements in accordance with the standards of
the Public Company Accounting Oversight Board (United States). Our opinions,
based on our audits, are presented below.
Consolidated financial statements and financial statement schedule
In our opinion, the consolidated financial statements listed in the accompanying
index present fairly, in all material respects, the financial position of
Westwood One, Inc. and its subsidiaries at December 31, 2004 and 2003, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2004 in conformity with accounting principles
generally accepted in the United States of America. In addition, in our opinion,
the financial statement schedule listed in the accompanying index presents
fairly, in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements. These financial
statements and financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audits. We
conducted our audits of these statements in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit of
financial statements includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
Internal control over financial reporting
Also, in our opinion, management's assessment, included in the accompanying
Management's Report on Internal Control over Financial Reporting appearing under
Item 9A, that the Company maintained effective internal control over financial
reporting as of December 31, 2004 based on criteria established in Internal
Control - Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO), is fairly stated, in all
material respects, based on those criteria. Furthermore, in our opinion, the
Company maintained, in all material respects, effective internal control over
financial reporting as of December 31, 2004, based on criteria established in
Internal Control - Integrated Framework issued by the COSO. The Company's
management is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal
control over financial reporting. Our responsibility is to express opinions on
management's assessment and on the effectiveness of the Company's internal
control over financial reporting based on our audit. We conducted our audit of
internal control over financial reporting in accordance with the standards of
the Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether effective internal control over financial reporting was maintained in
all material respects. An audit of internal control over financial reporting
includes obtaining an understanding of internal control over financial
reporting, evaluating management's assessment, testing and evaluating the design
and operating effectiveness of internal control, and performing such other
procedures as we consider necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinions.
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (i) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (ii)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (iii) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or disposition of the
company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
New York, NY /S/ PRICEWATERHOUSECOOPERS LLP
March 15, 2005 ------------------------------
PricewaterhouseCoopers LLP
F-2
WESTWOOD ONE, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
December 31, December 31,
2004 2003
---- ----
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents $ 10,932 $ 8,665
Accounts receivable, net of allowance for doubtful accounts
of $2,566 (2004) and $4,334 (2003) 142,014 135,720
Prepaid and other assets 21,400 21,110
----------- -----------
Total Current Assets 174,346 165,495
PROPERTY AND EQUIPMENT, NET 47,397 50,562
GOODWILL 981,969 990,472
INTANGIBLE ASSETS, NET 6,176 7,626
OTHER ASSETS 36,391 47,879
----------- -----------
TOTAL ASSETS $ 1,246,279 $ 1,262,034
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable 13,135 13,136
Amounts payable to related parties 20,274 18,680
Deferred revenues 14,258 12,215
Income taxes payable 5,211 7,949
Accrued expenses and other liabilities 28,463 32,082
----------- -----------
Total Current Liabilities 81,341 84,062
LONG-TERM DEBT 359,439 300,366
DEFERRED INCOME TAXES 12,541 32,713
OTHER LIABILITIES 8,465 8,943
----------- -----------
TOTAL LIABILITIES 461,786 426,084
----------- -----------
COMMITMENT AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Preferred stock: authorized 10,000,000 shares, none outstanding - -
Common stock, $.01 par value: authorized, 254,832,450 shares;
issued and outstanding, 94,353,675 (2004) and 99,056,659 (2003) 944 991
Class B stock, $.01 par value: authorized, 3,000,000 shares:
issued and outstanding, 291,796 (2004) and 703,466 (2003) 3 7
Additional paid-in capital 369,036 517,132
Accumulated earnings 414,510 319,020
----------- ------------
784,493 837,150
Less treasury stock, at cost; 0 (2004) and 35,000 (2003) shares - (1,200)
----------- ------------
TOTAL SHAREHOLDERS' EQUITY 784,493 835,950
----------- ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,246,279 $ 1,262,034
=========== ===========
See accompanying notes to consolidated financial statements.
F - 3
WESTWOOD ONE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
Year Ended December 31,
---------------------------------------
2004 2003 2002
---- ---- ----
REVENUES $ 562,246 $ 539,226 $ 550,751
--------- --------- ---------
Operating Costs (includes related party expenses
of $84,338, $80,659, and $77,566, respectively) 369,634 350,582 352,385
Depreciation and Amortization (includes related
party warrant amortization of $7,618, $1,352 and
$1,352, respectively) 18,429 11,513 11,464
Corporate General and Administrative Expenses
(includes related party expenses of $2,959, $2,793
and $5,012 respectively) 8,606 7,106 8,005
--------- --------- ---------
396,669 369,201 371,854
--------- --------- ---------
OPERATING INCOME 165,577 170,025 178,897
Interest Expense 11,911 10,132 6,955
Other (Income) Expense (948) (52) (110)
--------- --------- ---------
INCOME BEFORE TAXES 154,614 159,945 172,052
INCOME TAXES 59,124 59,906 62,937
--------- --------- ---------
NET INCOME $ 95,490 $ 100,039 $ 109,115
========= ========= =========
INCOME PER SHARE:
Basic $ 0.98 $ 0.99 $ 1.03
Diluted $ 0.97 $ 0.97 $ 1.00
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic 97,117 101,243 105,992
Diluted 98,454 103,625 109,101
See accompanying notes to consolidated financial statements.
