10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2007
OR
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o |
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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 0-14691
WESTWOOD ONE, INC.
(Exact name of registrant as specified in its charter)
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Delaware
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95-3980449 |
(State or other jurisdiction of
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(I.R.S. Employer |
incorporation or organization)
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Identification No.) |
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40 West 57th Street, 5th Floor, New York, NY
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10019 |
(Address of principal executive offices)
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(Zip Code) |
(212) 641-2000
(Registrants 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 (Exchange Act) 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 þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer or a non- accelerated filer. See definition of accelerated filer and large accelerated
filer in Rule 12b-2 of the Exchange Act (Check one):
Large Accelerated Filer o Accelerated Filer þ Non-Accelerated Filer o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ
Number of shares of stock outstanding at June 30, 2007 (excluding treasury shares):
Common stock, par value $.01 per share 87,144,077 shares
Class B stock, par value $.01 per share 291,796 shares
WESTWOOD ONE, INC.
INDEX
2
PART I. FINANCIAL INFORMATION
WESTWOOD ONE, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
(unaudited)
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June 30, |
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December 31, |
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2007 |
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2006 |
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ASSETS |
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CURRENT ASSETS: |
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Cash and cash equivalents |
|
$ |
4,830 |
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$ |
11,528 |
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Accounts receivable, net of allowance for doubtful accounts
of $5,222 (2007) and $4,387 (2006) |
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115,552 |
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115,505 |
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Warrants, current portion |
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9,706 |
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9,706 |
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Prepaid and other assets |
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8,563 |
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12,483 |
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Total Current Assets |
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138,651 |
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149,222 |
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PROPERTY AND EQUIPMENT, NET |
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33,462 |
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37,353 |
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GOODWILL |
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464,114 |
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464,114 |
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INTANGIBLE ASSETS, NET |
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3,834 |
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|
4,225 |
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OTHER ASSETS |
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38,290 |
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41,787 |
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TOTAL ASSETS |
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$ |
678,351 |
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$ |
696,701 |
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LIABILITIES AND SHAREHOLDERS EQUITY |
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CURRENT LIABILITIES: |
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Accounts payable |
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$ |
16,728 |
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$ |
35,425 |
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Amounts payable to related parties |
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28,860 |
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26,344 |
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Deferred revenue |
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6,289 |
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8,150 |
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Income taxes payable |
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694 |
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6,149 |
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Accrued expenses and other liabilities |
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40,538 |
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43,841 |
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Total Current Liabilities |
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93,109 |
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119,909 |
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LONG-TERM DEBT |
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365,615 |
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366,860 |
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OTHER LIABILITIES |
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6,618 |
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7,001 |
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TOTAL LIABILITIES |
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$ |
465,342 |
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$ |
493,770 |
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COMMITMENTS AND CONTINGENCIES |
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SHAREHOLDERS EQUITY |
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Preferred stock: authorized 10,000,000 shares, none outstanding |
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Common stock, $.01 par value: authorized, 300,000,000 shares;
issued and outstanding, 86,130,896 (2007) and 85,996,019 (2006) |
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861 |
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860 |
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Class B stock, $.01 par value: authorized, 3,000,000 shares;
issued and outstanding, 291,796 (2007 and 2006) |
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3 |
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3 |
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Additional paid-in capital |
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292,596 |
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291,851 |
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Unrealized gain on available for sale securities |
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6,290 |
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4,570 |
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Accumulated deficit |
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(86,741 |
) |
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(94,353 |
) |
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TOTAL SHAREHOLDERS EQUITY |
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213,009 |
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202,931 |
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TOTAL LIABILITIES AND SHAREHOLDERS EQUITY |
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$ |
678,351 |
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$ |
696,701 |
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See accompanying notes to consolidated financial statements
3
WESTWOOD ONE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
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Three Months Ended |
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Six Months Ended |
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June 30, |
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June 30, |
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2007 |
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2006 |
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2007 |
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2006 |
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NET REVENUES |
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$ |
111,145 |
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$ |
134,536 |
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$ |
225,183 |
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$ |
259,563 |
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Operating Costs (includes related party expenses
of $17,023, $20,348, $35,967 and $41,737, respectively) |
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83,752 |
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97,883 |
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181,267 |
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212,948 |
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Depreciation and Amortization (includes related party
warrant amortization of $2,427, $2,427, $4,854
and $4,854, respectively) |
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4,917 |
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5,063 |
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9,948 |
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10,185 |
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Impairment of Goodwill |
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Corporate General and Administrative Expenses
(includes related party expenses of $861, $826, $1,690
and $1,614 respectively) |
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3,576 |
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3,675 |
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7,451 |
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8,455 |
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Special Charges |
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2,282 |
