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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
---------
Annual Report Pursuant to Section 13 or 15 (d) of the
Securities Exchange Act of 1934
For the fiscal year ended December 31, 1997 Commission file number 0-13020
WESTWOOD ONE, INC.
(Exact name of registrant as specified in its charter)
Delaware 95-3980449
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
9540 Washington Boulevard
Culver City, CA 90232
(Address of principal executive offices)
(310) 204-5000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b)of the Act:
Name of Each Exchange on
Title of each class Which Registered
- ------------------- ----------------
None None
Securities registered pursuant to Section 12(g)of the Act:
Common Stock
(Title of Class)
Seven Year Common Stock Purchase Warrants
(Title of Class)
----------------
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. [ ]
The aggregate market value of Common Stock held by non-affiliates as of
February 13, 1998 was approximately $790 million.
As of February 13, 1998, 31,351,435 shares (excluding 3,290,295 treasury
shares) of Common Stock were outstanding and 351,733 shares of Class B Stock
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 in Part III of this
Form 10-K.
PART I
Item 1. Business
General
Westwood One, Inc. (the "Company" or "Westwood One") is a leading producer and
distributor of nationally sponsored radio programs and is the nation's largest
radio network as a result of its March 1997 agreement to represent the CBS Radio
Networks. In addition, the Company owns and operates Westwood One Broadcasting
Services, Inc. ("WBS"), which provides local traffic, news, sports and weather
programming to radio stations and other media outlets in New York, Chicago, Los
Angeles and Philadelphia. Westwood One is managed by CBS Radio Group (the
successor to Infinity Broadcasting Corporation) pursuant to a five-year
Management Agreement which expires on March 31, 1999.
The Company's principal source of revenue is selling radio time to advertisers
through one of its three operating divisions: Westwood One Radio Networks,
Westwood One Entertainment (collectively, the "Network Divisions"), and WBS. The
Company generates revenue principally by its Network Divisions entering into
radio station affiliation agreements to obtain audience and commercial spots and
then selling the spots to national advertisers. WBS generates revenue
principally by selling audience it obtains from radio stations and other media
outlets where it has operations to local as well as national advertisers. The
Company is strategically positioned to provide a broad range of programming and
services which both deliver audience to advertisers and news, talk, sports, and
entertainment programs to radio stations.
Westwood One Radio Networks offers radio stations four traditional news
services, CBS Radio news, CNN Radio, NBC Radio news and Mutual news, plus
youth-oriented network news and entertainment programming from The Source and
CBS Spectrum, in addition to eight 24-hour satellite-delivered continuous play
music formats and weekday and weekend news and entertainment features and
programs.
Westwood One Entertainment produces sports, talk, music and special event
programming. These programs include: major sporting events (principally covering
the NFL, Notre Dame football and other college football, basketball games, NHL
and the Olympics); live, personality intensive talk shows; live concert
broadcasts; countdown shows; music and interview programs; and exclusive
satellite simulcasts with HBO and other cable networks.
The Company's programs are broadcast in every radio market in the United States
measured by The Arbitron Ratings Company ("Arbitron"), the leading rating
service, as well as being broadcast internationally.
WBS provides radio stations and other media outlets, including television and
cable companies, with local traffic, news, sports and weather programming in New
York, Chicago, Los Angeles and Philadelphia.
Westwood One, through its Divisions, enables national advertisers to purchase
advertising time and to have their commercial messages broadcast on radio
stations throughout the United States, reaching demographically defined
listening audiences. The Company delivers both of the major demographic groups
targeted by national advertisers: the 25 to 54-year old adult market and the 12
to 34-year-old youth market. The Company currently sells advertising time to
over 300 national advertisers, including each of the 25 largest network radio
advertisers. Radio stations are able to obtain quality programming from Westwood
One to meet their objective of attracting larger listening audiences and
increasing local advertising revenue. Westwood One, through the development of
internal programming as well as through acquisitions, has developed an extensive
tape library of previously aired programs, interviews, live concert
performances, news and special events.
Westwood One is managed by CBS Radio Group pursuant to a Management Agreement
between the Company and CBS Radio Group under which (a) the Chief Executive
Officer of CBS Radio Group, currently Mel Karmazin, became the Chief Executive
Officer of the Company, (b) the Chief Financial Officer of CBS Radio Group,
currently Farid Suleman, became the Chief Financial Officer of the Company. In
1994, CBS Radio Group began managing the business and operations for an annual
base fee of $2,000,000 (adjusted for inflation), an annual cash bonus (payable
in the event of meeting certain financial targets) and warrants to acquire
shares of Common Stock exercisable after the Company's Common Stock reaches
certain market prices per share. In addition, a Voting Agreement was
-1-
executed providing for the reconstitution of the Board of Directors into a
maximum nine-member Board (currently eight members due to the sale of Common
Stock by Norman Pattiz) and the voting of Norman Pattiz's shares of the
Company's Common Stock and Class B Stock and the shares of the Common Stock held
by Infinity Network, Inc. ("INI"), a wholly-owned subsidiary of CBS Radio
Group.
Industry Background
Radio Broadcasting
As of January 1, 1998, there were approximately 10,300 commercial radio stations
in the United States.
A radio station selects a style of programming ("format") to attract a target
listening audience and thereby attract commercial advertising directed at that
audience. There are many formats from which a station may select, including
news, talk, sports and various types of music and entertainment programming.
The diversity in program formats has intensified competition among stations for
local advertising revenue. A radio station has two principal ways of effectively
competing for these 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 product, such as supplied by Westwood One, not available to its
competitors within its format. National programming broadcast on an exclusive
geographic basis can help differentiate a station within its market, and thereby
enable a station to increase its audience and local advertising revenue.
Radio Advertising
Radio advertising time can be purchased on a local, regional or national basis.
Local purchases allow an advertiser to select specific radio stations in chosen
geographic markets for the broadcast of commercial messages. However, this
process can be expensive and inefficient. Local and regional purchases are
typically best suited for an advertiser whose business or ad campaign is in a
specific geographic area. Advertising purchased from a radio network is one
method by which an advertiser targets its commercial messages to a specific
demographic audience, achieving national coverage on a cost efficient basis. In
addition, an advertiser can choose to emphasize its message in a certain market
or markets by supplementing a national purchase with local and/or regional
purchases.
In recent years, the increase in the number of program formats has led to more
demographically specific listening audiences making radio an attractive
alternative medium for national advertisers. In addition, nationally broadcast
news, concerts and special event programming have made radio an effective medium
of reach (size of listening audiences) as well as frequency (number of exposures
to the target audience).
To verify audience delivery and demographic composition, specific measurement
information is available to national advertisers by independent rating services
such as Arbitron and Statistical Research, Inc.'s RADAR. These rating services
provide demographic information such as the age and sex composition of the
listening audiences. Consequently, national advertisers can verify that their
advertisements are being heard by their target listening audience.
Business Strategy
Westwood One's Network Divisions provide targeted radio audiences and commercial
spots to national advertisers through its recognized programming and other
network products. The Company, through its various radio networks, produces and
distributes quality programming to radio stations seeking to increase their
listening audience and improve local and national advertising revenue. The
Company sells advertising time within its programs to national advertisers
desiring to reach large listening audiences nationwide with specific demographic
characteristics.
