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, 2002
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, 5th Floor 10019
New York, NY (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (212) 641-2000
Title of each class Name of Each Exchange on
Common Stock, par value [$0.01] per share Which Registered
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 as of March 1, 2003 was approximately $2,894,000,000 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, 2003, 103,118,508 shares (excluding treasury shares) of
Common Stock, par value $0.01 per share, were outstanding and 703,466 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 annual
meeting of shareholders (which will be filed with the Commission within 120 days
of the registrant's last 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's principal source of revenue is selling commercial airtime to
advertisers through one of its two operating divisions: (i) Traffic/Information
Division, which is comprised of Metro Networks, Inc. ("Metro") and "Shadow
Traffic" and (ii) the Network Division. The Company generates revenue
principally by selling audience it obtains from radio and television affiliates
to local and national advertisers. This enables advertisers to purchase
advertising time and have their commercial messages broadcast on radio and
television stations throughout the United States, reaching demographically
defined listening audiences.
The Traffic/Information Division provides local traffic and information
broadcast reports in over 90 Metro Survey Area markets (referred to herein as
MSA markets) in the United States. The Network Division 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 HBO and
other 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 10,300 commercial radio stations in the United States.
A radio station selects a style of programming ("format") to attract a target
listening audience and thereby attract commercial advertising directed at that
audience. 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 local advertising revenue.
Radio Advertising
Radio advertising time can be purchased on a local, regional or national basis.
Local 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 radio
network is one method by which an advertiser targets its commercial messages to
a specific demographic audience, achieving national coverage 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.
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To verify its network audience delivery and demographic
composition, specific measurement information is available to advertisers from
an independent rating service 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
Westwood One provides broad-based, local, regional or national audiences and
commercial spots to advertisers through its recognized programming and other
traffic and information products. The Company, through its various radio
networks, produces and distributes quality programming to meet listener needs
for information and to radio stations seeking to increase their listening
audience and improve advertising revenue by differentiating themselves from
their competitors. The Company sells advertising time to advertisers desiring to
reach large listening audiences with specific demographic characteristics.
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, which broadcasts 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 90 of the largest 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.
Local Traffic and Information Programming
The Company, through its Traffic/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
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 other third parties for
distribution through the internet, wireless devices or personnel digital
assistants ("PDA") and various other media systems. 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 becomes
integral "personalities" on such affiliates' station as a result of their
significant on-air presence and interaction with the station's 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 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 such 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
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providing live airborne coverage of the September 11 terrorist attack on the
World Trade Center and the Seattle earthquake, among others. By using our news
helicopters, the Company feeds live video to television affiliates around the
country. Moreover, by leveraging our infrastructure, the same reporters provided
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 90 markets and that is able to provide such
customized reports to these markets.
Metro Source, an information service available to subscribing affiliates, is a
total 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 are
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.
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.
Information Services
The Company's Information Services ("IS") develops non-broadcast traffic
information. IS 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. Accordingly, in 2000 the Company acquired the
operating assets of SmartRoute Systems, Inc. ("SmartRoute"). The Company is
currently working with several public and private entities across the United
States to improve dissemination of traffic and transportation information. The
Company is a supplier of information to the wireless telephone industry,
providing customized traffic information, direction services, and other local
information to wireless subscribers via the Company's STAR JAM (TM) and STAR
FIND (TM) services. IS 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 SmartTraveler brand name. In addition, the Company has
participated in a number of federally funded Intelligent Transportation Systems
Field Operational tests and Model Deployment Initiatives including the AZTech
Model Deployment in Phoenix, the Smart Trek Model Deployment in Seattle,
TravInfo, TransCal, St. Louis, Salt Lake City, the Atlanta Olympics Technology
Showcase, Partners in Motion in the Washington DC area, Advanced Regional
Traffic Interactive Management and Information System Program in Ohio, Kentucky
and Indianapolis, ORION City Model deployment with Minnesota DOT and Traffic
Wise in Indianapolis, and Advanced Traveler Information System in Massachusetts,
Connecticut, Pennsylvania and New Jersey.
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
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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.
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; 30 mobile units; 30 airborne camera
systems; 125 fixed-position camera systems; 75 broadcast studios; and 1,300
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 accurate 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.
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 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
2002, the Company produced and distributed numerous special event programs,
including exclusive broadcasts of The Grammy Awards, MTV's Live from The Rock
and Roll Hall of Fame, VH1 Divas Las Vegas Special and The NFL Kick-Off Concert
from Times Square in New York City, 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
worldwide over the radio (whether live or pre-recorded) for a specific 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 AC,
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.
-4-
Affiliated Radio Stations
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 air time that the stations may sell to local
advertisers. Westwood One typically distributes promotional announcements to the
stations and places advertisements in trade and consumer publications to further
promote the upcoming broadcast of its programs.
Westwood One enters into affiliation agreements 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 for the right
to broadcast the formats. Radio stations in the top 200 national markets may
also receive compensation for airing national advertising spots.
Affiliation agreements 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, are automatically
renewable for subsequent periods and are cancelable by either the Company or the
station upon 90 days' notice.
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.
Advertising Sales and Marketing
The Company packages its radio commercial airtime inventory on a network basis,
covering all affiliates in relevant markets, either regionally or nationally.
This packaged inventory typically appeals to advertisers seeking a broad
demographic reach. Because the Company generally sells its commercial airtime
inventory 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 inventory
on a regional and national network basis. The Company has developed a separate
sales force to sell its television commercial airtime inventory 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 300 sales representatives.
In most of the markets in which the Traffic/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 inventory in any and all of the Company's markets
in addition to selling such inventory 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), 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 inventory 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.
-5-
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
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 inventory that the Company
packages and sells on a regional and national basis. The amount and placement of
the commercial airtime inventory 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 inventory. 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 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's Traffic/Information
Division 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 recent consolidation of the radio
industry has created opportunities for large radio groups, such as Clear Channel
Communications, to gather information on their own.
The Company's Network Division operates in a very competitive environment. 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, as with its Traffic/Information
Division, the Network Division 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
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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.
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 services, is generally not subject to
regulation by the FCC. The Traffic/Information Division utilizes FCC regulated
two-way radio frequencies pursuant to licenses issued by the FCC.
Employees
On February 1, 2003, Westwood One had approximately 2,660 employees, including
an advertising sales force of approximately 300 people, and 900 part-time
employees. In addition, the Company maintains continuing relationships with
approximately 170 independent writers, program hosts, technical personnel and
producers. Certain employees at the Company's traffic and network operations are
covered by collective bargaining agreements. Including full and part-time
employees, approximately 720 persons are covered by collective bargaining
agreements. The Company believes relations with its employees, unions, and
independent contractors are satisfactory.
Available Information
Our current and periodic reports filed with the Securities and Exchange
Commission, 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 7,600 square-foot building in Culver City, California in
which its Network Division syndicated program production facilities are located
and a 14,000 square-foot building in Culver City, California which contains
administrative, and sales and marketing offices. The Company also owns a 10,000
square-foot building adjacent to its offices which it subleases. In addition,
the Company leases operation centers/broadcast studios and marketing and
administrative offices across the United States consisting of over 275,000
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
No matters were submitted to a vote of the Company's shareholders during the
fourth quarter of the year ended December 31, 2002.
-7-
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
On February 1, 2003 there were approximately 235 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 2002 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.