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|
1,198 |
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2,637 |
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|
1,398 |
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94,527 |
|
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107,819 |
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|
201,303 |
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232,986 |
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OPERATING INCOME |
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16,618 |
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26,717 |
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|
23,880 |
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|
26,577 |
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Interest Expense |
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|
5,852 |
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|
6,504 |
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|
11,949 |
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|
12,492 |
|
Other Income |
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(150 |
) |
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(126 |
) |
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(150 |
) |
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(235 |
) |
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INCOME BEFORE INCOME TAXES |
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10,916 |
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|
20,339 |
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|
|
12,081 |
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14,320 |
|
INCOME TAXES |
|
|
4,019 |
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|
8,169 |
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|
4,469 |
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5,677 |
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NET INCOME |
|
$ |
6,897 |
|
|
$ |
12,170 |
|
|
$ |
7,612 |
|
|
$ |
8,643 |
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EARNINGS PER SHARE: |
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COMMON STOCK |
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BASIC |
|
$ |
0.08 |
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|
$ |
0.14 |
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|
$ |
0.09 |
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|
$ |
0.10 |
|
|
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|
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DILUTED |
|
$ |
0.08 |
|
|
$ |
0.14 |
|
|
$ |
0.09 |
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|
$ |
0.10 |
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CLASS B STOCK |
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BASIC |
|
$ |
|
|
|
$ |
0.08 |
|
|
$ |
0.02 |
|
|
$ |
0.16 |
|
|
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|
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DILUTED |
|
$ |
|
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|
$ |
0.08 |
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|
$ |
0.02 |
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|
$ |
0.16 |
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WEIGHTED AVERAGE SHARES OUTSTANDING: |
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COMMON STOCK |
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|
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|
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BASIC |
|
|
86,094 |
|
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|
85,954 |
|
|
|
86,084 |
|
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|
87,528 |
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DILUTED |
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|
86,540 |
|
|
|
86,255 |
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|
|
86,408 |
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|
87,560 |
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CLASS B STOCK |
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|
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BASIC |
|
|
292 |
|
|
|
292 |
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|
292 |
|
|
|
292 |
|
|
|
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|
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DILUTED |
|
|
292 |
|
|
|
292 |
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|
|
292 |
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|
|
292 |
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DIVIDENDS DECLARED PER SHARE: |
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COMMON STOCK |
|
$ |
|
|
|
$ |
0.10 |
|
|
$ |
0.02 |
|
|
$ |
0.20 |
|
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|
|
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|
|
|
|
|
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|
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CLASS B STOCK |
|
$ |
|
|
|
$ |
0.08 |
|
|
$ |
0.02 |
|
|
$ |
0.16 |
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See accompanying notes to consolidated financial statements
4
WESTWOOD ONE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
|
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Six Months Ended |
|
|
|
June 30, |
|
|
|
2007 |
|
|
2006 |
|
CASH FLOW FROM OPERATING ACTIVITIES: |
|
|
|
|
|
|
|
|
Net income |
|
$ |
7,612 |
|
|
$ |
8,643 |
|
Adjustments to reconcile net income to net cash provided by
operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
9,948 |
|
|
|
10,185 |
|
Goodwill Impairment |
|
|
|
|
|
|
|
|
Loss on disposal of property and equipment |
|
|
|
|
|
|
|
|
Deferred taxes |
|
|
(3,079 |
) |
|
|
1,819 |
|
Non-cash stock compensation |
|
|
5,572 |
|
|
|
6,497 |
|
Gain on sale of property |
|
|
|
|
|
|
|
|
Amortization of deferred financing costs |
|
|
237 |
|
|
|
167 |
|
|
|
|
|
|
|
|
|
|
|
20,290 |
|
|
|
27,311 |
|
|
|
|
|
|
|
|
|
|
Changes in assets and liabilities: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
(47 |
) |
|
|
15,551 |
|
Prepaid and other assets |
|
|
5,264 |
|
|
|
9,768 |
|
Deferred revenue |
|
|
(1,861 |
) |
|
|
(1,126 |
) |
Income taxes payable and prepaid income taxes |
|
|
(5,455 |
) |
|
|
(27,812 |
) |
Accounts payable and accrued expenses
and other liabilities |
|
|
(23,269 |
) |
|
|
15,043 |
|
Amounts payable to related parties |
|
|
2,516 |
|
|
|
1,180 |
|
|
|
|
|
|
|
|
Net Cash (Used in) Provided By Operating Activities |
|
|
(2,562 |
) |
|
|
39,915 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOW FROM INVESTING ACTIVITIES: |
|
|
|
|
|
|
|
|
Capital expenditures |
|
|
(2,114 |
) |
|
|
(2,660 |
) |
Proceeds from sale of property |
|
|
|
|
|
|
|
|
Purchase of loan receivable |
|
|
|
|
|
|
|
|
Collection of loan receivable |
|
|
|
|
|
|
|
|
Acquisition of companies and other |
|
|
|
|
|
|
75 |
|
|
|
|
|
|
|
|
Net Cash Used In Investing Activities |
|
|
(2,114 |
) |
|
|
(2,585 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOW FROM FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
|
Issuance of common stock under equity based compensation plans |
|
|
|
|
|
|
302 |
|
Borrowings under bank and other long-term obligations |
|
|
30,000 |
|
|
|
10,000 |
|
Debt repayments and payments of capital lease obligations |
|
|
(30,359 |
) |
|
|
(20,336 |
) |
Dividend payments |
|
|
(1,663 |
) |
|
|
(17,263 |
) |
Repurchase of common stock |
|
|
|
|
|
|
(11,044 |
) |
Repurchase of warrants from related party |
|
|
|
|
|
|
|
|
Deferred financing costs |
|
|
|
|
|
|
|
|
Excess windfall tax benefits from stock option exercises |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Cash Used in Financing Activities |
|
|
(2,022 |
) |
|
|
(38,341 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET DECREASE IN CASH AND CASH EQUIVALENTS |
|
|
(6,698 |
) |
|
|
(1,011 |
) |
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD |
|
|
11,528 |
|
|
|
10,399 |
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS AT END OF PERIOD |
|
$ |
4,830 |
|
|
$ |
9,388 |
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements
5
WESTWOOD ONE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share data)
NOTE 1 - Basis of Presentation:
The accompanying Consolidated Balance Sheets as of June 30, 2007 and December 31, 2006, the
Consolidated Statements of Operations and the Consolidated Statements of Cash Flows for the three
and six month periods ended June 30, 2007 and 2006 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 and have been prepared in a manner consistent
with the audited financial statements for the year ended December 31, 2006. Results of operations
for interim periods are not necessarily indicative of annual results. These financial statements
should be read in conjunction with the audited financial statements and footnotes for the year
ended December 31, 2006, included in the Companys Annual Report on Form 10-K filed with the
Securities and Exchange Commission (the SEC).
Subsequent to the second quarter of 2006, the Company identified a clerical error in the
previously presented Statement of Cash Flows for the six month period ending June 30, 2006. The
error, in the amount of $10,000, related to a debt repayment that was classified as a reduction in
accounts payable resulting in an understatement of Net Cash Provided by Operating Activities and an
understatement of Net Cash Used in Financing Activities. Accordingly the Statement of Cash Flows
for the six months ended June 30, 2006 included herein has been restated.
NOTE 2 Reclassifications:
Certain balances in the prior periods have been reclassified to conform to the current period
presentation. In addition, revenue from certain contracts were recorded net of expenses paid to
third party partners. The Company has subsequently determined that it should be recording the
related revenue and expenses gross in its statement of operations. Accordingly, revenue and
operating costs for the three and six month periods ended June 30, 2006 were increased by $5,374
and $9,629, respectively.
NOTE 3 Disclosure of Out of Period Amounts:
In the Second quarter of 2007, the Company recorded net adjustments of approximately $1,000.
These adjustments were primarily comprised of overaccruals in the first quarter of 2007 offset by
various other adjustments. The Company does not believe these adjustments are material to its
Consolidated Financial Statements for the quarter ended June 30, 2007 or to any prior periods
Consolidated Financial Statements. As a result, the Company has not restated any prior period
amounts.
