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 March 31, 2005
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 April 29, 2005 (excluding treasury
shares):
Common Stock, par value $.01 per share - 92,333,315 shares
Class B Stock, par value $.01 per share - 291,796 shares
WESTWOOD ONE, INC.
-----------------
INDEX
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Page No.
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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 16
PART II. OTHER INFORMATION
Item 2. Use of Proceeds and Issuer Purchases
of Equity Securities 17
Item 6. Exhibits and Reports on Form 8K 17
SIGNATURES 18
CERTIFICATIONS 19
2
Item 1 - Financial Statements
WESTWOOD ONE, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands)
March 31, December 31,
2005 2004
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 4,679 $ 10,932
Accounts receivable, net of allowance for doubtful accounts
of $3,231 (2005) and $2,556 (2004) 123,051 142,014
Prepaid and other assets 19,057 21,400
-------- -----------
Total Current Assets 146,787 174,346
PROPERTY AND EQUIPMENT, NET 45,800 47,397
GOODWILL 982,219 981,969
INTANGIBLE ASSETS, NET 5,884 6,176
OTHER ASSETS 36,020 36,391
-------- -----------
TOTAL ASSETS $ 1,216,710 $ 1,246,279
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable 17,336 13,135
Amounts payable to related parties 23,763 20,274
Deferred revenue 10,697 14,258
Income taxes payable 13,463 5,211
Accrued expenses and other liabilities 32,052 28,463
----------- -----------
Total Current Liabilities 97,311 81,341
LONG-TERM DEBT 346,500 359,439
DEFERRED INCOME TAXES 12,694 12,541
OTHER LIABILITIES 8,290 8,465
----------- -----------
TOTAL LIABILITIES 464,795 461,786
----------- -----------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Preferred stock: authorized 10,000,000 shares, none outstanding - -
Common stock, $.01 par value: authorized, 252,751,250 shares;
issued and outstanding, 92,283,315 (2005) and 94,353,675 (2004) 923 944
Class B stock, $.01 par value: authorized, 3,000,000 shares:
issued and outstanding, 291,796 (2005 and 2004) 3 3
Additional paid-in capital 321,706 369,036
Accumulated earnings 430,300 414,510
----------- -----------
752,932 784,493
Less treasury stock, at cost; 50,000 (2005) and 0 (2004) shares (1,017) -
----------- -----------
TOTAL SHAREHOLDERS' EQUITY 751,915 784,493
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,216,710 $ 1,246,279
=========== ===========
See accompanying notes to consolidated financial statements
3
WESTWOOD ONE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
Three Months Ended
March 31,
2005 2004
(Unaudited)
NET REVENUES $ 134,082 $ 129,608
--------- ---------
Operating Costs (include related party expenses
of $21,415 and $22,515, respectively) 97,026 93,496
Depreciation and Amortization (includes related party
warrant amortization of $2,427 and $338, respectively 5,256 3,154
Corporate General and Administrative Expenses
(includes related party expenses of $759 and $703,
respectively) 2,584 1,970
--------- ---------
104,866 98,620
--------- ---------
OPERATING INCOME 29,216 30,988
Interest Expense 3,711 2,917
Other (Income) Expense (60) (40)
--------- ---------
INCOME BEFORE INCOME TAXES 25,565 28,111
INCOME TAXES 9,776 10,564
--------- ---------
NET INCOME $ 15,789 $ 17,547
========= =========
EARNINGS PER SHARE:
BASIC $ 0.17 $ 0.18
========= =========
DILUTED $ 0.17 $ 0.18
========= =========
WEIGHTED AVERAGE SHARES OUTSTANDING:
BASIC 93,696 98,003
========= =========
DILUTED 94,331 100,068
========= =========
See accompanying notes to consolidated financial statements
4
WESTWOOD ONE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Three Months Ended
March 31,
2005 2004
(Unaudited)
CASH FLOW FROM OPERATING ACTIVITIES:
Net income $ 15,789 $ 17,547
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 5,256 3,154
Deferred taxes 153 1,000
Amortization of deferred financing costs 84 458
-------- --------
21,282 22,159
Changes in assets and liabilities:
Accounts receivable 18,963 19,221
Prepaid and other assets 2,086 2,642
Deferred revenue (3,561) (4,646)
Income taxes payable 8,286 5,784
Accounts payable and accrued expenses
and other liabilities 6,749 4,764
Amounts payable to related parties 3,489 1,273
-------- --------
Net Cash Provided By Operating Activities 57,294 51,197
-------- --------
CASH FLOW FROM INVESTING ACTIVITIES:
Capital expenditures (803) (989)
Acquisition of companies and other (204) 12
-------- --------
Net Cash Used in Investing Activities (1,007) (977)
-------- --------
CASH FLOW FROM FINANCING ACTIVITIES:
Issuance of common stock 193 5,843
Borrowings under bank and other long-term obligations 10,000 120,000
Debt repayments and payments of capital lease obligations (25,156) (100,146)
Repurchase of common stock (47,577) (63,286)
Deferred financing costs - (1,269)
-------- ---------
Net Cash Used in Financing Activities (62,540) (38,858)
-------- ---------
NET DECREASE/INCREASE IN CASH AND CASH EQUIVALENTS (6,253) 11,362
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 10,932 8,665
-------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 4,679 $ 20,027
======== =========
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 March 31, 2005, the
consolidated statements of operations and the consolidated statements of cash
flows for the three month periods ended March 31, 2005 and 2004 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:
----------------------------
Net income per share is computed in accordance with SFAS No. 128. 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:
March 31,
----------------------
2005 2004
---- ----
Options 635 2,065
Common equivalent shares are excluded in periods in which they are
anti-dilutive. The following options were excluded from the calculation of
diluted earnings per share because the exercise price was greater than the
average market price of the Company's Common Stock for the first quarter of 2005
and 2004:
March 31,
-----------------------
2005 2004
---- ----
Options 3,734 2,804
The per share exercise prices of the options were $26.96-$38.34 in 2005,
and $32.25-$38.34 in 2004. Also excluded from the computation of diluted
earnings per share were 4,000 warrants issued in May 2002 in conjunction with
extending the terms of the Company's management agreement with a related party.
NOTE 3 - Debt:
--------------
Long-term debt consists of the following at:
March 31, 2005 December 31, 2004
-------------- -----------------
Revolving Credit Facility/Term Loan $145,000 $160,000
4.64% Senior Unsecured Notes 50,000 50,000
5.26% Senior Unsecured Notes 150,000 150,000
Fair market value of Swap (a) 1,500 (561)
-------- ---------
$346,500 $359,439
======== ========
(a) write-up (write-down) to market value adjustments for debt with
qualifying hedges that are recorded as debt on the balance sheet.
6
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, capital
expenditures and interest coverage and leverage ratios. At March 31, 2005, 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-month periods ended March 31:
2005 2004
---- ----
Representation Agreement $ 6,256 $ 6,126
Programming and Affiliations 15,189 16,389
Management Agreement (excluding warrant
amortization) 759 703
Warrant Amortization 2,427 338
------- -------
$24,631 $23,556
======= =======
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. 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 $1,682 ($.02 per basic and
diluted share) in the first quarter of 2005 and $2,273 ($.02 per basic and
diluted share) in the first quarter of 2004.