2002 High Low
---- ---- ---
First Quarter $40.00 $28.80
Second Quarter 39.73 32.46
Third Quarte 37.04 25.66
Fourth Quarter 38.98 31.72
2001
----
First Quarter $25.00 $18.18
Second Quarter 36.85 22.11
Third Quarter 36.50 21.00
Fourth Quarter 31.38 22.10
The Company does not intend to pay cash dividends. No cash dividend was paid on
the Company's stock during 2002 or 2001, and the payment of dividends is
restricted by the terms of its loan agreements.
Equity Compensation Plan Information
The following table contains information regarding equity compensation plans and
warrants to be issued to Infinity as of December 31, 2002:
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) 9,442,330 $19.40 3,133,200
Warrants (2) 4,500,000 (2) N/A
Equity compensation plans not
approved by security holders - - -
---------- ---------
Total 13,942,330 3,133,200
========== =========
(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.
(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 4,500,000 warrants issued, two warrants to
purchase 1,000,000 Common shares 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 Common shares, the exercise
price for each of the five warrants will be equal to approximately 115%,
132%, 152%, 175%, and 201%, respectively, of the average price of the
Company's Common Stock for the 15 trading days prior to January 2, 2004.
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,
-8-
respectively. Additionally, 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.
Item 6. SELECTED FINANCIAL DATA
(In thousands except per share data)
The Selected Financial Data in the table below are derived from the consolidated
financial statements of Westwood One. The data should be read in conjunction
with the consolidated financial statements, related notes, and other financial
information included herein.
The per share amounts included herein have been restated to reflect on a
retroactive basis the Company's two-for-one stock split which was effected on
March 22, 2000.
2002 (1) 2001 2000 1999 (2) 1998 (3)
-------- ---- ---- -------- --------
OPERATING RESULTS FOR YEAR ENDED DECEMBER 31:
Net Revenues $550,751 $515,940 $553,693 $358,305 $259,310
Operating and Corporate Costs, Excluding
Depreciation and Amortization 360,390 349,936 388,095 267,294 206,996
Depreciation and Amortization 11,464 67,611 62,104 30,214 18,409
Operating Income 178,897 98,393 103,494 60,797 33,354
Net Income $109,115 $43,195 $42,283 $23,887 $13,046
Income Per Basic Share $ 1.03 $.40 $.38 $.33 $.22
Income Per Diluted Share $ 1.00 $.38 $.36 $.30 $.20
BALANCE SHEET DATA AT DECEMBER 31:
Current Assets $153,628 $140,527 $ 153,881 $167,848 $85,663
Working Capital 63,542 35,012 15,679 39,843 7,111
Total Assets 1,266,312 1,210,017 1,285,556 1,333,153 345,279
Long-Term Debt 232,135 152,000 168,000 158,000 170,000
Total Shareholders' Equity 903,040 915,371 949,892 1,019,775 77,218
(1) Results for the year ended December 31, 2002 include the effects of
adopting Statement of Financial Accounting Standards No. 142 "Goodwill and
Other Intangible Assets" ("SFAS 142"). Retroactive application was
prohibited.
(2) Results for the year ended December 31, 1999 include the results of Metro
from the date of the merger on September 22, 1999.
(3) Results for the year ended December 31, 1998 include the Shadow Traffic
Operations for 10 markets from the time they were acquired in May 1998.
- -- No cash dividend was paid on the Company's Common Stock during the periods
presented above.
-9-
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
(In thousands except for share and per share amounts)
Effective January 1, 2002, the Company adopted Statement of Financial Accounting
Standards No. 141, "Business Combinations" ("SFAS 141") and SFAS 142. 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 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. As a result, the Company has included pro forma disclosures to compare
the current year operating results to those that would have been reported had
the Statements been applied as of January 1, 2001.
Discussions included herein related to "revenue" or "net revenues" corresponds
to the financial statement caption of Net Revenues on the Company's Consolidated
Statements of Operations. The principal components of Operating costs and
expenses excluding depreciation and amortization are personnel costs (exclusive
of corporate personnel), affiliate compensation, broadcast rights fees, program
production and distribution costs, sales related expenses (including bad debt
expenses, commissions, and promotional and advertising expenses), expenses
related to the Company's representation agreement with Infinity and news
expenses. Corporate general and administrative expenses are primarily comprised
of costs associated with the Infinity Management Agreement, personnel costs and
other administrative expenses.
Results of Operations
Westwood One derives substantially all of its revenue from the sale of
advertising time to advertisers. Net revenues increased 7% to $550,751 in 2002
from $515,940 in 2001, and decreased 7% in 2001 from $553,693 in 2000. The 2002
increase in net revenue was due principally to increased advertising rates and
better inventory management at both our network and traffic divisions, the
exclusive radio broadcast of the Winter Olympics from Salt Lake City and as a
result of launching new programming. The 2001 decrease in net revenue was due to
non-recurring revenues from the 2000 Summer Olympics from Sydney, Australia, a
reduction of spending by internet companies, the cancellation of programming and
advertising commitments due to the events of September 11, 2001 and a slowdown
in the advertising market generally.
Operating costs and expenses excluding depreciation and amortization increased
3% to $352,385 in 2002 from $343,120 in 2001, and decreased 10% in 2001 from
$380,346 in 2000. The 2002 increase was principally due to broadcast rights fees
and other related costs associated with the Company's exclusive radio broadcast
of the Winter Olympics, higher bad debt expense, new program costs and higher
sports rights fees, partially offset by reductions in personnel costs and
affiliate compensation. The 2001 decrease was primarily attributable to the
non-recurrence of broadcast rights fees and related costs associated with the
2000 Summer Olympics, tight cost controls, reductions in affiliate and personnel
costs, and lower revenue related expenses including bad debts, partially offset
by operating costs incurred for the full year in 2001 associated with the
operations of SmartRoute, whose assests were acquired in November 2000.
Depreciation and amortization decreased 83% to $11,464 in 2002 from $67,611 in
2001, and increased 9% in 2001 from $62,104 in 2000. The decrease in 2002 was
principally attributable to the Company's adoption of SFAS 142, which prohibits
the Company from continuing to amortize goodwill and lower depreciation expense
resulting from a change in useful lives surrounding certain studio and
broadcasting equipment as well as a result of certain assets becoming fully
depreciated. The 2001 increase was principally attributable to depreciation and
amortization related to the acquisition of the operating assets of SmartRoute.
Corporate general and administrative expenses increased 17% to $8,005 in 2002
from $6,816 in 2001, and decreased 12% in 2001 from $7,749 in 2000. The 2002
increase was principally attributable to a higher incentive bonus earned by
Infinity pursuant to the terms of the Management Agreement and higher insurance
costs. The decrease in 2001 was principally attributable to a lower incentive
bonus earned by Infinity pursuant to the terms of the Management Agreement.
Operating income increased 82% to $178,897 in 2002 from $98,393 in 2001, and
decreased 5% in 2001 from $103,494 in 2000. The 2002 increase was primarily
attributable to higher net revenue and lower depreciation and amortization
expense resulting from the adoption of SFAS 142. On a pro forma basis, assuming
the Company had adopted the provisions of SFAS 142 on January 1, 2001, the
Company's operating income would have increased by approximately 24%. The 2001
decrease was due to lower revenues and higher depreciation and amortization
partially offset by a reduction in operating costs.
-10-
Interest expense was $6,955, $8,705 and $10,785 in 2002, 2001 and 2000,
respectively. The 2002 decrease was attributable to lower interest rates,
partially offset by higher debt levels. The 2001 decrease was attributable to
lower interest rates and debt levels.