F - 4
WESTWOOD ONE, INC
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands)
Common Stock Class B Stock Additional Treasury Stock Total
--------------- --------------- Paid-in Retained -------------- Shareholders'
Shares Amount Shares Amount Capital Earnings Shares Amount Equity
---------------- ------ ------ -------- -------- ------ ------ ------
BALANCE AT DECEMBER 31, 2002 103,989 $ 1,040 704 $ 7 $ 684,311 $ 218,981 (35) $ (1,299) $ 903,040
Net income for 2003 - - - - - 100,039 - - 100,039
Issuance of common stock under
stock option plans 602 6 - - 13,277 - - - 13,283
Purchase of treasury stock - - - - - - (5,534) (180,412) (180,412)
Retirement of treasury stock (5,534) (55) - - (180,456) - 5,534 180,511 -
------ ----- --- --- --------- --------- ------ -------- --------
BALANCE AT DECEMBER 31, 2003 99,057 $ 991 704 $ 7 $ 517,132 $ 319,020 (35) $ (1,200) $ 835,950
Net income for 2004 - - - - - 95,490 - - 95,490
Issuance of common stock under
stock option plans 3,788 38 (412) (4) 69,522 - - - 69,556
Purchase of treasury stock - - - - - - (8,456) (216,503) (216,503)
Retirement of treasury stock (8,491) (85) - - (217,618) - 8,491 217,703 -
------- ------ ---- ----- --------- --------- ------ ------- ---------
BALANCE AT DECEMBER 31, 2004 94,354 $ 944 292 $ 3 $ 369,036 $ 414,510 - $ - $ 784,493
======= ======= ==== ===== ========= ========= ======= ======== =========
See accompanying notes to consolidated financial statements.
F - 5
WESTWOOD ONE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
December 31,
---------------------------------------
2004 2003 2002
---- ---- ----
CASH FLOW FROM OPERATING ACTIVITIES:
Net income $ 95,490 $ 100,039 $ 109,115
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 18,429 11,513 11,464
Deferred taxes 642 5,331 6,355
Non-cash stock compensation 391 - -
Amortization of deferred financing costs 709 635 562
-------- --------- ---------
115,661 117,518 127,496
Changes in assets and liabilities:
Accounts receivable (7,082) (4,044) (7,943)
Prepaid and other assets 1,929 (1,186) (839)
Deferred revenue 2,043 (525) (968)
Income taxes payable 17,324 2,822 45,098
Accounts payable and accrued expenses
and other liabilities (3,495) (8,348) (5,958)
Amounts payable to related parties 1,594 1,633 (9,268)
------- --------- ---------
Net Cash Provided By Operating Activities 127,974 107,870 147,618
------- --------- ---------
CASH FLOW FROM INVESTING ACTIVITIES:
Capital expenditures (5,920) (4,370) (4,252)
Acquisition of companies and other 6 (602) (808)
------- --------- ---------
Net Cash Used in Investing Activities (5,914) (4,972) (5,060)
------- --------- ---------
CASH FLOW FROM FINANCING ACTIVITIES:
Issuance of common stock 38,595 9,372 30,186
Borrowings under bank and other long-term obligations 195,000 70,000 200,000
Debt repayments and payments of capital lease obligations (135,602) (564) (129,883)
Repurchase of common stock (216,503) (180,412) (188,337)
Repurchase of warrants from related party - - (51,070)
Deferred financing costs (1,283) - (592)
-------- --------- ---------
Net Cash Used in Financing Activities (119,793) (101,604) (139,696)
-------- --------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS 2,267 1,294 2,862
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 8,665 7,371 4,509
-------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 10,932 $ 8,665 $ 7,371
======== ========= =========
See accompanying notes to consolidated financial statements.
F - 6
WESTWOOD ONE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts)
NOTE 1 - Summary of Significant Accounting Policies:
Nature of Business
Westwood One, Inc. and subsidiaries (the "Company") supplies radio and
television station affiliates with a broad range of programming and information
services. The Company is the largest domestic outsource provider of traffic
reporting services and the nation's largest radio network, 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.
Westwood One is managed by Infinity Broadcasting Corporation ("Infinity"), a
wholly-owned subsidiary of Viacom Inc, pursuant to a management agreement
between the Company and Infinity which expires on March 31, 2009 (the
"Agreement" or "Management Agreement").
Principles of Consolidation
The consolidated financial statements include the accounts of all majority and
wholly-owned subsidiaries.
Revenue Recognition
Revenue is recognized when earned which is at the time commercial advertisements
are broadcast. Payments received in advance are deferred until earned and such
amounts are included as a component of Deferred Revenue in the accompanying
Balance Sheet.
Barter transactions represent the exchange of commercial announcements for
merchandise or services. These transactions are recorded at the fair market
value of the commercial announcements relinquished, or the fair value of the
merchandise and services received. Revenue is recognized on barter transactions
when the advertisements are broadcast. Expenses are recorded when the
merchandise or service is utilized. Barter revenue of $22,083, $22,441 and
$19,595 has been recognized for the years ended December 31, 2004, 2003 and
2002, respectively and barter expenses of $20,808, $20,885 and $18,886 have been
recognized for the years ended December 31, 2004, 2003 and 2002, respectively.
Program Rights
Program rights are stated at the lower of cost, less accumulated amortization,
or net realizable value. Program rights and the related liabilities are recorded
when the license period begins and the program is available for use, and are
charged to expense when the event is broadcast.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets, liabilities, revenue and expenses as well
as the disclosure of contingent assets and liabilities. Management continually
evaluates its estimates and judgments including those related to allowances for
doubtful accounts, useful lives of property, plant and equipment and intangible
assets, income taxes and other contingencies. Management bases its estimates and
judgments on historical experience and other factors that are believed to be
reasonable in the circumstances. Actual results may differ from those estimates
under different assumptions or conditions.