In 1996, the Company expanded its strategy to include providing local traffic,
news, sports and weather programming
-2-
to radio stations and other media outlets in selected cities across the United
States. In March 1996, WBS acquired the operating assets of New York Shadow
Traffic Limited Partnership, Chicago Shadow Traffic Limited Partnership, Los
Angeles Shadow Traffic Limited Partnership, and Philadelphia Express Traffic
Limited Partnership (collectively "Shadow Traffic") and has options to
acquire the remaining Shadow operations in other cities.
Radio Programming
The Company produces and distributes 24-hour continuous play formats, regularly
scheduled and special syndicated programs, including exclusive live concerts,
music and interview shows, national music countdowns, lifestyle short features,
news broadcasts, talk programs, sporting events, and sports features.
The Company controls most aspects of production of its programs, therefore being
able to tailor its programs to respond to current and changing listening
preferences. The Company produces regularly scheduled short-form programs
(typically 5 minutes or less), long-form programs (typically 60 minutes or
longer) and 24-hour continuous play formats. Typically, the short-form programs
are produced at the Company's in-house facilities located in Culver City,
California, New York, New York and Arlington, Virginia. The long-form programs
include shows produced entirely at the Company's in-house production facilities
and recordings of live concert performances and sports events made on location.
The 24-hour continuous play formats are produced at the Company's facilities in
Valencia, California.
Westwood One also produces and distributes special event syndicated programs. In
1997 the Company produced and distributed numerous special event programs,
including exclusive broadcasts of Garth Brooks Live from Central Park, U2 Live
from Sarajevo, MTV 1997 Video Music Awards and The Rolling Stones "Bridges to
Babylon" Tour Live Pay-per-view from St. Louis.
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 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 eight 24-hour continuous play formats
providing music, news and talk programming for Country, Hot Country, Adult
Contemporary, Soft AC, Oldies, Adult Standards, Adult Rock and Roll and the 70's
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.
Affiliated Radio Stations
The Network Divisions' radio network 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.
-3-
The Company offers radio stations a wide selection of regularly scheduled and
special event syndicated programming as well as 24-hour continuous play formats.
These programs and formats are completely produced by the Company and,
therefore, the stations have no production costs. Typically, each program is
offered for broadcast by the Company exclusively to one station in its
geographic market, which assists the station in competing for audience share in
its local marketplace. In addition, except for news programming, Westwood One's
programs contain available commercial air time that the stations may sell to
local advertisers. Westwood One typically distributes promotional announcements
to the stations and places advertisements in trade and consumer publications to
further promote the upcoming broadcast of its programs.
Westwood One's networks enter into affiliation agreements with radio stations.
In the case of news and current events programming, the agreements commit the
station to broadcast only the advertisements associated with these programs and
allows the station flexibility to have the news headlined by their newscasters.
The other affiliation agreements 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 the 24-hour
formats, the Company may also receive a fee from the affiliated stations for the
right to broadcast the formats. Radio stations in the top 200 national markets
may also receive compensation for airing national advertising spots.
Affiliation agreements specify the number of times and the approximate daypart
each program and advertisement may be broadcast. Westwood One requires that each
station complete and promptly return to the Company an affidavit
(proof-of-performance) that verifies the time of each broadcast. Affiliation
agreements for Westwood One's entertainment programming are non-cancelable for
26 weeks and are automatically renewed for subsequent 26-week periods, if not
canceled 30 days prior to the end of the existing contract term. Affiliation
agreements for Westwood One's news and current events programming 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 a number of people responsible for station relations and
marketing its programs to radio stations. Station relationships are managed
geographically to allow the marketing staff to concentrate on specific
geographical regions. This enables the Company's staff to develop and maintain
close, professional relationships with radio station personnel and to provide
them with quick programming assistance.
National Advertisers
Westwood One provides national advertisers with a cost-effective way to
communicate their commercial messages to large listening audiences nationwide
that have specific demographic characteristics. An advertiser can obtain both
frequency (number of exposures to the target audience) and reach (size of
listening audience) by purchasing advertising time in the Company's programs. By
purchasing time in 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 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.
The Company sells its commercial time to advertisers either as "bulk" or
"flighted" purchases. Bulk purchases are long-term contracts (26 to 52 weeks)
that are sold "up-front" (early advertiser commitments for national broadcast
time). Flighted purchases are contracts for a specific, short-term period of
time (one to six weeks) that are sold at or above prevailing market prices.
Advertising prices vary significantly based on prevailing market conditions.
Generally, the contracts provide that advertising orders are firm and
non-cancelable. The Company's strategy for growth in advertising revenue is to
increase the amount of advertising time sold on the usually more profitable
flighted basis, to increase revenue of the non-RADAR rated programs, and to
increase audience size for news, talk and current events programming.
-4-
Local Traffic and Information Programming
In 1996, the Company expanded its business to include the production and
distribution of local traffic, news, sports and weather programming in selected
metropolitan areas (initially New York, Chicago, Los Angeles and Philadelphia).
The programming is produced in facilities rented by the Company in those
metropolitan areas. Local traffic information is obtained through the
utilization of strategically placed cameras overlooking portions of major
freeways, monitoring police radio bands, phone calls from drivers, and through
patrolling freeways with rented aircraft.
Competition
The Company operates in a very competitive environment. In marketing its
programs to national advertisers, the Company directly competes with other radio
networks as well as with independent radio syndication producers and
distributors. More recently, as a result of consolidations in the radio
industry, companies owning large groups of stations have begun to create
competing networks that will result in additional competition for network radio
advertising expenditures. In addition, Westwood One competes for advertising
revenue with network television, cable television, print and other forms of
communications media. The Company believes that the high quality of its
programming and the strength of its station relations and advertising sales
forces enable it to compete effectively with other forms of communication media.
Westwood One markets its programs to radio stations, including affiliates of
other radio networks, that it believes will have the largest and most desirable
listening audience for each of its programs. The Company often has different
programs airing on a number of stations in the same geographic market at the
same time. The Company believes that in comparison with any other independent
radio syndication producer and distributor or radio network it has a more
diversified selection of programming from which national advertisers and radio
stations may choose. In addition, the Company both produces and distributes
programs, thereby enabling it to respond more effectively to the demands of
advertisers and radio stations.
The increase in the number of program formats has led to increased competition
among local radio stations for audience. As stations attempt to differentiate
themselves in an increasingly competitive environment, their demand for quality
programming available from outside programming sources increases. This demand
has been intensified by high operating and production costs at local radio
stations and increased competition for local advertising revenue.
WBS, in the metropolitan areas in which it operates, competes for advertising
revenue with local print and other forms of communications media. The Company's
principal competitor providing local traffic is Metro Networks.
Government Regulation
Radio broadcasting and station ownership are regulated by the FCC. Westwood One,
as a producer and distributor of radio programs, is generally not subject to
regulation by the FCC. Shadow Traffic utilizes FCC regulated frequencies
pursuant to licenses issued by the FCC.
Employees
On February 13, 1998, Westwood One had 635 full-time employees, including a
domestic advertising sales force of 96 people. In addition, the Company
maintains continuing relationships with approximately 92 independent writers,
program hosts, technical personnel and producers. Certain employees at the
Mutual Broadcasting System, NBC Radio Networks, and Unistar Radio Networks
("Unistar") are covered by collective bargaining agreements. The Company
believes relations with its employees and independent contractors are good.
