SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to ______
Commission file number 0-13020
WESTWOOD ONE, INC.
(Exact name of registrant as specified in its charter)
Delaware 95-3980449
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
40 West 57th Street, New York, NY 10019
(Address of principal executive offices) (Zip Code)
(212) 641-2000
Registrant's telephone number, including area code
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 whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes X No
--- ---
Number of shares of Stock Outstanding at July 30, 2004 (excluding treasury
shares):
Common Stock, par value $.01 per share - 96,537,417 shares
Class B Stock, par value $.01 per share - 703,466 shares
WESTWOOD ONE, INC.
INDEX
Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets 3
Consolidated Statements of Operations 4
Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 9
Item 3. Qualitative and Quantitative Disclosures
About Market Risk 16
Item 4. Controls and Procedures 17
PART II. OTHER INFORMATION
Item 2. Use of Proceeds and Issuer Purchases
of Equity Securities 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 6. Exhibits and Reports on Form 8K 19
SIGNATURES 21
CERTIFICATIONS 22
Item 1 - Financial Statements
WESTWOOD ONE, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands)
June 30, December 31,
2004 2003
----------- ------------
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 13,649 $ 8,665
Accounts receivable, net of allowance for doubtful accounts
of $4,097 (2004) and $4,334 (2003) 125,293 135,720
Prepaid and other assets 21,828 21,110
-------- ---------
Total Current Assets 160,770 165,495
PROPERTY AND EQUIPMENT, NET 48,637 50,562
GOODWILL 990,472 990,472
INTANGIBLE ASSETS, NET 6,762 7,626
OTHER ASSETS 40,322 47,879
-------- ---------
TOTAL ASSETS $1,246,963 $1,262,034
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 13,024 $ 13,136
Amounts payable to related parties 18,836 18,680
Deferred revenue 12,689 12,215
Income taxes payable - 3,760
Accrued expenses and other liabilities 34,741 32,082
-------- --------
Total Current Liabilities 79,290 79,873
LONG-TERM DEBT 342,557 300,366
DEFERRED INCOME TAXES 40,012 36,902
OTHER LIABILITIES 8,627 8,943
-------- ---------
TOTAL LIABILITIES 470,486 426,084
-------- ---------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Preferred stock: authorized 10,000 shares, none outstanding - -
Common stock, $.01 par value: authorized, 300,000 shares;
issued and outstanding, 96,261 (2004) and 99,057 (2003) 963 991
Class B stock, $.01 par value: authorized, 3,000 shares:
issued and outstanding, 704 (2004 and 2003) 7 7
Additional paid-in capital 420,283 517,132
Accumulated earnings 361,673 319,020
-------- ---------
782,926 837,150
Less treasury stock, at cost; 275 (2004) and 35 (2003) shares (6,449) (1,200)
-------- ---------
TOTAL SHAREHOLDERS' EQUITY 776,477 835,950
-------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,246,963 $1,262,034
========== ==========
See accompanying notes to consolidated financial statements.
3
WESTWOOD ONE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
2004 2003 2004 2003
---- ---- ---- ----
(Unaudited) (Unaudited)
NET REVENUES $139,585 $132,675 $269,193 $258,470
-------- -------- -------- --------
Operating Costs (includes related party expenses
of $21,812, $20,360 , $44,327 and $41,488,
respectively) 89,761 86,504 183,257 178,556
Depreciation and Amortization (includes related party
warrant amortization of $2,427, $338, $2,765 and
$676, respectively) 4,956 2,860 8,110 5,740
Corporate General and Administrative Expenses
(includes related party expenses of $759, $703,
$1,462, and $1,386, respectively) 1,806 1,647 3,776 3,291
-------- ------- -------- --------
96,523 91,011 195,143 187,587
-------- ------- -------- --------
OPERATING INCOME 43,062 41,664 74,050 70,883
Interest Expense 2,700 2,496 5,617 4,947
Other (Income) Expense (33) (16) (73) (36
-------- ------- -------- --------
INCOME BEFORE INCOME TAXES 40,395 39,184 68,506 65,972
INCOME TAXES 15,289 14,848 25,853 24,722
-------- ------- -------- --------
NET INCOME $25,106 $24,336 $42,653 $41,250
======= ======= ======= =======
EARNINGS PER SHARE:
BASIC $ .26 $ .24 $ .44 $ .40
======= ======= ======= =======
DILUTED $ .26 $ .23 $ .43 $ .39
======= ======= ======= =======
WEIGHTED AVERAGE SHARES OUTSTANDING:
BASIC 96,285 101,771 97,144 102,417
======= ======= ======= =======
DILUTED 97,910 104,253 98,975 104,938
======= ======= ======= =======
See accompanying notes to consolidated financial statements.