NOTE 4 Income Taxes:
In June 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No.
48 (FIN 48), Accounting for Uncertainty in Income Taxes, an interpretation of SFAS No. 109,
(SFAS No. 109), Accounting for Income Taxes. FIN 48 clarifies the accounting for uncertainty in
income taxes recognized in an enterprises financial statements in accordance with SFAS No. 109 and
prescribes a recognition threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to be taken in a tax return. The
evaluation of a tax position in accordance with this Interpretation is a two-step process. The
first step is recognition, in which the enterprise determines whether it is more likely than not
that a tax position will be sustained upon examination, including resolution of any related appeals
or litigation processes, based on the technical merits of the position. The second step is
measurement. A tax position that meets the more-likely-than-not recognition threshold is measured
to determine the amount of benefit to recognize in the financial statements. FIN 48 was effective
for fiscal years beginning after December 15, 2006.
The Company adopted the provisions of FIN 48 on January 1, 2007. As a result of the
implementation of FIN 48 the Company recognized no material adjustment in the liability for
unrecognized income tax benefits. At the
6
WESTWOOD ONE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share data)
adoption date of January 1, 2007, the Company had $7.5 million of unrecognized tax benefits,
all of which would affect our effective tax rate if recognized. At June 30, 2007, the Company had
$6.9 million of unrecognized tax benefits. The Company does not anticipate that total unrecognized
tax benefits will significantly change due to the settlement of audits within the next twelve
months. The Company recognizes interest and penalties related to uncertain tax positions in income
tax expense. As of January 1, 2007, the Company had approximately $0.7 million accrued interest and
penalties related to uncertain tax positions.
The Company is subject to taxation in all states in which it has nexus. The Company is
currently under federal audit for 2004 and is subject to various ongoing state audits for the years
2003 through 2005. With a few exceptions, the Company is no longer subject to U.S. Federal, State
and local income tax examinations for years prior to 2002.
Income tax expense in the second quarter of 2007 was $4,019 as compared with $8,169 in the
second quarter of 2006. The Companys effective income tax rate was approximately 36.8% in the
second quarter of 2007 compared with 40.2% in the second quarter of 2006. The decrease was due to
the impact of a change in New York State tax law on the Companys deferred tax balance
NOTE 5 Equity Based Compensation:
During the six months ended June 30, 2007, the Company awarded 792,736 shares of restricted
stock to certain employees. The awards have restriction periods tied solely to employment and vest
over three years. The cost of restricted stock awards, which is determined to be the fair market
value of the shares on the date of grant net of estimated forfeitures, is expensed ratably over the
related vesting period. The Companys restricted stock activity during the six-month period ended
June 30, 2007 follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
|
|
|
|
Grant Date |
|
|
|
2007 |
|
|
Grant Date |
|
|
Fair Value |
|
Restricted Stock: |
|
Shares |
|
|
Fair Value |
|
|
Per Share |
|
Unvested at December 31, 2006 |
|
|
326,326 |
|
|
$ |
4,265 |
|
|
$ |
13.06 |
|
Granted during the period |
|
|
792,736 |
|
|
|
4,891 |
|
|
|
6.17 |
|
Vested during the period |
|
|
(72,854 |
) |
|
|
(984 |
) |
|
|
13.51 |
|
Forfeited during the period |
|
|
(57,434 |
) |
|
|
(570 |
) |
|
|
9.92 |
|
|
|
|
|
|
|
|
|
|
|
Unvested at June 30, 2007 |
|
|
988,774 |
|
|
$ |
7,602 |
|
|
$ |
7.69 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Amount includes dividend equivalents on unvested shares. |
In addition, during the six months ended June 30, 2007, the Company granted 240,000 options
with an aggregate estimated fair value of $607. The options vest over three years and have an
exercise price of $6.17.
NOTE 6 Special Charges:
The special charges line item on the Consolidated Statement of Operations is comprised of
the following:
7
WESTWOOD ONE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
Professional fees related to new
CBS agreements |
|
$ |
1,282 |
|
|
$ |
1,198 |
|
|
$ |
1,637 |
|
|
$ |
1,398 |
|
Severance related obligations related to
executive officers |
|
|
1,000 |
|
|
|
|
|
|
|
1,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
2,282 |
|
|
$ |
1,198 |
|
|
$ |
2,637 |
|
|
$ |
1,398 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 7 Investments:
On September 29, 2006, the Company, along with the other limited partners of its investee POP
Radio, elected to participate in a recapitalization transaction negotiated by POP Radio with Alta
Communications, Inc. (Alta), in return for which the Company received $529 on November 13, 2006.
Pursuant to the terms of the transaction, if and when Alta elects to exercise warrants it received
in connection with the transaction, the Companys limited partnership interest in POP Radio will
decrease from 20% to 6%. As of June 30, 2007, Alta has not elected to exercise these warrants.
NOTE 8 Comprehensive Income:
Comprehensive income reflects the change in equity of a business enterprise during a period
from transactions and other events and circumstances from non-owner sources. For the Company,
comprehensive income represents net income or loss adjusted for unrealized gains or losses on
available for sale securities. Comprehensive income is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
|
|
June 30, |
|
June 30, |
|
|
2007 |
|
2006 |
|
2007 |
|
2006 |
Net Income (Loss) |
|
$ |
6,897 |
|
|
$ |
12,170 |
|
|
$ |
7,612 |
|
|
$ |
8,643 |
|
Other Comprehensive Income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized Gain |
|
|
1,408 |
|
|
|
(445 |
) |
|
|
1,720 |
|
|
|
4,905 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive Income |
|
$ |
8,305 |
|
|
$ |
11,725 |
|
|
$ |
9,332 |
|
|
$ |
13,548 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 9 - Earnings Per Share:
Basic earnings per share (EPS) excludes all dilution and is calculated using the weighted
average number of Common shares outstanding in the period. Diluted earnings per share reflects the
potential dilution that would occur if all dilutive financial instruments which may be exchanged
for equity securities were exercised or converted to Common stock.
Diluted EPS for Common stock is calculated, utilizing the if-converted method. All other EPS
calculations are calculated utilizing the two-class method, by dividing the sum of distributed
earnings to Common and Class B shareholders and undistributed earnings allocated to such
shareholders by the weighted average number of such shares outstanding during the period. In
applying the two-class method, undistributed earnings are allocated to Common shares and Class B
stock in accordance with the cash dividend provisions of the Companys articles of incorporation.