-5-
Item 2. Properties
The Company owns a 7,600 square-foot building in Culver City, California in
which its production facilities are located and a 14,000 square-foot building
and an adjacent 10,000 square-foot building in Culver City, California which
contains administrative, sales and marketing offices, and storage space. In
addition, the Company leases offices in New York; Chicago; Detroit; Dallas;
Philadelphia; San Francisco; Arlington, Virginia and Valencia, California.
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, 1997.
-6-
PART II
Item 5. Market for Registrant's Common Stock and Related Shareholder Matters
On February 13, 1998 there were approximately 220 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 shareholders' meeting on June 17, 1997, the Company
estimates that the total number of beneficial holders of the Company's Common
Stock exceeds 4,500.
The Company's Common Stock has been traded in the over-the-counter market under
the NASDAQ symbol WONE since the Company's initial public offering on April 24,
1984. The following table sets forth the range of high and low last sales prices
on the NASDAQ/National Market System, as reported by NASDAQ, for the Common
Stock for the calendar quarters indicated.
1997 High Low
---- ---- ---
First Quarter . . . . . . . . . . 19 11/16 16 3/4
Second Quarter . . . . . . . . . . 32 1/4 19 1/8
Third Quarter . . . . . . . . . . . 33 5/8 27 5/16
Fourth Quarter . . . . . . . . . . . 37 1/8 29
1996 High Low
---- ---- ---
First Quarter . . . . . . . . . . 18 1/2 14 1/8
Second Quarter . . . . . . . . . . 18 5/8 15 1/8
Third Quarter . . . . . . . . . . . 18 3/8 13 1/2
Fourth Quarter . . . . . . . . . . . 18 5/8 15 3/8
No cash dividend was paid on the Company's stock during 1997 or 1996, and the
payment of dividends is restricted by the terms of its loan agreements.
-7-
Item 6. Selected Financial Data
(In thousands except per share data)
The table below summarizes selected consolidated financial data of the Company
for each of the last five fiscal years:
OPERATING RESULTS FOR YEAR ENDED: December 31, November 30,
---------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
NET REVENUES $240,790 $171,784 $145,729 $136,340 $84,014
OPERATING EXPENSES, EXCLUDING
DEPRECIATION AND AMORTIZATION 191,854 132,247 112,661 112,198 69,821
DEPRECIATION AND AMORTIZATION 13,031 12,265 13,753 18,160 16,384
OPERATING INCOME (LOSS) 35,905 27,272 19,315 5,982 (2,191)
INCOME (LOSS) FROM CONTINUING
OPERATIONS 25,496 17,500 9,685 (2,730) (8,682)
(LOSS) FROM DISCONTINUED OPERATIONS
- - - - (15,227)
INCOME (LOSS) BEFORE EXTRAORDINARY
ITEM 25,496 17,500 9,685 (2,730) (23,909)
EXTRAORDINARY (LOSS) - - - (590) -
NET INCOME (LOSS) $25,496 $17,500 $9,685 ($3,320) $23,909)
INCOME (LOSS) PER SHARE:
BASIC:
Continuing Operations $ .83 $ .56 $ .31 ($ .09) ($ .57)
Discontinued Operations - - - - ( 1.01)
Income (Loss) Before Extraordinary Item .83 .56 .31 ( .09) ( 1.58)
Extraordinary Item - - - ( .02) -
Net Income (Loss) $ .83 $ .56 $ .31 ($ .11) ($1.58)
DILUTED:
Continuing Operations $ .74 $ .51 $ .28 ($ .09) ($ .57)
Discontinued Operations - - - - ( 1.01)
Income (Loss) Before Extraordinary Item .74 .51 $ .28 ( .09) ( 1.58)
Extraordinary Item - - - ( .02) -
Net Income (Loss) $ .74 $ .51 $ .28 ($ .11) ($1.58)
BALANCE SHEET DATE AT: December, 31 November 30,
---------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
CURRENT ASSETS $ 77,933 $48,379 $41,885 $46,157 $32,987
WORKING CAPITAL 12,180 (3,647) 6,563 7,685 (1,503)
TOTAL ASSETS 335,850 273,046 245,595 260,112 152,067
LONG-TERM DEBT 115,000 130,443 107,943 115,443 51,943
TOTAL SHAREHOLDERS' EQUITY 124,678 86,848 94,123 95,454 55,151
- --------------------------------------------------------
Results for the year ended December 31, 1996 include Shadow Traffic from the
time it was acquired in March 1996.
Results for the year ended December 31, 1994 include Unistar from the time it
was acquired in February 1994.
No cash dividend was paid on the Company's Common Stock during the periods
presented above.
-8-
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
(In thousands except for per share amounts)
On March 31, 1997, the Company entered into a Representation Agreement with CBS
Inc. to operate the CBS Radio Networks. The Company retains all revenue and is
responsible for all expenses of the CBS Radio Networks from the effective date
of the Representation Agreement.
Results of Operations
Westwood One derives substantially all of its revenue from the sale of
advertising time to advertisers. Net revenues increased 40% to $240,790 in 1997
from $171,784 in 1996, and increased 18% in 1996 from $145,729 in 1995. The
increase in 1997 net revenue was primarily due to the inclusion of the results
of the CBS Radio Networks, the acquisition of Shadow Traffic, and higher
advertising rates for the Company's programs, partially offset by the
non-recurrence of the 1996 Summer Olympics. The increase in 1996 net revenues
was primarily due to the acquisition of Shadow Traffic effective March 1, 1996
and the Company's exclusive radio rights to the 1996 Summer Olympics.
Operating costs and expenses excluding depreciation and amortization increased
48% to $186,918 in 1997 from $126,702 in 1996, and increased 19% in 1996 from $
106,685 in 1995. The 1997 increase was primarily attributable to the inclusion
of the CBS Radio Networks, including fees payable to CBS in connection with the
Representation Agreement and the acquisition of Shadow Traffic, partially offset
by lower station compensation expenses for the Company's network operation and
the non- recurrence of costs associated with the Company's coverage of the 1996
Summer Olympics. The 1996 increase was primarily attributable to the acquisition
of Shadow Traffic and costs associated with the 1996 Summer Olympics, partially
offset by lower station compensation expenses.
Corporate general and administrative expenses decreased 11% to $4,936 in 1997
from $5,545 in 1996, and decreased 7% in 1996 from $ 5,976 in 1995. The decrease
in 1997 is primarily attributable to lower compensation expense. The decrease in
1996 was principally attributable to a reduction in corporate staff.
Operating income increased 32% to $35,905 in 1997 from $27,272 in 1996, and
increased 41% in 1996 from $19,315 in 1995. The 1997 improvement is principally
attributable to higher revenue and consolidations in operations resulting from
the inclusions of the CBS Radio Networks and the Shadow Traffic acquisition,
partially offset by the non- recurrence of the 1996 Summer Olympics. The
improvement in 1996 was attributable to the acquisition of Shadow Traffic, the
1996 Summer Olympics, controlling costs and lower amortization of programming
costs and rights.
Interest expense was $8,513, $8,749 and $9,524 in 1997, 1996 and 1995,
respectively. The 1997 decrease was primarily attributable to lower debt levels
as a result of the conversion to Common Stock of the Company's 6 3/4%
Convertible Subordinated Debentures (the "6 3/4% Debentures") and lower interest
rates. The decrease in 1996 was primarily attributable to lower interest rates,
partially offset by higher debt levels due to the purchase of Shadow Traffic.