- 4 -
WESTWOOD ONE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Six Months Ended
June 30,
----------------
2004 2003
---- ----
(Unaudited)
CASH FLOW FROM OPERATING ACTIVITIES:
Net income $42,653 $41,250
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 8,110 5,740
Deferred taxes 339 2,000
Amortization of deferred financing costs 542 318
------- -------
51,644 49,308
Changes in assets and liabilities:
Accounts receivable 10,427 14,025
Prepaid and other assets 4,089 5,499
Deferred revenue 474 589
Income taxes payable 6,678 1,793
Accounts payable and accrued
and other liabilities 2,526 (5,188)
Amounts payable to related parties 156 2,682
------- -------
Net Cash Provided By Operating Activities 75,994 68,708
------- -------
CASH FLOW FROM INVESTING ACTIVITIES:
Capital expenditures (2,372) (2,336)
Acquisition of companies and other 6 (80)
------- -------
Net Cash Used In Investing Activities (2,366) (2,416)
------- -------
CASH FLOW FROM FINANCING ACTIVITIES:
Issuance of common stock 11,308 5,430
Borrowings under bank and other long-term obligations 155,000 35,000
Debt repayments and payments of capital lease obligations (110,295) (277)
Repurchase of common stock (123,388) (107,102)
Deferred financing costs (1,269) -
------- --------
Net Cash Used In Financing Activities (68,644) (66,949)
------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 4,984 (657)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 8,665 7,371
------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $13,649 $6,714
======= =======
See accompanying notes to consolidated financial statements.
- 5 -
WESTWOOD ONE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
NOTE 1 - Basis of Presentation:
The accompanying consolidated balance sheet as of June 30, 2004, the
consolidated statements of operations and the consolidated statements of cash
flows for the three and six month periods ended June 30, 2004 and 2003 are
unaudited, but in the opinion of management include all adjustments necessary
for a fair presentation of the financial position, the results of operations and
cash flows for the periods presented. Results of operations for interim periods
are not necessarily indicative of annual results. These financial statements
should be read in conjunction with the Company's Annual Report on Form 10-K,
filed with the Securities and Exchange Commission.
NOTE 2 - Earnings Per Share:
Basic earnings per share excludes all dilution and is calculated using the
weighted average number of shares outstanding in the period. Diluted earnings
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 numbers 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:
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
2004 2003 2004 2003
---- ---- ---- ----
Options 1,625 2,482 1,831 2,521
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 each period:
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
2004 2003 2004 2003
---- ---- ---- ----
Options 3,751 1,289 3,751 2,521
The per share exercise prices of the options were $30.19-$38.34 in 2004,
and $35.19-$38.34 in 2003. Also excluded were 4,500 warrants issued in May 2002
in conjunction with an extension of the terms of the Company's management
agreement with a related party.
6
NOTE 3 - Debt:
Long-term debt consists of the following at:
June 30, 2004 December 31, 2003
------------- -----------------
Term Loan $120,000 -
Revolving Credit Facility 25,000 $100,000
4.64% Senior Unsecured Notes 50,000 50,000
5.26% Senior Unsecured Notes 150,000 150,000
Fair market value of Swap (a) (2,443) 366
-------- --------
$342,557 $300,366
======== ========
(a) write-up (write-down) to market value adjustments for debt with qualifying
hedges that are recorded as debt on the balance sheet.
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 loan and a five-year
$180,000 revolving credit facility (collectively the "New Facility"). In
connection with the closing of the New Facility, the Company borrowed the full
amount of the term loan, the proceeds of which were used to repay the
outstanding borrowings under the prior 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. At June 30, 2004, the Company had available
borrowings under the New Facility of $155,000.
NOTE 4 - Related Party Transactions:
In return for receiving services under a management agreement (the
"Management Agreement"), the Company compensates Infinity Broadcasting
Corporation ("Infinity"), a wholly-owned subsidiary of Viacom Inc, via an annual
base fee and provides Infinity the opportunity to earn an incentive bonus if the
Company exceeds pre-determined targeted cash flows. In addition to the base fee
and incentive compensation, the Company also granted Infinity fully vested and
non-forfeitable warrants to purchase Company Common Stock.
