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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, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to ______
Commission file number 0-13020
WESTWOOD ONE, INC.
(Exact name of registrant as specified in its charter)
Delaware 95-3980449
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
40 West 57th Street 10019
New York, NY (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (212) 641-2000
Securities Registered Pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
Common Stock, par value [$0.01] New York Stock Exchange
per share
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. [X ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes X No ___
The aggregate market value of Common Stock held by non-affiliates of the
registrant was approximately $2.88 billion based on the last reported sales
price of the registrant's Common Stock on June 30, 2003 and assuming solely for
the purpose of this calculation that all directors and officers of the
registrant are "affiliates." The determination of affiliate status is not
necessarily a conclusive determination for other purposes.
As of March 1, 2004, 98,559,367 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 derives substantially all of its revenues from the sale of :10
second, :30 second and :60 second commercial airtime to advertisers. The Company
obtains the commercial airtime it sells to advertisers from radio and television
affiliates in exchange for the programming it provides to them and in some
cases, for cash compensation. That commercial airtime is sold to local/regional
advertisers (typically :10 second commercial airtime) and to national
advertisers (typically :30 or :60 second commercial airtime). By purchasing
commercial airtime from the Company, advertisers are able to have their
commercial messages broadcast on radio and television stations throughout the
United States, reaching demographically defined listening audiences.
The Company provides local traffic and information broadcast reports in over 95
Metro Survey Area markets (referred to herein as MSA markets) in the United
States. The Company also offers radio stations traditional news services,
including CBS Radio news and CNN Radio news, in addition to seven 24-hour
satellite-delivered continuous play music formats ("24/7 Formats") and weekday
and weekend news and entertainment features and programs. These programs
include: major sporting events, including the National Football League, Notre
Dame football and other college football and basketball games, the National
Hockey League, the Masters and the Olympics, live, personality intensive talk
shows, live concert broadcasts, countdown shows, music and interview programs;
and exclusive satellite simulcasts with cable networks.
Westwood One is managed by Infinity Broadcasting Corporation ("Infinity"), a
wholly-owned subsidiary of Viacom Inc, pursuant to a management agreement
between the Company and Infinity which expires on March 31, 2009 (the
"Agreement" or "Management Agreement").
Industry Background
Radio Broadcasting
There are approximately 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 attracts advertisers that are targeting that
audience demographic. There are many formats from which a station may select,
including news, talk, sports and various types of music and entertainment
programming.
A radio station has two principal ways of effectively competing for revenues.
First, it can differentiate itself in its local market by selecting and
successfully executing a format targeted at a particular audience thus enabling
advertisers to place their commercial messages on stations aimed at audiences
with certain demographic characteristics. A station can also broadcast special
programming, syndicated shows, sporting events or national news products, such
as those supplied by Westwood One, not available to its competitors within its
format. National programming broadcast on an exclusive geographic basis can help
differentiate a station within its market, and thereby enable a station to
increase its audience and advertising revenue.
Radio Advertising
Radio advertising time can be purchased on a local, regional or national basis.
Local and regional purchases allow an advertiser to select specific radio
stations in chosen geographic markets for the broadcast of commercial messages.
Local and regional purchases are typically best suited for an advertiser whose
business or ad campaign is in a specific geographic area. Advertising purchased
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from a radio network allows an advertiser to target its commercial messages to a
specific demographic audience, nationally on a cost-efficient basis. In
addition, an advertiser can choose to emphasize its message in a certain market
or markets by supplementing a national purchase with local and/or regional
purchases.
To verify its network audience delivery and demographic composition, specific
measurement information is available to advertisers from independent rating
services such as Arbitron and their RADAR rating service. The rating service
provides demographic information such as the age and gender composition of the
listening audiences. Consequently, advertisers can verify that their
advertisements are being heard by their target listening audience.
Business Strategy/Services
The Company's business strategy is to provide for the programming needs of radio
stations by supplying to radio stations programs and services that individual
stations may not be able to produce on their own on a cost effective basis. The
Company offers radio stations traffic and news information as well as a wide
selection of regularly scheduled and special event syndicated programming and
24/7 Formats. The information, programs and formats are produced by the Company
and, therefore, the stations typically have virtually no production costs. With
respect to the Company's programs and formats, each program or format is offered
for broadcast by the Company exclusively to one station in its geographic
market, which assists the station in competing for audience share in its local
marketplace. In addition, except for news programming, Westwood One's programs
contain available commercial airtime that the stations may sell to local
advertisers. Westwood One typically distributes promotional announcements to the
stations and occasionally places advertisements in trade and consumer
publications to further promote the upcoming broadcast of its programs.
In 1996, the Company expanded its product offerings to include providing local
traffic, news, sports and weather programming to radio stations and other media
outlets in selected cities across the United States. This expansion gave the
Company's advertisers the ability to easily supplement their national purchases
with local and regional purchases from the Company. It also allowed the Company
to develop relationships with local and regional advertisers. In 1996 and 1998,
the Company acquired the operating assets of Shadow Traffic in a total of 14
major metropolitan markets (4 in 1996 and 10 in 1998). In 1999, Westwood One
significantly expanded its local and regional reach through its merger with the
country's largest traffic service provider, Metro, which broadcast information
reports in 67 of the 75 largest MSA markets in the United States. Since then,
the Company has expanded its reach to more than 95 of the 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.
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 in exchange
for the stations receiving the right to broadcast the formats. Radio stations in
the top 200 national markets typically 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.
Local Traffic and Information Programming
The Company, through its Traffic and Information Division, provides traffic
reports and local news, weather and sports information programming to radio and
television affiliates.
The Company gathers traffic and other data utilizing the Company's
information-gathering infrastructure, which includes aircraft (helicopters and
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airplanes), broadcast-quality remote camera systems positioned at strategically
located fixed positions and on aircraft, mobile units and wireless systems, and
by accessing various government-based traffic tracking systems. The Company also
gathers information from various third-party news and information services. The
information is processed, converted into broadcast copy and entered into the
Company's computer systems by the Company's local writers and producers. This
permits the Company to easily resell the information to third parties for
distribution through the internet, wireless devices or 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 become
integral "personalities" on such affiliate stations as a result of their
significant on-air presence and interaction with the stations' on-air personnel.
In order to realize operating efficiencies, the Company endeavors to utilize its
professional on-air talent on multiple affiliate stations within a particular
market.
The Company believes that its extensive fleet of aircraft and other
information-gathering technology and broadcast equipment have allowed the
Company to provide high quality programming, enabling it to retain and expand
its affiliate base. In the aggregate, the Company utilizes approximately: 125
helicopters and fixed-wing aircraft; 30 mobile units; 30 airborne camera
systems; 125 fixed-position camera systems; 70 broadcast studios; and 1,400
broadcasters and producers. The Company also maintains a staff of computer
programmers and graphics experts to supply customized graphics and other visual
programming elements to television station affiliates. In addition, the
Company's operations centers and broadcast studios have sophisticated computer
technology, video and broadcast equipment and cellular and wireless technology,
which enables the Company's on-air talent to deliver reports to its affiliates.
The infrastructure and resources dedicated to a specific market by the Company
are determined by the size of the market, the number of affiliates the Company
serves in the market and the type of services being provided.
The Company generally does not require its affiliates to identify the Company as
the supplier of its information reports. This provides the Company's affiliates
with a high degree of customization and flexibility, as each affiliate has the
right to present the information reports provided by the Company as if the
affiliate had generated the reports with its own resources.
As a result of its extensive network of operations and talent, the Company
regularly reports breaking and important news stories and provides its
affiliates with live coverage of these stories. The Company is able to customize
and personalize its reports of breaking stories using its individual affiliates'
call letters from the scene of news events. Past examples have included, among
others, providing live airborne coverage of the September 11 terrorist attack on
the World Trade Center and the Seattle earthquake. By using our news
helicopters, the Company feeds live video to television affiliates around the
country. Moreover, by leveraging our infrastructure, the same reporters provide
live customized airborne reports for the Company's radio affiliates via the
Company's Metro Source service, which is described below. The Company believes
that it is the only radio network news organization that has local studio
operations that cover in excess of 95 markets and that is able to provide
customized reports to these markets.
Metro Source, an information service available to subscribing affiliates, is an
information system and digital audio workstation that allows the Company's news
affiliates to receive via satellite and view, write, edit and report the latest
news, features and show preparation material. With this product, the Company
provides continuously updated and breaking news, weather, sports, business and
entertainment information to its affiliate stations which have subscribed to the
service. Information and content for Metro Source is primarily generated from
the Company's staff of news bureau chiefs, state correspondents and professional
news writers and reporters.
Local, regional and national news and information stories are fed to the
Company's national news operations center in Phoenix, Arizona where the
information is verified, edited, produced and disseminated via satellite to the
Company's internal Metro Source workstations located in each of its operations
centers and to workstations located at affiliate radio stations nationwide.
Metro Source includes proprietary software that allows for customizing reports
and editing in both audio and text formats. The benefit to stations is that
Metro Source allows them to substantially reduce time and cost from the news
gathering and editing process at the station level, while providing greater
volume and quality news and information coverage from a single source.
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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. 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
through numerous delivery mechanisms, including the internet, paging, FM
subcarrier, traditional cellular and newly-developed and evolving wireless
systems. Information can be delivered to a wide array of devices including
pagers, computers, and in-vehicle navigation and information systems.
National Radio Programming
The Company produces and distributes 24/7 Formats, regularly scheduled and
special syndicated programs, including exclusive live concerts, music and
interview shows, national music countdowns, lifestyle short features, news
broadcasts, talk programs, sporting events, and sports features.
The Company controls most aspects of the production of its programs, thereby
being able to tailor its programs to respond to current and changing listening
preferences. The Company produces regularly scheduled short-form programs
(typically five minutes or less), long-form programs (typically 60 minutes or
longer) and 24/7 Formats. Typically, the short-form programs are produced at the
Company's in-house facilities located in Culver City, California, and New York,
New York. The long-form programs include shows produced primarily at the
Company's in-house production facilities and recordings of live concert
performances and sports events made on location. The 24/7 Formats are produced
at the Company's facilities in Valencia, California.
Westwood One also produces and distributes special event syndicated programs. In
2003, the Company produced and distributed numerous special event programs,
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including exclusive radio broadcasts of The Grammy Awards, VH-1's 2003 Rock &
Roll Hall of Fame Induction, the Academy of Country Music Award, MTV Music
Awards and the BET Awards, among others.
Westwood One obtains most of the programming for its concert series by recording
live concert performances of prominent recording artists. The agreements with
these artists often provide the exclusive right to broadcast the concerts
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.
Advertising Sales and Marketing
The Company packages its radio commercial airtime on a network basis, covering
all affiliates in relevant markets, either locally, regionally or nationally.
This packaged airtime typically appeals to advertisers seeking a broad
demographic reach. Because the Company generally sells its commercial airtime on
a network basis rather than station-by-station, the Company does not compete for
advertising dollars with its local radio station affiliates. The Company
believes that this is a key factor in maintaining its affiliate relationships.
The Company packages its television commercial airtime on a local regional and
national network basis. The Company has developed a separate sales force to sell
its television commercial airtime and to optimize the efforts of the Company's
national internal structure of sales representatives. The Company's advertising
sales force is comprised of approximately 300 sales representatives.