The income tax provisions for 1997, 1996 and 1995 were based on annual effective
tax rates of 8%, 7% and 5%, respectively, as a result of the utilization of net
operating loss carryforwards. In 1998, the Company expects to record income tax
expense at a normalized tax rate of approximately 41% of income before taxes.
Net income in 1997 increased 46% to $25,496 ($.83 per basic share and $.74 per
diluted share) from $17,500 ($.56 per basic share and $.51 per diluted share) in
1996, and increased 81% in 1996 from $9,685 ($.31 per basic share and $.28 per
diluted share) in 1995.
-9-
The Company has adopted SFAS 128 "Earnings per Share" and in accordance with the
pronouncement has restated all previously reported per share amounts to present
both Basic and Diluted earnings per share amounts. Weighted averages shares
outstanding for purposes of computing basic earnings per share were 30,750,
31,018 and 31,400 in 1997, 1996 and 1995, respectively. The 1997 decrease was
attributable to the Company's stock repurchase program, partially offset by
additional share issuances as a result of the conversion to Common Stock of the
Company's 6 3/4% Convertible Debentures and approximately 2,036 shares of Common
Stock being issued as a result of warrants being exercised. The 1996 decrease is
due principally to the Company's stock repurchase program. Weighted average
shares outstanding for purposes of computing diluted earnings per share were
34,651, 34,521 and 35,209 in 1997, 1996 and 1995, respectively. The changes in
weighted average shares are due principally to the Company's stock repurchase
program partially offset by the effect of stock option grants.
Liquidity and Capital Resources
At December 31, 1997, the Company's cash and cash equivalents were $2,763 and
available borrowings under its loan agreement of $35,000.
For 1997, net cash from operating activities was $19,931, a decrease of $13,306
from 1996. The decrease was primarily attributable to an increase in accounts
receivable as a result of the inclusion of the CBS Radio Networks, partially
offset by higher cash flow from operations and an increase in accrued expenses.
As part of the Representation Agreement with CBS, CBS provided a $9,012 working
capital loan to the Company which is payable on March 31, 1999. In addition, on
July 21, 1997, $15,293 principal amount of the Company's 6 3/4% Debentures were
converted into approximately 622 shares of the Company's Common Stock. The
remaining outstanding balance of the issuance was redeemed for cash. In the
Company's third quarter, warrants covering approximately 2,036 shares were
exercised, resulting in a cash inflow of $35,114 to the Company.
During 1997, the Company purchased 1,377 shares of the Company's Common Stock
and 500 warrants for a total cost of $49,434. During 1996, the Company purchased
1,288 shares of the Company's Common Stock and 500 warrants for a total cost of
$25,689. In 1998 (through March 6), the Company repurchased an additional 161
shares of Common Stock at a cost of $5,007. The stock buybacks have been funded
principally from the Company's free cash flow.
The Company has addressed the impact the Year 2000 issue will have on its
operations and believes the costs to be incurred to resolve this issue will not
be significant.
Item 8. Financial Statements and Supplementary Data
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-15 and by this reference incorporated herein.
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure
None.
-10-
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.
-11-
PART IV
Item 14. 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 thereunder are indexed
on page F-1 hereof.
2. Exhibits
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
3.1 Certificate of Incorporation of Registrant. (1)
3.2 Agreement of Merger. (1)
3.3 Certificate of Amendment of Certificate of Incorporation, as filed on
October 10, 1986. (2)
3.4 Certificate of Amendment of Certificate of Incorporation, as filed on
October 9, 1986. (3)
3.5 Certificate of Amendment of Certificate of Incorporation, as filed on
March 23, 1987. (3)
3.6 Certificate of Correction of Certificate of Amendment, as filed on
March 31, 1987 at 10:00 a.m. (3)
3.7 Certificate of Correction of Certificate of Amendment, as filed on
March 31, 1987 at 10:01 a.m. (3)
3.8 Bylaws of Registrant as currently in effect. (14)
*10.1 Employment Agreement and Registration Rights Agreement, dated
October 18, 1993, between Registrant and Norman J. Pattiz. (12)
*10.2 First Amendment to Employment Agreement, dated January 26, 1994,
between Registrant and Norman J. Pattiz. (12)
*10.3 Second Amendment to Employment Agreement, dated February 2, 1994,
between Registrant and Norman J. Pattiz. (14)
10.4 Form of Indemnification Agreement Between Registrant and its Directors
and Executive Officers. (4)
10.5 Amended and Restated Credit Agreement, dated September 30, 1996,
between Registrant and The Chase Manhattan Bank and Co-Agents. (17)
10.6 Purchase Agreement, dated as of August 24, 1987, between Registrant
and National Broadcasting Company, Inc. (5)
10.7 Securities Purchase Agreement, dated November 4, 1993, between
Registrant and Infinity Network, Inc. (11) *10.8 Management Agreement,
dated as of February 4, 1994, between Registrant and Infinity
Broadcasting Corporation. (11)
*10.9 Extension Agreement, dated as of March 1, 1997, between Registrant
and Infinity Broadcasting Corporation *10.10 Voting Agreement, dated
as of February 4, 1994, among Registrant, Infinity Network, Inc.,
Infinity Broadcasting Corporation and Norman J. Pattiz. (11)
10.11 Representation Agreement, dated as of March 31, 1997, between
Registrant and CBS, Inc.
10.12 Asset Purchase Agreement, dated March 4, 1996, between Westwood One
Broadcasting Services, Inc. and Chicago Shadow Traffic Limited
Partnership, New York Shadow Traffic Limited Partnership, Los Angeles
Shadow Traffic Limited Partnership, Philadelphia Express Traffic
Limited Partnership, City Traffic Corp., Express Traffic Corp. and
Alan Markowitz. (15)
10.13 Westwood One, Inc. 1989 Stock Incentive Plan. (9)
10.14 Amendments to the Westwood One, Inc. Amended 1989 Stock Incentive
Plan. (13) (16)
10.15 Lease, dated July 19, 1989, between First Ball Associates Limited
Partnership and Registrant, relating to Arlington, Virginia offices.(6)
10.16 Lease, dated June 18, 1990, between Broadway 52nd Associates and
Unistar Communications Group, Inc. relating to New York, New York
offices. (14)
10.17 Lease, dated December 18, 1991, between Valencia Paragon Associates,
Ltd., and Unistar Communications Group, Inc. relating to Valencia,
California offices. (14)
10.18 Digital Audio Transmission Service Agreement, dated June 5, 1990,
between Registrant and GE American Communications, Inc. (7)
10.19 Transmission Service Agreement, dated May 28, 1993, between IDB
Communications Group, Inc. and Unistar Radio Networks, Inc. (14)
10.20 Agreement for Cancellation of Loan Documents, Guarantees and Securities
Purchase Documents, dated as of November 19, 1993, between Registrant,
Westwood One Stations Group, Inc., Westwood One Stations-LA, Inc.,
Radio & Records, Inc. and Westinghouse Electric Corporation. (12)
-12-
22 List of Subsidiaries
24 Consent of Independent Accountants
27 Financial Data Schedule
**********************
* Indicates a management contract or compensatory plan.