Cash Equivalents
The Company considers all highly liquid instruments purchased with a maturity of
less than three months to be cash equivalents. The carrying amount of cash
equivalents approximates fair value because of the short maturity of these
instruments.
Financial Instruments
The Company uses derivative financial instruments (fixed-to-floating interest
rate swap agreements) for the purpose of hedging specific exposures and holds
all derivatives for purposes other than trading. All derivative financial
instruments held reduce the risk of the underlying hedged item and are
designated at inception as hedges with respect to the underlying hedged item.
Hedges of fair value exposure are entered into in order to hedge the fair value
of a recognized asset, liability, or a firm commitment. Derivative contracts are
entered into with major creditworthy institutions to minimize the risk of credit
loss and are structured to be 100% effective.
F-7
WESTWOOD ONE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts)
Depreciation
Depreciation is computed using the straight line method over the estimated
useful lives of the assets, as follows:
Buildings and improvements 40 years
Recording, broadcasting and studio equipment 5 - 10 years
Furniture, and equipment and other 3 - 10 years
Goodwill and Intangible Assets
Effective January 1, 2002, the Company adopted Statement of Financial Accounting
Standards No. 141, "Business Combinations" ("SFAS 141") and Statement of
Financial Accounting Standards No. 142 ("SFAS 142") "Goodwill and Other
Intangible Assets". The Statements require all business combinations to be
accounted for under the purchase method and prohibits the amortization of
goodwill and indefinite-lived intangible assets, requires that goodwill and
indefinite-lived intangible assets be tested annually for impairment (and in
interim periods if events occur indicating that the carrying value of goodwill
and/or indefinite-lived intangible assets may be impaired), requires that
reporting units be identified for the purpose of assessing potential future
impairments of goodwill, and removes the forty-year limitation on the
amortization period of intangible assets that have finite lives.
Goodwill represents the excess of cost over fair value of net assets of
businesses acquired. In accordance with SFAS 142, the value assigned to goodwill
and indefinite lived intangible assets is not amortized to expense, but rather
the fair value of the reporting unit is compared to its carrying amount on an
annual basis to determine if there is a potential impairment. If the fair value
of the reporting unit is less than its carrying value, an impairment loss is
recorded to the extent that the fair value of the goodwill and intangible assets
is less than their carrying value, determined based on discounted cash flows,
market multiples or appraised values as appropriate. The Company has determined
that there was no impairment of goodwill or intangible assets as a result of
completing impairment reviews.
Intangible assets subject to amortization primarily consist of affiliation
agreements that were acquired in prior years. Such affiliate contracts, when
aggregated, create a nationwide audience that is sold to national advertisers.
The intangible asset values assigned to the affiliate agreements for each
acquisition were determined based upon the expected discounted aggregate cash
flows to be derived over the life of the affiliate relationship. The method of
amortizing the intangible asset values reflects, based upon the Company's
historical experience, an accelerated rate of attrition in the affiliate base
over the expected life of the affiliate relationships. Accordingly, the Company
amortizes the value assigned to affiliate agreements on an accelerated basis
(periods ranging from 4 to 20 years with a weighted-average amortization period
of approximately 8 years) consistent with the pattern of cash flows which are
expected to be derived.
Stock-Based Compensation
Statement of Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting
for Stock-Based Compensation," encourages, but does not require, companies to
record compensation cost for stock-based employee compensation plans at fair
value. The Company has chosen to continue to account for stock-based
compensation using the intrinsic value method prescribed in Accounting
Principles Board Opinion No. 25 ("APB 25"), "Accounting for Stock Issued to
Employees," and related Interpretations.
No compensation expense has been recognized for stock option grants as all such
grants had an exercise price not less than the fair market value on the date of
grant, except for a non-cash stock compensation charge recorded of $391,000 in
connection with the modification of the terms of previously granted stock
options coinciding with the change in status of an employee to an independent
contractor. Had compensation cost been determined in accordance with the
methodology prescribed by SFAS 123, the Company's net income and earnings per
share would have been reduced to the pro forma amounts indicated below:
F-8
WESTWOOD ONE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts)
2004 2003 2002
---- ---- ----
Net Income as Reported $95,490 $100,039 $109,115
Deduct: Total stock based
compensation expense determined under fair-
value based method, net of tax 9,588 8,809 8,444
------- -------- --------
Pro Forma Net Income $85,902 $91,230 $100,671
======= ======= ========
Net Income Per Share:
Basic - As Reported $.98 $.99 $1.03
==== ==== =====
Basic - Pro Forma $.88 $.90 $.95
==== ==== ====
Diluted - As Reported $.97 $.97 $1.00
==== ==== =====
Diluted - Pro Forma $.87 $.88 $.92
==== ==== ====
Income Taxes
The Company uses the asset and liability method of financial accounting and
reporting for income taxes required by Statement of Financial Accounting
Standards No. 109 ("SFAS 109"), "Accounting for Income Taxes". Under SFAS 109,
deferred income taxes reflect the tax impact of temporary differences between
the amount of assets and liabilities recognized for financial reporting purposes
and the amounts recognized for tax purposes.