In most of the markets in which the Traffic and Information Division conducts
operations, the Company maintains an advertising sales office as part of its
operations center. The Company's advertising sales force is able to sell
available commercial airtime in any and all of the Company's markets in addition
to selling such airtime in each local market, which the Company believes affords
its sales representatives an advantage over certain of its competitors. For
example, an airline advertiser can purchase sponsorship advertising packages in
multiple markets from the Company's local sales representative in the city in
which the airline is headquartered.
The Company's typical radio advertisement for traffic and information
programming consists of an opening announcement and a ten-second commercial
message presented immediately prior to, in the middle of, or immediately
following a regularly scheduled information report. Because the Company has
numerous radio station affiliates in each of its markets (averaging
approximately 25 affiliates per market), the Company believes that its traffic
and information broadcasts reach more people, more often, in a higher impact
manner than can be achieved using any other advertising medium. The Company
combines its commercial airtime into multiple "sponsorship" packages which it
then sells as an information sponsorship package to advertisers throughout its
networks on a local, regional or national basis, primarily during morning and
afternoon drive periods. The Company generally does not allow an advertiser to
select individual stations from its networks on which to run its advertising
campaign.
The Company believes that the positioning of advertisements within or adjacent
to its information reports appeals to advertisers because the advertisers'
messages are broadcast along with regularly scheduled programming during peak
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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 that the Company packages and
sells on a regional and national basis. The amount and placement of the
commercial airtime that the Company receives from television stations varies by
market and the type of service provided by the Company. As the Company has
provided enhanced television video services, it has been able to acquire more
valuable commercial airtime. The Company believes that it offers advertisers
significant benefits because, unlike traditional television networks, the
Company often delivers more than one station in major markets and advertisers
may select specific markets.
The Company has established a morning TV news network for its advertisers'
commercials to air during local news programming and local news breaks from 5:30
a.m. to 9:00 a.m. Because the Company has affiliated a large number of network
television stations in major markets, its morning news network delivers a
significant national household rating in an efficient and compelling local news
environment. As the Company continues to expand its service offerings for local
television affiliates, it plans to create additional news networks to leverage
its television news gathering infrastructure.
Competition
In the MSA markets in which it operates, the Company competes for advertising
revenue with local print and other forms of communications media including
magazines, outdoor advertising, network radio and network television
advertising, transit advertising, direct response advertising, yellow page
directories, internet/new media and point-of-sale advertising. Although the
Company is significantly larger than the next largest provider of traffic and
local information services, there are several multi-market operations providing
local radio and television programming services in various markets. In addition,
the recent consolidation of the radio industry has created opportunities for
large radio groups, such as Clear Channel Communications, to gather information
on their own.
In marketing its programs to national advertisers, the Company directly competes
with other radio networks as well as with independent radio syndication
producers and distributors. More recently, as a result of consolidation in the
radio industry, companies owning large groups of stations have begun to create
competing networks that have resulted in additional competition for network
radio advertising expenditures. In addition, the Company competes for
advertising revenue with network television, cable television, print and other
forms of communications media. The Company believes that the quality of its
programming and the strength of its station relations and advertising sales
forces enable it to compete effectively with other forms of communication media.
Westwood One markets its programs to radio stations, including affiliates of
other radio networks, that it believes will have the largest and most desirable
listening audience for each of its programs. The Company often has different
programs airing on a number of stations in the same geographic market at the
same time. The Company believes that in comparison with any other independent
radio syndication producer and distributor or radio network it has a more
diversified selection of programming from which national advertisers and radio
stations may choose. In addition, the Company both produces and distributes
programs, thereby enabling it to respond more effectively to the demands of
advertisers and radio stations.
The increase in the number of program formats has led to increased competition
among local radio stations for audience. As stations attempt to differentiate
themselves in an increasingly competitive environment, their demand for quality
programming available from outside programming sources increases. This demand
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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 information services, is generally not subject
to regulation by the FCC. The Traffic and Information Division utilizes FCC
regulated two-way radio frequencies pursuant to licenses issued by the FCC.
Employees
On February 1, 2004, Westwood One had approximately 2,500 employees, including
an advertising sales force of approximately 300 people and 800 part-time
employees. In addition, the Company maintains continuing relationships with
approximately 175 independent writers, program hosts, technical personnel and
producers. Approximately 600 of the Company's employees are covered by
collective bargaining agreements. The Company believes relations with its
employees, unions, and independent contractors are satisfactory.
Available Information
We are a Delaware corporation. We re-incorporated in Delaware on June 21, 1985.
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, which
houses the syndicated program production facilities and a 14,000 square-foot
building in Culver City, California, which contains administrative, and sales
and marketing offices. The Company also owns a 10,000 square-foot building
adjacent to its administrative and sales and marketing 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, 2003.
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PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
On March 1, 2004 there were approximately 219 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 2003 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.
2003 High Low
---- ---- ---
First Quarter $39.15 $29.60
Second Quarter 35.56 31.05
Third Quarter 33.73 29.30
Fourth Quarter 34.40 29.60
2002
----
First Quarter $40.00 $28.80
Second Quarter 39.73 32.46
Third Quarter 37.04 25.66
Fourth Quarter 38.98 31.72
The last sales price for our Common Stock on the NYSE on March 10, 2004 was
$29.76.
The Company does not intend to pay cash dividends. No cash dividend was paid on
the Company's stock during 2003 or 2002, and the payment of dividends may be
restricted by the terms of its loan agreements.
There is no established public trading market for our Class B Stock. However,
the Class B Stock is convertible to Common Stock on a share-for-share basis.
Equity Compensation Plan Information
The following table contains information regarding equity compensation plans and
warrants issued to Infinity as of December 31, 2003:
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
Options (1) 10,319,549 $21.27 1,653,600
Warrants (2) 4,500,000 49.44 N/A
Equity compensation plans not
Total 14,819,549 1,653,600
(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 seven warrants issued, two warrants to
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purchase an aggregate of 2,000,000 shares of Common Stock each have an
exercise price of $43.11 and $48.36, respectively, and become exercisable
only if the average price of the Company's Common Stock reaches a price of
$64.67 and $77.38, respectively, for at least 20 out of 30 consecutive
trading days for any period throughout the ten year term of the warrants.
Of the remaining five warrants to purchase an aggregate of 2,500,000 shares
of Common Stock, the exercise price for each of the five warrants is equal
to $38.87, $44.70, $51.40, $59.11, and $67.98, respectively. The five
warrants have a term of 10 years (only if they become exercisable) and
become exercisable on January 2, 2005, 2006, 2007, 2008, and 2009,
respectively. However, in order for the warrants to become exercisable, the
average price of the Company's Common Stock for each of the 15 trading days
prior to January 2 of such year (commencing on January 2, 2005 with respect
to the first 500,000 warrant tranche and each January 2 thereafter for each
of the remaining four warrants) must be at least equal to both the exercise
price of the warrant and 120% of the corresponding prior year 15 day
trading average. In the case of the $38.87 warrants, the Company's average
stock price for the 15 trading days prior to January 2, 2005 must equal or
exceed $40.56 for the warrants to become exercisable.
Item 6. Selected Financial Data
(In thousands except per share data)
2003 (1) 2002 (1) 2001 2000 1999 (2)
---- ---- ---- ---- ----
OPERATING RESULTS FOR YEAR
ENDED DECEMBER 31:
Net Revenues $539,226 $550,751 $515,940 $553,693 $358,305
Operating and Corporate Costs, Excluding
Depreciation and Amortization 357,688 360,390 349,936 388,095 267,294
Depreciation and Amortization 11,513 11,464 67,611 62,104 30,214
Operating Income 170,025 178,897 98,393 103,494 60,797
Net Income $100,039 $109,115 $43,195 $42,283 $23,887
Income Per Basic Share $.99 $ 1.03 $.40 $.38 $.33
Income Per Diluted Share $.97 $ 1.00 $.38 $.36 $.30
BALANCE SHEET DATA AT
DECEMBER 31:
Current Assets $165,495 $153,628 $140,527 $ 153,881 $167,848
Working Capital 85,622 63,542 35,012 15,679 39,843
Total Assets 1,262,034 1,266,312 1,210,017 1,285,556 1,333,153
Long-Term Debt 300,366 232,135 152,000 168,000 158,000
Total Shareholders' Equity 835,950 903,040 915,371 949,892 1,019,775
(1) Results for the years ended December 31, 2003 and 2002 include the effects
of adopting Statement of Financial Accounting Standards No. 142 "Goodwill
and Other Intangible Assets" ("SFAS 142"). Retroactive application prior to
January 1, 2002 was prohibited.
(2) Results for the year ended December 31, 1999 include the results of Metro
from the date of the merger on September 22, 1999.
- -- No cash dividend was paid on the Company's Common Stock during the periods
presented above.
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Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations (In thousands except for share and per share amounts)
EXECUTIVE OVERVIEW
Westwood One supplies radio and television stations with information services
and programming. The Company is the largest domestic outsource provider of
traffic reporting services and the nation's largest radio network, producing and
distributing national news, sports, talk, music and special event programs, in
addition to local news, sports, weather, video news and other information
programming. The commercial airtime that we sell to our advertisers is acquired
from radio and television affiliates in exchange for our programming, content,
information, and in certain circumstances, cash compensation.
The radio broadcasting industry has experienced a significant amount of
consolidation in recent years. As a result, certain major radio station groups,
including Infinity and Clear Channel Communications, have emerged as powerful
forces in the industry. Westwood One is managed by Infinity under a Management
Agreement, which expires on March 31, 2009. While Westwood One provides
programming to all major radio station groups, the Company has affiliation
agreements with most of Infinity's owned and operated radio stations, which in
the aggregate, provide the Company with a significant portion of the audience
that it sells to advertisers. Accordingly, the Company's operating performance
could be materially adversely impacted by its inability to continue to renew its
affiliate agreements with Infinity stations.
The Company derives substantially all of its revenues from the sale of :10
second, :30 second and :60 second commercial airtime to advertisers. Our
advertisers who target local/regional audiences generally find the most
effective method is to purchase shorter duration :10 second advertisements,
which are principally correlated to traffic and information related programming
and content. Our advertisers who target national audiences generally find the
most cost effective method is to purchase longer :30 or :60 second
advertisements, which are principally correlated to news, talk, sports and music
and entertainment related programming and content. Generally, the greater amount
of programming we provide our affiliates the greater amount of commercial
airtime is available for the Company to sell. Additionally, over an extended
period of time an increase in the listening audience results in our ability to
generate more revenues. Our goal is to maximize the yield of our available
commercial airtime to optimize revenues.
In managing our business, we develop programming and exploit the commercial
airtime by concurrently taking into consideration the demands of our advertisers
on both a market specific and national basis, the demands of the owners and
management of our radio station affiliates, and the demands of our programming
partners and talent. Our continued success and prospects for growth are
dependent upon our ability to manage the aforementioned factors in a cost
effective manner. Our results may also be impacted by overall economic
conditions, trends in demand for radio related advertising, competition, and
risks inherent in our customer base, including customer attrition and our
ability to generate new business opportunities to offset any attrition.