In addition to the Management Agreement, the Company also enters into other
transactions with Infinity in the normal course of business. These transactions
are more fully described in the Company's Annual Report on Form 10-K.
The Company incurred the following expenses relating to transactions with
Infinity or its affiliates for the three and six-month periods ended June 30:
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
2004 2003 2004 2003
---- ---- ---- ----
Representation Agreement $6,963 $7,164 $13,917 $13,931
Programming and Affiliations 14,849 13,196 30,410 27,557
Management Agreement (excluding warrant
amortization) 759 703 1,462 1,386
Warrant Amortization 2,427 338 2,765 676
------- ------- ------- -------
$24,998 $21,401 $48,554 $43,550
======= ======= ======= =======
NOTE 5 - Stock Options:
The Company applies APB 25 and related interpretations in accounting for
its stock option plans. Accordingly, no compensation expense has been recognized
for its plans. For the three and six-month periods ended June 30, 2004 and 2003,
had compensation cost been determined in accordance with the methodology
prescribed by SFAS 123, the Company's net income and earnings per share would
have been reduced by approximately $2,275 ($.02 per basic share and $.03 diluted
share) and $2,118 ($.02 per basic and diluted share) for the three-month
7
periods, respectively and $4,548 ($.05 per basic and diluted share) and $4,155
($.04 per basic and diluted share) for the six month periods, respectively.
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
2004 2003 2004 2003
---- ---- ---- ----
Net Income as Reported $25,106 $24,336 $42,653 $41,250
Deduct: Total Stock Based
Employee Compensation Expense,
Net of Tax (2,275) (2,118) (4,548) (4,155)
------- ------- ------- -------
Pro Forma Net Income $22,831 $22,218 $38,105 $37,095
======= ======= ======= =======
Net Income Per Share:
Basic - As Reported $.26 $.24 $.44 $.40
==== ==== ==== ====
Basic - Pro Forma $.24 $.22 $.39 $.36
==== ==== ==== ====
Diluted - As Reported $.26 $.23 $.43 $.39
==== ==== ==== ====
Diluted - Pro Forma $.23 $.21 $.38 $.35
==== ==== ==== ====
8
Item 2. 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 leaders 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 the Company's 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
9
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
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.
Results of Operations
Three Months Ended June 30, 2004 Compared
With Three Months Ended June 30, 2003
-------------------------------------
Revenues
Revenues presented by type of commercial advertisements are as follows for
the three-month periods ending June 30,:
2004 2003
--------------------- ---------------------
$ % of total $ % of total
-------- ---------- -------- ----------
Local/Regional $76,397 55% $73,907 56%
National 63,188 45% 58,768 44%
------- ---- -------- ----
Total (1) $139,585 100% $132,675 100%
======== ==== ======== ====
(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 advertisers.
Revenues for the second quarter of 2004 increased $6,910, or 5%, to
$139,585 compared with $132,675 in the second quarter of 2003. Both
local/regional and national revenues increased in the quarter compared with the
comparable 2003 period.
During the second quarter of 2004, revenues aggregated from the sale of
local/regional airtime increased approximately 3%, or approximately $2,490, and
national based revenues increased approximately 8%, or $4,420 compared with the
second quarter of 2003. This increase is the result of an increase in demand for
our local/regional products and services.
In the second quarter of 2004, the increase in our aggregated national
based revenues was accomplished through attaining higher revenues in the news
and entertainment programming categories and through adding station
affiliations.
10
Operating Costs
Operating costs for the three months ended June 30, 2004, and 2003 were as
follows:
2004 2003
-------------------- ---------------------
$ % of total $ % of total
------- ---------- ------- ----------
Programming, production and
distribution expenses $55,877 62% $53,531 62%
Selling expenses 9,317 11% 10,984 13%
Other operating expenses 24,567 27% 21,989 25%
------- --- ------- ----
$89,761 100% $86,504 100%
======= ==== ======= ====
Operating costs increased approximately 4%, or $3,257, to $89,761 in 2004
from $86,504 in the second quarter of 2003. The increase was principally
attributable to (i) increases in programming, production and distribution
expenses resulting from the investment in additional network audiences as a
result of adding station affiliations, expanding into new traffic and
information markets and the development of new program offerings, (ii) lower
selling expenses related to decreasing the size of our sales management, and
lower bad debt expense (approximately $360) and (iii) higher other operating
expenses due principally to increases in personnel and personnel related costs.