Earnings per Share
Basic earnings per share excludes all dilution and is calculated using the
weighted average number of common shares outstanding in the period. Diluted
earnings per share amounts are based upon the weighted average number of common
and common equivalent shares outstanding during the year. Common equivalent
shares are related to warrants and stock options. The following number of common
equivalent shares were added to the basic weighted average shares outstanding
for each period:
2004 2003 2002
---- ---- ----
Options 1,337,000 2,382,000 2,967,000
Warrants - - 142,000
Common equivalent shares are excluded in periods in which they are
anti-dilutive. The following options were excluded from the calculation of
diluted earnings per share because the exercise price was greater than the
average market price of the Company's Common Stock for the years presented:
2004 2003 2002
---- ---- ----
Options 3,779,700 1,904,382 390,000
The per share exercise prices of the options excluded were $26.96-$38.34 in
2004, $32.90-38.34 in 2003, and $37.00-$38.34 in 2002. Also excluded from the
weighted average share computation were 4,500,000 warrants issued in May 2002 in
conjunction with extending the terms of the Company's management agreement with
a related party. See Note 2 for a further discussion of the warrant terms.
Recent Accounting Pronouncements
In December 2004, the FASB issued SFAS No. 123 (revised 2004), "Share-Based
Payment" ("SFAS 123R"), which replaces SFAS No. 123, "Accounting for Stock-Based
Compensation," ("SFAS 123") and supercedes APB Opinion No. 25, "Accounting for
Stock Issued to Employees." SFAS 123R requires all share-based payments to
employees, including grants of employee stock options, to be recognized in the
financial statements based on their fair values beginning with the first interim
or annual period after June 15, 2005, with early adoption encouraged. The pro
forma disclosures previously permitted under SFAS 123 no longer will be an
alternative to financial statement recognition. The Company is required to adopt
SFAS 123R in the second quarter of fiscal 2005. Under SFAS 123R, the Company
must determine the appropriate fair value model to be used for valuing
share-based payments, the amortization method for compensation cost and the
transition method to be used at date of adoption. The transition methods include
prospective and retroactive adoption options. Under the retroactive option,
F-9
prior periods may be restated either as of the beginning of the year of adoption
or for all periods presented. The prospective method requires that compensation
expense be recorded for all unvested stock options and restricted stock at the
beginning of the first quarter of adoption of SFAS 123R, while the retroactive
methods would record compensation expense for all unvested stock options and
restricted stock beginning with the first period restated. The Company is
evaluating the requirements of SFAS 123R and expects that the adoption of SFAS
123R will have a material impact on the Company's consolidated results of
operations and earnings per share. The Company has not yet determined the method
of adoption or the effect of adopting SFAS 123R. The Company believes the pro
forma disclosures in Note 1, "Significant Accounting Policies," on page F-8
under "Stock-Based Compensation" provide an appropriate short-term indicator of
the level of expense that will be recognized in accordance with SFAS No. 123R.
However, the total expense recorded in future periods will depend on several
variables, including the number of shared-based awards that vest and the fair
value of those vested awards.
In October 2004, the American Jobs Creation Act of 2004 (the "AJCA") was passed.
The AJCA provides a deduction for income from qualified domestic production
activities which will be phased in from 2005 through 2010. In return, the AJCA
also provides for a two-year phase-out of the existing extra-territorial income
exclusion for foreign sales that was viewed to be inconsistent with
international trade protocols by the European Union. In December 2004, the FASB
issued FASB Staff Position ("FSP") No. 109-1, "Application of FASB Statement
No.109, Accounting for Income Taxes, to the Tax Deduction on Qualified
Production Activities by the American Jobs Creation Act of 2004." FSP 109-1
treats the deduction as a "special deduction" as described in FAS No. 109. As
such, the special deduction has no effect on deferred tax assets and liabilities
existing at the enactment date. Rather, the impact of this deduction will be
reported in the same period in which the deduction is claimed in the tax return.
We are currently evaluating the impact the AJCA will have on our results of
operations and financial position.
The AJCA also creates a temporary incentive for U.S. corporations to repatriate
accumulated income earned abroad by providing an 85% dividends received
deduction for certain dividends from controlled foreign corporations. This
aspect of the AJCA legislation will not have an impact on the Company's results
of operations and financial position as the Company does not have foreign
operations.
In December 2004, the FASB issued SFAS No.153, "Exchanges of Nonmonetary
Assets--an Amendment of APB No. 29" (SFAS 153). The amendments made by SFAS 153
are based on the principle that exchanges of nonmonetary assets should be
measured based on the fair value of the assets exchanged. Further, the
amendments eliminate the narrow exception for nonmonetary exchanges of similar
productive assets and replace it with a broader exception for exchanges of
nonmonetary assets that do not have "commercial substance." This standard is
effective for nonmonetary asset exchanges occurring after July 1, 2005. The
adoption of this standard is not expected to impact the Company's Consolidated
Financial Statements.
Reclassification
Certain amounts reported in prior years have been reclassified to conform to the
current year presentation.
NOTE 2 - Related Party Transactions:
In return for receiving services under the Management Agreement, the Company
compensates Infinity via an annual base fee and provides Infinity the
opportunity to earn an incentive bonus if the Company exceeds pre-determined
targeted cash flows. For the year ended December 31, 2004, 2003 and 2002,
Infinity earned cash compensation of $2,959, $2,793 and $5,012, respectively,
pursuant to this Management Agreement.