Three Months Ended March 31,
----------------------------
2005 2004
---- ----
Net Income as Reported $15,789 $17,547
Deduct: Total Stock Based
Employee Compensation Expense,
Net of Tax (1,682) (2,273)
------ ------
Pro Forma Net Income $14,107 $15,274
======= =======
Net Income Per Share:
Basic - As Reported $.17 $.18
==== ====
Basic - Pro Forma $.15 $.16
==== ====
Diluted - As Reported $.17 $.18
==== ====
Diluted - Pro Forma $.15 $.15
==== ====
7
In December 2004, the FASB issued SFAS No. 123 (revised 2004), "Share-Based
Payment" ("SFAS 123R"), which replaces SFAS No. 123, "Accounting for Stock-Based
Compensation," ("SFAS 123") and supercedes APB Opinion No. 25, "Accounting for
Stock Issued to Employees." SFAS 123R requires all share-based payments to
employees, including grants of employee stock options, to be recognized in the
financial statements based on their fair values beginning with the next fiscal
year after June 15, 2005, with early adoption encouraged. The pro forma
disclosures previously permitted under SFAS 123 no longer will be an alternative
to financial statement recognition. The Company is required to adopt SFAS 123R
in the first quarter of fiscal 2006. Under SFAS 123R, the Company must determine
the appropriate fair value model to be used for valuing share-based payments,
the amortization method for compensation cost and the transition method to be
used at date of adoption. The transition methods include prospective and
retroactive adoption options. Under the retroactive option, prior periods may be
restated either as of the beginning of the year of adoption or for all periods
presented. The prospective method requires that compensation expense be recorded
for all unvested stock options and restricted stock at the beginning of the
first quarter of adoption of SFAS 123R, while the retroactive methods would
record compensation expense for all unvested stock options and restricted stock
beginning with the first period restated. The Company is evaluating the
requirements of SFAS 123R and expects that the adoption of SFAS 123R will have a
material impact on the Company's consolidated results of operations and earnings
per share. The Company has not yet determined the method of adoption or the
effect of adopting SFAS 123R. The Company believes the pro forma disclosures
above provide an appropriate short-term indicator of the level of expense that
will be recognized in accordance with SFAS No. 123R. However, the total expense
recorded in future periods will depend on several variables, including the
number of shared-based awards that vest and the fair value of those vested
awards.
NOTE 6 - Subsequent Events:
---------------------------
On April 29, 2005 the Company's Board of Directors declared a quarterly
cash dividend of $0.10 per share for every issued and outstanding share of
Common Stock and $0.08 per share for every issued and outstanding share of Class
B Stock, payable on May 31, 2005 to shareholders of record at the close of
business on May 20, 2005. In addition, the Board of Directors authorized an
additional $300 million for its existing stock repurchase program.
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 content,
information services and programming. The Company is the largest domestic
outsource provider of traffic reporting services and the nation's largest radio
network, producing and distributing national news, sports, talk, music and
special event programs, in addition to local news, sports, weather, video news
and other information programming. The commercial airtime that we sell to our
advertisers is acquired from radio and television affiliates in exchange for our
programming, content, information, and in certain circumstances, cash
compensation.
The radio broadcasting industry has experienced a significant amount of
consolidation. 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
9
impacting the pricing of commercial airtime include, but are not limited to: (i)
the dollar value, length and breadth of the order, (ii) the desired reach and
audience demographic, (iii) the level of commercial airtime available for the
desired demographic requested by the advertiser for sale at the time their order
is negotiated; and (iv) the proximity of the date of the order placement to the
desired broadcast date of the commercial airtime. Our commercial airtime is
perishable, and accordingly, our revenues are significantly impacted by the
commercial airtime available at the time we enter into an arrangement with an
advertiser.
The principal critical components of our operating expenses are
programming, production and distribution costs (including affiliate compensation
and broadcast rights fees), selling expenses (including bad debt expenses,
commissions and promotional expenses), depreciation and amortization, and
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 March 31, 2005 Compared
With Three Months Ended March 31, 2004
--------------------------------------
Revenues
Revenues presented by type of commercial advertisements are as follows for
the three-month periods ending March 31,:
2005 2004
-------------------- ------------------------
$ % of total $ % of total
-------- ---------- ---------- ----------
Local/Regional $68,378 51% $64,651 50%
National 65,704 49% 64,957 50%
------- ---- ---------- ----
Total (1) $134,082 100% $129,608 100%
======== ==== ========== ====
(1) As described above, the Company currently aggregates revenue data based on
the type of commercial airtime sold. A number of advertisers purchase both
local/regional and national commercial airtime. Accordingly, this factor
should be considered in evaluating the relative revenues generated on a
local/regional versus national basis. Our objective is to optimize total
revenues from those advertisers.
Revenues for the first quarter of 2005 increased $4,474, or 3.5%, to
$134,082 compared with $129,608 in the first quarter of 2004. Both
local/regional and national revenues increased in the quarter compared with the
comparable 2004 period.