Depreciation and Amortization
Depreciation and amortization increased $2,096, or 73%, to $4,956 in the
second quarter of 2004 from $2,860 in the second quarter of 2003. The increase
was principally attributable to higher amortization resulting from an increase
in the fair market value of the warrants issued to Infinity as part of the
extension of the Management Agreement which commenced in the second quarter of
2004.
Corporate General and Administrative Expenses
Corporate general and administrative expenses increased $159, or 10%, to
$1,806 in the second quarter of 2004 from $1,647 in the second quarter of 2003.
The increase was principally attributable to higher expenses associated with our
corporate governance activities, including fees incurred for professional
services.
Operating Income
Operating income increased $1,398, or 3%, to $43,062 in the second quarter
of 2004 from $41,664 in the second quarter of 2003.
Interest Expense
Interest expense increased 8% in the second quarter of 2004 to $2,700 from
$2,496 in 2003. The increase was principally attributable to higher debt
outstanding.
Provision for income taxes
Income tax expense in the second quarter of 2004 was $15,289 compared with
$14,848 in the second quarter of 2003. The Company's effective income tax rate
in the second quarter of 2004 was approximately 37.8% which was consistent with
the rate experienced in the comparable period of 2003.
11
Net income
Net income in the second quarter of 2004 was $25,106 compared with $24,336
in the second quarter of 2003, an increase of $770, or 3%. Net income per basic
share increased approximately $.02, or 9%, to $.26 compared with $.24 in the
second quarter of 2003. Net income per diluted share increased approximately
$.03, or 10%, to $.26 compared with $.23 in the comparable 2003 period.
Earnings per share
Weighted averages shares outstanding used to compute basic and diluted
earnings per share decreased approximately 6% to 96,285 and 97,910,
respectively, in the second quarter of 2004 from 101,771 and 104,253,
respectively, in the second quarter of 2003. The decrease is principally
attributable to the Company's stock repurchase program.
Six Months Ended June 30, 2004 Compared
With Six Months Ended June 30, 2003
-----------------------------------
Revenues
Revenues presented by type of commercial advertisements are as follows for
the six-month periods ending June 30,:
2004 2003
---------------------- -----------------------
$ % of total $ % of total
--------- ---------- --------- ----------
Local/Regional $ 141,048 52% $ 137,269 53%
National 128,145 48% 121,201 47%
--------- ---- --------- ----
Total (1) $ 269,193 100% $ 258,470 100%
========= ==== ========= ====
(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 advertisers.
Revenues for the first half of 2004 increased $10,723, or 4%, to $269,193
compared with $258,470 in the first half of 2003. Both local/regional and
national revenues increased in the first half compared with the comparable 2003
period.
During the first six months of 2004, revenues aggregated from the sale of
local/regional airtime increased approximately 3%, or approximately $3,779, and
national based revenues increased approximately 6%, or $6,944 compared with the
first half of 2003. The increase is a result of higher demand for our products
and services.
In the first half of 2004, the increase in our aggregated national based
revenues was accomplished through attaining higher revenues in the news and
entertainment programming categories and through adding station affiliations.
We expect our revenues for the second half of 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.
12
Operating Costs
Operating costs for the six months ended June 30, 2004 and 2003 were as
follows:
2004 2003
---------------------- ----------------------
$ % of total $ % of total
-------- ---------- -------- ----------
Programming, production and
distribution expenses $115,796 63% $110,774 62%
Selling expenses 20,512 11% 21,124 12%
Other operating expenses 46,949 26% 46,658 26%
-------- ---- -------- ----
$183,257 100% $178,556 100%
======== ==== ======== ====
Operating costs increased approximately 3%, or $4,701, to $183,257 in 2004
from $178,556 in the first six months of 2003. The increase was principally
attributable to (i) increases in programming, production and distribution
expenses resulting from the investment in additional network audiences as a
result of adding station affiliations, expanding into new traffic and
information markets and the development of new program offerings, and (ii)
decreased selling expenses related to lower bad debt expense (approximately
$950).
We currently anticipate that operating costs will continue to increase in
the second half of 2004 compared with 2003 due to expenses attributable to the
Company's broadcast of the 2004 Summer Olympics, additional investments in our
national network audiences and programs, and normal recurring contractual cost
increases.