(1) Filed as an exhibit to Registrant's registration statement on Form S-1
(File Number 2-98695) and incorporated herein by reference.
(2) Filed as an exhibit to Registrant's registration statement on Form S-1
(Registration Number 33-9006) and incorporated herein by reference.
(3) Filed as an exhibit to Registrant's Form 8 dated March 1, 1988
(File Number 0-13020), and incorporated herein by reference.
(4) Filed as part of Registrant's September 25, 1986 proxy statement
(File Number 0-13020) and incorporated herein by reference.
(5) Filed an exhibit to Registrant's current report on Form 8-K dated
September 4, 1987 (File Number 0-13020) and incorporated herein by
reference.
(6) Filed as an exhibit to Registrant's Annual Report on Form 10-K for the
fiscal year ended November 30, 1989 (File Number 0-13020) and
incorporated herein by reference.
(7) Filed as an exhibit to Registrant's Annual Report on Form 10-K for the
fiscal year ended November 30, 1990 (File Number 0-13020) and
incorporated herein by reference.
(8) Filed as an exhibit to Registrant's Annual Report on Form 10-K for the
fiscal year ended November 30, 1991 File Number 0-13020) and
incorporated herein by reference.
(9) Filed as part of Registrant's March 27, 1992 proxy statement (File
Number 0-13020) and incorporated herein by reference.
(10) Filed as an exhibit to Registrant's Annual Report on Form 10-K for the
fiscal year ended November 30, 1992 (File Number 0-13020) and
incorporated herein by reference.
(11) Filed as part of Registrant's January 7, 1994 proxy statement (File
Number 0-13020) and incorporated herein by reference.
(12) Filed as an exhibit to Registrant's Annual Report on Form 10-K for the
fiscal year ended November 30, 1993 (File Number 0-13020) and
incorporated herein by reference.
(13) Filed as an exhibit to Registrant's July 20, 1994 proxy statement (File
Number 0-13020) and incorporated herein by reference.
(14) Filed as an exhibit to Registrant's Annual Report on Form 10-K for the
year ended December 31, 1994 (File Number 0-13020) and incorporated
herein by reference.
(15) Filed as an exhibit to Registrant's Annual Report on Form 10-K for the
year ended December 31, 1995 (File Number 0-13020) and incorporated
herein by reference.
(16) Filed as an exhibit to Registrant's May 17, 1996 proxy statement (File
Number 0-13020) and incorporated herein by reference.
(17) Filed as an exhibit to Registrant's Quarterly report on Form 10-Q for
the quarter ended September 30, 1996 File Number 0-13020) and
incorporated herein by reference.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the fourth quarter of 1997.
-13-
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.
March 26, 1997 By /s/ FARID SULEMAN
---------------------
Farid Suleman
Director, Secretary and 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
Principal Executive Officer:
/s/ MEL A. KARMAZIN Director, President and March 26, 1997
- ---------------------------- Chief Executive Officer
Mel A. Karmazin
Principal Financial Officer and
Chief Accounting Officer:
/s/ FARID SULEMAN Director, Secretary and March 26, 1997
- ---------------------------- Chief Financial Officer
Farid Suleman
Additional Directors:
/s/ NORMAN J. PATTIZ Chairman of the Board of March 26, 1997
- ---------------------------- Directors
Norman J. Pattiz
/s/ DAVID L. DENNIS Director March 26, 1997
- ----------------------------
David L. Dennis
/s/ GERALD GREENBERG Director March 26, 1997
- ----------------------------
Gerald Greenberg
/s/ STEVEN A. LERMAN Director March 26, 1997
- ----------------------------
Steven A. Lerman
/s/ PAUL KRASNOW Director March 26, 1997
- ----------------------------
Paul Krasnow
/s/ JOSEPH B. SMITH Director March 26, 1997
- ----------------------------
Joseph B. Smith
-14-
WESTWOOD ONE, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES
1. Consolidated Financial Statements Page
----
--Report of Independent Accountants F-2
--Consolidated Balance Sheets at December 31, 1997
and 1996 F-3
--Consolidated Statements of Operations for the years
ended December 31, 1997, 1996 and 1995 F-4
--Consolidated Statements of Shareholders' Equity
for the years ended December 31, 1997, 1996 and 1995 F-5
--Consolidated Statements of Cash Flows for the years
ended December 31, 1997, 1996 and 1995 F-6
--Notes to Consolidated Financial Statements F-7 - F14
2. Financial Statement Schedules:
IX. --Short-term Borrowings F-15
All other schedules have been omitted because they are not applicable, the
required information is immaterial, or the required information is included
in the consolidated financial statements or notes thereto.
F-1
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
of Westwood One, Inc.
In our opinion, the consolidated financial statements listed in the index to
consolidated financial statements and financial statement schedules on page F-1
present fairly, in all material respects, the financial position of Westwood
One, Inc. ("the Company") and its subsidiaries at December 31, 1997 and 1996,
and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards 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 the opinion expressed above.
PRICE WATERHOUSE LLP
Century City, California
February 18, 1998
F-2
WESTWOOD ONE, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
December 31,
----------------------------
1997 1996
------ ------
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents $ 2,763 $ 2,655
Accounts receivable, net of allowance for doubtful accounts
of $2,907 (1997) and $1,724 (1996) 67,765 41,325
Other current assets 7,405 4,399
-------- --------
Total Current Assets 77,933 48,379
PROPERTY AND EQUIPMENT, NET 15,516 16,146
INTANGIBLE ASSETS, NET 204,339 201,730
DEFERRED TAXES 28,722 -
OTHER ASSETS 9,340 6,791
-------- --------
TOTAL ASSETS $335,850 $273,046
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 15,511 $ 13,250
Income taxes payable 3,564 2,472
Deferred revenue 4,670 3,767
Other accrued expenses and liabilities 27,077 21,694
Amounts payable to affiliates 14,931 10,843
-------- --------
Total Current Liabilities 65,753 52,026
LONG-TERM DEBT 115,000 130,443
DEFERRED TAXES 18,155 -
OTHER LIABILITIES 12,264 3,729
-------- --------
TOTAL LIABILITIES 211,172 186,198
-------- --------
COMMITMENTS AND CONTINGENCIES - -
SHAREHOLDERS' EQUITY
Preferred stock: authorized 10,000,000 shares, none outstanding - -
Common stock, $.01 par value: authorized, 117,000,000 shares;
issued and outstanding, 34,639,730 (1997) and 31,817,652 (1996) 347 318
Class B stock, $.01 par value: authorized, 3,000,000 shares:
issued and outstanding, 351,733 (1997 and 1996) 4 4
Additional paid-in capital 201,759 152,708
Accumulated deficit (11,903) (37,399)
-------- --------
190,207 115,631
Less treasury stock, at cost; 3,272,295 (1997) and 1,895,395 (1996) shares (65,529) (28,783)
-------- --------
TOTAL SHAREHOLDERS' EQUITY 124,678 86,848
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $335,850 $273,046
======== ========
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,
-----------------------
1997 1996 1995
---- ---- ----
GROSS REVENUES $278,978 $198,988 $169,598
Less Agency Commissions 38,188 27,204 23,869
-------- -------- --------
NET REVENUES 240,790 171,784 145,729
-------- -------- --------
Operating Costs and Expenses Excluding
Depreciation and Amortization 186,918 126,702 106,685
Depreciation and Amortization 13,031 12,265 13,753
Corporate General and Administrative Expenses 4,936 5,545 5,976
-------- -------- --------
204,885 144,512 126,414
-------- -------- --------
OPERATING INCOME 35,905 27,272 19,315
Interest Expense 8,513 8,749 9,524
Other Income (334) (307) (389)
-------- -------- --------
INCOME BEFORE TAXES 27,726 18,830 10,180
INCOME TAXES 2,230 1,330 495
-------- -------- --------
NET INCOME $25,496 $17,500 $9,685
======= ======= =======
INCOME PER SHARE:
Basic $ .83 $ .56 $ .31
Diluted $ .74 $ .51 $ .28
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic 30,750 31,018 31,400
Diluted 34,651 34,521 35,209
See accompanying notes to consolidated financial statements.