Such provision provides that payment of a cash dividend to holders of Common shares does not
necessitate a dividend payment to holders of Class B stock. Therefore, in accordance with SFAS 128,
Earnings Per Share and Emerging Issues Task Force Issue 03-06, the Company has allocated all
undistributed earnings to Common shareholders in the calculations of net income per share.
8
WESTWOOD ONE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share data)
The following is a reconciliation of the Companys earnings, Common shares and Class B shares
outstanding for calculating basic and diluted net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
Net Income |
|
$ |
6,897 |
|
|
$ |
12,170 |
|
|
$ |
7,612 |
|
|
$ |
8,643 |
|
|
Less: distributed earnings to Common shareholders |
|
|
|
|
|
|
8,624 |
|
|
|
1,658 |
|
|
|
17,216 |
|
|
Less: distributed earnings to Class B shareholders |
|
|
|
|
|
|
23 |
|
|
|
5 |
|
|
|
47 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Undistributed earnings (loss) |
|
$ |
6,897 |
|
|
$ |
3,523 |
|
|
$ |
5,949 |
|
|
$ |
(8,620 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings Common stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributed earnings to Common shareholders |
|
$ |
|
|
|
$ |
8,624 |
|
|
$ |
1,658 |
|
|
$ |
17,216 |
|
Undistributed earnings (loss) allocated to
Common shareholders |
|
|
6,897 |
|
|
|
3,523 |
|
|
|
5,949 |
|
|
|
(8,620 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Earnings Common stock, basic |
|
$ |
6,897 |
|
|
$ |
12,147 |
|
|
$ |
7,607 |
|
|
$ |
8,596 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributed earnings to Common shareholders |
|
$ |
|
|
|
$ |
8,624 |
|
|
$ |
1,658 |
|
|
$ |
17,216 |
|
Distributed earnings to Class B shareholders |
|
|
|
|
|
|
23 |
|
|
|
5 |
|
|
|
47 |
|
Undistributed earnings (loss) allocated to
Common shareholders |
|
|
6,897 |
|
|
|
3,523 |
|
|
|
5,949 |
|
|
|
(8,620 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Earnings (loss) Common stock,
Diluted |
|
$ |
6,897 |
|
|
$ |
12,170 |
|
|
$ |
7,612 |
|
|
$ |
8,643 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average Common shares outstanding, basic |
|
|
86,094,026 |
|
|
|
85,953,821 |
|
|
|
86,083,608 |
|
|
|
87,527,627 |
|
Share-based compensation shares |
|
|
153,764 |
|
|
|
9,751 |
|
|
|
32,711 |
|
|
|
32,634 |
|
Warrants |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average Class B shares |
|
|
291,796 |
|
|
|
291,796 |
|
|
|
291,796 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average Common shares outstanding, diluted |
|
|
86,539,586 |
|
|
|
86,255,368 |
|
|
|
86,408,115 |
|
|
|
87,560,261 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per Common share, basic |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributed earnings, basic |
|
$ |
|
|
|
$ |
0.10 |
|
|
$ |
0.02 |
|
|
$ |
0.20 |
|
Undistributed earnings (loss) basic |
|
|
0.08 |
|
|
|
0.04 |
|
|
|
0.07 |
|
|
|
(0.10 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
0.08 |
|
|
$ |
0.14 |
|
|
$ |
0.09 |
|
|
$ |
0.10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per Common share, diluted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributed earnings, diluted |
|
$ |
|
|
|
$ |
0.10 |
|
|
$ |
0.02 |
|
|
$ |
0.20 |
|
Undistributed earnings (loss) diluted |
|
|
0.08 |
|
|
|
0.04 |
|
|
|
0.07 |
|
|
|
(0.10 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
0.08 |
|
|
$ |
0.14 |
|
|
$ |
0.09 |
|
|
$ |
0.10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9
WESTWOOD ONE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
Earnings Class B stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributed earnings to Class B
shareholders |
|
$ |
|
|
|
$ |
23 |
|
|
$ |
5 |
|
|
$ |
47 |
|
Undistributed earnings allocated to Class
B Shareholders |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Earnings Class B stock, basic |
|
$ |
|
|
|
$ |
23 |
|
|
$ |
5 |
|
|
$ |
47 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributed Earnings to Class B
shareholders |
|
$ |
|
|
|
$ |
23 |
|
|
$ |
5 |
|
|
$ |
47 |
|
Undistributed earnings allocated to
Class B shareholders |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Earnings Class B stock, diluted |
|
$ |
|
|
|
$ |
23 |
|
|
$ |
5 |
|
|
$ |
47 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average Class B shares outstanding,
basic |
|
|
291,796 |
|
|
|
291,796 |
|
|
|
291,796 |
|
|
|
291,796 |
|
Share-based compensation
Warrants |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average Class B shares outstanding,
diluted |
|
|
291,796 |
|
|
|
291,796 |
|
|
|
291,796 |
|
|
|
291,796 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per Class B share, basic |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributed earnings, basic |
|
$ |
|
|
|
$ |
0.08 |
|
|
$ |
0.02 |
|
|
$ |
0.16 |
|
Undistributed earnings basic |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
|
|
|
$ |
0.08 |
|
|
$ |
0.02 |
|
|
$ |
0.16 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per Class B share, diluted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributed earnings, diluted |
|
$ |
|
|
|
$ |
0.08 |
|
|
$ |
0.02 |
|
|
$ |
0.16 |
|
Undistributed earnings diluted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
|
|
|
$ |
0.08 |
|
|
$ |
0.02 |
|
|
$ |
0.16 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common equivalent shares are excluded in periods in which they are anti-dilutive. The
following options, restricted stock, restricted stock units, and warrants (see Note 11 Related
Party Transactions for more information) were excluded from the calculation of diluted earnings
per share because the combined exercise price, unamortized fair value, and excess tax benefits per
share were greater than the average market price of the Companys Common stock for the periods
presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
|
|
June 30, |
|
June 30, |
|
|
2007 |
|
2006 |
|
2007 |
|
2006 |
Options |
|
|
5,881,947 |
|
|
|
7,495,394 |
|
|
|
6,085,794 |
|
|
|
7,648,968 |
|
Restricted Stock |
|
|
244,088 |
|
|
|
323,550 |
|
|
|
1,025,963 |
|
|
|
323,550 |
|
Restricted Stock Units |
|
|
134,621 |
|
|
|
225,603 |
|
|
|
127,778 |
|
|
|
225,603 |
|
Warrants |
|
|
3,000,000 |
|
|
|
3,500,000 |
|
|
|
3,000,000 |
|
|
|
3,500,000 |
|
10
WESTWOOD ONE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share data)
The per share exercise price of the options excluded were $6.57 $38.34 and $9.13 $38.34
for the three months, and $6.57- $38.34 and $8.88 $38.34 for the six months ended June 30, 2007
and 2006, respectively. The per share exercise prices of the warrants excluded were $43.11 $67.98
for the three and six month periods ended June 30, 2007 and 2006.