There are a variety of factors that influence the Company's revenues on a
periodic basis including but not limited to: (i) economic conditions and the
relative strength or weakness in the United States economy, (ii) advertiser
spending patterns and the timing of the broadcasting of our programming,
principally the seasonal nature of sports programming, (iii) advertiser demand
on a local/regional or national basis for radio related advertising products,
(iv) increases or decreases in our portfolio of program offerings and related
audiences, including changes in the demographic composition of our audience base
and (v) competitive and alternative programs and advertising mediums.
Our ability to specifically isolate the relative historical aggregate impact of
price and volume is not practical as commercial airtime is sold and managed on
an order-by-order basis. It should be noted, however, that the Company closely
monitors advertiser commitments for the current calendar year, with particular
emphasis placed on the next three month period. Factors impacting the pricing of
commercial airtime include, but are not limited to: (i) the dollar value, length
and breadth of the order, (ii) the desired reach and audience demographic, (iii)
the level of commercial airtime available for the desired demographic requested
by the advertiser for sale at the time their order is negotiated; and (iv) the
proximity of the date of the order placement to the desired broadcast date of
the commercial airtime. Our commercial airtime is perishable, and accordingly,
our revenues are significantly impacted by the commercial airtime available at
the time we enter into an arrangement with an advertiser.
The principal critical components of our operating expenses are programming,
production and distribution costs (including affiliate compensation and
broadcast rights fees), selling expenses (including bad debt expenses,
commissions and promotional expenses), depreciation and amortization, and
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corporate, general and administrative expenses. Corporate general and
administrative expenses are primarily comprised of costs associated with the
Infinity Management Agreement, personnel costs and other administrative
expenses, including those associated with new corporate governance regulations.
We consider the Company's operating cost structure to be predominantly fixed in
nature, and as a result, the Company needs at least several months lead-time to
make reductions in its cost structure to react to what it believes are more than
temporary declines in advertiser demand. This factor is important in predicting
the Company's performance in periods when advertiser revenues are increasing or
decreasing. In periods where advertiser revenues are increasing, the fixed
nature of a substantial portion of our costs means that Operating Income will
grow faster than the related growth in revenue. Conversely, in a period of
declining revenue Operating Income will decrease by a greater percentage than
the decline in revenue because of the lead-time needed to reduce the Company's
operating cost structure. Furthermore, if the Company perceives a decline in
revenue to be temporary, it may choose not to reduce its fixed costs, or may
even increase its fixed costs, so as to not limit its future growth potential
when the advertising marketplace rebounds.
Revenues
Revenues presented by type of commercial advertisements are as follows for the
years ending December 31,:
2003 2002 2001
---- ---- ----
$ % of Total $ % of Total $ % of Total
- ---------- - ---------- - ----------
Local/Regional $283,687 53% $302,554 55% $290,760 56%
National 255,539 47% 248,197 45% 225,180 44%
-------- ---- -------- ---- -------- ----
Total (1) $539,226 100% $550,751 100% $515,940 100%
======== ==== ======== ==== ======== ====
(1) As described above, the Company currently aggregates revenue data based on
the type of commercial airtime sold. A number of advertisers purchase both
local/regional and national commercial airtime. Accordingly, this factor
should be considered in evaluating the relative revenues generated on a
local/regional versus national basis. Our objective is to optimize total
revenues from those advertisers.
Revenues for the year ended December 31, 2003 decreased $11,525, or 2%, compared
with the year ended December 31, 2002. The decrease was due principally to the
absence of approximately $6,000 of revenues recorded in the prior year from the
Company's exclusive 2002 Winter Olympics radio broadcast, an overall reduction
in advertiser demand for our products immediately prior to and concurrent with
the commencement of the war with Iraq, weaker relative demand in certain
local/regional markets, reduced fee based traffic information revenues of
approximately $1,000 due to the expiration of certain contracts, partially
offset by approximately $7,000 of incremental revenues attributable to new
programming developed to reach national audiences.
During the year ended December 31, 2003, revenues aggregated from the sale of
local/regional airtime declined approximately 6%, or approximately $18,900,
while national based revenues increased approximately 3%, or $7,300. The
decrease in local/regional revenue was greatest in the northeast and Texas
regions, while revenue in the western region increased. Despite the decrease in
local/regional revenues, the Company continued to invest in new traffic and
information markets.
In 2003, the increase in our aggregated national based revenues was accomplished
through attaining higher revenues in the news and sports programming categories
through adding new sports programming and effective management of our commercial
airtime partially offset by the absence of revenues from the 2002 Winter
Olympics.
Revenues for the year ended December 31, 2002 increased $34,811, or 7%, compared
with the year ended December 31, 2001. The increase in revenue was attributable
to higher advertiser demand and a better economic climate compared with 2001
where the 2001 annual results were adversely affected by the September 11, 2001
terrorist attacks.
During the year ended December 31, 2002, revenues derived from the sale of
local/regional and national airtime increased by approximately 4%, or $11,800,
and 10%, or $23,000, respectively. During 2002, the Company invested in new
traffic and information markets which contributed to revenue growth on a
local/regional level.
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In 2002, the increase in our national based revenues was attributable to the
addition of new programming (approximately $14,600) including the radio
broadcast of the 2002 Winter Olympics as well as a result of the overall
improvement in economic conditions as further discussed above.
We expect our revenues in 2004 to increase compared with 2003, resulting
primarily from an anticipated overall increase in demand for our product
offerings due to higher audience delivery, the Company's exclusive U.S. radio
broadcast of the 2004 Summer Olympics, inventory management initiatives, and the
development of new distribution alternatives for our content.
Operating Costs
Operating costs for the years ended December 31, 2003, 2002 and 2001 were as
follows:
2003 2002 2001
---- ---- ----
$ % of total $ % of total $ % of total
- ---------- - ---------- - ----------
Programming, production and
distribution expenses $227,141 65% $218,646 62% $208,759 61%
Selling expenses 43,059 12% 47,829 14% 45,457 13%
Other operating expenses 80,382 23% 85,910 24% 88,904 26%
-------- ---- -------- ---- -------- ----
$350,582 100% $352,385 100% $343,120 100%
======== ==== ======== ==== ======== ====
Operating costs decreased 1% to $350,582 in 2003 from $352,385 in 2002, and
increased 3% in 2002 from $343,120 in 2001. The 2003 decrease was principally
attributable to approximately $3,200 of proceeds from an insurance settlement
related to claims resulting from the September 11, 2001 terrorist attacks
(included in Other operating expenses in the table above). Excluding this item,
operating costs increased approximately $1,400, or less than 1% in 2003. The net
increase is primarily attributable to: (i) increases in programming, production
and distribution expenses resulting from costs related to the development of new
or expanded program offerings, new traffic and information markets, higher
sports rights fees resulting from both new programming and contractual rate
increases with respect to existing program commitments and additional news costs
to cover the war with Iraq, partially offset by the absence of costs associated
with the Company's broadcast of the 2002 Winter Olympics, (ii) lower Selling
expenses including lower bad debt expense (approximately $2,800), resulting from
the absence of a significant customer's bankruptcy in 2002, and lower employee
related expenses, principally resulting from lower commissions earned by the
Company's sales personnel due to lower revenues and (iii) lower Other operating
expenses due principally to the insurance settlement discussed above.
The 2002 increase in Operating costs was principally attributable to: (i) an
increase in programming, production and distribution expenses resulting from
expenses associated with our radio broadcast of the 2002 Winter Olympics, higher
sports rights fees and the opening of new traffic and information markets,
partially offset by reductions in affiliate compensation and personnel costs,
(ii) higher bad debt expenses resulting from a significant customer's bankruptcy
(approximately $4,400), and lower personnel costs resulting from reductions
and/or changes in sales related staffing levels and commission rates and (iii)
lower other operating expenses due principally to reductions in personnel costs.
We currently anticipate that operating costs will increase in 2004 compared with
2003 due to expenses attributable with the Company's broadcast of the 2004
Summer Olympics, additional investments in our national network audiences and
programs and normal recurring contractual cost increases. In addition, we expect
to make certain continued investments in our sales support functions to support
our planned growth in revenues.
Depreciation and Amortization
Depreciation and amortization increased nominally to $11,513 in 2003 from
$11,464 in 2002, and decreased 83% in 2002 from $67,611 in 2001. 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. As a result of the extension of the Management Agreement with
Viacom - approved by Shareholders on May 29, 2002, starting with the second
quarter of 2004 and through the first quarter of 2009, the Company's quarterly
amortization expense will increase by approximately $2,100. The increase will
result from the higher amortization attributable to the fair market value of the
warrants issued to Infinity as part of the extension of the Management
Agreement.
Corporate General and Administrative Expenses
Corporate general and administrative expenses decreased 11% to $7,106 in 2003
from $8,005 in 2002, and increased 17% in 2002 from $6,816 in 2001. The 2003
decrease was principally attributable to lower compensation expense to Infinity
-12-
as no incentive bonus was earned, partially offset by higher expenses associated
with our corporate governance activities, including fees incurred for
professional services. 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.
We expect our corporate general and administrative costs to increase in 2004
compared with 2003. We expect to incur increased expenses relating to our
compliance and corporate governance activities. Further, we note that our
incentive bonus arrangement with Infinity is variable, contingent upon our
performance.
Operating Income
Operating income decreased 5% to $170,025 in 2003 from $178,897 in 2002, and
increased 82% in 2002 from $98,393 in 2001. The 2003 decrease was principally
attributable to the decline in revenues. 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% in 2002.
Interest Expense
Interest expense was $10,132, $6,955 and $8,705 in 2003, 2002 and 2001,
respectively. The 2003 increase was attributable to higher outstanding debt in
2003 and higher average interest rates as a result of the Company's issuance of
$200,000 in a combination of 7 and 10-year fixed rate Senior Unsecured Notes in
the fourth quarter of 2002. The 2002 decrease was attributable to lower interest
rates, partially offset by higher debt levels resulting from increased share
repurchases. Our average effective interest rate for 2003, 2002 and 2001 was
3.1%, 2.9% and 4.9%, respectively. The increase in the 2003 and 2002 debt levels
results from share and warrant repurchases pursuant to the Company's stock
repurchase program, which is further described below.
We expect that our interest expense will increase in 2004 commensurate with our
anticipated higher average debt levels.
Provision for income taxes
The income tax provisions for 2003, 2002 and 2001 are based on annual effective
tax rates of 37.5%, 36.6% and 51.3%, respectively, resulting in income tax
expense of $59,906, $62,937 and $45,564 in 2003, 2002 and 2001, respectively.
The Company's effective income tax rate in 2003 was slightly higher than in 2002
principally as a result of higher state taxes resulting from recently enacted
tax law changes in the states in which we operate. Both the Company's effective
income tax rates and reported income tax expense in 2002 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, 2003, 2002 and 2001 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 $3,911, $39,245 and $32,901 respectively, which are
credited directly to additional paid in capital.
Net income
Net income in 2003 decreased 8% to $100,039 ($.99 per basic share and $.97 per
diluted share) from $109,115 ($1.03 per basic share and $1.00 per diluted share)
in 2002 and increased 153% in 2002 from $43,195 ($.40 per basic share and $.38
per diluted share) in 2001. 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.