Depreciation and Amortization
Depreciation and amortization increased $2,370, or 41%, to $8,110 in the
first six months of 2004 from $5,740 in the comparable 2003 period. The increase
was principally attributable to higher amortization resulting from an increase
in the fair market value of the warrants issued to Infinity as part of the
extension of the Management Agreement which was effective in the second quarter
of 2004.
We expect depreciation and amortization expense will increase by
approximately $2,100 for the remaining two quarters in 2004 versus the
comparable period in the prior year due to increased warrant amortization.
Corporate General and Administrative Expenses
Corporate general and administrative expenses increased $485, or 15%, to
$3,776 in the first half of 2004 from $3,291 in the comparable period of 2003.
The increase was principally attributable to higher expenses associated with our
corporate governance activities, including fees incurred for professional
services.
We expect our corporate general and administrative costs will continue to
increase in the second half of 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 increased $3,167, or 4%, to $74,050 in the first half of
2004 from $70,883 in the same period of 2003.
Interest Expense
Interest expense increased 14% in the first half of 2004 to $5,617 from
$4,947 in 2003. The increase was attributable to higher debt outstanding as well
13
as the $325 amortization of previously capitalized deferred debt costs
attributable to the refinancing of our bank credit facility.
We expect that our interest expense will continue to increase in the second
half of 2004 versus the comparable period in the prior year commensurate with
our anticipated higher average debt levels.
Provision for income taxes
Income tax expense in the first six months of 2004 was $25,853 compared
with $24,722 in the first six months of 2003. The Company's effective income tax
rate in the first half of 2004 was approximately 37.7%, which is consistent
with the rate experienced in the comparable 2003 period.
Net income
Net income in the first six months of 2004 was $42,653 compared with
$41,250 in the comparable 2003 period, an increase of $1,403, or 3%. Net income
per basic share increased approximately $.04, or 9%, to $.44 compared with $.40
in the first half of 2003. Net income per diluted share increased approximately
$.04, or 10%, to $.43 compared with $.39 in the comparable 2003 period.
Earnings per share
Weighted averages shares outstanding used to compute basic and diluted
earnings per share decreased approximately 5% and 6% respectively to 97,144 and
98,975, respectively, in the first six months of 2004 compared with 102,417 and
104,938, respectively, in the same period of 2003. The decrease is principally
attributable to the Company's stock repurchase program.
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 June 30, 2004, the Company's principal sources of liquidity were its
cash and cash equivalents of $13,649 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 three month periods ended June 30, 2004
and 2003, net cash provided by operating activities were $75,994 and $68,708,
respectively.
At June 30, 2004, the Company had an unsecured $120,000 term loan and a
$180,000 bank revolving credit facility (the "New Facility"), $50,000 in senior
unsecured notes due in 2009 and $150,000 in senior unsecured notes due in 2012
(collectively the "Notes"). At June 30, 2004, the Company had available
borrowings of $155,000 under its New Facility.
In conjunction with the Company's objective of enhancing shareholder value,
the Company's Board of Directors has authorized a stock repurchase program. In
the first half of 2004, the Company principally used cash flow from operations
and bank borrowings to purchase approximately 4,346 shares of the Company's
Common Stock for a total cost of approximately $123,388. In the first six months
of 2003, the Company purchased approximately 3,179 shares of the Company's
Common Stock for a total cost of $107,102. In the month of July, the Company
repurchased an additional 950 shares of Common Stock at a cost of approximately
$21,877. The Company expects to continue to use its cash flow to repurchase its
Common Stock. At July 30, 2004, the Company had authorization to repurchase up
to an additional $233,375 of its Common Stock.
14
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.
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 leaders 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
15
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.
-- 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 3. 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.
16
Item 4. Controls and Procedures
The Company's Chief Executive Officer and Chief Financial Officer have
evaluated the effectiveness of the Company's disclosure controls and procedures
(as defined in Rules 13a-14 and 15d-14 of the Securities Exchange Act of 1934,
as amended) within 90 days of the filing date of this report, and have concluded
that the Company's disclosure controls and procedures are effective for
gathering, analyzing and disclosing the information we are required to disclose
in our reports filed under the Securities and Exchange Act of 1934. There have
been no significant changes in our internal controls or in other factors that
could significantly affect these controls subsequent to the evaluation date.