NOTE 10 - Debt:
Long-term debt consists of the following at:
|
|
|
|
|
|
|
|
|
|
|
June 30, 2007 |
|
|
December 31, 2006 |
|
Revolving Credit Facility/Term Loan |
|
$ |
170,000 |
|
|
$ |
170,000 |
|
4.64% Senior Unsecured Notes due 2009 |
|
|
50,000 |
|
|
|
50,000 |
|
5.26% Senior Unsecured Notes due 2012 |
|
|
150,000 |
|
|
|
150,000 |
|
Fair market value of Swap (a) |
|
|
(4,385 |
) |
|
|
(3,140 |
) |
|
|
|
|
|
|
|
|
|
$ |
365,615 |
|
|
$ |
366,860 |
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
write-up (write-down) to market value adjustments for debt with qualifying hedges that are
recorded as debt on the balance sheet. |
On October 31, 2006, the Company amended its existing senior loan agreement with a syndicate
of banks led by JP Morgan Chase Bank and Bank of America. The facility, as amended, is comprised
of an unsecured five-year $120,000 term loan and a five-year $150,000 revolving credit facility
which shall be automatically reduced to $125,000 effective September 28, 2007 (collectively the
Facility). Interest on the Facility is variable and is payable at a maximum of the prime rate
plus an applicable margin of up to .25% or LIBOR plus an applicable margin of up to 1.25%, at the
Companys option. The applicable margin is determined by the Companys Total Debt Ratio, as defined
in the underlying agreements. The Facility contains covenants relating to dividends, liens,
indebtedness, capital expenditures and restricted payments, as defined, interest coverage and
leverage ratios. At June 30, 2007, the Company had available borrowings under the Facility of
approximately $78,000.
As of June 30, 2007, the applicable margin was LIBOR plus 1.125%. Additionally, at June 30,
2007, the Company had borrowed $170,000 at a weighted-average interest rate of 6.9% (including the
applicable margin). As of December 31, 2006, the Company had borrowed $170,000 under the Facility
at a weighted average interest rate of 6.3% (including the applicable margin).
As a result of the Companys deteriorating operating performance, the existing Total Debt
Coverage Ratio is reducing the amount of the Companys available borrowings under its loan
agreement. The Company anticipates that its Annualized Consolidated Operating Cash Flow will
continue to decline through the end of the year. Accordingly, the Company may be forced to reduce
its outstanding borrowings. If the Company does not have sufficient liquidity to repay these
borrowings and if it is unable to obtain waivers or modifications to its senior loan agreement and
Senior Unsecured Note purchase agreements, it may default on one or more of such agreements. The
Company and its advisors to the Strategic Review Committee of the Board are actively evaluating
all of its options to avoid such an occurrence, including but not limited to: (i)
amending the existing loan agreements to modify their covenants; (ii) reducing the Companys
outstanding debt balance through the generation of free cash flow and/or through raising equity,
(iii) refinancing the Companys existing debt or (iv) obtaining the necessary waivers from the
holders or each outstanding debt security. While the Company believes it will be able to avoid a
default, it cannot provide any assurance that it will not violate a covenant in the next twelve
months, the occurrence of which could result in all its debt becoming immediately due and payable.
11
WESTWOOD ONE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share data)
NOTE 11 Related Party Transactions:
CBS Radio Inc. (CBS Radio; previously known as Infinity Broadcasting Corporation, a
wholly-owned subsidiary of CBS Corporation) holds a common equity position in the Company and
provides ongoing management services to the Company under the terms of a management agreement (the
Management Agreement). In return for receiving services under the Management Agreement, the
Company compensates CBS Radio via an annual base fee and provides CBS Radio 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 CBS Radio 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
CBS Radio in the normal course of business. These transactions, as well as the terms of the
warrants described above, are more fully described in the Companys Annual Report on Form 10-K .
The Company incurred the following expenses relating to transactions with CBS Radio and/or its
affiliates for the three and six-month periods ended June 30:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
Representation Agreement |
|
$ |
6,989 |
|
|
$ |
7,150 |
|
|
$ |
13,740 |
|
|
$ |
13,641 |
|
Programming and Affiliations |
|
|
10,034 |
|
|
|
13,198 |
|
|
|
22,227 |
|
|
|
28,096 |
|
Management Agreement
(excluding warrant
amortization) |
|
|
861 |
|
|
|
826 |
|
|
|
1,690 |
|
|
|
1,614 |
|
Warrant Amortization |
|
|
2,427 |
|
|
|
2,427 |
|
|
|
4,854 |
|
|
|
4,854 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
20,311 |
|
|
$ |
23,601 |
|
|
$ |
42,511 |
|
|
$ |
48,205 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses incurred for the Representation Agreement and programming and affiliate arrangements
are included as a component of operating costs in the accompanying Consolidated Statement of
Operations. Expenses incurred for the Management Agreement (excluding warrant amortization) and
amortization of the warrants granted to CBS Radio under the Management Agreement are included as a
component of corporate general and administrative expenses and depreciation and amortization,
respectively, in the accompanying Consolidated Statement of Operations. The description and
amounts regarding related party transactions set forth in these consolidated financial statements
and related notes, also reflect transactions between the Company and Viacom Inc. (Viacom) because
of Viacoms affiliation with CBS Radio. Viacom is the former parent company of CBS Radio and, like
CBS Radio, is majority-owned by National Amusements, Inc.