Earnings per share
Weighted averages shares outstanding for purposes of computing basic earnings
per share were 101,243,000, 105,992,000 and 107,551,000 in 2003, 2002 and 2001,
respectively. The decreases in 2003 and 2002 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 103,625,000, 109,101,000 and 112,265,000 in 2003, 2002 and 2001,
respectively. The changes in weighted average diluted shares are due principally
to the decrease in basic shares and the reduction in the dilutive effect of
warrants issued pursuant to the Management Agreement due to the warrant
repurchases in 2002 and 2001.
-13-
Liquidity and Capital Resources
The Company continually projects anticipated cash requirements, which include
share repurchases, acquisitions, capital expenditures, and principal and
interest payments on its outstanding indebtedness. Funding requirements are
financed through cash flow from operations and the issuance of short-term
borrowings and/or long-term debt.
At December 31, 2003, the Company's principal sources of liquidity were its cash
and cash equivalents of $8,665 and available borrowings under its bank facility
which is further described below.
The Company has and continues to expect to generate significant cash flows from
operating activities. For the years ended December 31, 2003, 2002 and 2001, net
cash provided by operating activities were $107,870, $147,618 and $145,673,
respectively. For 2003, net cash from operating activities decreased $39,748
from 2002. The reduction is primarily attributable to an increase in cash taxes
paid resulting from lower tax benefits from the exercise of stock options and
warrants.
At December 31, 2003, the Company had an unsecured $205,000 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").
At December 31, 2003, the Company had available borrowings of $105,000 under its
Facility ($205,000 at December 31, 2002). The amount of the Facility was
scheduled to be reduced by $10,000 at the end of each quarter during 2004 until
it matured on September 30, 2004. In March 2004, the Company refinanced its
existing Facility, obtaining a five-year $120,000 term loan, which was fully
borrowed on the closing date and the proceeds of which were used to repay
outstanding borrowings under the Facility, and a five-year $180,000 revolving
credit facility (collectively the "New Facility"). The terms of the New Facility
are substantially the same as those contained in the Company's existing
Facility, with the exception that the New Facility does not contain any
provisions with respect to mandatory reductions. In addition, the Company has
entered into, fixed to floating interest rate swap agreements for 50% of the
notional amount of the Notes. The New Facility and/or Notes contain covenants
relating to dividends, liens, indebtedness, and interest coverage and leverage
ratios. None of these covenants are expected to have an impact on the Company's
ability to operate and manage its business.
In conjunction with the Company's objective of enhancing shareholder value, the
Company's Board of Directors has authorized a stock repurchase program. In 2003,
the Company purchased 5,534,000 shares of the Company's Common Stock for a total
cost of $180,412. In 2002, the Company purchased approximately 7,414,000 shares
of the Company's Common Stock and warrants for a total cost of $239,407 and in
2001, purchased approximately 6,152,000 shares of the Company's Common Stock and
warrants for a total cost of $146,278. In 2004 (through February 2004), the
Company repurchased an additional 855,000 shares of Common Stock at a cost of
$26,888. The Company expects to continue to use its cash flow to repurchase its
Common Stock. At the end of February 2004, the Company had authorization to
repurchase up to an additional $351,753 of its Common Stock.
The Company's business does not require, and is not expected to require,
significant cash outlays for capital expenditures.
The Company believes that its cash, other liquid assets, operating cash flows
and available bank borrowings, taken together, provide adequate resources to
fund ongoing operating requirements.
Contractual Obligations and Commitments
The following table lists the Company's future contractual obligations and
commitments as of December 31, 2003:
Payments due by Period
------------------------
Contractual Obligations Total Less Than 1 Year 1 - 3 years 3 - 5 years More Than 5 years
----------------------- ----- ---------------- ----------- ----------- -----------------
Long-term Debt (1) $300,000 - - - $300,000
Capital Lease Obligations 7,360 $ 960 $ 1,920 $1,920 2,560
Operating Leases 37,512 6,921 12,077 9,895 8,619
Other Long-term Obligations 275,745 75,490 96,886 78,149 25,220
-------- ------- -------- ------- --------
Total Contractual Obligations $620,617 $83,371 $110,883 $89,964 $336,399
======== ======= ======== ======= ========
(1) In March 2004, the Company refinanced its existing Facility, obtaining a
five-year $120,000 term loan and a five-year $180,000 revolving credit
facility.
-14-
The Company has long-term noncancelable operating lease commitments for office
space and equipment. The Company has also entered into capital leases for
satellite transponders.
Included in Other Long-term Obligations enumerated in the table above, are
various contractual agreements to pay for talent, broadcast rights, research and
various related party arrangements, including $154,533 of payments due under the
Management and Representation Agreements. See Related Parties below and Note 2
to the consolidated financial statements for further discussion.
Related Parties
Infinity holds a common equity position in the Company and provides ongoing
management services to the Company under the terms of the Management Agreement.
In return for receiving services under the Management Agreement, the Company
compensates Infinity via an annual base fee and provides Infinity the
opportunity to earn an incentive bonus if the Company exceeds pre-determined
targeted cash flows. For the year ended December 31, 2003, 2002 and 2001,
Infinity earned cash compensation of $2,793, $5,012 and $3,983, respectively.
In addition to the base fee and incentive compensation described above, the
Company granted to Infinity two vested and non-forfeitable warrants to purchase
4,000,000 shares in the aggregate (one warrant with an exercise price of $10.00
per share and the other warrant with an exercise price of $12.50 per share -
each warrant represents 2,000,000 shares of 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 seven warrants convertible into 4,500,000 fully vested and
nonforfeitable shares (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. For additional information on these
warrants see Note 2 to our consolidated financial statements.
In addition to the Management Agreement described above, the Company also enters
into other transactions with Infinity in the normal course of business. Such
arrangements include a representation agreement (including a related news
programming agreement, a license agreement and a technical services agreement
with an affiliate of Infinity - the "Representation Agreement") to operate the
CBS Radio Networks, affiliation agreements with many of Infinity's radio
stations and the purchase of programming rights from Infinity and affiliates of
Infinity. The Management Agreement provides that all transactions, other than
the Management Agreement and Representation Agreement to operate the CBS Radio
Networks which were ratified by the Company's shareholders, between the Company
and Infinity or its affiliates must be on a basis that is at least as favorable
to the Company as if the transaction were entered into with an independent third
party. In addition, subject to specified exceptions, all agreements between the
Company and Infinity or any of its affiliates must be approved by the Company's
Board of Directors. During 2003, the Company incurred expenses aggregating
approximately $80,659 for the Representation Agreement, affiliation agreements
and the purchase of programming rights from Infinity and affiliates ($77,566 in
2002 and $77,444 in 2001).
Critical Accounting Policies and Estimates
Westwood One's financial statements are prepared in accordance with accounting
principles that are generally accepted in the United States. The preparation of
these financial statements requires management to make estimates and assumptions
that affect the reported amounts of assets, liabilities, revenue and expenses as
well as the disclosure of contingent assets and liabilities. Management
continually evaluates its estimates and judgments including those related to
allowances for doubtful accounts, useful lives of property, plant and equipment
and intangible assets, and other contingencies. Management bases its estimates
and judgments on historical experience and other factors that are believed to be
reasonable under the circumstances. Actual results may differ from these
estimates under different assumptions or conditions. We believe that of our
-15-
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. Alternatively, if trends improve beyond our estimates, we would be
required to decrease our allowance for doubtful accounts. Our estimates are
reviewed periodically, and adjustments are reflected through bad debt expense in
the period they become known. Our bad debt expense approximated $3,600, or .7%
of revenue, in 2003, $6,400, or 1.2% of revenue, in 2002, and $2,000, or .4% of
revenue, in 2001 and changes in our bad debt experience can materially affect
our results of operations. Our allowance for bad debts requires us to consider
anticipated collection trends and requires a high degree of judgment. In
addition, as fully described herein, our results in any reporting period could
be impacted by relatively few significant bad debts.
Estimated useful lives of property, plant and equipment and intangible assets -
we estimate the useful lives of property, plant and equipment and intangible
assets in order to determine the amount of depreciation and amortization expense
to be recorded during any reporting period. The useful lives, which are
disclosed in Note 1 of the consolidated financial statements, are estimated at
the time the asset is acquired and are based on historical experience with
similar assets as well as taking into account anticipated technological or other
changes. If technological changes were to occur more rapidly than anticipated or
in a different form than anticipated, the useful lives assigned to these assets
may need to be shortened, resulting in the recognition of increased depreciation
and amortization expense in future periods. During 2002, the Company changed the
useful lives of certain studio and broadcasting equipment. Alternately, these
types of technological changes could result in the recognition of an impairment
charge to reflect the write-down in value of the asset. 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.
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 January 2003, the FASB issued FASB Interpretation No. 46, "Consolidation of
Variable Interest Entities, an Interpretation of ARB No. 51" which was replaced
in December 2003 by the issuance of FIN 46R ("FIN 46R"). FIN 46R explains how to
identify variable interest entities ("VIEs") and how a company should assess its
interests in a variable interest entity to decide whether to consolidate that
entity. FIN 46R requires existing unconsolidated variable interest entities to
be consolidated by their primary beneficiaries if the entities do not
effectively disperse risks among parties involved.
The provisions of FIN 46R are effective for special purpose entities as of
December 31, 2003. The Company has completed its review of its special purpose
entities under FIN 46R and has determined that the application of FIN 46R did
not impact the Company's consolidated financial position, results of operations
or cash flows.
The provisions of FIN 46R must be applied to VIEs as of March 31, 2004. The
Company has determined that the adoption of the remaining provisions of FIN 46R
will not have an impact on the Company.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities". SFAS No. 149 amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts for hedging
activities under SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities." In general, SFAS No. 149 is effective for contracts entered
into or modified after June 30, 2003 and for hedging relationships designated
after June 30, 2003. The adoption of SFAS 149 did not have any impact on the
Company's financial position, results of operations or cash flows.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." In accordance
-16-
with SFAS 150, financial instruments that embody obligations for the issuer are
required to be classified as liabilities. SFAS 150 is effective for financial
instruments entered into or modified after May 31, 2003, and otherwise shall be
effective at the beginning of the first interim period beginning after June 15,
2003, except for the provisions relating to mandatorily redeemable financial
instruments which have been deferred indefinitely. The adoption of SFAS 150 did
not have any impact on the Company's financial position.
On December 17, 2003, the Staff of the Securities and Exchange Commission issued
Staff Accounting Bulletin No. 104 ("SAB 104"), Revenue Recognition, which
supercedes SAB 101, Revenue Recognition in Financial Statements. SAB 104's
primary purpose is to rescind accounting guidance contained in SAB 101 related
to multiple element revenue arrangements, superceded as a result of the issuance
of EITF 00-21, "Accounting for Revenue Arrangements with Multiple Deliverables."
The adoption of SAB 104 did not have a material impact on the Company's
financial position, results of operations or cash flows.
Forward-Looking Statements and Factors Affecting Forward-Looking Statements
The Private Securities Litigation Reform Act of 1995 provides a safe harbor for
forward-looking statements made by or on the behalf of the Company.
Forward-looking statements involve known and unknown risks, uncertainties and
other factors which may cause the actual results, performance or achievements of
the Company to be materially different from any future results, performance or
achievements expressed or implied by such forward-looking statements. These
statements are based on management's views and assumptions at the time the
statements are made, however no assurances can be given that management's
expectations will come to pass. The forward-looking statements included in this
document are only made as of the date of this document and the Company does not
have any obligation to publicly update any forward-looking statement to reflect
subsequent events or circumstances.