During the first quarter of 2005, revenues aggregated from the sale of
local/regional airtime increased approximately 5.8%, or approximately $3,727,
and national based revenues increased approximately 1.1%, or $747 compared with
the first quarter of 2004.
In the first quarter of 2005, the increase in our aggregated local/regional
based revenues was the result of an increase in demand for our :10 second
commercial airtime and the increased demand for information services and data by
non-terrestrial radio providers of programming and/or information.
10
The increase in our aggregated national based revenues was accomplished
primarily through new programming initiatives and expanded distribution of our
content to non-terrestrial providers of programming and/or information. Further,
the increase in our aggregated national based revenues was primarily in the
sports, talk, and music/entertainment categories, partially offset by a
reduction in the news category.
We expect our revenues in 2005 to increase compared with 2004, resulting
primarily from an anticipated overall increase in demand for our product
offerings due to the implementation of sales strategies to optimize network
audience delivery, new programming initiatives, inventory management
initiatives, and the development of new distribution alternatives for our
content.
Operating Costs
Operating costs for the three months ended March 31, 2005 and 2004 were as
follows:
2005 2004
---- ----
$ % of total $ % of total
------- ---------- ------- ----------
Programming, production and
distribution expenses $72,767 75% $69,233 74%
Selling expenses 14,051 14% 13,523 15%
Other operating expenses 10,208 11% 10,740 11%
------ --- ------- ----
$97,026 100% $93,496 100%
======= ==== ======= ====
Operating costs increased approximately 3.8%, or $3,530, to $97,026 in the
first quarter of 2005 from $93,496 in the first quarter of 2004. The net
increase is primarily attributable to: (i) increases in Programming, production
and distribution expenses resulting from costs related to the development of new
or expanded program offerings, new and expanded traffic and information markets,
higher broadcast rights fees resulting from increases with respect to existing
program commitments offset by a decrease in certain station affiliations in
conjunction with our network reconfiguration, and (ii) higher selling expenses
related to increased promotional spending and higher commission expense
correlated to increased revenue.
We currently anticipate that operating costs will increase in 2005 compared
with 2004 due to expenses attributable to additional investments in our national
network audiences and programs, and normal recurring contractual cost increases.
In addition, we expect to continue investing in our sales and sales support
functions to support our planned growth in revenues.
Depreciation and Amortization
Depreciation and amortization increased $2,102, or 67%, to $5,256 in the
first quarter of 2005 from $3,154 in the first quarter of 2004. 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. Amortization of these warrants totals approximately $2,400 per quarter.
Corporate General and Administrative Expenses
Corporate general and administrative expenses increased $614, or 31% to
$2,584 in the first quarter of 2005 from $1,970 in the first quarter of 2004.
The increase was principally attributable to higher expenses associated with our
corporate governance activities, including fees incurred for professional
services when compared to the first quarter of 2004.
We expect our corporate general and administrative costs to increase in
2005 compared with 2004. Further, we note that our incentive bonus arrangement
with Infinity is variable, contingent upon our performance.
11
Operating Income
Operating income decreased $1,772, or 5.7% to $29,216 in the first quarter
of 2005 from $30,988 in the first quarter of 2004.
Interest Expense
Interest expense increased 27% in the first quarter of 2005 to $3,711 from
$2,917 in the first quarter of 2004. The increase was attributable to higher
debt outstanding and a higher average interest rate.
We expect that our interest expense will increase in 2005 commensurate with
our anticipated higher average debt levels.
Provision for income taxes
Income tax expense in the first quarter of 2005 was $9,776 compared with
$10,564 in the first quarter of 2004. The Company's effective income tax rate
was approximately 38.2% in the first quarter of 2005 compared with approximately
37.6% in the first quarter of 2004. The increase in the effective income tax
rate was principally a result of recent tax developments in the states in which
we operate.
Net income
Net income in the first quarter of 2005 was $15,789 compared with $17,547
in the first quarter of 2004, a decrease of $1,758 or 10%. Net income per basic
and diluted share decreased approximately $.01, or 5.6%, to $.17 in the first
quarter of 2005 compared with $.18 in the first quarter of 2004.