F-4
WESTWOOD ONE, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands)
Additional
Common Stock Class B Stock Paid-in Accumulated Treasury Stock
Shares Amount Shares Amount Capital (Deficit) Shares Amount
------ ------ ------ ------ ------- --------- ------ ------
BALANCE AT DECEMBER 31, 1994 ............. 30,653 $307 352 $4 $159,727 ($64,584) - -
Net income for 1995 ..................... - - - - - 9,685 - -
Issuance of common stock under
stock option plans .................... 754 7 - - 3,215 - - -
Issuance of common stock under
warrants .............................. 100 1 - - 236 - - -
Purchase and cancellation of warrant .... - - - - (5,631) - - -
Purchase of treasury stock .............. - - - - - - 607 8,844
------- ---- ---- ---- -------- --------- ------- -------
BALANCE AT DECEMBER 31, 1995 ............. 31,507 315 352 4 157,547 (54,899) 607 8,844
Net income for 1996 ..................... - - - - - 17,500 - -
Issuance of common stock under
stock option plans .................... 311 3 - - 911 - - -
Purchase and cancellation of warrant .... - - - - (5,750) - - -
Purchase of treasury stock .............. - - - - - - 1,288 19,939
------- ---- ---- ---- -------- --------- ------ -------
BALANCE AT DECEMBER 31, 1996 ............. 31,818 318 352 4 152,708 (37,399) 1,895 28,783
Net income for 1997 ..................... - - - - - 25,496 - -
Issuance of common stock under
stock option plans .................... 164 2 - - 1,183 - - -
Issuance of common stock under
warrants .............................. 2,036 21 - - 35,093 - - -
Conversion of 6 3/4% debentures to
common stock ......................... 622 6 - - 14,896 - - -
Purchase and cancellation of warrant .... - - - - (12,688) - - -
Income tax benefit of option and warrant
exercises ............................. - - - - 10,567 - - -
Purchase of treasury stock .............. - - - - - - 1,377 36,746
------- ---- ---- ---- -------- --------- ------ -------
BALANCE AT DECEMBER 31, 1997 ............. 34,640 $347 352 $4 $201,759 ($11,903) 3,272 $65,529
======= ===== ==== ==== ======== ========= ====== =======
See accompanying notes to consolidated financial statements
F-5
WESTWOOD ONE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Year Ended December 31,
-----------------------
1997 1996 1995
---- ---- ----
CASH FLOW FROM OPERATING ACTIVITIES:
Net income $25,496 $17,500 $9,685
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 13,031 12,265 13,753
Other 320 403 (206)
------- -------- --------
38,847 30,168 23,232
Changes in assets and liabilities:
Decrease (increase) in accounts receivable (26,440) (489) 1,040
Decrease (increase) in prepaid assets (3,006) 310 (430)
Increase in accounts payable and accrued liabilities 10,530 3,248 381
-------- -------- --------
Net Cash Provided By Operating Activities 19,931 33,237 24,223
-------- -------- --------
CASH FLOW FROM INVESTING ACTIVITIES:
Acquisition of businesses and other (CBS Radio Networks
in 1997 and Shadow Traffic in 1996) (13,839) (26,172) (1,106)
Capital expenditures (1,711) (1,701) (1,229)
-------- -------- --------
Net Cash Used For Investing Activities (15,550) (27,873) (2,335)
-------- -------- --------
CASH PROVIDED BEFORE FINANCING ACTIVITIES 4,381 5,364 21,888
-------- -------- --------
CASH FLOW FROM FINANCING ACTIVITIES:
Debt repayments - (1,250) (12,500)
Borrowings under bank and other long-term obligations 8,862 23,750 -
Issuance of common stock 36,299 914 3,459
Repurchase of common stock and warrants (49,434) (25,689) (14,475)
Deferred financing costs - (690) (555)
-------- -------- --------
NET CASH (USED FOR) FINANCING ACTIVITIES (4,273) (2,965) (24,071)
-------- -------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 108 2,399 (2,183)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 2,655 256 2,439
-------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $2,763 $2,655 $256
======== ======== ========
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:
Principles of Consolidation
The consolidated financial statements include the accounts of all wholly-owned
subsidiaries.
Revenue Recognition
Revenue is recognized when commercial advertisements are broadcast.
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.
Depreciation
Depreciation is computed using the straight line method over the estimated
useful lives of the assets.
Measurement of Intangible Asset Impairment
At each balance sheet date, the Company determines whether an impairment of
Intangible Assets has occurred based upon expectations of nondiscounted
broadcast cash flow. Broadcast Cash Flow is based on the consolidated statement
of operations, calculated by subtracting from net revenue, operating costs and
expenses excluding depreciation and amortization. To date, the Company has not
experienced an impairment in any of its intangible assets. However, should such
an impairment exist, the impairment will be measured as the amount by which the
carrying amount of the asset exceeds its fair value, as defined by Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of".
Stock-Based Compensation
Statement of Financial Accounting Standards No. 123 ("FAS 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 (FAS 109), "Accounting for Income Taxes". Under FAS 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.
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 and liabilities at the date of the
financial statements and revenue and expenses during the reporting period.
Actual results may differ from those estimates.
NOTE 2 - Earnings per Share:
The Company has adopted SFAS 128 "Earnings per Share" and in accordance with the
pronouncement has restated all previously reported per share amounts to conform
to the new presentation. The pronouncement requires companies to disclose
"Basic" and "Diluted" earnings per share amounts. Basic earnings per share
excludes all dilution and is calculated using the weighted average number of
shares outstanding in the period. Diluted earnings
F-7
WESTWOOD ONE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
per share reflects the potential dilution that would occur if all financial
instruments which may be exchanged for equity securities were exercised or
converted to common stock.
The Company has issued options and warrants which may have a dilutive effect on
reported earnings if they were exercised or converted to Common Stock. The
following number of shares related to options and warrants were added to the
basic weighted average shares outstanding to arrive at the diluted weighted
average shares outstanding for each period:
1997 1996 1995
---- ---- ----
Warrants 3,182,000 3,029,000 3,264,000
Options 719,000 474,000 545,000
The following securities were not included in the computation of diluted
earnings per share for the years presented because the exercise price was
greater than the average market price of the Company's Common Stock:
1997 1996 1995
---- ---- ----
Options 790,000 50,000 740,000
Warrants - 2,499,000 2,499,000
The per share exercise prices of the options were $30.00 and $17.50 in 1997 and
1996, respectively, and $14.50 - $16.31 in 1995. The per share exercise price of
warrants was $17.25.