In addition to the base fee and incentive compensation described above, the
Company granted to Infinity two fully vested and non-forfeitable warrants to
purchase 4,000,000 shares of the Company's Common Stock in the aggregate
(comprised of one warrant to purchase 2,000,000 shares at an exercise price of
$10.00 per share and another warrant to purchase 2,000,000 shares at an exercise
price of $12.50 per share) in connection with extending the term of the
Management Agreement in March 1999 for an additional term of five years
commencing April 1, 1999. Such warrants were only exercisable to the extent the
Company's Common Stock reached certain market prices, which have subsequently
been achieved. In 2002 Infinity sold its $12.50 warrant, representing 2,000,000
shares of Common Stock, to the Company for cash consideration of $51,070. In
2001, Infinity sold its $10.00 warrant, representing 2,000,000 shares of Common
Stock, to the Company for cash consideration of $41,350. The repurchase of the
Infinity warrants for cash consideration has been reflected as a reduction to
Additional Paid in Capital during 2002 and 2001.
F-10
WESTWOOD ONE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts)
On May 29, 2002, the Company's shareholders ratified an extension of the
Management Agreement for an additional five-year term which commences April 1,
2004 and expires on March 31, 2009. In return for receiving services under the
Management Agreement, the Company will continue to compensate Infinity via an
annual base fee and an opportunity to earn an annual incentive bonus provided
certain performance objectives are met. Additionally, the Company granted to
Infinity seven fully vested and non-forfeitable warrants to purchase 4,500,000
shares of the Company's Common Stock in the aggregate (comprised of two warrants
to purchase 1,000,000 Common shares per warrant and five warrants to purchase
500,000 Common shares per warrant) to purchase Company Common Stock. Of the
seven warrants issued, the two one million share warrants have an exercise price
of $43.11 and $48.36, respectively, and become exercisable if the average price
of the Company's Common Stock reaches a price of $64.67 and $77.38,
respectively, for at least 20 out of 30 consecutive trading days for any period
throughout the ten year term of the warrants.
The exercise prices for the five remaining warrants is equal to $38.87, $44.70,
$51.40, $59.11 and $67.98, respectively. These warrants each have a term of 10
years, commencing on the date they become exercisable, and become exercisable on
January 2, 2005, 2006, 2007, 2008, and 2009, respectively, subject to a trading
price condition. The trading price condition specifies that the average price of
the Company's Common Stock for each of the 15 trading days prior to January 2 of
the applicable year (commencing on January 2, 2005 with respect to the first
500,000 warrant tranche and each January 2 thereafter for each of the remaining
four warrants) must be at least equal to both the exercise price of the warrant
and 120% of the corresponding prior year 15 day trading average. In the case of
the $38.87 warrants, the Company's average stock price for the 15 trading days
prior to January 2, 2005 must equal or exceed $40.56 for the warrants to become
exercisable. The Company's stock price did not equal or exceed $40.56 for the 15
trading days prior to January 2, 2005 and therefore, the warrants did not become
exercisable.
In connection with the May 2002 issuance of warrants to Infinity for management
services to be provided to the Company in the future, the Company originally
reflected the fair value of the warrant issuance of $48,530 as a component of
Other Assets with a corresponding increase to additional paid in capital in the
accompanying balance sheet. At December 31, 2003, the unamortized value of the
May 2002 warrants was $48,350, of which $7,200 was included as a component of
Prepaid and Other current assets and $41,330 was included as a component of
Other Assets in the accompanying consolidated balance sheet. Upon commencement
of the term of the service period to which the warrants relate (April 1, 2004),
the Company commenced amortizing the cost of the warrants issued ratably over
the five-year service period. At December 31, 2004, the unamortized value of the
May 2002 warrants was $41,250, of which $9,706 was included as a component of
Prepaid and Other assets and $31,544 was included as a component of Other Assets
in the accompanying consolidated balance sheet.
In addition to the Management Agreement described above, the Company also enters
into other transactions with Infinity in the normal course of business. Such
arrangements include a Representation Agreement (including a related news
programming agreement, a license agreement and a technical services agreement
with an affiliate of Infinity - the "Representation Agreement") to operate the
CBS Radio Networks, affiliation agreements with many of Infinity's radio
stations and the purchase of programming rights from Infinity and affiliates of
Infinity. The Management Agreement provides that all transactions, other than
the Management Agreement and Representation Agreement to operate the CBS Radio
Networks which were ratified by the Company's shareholders, between the Company
and Infinity or its affiliates must be on a basis that is at least as favorable
to the Company as if the transactions were entered into with an independent
third party. In addition, subject to specified exceptions, all agreements
between the Company and Infinity or any of its affiliates must be approved by
the Company's Board of Directors.
The Company incurred the following expenses relating to transactions with
Infinity or its affiliates for the following years:
Nature
------
2004 2003 2002
---- ---- ----
Representation Agreement $25,093 $24,575 $23,309
Programming and Affiliations 59,245 56,084 54,257
Management Agreement
(excluding warrant amortization) 2,959 2,793 5,012
Warrant Amortization 7,618 1,352 1,352
------ ------ ------
$94,915 $84,804 $83,930
======= ======= =======
Expenses incurred for the Representation Agreement and programming and affiliate
arrangements are included as a component of Operating Costs in the accompanying
Consolidated Statement of Operations. Expenses incurred for the Management
F-11
Agreement (excluding warrant amortization) and amortization of the warrants
granted to Infinity under the Management Agreement are included as a component
of Corporate General and Administrative expenses and Depreciation and
Amortization, respectively, in the accompanying Consolidated Statement of
Operations.