The income tax provisions for 2002, 2001 and 2000 are based on annual effective
tax rates of 37%, 51% and 55%, respectively, resulting in income tax expense of
$62,937, $45,564 and $51,085 in 2002, 2001 and 2000, respectively. Both the
Company's effective income tax rates and reported income tax expense were
affected by the Company's adoption of SFAS 142. On a pro forma basis, assuming
the Company had adopted the provisions of SFAS 142 on January 1, 2001, the
Company's effective income tax rate would have been approximately 35% in 2001.
For the years ended December 31, 2002, 2001 and 2000 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 $39,245, $32,901 and $9,734,
respectively, which are credited directly to additional paid in capital.
Net income in 2002 increased 153% to $109,115 ($1.03 per basic share and $1.00
per diluted share) from $43,195 ($.40 per basic share and $.38 per diluted
share) in 2001 and increased 2% in 2001 from $42,283 ($.38 per basic share and
$.36 per diluted share) in 2000. On a pro forma basis, assuming the Company had
adopted the provisions of SFAS 142 on January 1, 2001, the Company's net income,
net income per basic share and net income per diluted share would have increased
by approximately 24%, 26% and 28%, respectively, in 2002.
Weighted averages shares outstanding for purposes of computing basic earnings
per share were 105,992,000, 107,551,000 and 110,640,000 in 2002, 2001 and 2000,
respectively. The decreases in 2002 and 2001 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 109,101,000, 112,265,000 and 115,864,000 in 2002, 2001 and 2000,
respectively. The changes in weighted average diluted shares are due principally
to the decrease in basic shares and warrant repurchases partially offset by the
effect of stock option grants and the increase in the Company's stock price.
Liquidity and Capital Resources
We finance our business through cash flows from operations and the issuance of
debt and equity. The Company continually projects anticipated cash requirements,
which include share repurchases, acquisitions, capital expenditures, and
principal and interest payments on its outstanding indebtedness, as well as cash
flows generated from operating activity available to meet these needs. Any net
cash funding requirements are financed with short-term borrowings and long-term
debt.
At December 31, 2002, the Company's principal sources of liquidity were its cash
and cash equivalents of $7,371 and available borrowings under its loan agreement
of $205,000.
For 2002, net cash from operating activities was $147,618, an increase of $1,945
from 2001. Cash flow from operations was principally used to fund the Company's
stock repurchase program.
The Company's business does not require, and is not expected to require,
significant cash outlays for capital expenditures.
At December 31, 2002, the Company had an unsecured $235,000 bank revolving
credit facility (the "Facility"), $50,000 in senior unsecured notes due in 2009
and $150,000 in senior unsecured notes due in 2012 (collectively the "Notes").
Proceeds from the Notes, which were issued in December 2002, were used to repay
outstanding borrowings under the Company's Facility and term loan. At December
31, 2002, the Company had available borrowings of $205,000 under its Facility
($147,000 at December 31, 2001). The amount of the Facility is scheduled to be
reduced by $7,500 at the end of each quarter during 2003. In addition, the
Company has entered into, fixed to floating interest rate swap agreements for
50% of the notional amount of the Notes. The 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 2002, the Company purchased 7,414,000 shares of the Company's Common Stock
and warrants for a total cost of $239,407. In 2001, the Company purchased
approximately 6,152,000 shares of the Company's Common Stock for a total cost of
$146,278 and in 2000, purchased approximately 5,190,000 shares of the Company's
Common Stock for a total cost of $123,431. In 2003 (through February 28, 2003),
the Company repurchased an additional 1,075,000 shares of Common Stock at a cost
-11-
of $37,638. 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, 2002:
Payments due by Period
Contractual Obligations Total <1 year 1 -3 years 3 -5 years >5 years
----------------------- ----- ------- ---------- ---------- --------
Long-term Debt $230,000 -- $ 30,000 -- $200,000
Capital Lease Obligations 8,320 $ 960 1,920 $ 2,780 2,660
Operating Leases 44,494 7,790 13,295 11,487 11,922
Other Long-term Obligations 338,825 71,929 118,297 84,829 63,770
-------- ------- -------- ------- --------
Total Contractual Obligations $621,639 $80,679 $163,512 $99,096 $278,352
======== ======= ======== ======= ========
Other Commitments
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 commitments enumerated in the table above, are various
contractual agreements to pay for talent, broadcast rights, research and various
related party arrangements including payments due under the Management
Agreement. See Notes 3 and 11 to the consolidated financial statements for
further discussion.
Related Parties
Infinity Broadcasting Corporation ("Infinity") is a wholly owned subsidiary of
Viacom, Inc., holds a common equity position in the Company and provides ongoing
management services to the Company under the terms of a management agreement
(the "Management Agreement"), which expires March 31, 2009. In return for
receiving services under the Management Agreement, the Company compensates
Infinity via an annual base fee, and an opportunity to earn an incentive bonus
provided the Company exceeds pre-determined targeted cash flows. For the year
ended December 31, 2002, 2001 and 2000, Infinity earned cash compensation of
$5,012, $3,983 and $5,022, respectively.
In addition to the base fee and incentive compensation described above, the
Company granted to Infinity 4 million fully vested and non-forfeitable warrants
(2 million warrants with an exercise price of $10.00 per share and 2 million
warrants with an exercise price of $12.50 per share) to purchase Company Common
Stock 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 warrants, representing 2 million shares of Common Stock, to the
Company receiving net proceeds aggregating $51,070. In 2001, Infinity sold its
$10.00 warrants, representing 2 million shares of Common Stock, to the Company
receiving net proceeds aggregating $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 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 4.5 million fully vested and nonforfeitable warrants (comprised of two
warrants to purchase 1 million Common shares per warrant and five warrants to
purchase 500,000 Common shares per warrant) to purchase Company Common Stock. Of
the 4.5 million warrants issued, two warrants to purchase 1 million shares each
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.
Of the remaining five warrants to purchase an aggregate of 2.5 million Common
shares, the exercise price for each of the five warrants will be equal to
approximately 115%, 132%, 152%, 175%, and 201%, respectively, of the average
price of the Company's Common Stock for the 15 trading days prior to January 2,
-12-
2004. 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. Additionally, 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 connection with the issuance of warrants to Infinity for management services
to be provided to the Company in the future, the Company has 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. Upon commencement of the term of the service period to which the warrants
relate, the Company will amortize the cost of the warrants issued to operations
ratably over the five-year service period.
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) 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 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 2002, the Company incurred expenses aggregating approximately $77,566 for
the representation agreement, affiliation agreements and the purchase of
programming rights from Infinity and affiliates ($77,444 in 2001 and $77,578 in
2000).
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, income taxes, 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
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
by recording additional expense. Alternatively, if trends improve beyond our
estimates, we would be required to decrease our allowance for doubtful accounts
by reducing our recorded expense.
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 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. Alternatively, these types of
technological changes could result in the recognition of an impairment charge to
reflect the write-down in value of the asset. We review these types of assets
for impairment annually, or when events or circumstances indicate that the
carrying amount may not be recoverable over the remaining lives of the assets.
If an event occurs which would cause us to revise our estimates and assumptions
used in analyzing the value of our goodwill or other intangibles, such revision
could result in an impairment charge that could have a material impact on our
financial results. Beginning January 1, 2002, in accordance with the provisions
of Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets" ("SFAS 142"), we no longer amortize goodwill but review at
least annually for impairment.
-13-
Valuation of stock options and warrants -- 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.