The Company also has a related party relationship, including a sales representation agreement,
with its investee, POP Radio, LP (POP), which is described in Note 7 Investments. The Company
earns revenue from the sale to third parties of advertising time on POPs in-store network, for
which it pays POP a fee based on the level of sales attained. The Company earned the following
revenue and incurred the following expenses, related to such sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
|
|
June 30, |
|
June 30, |
|
|
2007 |
|
2006 |
|
2007 |
|
2006 |
Sales |
|
$ |
1,013 |
|
|
$ |
829 |
|
|
$ |
2,164 |
|
|
$ |
1,314 |
|
POP fees |
|
|
673 |
|
|
|
542 |
|
|
|
1,404 |
|
|
|
862 |
|
12
WESTWOOD ONE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share data)
NOTE 12 Shareholders Equity:
On March 30, 2007, the Company paid a cash dividend of $0.02 per share for every issued and
outstanding share of Common stock and $0.016 per share for every issued and outstanding share of
Class B stock. In May 2007, the Board of Directors elected to discontinue the payment of a
dividend. Further declarations of dividends, if any, will be at the discretion of the Companys
Board of Directors.
NOTE 13 Recent Accounting Pronouncements:
In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, The
Fair Value Option for Financial Assets and Financial Liabilities Including an amendment of FASB
No. 115 (SFAS No. 159), which provides a fair value measurement option for eligible financial
assets and liabilities. Under SFAS No. 159, an entity is permitted to elect to apply fair value
accounting to a single eligible item, subject to certain exceptions, without electing it for other
identical items. Subsequent unrealized gains and losses on items for which the fair value option
has been elected will be included in earnings. The fair value option established by this Statement
is irrevocable, unless a new election date occurs. This standard reduces the complexity in
accounting for financial instruments and mitigates volatility in earnings caused by measuring
related assets and liabilities differently. SFAS No. 159 is effective as of the beginning of an
entitys first fiscal year beginning after November 15, 2007 which for the Company is January 1,
2008. The Company will adopt the provisions of this Statement beginning in fiscal 2008. Management
is currently evaluating the impact the adoption of SFAS No. 159 will have on the Companys
consolidated financial statements, but does not presently anticipate it will have a material effect
on its consolidated financial position or results of operations.
13
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
(In thousands except for share and per share amounts)
EXECUTIVE OVERVIEW
The following discussion should be read in conjunction with the Companys unaudited condensed
consolidated financial statements and notes thereto included elsewhere in this Quarterly Report on
Form 10-Q and the annual audited consolidated financial statements and notes thereto included in
the Companys Annual Report on Form 10-K for the year ended December 31, 2006.
Westwood One supplies radio and television stations with content, information services, and
programming. The Company is one of the largest domestic outsource providers of traffic reporting
services and one of the nations largest radio networks, 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 Clear Channel Communications and
CBS Radio, have emerged as powerful forces in the industry. Westwood One is managed by CBS Radio
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
CBS Radios 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 Companys
operating performance could be materially adversely impacted by its inability to continue to renew
its affiliate agreements with CBS Radio stations.
On November 9, 2006, the Company announced that its Board of Directors has established a Strategic
Review Committee comprised of independent directors to evaluate means by which Westwood may be able
to enhance shareholder value. The Committees principal task at this time is to seek to modify and
extend the Companys various agreements with CBS Radio and its affiliates, including the Companys
Management Agreement and programming and distribution arrangements with CBS Radio, which are
scheduled to expire on March 31, 2009. On April 12, 2007, the Committee announced that the Company
and CBS Radio entered into a non-binding letter of intent for the modification and extension of the
aforementioned agreements through 2017. Consummation of this transaction will require successful
negotiation and execution of definitive documentation, approval by the Companys Board of Directors
and a majority vote of the Common and Class B shareholders voting together (not including the
shares owned by CBS Radio or its affiliates.) There can be no assurance that this process will
result in any modification or extension to these agreements, however the Company is optimistic that
an agreement will be reached in August 2007 and submitted to a vote of its shareholders in the
fourth quarter after filing a definitive proxy statement with the SEC.
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. A growing number of
advertisers purchase both local/regional and national airtime. Our goal is to maximize the yield
of our available commercial airtime to optimize revenues.
In managing our business, we develop programming and exploit our 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
14
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 Companys revenues on a periodic basis including
but not limited to: (i) economic conditions and the relative strength or weakness in the United
States economy; (ii) advertiser spending patterns and the timing of the broadcasting of our
programming, principally the seasonal nature of sports programming; (iii) advertiser demand on a
local/regional or national basis for radio related advertising products; (iv) increases or
decreases in our portfolio of program offerings and related audiences, including changes in the
demographic composition of our audience base; and (v) competitive and alternative programs and
advertising mediums, including, but not limited to, radio.
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 a prospective 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 quantity 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 commissions, promotional expenses and bad debt expenses, depreciation and amortization,
and corporate general and administrative expenses. Corporate general and administrative expenses
are primarily comprised of costs associated with the Management Agreement, corporate accounting,
legal and administrative personnel costs, and other administrative expenses, including those
associated with corporate governance matters.
We consider the Companys operating cost structure to be predominantly fixed in nature, and as a
result, the Company needs at least several months lead-time to make significant modifications to
its cost structure to react to what it believes are more than temporary increases or decreases in
advertiser demand. This factor is important in predicting the Companys 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 revenues,
operating income will decrease by a greater percentage than the decline in revenue because of the
lead-time needed to reduce the Companys 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. The Company carefully considers matters such as credit and commercial
inventory risks, among others, in assessing arrangements with its programming and distribution
partners. In those circumstances where the Company functions as the principal in the transaction,
the revenue and associated operating costs are presented on a gross basis in the Consolidated
Statement of Operations. In those circumstances where the Company functions as an agent or sales
representative, the Companys effective commission is presented within revenues with no
corresponding operating expenses. Although no individual relationship is significant, the relative
mix of such arrangements should be considered when evaluating operating margin and/or increases and
decreases in operating expenses.