Factors That May Affect Forward-Looking Statements
A wide range of factors could materially affect future developments and
performance including the following:
-- The Company is managed by Infinity under the terms of the Management
Agreement, which expires in 2009. In addition, the Company has
extensive business dealings with Infinity and its affiliates in its
normal course of business. The Company's business prospects could be
adversely affected by its inability to retain Infinity's services
under the Management Agreement beyond the contractual term.
-- The Company competes in a highly competitive business. Its radio
programming competes for audiences and advertising revenues directly
with radio and television stations and other syndicated programming,
as well as with such other media as newspapers, magazines, cable
television, outdoor advertising and direct mail. Audience ratings and
revenue shares are subject to change and any adverse change in a
particular geographic area could have a material and adverse effect on
the Company's ability to attract not only advertisers in that region,
but national advertisers as well. Future operations are further
subject to many factors which could have an adverse effect upon the
Company's financial performance. These factors include:
- 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 advertisers.
-17-
-- 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
'
authorization and properly recorded, and that accounting records may be relied
-18-
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 auditors, as well as with management, to review accounting,
auditing, internal accounting controls and financial reporting matters. The
Audit Committee, pursuant to its Charter, is also responsible for retaining the
Company's independent accountants. The independent accountants have full and
free access to the Audit Committee with and without management's presence.
Further, as a result of changes in the listing standards for the New York Stock
Exchange and as a result of the Sarbanes-Oxley Act of 2002, members of the Audit
Committee will be required to meet stringent independence standards and at least
one member must have financial expertise. The majority of our Audit Committee
members satisfy the new independence standards and, the Audit Committee also has
at least one member with financial expertise.
The Consolidated Financial Statements and the related notes and schedules of the
Company are indexed on page F-1 of this Report, and attached hereto as pages F-1
through F-18 and by this reference incorporated herein.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
Item 9A. Controls and Procedures
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.
-19-
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. Principal Accounting Fees and Services
This information is incorporated by reference to the Company's definitive
proxy statement to be filed pursuant to Regulation 14A not later than 120 days
after the end of the Company's fiscal year.
-20-
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 Amendment to Employment Agreement, dated October 27, 2003, between
Registrant and Norman J. Pattiz.
10.3 Form of Indemnification Agreement between Registrant and its Directors
and Executive Officers. (1)
10.4 Credit Agreement, dated March 2, 2004, between Registrant and The
Lenders and JPMorgan Chase Bank as Administrative Agent
10.5 Purchase Agreement, dated as of August 24, 1987, between Registrant
and National Broadcasting Company, Inc. (2)
10.6 Agreement and Plan of Merger among Registrant, Copter Acquisition
Corp. and Metro Networks, Inc. dated of June 1, 1999 (9)
*10.7 Amendment No. 1 to the Agreement and Plan Merger, dated as of August
20, 1999, by and among Registrant, Copter Acquisition Corp. and Metro
Networks, Inc. (10)
10.8 Management Agreement, dated as of March 30, 1999, and amended on April
15, 2002 between Registrant and Infinity Broadcasting Corporation. (9)
(13)
10.9 Representation Agreement, dated as of March 31, 1997, between
Registrant and CBS, Inc. (7) (13)
10.10 Westwood One Amended 1999 Stock Incentive Plan. (9)
10.11 Westwood One, Inc. 1989 Stock Incentive Plan. (3)
10.12 Amendments to the Westwood One, Inc. Amended 1989 Stock Incentive
Plan. (4) (5)
10.13 Leases, dated August 9, 1999, between Lefrak SBN LP and Westwood One,
Inc. and between Infinity and Westwood One, Inc. relating to New York,
New York offices. (11)
21 List of Subsidiaries
23 Consent of Independent Auditors
31.a Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002.
31.b Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002.
32.a Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
32.b Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
No Report on Form 8-K were filed during the fourth quarter of 2003. A
Form 8-K was furnished on October 29, 2003 in connection with the
Company's disclosure of certain earnings information.
*********************************
*Indicates a management contract or compensatory plan
-21-
(1) Filed as part of Registrant's September 25, 1986 proxy statement and
incorporated herein by reference.
(2) Filed an exhibit to Registrant's current report on Form 8-K dated September
4, 1987 and incorporated herein by reference.
(3) Filed as part of Registrant's March 27, 1992 proxy statement and
incorporated herein by reference.
(4) Filed as an exhibit to Registrant's July 20, 1994 proxy statement and
incorporated herein by reference.
(5) Filed as an exhibit to Registrant's May 17, 1996 proxy statement and
incorporated herein by reference.
(6) Filed as an exhibit to Registrant's Quarterly report on Form 10-Q for the
quarter ended September 30, 1996 and incorporated herein by reference.
(7) Filed as an exhibit to Registrant's Annual Report on Form 10-K for the year
ended December 31, 1997 and incorporated herein by reference.
(8) Filed as an exhibit to Registrant's Annual Report on Form 10-K for the year
ended December 31, 1998 and incorporated herein by reference.
(9) Filed as an exhibit to Registrant's August 24, 1999 proxy statement and
incorporated herein by reference.
(10) Filed as an exhibit to Registrant's current report on Form 8-K dated
October 1, 1999 and incorporated herein by reference.
(11) Filed as an exhibit to Registrant's Annual Report on Form 10-K for the year
ended December 31, 1999 and incorporated herein by reference.
(12) Filed as an exhibit to Registrant's Annual Report on Form 10-K for the year
ended December 31, 2000 and incorporated herein by reference.
(13) Filed as an exhibit to Registrant's April 29, 2002 proxy statement and
incorporated herein by reference.
(14) Filed as an exhibit to Registrant's Quarterly report on Form 10-Q for the
quarter ended September 30, 2002 and incorporated herein by reference.
(15) Filed as an exhibit to Registrant's current report on Form 8-K dated
December 3, 2002 and incorporated herein by reference.
-22-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
WESTWOOD ONE, INC.
Date: March 15, 2004 By /S/ ANDREW ZAREF
--------------------
Andrew Zaref
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
/S/ SHANE COPPOLA Director, President and March 15, 2004
- -----------------
Shane Coppola Chief Executive Officer
(Principal Executive Officer)
/S/ ANDREW ZAREF Chief Financial Officer March 15, 2004
- ----------------
Andrew Zaref (Principal Financial Officer and
Chief Accounting Officer)
/S/ NORMAN J. PATTIZ Chairman of the Board of March 15, 2004
- -------------------- Directors
Norman J. Pattiz
/S/ DAVID L. DENNIS Director March 15, 2004
- -------------------
David L. Dennis
/S/ GERALD GREENBERG Director March 15, 2004
- ---------------------
Gerald Greenberg
/S/ ROBERT K. HERDMAN Director March 15, 2004
- ---------------------
Robert K. Herdman
/S/ JOEL HOLLANDER Director March 15, 2004
- -------------------
Joel Hollander
/S/ DENNIS HOLT Director March 15, 2004
- ----------------
Dennis Holt
/S/ MARIA D. HUMMER Director March 15, 2004
- --------------------
Maria D. Hummer
/S/ MEL A. KARMAZIN Director March 15, 2004
- --------------------
Mel A. Karmazin
/S/ STEVEN A. LERMAN Director March 15, 2004
- ---------------------
Steven A. Lerman
/S/ GEORGE MILES Director March 15, 2004
- ----------------
George Miles
/S/ JOSEPH B. SMITH Director March 15, 2004
- --------------------
Joseph B. Smith
/S/ FARID SULEMAN Director March 15, 2004
- -----------------
Farid Suleman
-23-
EXHIBIT 31.a
CHIEF EXECUTIVE OFFICER CERTIFICATION
I, Shane Coppola, 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-15(e) and 15d-15(e) 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; and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
(c) disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and;
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 functions):
(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.
/S/ Shane Coppola
- -----------------
Shane Coppola
Chief Executive Officer
March 15, 2004
-24-
EXHIBIT 31.b
CHIEF FINANCIAL OFFICER CERTIFICATION
I, Andrew Zaref, 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-15(e) and 15d-15(e) 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; and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
(c) disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and;
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 functions):
(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.
/S/ Andrew Zaref
- ----------------
Andrew Zaref
Chief Financial Officer
March 15, 2004
-25-
EXHIBIT 32.a
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 0F THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Westwood One, Inc. (the "Company")
on Form 10-K for the period ending December 31, 2003 as filed with the
Securities and Exchange Commission (the "Report"), I, Shane Coppola, Chief"
Executive Officer of the Company, certify that to my knowledge:
1. the Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
2. the information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of the Company.
/S/ Shane Coppola
- -----------------
Shane Coppola
March 15, 2004
This statement is being furnished to the Securities and Exchange Commission as
an exhibit to this Annual Report on Form 10-K.
-26-
EXHIBIT 32.b
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 0F THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Westwood One, Inc. (the "Company")
on Form 10-K for the period ending December 31, 2003 as filed with the
Securities and Exchange Commission (the "Report"), I, Andrew Zaref, Chief
Financial Officer of the Company, certify that to my knowledge:
1. the Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
2. the information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of the Company.
/S/ Andrew Zaref
- ----------------
Andrew Zaref
March 15, 2004
This statement is being furnished to the Securities and Exchange Commission as
an exhibit to this Annual Report on Form 10-K.
-27-
WESTWOOD ONE, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES
1. Consolidated Financial Statements Page
----
--Report of Independent Auditors F-2
--Consolidated Balance Sheets at December 31, 2003
and 2002 F-3
--Consolidated Statements of Operations for the years
ended December 31, 2003, 2002 and 2001 F-4
--Consolidated Statements of Shareholders' Equity
for the years ended December 31, 2003, 2002 and 2001 F-5
--Consolidated Statements of Cash Flows for the years
ended December 31, 2003, 2002 and 2001 F-6
--Notes to Consolidated Financial Statements F-7 - F-17
2. Financial Statement Schedules:
II. -Valuation and Qualifying Accounts F-18
All other schedules have been omitted because they are not applicable, the
required information is immaterial, or the required information is included in
the consolidated financial statements or notes thereto.