Recent Accounting Pronouncements Affecting Future Results
In August 2001, the FASB issued Statement of Financial Accounting Standards No.
143, "Accounting for Obligations Associated with the Retirement of Long-Lived
Assets" ("SFAS 143"). The objective of SFAS 143 is to provide accounting
guidance for legal obligations associated with the retirement of long-lived
assets. The retirement obligations included within the scope of this
pronouncement are those that an entity cannot avoid as a result of either the
acquisition, construction or normal operation of a long-lived asset. Components
of larger systems also fall under this pronouncement, as well as tangible
long-lived assets with indeterminable lives. The provisions of SFAS 143 are
effective for financial statements issued for fiscal years beginning after June
15, 2002. The Company expects that the provisions of SFAS 143 will not have a
material impact on its consolidated results of operations and financial position
upon adoption. The Company will adopt the standard in the first quarter of
fiscal 2003.
In October 2001, the FASB issued Statement of Financial Accounting Standards No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS
144"). The objectives of SFAS 144 are to address significant issues relating to
the implementation of Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of" ("SFAS 121") and to develop a single accounting model, based on
the framework established in SFAS 121, for the long-lived assets to be disposed
of by sale, whether previously held and used or newly acquired. The provisions
of SFAS 144 are effective for financial statements issued for fiscal years
beginning after December 15, 2001. The Company adopted the standard for fiscal
year 2002 and this has had no material impact on the Company's financial
condition, cash flows or results of operations.
In April 2002, the FASB issued Statement of Financial Accounting Standards No.
145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment to FASB
Statement No. 13, and Technical Corrections" ("SFAS 145"). SFAS 145 eliminates
the requirement (in SFAS No. 4) that gains and losses from the extinguishments
of debt be aggregated and classified as extraordinary items, net of the related
income tax. The rescission of SFAS No. 4 is effective for fiscal years beginning
after May 15, 2002, which for the Company would be January 1, 2003. The Company
does not expect that the rescission of SFAS No. 4 will have a material impact on
the Company's financial condition, cash flows or results of operations.
In July 2002, the FASB issued Statement of Financial Accounting Standards No.
146, "Accounting for Costs Associated with Exit or Disposal Activities" ("SFAS
146"). SFAS 146 requires the recognition of such costs when they are incurred
rather than at the date of a commitment to an exit or disposal plan. The
provisions of SFAS 146 are to be applied prospectively to exit or disposal
activities initiated after December 31, 2002.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others", ("FIN 45"). FIN 45 expands previously issued accounting
guidance and disclosure requirements for certain guarantees and requires
recognition of an initial liability for the fair value of an obligation assumed
by issuing a guarantee. The provision for initial recognition and measurement of
liability will be applied on a prospective basis to guarantees issued or
modified after December 31, 2002. The adoption of FIN 45 is not expected to have
a material impact on the Company's financial condition or results of operations.
In December 2002, the FASB issued Statement of Financial Accounting Standards
("SFAS") No. 148, "Accounting for Stock-Based Compensation-Transition and
Disclosure" ("SFAS 148"), which amends SFAS No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"). SFAS 148 provides alternative methods of transition
for a voluntary change to the fair value based method of accounting for
stock-based employee compensation. SFAS 148 also amends the disclosure
provisions of SFAS 123 to require prominent disclosure about the effects on
reported net income of an entity's accounting policy decisions with respect to
stock-based employee compensation, and requires disclosure about those effects
in both annual and interim financial statements. SFAS 148 is effective for the
Company's first quarter of fiscal 2003. The Company has elected to continue to
apply Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued
to Employees" in accounting for its stock compensation plans. Therefore, the
adoption of SFAS 148 is not expected to have an impact on the Company's
consolidated results of operations, financial position or cash flows.
-14-
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN 46"). FIN 46 clarifies the application of
Accounting Research Bulletin No. 51 for certain entities in which equity
investors do not have the characteristics of a controlling financial interest or
do not have sufficient equity at risk for the entity to finance its activities
without additional subordinated financial support from other parties. FIN 46
applies to variable interest entities created after January 31, 2003, and to
variable interest entities in which an enterprise obtains an interest after that
date. It applies in the fourth quarter of fiscal 2003 to variable interest
entities in which the Company may hold a variable interest that it acquired
before February 1, 2003. The provisions of FIN 46 require that the Company
immediately disclose certain information if it is reasonably possible that the
Company will be required to consolidate or disclose variable interest entities
when FIN 46 becomes effective. The Company has determined that it does not have
a significant interest in such entities requiring the related disclosure.
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 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 Broadcasting Corporation
("Infinity"), a wholly owned subsidiary of Viacom, Inc., 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:
- 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 station
groups, including Infinity and Clear Channel Communications, 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. 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 national advertisers.
-15-
-- 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.
-- Changes in tax rates may adversely affect the Company's profitability.
-- 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.
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
-16-
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 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 accountants, 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 recently proposed 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-17 and by this reference incorporated herein.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
-17-
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.
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
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. Controls and Procedures
Our management carried out an evaluation of the effectiveness of our disclosure
controls and procedures within the 90-day period prior to the filing of this
report. Based on that evaluation, the Chief Executive Officer and Chief
Financial Officer of the Company have concluded that our disclosure controls and
procedures are effective to ensure that information required to be disclosed by
us in reports that we file or submit under the Securities Exchange Act of 1934
is recorded, processed, summarized and reported within the time periods
specified in Securities Exchange Commission rules and forms. Subsequent to the
date of our evaluation, there were no significant changes in our internal
controls or in other factors that could significantly affect our controls and
procedures.
-18-
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) Documents filed as part of this Report on Form 10-K
1. Financial statements and schedules to be filed hereunder are indexed
on page F-1 hereof.
2. 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 Form of Indemnification Agreement between Registrant and its Directors
and Executive Officers. (1)
10.3 Amended and Restated Credit Agreement, dated September 30, 1996,
between Registrant and The Chase Manhattan Bank and Co-Agents. (6)
10.4 Second Amended and Restated Credit Agreement dated November 17, 2000,
between Registrant and The Chase Manhattan Bank and Co-Agents. (12)
10.5 Amendment One dated October 24, 2002 to the Amended and Restated
Credit Agreement. (15)
10.6 Purchase Agreement, dated as of August 24, 1987, between Registrant
and National Broadcasting Company, Inc. (2)
10.7 Agreement and Plan of Merger among Registrant, Copter Acquisition
Corp. and Metro Networks, Inc. dated as of June 1, 1999 (9)
*10.8 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)
10.9 Management Agreement, dated as of March 30, 1999, and amended on April
15, 2002 between Registrant and Infinity Broadcasting Corporation. (9)
(13)
10.10 Representation Agreement, dated as of March 31, 1997, between
Registrant and CBS, Inc. (7) (13)
10.11 Westwood One Amended 1999 Stock Incentive Plan. (9)
10.12 Westwood One, Inc. 1989 Stock Incentive Plan. (3)
10.13 Amendments to the Westwood One, Inc. Amended 1989 Stock Incentive
Plan. (4) (5)
10.14 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)
21 List of Subsidiaries
23 Consent of Independent Accountants
**********************
* Indicates a management contract or compensatory plan or arrangement.
-19-
(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 Registrants 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.
(b) Reports on Form 8-K
On December 3, 2002, Registrant filed a current report on Form 8-K
relating to its sale of $200 million in Senior Guarantee Notes due
November 12, 2009 and November 30, 2012.