NOTE 3 - Property and Equipment:
Property and equipment is recorded at cost and is summarized as follows at:
December 31,
------------
2004 2003
---- ----
Land, buildings and improvements..................... $14,208 $14,088
Recording, broadcasting and studio equipment......... 68,405 64,234
Furniture and equipment and other.................... 12,105 15,567
------- ------
94,718 93,889
Less: Accumulated depreciation and amortization..... 47,321 43,327
------- ------
Property and equipment, net.................. $47,397 $50,562
======= =======
Depreciation expense was $9,085 in 2004, $7,898 in 2003, and $7,711 in 2002. The
Company has entered into one capital lease totaling $6,723. Accumulated
amortization related to for the capital lease was $2,241 and $1,569 as of
December 31, 2004 and 2003, respectively.
NOTE 4 - Goodwill and Intangible Assets:
The changes in the carrying amount of goodwill for the years ended December 31,
2004 and 2003 follows:
2004 2003
---- ----
Balance at January 1, $990,472 $990,192
Goodwill acquired during the period - 280
Pre-acquisition contingencies related to income taxes
and other (8,503) -
-------- --------
$981,969 $990,472
========= ========
At December 31, 2004, the gross value of the Company's amortizable intangible
assets was approximately $28,780 with accumulated amortization of approximately
$22,603. As of December 31, 2003, the gross value of the Company's amortizable
intangible assets was approximately $28,780 with accumulated amortization of
approximately $21,154. Amortization expense was $1,449, $2,263 and $2,401, for
the year ended December 31, 2004, 2003 and 2002, respectively. The Company's
estimated aggregate amortization expense for intangibles for fiscal year 2005,
2006, 2007, 2008 and 2009 are $1,169, $783, $783, $783 and $783, respectively.
NOTE 5 - Debt:
Long-term debt consists of the following at:
December 31,
----------------------
2004 2003
---- ----
Revolving Credit Facility/Term Loan........ $160,000 $100,000
4.64% Senior Unsecured Notes
due on November 30, 2009.................. 50,000 50,000
5.26% Senior Unsecured Notes
due on November 30, 2012.................. 150,000 150,000
Fair market value of Swap.................. (561) 366
-------- --------
$359,439 $300,366
======== ========
On March 3, 2004, the Company refinanced its existing senior loan agreement with
a syndicate of banks led by JP Morgan Chase Bank and Bank of America. The new
facility is comprised of a five-year $120,000 term and a five-year $180,000
F-12
WESTWOOD ONE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts)
revolving credit facility (collectively the "New Facility"). In connection with
the closing of the facility, the Company borrowed the full amount of the term
loan, the proceeds of which were used to repay the outstanding borrowings under
the existing Facility. Interest on the New Facility is payable at the prime rate
plus an applicable margin of up to .25% or LIBOR plus an applicable margin of up
to 1.25%, at the Company's option. The New Facility contains covenants relating
to dividends, liens, indebtedness capital expenditures and interest coverage and
leverage ratios.
At December 31, 2004, the Company had available borrowings under the New
Facility of $140,000. As of December 31, 2004, the applicable margin was LIBOR
plus .625%. Additionally, at December 31, 2004, the Company had borrowed
$160,000 under the New Facility at a weighted-average interest rate of 2.2%
(including the applicable margin). As of December 31, 2003, the Company had
borrowed $100,000 under the previous revolving credit facility at a
weighted-average interest rate of 1.8% (including applicable margin).
On December 3, 2002, the Company issued, through a private placement, $150,000
of ten-year Senior Unsecured Notes due November 30, 2012 and $ 50,000 of
seven-year Senior Unsecured Notes due November 30, 2009 (collectively the
"Notes"). Interest on the Notes is payable semi-annually in May and November.
The Notes, which are unsecured, contain covenants relating to indebtedness and
interest coverage ratios that are identical to those contained in the Company's
New Facility. The Notes may be prepaid at the option of the Company upon
providing proper notice and by paying principal, interest and an early payment
penalty.
The aggregate maturities of debt for the next five years and thereafter,
pursuant to the Company's debt agreements as in effect at December 31, 2004, are
as follows (excludes market value adjustments):
Year
----
2005...................... $ -
2006...................... -
2007...................... -
2008...................... -
2009...................... 210,000
2010 and thereafter..... 150,000
--------
$360,000
NOTE 6 - Financial Instruments:
Interest Rate Risk Management In order to achieve a desired proportion of
variable and fixed rate debt, the Company entered into fixed-to-floating
interest rate swap agreements covering one-half of the notional amounts of the
Notes. These swap transactions allow the Company to benefit from short-term
declines in interest rates while having the long-term stability of fairly low
fixed rates. The instruments meet all of the criteria of a fair-value hedge. The
Company has the appropriate documentation, including the risk management
objective and strategy for undertaking the hedge, identification of the hedged
instrument, the hedge item, the nature of the risk being hedged, and how the
hedging instrument's effectiveness offsets the exposure to changes in the hedged
item's fair value or variability in cash flows attributable to the hedge risk.
At December 31, 2004, the Company had the following interest rate swaps:
Interest Rate
----------------------
Maturity Dates Notional Principal Amount Paid (1) Received Variable Rate Index
-------------- ------------------------- -------- -------- -------------------
November 2009 $25,000 2.4% 3.907% 3 Month LIBOR
November 2012 $25,000 2.4% 4.410% 3 Month LIBOR
November 2012 $50,000 2.4% 4.535% 3 Month LIBOR
(1) The interest rate paid at December 31, 2003 was 1.173%.