Results of Operations
Three Months Ended June 30, 2007 Compared With Three Months Ended June 30, 2006
Revenues
Revenues presented by type of commercial advertisements are as follows for the three month
periods ending June 30:
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
June 30, |
|
|
|
2007 |
|
|
2006 |
|
|
|
$ |
|
|
% of total |
|
|
$ |
|
|
% of total |
|
Local/Regional |
|
$ |
63,943 |
|
|
|
58 |
% |
|
$ |
72,566 |
|
|
|
54 |
% |
National |
|
|
47,202 |
|
|
|
42 |
% |
|
|
61,970 |
|
|
|
46 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total (1) |
|
$ |
111,145 |
|
|
|
100 |
% |
|
$ |
134,536 |
|
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
As described above, the Company currently aggregates revenue data based on the type or
duration 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 revenue generated on a local/regional versus national basis. Our objective is to
optimize total revenue from those advertisers. |
Revenue for the second quarter of 2007 decreased $23,391 or 17.4%, to $111,145 compared with
$134,536 in the second quarter of 2006. During the second quarter of 2007, revenue aggregated from
the sale of local/regional airtime decreased approximately 11.9%, or approximately $8,623, and
national-based revenues decreased approximately $14,768 or 23.8% compared with the second quarter
of 2006.
The decrease in local/regional revenue was a result of decreased demand for our :10 second
commercial airtime and increased competition relative to the comparable period of the prior year.
The reduced demand was experienced in virtually all markets and all advertiser categories.
The decline in our aggregated national-based revenue was primarily a result of lower demand
for our products in the marketplace and lower audience levels resulting from planned reductions in
affiliate compensation, partially offset by revenue generated from new program launches.
Operating Costs
Operating costs for the three month periods ended June 30 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
June 30, |
|
|
|
2007 |
|
|
2006 |
|
|
|
$ |
|
|
% of total |
|
|
$ |
|
|
% of total |
|
Programming, production
and distribution
expenses |
|
$ |
64,576 |
|
|
|
77 |
% |
|
$ |
73,346 |
|
|
|
75 |
% |
Selling expenses |
|
|
8,126 |
|
|
|
10 |
% |
|
|
12,076 |
|
|
|
12 |
% |
Stock-based compensation |
|
|
1,553 |
|
|
|
2 |
% |
|
|
1,650 |
|
|
|
2 |
% |
Other operating expenses |
|
|
9,497 |
|
|
|
11 |
% |
|
|
10,811 |
|
|
|
11 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
83,752 |
|
|
|
100 |
% |
|
$ |
97,883 |
|
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating costs decreased approximately $14,131, or 14.4%, to $83,752 in the second quarter of
2007 from $97,883 in the second quarter of 2006. The decrease was principally attributable to
lower payroll and related benefit costs (approximately $5,900), reduced programming and production
costs (approximately $5,000), and lower distribution costs (approximately $1,700). In addition, the
Company has curtailed certain discretionary expenses.
16
Depreciation and Amortization
Depreciation and amortization was $4,917 in the second quarter of 2007 and $5,063 in the
second quarter of 2006, effectively constant for the comparable periods presented.
Corporate General and Administrative Expenses
Corporate general and administrative expenses decreased $99 or 2.7%, to $3,576 in the second
quarter of 2007 from $3,675 in the second quarter of 2006. Exclusive of stock-based compensation
expense of $1,263 and $1,462 in the second quarter of 2007 and 2006, respectively, corporate
general and administrative expenses increased by $100.
Operating Income
Operating income decreased $10,099 to $16,618 in the second quarter of 2007 from $26,717 in
the second quarter of 2006. The 2007 decrease was principally attributable to a larger reduction
in revenues in the second quarter of 2007 compared to the second quarter of 2006, relative to the
reduction in operating expenses for the comparable periods.
Interest Expense
Interest expense decreased 10% in the second quarter of 2007 to $5,852 from $6,504 in the
second quarter of 2006. The decrease was principally attributable to lower average borrowings
under our credit facility in the second quarter of 2007 compared to the second quarter of 2006,
partially offset by higher interest rates.
Provision for Income Taxes
Income tax expense in the second quarter of 2007 was $4,019 as compared with $8,169 in the
second quarter of 2006. The Companys effective income tax rate was approximately 36.8% in the
second quarter of 2007 compared with 40.2% in the second quarter of 2006. The decrease was due to
the impact of a change in New York State tax law on the Companys deferred tax balance.
Net Income
Net income in the second quarter of 2007 was $6,897 compared with net income of 12,170 in the
second quarter of 2006, a decrease of $5,273. Net income per basic share and net income per
diluted share, were $0.08 in the second quarter of 2007. Net income per basic share and net income
per diluted share were $0.14 in the same period of the prior year.
Earnings Per Share
Weighted average shares outstanding used to compute basic and diluted earnings per share
increased approximately 0.2% to 86,094 and 0.3% to 86,540, respectively, in the second quarter of
2007 compared with 85,954 and 86,255 in the second quarter of 2006.
17
Six Months Ended June 30, 2007 Compared With Six Months Ended June 30, 2006
Revenues
Revenues presented by type of commercial advertisements are as follows for the six month periods
ending June 30:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, |
|
|
|
2007 |
|
|
2006 |
|
|
|
$ |
|
|
% of total |
|
|
$ |
|
|
% of total |
|
Local/Regional |
|
$ |
117,366 |
|
|
|
52 |
% |
|
$ |
130,505 |
|
|
|
50 |
% |
National |
|
|
107,817 |
|
|
|
48 |
% |
|
|
129,058 |
|
|
|
50 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total (1) |
|
$ |
225,183 |
|
|
|
100 |
% |
|
$ |
259,563 |
|
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
As described above, the Company currently aggregates revenue data based on the type or
duration 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. |
Revenue for the first six months of 2007 decreased $34,380, or 13.2%, to $225,183 compared
with $259,563 in the first six months of 2006. During the first six months of 2007, revenues
aggregated from the sale of local/regional airtime decreased approximately $13,139, or 10.1%, and
national-based revenue decreased approximately $21,241, or 16.5%, compared with the first six
months of 2006.
The decrease in local/regional revenues was a result of decreased demand for our :10 second
commercial airtime and increased competition relative to the comparable period of the prior year.
The reduced demand was experienced in virtually all markets and all advertiser categories.
The decline in our national-based revenue was primarily a result of non-recurring revenue
derived from our exclusive broadcast of the 2006 Winter Olympic games from Torino, Italy
(approximately $5,700), and overall reduced demand for our products in the marketplace, and lower
audience levels, partially offset by revenue generated from new program launches.
We expect revenue in the last half of 2007 to be lower than comparable 2006 amounts.