F-1
REPORT OF INDEPENDENT AUDITORS
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, 2003 and
2002, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 2003 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 17, 2004, except for Notes 5 and 13, as to which the date is March 3,
2004
F-2
WESTWOOD ONE, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
December 31,
------------
2003 2002
---- ----
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 8,665 $ 7,371
Accounts receivable, net of allowance for doubtful accounts
of $4,334 (2003) and $11,757 (2002) 135,720 131,676
Prepaid and other assets 21,110 14,581
---------- ----------
Total Current Assets 165,495 153,628
PROPERTY AND EQUIPMENT, NET 50,562 53,699
INTANGIBLE ASSETS, NET 7,626 9,647
GOODWILL 990,472 990,192
OTHER ASSETS 47,879 59,146
---------- ----------
TOTAL ASSETS $1,262,034 $1,266,312
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $13,136 $13,715
Amounts payable to related parties 18,680 17,047
Deferred revenue 12,215 12,740
Income taxes payable 3,760 7,544
Accrued expenses and other liabilities 32,082 39,040
---------- ----------
Total Current Liabilities 79,873 90,086
LONG-TERM DEBT 300,366 232,135
DEFERRED INCOME TAXES 36,902 30,733
OTHER LIABILITIES 8,943 10,318
---------- ----------
TOTAL LIABILITIES 426,084 363,272
---------- ----------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Preferred stock: authorized 10,000,000 shares, none outstanding - -
Common stock, $.01 par value: authorized, 263,323,250 shares;
issued and outstanding, 99,056,659 (2003) and 103,988,678 (2002) 991 1,040
Class B stock, $.01 par value: authorized, 3,000,000 shares:
issued and outstanding, 703,466 (2003 and 2002) 7 7
Additional paid-in capital 517,132 684,311
Retained earnings 319,020 218,981
---------- ----------
837,150 904,339
Less treasury stock, at cost; 35,000 (2003 and 2002) shares -1,200 -1,299
---------- ----------
TOTAL SHAREHOLDERS' EQUITY 835,950 903,040
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,262,034 $1,266,312
========== ==========
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,
------------------------------------
2003 2002 2001
---- ---- ----
REVENUES $539,226 $550,751 $515,940
-------- -------- --------
Operating Costs (includes related party expenses
of $80,659, $77,566, and $77,444, respectively) 350,582 352,385 343,120
Depreciation and Amortization (includes related
party warrant amortization of $1,352 in each period) 11,513 11,464 67,611
Corporate General and Administrative Expenses
(includes related party expenses of $2,793, $5,012,
and $3,983, respectively) 7,106 8,005 6,816
-------- -------- --------
369,201 371,854 417,547
-------- -------- --------
OPERATING INCOME 170,025 178,897 98,393
Interest Expense 10,132 6,955 8,705
Other (Income) Expense (52) (110) 929
-------- -------- --------
INCOME BEFORE TAXES 159,945 172,052 88,759
INCOME TAXES 59,906 62,937 45,564
-------- -------- --------
NET INCOME $100,039 $109,115 $43,195
======== ======== =======
INCOME PER SHARE:
Basic $ .99 $1.03 $ .40
Diluted $ .97 $1.00 $ .38
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic 101,243 105,992 107,551
Diluted 103,625 109,101 112,265
See accompanying notes to consolidated financial statements
F-4
WESTWOOD ONE, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands)
Accumul'd
Preferred Other Treasury
Stock Common Stock Class B Stock Add'l Comp Stock Total
--------- ------------ -------------Paid-in Retained Income ----- Shareholders'
Shares Amount Shares Amount Shares Amount Capital Earnings (Loss) Shares Amount Equity
------ ------ ------ ------ ------ ------ ------- -------- ------ ------ ------ ------
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 from related party - - - - - - (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
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 to related
party - - - - - - 48,530 - - - - 48,530
Purchase and cancellation of
warrants from related party - - - - - - (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 - 35 1,299 903,040
Net income for 2003 - - - - - - - 100,039 - - - 100,039
Issuance of common stock under
stock option plans - - 602 6 - - 13,277 - - - - 13,283
Purchase of treasury stock - - - - - - - - - 5,534 180,412 (180,412)
Retirement of treasury stock - - (5,534) (55) - - (180,456) - - (5,534)(180,511) 0
----- ----- ------- ------ ------ ---- --------- --------- ------- ------- -------- -------
BALANCE AT DECEMBER 31, 2003 - - 99,057 $991 704 $7 $517,132 $319,020 - 35 $1,200 $835,950
===== ===== ======= ====== ===== ==== ========= ======== ======= ======= ======== =======
See accompanying notes to consolidated financial statements.
F-5
WESTWOOD ONE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Year Ended December 31,
---------------------------------
2003 2002 2001
---- ---- ----
CASH FLOW FROM OPERATING ACTIVITIES:
Net income $100,039 $109,115 $43,195
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 11,513 11,464 67,611
Deferred taxes 5,331 6,355 5,555
Other 635 562 1,802
-------- ------- -------
117,518 127,496 118,163
Changes in assets and liabilities:
(Increase) decrease in accounts receivable (4,044) (7,943) 11,817
(Increase) decrease in prepaid and other assets (1,186) (839) 1,334
(Decrease) in deferred revenue (525) (968) (4,586)
Increase in income taxes payable 2,822 45,098 33,936
(Decrease) increase in accounts payable and accrued
and other liabilities (8,348) (5,958) (14,764)
Increase (decrease) in amounts payable to related parties 1,633 (9,268) (227)
-------- ------- -------
Net Cash Provided By Operating Activities 107,870 147,618 145,673
-------- -------- -------
CASH FLOW FROM INVESTING ACTIVITIES:
Capital expenditures (4,370) (4,252) (6,828)
Acquisition of companies and other (602) (808) (6,218)
-------- -------- -------
Net Cash Used For Investing Activities (4,972) (5,060) (13,046)
-------- -------- -------
CASH FLOW FROM FINANCING ACTIVITIES:
Debt repayments and payments of capital lease obligations (564) (129,883) (20,623)
Borrowings under bank and other long-term obligations 70,000 200,000 -
Issuance of common stock 9,372 30,186 32,026
Repurchase of common stock (180,412) (188,337) (104,928)
Repurchase of warrants from related party - (51,070) (41,350)
Deferred financing costs - (592) -
-------- -------- -------
Net Cash Used For Financing Activities (101,604) (139,696) (134,875)
-------- -------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,294 2,862 (2,248)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 7,371 4,509 6,757
-------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $8,665 $7,371 $4,509
======= ======= =======
See accompanying notes to consolidated financial statements.
F-6
WESTWOOD ONE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts)
NOTE 1 - Summary of Significant Accounting Policies:
Nature of Business
Westwood One, Inc. and subsidiaries (the "Company") supplies radio and
television station affiliates with a broad range of programming and information
services. The Company is the largest domestic outsource provider of traffic
reporting services and the nation's largest radio network, producing and
distributing national news, sports, talk, music and special event programs, in
addition to local news, sports, weather, video news and other information
programming.
Westwood One is managed by Infinity Broadcasting Corporation ("Infinity"), a
wholly-owned subsidiary of Viacom Inc, pursuant to a management agreement
between the Company and Infinity which expires on March 31, 2009 (the
"Agreement" or "Management Agreement").
Principles of Consolidation
The consolidated financial statements include the accounts of all majority and
wholly-owned subsidiaries.
Revenue Recognition
Revenue is recognized when earned which is at the time commercial advertisements
are broadcast. Payments received in advance are deferred until earned and such
amounts are included as a component of 'Accrued expenses and other liabilities'
on the accompanying balance sheet.
Barter transactions represent the exchange of commercial announcements for
merchandise or services. These transactions are generally recorded at the fair
market value of the commercial announcements relinquished or the fair value of
the merchandise and services received. Revenue is recognized on barter
transactions when the advertisements are broadcast. Expenses are recorded when
the merchandise or service is utilized. Barter revenue of $22,441, $19,595 and
$13,103 has been recognized for the years ended December 31, 2003, 2002 and
2001, respectively and barter expenses of $ 20,885, $18,886 and $12,453 have
been recognized for the years ended December 31, 2003, 2002 and 2001,
respectively.
Program Rights
Program rights are stated at the lower of cost, less accumulated amortization,
or net realizable value. Program rights and the related liabilities are recorded
when the license period begins and the program is available for use and are
charged to expense when the event is broadcast.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets, liabilities, revenue and expenses as well
as the disclosure of contingent assets and liabilities. Management continually
evaluates its estimates and judgments including those related to allowances for
doubtful accounts, useful lives of property, plant and equipment and intangible
assets, income taxes and other contingencies. Management bases its estimates and
judgments on historical experience and other factors that are believed to be
reasonable in the circumstances. Actual results may differ from those estimates
under different assumptions or conditions.
Cash Equivalents
The Company considers all highly liquid instruments purchased with a maturity of
less than three months to be cash equivalents. The carrying amount of cash
equivalents approximates fair value because of the short maturity of these
instruments.
Financial Instruments
The Company uses derivative financial instruments (fixed-to-floating interest
rate swap agreements) for the purpose of hedging specific exposures and holds
all derivatives for purposes other than trading. All derivative financial
instruments held reduce the risk of the underlying hedged item and are
designated at inception as hedges with respect to the underlying hedged item.
Hedges of fair value exposure are entered into in order to hedge the fair value
of a recognized asset, liability, or a firm commitment. Derivative contracts are
entered into with major creditworthy institutions to minimize the risk of credit
loss and are structured to be 100% effective.
F-7
WESTWOOD ONE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts)
Depreciation
Depreciation is computed using the straight line method over the estimated
useful lives of the assets, as follows:
Buildings and improvements 40 years
Recording and studio equipment 5 - 10 years
Capitalized leases Term of lease
Furniture and equipment and other 3 - 10 years
Goodwill and Intangible Assets
Effective January 1, 2002, the Company adopted Statement of Financial Accounting
Standards No. 141, "Business Combinations" ("SFAS 141") and Statement of
Financial Accounting Standards No. 142 ("SFAS 142") "Goodwill and Other
Intangible Assets". The Statements require all business combinations to be
accounted for under the purchase method and prohibits the amortization of
goodwill and indefinite-lived intangible assets, requires that goodwill and
indefinite-lived intangible assets be tested annually for impairment (and in
interim periods if events occur indicating that the carrying value of goodwill
and/or indefinite-lived intangible assets may be impaired), requires that
reporting units be identified for the purpose of assessing potential future
impairments of goodwill, and removes the forty-year limitation on the
amortization period of intangible assets that have
finite lives.
Goodwill represents the excess of cost over fair value of assets of businesses
acquired. In accordance with SFAS 142, the value assigned to goodwill and
indefinite lived intangible assets is not amortized to expense, but rather the
fair value of the reporting unit is compared to its carrying amount on an annual
basis to determine if there is a potential impairment. If the fair value of the
reporting unit is less than its carrying value, an impairment loss is recorded
to the extent that the fair value of the goodwill and intangible assets is less
than their carrying value, determined based on discounted cash flows, market
multiples or appraised values as appropriate. The Company has determined that
there was no impairment of goodwill or intangible assets as a result of
completing impairment reviews.
Intangible assets subject to amortization primarily consist of affiliation
agreements that were acquired in prior years. Such affiliate contracts, when
aggregated, create a nationwide audience that is sold to national advertisers.
The intangible asset values assigned to the affiliate agreements for each
acquisition were determined based upon the expected discounted aggregate cash
flows to be derived over the life of the affiliate relationship. The method of
amortizing the intangible asset values reflects, based upon the Company's
historical experience, an accelerated rate of attrition in the affiliate base
over the expected life of the affiliate relationships. Accordingly, the Company
amortizes the value assigned to affiliate agreements on an accelerated basis
(periods ranging from 4 to 20 years with a weighted-average amortization period
of approximately 8 years)consistent with the pattern of cash flows which are
expected to be derived.
Stock-Based Compensation
Statement of Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting
for Stock-Based Compensation," encourages, but does not require companies to
record compensation cost for stock-based employee compensation plans at fair
value. The Company has chosen to continue to account for stock-based
compensation using the intrinsic value method prescribed in Accounting
Principles Board Opinion No. 25 ("APB 25"), "Accounting for Stock Issued to
Employees," and related Interpretations.
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.