The estimated fair value of the Company's interest rate swaps at December 31,
2004 and 2003 were ($561) and $366, respectively.
F-13
WESTWOOD ONE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts)
Fair Value of Financial Instruments
The Company's financial instruments included cash, cash equivalents,
receivables, accounts payable, borrowings and interest rate contracts. At
December 31, 2003 and 2002, the fair values of cash and cash equivalents,
receivables and accounts payable approximated carrying values because of the
short-term nature of these instruments. The estimated fair values of other
financial instruments subject to fair value disclosures, determined based on
broker quotes or quoted market prices or rates for the same or similar
instruments, and the related carrying amounts are as follows:
December 31, 2004 December 31, 2003
----------------- -----------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
Borrowings (Short and Long Term) $ 360,000 $ 358,878 $ 300,000 $300,732
Risk management contracts:
Interest rate swaps (561) (561) 366 366
Credit Concentrations
The Company continually monitors its positions with, and the credit quality of,
the financial institutions that are counterparties to its financial instruments,
and does not anticipate nonperformance by the counterparties.
The Company's receivables do not represent a significant concentration of credit
risk at December 31, 2004, due to the wide variety of customers and markets in
which the Company operates.
NOTE 7 - Shareholders' Equity:
The authorized capital stock of the Company consists of Common Stock, Class B
Stock and Preferred Stock. Common Stock is entitled to one vote per share while
Class B Stock is entitled to 50 votes per share. Class B Stock is convertible to
Common Stock on a share-for-share basis.
As further discussed in Note 2, in conjunction with the renewal and extension of
the Company's Management Agreement with Infinity in May 2002, the Company
granted to Infinity fully vested and nonforfeitable warrants to purchase up to
4,500,000 shares of Company Common Stock. The Company has reflected the fair
value of the warrants issued of $48,530 as a component of additional paid in
capital.
During 2002, Infinity sold their $12.50 warrants to the Company for cash
consideration of $51,070. The purchase of the warrants resulted in a reduction
to additional paid in capital equal to the amount of cash consideration paid.
The aforementioned warrants were granted to Infinity in connection with the
extension of the Management Agreement in March 1999 (see Note 2).
The Company's Board of Directors has approved plans to purchase shares of the
Company's Common Stock to enhance shareholder value. The Company purchased
8,456,000 shares in 2004 for approximately $216,503, 5,534,000 shares in 2003
for approximately $180,412, and 5,414,000 shares in 2002 for approximately
$188,337.
On September 27, 2004 a shareholder converted 411,670 shares of Class B Stock
into an equal number of shares of Common Stock.
NOTE 8 - Stock Options:
The Company established stock option plans in 1989 and 1999 (collectively "the
Plan") which provide for the granting of options to directors, officers and key
employees to purchase stock at its market value on the date the options are
granted. Under the 1989 Plan, 12,600,000 shares were reserved for grant through
March 1999. This plan expired, but certain previous grants remain outstanding at
December 31, 2004. On September 22, 1999, the stockholders ratified the
Company's 1999 stock incentive plan which authorized the grant of up to
8,000,000 shares of Common Stock. Options granted generally become exercisable
after one year in 20% increments per year and expire within ten years from the
date of grant.
F-14
WESTWOOD ONE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts)
The weighted average fair value of the options granted in 2004, 2003 and 2002 is
estimated at $6.77, $10.09 and $11.46, respectively, measured on the date of
grant using the Black-Scholes option pricing model with the following weighted
average assumptions:
2004 2003 2002
---- ---- ----
Risk Free Interest Rate............... 3.5% 3.3% 3.4%
Expected Life (In Years)............ 5 5 5
Expected Volatility................... 28.3% 29.6% 29.0%
Expected Dividend Yield............... - - -
Information concerning options outstanding under the Plan is as follows for:
2004 2003 2002
---- ---- ----
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ ----- ------ ----- ------ -----
Outstanding at beginning
of period........................... 10,319,549 $21.27 9,442,330 $19.40 11,089,934 $16.01
Granted during the period............. 1,472,000 $21.38 1,568,500 $31.32 1,272,500 $35.79
Exercised during the period........... (3,376,786) $11.43 (602,381) $15.56 (2,505,674) $12.21
Forfeited during the period........... (418,745) $31.19 (88,900) $36.79 (414,430) $23.43
---------- --------- ----------
Outstanding at end of period.......... 7,996,018 $24.90 10,319,549 $21.27 9,442,330 $19.40
========== ========== =========-
Available for stock option issuance
at end of period.................... 600,345 1,653,600 3,133,200
========== ========= ==========
At December 31, 2004, options to purchase 4,089,918 shares of Common Stock were
currently exercisable at a weighted average exercise price of $22.57.