-20-
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 25, 2003 By /S/ JACQUES TORTOROLI
------------------------------
Jacques Tortoroli
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/ JOEL HOLLANDER Director, President and March 25, 2003
- ------------------------ Chief Executive Officer
Joel Hollander (Principal Executive Officer)
/S/JACQUES TORTOROLI Chief Financial Officer March 25, 2003
- ------------------------ (Principal Financial Officer and
Jacques Tortoroli Chief Accounting Officer)
/S/ NORMAN J. PATTIZ
- ------------------------ Chairman of the Board of March 25, 2003
Norman J. Pattiz Directors
/S/ DAVID L. DENNIS Director March 25, 2003
- ------------------------
David L. Dennis
/S/ GERALD GREENBERG Director March 25, 2003
- ------------------------
Gerald Greenberg
/S/ DENNIS HOLT Director March 25, 2003
- ------------------------
Dennis Holt
/S/ MARIA D. HUMMER Director March 25, 2003
- ------------------------
Maria D. Hummer
/S/ MEL A. KARMAZIN Director March 25, 2003
- ------------------------
Mel A. Karmazin
/S/ STEVEN A. LERMAN Director March 25, 2003
- ------------------------
Steven A. Lerman
/S/ GEORGE L. MILES, JR. Director March 25, 2003
- ------------------------
George Miles
/S/ JOSEPH B. SMITH Director March 25, 2003
- ------------------------
Joseph B. Smith
/S/ FARID SULEMAN Director March 25, 2003
- ------------------------
Farid Suleman
-21-
CHIEF EXECUTIVE OFFICER CERTIFICATION
I, Joel Hollander, Chief Executive Officer of the Company, certify that:
1) I have reviewed this annual report on Form 10-K of Westwood One, Inc.;
2) Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3) Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4) The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have;
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
(c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as the Evaluation Date;
5) The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6) The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
/S/ Joel Hollander
- ------------------
Joel Hollander
Chief Executive Officer
March 25, 2003
-22-
CHIEF FINANCIAL OFFICER CERTIFICATION
I, Jacques Tortoroli, Chief Financial Officer of the Company, certify that:
1) I have reviewed this annual report on Form 10-K of Westwood One, Inc.;
2) Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3) Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4) The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have;
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
(c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as the Evaluation Date;
5) The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6) The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
/S/ Jacques Tortoroli
- ---------------------
Jacques Tortoroli
Chief Financial Officer
March 25, 2003
-23-
WESTWOOD ONE, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES
1. Consolidated Financial Statements Page
--Report of Independent Accountants F-2
--Consolidated Balance Sheets at December 31, 2002
and 2001 F-3
--Consolidated Statements of Operations for the years
ended December 31, 2002, 2001 and 2000 F-4
--Consolidated Statements of Shareholders' Equity
for the years ended December 31, 2002, 2001 and 2000 F-5
--Consolidated Statements of Cash Flows for the years
ended December 31, 2002, 2001 and 2000 F-6
--Notes to Consolidated Financial Statements F-7 - F-16
2. Financial Statement Schedules:
II. -Valuation and Qualifying Accounts F-17
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.
F-1
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
of Westwood One, Inc.
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 it subsidiaries ("the Company") at December 31, 2002 and
2001, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 2002 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
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
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.
As discussed in Note 1, effective January 1, 2002, the Company adopted the
provisions of Statement of Financial Accounting Standards No. 141, "Business
Combinations" and Statement of Financial Accounting Standards No. 142, "Goodwill
and Other Intangible Assets."
/S/ PRICEWATERHOUSECOOPERS LLP
- -----------------------------------------------------
New York, New York
February 10 , 2003
F-2
WESTWOOD ONE, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
December 31,
------------
2002 2001
ASSETS ---- ----
CURRENT ASSETS:
Cash and cash equivalents $ 7,371 $ 4,509
Accounts receivable, net of allowance for doubtful accounts
of $11,757 (2002) and $9,282 (2001) 131,676 123,733
Other current assets 14,581 12,285
---------- --------
Total Current Assets 153,628 140,527
PROPERTY AND EQUIPMENT, NET 53,699 56,778
INTANGIBLE ASSETS, NET 9,647 12,048
GOODWILL 990,192 991,289
OTHER ASSETS 59,146 9,375
---------- --------
TOTAL ASSETS $1,266,312 $1,210,017
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 13,715 $ 16,848
Amounts payable to related parties 17,047 26,315
Other accrued expenses and liabilities 59,324 54,852
Current maturity of long-term debt - 7,500
---------- ----------
Total Current Liabilities 90,086 105,515
LONG-TERM DEBT 232,135 152,000
DEFERRED INCOME TAXES 30,733 23,168
OTHER LIABILITIES 10,318 13,963
---------- ----------
TOTAL LIABILITIES 363,272 294,646
---------- ----------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Preferred stock: authorized 10,000,000 shares, none outstanding - -
Common stock, $.01 par value: authorized, 268,857,650 shares;
issued and outstanding, 103,988,678 (2002) and 106,862,304 (2001) 1,040 1,069
Class B stock, $.01 par value: authorized, 3,000,000 shares:
issued and outstanding, 703,466 (2002 and 2001) 7 7
Additional paid-in capital 684,311 804,429
Retained earnings 218,981 109,866
---------- ----------
904,339 915,371
Less treasury stock, at cost; 35,000 (2002) shares (1,299) -
---------- ----------
TOTAL SHAREHOLDERS' EQUITY 903,040 915,371
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,266,312 $1,210,017
========== ==========
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,
-----------------------
2002 2001 2000
---- ---- ----
GROSS REVENUES $640,927 $597,719 $644,774
Less Agency Commissions 90,176 81,779 91,081
-------- -------- --------
NET REVENUES 550,751 515,940 553,693
-------- -------- --------
Operating Costs and Expenses Excluding
Depreciation and Amortization 352,385 343,120 380,346
Depreciation and Amortization 11,464 67,611 62,104
Corporate General and Administrative Expenses 8,005 6,816 7,749
-------- -------- --------
371,854 417,547 450,199
-------- -------- --------
OPERATING INCOME 178,897 98,393 103,494
Interest Expense 6,955 8,705 10,785
Other (Income) Expense (110) 929 (659)
-------- -------- --------
INCOME BEFORE TAXES 172,052 88,759 93,368
INCOME TAXES 62,937 45,564 51,085
-------- -------- --------
NET INCOME $109,115 $43,195 $42,283
======== ======= =======
INCOME PER SHARE:
Basic $1.03 $ .40 $ .38
Diluted $1.00 $ .38 $ .36
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic 105,992 107,551 110,640
Diluted 109,101 112,265 115,864
See accompanying notes to consolidated financial statements.