Shares issuable upon conversion of the Company's 6 3/4% Convertible Subordinated
Debentures were not included for purposes of calculating diluted earnings per
share because they were antidilutive securities.
NOTE 3 - Acquisitions of businesses:
On March 1, 1996, the Company through its wholly-owned subsidiary Westwood One
Broadcasting Services Inc. acquired the operating assets of New York Shadow
Traffic Limited Partnership, Chicago Shadow Traffic Limited Partnership, Los
Angeles Shadow Traffic Limited Partnership and Philadelphia Express Traffic
Limited Partnership (collectively "Shadow Traffic") for $20,000 plus expenses,
subject to an adjustment based on the future cash flow of Shadow Traffic. The
acquisition was accounted for as a purchase, and accordingly, Shadow Traffic's
operating results are included with those of the Company from the date of
acquisition. The purchase price has been allocated to the assets and liabilities
acquired based on preliminary estimates of their respective fair values. The
intangible assets acquired as part of the purchase are being amortized over 15
years.
On March 31, 1997, the Company entered into a representation and management
agreement (the "Representation Agreement") with CBS Inc. ("CBS"), whereby the
Company will operate the CBS Radio Networks for an initial two-year period
ending March 31, 1999. In accordance with the Representation Agreement, the
Company pays CBS a representation fee and retains all revenues from sales of
commercial time and is responsible for all expenses of the CBS Radio Networks.
Accordingly, the operating results of CBS Radio Network are included with those
of the Company from the effective date of the Representation Agreement. Pursuant
to the Representation Agreement, CBS provided a working capital loan of $9,012,
repayable on March 31, 1999, with interest payable at 50 basis points over the
six-month LIBOR rate. The Company is required to pay a representation fee of
$10,000 and $12,000 respectively in the first and second year of the
Representation Agreement and to reimburse CBS for certain programming costs,
including news, that CBS provides to Westwood One.
F-8
WESTWOOD ONE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 4 - Property and Equipment:
Property and equipment is recorded at cost and is summarized as follows at:
December 31,
-----------------------
1997 1996
---- ----
Land........................................... $ 3,378 $ 3,378
Recording and studio equipment................. 17,522 16,117
Buildings and leasehold improvements........... 7,977 7,972
Furniture and equipment........................ 7,328 6,734
Transportation equipment....................... 480 557
Construction-in-progress....................... - 1,378
------- ------
36,685 36,136
Less: Accumulated depreciation
and amortization...................... 21,169 19,990
------- ------
Property and equipment, net............. $15,516 $16,146
======= =======
Depreciation expense was $2,341 in 1997, $2,472 in 1996, and $2,340 in 1995.
NOTE 5 - Intangible Assets:
Intangible assets are summarized as follows at:
December 31,
-------------------------
1997 1996
---- ----
Goodwill, less accumulated amortization
of $32,166 (1997) and $26,205 (1996) ......... $164,862 $168,249
Acquired station affiliation agreements,
less accumulated amortization of $7,670
1997) and $6,274 (1996)...................... 16,109 17,505
Other intangible assets, less accumulated
amortization of $7,562 (1997) and $5,622
(1996) ....................................... 23,368 15,978
-------- --------
Intangible assets, net................... $204,339 $201,730
======== ========
Intangible assets, except for acquired station affiliation agreements, are
generally amortized on a straight-line basis principally over 40 years.
Station affiliation agreements are comprised of values assigned to agreements
acquired as part of the purchase of radio networks and are amortized using an
accelerated method over 40 years. The period of amortization is evaluated
periodically to determine whether a revision to the estimated useful life is
warranted.
F-9
WESTWOOD ONE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 6 - Debt:
Long-term debt consists of the following at:
December 31,
-----------------------
1997 1996
---- ----
Revolving Credit Facility/Term Loans............... $115,000 $115,000
6 3/4% Convertible Subordinated Debentures
maturing 2011..................................... - 15,443
-------- --------
$115,000 $130,443
======== ========
The Company's amended senior loan agreement with a syndicate of banks, led by
Chase Manhattan Bank, provides for an unsecured $75,000 revolving credit
facility and an unsecured $75,000 term loan (the "Facility"). The Facility is
available until September 30, 2004. At December 31, 1997, the Company had
available borrowings under the Facility of $35,000. 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, 1997, the
applicable margin was LIBOR plus .5%. At December 31, 1997, the Company had
borrowed $40,000 under the revolving credit facility and $75,000 under the term
loan at a weighted-average interest rate of 6.3%. The Facility contains
covenants relating to dividends, liens, indebtedness, capital expenditures and
interest coverage and leverage ratios.
On July 21, 1997, $15,293 principal amount of the Company's 6 3/4% Convertible
Subordinated Debenture were converted into approximately 622,000 shares of the
Company's Common Stock and the remaining balance of $150 was redeemed for cash,
thereby resulting in a complete redemption of the securities.
The aggregate maturities of long-term debt for the next five fiscal years and
thereafter, pursuant to the Company's debt agreements as in effect at December
31, 1997, are as follows:
Year
----
2000................................. $ 10,000
2001................................. 10,000
2002................................. 17,500
Thereafter........................... 77,500
--------
$115,000
========
The fair value of debt approximates its carrying value.
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.
In connection with the Company's purchase of Unistar, the Company sold 5 million
shares of common stock and a warrant to purchase up to an additional 3 million
shares of common stock at an exercise price of $3.00 per share (subject to
certain vesting conditions) to a wholly-owned subsidiary of Infinity
Broadcasting Corporation for $15,000.
F-10
WESTWOOD ONE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 8 - Stock Options:
The Company has a stock option plan established in 1989 which provides 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. There are 6,800,000
shares authorized under the 1989 Plan, as amended. 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 FAS 123, the Company's net income and earnings per
share would have been reduced by approximately $2,835 ($.09 per basic share and
$.08 per diluted share) in 1997, $795 ($.03 per basic share and $.02 per diluted
share) in 1996 and $134 in 1995. The weighted average fair value of the options
granted in 1997, 1996 and 1995 is estimated at $37.31, $24.30 and $20.74,
respectively, on the date of grant using the Black-Scholes option pricing model
with the following weighted average assumptions:
1997 1996
---- ----
Weighted Average Risk Free Interest Rate 6.3% 6.1%
Expected Life (In Years) 5 5
Expected Volatility 53.9% 31.1%
Expected Dividend Yield - -
Expected Forfeitures per Year 5% 5%
Information concerning options outstanding under the Plan is as follows for the
year ended:
Year Ended December 31,
----------------------------------------------------------------------------------
1997 1996 1995
------------------------ ------------------------ -----------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ ----- ------ ----- ------ -----
Outstanding at beginning of
period 1,732,500 $10.30 2,036,875 $ 9.02 1,686,875 $ 5.65
Granted during the period 1,660,000 $23.84 50,000 $17.50 675,000 $14.47
Exercised during the period (166,500) $ 7.24 (310,625) $ 3.01 (304,375) $ 2.92
Forfeited during the period (215,500) $16.65 (43,750) $10.61 (20,625) $ 2.19
--------- -------- --------
Outstanding at end of period 3,010,500 $17.48 1,732,500 $10.30 2,036,875 $ 9.02
========= ========= =========
Available for new stock options
at end of period 1,527,000 971,500 977,750
========= ======= =======
F-11
WESTWOOD ONE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
At December 31, 1997, options to purchase 794,500 shares of common stock were
currently exerciseable at a weighted average exercise price of $9.12.