Earnings per share
Weighted averages shares outstanding used to compute basic and diluted
earnings per share decreased approximately 4.4% to 93,696 and 5.7% to 94,331,
respectively, in the first quarter of 2005 compared with 98,003 and 100,068,
respectively, in the first quarter of 2004. 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, dividends, 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
long-term debt.
At March 31, 2005, the Company's principal sources of liquidity were its
cash and cash equivalents of $4,679 and available borrowings under its bank
facility which are further described below.
The Company has and continues to expect to generate significant cash flows
from operating activities. For the three month periods ended March 31, 2005 and
2004, net cash provided by operating activities were $57,294 and $51,197,
respectively.
At March 31, 2005, 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 March 31, 2005, 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 authorized an additional $300 million for its
existing stock repurchase program and declared the payment of a cash dividend of
12
$0.10 per share of outstanding Common Stock and $0.08 per share of outstanding
Class B Stock. In the first quarter of 2005, the Company principally used cash
flow from operations to purchase and retire approximately 2,081 shares of the
Company's Common Stock for a total cost of approximately $47,577. In the first
quarter of 2004, the Company purchased approximately 2,100 shares of the
Company's Common Stock for a total cost of $63,286. In the month of April 2005
(through April 29), the Company repurchased an additional 580 shares of Common
Stock at a cost of approximately $11,520. On April 29, 2005 the Board of
Directors has authorized an additional $300 million of Common Stock repurchases
under its existing stock repurchase program. Accordingly on April 29, 2005, the
Company had authorization to repurchase up to an additional $402,023 of its
Common Stock. The Company expects to continue to use its cash flows and
available bank borrowings to repurchase its Common Stock and pay quarterly
dividends, although the establishment of record and payment dates is subject to
the final determination by the Board of Directors.
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.
New Accounting Standards and Interpretations Not Yet Adopted
In December 2004, the FASB issued SFAS No. 123 (revised 2004), "Share-Based
Payment" ("SFAS 123R"), which replaces SFAS No. 123, "Accounting for Stock-Based
Compensation," ("SFAS 123") and supercedes APB Opinion No. 25, "Accounting for
Stock Issued to Employees." SFAS 123R requires all share-based payments to
employees, including grants of employee stock options, to be recognized in the
financial statements based on their fair values beginning with the next fiscal
year after June 15, 2005, with early adoption encouraged. The pro forma
disclosures previously permitted under SFAS 123 no longer will be an alternative
to financial statement recognition. The Company is required to adopt SFAS 123R
in the first quarter of fiscal 2006. Under SFAS 123R, the Company must determine
the appropriate fair value model to be used for valuing share-based payments,
the amortization method for compensation cost and the transition method to be
used at date of adoption. The transition methods include prospective and
retroactive adoption options. Under the retroactive option, prior periods may be
restated either as of the beginning of the year of adoption or for all periods
presented. The prospective method requires that compensation expense be recorded
for all unvested stock options and restricted stock at the beginning of the
first quarter of adoption of SFAS 123R, while the retroactive methods would
record compensation expense for all unvested stock options and restricted stock
beginning with the first period restated. The Company is evaluating the
requirements of SFAS 123R and expects that the adoption of SFAS 123R will have a
material impact on the Company's consolidated results of operations and earnings
per share. The Company has not yet determined the method of adoption or the
effect of adopting SFAS 123R. The Company believes the pro forma disclosures
above provide an appropriate short-term indicator of the level of expense that
will be recognized in accordance with SFAS No. 123R. However, the total expense
recorded in future periods will depend on several variables, including the
number of shared-based awards that vest and the fair value of those vested
awards.
Forward-Looking Statements and Factors Affecting Forward-Looking Statements
The Private Securities Litigation Reform Act of 1995 provides a safe harbor
for forward-looking statements made by or on the behalf of the Company.
Forward-looking statements involve known and unknown risks, uncertainties and
other factors which may cause the actual results, performance or achievements of
the Company to be materially different from any future results, performance or
achievements expressed or implied by such forward-looking statements. These
statements are based on management's views and assumptions at the time the
statements are made, however no assurances can be given that management's
expectations will come to pass. The forward-looking statements included in this
document, including those related to our revenue, operating costs, general and
administrative costs, interest expense and capital expenditure trend for 2005,
are only made as of the date of this document and the Company does not have any
obligation to publicly update any forward-looking statement to reflect
subsequent events or circumstances.