F - 4
WESTWOOD ONE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts)
Accumul'd
Preferred Other Treasury
Stock Common Stock Class B Stock Add'l Retained Comp Stock Total
--------- ------------ ------------- Paid-in Earnings Income ----- Shareholders'
Shares Amount Shares Amount Shares Amount Capital (Deficit)(Loss) Shares Amount Equity
------ ------ ------ ------ ------ ------ ------- -------- ------ ------ ------ ------
BALANCE AT DECEMBER 31, 1999 - - 127,898 $1,279 704 $7 $1,171,370 $ 24,388 $ 7,862 16,422 $185,131 $1,019,775
Components of comprehensive income:
Net income for 2000 - - - - - - - 42,283 - - - 42,283
Unrealized holding gain (loss) in
equity securities net of tax - - - - - - - - (11,497) - - (11,497)
----- ----- ------- ------ ------ ---- --------- --------- ------- ------- -------- --------
Total comprehensive income - - - - - - - 42,283 (11,497) - - 30,786
Issuance of common stock under
stock option plans - - 1,402 14 - - 22,748 - - - - 22,762
Purchase of treasury stock - - - - - - - - - 5,190 123,431 (123,431)
----- ----- ------- ------ ------ ---- --------- --------- ------- ------- -------- --------
BALANCE AT DECEMBER 31, 2000 - - 129,300 1,293 704 7 1,194,118 66,671 (3,635) 21,612 308,562 949,892
Components of comprehensive income:
Net income for 2001 - - - - - - - 43,195 - - - 43,195
Unrealized holding gain (loss) in
equity securities net of tax - - - - - - - - 3,635 - - 3,635
----- ----- ------- ------ ------ ---- --------- --------- ------- ------- -------- --------
Total comprehensive income - - - - - - - 43,195 3,635 - - 46,830
Issuance of common stock under
stock option plans - - 3,326 34 - - 64,893 - - - - 64,927
Purchase and cancellation of warrants - - - - - - (41,350) - - - - (41,350)
Purchase of treasury stock - - - - - - - - - 4,152 104,928 (104,928)
Retirement of treasury stock - - (25,764) (258) - - (413,232) - - (25,764)(413,490) 0
----- ----- ------- ------ ------ ---- --------- --------- ------- ------- -------- --------
BALANCE AT DECEMBER 31, 2001 - - 106,862 1,069 704 7 804,429 109,866 - - - 915,371
Components of comprehensive income:
Net income for 2002 - - - - - - - 109,115 - - - 109,115
Issuance of common stock under
stock option plans - - 2,506 25 - - 69,406 - - - - 69,431
Issuance of warrants 48,530 48,530
Purchase and cancellation of warrants - - - - - - (51,070) - - - - (51,070)
Purchase of treasury stock - - - - - - - - - 5,414 188,337 (188,337)
Retirement of treasury stock - - (5,379) (54) - - (186,984) - - (5,379)(187,038) 0
----- ----- ------- ------ ----- ---- --------- --------- ------- ------- ------- ---------
BALANCE AT DECEMBER 31, 2002 - - 103,989 $1,040 704 $7 $684,311 $218,981 $0 35 $1,299 $903,040
===== ===== ======= ====== ===== ==== ========= ======== ======= ======= ======= =========
See accompanying notes to consolidated financial statements.
F-5
WESTWOOD ONE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Year Ended December 31,
----------------------
2002 2001 2000
---- ---- ----
CASH FLOW FROM OPERATING ACTIVITIES:
Net income $109,115 $43,195 $42,283
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 11,464 67,611 62,104
Deferred taxes 6,355 5,555 13,144
Other 562 1,802 329
-------- ------- --------
127,496 118,163 117,860
Changes in assets and liabilities:
(Increase) decrease in accounts receivable (7,943) 11,817 8,976
(Increase) decrease in prepaid and other assets (839) 1,334 (179)
Increase in accounts payable and accrued liabilities 28,904 14,359 29,735
-------- ------- -------
Net Cash Provided By Operating Activities 147,618 145,673 156,392
-------- ------- -------
CASH FLOW FROM INVESTING ACTIVITIES:
Capital expenditures (4,252) (6,828) (9,201)
Acquisition of companies and other (808) (6,218) (46,280)
-------- ------- -------
Net Cash Used For Investing Activities (5,060) (13,046) (55,481)
-------- ------- -------
CASH PROVIDED BEFORE FINANCING ACTIVITIES 142,558 132,627 100,911
-------- ------- -------
CASH FLOW FROM FINANCING ACTIVITIES:
Debt repayments and payments of capital lease obligations (129,883) (20,623) (3,404)
Borrowings under bank and other long-term obligations 200,000 - 10,000
Issuance of common stock 30,186 32,026 13,028
Repurchase of common stock and warrants (239,407) (146,278) (123,431)
Deferred financing costs (592) - (973)
-------- ------- -------
Net Cash Used For Financing Activities (139,696) (134,875) (104,780)
-------- ------- -------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 2,862 (2,248) (3,869)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 4,509 6,757 10,626
-------- ------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $7,371 $4,509 $6,757
======== ======= =======
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 information services and programming. The
Company provides a broad range of programming and information services to
advertisers and also delivers traffic news, talk, sports and entertainment
program to its affiliate stations. Its principle source of revenue is selling
commercial airtime to advertisers.
Principles of Consolidation
The consolidated financial statements include the accounts of all majority and
wholly-owned subsidiaries.
Revenue Recognition
Revenue is recognized when commercial advertisements are broadcast.
Barter transactions are recorded in accordance with Accounting Principles Board
Opinion No. 29, "Accounting for Non-Monetary Transactions". Revenue from barter
transactions is recognized when advertisements are broadcast. Merchandise or
services received are charged to expense when utilized. Barter revenue of
$19,595, $13,103, and $15,389 and barter expenses of $18,886, $12,453, and
$14,296 have been recognized for the years ended December 31, 2002, 2001, and
2000, respectively.
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.
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 and studio equipment 5 - 10 years
Capitalized leases Term of lease
Furniture and equipment and other 3 - 10 years
Goodwill and Intangible Assets
Goodwill represents the excess of cost over fair value of assets of businesses
acquired. In accordance with Statement of Financial Accounting Standards No. 142
("SFAS 142") "Goodwill and Other Intangible Assets", the value assigned to
F-7
WESTWOOD ONE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts)
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. During 2002, the
Company completed its impairment review, which indicated that there was no
impairment of goodwill or intangible assets.
Intangible assets subject to amortization primarily consist of network
affiliation agreements, which are being amortized on an accelerated basis over
periods ranging from 4 to 20 years with a weighted-average amortization period
of approximately 8 years.
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.
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:
2002 2001 2000
---- ---- ----
Warrants 142,000 1,238,000 1,431,000
Options 2,967,000 3,476,000 3,793,000
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:
2002 2001 2000
---- ---- ----
Options 390,000 1,380,000 1,350,000
The per share exercise prices of the options were $37.00-$38.34 in 2002,
$30.30-$40.70 in 2001, and $32.25-$40.70 in 2000. Also excluded were warrants
issued in May 2002 in conjunction with extending the terms of the Company's
management agreement with a related party. See Note 3 for a further discussion
of the warrant terms.
Recent Accounting Pronouncements
Recent accounting pronouncements issued by the Financial Accounting Standards
Board include Statements of Financial Accounting Standards ("SFAS") No. 143,
"Accounting for Obligations Associated with the Retirement of Long-Lived
Assets"; SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets"; SFAS 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment to
FASB Statement No. 13, and Technical Corrections"; SFAS 146, "Accounting for
Costs Associated with Exit or Disposal Activities"; SFAS 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure" and FASB Interpretation
No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees
Including Indirect Indebtedness of Others" and FASB Interpretation No. 46,
"Consolidation of Variable Interest Entities". The adoption of these Statements
and Interpretations is not expected to have a material impact on the Company's
consolidated results of operations, financial position or cash flows.
F-8
WESTWOOD ONE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts)
Changes in Accounting Principles
Effective January 1, 2002, the Company adopted Statement of Financial Accounting
Standards No. 141, "Business Combinations" ("SFAS 141") and SFAS 142. 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.
Reclassification
Certain amounts reported in prior years have been reclassified to conform to the
current year presentation.