The following table contains additional information with respect to options at
December 31, 1997:
Remaining
Weighted Weighted
Average Average
Number of Exercise Contractual
Options Price Life (In Years)
------- ----- ---------------
Options Outstanding at Exercise Price Ranges of:
$ 1.81 - $ 2.75 102,500 $ 2.27 3.9
$ 5.38 - $ 9.75 828,000 $ 8.59 6.6
$12.75 - $18.25 1,290,000 $16.74 8.6
$30.00 790,000 $30.00 9.5
-------
3,010,500 $17.48 8.1
=========
On December 1, 1986, the Chairman of the Board was granted options not covered
by the Plan to acquire 525,000 shares of common stock, which vested ratably over
a seven-year term or immediately upon a change in control of the Company. The
options became exercisable at the fair market value of the common stock, as
defined, on the date of vesting. At December 31, 1997, options covering 75,000
shares were outstanding and exercisable at $16.31 per share.
NOTE 9 - Income Taxes:
As of December 31, 1997, the Company had approximately $58,000 of available U.S.
net operating loss carryforwards for tax purposes, which begin to expire in
2002. Utilization of the carryforwards is dependent upon future taxable income
and the absence of any significant changes in the stock ownership of the
Company.
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,
---------------------
1997 1996
---- ----
Deferred tax liabilities:
Affiliation agreements............................. $7,237 $ 7,840
Purchase accruals.................................. 10,705 7,705
Other.............................................. 214 594
------- -------
Total deferred tax liabilities................... 18,155 16,139
------- -------
Deferred tax assets:
Net operating loss................................. 20,433 24,104
Accrued liabilities and reserves................... 6,986 5,724
Tax credits (AMT and ITC).......................... 1,303 1,850
------- -------
Total deferred tax assets........................ 28,722 31,678
------- -------
Valuation allowance.................................. - 15,539
------- -------
Net deferred tax assets.............................. $10,567 $ -
======= =======
F-12
WESTWOOD ONE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In 1997, as a result of its current trend of positive operating results, the
Company determined that it no longer needed to maintain a valuation allowance
for its net deferred tax assets. Accordingly, the benefit of the resulting net
operating losses was credited to paid-in-capital.
The components of the provision for income taxes related to continuing
operations is summarized as follows:
Year Ended December 31,
--------------------------------------
Current payable: 1997 1996 1995
---- ---- ----
Federal........................................ $ 483 $ 520 $ 280
State.......................................... 1,747 810 215
------ ------ ------
Total income tax expense....................... $2,330 $1,330 $ 495
====== ====== ======
NOTE 10 - Related Party Transactions:
In connection with the acquisition of Unistar, the Company sold 5,000,000 shares
of the Company's common stock and a warrant to purchase up to an additional
3,000,000 shares to INI (See Note 7) and entered into a Management Agreement
with CBS Radio Group. Pursuant to the Management Agreement, the Company paid
or accrued expenses aggregating $2,713 to CBS Radio Group in 1997 ($2,825 in
1996). As part of the Management Agreement, CBS Radio Group was given
1,500,000 warrants to acquire shares of common stock after the Company's common
stock reaches certain market prices per share. In 1997, the Company purchased
and cancelled CBS Radio Group's $5.00 incentive warrants covering 500,000
common shares for $12,688. In 1996, the Company purchased and cancelled CBS
Radio Group's $4.00 incentive warrants covering 500,000 common shares for
$5,750.
On March 31, 1997, the Company entered into a Representation Agreement with CBS
(Note 3). In addition, several of CBS Radio Group's radio stations are
affiliated with the Company's radio networks and the Company purchases several
programs from CBS Radio Group. During 1997 the Company incurred expenses
aggregating approximately $61,564 for the Representation Agreement and CBS
Radio Group affiliations and programs ($22,886 in 1996).
NOTE 11 - Commitments and Contingencies:
The Company has various non-cancelable, long-term operating leases for office
space and equipment. In addition, the Company is committed under various
contractual agreements to pay for talent, broadcast rights, research, certain
digital audio transmission services, the CBS Representation Agreement and the
Management Agreement with CBS Radio Group. The approximate aggregate future
minimum obligations under such operating leases and contractual agreements for
the five years after December 31, 1997, are set forth below:
Year
------
1998................................. $ 57,506
1999................................. 25,671
2000................................. 16,984
2001................................. 8,459
2002................................. 10,365
--------
$118,985
========
F-13
WESTWOOD ONE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 12 - Supplemental Cash Flow Information:
Supplemental Information on cash flows, including amounts from discontinued
operations, and non-cash transactions is summarized as follows:
Year Ended December 31,
------------------------------------
1997 1996 1995
---- ---- ----
Cash paid for:
Interest......................................... $ 8,245 $6,837 $9,597
Income taxes..................................... 1,174 754 326
Non-cash investing and financing activities:
Conversion of 6 3/4% Debentures
to common stock................................. $15,293 - -
NOTE 13 - Quarterly Results of Operations (unaudited):
The following is a tabulation of the unaudited quarterly results of operations.
The quarterly results are presented for the years ended December 31, 1997 and
1996.
(In thousands, except per share data)
First Second Third Fourth For the
Quarter Quarter Quarter Quarter Year
------- ------- ------- ------- ----
1997
----
Net revenues...................................... $41,461 $66,117 $63,373 $69,839 $240,790
Operating income.................................. 2,758 11,960 10,778 10,409 35,905
Net income ....................................... 504 8,983 7,866 8,143 25,496
Net income per share:
Basic ....................................... $ 0.02 $ 0.30 $ 0.25 $ 0.26 $ 0.83
Diluted ..................................... 0.02 0.26 0.23 0.23 0.74
1996
----
Net revenues...................................... $33,848 $45,392 $47,561 $44,983 $171,784
Operating income ................................. 1,330 9,548 8,956 7,438 27,272
Net income (loss) ................................ (639) 6,991 6,465 4,683 17,500
Net income (loss) per share:
Basic ...................................... $ (0.02) $ 0.23 $ 0.21 $ 0.15 $ 0.56
Diluted .................................... (0.02) 0.20 0.19 0.14 0.51
F-14
WESTWOOD ONE, INC.
SCHEDULE IX
CONSOLIDATED SHORT-TERM BORROWINGS
(In thousands)
MAXIMUM AVERAGE WEIGHTED
AMOUNT AMOUNT AVERAGE
CATEGORY OF BALANCE WEIGHTED OUT- OUT- INTEREST
AGGREGATE AT AVERAGE STANDING STANDING RATE
SHORT-TERM END OF INTEREST DURING THE DURING THE DURING THE
BORROWINGS PERIOD RATE PERIOD PERIOD PERIOD
- ---------- -------- ------ -------- -------- --------
Year ended
December 31,
1996:
Notes payable $ - - $10,000 $1,760 6.4 %
Notes: Short-term borrowings during the years covered by this schedule consist
of loans made under various established credit lines. The average amount
outstanding during each period was computed by dividing the average outstanding
principal balance by 365 days. The weighted average interest rate during each
period was computed by dividing the actual interest expense on such borrowings
by the average amount outstanding during that period. The Company did not have
any short-term borrowings in 1997 and 1995.
F-15