F-8
WESTWOOD ONE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts)
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:
2003 2002 2001
---- ---- ----
Options 2,382,000 2,967,000 3,476,000
Warrants - 142,000 1,238,000
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:
2003 2002 2001
---- ---- ----
Options 1,904,382 390,000 1,380,000
The per share exercise prices of the options were $32.90-$38.34 in 2003,
$37.00-$38.34 in 2002, and $30.30-$40.70 in 2001. Also excluded were 4,500,000
warrants issued in May 2002 in conjunction with extending the terms of the
Company's management agreement with a related party. See Note 2 for a further
discussion of the warrant terms.
Recent Accounting Pronouncements
In January 2003, the FASB issued FASB Interpretation No. 46, "Consolidation of
Variable Interest Entities, an Interpretation of ARB No. 51" which was replaced
in December 2003 by the issuance of FIN 46R ("FIN 46R"). FIN 46R explains how to
identify variable interest entities ("VIEs") and how a company should assess its
interests in a variable interest entity to decide whether to consolidate that
entity. FIN 46R requires existing unconsolidated variable interest entities to
be consolidated by their primary beneficiaries if the entities do not
effectively disperse risks among parties involved.
The provisions of FIN 46R are effective for special purpose entities as of
December 31, 2003. The Company has completed its review of its special purpose
entities under FIN 46R and has determined that the application of FIN 46R did
not impact the Company's consolidated financial position, results of operations
or cash flows.
The provisions of FIN 46R must be applied to VIEs as of March 31, 2004. The
Company has determined that the adoption of the remaining provisions of FIN 46R
will not impact the Company's consolidated financial position, results of
operations or cash flows.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities". SFAS No. 149 amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts for hedging
activities under SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities." In general, SFAS No. 149 is effective for contracts entered
into or modified after June 30, 2003 and for hedging relationships designated
after June 30, 2003. The adoption of SFAS 149 did not have any impact on the
Company's financial position, results of operations or cash flows.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity". In accordance
with SFAS 150, financial instruments that embody obligations for the issuer are
required to be classified as liabilities. SFAS 150 is effective for financial
instruments entered into or modified after May 31, 2003, and otherwise shall be
effective at the beginning of the first interim period beginning after June 15,
2003, except for the provisions relating to mandatorily redeemable financial
instruments which have been deferred indefinitely. The adoption of SFAS 150 did
not have any impact on the Company's financial position.
On December 17, 2003, the Staff of the Securities and Exchange Commission issued
Staff Accounting Bulletin No. 104 ("SAB 104"), Revenue Recognition, which
supercedes SAB 101, Revenue Recognition in Financial Statements. SAB 104's
primary purpose is to rescind accounting guidance contained in SAB 101 related
to multiple element revenue arrangements, superceded as a result of the issuance
of EITF 00-21, "Accounting for Revenue Arrangements with Multiple Deliverables."
The adoption of SAB 104 did not have a material impact on the Company's
financial position, results of operations or cash flows.
F-9
WESTWOOD ONE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts)
Reclassification
Certain amounts reported in prior years have been reclassified to conform to the
current year presentation.
NOTE 2 - Related Party Transactions:
In return for receiving services under the Management Agreement, the Company
compensates Infinity via an annual base fee and provides Infinity the
opportunity to earn an incentive bonus if the Company exceeds pre-determined
targeted cash flows. For the year ended December 31, 2003, 2002 and 2001,
Infinity earned cash compensation of $2,793, $5,012 and $3,983, respectively.
In addition to the base fee and incentive compensation described above, the
Company granted to Infinity two fully vested and non-forfeitable warrants to
purchase 4,000,000 shares of the Company's Common Stock in the aggregate (one
warrant with an exercise price of $10.00 per share and the other warrant with an
exercise price of $12.50 per share - each warrant represents 2,000,000 shares of
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 seven warrants convertible into 4,500,000 fully vested and
nonforfeitable shares (comprised of two warrants to purchase 1,000,000 Common
shares per warrant and five warrants to purchase 500,000 Common shares per
warrant) to purchase Company Common Stock. Of the seven warrants issued, the two
one million share warrants have an exercise price of $43.11 and $48.36,
respectively, and become exercisable if the average price of the Company's
Common Stock reaches a price of $64.67 and $77.38, respectively, for at least 20
out of 30 consecutive trading days for any period throughout the ten year term
of the warrants.
The exercise prices for the five remaining warrants is equal to $38.87, $44.70,
$51.40, $59.11 and $67.98, respectively. These warrants each have a term of 10
years and become exercisable on January 2, 2005, 2006, 2007, 2008, and 2009,
respectively, subject to a trading price condition. The trading price condition
specifies the average price of the Company's Common Stock for each of the 15
trading days prior to January 2 of the applicable year (commencing on January 2,
2005 with respect to the first 500,000 warrant tranche and each January 2
thereafter for each of the remaining four warrants) must be at least equal to
both the exercise price of the warrant and 120% of the corresponding prior year
15 day trading average. In the case of the $38.87 warrants, the Company's
average stock price for the 15 trading days prior to January 2, 2005 must equal
or exceed $40.56 for the warrants to become exercisable.
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 (April 1, 2004), 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 - the "Representation Agreement") to operate the
CBS Radio Networks, affiliation agreements with many of Infinity's radio
stations and the purchase of programming rights from Infinity and affiliates of
Infinity. The Management Agreement provides that all transactions, other than
the Management Agreement and Representation Agreement to operate the CBS Radio
Networks which were ratified by the Company's shareholders, between the Company
and Infinity or its affiliates must be on a basis that is at least as favorable
to the Company as if the transaction were entered into with an independent third
party. In addition, subject to specified exceptions, all agreements between the
Company and Infinity or any of its affiliates must be approved by the Company's
Board of Directors.
F-10
WESTWOOD ONE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts)
The Company incurred the following expenses relating to transactions with
Infinity or its affiliates for the following years:
Nature 2003 2002 2001
------ ------- ------- -------
Representation Agreement $24,575 $23,309 $22,925
Programming and Affiliations 56,084 54,257 54,519
Management Agreement
(excluding warrant amortization) 2,793 5,012 3,983
Warrant Amortization 1,352 1,352 1,352
------- ------- -------
$84,804 $83,930 $82,779
======= ======= =======
Expenses incurred for the Representation Agreement and programming and affiliate
arrangements are included as a component of Operating Costs in the accompanying
Consolidated Statement of Operations. Expenses incurred for the Management
Agreement (excluding warrant amortization) and amortization of the warrants
granted to Infinity under the Management Agreement are included as a component
of Corporate General and Administrative expenses and Depreciation and
Amortization, respectively in the accompanying Consolidated Statement of
Operations.
NOTE 3 - Property and Equipment:
Property and equipment is recorded at cost and is summarized as follows at:
December 31,
----------------------
2003 2002
------- -------
Land, buildings and improvements................. $14,088 $12,859
Recording and studio equipment................... 57,511 53,961
Capitalized leases............................... 6,723 6,723
Furniture and equipment and other................ 15,567 16,430
------- ------
93,889 89,973
Less: Accumulated depreciation and amortization. 43,327 36,274
------- -------
Property and equipment, net.............. $50,562 $53,699
======= =======
Depreciation expense was $7,898 in 2003, $7,711 in 2002, and $17,223 in 2001.
NOTE 4 - Goodwill and Intangible Assets:
The following table provides a reconciliation of reported net income for 2001 to
net income that would have been reported had SFAS 142 been applied as of January
2001:
Year Ended December 31,
-----------------------
2001
----
Reported net income............................. $43,195
Add back goodwill amortization, net of tax...... 44,460
-------
Adjusted net income............................. $87,655
=======
Net income per share:
Basic -
As reported................................... $.40
Goodwill amortization, net of tax............. .42
----
As adjusted................................... $.82
====
Diluted -
As reported.................................... $.38
Goodwill amortization, net of tax.............. .40
----
As adjusted.................................... $.78
====
F-11
WESTWOOD ONE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts)
The changes in the carrying amount of goodwill for the years ended December 31,
2003 and 2002 follows:
2003 2002
-------- --------
Balance at January 1, $990,192 $991,289
Goodwill acquired during the period 280 -
Acquisition purchase price adjustments - (1,097)
-------- ---------
$990,472 $990,192
======== ========
At December 31, 2003, the Company's amortizable intangible assets gross value
was approximately $28,780 with accumulated amortization of approximately $21,154
($28,538 and $18,891, respectively at December 31, 2002). Amortization expense
for fiscal 2003 was $2,263 ($2,401 and $3,158 in 2002 and 2001, respectively).
The Company's estimated aggregate amortization expense for intangibles for
fiscal year 2004, 2005, 2006, 2007 and 2008 are $1,448, $1,169, $623, $623 and
$604, respectively.
NOTE 5 - Debt:
Long-term debt consists of the following at:
December 31,
----------------------
2003 2002
---- -----
Revolving Credit Facility/Term Loan......... $100,000 $30,000
4.64% Senior Unsecured Notes
due on November 30, 2009.................. 50,000 50,000
5.26% Senior Unsecured Notes
due on November 30, 2012.................. 150,000 150,000
Fair market value of Swap (a)............... 366 2,135
------- -------
$300,366 $232,135
======== ========
(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, 2003 and
2002.
The Company's amended senior loan agreement with a syndicate of banks, led by JP
Morgan Chase Bank, provides for an unsecured $205,000 revolving credit facility
(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 ($10,000 per quarter in 2004).
As more fully discussed in Note 13, the Company refinanced the Facility on March
3, 2004. Accordingly, the outstanding borrowings under the Facility have been
classified as long-term debt at December 31, 2003 in the accompanying
Consolidated Balance Sheet.
At December 31, 2003, the Company had available borrowings under the Facility of
$105,000 ($205,000 at December 31, 2002). 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, 2003, the applicable margin
was LIBOR plus .50%-.625%. At December 31, 2003, the Company had borrowed
$100,000 under the revolving credit facility at a weighted-average interest rate
of 1.8% (including the applicable margin). 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). 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
Facility. The Notes may be prepaid at the option of the Company upon providing
proper notice and by paying principal, interest and an early payment penalty.
F-12
WESTWOOD ONE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts)
The aggregate maturities of debt for the next five years (See Note 13) and
thereafter, pursuant to the Company's debt agreements as in effect at December
31, 2003, are as follows (excludes market value adjustments):
Year
2004................... $ -
2005................... -
2006................... -
2007................... -
2008................... -
2009 and thereafter.... 300,000
-------
$300,000
========
NOTE 6 - Financial Instruments:
Interest Rate Risk Management
In order to achieve a desired proportion of variable and fixed rate debt, the
Company entered into fixed-to-floating interest rate swap agreements covering
one-half of the notional amounts of the Notes. These swap transactions allow the
Company to benefit from short-term declines in interest rates while having the
long-term stability of fairly low fixed rates. The instruments meet all of the
criteria of a fair-value hedge. The Company has the appropriate documentation,
including the risk management objective and strategy for undertaking the hedge,
identification of the hedged instrument, the hedge item, the nature of the risk
being hedged, and how the hedging instrument's effectiveness offsets the
exposure to changes in the hedged item's fair value or variability in cash flows
attributable to the hedge risk.