NOTE 2 - Acquisitions of Businesses:
On November 17, 2000, the Company acquired the operating assets of SmartRoute
Systems, Inc. for $24,250 plus costs and the assumption of certain obligations.
The acquisition was accounted for as a purchase, and accordingly, the operating
results are included with those of the Company from November 18, 2000. The
purchase price was allocated to the assets and liabilities acquired based on
their respective fair values.
NOTE 3 - Related Party Transactions:
Under the terms of a management agreement (the "Management Agreement"), which
expires March 31, 2009, the Company is managed by Infinity Broadcasting
Corporation ("Infinity"), a wholly owned subsidiary of Viacom Inc. In return for
receiving services under the Management Agreement, the Company compensates
Infinity via an annual base fee and an opportunity to earn an incentive bonus
provided the Company exceeds pre-determined targeted cash flows. For the year
ended December 31, 2002, 2001 and 2000, Infinity earned cash compensation of
$5,012, $3,983 and $5,022, respectively.
In addition to the base fee and incentive compensation described above, the
Company granted to Infinity 4,000,000 fully vested and non-forfeitable warrants
(2,000,000 warrants with an exercise price of $10.00 per share and 2,000,000
warrants with an exercise price of $12.50 per share) to purchase Company Common
Stock 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 warrants, representing 2,000,000 shares of Common Stock, to the
Company receiving net proceeds aggregating $51,070. In 2001, Infinity sold its
$10.00 warrants, representing 2,000,000 shares of Common Stock, to the Company
receiving net proceeds aggregating $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 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 4,500,000 fully vested and nonforfeitable warrants (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 4,500,000 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.
Of the remaining five warrants to purchase an aggregate of 2,500,000 Common
shares, the exercise price for each of the five warrants will be equal to
approximately 115%, 132%, 152%, 175%, and 201%, respectively, of the average
price of the Company's Common Stock for the 15 trading days prior to January 2,
2004. 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. Additionally, 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.
F-9
WESTWOOD ONE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts)
In connection with the issuance of warrants to Infinity for management services
to be provided to the Company in the future, the Company has 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. Upon commencement of the term of the service period to which the warrants
relate, the Company will amortize the cost of the warrants issued to operations
ratably over the five-year service period.
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) 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 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 2002, the Company incurred expenses aggregating approximately $77,566 for
the representation agreement, affiliation agreements and the purchase of
programming rights from Infinity and affiliates ($77,444 in 2001 and $77,578 in
2000).
NOTE 4 - Property and Equipment:
Property and equipment is recorded at cost and is summarized as follows at:
December 31,
----------------------
2002 2001
---- ----
Land, buildings and improvements...................... $12,859 $12,380
Recording and studio equipment........................ 53,961 51,521
Capitalized leases.................................... 6,723 6,723
Furniture and equipment and other..................... 16,430 16,817
------ ------
89,973 87,441
Less: Accumulated depreciation and amortization...... 36,274 30,663
------ ------
Property and equipment, net.................... $53,699 $56,778
====== ======
Depreciation expense was $7,331 in 2002, $14,579 in 2001, and $13,188 in 2000.
NOTE 5 - Goodwill and Intangible Assets:
The following table provides a reconciliation of reported net income for the
years 2001 and 2000 to net income that would have been reported had SFAS 142
been applied as of January 2000:
Year Ended December 31,
-----------------------
2001 2000
---- ----
Reported net income............................. $43,195 $42,283
Add back goodwill amortization, net of tax...... 44,460 41,671
------ ------
Adjusted net income............................. $87,655 $83,954
====== ======
Net income per share:
Basic -
As reported................................... $.40 $.38
Goodwill amortization, net of tax............. .42 .38
---- ----
As adjusted................................... $.82 $.76
==== ====
Diluted -
As reported................................... $.38 $.36
Goodwill amortization, net of tax............. .40 .36
---- ----
As adjusted................................... $.78 $.72
==== ====
F-10
WESTWOOD ONE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts)
At December 31, 2002, the Company's amortizable assets gross value was
approximately $28,538 with accumulated amortization of approximately $18,891
($29,338 and $17,290 , respectively at December 31, 2001). Amortization expense
for fiscal 2002 was $2,401 ($3,158 and $2,921 in 2001 and 2000, respectively).
The Company's estimated aggregate amortization expense for fiscal year 2003,
2004, 2005, 2006 and 2007 are $1,830, $1,820, $1,121, $575, and $575,
respectively.
NOTE 6 - Debt:
Long-term debt consists of the following at:
December 31,
-----------------------
2002 2001
---- ----
Revolving Credit Facility/Term Loan.................. $ 30,000 $152,000
4.64% Senior Unsecured Notes
due on November 30, 2009........................... 50,000 -
5.26% Senior Unsecured Notes
due on November 30, 2012........................... 150,000 -
Fair market value of Swap (a)........................ 2,135 -
------- --------
Total Long-term Debt......................... $232,135 $152,000
======== ========
(a) write-up due to market value adjustments for debt with qualifying
hedges that are recorded as debt on the balance sheet at December 31,
2002.
The Company's amended senior loan agreement with a syndicate of banks, led by
Chase Manhattan Bank, provides for an unsecured $235,000 revolving credit
facility at December 31, 2002 and an unsecured term loan, which was repaid in
its entirety in 2002 (the "Facility"). The Facility is available until September
30, 2004, however, the facility contains provisions which require mandatory
reductions in the amount of the facility starting in September 1999 ($7,500 per
quarter in 2003). At December 31, 2002, the Company had available borrowings
under the Facility of $205,000 ($147,000 at December 31, 2001). Interest 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. At December 31,
2002, the applicable margin was LIBOR plus .50% -.625%. At December 31, 2002,
the Company had borrowed $30,000 under the revolving credit facility at a
weighted-average interest rate of 1.91% (including the applicable margin). At
December 31, 2001, the Company had borrowed $112,000 under the revolving credit
facility and $47,500 under the term loan at a weighted-average interest rate of
2.74% (including the applicable margin). The Facility contains covenants
relating to dividends, liens, indebtedness, capital expenditures and interest
coverage and leverage ratios.
On December 3, 2002, the Company issued, through a private placement, $150,000
of ten-year Senior Unsecured Notes dues 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
senior bank loan agreement. 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, 2002, are
as follows (excludes market value adjustments):
Year
----
2003......................... $ -
2004......................... 30,000
2005......................... -
2006......................... -
2007......................... -
2008 and thereafter.......... 200,000
-------
$230,000
========
F-11
WESTWOOD ONE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts)
NOTE 7 - 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 hedging 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, 2002 the Company had the following interest rate swaps:
Interest Rate
Notional Principal ------------------ Variable
Maturity Dates Amount Paid Received Rate Index
- -------------- ------------------ ----- -------- ----------
November 2009 $25,000 1.4225% 3.907% 3 Month LIBOR
November 2012 $25,000 1.4225% 4.410% 3 Month LIBOR
November 2012 $50,000 1.4225% 4.535% 3 Month Libor
The estimate fair value of the Company's interest rate swaps at December 31,
2002 was $2,135.
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, 2002 and 2001, 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, 2002 December 31, 2001
----------------- -----------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- ----- -------- -----
Borrowings (Short and Long Term) $ 230,000 $ 234,270 $159,500 $ 159,500
Risk management contracts:
Interest rate swaps 2,135 2,135 - -
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, 2002, due to the wide variety of customers and markets in
which the Company operates.