17
PART II. OTHER INFORMATION
Item 1
This item is not applicable.
Item 2 - Use of Proceeds and Issuer Purchases of Equity Securities
Approximate Dollar
Total Number of Value of Shares that
Shares Purchased May Yet Be
as Part of Publicly Purchased Under the
Number of Shares Average Price Paid Announced Plan Plans or Programs
Period Purchased in Period Per Share or Program (A)
------ ------------------- ------------------ ------------------- -------------------
April 2004 437,500 $31.60 6,318,224 $301,529,000
May 2004 788,000 27.40 7,106,224 279,937,000
June 2004 1,020,000 24.20 8,126,224 255,253,000
---------
2,245,500 $26.77
=========
(A) Represents remaining authorization from the $250 million repurchase
authorization approved on September 25, 2002 and the additional $250
million repurchase authorization approved by the Company's Board of
Directors on February 24, 2004.
Items 3
This item is not applicable.
Item 4 - Submission of Maters to a Vote of Security Holders
(a) The Annual Meeting of Shareholders of the Company was held on May 13,
2004.
(b) The Matters voted upon and the related voting results were as follows
(holders of Common Stock and Class B Stock voted together on all
matters except for the election of Class I Directors, for which
holders of Common Stock voted alone for the election of Mr. Holt and
Mr. Smith).
(1) Election of Class I Directors:
FOR WITHHELD
--- --------
Shane Coppola 123,556,769 1,617,728
Dennis Holt 88,690,935 1,314,562
Mel Karmazin 121,862,720 3,311,777
Norman J. Pattiz 124,138,763 1,035,734
Joseph B. Smith 88,677,661 1,327,836
(2) Ratification of the selection of PricewaterhouseCoopers LLP as
the independent accountants of the Company for Fiscal 2004.
FOR 124,126,805
AGAINST 1,010,618
ABSTAIN 37,074
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Item 5
This item is not applicable.
Item 6 - Exhibits and Reports on Form 8-K
(a) 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)
*10.1Employment Agreement, dated April 29, 1998, between Registrant and Norman
J. Pattiz. (8)
*10.2Amendment 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)
*10.7Amendment 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)
10.12Amendments to the Westwood One, Inc. Amended 1989 Stock Incentive Plan.
(4) (5)
10.13Leases, 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)
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 Reports on Form 8-K were filed during the second quarter of 2004. A Form
8-K was furnished on February 18, 2004 in connection with the Company's
disclosure of certain earnings information.
*********************************
*Indicates a management contract or compensatory plan
**********************************
19
(1) Filed as part of Registrant's September 25, 1986 proxy statement and
incorporated herein by reference.
(2) Filed an exhibit to Registrant's current report on Form 8-K dated September
4, 1987 and incorporated herein by reference.
(3) Filed as part of Registrant's March 27, 1992 proxy statement and
incorporated herein by reference.
(4) Filed as an exhibit to Registrant's July 20, 1994 proxy statement and
incorporated herein by reference.
(5) Filed as an exhibit to Registrant's May 17, 1996 proxy statement and
incorporated herein by reference.
(6) Filed as an exhibit to Registrant's Quarterly report on Form 10-Q for the
quarter ended September 30, 1996 and incorporated herein by reference.
(7) Filed as an exhibit to Registrant's Annual Report on Form 10-K for the year
ended December 31, 1997 and incorporated herein by reference.
(8) Filed as an exhibit to Registrant's Annual Report on Form 10-K for the year
ended December 31, 1998 and incorporated herein by reference.
(9) Filed as an exhibit to Registrant's August 24, 1999 proxy statement and
incorporated herein by reference.
(10) Filed as an exhibit to Registrant's current report on Form 8-K dated
October 1, 1999 and incorporated herein by reference.
(11) Filed as an exhibit to Registrant's Annual Report on Form 10-K for the year
ended December 31, 1999 and incorporated herein by reference.
(12) Filed as an exhibit to Registrant's Annual Report on Form 10-K for the year
ended December 31, 2000 and incorporated herein by reference.
(13) Filed as an exhibit to 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.
20
SIGNATURES
Pursuant to the requirements 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.
By: /S/ Shane Coppola
----------------------
Shane Coppola
Chief Executive Officer
By: /S/Andrew Zaref
-----------------------
Andrew Zaref
Chief Financial Officer
Dated: July 30, 2004
21