At December 31, 2003 and 2002, the Company had the following interest rate
swaps:
Interest Rate
-----------------------
Maturity Dates Notional Principal Amount Paid (1) Received Variable Rate Index
- -------------- ------------------------- -------- -------- -------------------
November 2009 $25,000 1.173% 3.907% 3 Month LIBOR
November 2012 $25,000 1.173% 4.410% 3 Month LIBOR
November 2012 $50,000 1.173% 4.535% 3 Month LIBOR
(1) The interest rate paid at December 31, 2002 was 1.4225%.
The estimated fair value of the Company's interest rate swaps at December 31,
2003 and 2002 were $366 and $2,135, respectively.
Fair Value of Financial Instruments
The Company's financial instruments included cash, cash equivalents,
receivables, accounts payable, borrowings and interest rate contracts. At
December 31, 2003 and 2002, the fair values of cash and cash equivalents,
receivables and accounts payable approximated carrying values because of the
short-term nature of these instruments. The estimated fair values of other
financial instruments subject to fair value disclosures, determined based on
broker quotes or quoted market prices or rates for the same or similar
instruments, and the related carrying amounts are as follows:
December 31, 2003 December 31, 2002
------------------- -------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
--------- --------- --------- ---------
Borrowings (Short and Long Term) $ 300,000 $ 300,732 $ 230,000 $ 234,270
Risk management contracts:
Interest rate swaps 366 366 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, 2003, due to the wide variety of customers and markets in
which the Company operates.
F-13
WESTWOOD ONE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts)
NOTE 7 - Shareholders' Equity:
The authorized capital stock of the Company consists of Common Stock, Class B
Stock and Preferred Stock. Common Stock is entitled to one vote per share while
Class B Stock is entitled to 50 votes per share. Class B Stock is convertible to
Common Stock on a share-for-share basis.
As further discussed in Note 2, in conjunction with the renewal and extension of
the Company's Management Agreement with Infinity in May 2002, the Company
granted to Infinity fully vested and nonforfeitable warrants to purchase up to
4,500,000 shares of Company Common Stock. The Company has reflected the fair
value of the warrants issued of $48,530 as a component of additional paid in
capital.
During 2002, Infinity sold their $12.50 warrants to the Company for cash
consideration of $51,070. During 2001, Infinity sold their $10.00 warrants to
the Company for cash consideration of $41,350. The purchase of the warrants
during 2002 resulted in a reduction to additional paid in capital equal to the
amount of cash consideration paid. The aforementioned warrants were granted to
Infinity in connection with the extension of the Management Agreement in March
1999 (see Note 2).
The Company's Board of Directors has approved plans to purchase shares of the
Company's Common Stock to enhance shareholder value. The Company purchased
5,534,000 shares in 2003 for approximately $180,412, 5,414,000 shares in 2002
for approximately $188,337, and 4,152,000 shares in 2001 for approximately
$104,928.
NOTE 8 - 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, 2003. 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 to the pro forma amounts indicated below:
2003 2002 2001
-------- -------- -------
Net Income as Reported $100,039 $109,115 $43,195
Deduct: Total stock based
compensation expense determined under fair-
value based method, net of tax 8,809 8,444 7,168
------- ------- ------
Pro Forma Net Income $91,230 $100,671 $ 36,027
======= ======== ========
Net Income Per Share:
Basic - As Reported $.99 $1.03 $.40
==== ===== ====
Basic - Pro Forma $.90 $.95 $.33
==== ==== ====
Diluted - As Reported $.97 $1.00 $.38
==== ===== ====
Diluted - Pro Forma $.88 $.92 $.32
==== ==== ====
The weighted average fair value of the options granted in 2003, 2002 and 2001 is
estimated at $10.09, $11.46 and $12.56, respectively, on the date of grant using
the Black-Scholes option pricing model with the following weighted average
assumptions:
2003 2002 2001
---- ---- ----
Weighted Average Risk Free Interest Rate 3.3% 3.4% 6.0%
Expected Life (In Years)................... 5 5 5
Expected Volatility........................ 29.6% 29.0% 61.9%
Expected Dividend Yield.................... - - -
F-14
WESTWOOD ONE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts)
Information concerning options outstanding under the Plan is as follows for:
2003 2002 2001
---- ---- ----
Weighted Weighted Weighted
Average Average Average
Exercised Exercised Exercised
Shares Price Shares Price Shares Price
------ --------- ------ --------- ------ ---------
Outstanding at beginning
of period....................... 9,442,330 $19.40 11,089,934 $16.01 13,522,288 $14.03
Granted during the period......... 1,568,500 $31.32 1,272,500 $35.79 1,181,500 $22.30
Exercised during the period....... (602,381) $15.56 (2,505,674) $12.21 (3,325,718) $ 9.81
Forfeited during the period....... (88,900) $36.79 (414,430) $23.43 (288,136) $20.21
---------- ----------- -----------
Outstanding at end of period...... 10,319,549 $21.27 9,442,330 $19.40 11,089,934 $16.01
========== ========== ==========
Available for stock
option issuance at end
of period....................... 1,653,600 3,133,200 4,002,500
========= ========= =========
At December 31, 2003, options to purchase 6,281,149 shares of Common Stock were
currently exercisable at a weighted average exercise price of $15.86.
The following table contains additional information with respect to options at
December 31, 2003:
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 .................... 946,160 $5.13 .9
$7.25-$11.55.................... 974,742 $8.78 3.4
$12.54-$15.75................... 2,756,747 $14.18 4.1
$17.25-$22.57................... 1,653,000 $21.44 6.6
$30.19-$38.34................... 3,988,900 $32.98 8.3
10,319,549 $21.27 5.8
NOTE 9 - Income Taxes:
The components of the provision for income taxes follows:
Year Ended December 31,
---------------------------------------
Current 2003 2002 2001
---- ---- ----
Federal............ $49,138 $52,982 $40,490
State.............. 5,437 3,600 (481)
------ ------ ------
54,575 56,582 40,009
------ ------ ------
Deferred
Federal............ 4,842 5,705 5,107
State.............. 489 650 448
----- ----- -----
5,331 6,355 5,555
----- ----- -----
Income Tax............ $59,906 $62,937 $45,564
======= ======= =======
F-15
WESTWOOD ONE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts)
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities on the Company's balance
sheet and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities follow:
December 31,
--------------------
2003 2002
------- -------
Deferred tax liabilities:
Goodwill, intangibles and other....................... $32,755 $31,246
Property and equipment................................ 4,783 2,100
Other................................................. 126 619
------- -------
Total deferred tax liabilities........................ 37,664 33,965
------- -------
Deferred tax assets:
Allowance for doubtful accounts....................... 1,394 4,121
Accrued expenses and other............................ 1,013 2,613
----- -----
Total deferred tax assets............................. 2,407 6,734
----- -----
Net deferred tax liabilities.............................. 35,257 27,231
Net deferred tax asset - current.......................... 1,645 3,502
------ ------
Net deferred tax liability - long-term.................... $36,902 $30,733
======= =======
The reconciliation of the federal statutory income tax rate to the Company's
effective income tax rate follows:
Year Ended December 31,
-------------------------
2003 2002 2001
---- ---- ----
Federal statutory rate............... 35.0% 35.0% 35.0%
State taxes net of federal benefit... 2.5 1.6 -
Nondeductible amortization of
intangible assets................... - - 16.3
---- ---- ----
Effective tax rate................... 37.5% 36.6% 51.3%
===== ===== =====
In 2003, 2002 and 2001, $3,911, $39,245 and $32,901 respectively, of income tax
benefits attributable to employee stock and warrant transactions were allocated
to shareholders' equity.
NOTE 10 - Commitments and Contingencies:
The Company has various non-cancelable, long-term operating leases for office
space and equipment. In addition, the Company is committed under various
contractual agreements to pay for talent, broadcast rights, research, the CBS
Representation Agreement and the Management Agreement with Infinity. The
approximate aggregate future minimum obligations under such operating leases and
contractual agreements for the five years after December 31, 2003 and
thereafter, are set forth below:
Leases
--------------------------------
Year Capital Operating Other Total
------- --------- ----- -----
2004.................. $960 $6,921 $75,490 $83,371
2005.................. 960 6,141 51,050 58,151
2006.................. 960 5,936 45,836 52,732
2007.................. 960 5,388 39,594 45,942
2008.................. 960 4,507 38,555 44,022
Thereafter............ 2,560 8,619 25,220 36,399
------ ------- -------- --------
$7,360 $37,512 $275,745 $320,617
====== ======= ======== ========
The present value of net minimum payments under capital leases was $5,388 at
December 31, 2003.
Included in Other in the table above is $154,533 of commitments due to Infinity
pursuant to the Representation and Management Agreements.
F-16
WESTWOOD ONE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts
NOTE 11 - Supplemental Cash Flow and Other Information:
Supplemental information on cash flows, is summarized as follows:
Year Ended December 31,
------------------------------
2003 2002 2001
---- ---- ----
Cash paid for:
Interest......................................... $12,047 $5,687 $8,473
Income taxes..................................... 51,755 8,561 8,403
The Company had certain non-cash investing and financing activities in 2003 and
2002. 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.
Insurance Claim
The Company has insurance policies that cover business interruption related to
September 11, 2001 terrorist attacks. For the year ended December 31, 2003, the
Company recorded $3,200 as a reduction to operating costs in the accompanying
Consolidated Statements of Operations, reflecting the settlement of its business
interruption insurance claim.
NOTE 12 - Quarterly Results of Operations (unaudited):
The following is a tabulation of the unaudited quarterly results of operations.
The quarterly results are presented for the years ended December 31, 2003 and
2002.
(In thousands, except per share data)
First Second Third Fourth For the
Quarter Quarter Quarter Quarter Year
------- ------- ------- ------- -------
2003
----
Net revenues................................... $125,795 $132,675 $134,680 $146,076 $539,226
Operating income............................... 29,219 41,664 46,782 52,360 170,025
Net income..................................... 16,914 24,336 27,710 31,079 100,039
Net income per share:
Basic..................................... $.16 $.24 $.28 $.31 $.99
Diluted .................................. .16 .23 .27 .31 .97
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
NOTE 13 - Subsequent Event:
On March 3, 2004, the Company refinanced its existing senior loan agreement with
a syndicate of banks led by JP Morgan Chase Bank and Bank of America. The new
facility is comprised of a five-year $120,000 term and a five-year $180,000
revolving credit facility (collectively the "New Facility"). In connection with
the closing of the facility, the Company borrowed the full amount of the term
loan, the proceeds of which were used to repay the outstanding borrowings under
the Facility. Interest on the New Facility is payable at the prime rate plus an
applicable margin of up to .25% or LIBOR plus an applicable margin of up to
1.25%, at the Company's option. The New Facility contains covenants relating to
dividends, liens, indebtedness and interest coverage and leverage ratios.
F-17
WESTWOOD ONE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts)
Schedule II - Valuation and Qualifying Accounts
Allowance for Doubtful Accounts
Additions Deductions
Balance at --------------------------------- ----------------- Balance at
Beginning of Charged to Costs Charged to Write-offs and End of
Period And Expenses Other Accounts Other Adjustments Period
------------ --------------------------------- ----------------- ----------
2003 $11,757 $3,624 - $(11,047) $4,334
2002 9,282 6,379 - (3,904) 11,757
2001 9,356 1,968 - (2,042) 9,282
F-18