The following table contains additional information with respect to options at
December 31, 2004:
Remaining
Weighted Weighted
Average Average
Number of Exercise Contractual
Options Price Life (In Years)
------- ----- --------------
Options Outstanding at Exercise Price Ranges of:
$5.34-$19.29...................................... 1,497,658 $11.89 3.2
$20.25-26.96...................................... 2,818,660 $21.31 7.8
$30.19-$38.34..................................... 3,679,700 $32.94 7.3
---------
7,996,018 $24.90 6.7
=========
NOTE 9 - Income Taxes:
The components of the provision for income taxes follows:
Year Ended December 31,
------------------------------------
Current 2004 2003 2002
---- ---- ----
Federal......................... $51,205 $49,138 $52,982
State........................... 7,277 5,437 3,600
------- ------- -------
58,482 54,575 56,582
------- ------- -------
Deferred
Federal......................... 483 4,842 5,705
State........................... 159 489 650
------- ------- -------
642 5,331 6,355
------- ------- -------
Income Tax....................... $59,124 $59,906 $62,937
======= ======= =======
F-15
WESTWOOD ONE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts)
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities on the Company's balance
sheet and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities follow:
December 31,
----------------------
2004 2003
---- ----
Deferred tax liabilities:
Goodwill, intangibles and other............ $9,174 $28,566
Property and equipment..................... 7,758 4,783
Other...................................... 188 126
------- -------
Total deferred tax liabilities.......... 17,120 33,475
------- -------
Deferred tax assets:
Allowance for doubtful accounts......... 978 1,394
Deferred Compensation................... 4,060 1,013
Accrued expenses and other.............. 519 0
------- -------
Total deferred tax assets............... 5,557 2,407
------- -------
Net deferred tax liabilities................ 11,563 31,068
------- -------
Net deferred tax asset - current............ 978 1,645
------- -------
Net deferred tax liability - long-term...... $12,541 $32,713
======= =======
The reconciliation of the federal statutory income tax rate to the Company's
effective income tax rate follows:
Year Ended December 31,
-----------------------
2004 2003 2002
---- ---- ----
Federal statutory rate............... 35.0% 35.0% 35.0%
State taxes net of federal benefit... 3.2 2.5 1.6
---- ---- ----
Effective tax rate................... 38.2% 37.5% 36.6%
===== ===== =====
In 2004, 2003 and 2002, $18,182, $3,911 and $39,245 respectively, of income tax
benefits attributable to employee stock and warrant transactions were allocated
to shareholders' equity.
NOTE 10 - Commitments and Contingencies:
The Company has various non-cancelable, long-term operating leases for office
space and equipment. In addition, the Company is committed under various
contractual agreements to pay for talent, broadcast rights, research, the CBS
Representation Agreement and the Management Agreement with Infinity. The
approximate aggregate future minimum obligations under such operating leases and
contractual agreements for the five years after December 31, 2004 and
thereafter, are set forth below:
Leases
-------------------------------
Year Capital Operating Other Total
---- ------- --------- ----- -----
2005........... $960 $7,039 $61,534 $ 69,533
2006........... 960 6,724 58,772 66,456
2007........... 960 5,911 47,618 54,489
2008........... 960 5,158 44,746 50,864
2009........... 960 5,229 14,649 20,838
Thereafter..... 1,600 6,404 14,001 22,005
----- ----- ------ ------
$6,400 $36,465 $241,320 $284,185
====== ======= ======== ========
The present value of net minimum payments under capital leases was $5,182 at
December 31, 2004.
Rent expense charged to operations for 2004, 2003, and 2002 was $8,485, $8,597
and $9,193, respectively.
F-16
WESTWOOD ONE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts)
Included in Other in the table above is $162,955 of commitments due to Viacom
and its affiliates pursuant to various agreements as described in Note 2.
NOTE 11 - Supplemental Cash Flow and Other Information:
Supplemental information on cash flows, is summarized as follows:
Year Ended December 31,
-------------------------------
2004 2003 2002
---- ---- ----
Cash paid for:
Interest............................. $13,564 $12,047 $5,687
Income taxes......................... 41,158 51,755 8,561
The Company had certain cash investing and financing activities. During 2002,
the Company issued warrants to purchase up to 4,500,000 shares of its Common
Stock to Infinity with a value of $48,530.
Insurance Claim
The Company has insurance policies that cover business interruption related to
September 11, 2001 terrorist attacks. For the year ended December 31, 2003, the
Company recorded $3,200 as a reduction to operating costs in the accompanying
Consolidated Statements of Operations, reflecting the settlement of its business
interruption insurance claim.
NOTE 12 - Quarterly Results of Operations (unaudited):
The following is a tabulation of the unaudited quarterly results of operations.
The quarterly results are presented for the years ended December 31, 2004 and
2003.
(In thousands, except per share data)
First Second Third Fourth For the
Quarter Quarter Quarter Quarter Year
------- ------- ------- ------- -------
2004
----
Net revenues................................... $129,608 $139,585 $141,422 $151,632 $562,246
Operating income............................... 30,988 43,062 40,419 51,108 165,577
Net income ................................... 17,547 25,106 23,236 29,601 95,490
Net income per share:
Basic .................................... $.18 $.26 $.24 $.31 $.98
Diluted .................................. $.18 $.26 $.24 $.31 $.97
2003
----
Net revenues................................... $125,795 $132,675 $134,680 $146,076 $539,226
Operating income............................... 29,219 41,664 46,782 52,360 170,025
Net income ................................... 16,914 24,336 27,710 31,079 100,039
Net income per share:
Basic .................................... $.16 $.24 $.28 $.31 $.99
Diluted .................................. $.16 $.23 $.27 $.31 $.97
F-17
WESTWOOD ONE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts)
Schedule II - Valuation and Qualifying Accounts
-----------------------------------------------
Allowance for Doubtful Accounts
Additions Deductions
------------------------------------- ----------------
Balance at Balance at
Beginning of Charged to Costs Charged to Write-offs and End of
Period And Expenses Other Accounts Other Adjustments Period
------------ ---------------- -------------- ----------------- ----------
2004 $4,334 $874 - ($2,642) $2,566
2003 11,757 3,624 - (11,047) 4,334
2002 9,282 6,379 - (3,904) 11,757
F-18