13
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 and state
regulatory bodies.
Although the Company believes that its radio programming will be able to
compete effectively and will continue to attract audiences and advertisers,
there can be no assurance that the Company will be able to maintain or increase
the current audience ratings and advertising revenues.
-- The radio broadcasting industry has experienced a significant amount
of consolidation in recent years. As a result, certain major station
groups, including Infinity and Clear Channel Communications, have
emerged as powerful forces in the industry. Given the size and
financial resources of these station groups, they may be able to
develop their own programming as a substitute to that offered by the
Company or, alternatively, they could seek to obtain programming from
the Company's competitors. Any such occurrences, or merely the threat
of such occurrences, could adversely affect the Company's ability to
negotiate favorable terms with its station affiliates, to attract
audiences and to attract advertisers. In addition, a major station
group has recently announced plans to reduce overall amounts of
commercial inventory broadcast on their radio stations. To the extent
similar initiatives are adopted by other major station groups, this
could adversely impact the amount of commercial inventory made
available to the Company or increase the cost of such commercial
inventory at the time of renewal of existing affiliate agreements.
-- Changes in U.S. financial and equity markets, including market
disruptions and significant interest rate fluctuations, could impede
the Company's access to, or increase the cost of, external financing
for its operations and investments.
-- The Company believes relations with its employees and independent
contractors are satisfactory. However, the Company may be adversely
affected by future labor disputes, which may lead to increased costs
or disruption of operations in any of the Company s business units.
This list of factors that may affect future performance and the accuracy of
14
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.
15
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 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 New 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 thousand
for every $2 million of outstanding debt. As of March 31, 2005, the Company had
$145,000 outstanding under the New Facility.
The Company continually monitors its positions with, and the credit quality
of, the financial institutions that are counterparties to its financial
instruments, and does not anticipate nonperformance by the counterparties.
The Company's receivables do not represent a significant concentration of
credit risk due to the wide variety of customers and markets in which the
Company operates.
Item 4. Controls and Procedures
The Company's management, under the supervision and with the participation
of the Company's Chief Executive Officer and Chief Financial Officer, carried
out an evaluation of the effectiveness of the Company's disclosure controls and
procedures as of the end of the most recent fiscal period (the "Evaluation").
Based upon the Evaluation, the Company's Chief Executive Officer and Chief
Financial Officer concluded that the Company's disclosure controls and
procedures (as defined in Exchange Act Rule 13a-15(e)) are effective in ensuring
that information required to be disclosed by the Company in the reports that it
files or submits under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified by the SEC's rules and forms.
In addition, there were no changes in our internal control over financial
reporting during our first fiscal quarter of 2005 that have materially affected,
or are reasonably likely to materially affect, our internal controls over
financial reporting.
16
PART II. OTHER INFORMATION
Item 1
None.
Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities
Approximate Dollar
Value of Shares that
Total Number of Shares May Yet Be
Purchased as Part of Purchased Under the
Number of Shares Average Price Paid Publicly Announced Plan Plans or Programs
Period Purchased in Period Per Share or Program (A)
< ------ ------------------- ------------------ ----------------------- --------------------
January 2005 635,000 $25.03 12,871,224 $146,245,000
February 2005 505,000 23.47 13,376,224 134,390,000
March 2005 991,200 21.03 14,367,424 113,543,000
--------- -------
2,131,200 $22.80
========= ======
(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.
On April 29, 2005 the Board of Directors declared the payment of a cash dividend
of $0.10 per outstanding share of Common Stock and $0.08 per outstanding share
of Class B Stock. Additionally, on April 29, 2005, the Company's Board of
Directors authorized an additional $300 million for its existing stock
repurchase program.
Items 3 - 5
None.
Item 6 - Exhibits and Reports on Form 8-K
(a) EXHIBIT
NUMBER DESCRIPTION
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.
17
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: May 10, 2005
18