NOTE 8 - 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 3, 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.
F-12
WESTWOOD ONE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts)
During 2002, Infinity sold their $12.50 warrants to the Company for cash
consideration of $51,070. During 2001, Infinity sold their $10.00 warrants to
the Company for cash consideration of $41,350. The purchase of the warrants
during 2002 and 2001 has 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 3).
The Company effected a two-for-one split of its Common Stock and Class B Stock
on March 22, 2000.
NOTE 9 - Stock Options:
The Company has stock option plans established 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, 2002. 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.
The Company applies APB 25 and related interpretations in accounting for its
plans. Accordingly, no compensation expense has been recognized for its stock
option plans. 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 by approximately $8,444 ($.08 per basic and
diluted share) in 2002, $7,168 ($.07 per basic share and $.06 per diluted share)
in 2001 and $5,709 ($.05 per basic and diluted share) in 2000. The weighted
average fair value of the options granted in 2002, 2001 and 2000 is estimated at
$11.46, $12.56 and $15.46, respectively, on the date of grant using the
Black-Scholes option pricing model with the following weighted average
assumptions:
2002 2001
---- ----
Weighted Average Risk Free Interest Rate 3.4% 6.0%
Expected Life (InYears)...................... 5 5
Expected Volatility.......................... 29.0% 61.9%
Expected Dividend Yield...................... - -
Expected Forfeitures Per Year................ 3.7% 4.1%
Information concerning options outstanding under the Plan is as follows for:
2002 2001 2000
---- ---- ----
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ ----- ------ ----- ------ -----
Outstanding at beginning
of period......................... 11,089,934 $16.01 13,522,288 $14.03 13,242,758 $11.39
Granted during the period........... 1,272,500 $35.79 1,181,500 $22.30 1,929,000 $29.00
Exercised during the period......... (2,505,674) $12.21 (3,325,718) $ 9.81 (1,402,136) $ 9.79
Forfeited during the period......... (414,430) $23.43 (288,136) $20.21 (247,334) $13.71
------- ------- -------
Outstanding at end of period........ 9,442,330 $19.40 11,089,934 $16.01 13,522,288 $14.03
========= ========== ==========
Available for new stock
Options at end of period............ 3,133,200 4,002,500 5,037,000
========= ========= =========
At December 31, 2002, options to purchase 5,457,130 shares of Common Stock were
currently exercisable at a weighted average exercise price of $14.01.
F-13
WESTWOOD ONE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts)
The following table contains additional information with respect to options at
December 31, 2002:
Remaining
Weighted Weighted
Average Average
Number of Exercise Contractual
Options Price Life (In Years)
--------- --------- ---------------
Options Outstanding at Exercise Price Ranges of:
$ 1.07 - $ 5.34........................... 951,160 $ 5.26 1.9
$ 7.25 - $11.55........................... 1,037,244 $ 8.78 4.4
$12.54 - $15.75........................... 3,136,306 $14.16 5.2
$17.25 - $22.57........................... 1,777,070 $21.44 7.6
$30.30 - $38.34........................... 2,540,550 $34.05 8.5
---------
9,442,330 $19.40 6.1
=========
NOTE 10 - Income Taxes:
The components of the provision for income taxes follows:
Year Ended December 31,
-------------------------------
Current 2002 2001 2000
Federal.............. $52,982 $40,490 $30,688
State................ 3,600 (481) 7,253
------ ------ ------
56,582 40,009 37,941
------- ------- -------
Deferred
Federal.............. 5,705 5,107 12,167
State................ 650 448 977
----- ----- ------
6,355 5,555 13,144
----- ----- ------
Income Tax............. $62,937 $45,564 $51,085
======= ======= =======
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,
----------------------
2002 2001
Deferred tax liabilities: ---- ----
Goodwill, intangibles and other................. $31,246 $27,340
Property and equipment........................... 2,100 838
Other........................................... 619 1,114
------ ------
Total deferred tax liabilities.................. 33,965 29,292
------ ------
Deferred tax assets:
Allowance for doubtful accounts.................. 4,121 3,159
Accrued expenses and other....................... 2,613 5,010
------ ------
Total deferred tax assets........................ 6,734 8,169
------ ------
Net deferred tax liabilities........................ 27,231 21,123
Net deferred tax asset - current.................... 3,502 2,045
------ ------
Net deferred tax liability - long-term.............. $30,733 $23,168
======= =======
F-14
WESTWOOD ONE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts
effective income tax rate follows:
Year Ended December 31,
------------------------
2002 2001 2000
---- ---- ----
Federal statutory rate................ 35.0% 35.0% 35.0%
State taxes net of federal benefit.... 1.6 - 3.3
Nondeductible amortization of
intangible assets................... - 16.3 16.4
---- ---- ----
Effective tax rate.................... 36.6% 51.3% 54.7%
==== ==== ====
In 2002, 2001 and 2000, $39,245, $32,901 and $9,734 respectively, of income tax
benefits attributable to employee stock and warrant transactions were allocated
to shareholders' equity.
NOTE 11 - 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, 2002 and
thereafter, are set forth below:
Leases
--------------------
Year Capital Operating Other Total
- ---- ------- --------- ----- -----
2003........ $ 960 $ 7,790 $ 71,929 $ 80,679
2004........ 960 7,065 70,980 79,005
2005........ 960 6,230 47,317 54,507
2006........ 960 6,105 45,001 52,066
2007........ 960 5,382 39,829 46,171
Thereafter.. 3,520 11,922 63,769 79,211
----- ------ ------- -------
$8,320 $44,494 $338,825 $391,639
====== ======= ======== ========
The present value of net minimum payments under capital leases was $6,348 at
December 31, 2002.
NOTE 12 - Supplemental Cash Flow Information:
Supplemental information on cash flows, is summarized as follows:
Year Ended December 31,
----------------------------
2002 2001 2000
---- ---- ----
Cash paid for:
Interest................... $5,687 $ 8,473 $11,017
Income taxes............... 8,561 8,403 28,569
The Company had certain non-cash investing and financing activities in 2002 and
2001. 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. During 2001,
$6,723 of lease assets and obligations were capitalized.
F-15
WESTWOOD ONE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts
NOTE 13 - 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, 2002 and
2001.
(In thousands, except per share data)
First Second Third Fourth For the
Quarter Quarter Quarter Quarter Year
------- ------- ------- ------- -------
2002
----
Net revenues............. $126,296 $140,812 $133,829 $149,814 $550,751
Operating income......... 29,323 49,736 43,480 56,358 178,897
Net income............... 17,443 30,474 26,702 34,496 109,115
Net income per share:
Basic.................. $.16 $.29 $.25 $.33 $1.03
Diluted ............... .16 .28 .25 .32 1.00
2001
----
Net revenues............. $121,569 $133,684 $123,983 $136,704 $515,940
Operating income......... 12,310 28,007 23,111 34,965 98,393
Net income............... 4,600 12,132 10,181 16,282 43,195
Net income per share:
Basic.................. $0.04 $0.11 $0.10 $0.15 $0.40
Diluted................ 0.04 0.11 0.09 0.15 0.38
Note:Net income and net income per share amounts are not comparable
between periods due to the Company's adoption of SFAS 142 on January
1, 2002.
F-16
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
------------ ---------------- -------------- ----------------- ----------
2002 $9,282 $6,379 - $(3,904) $11,757
2001 9,356 1,968 - (2,042) 9,282
2000 7,714 12,112 - (10,470) 9,356
F-17