Operating Costs
Operating costs for the six months ended June 30 in each of 2007 and 2006 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, |
|
|
|
2007 |
|
|
2006 |
|
|
|
$ |
|
|
% of total |
|
|
$ |
|
|
% of total |
|
Programming, production
and distribution
expenses |
|
$ |
141,454 |
|
|
|
78 |
% |
|
$ |
161,345 |
|
|
|
76 |
% |
Selling expenses |
|
|
18,107 |
|
|
|
10 |
% |
|
|
26,648 |
|
|
|
12 |
% |
Stock-based compensation |
|
|
2,929 |
|
|
|
2 |
% |
|
|
3,413 |
|
|
|
2 |
% |
Other operating expenses |
|
|
18,777 |
|
|
|
10 |
% |
|
|
21,542 |
|
|
|
10 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
181,267 |
|
|
|
100 |
% |
|
$ |
212,948 |
|
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating costs decreased approximately $31,681, or 14.9%, to $181,267 in the first six months
of 2007 from $212,948 in the first six months of 2006. The decrease was principally attributable
to lower payroll and related benefit costs (approximately $12,500), reduced programming and
production costs (approximately $9,800), lower distribution costs (approximately $3,400), and
reduced stock-based compensation charges. In addition, the
Company has curtailed certain discretionary expenses.
18
The Company anticipates operating costs will increase in the last half of 2007 compared with
the last half of 2006 as a result of higher programming and production expenses related to
contractual increases and new programs.
Depreciation and Amortization
Depreciation and amortization was $9,948 in the first six months of 2007 and $10,185 in the
first six months of 2006, effectively constant for the comparable periods presented.
We expect depreciation and amortization expense for the last half of 2007 will approximate the
2006 last half expense.
Corporate General and Administrative Expenses
Corporate general and administrative expenses decreased $1,004, or 11.9%, to $7,451 in the
first six months of 2007 from of $8,455 in the first six months of 2006. Exclusive of stock-based
compensation expense of $2,642 and $3,084 in the first six months of 2007 and 2006, respectively,
corporate general and administrative expenses decreased by $562. The decrease was principally
attributable to reduced governance and business development expenses in the second half of 2007 as
compared to the second half of 2006.
We expect corporate general and administrative expenses will increase in the last half of
2007, compared with the last half of 2006.
Operating Income
Operating income decreased $2,697, or 10.1%, to $23,880 in the first six months of 2007 from
$26,577 in the first six months of 2006. The 2007 decrease was principally attributable to a
larger reduction in revenue in the first six months of 2007 compared to the first six months of
2006, relative to a reduction in operating expenses for the comparable periods.
We expect operating income for the remainder of 2007 to be below 2006 levels as a result of
the anticipated decline in revenue and increase in operating expenses in the last half of 2007.
Interest Expense
Interest expense decreased 4.3% in the first six months of 2007 to $11,949 from $12,492 in the
first six months of 2006. The decrease was principally attributable to lower average borrowings
under our credit facility. In the first six months of 2007, partially offset by an increase in
interest rates. Our weighted average interest rate was 6.9% compared to 5.5% in the first six
months of 2006.
We anticipate interest expense for the last half of 2007 to be comparable to the amount
reported in the same period of 2006.
Provision for Income Taxes
Income tax expense in the first six months of 2007 was $4,469 as compared with an expense of
$5,677 in the first six months of 2006. The Companys effective income tax rate was approximately
37% in the first six months of 2007 compared with 39.6% in the first six months of 2006. The
decrease was due to the impact of a change in New York State tax law on the Companys deferred tax
balance.
We expect our full year effective tax rate to be between 39% and 40%.
19
Net Income
Net income in the first six months of 2007 was $7,612 compared with net income of $8,643 in
the first six months of 2006, a decrease of $1,031, or 11.9%. Net income per basic and diluted
share, were $0.09 in the first six months of 2007, compared with $0.10 in the same period of the
prior year.
Earnings Per Share
Weighted average shares outstanding used to compute basic and diluted earnings per share
decreased approximately 2% to 86,084 and 1% to 86,408 respectively, in the first six months of 2007
compared with 87,528 and 87,560 in the first six months of 2006.
Liquidity and Capital Resources
The Company continually projects anticipated cash requirements, which may include share
repurchases, dividends, potential acquisitions, capital expenditures, principal and interest
payments on its outstanding and future indebtedness, and working capital requirements. Funding
requirements have been financed through cash flows from operations, the issuance of Common stock
and the issuance of long-term debt.
At June 30, 2007, the Companys principal sources of liquidity were its cash and cash
equivalents of $4,830 and available borrowings under its credit facility which is further
described below.
For the six month period ended June 30, 2007 net cash provided by operating activities
decreased $42,477 to a net use of cash from operating activities of $2,562 compared with net cash
provided by operating activities in the same period of 2006 of $39,915. The decrease in cash
provided by operating activities is principally related to slower collections of accounts
receivable and a reduction in accounts payable and accrued expenses.
At June 30, 2007, the Company has an unsecured five-year $120,000 term loan and a five-year
$150,000 revolving credit facility which shall be automatically reduced to $125,000 effective
September 28, 2007 (referred to herein as the Facility), both of which mature in 2009. As of
June 30, 2007, the Company had available borrowings of $77,693 under its Facility. Interest on the
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 Companys option. The applicable margin is determined by
the Companys total debt ratio, as defined in the underlying agreements. The Facility contains
covenants relating to dividends, liens, indebtedness, capital expenditures and restricted payments,
as defined, interest coverage and leverage ratios. The Company also has issued through a private
placement $150,000 of ten year Senior Unsecured Notes due November 30, 2012 (interest at a fixed
rate of 5.26%) and $50,000 of seven year Senior Unsecured Notes due November 30, 2009 (interest at
a fixed rate of 4.64%). In addition, the Company has entered into fixed to floating interest rate
swap agreements for 50% of the notional amount of its two Senior Unsecured Notes. The Senior
Unsecured Notes contain covenants relating to dividends, liens, indebtedness, capital expenditures,
and interest coverage and leverage ratios.
On October 31, 2006 the Company amended its existing senior loan agreement with a syndicate of
banks, to change among other things its allowable Total Debt Coverage Ratio to 4.0 times its
Annualized Consolidated Operating Cash Flow until March 31, 2008 and 3.5 times thereafter. As a
result of the Companys deteriorating operating performance, the existing Total Debt Coverage Ratio
is reducing the amount of the Companys available borrowings under its loan agreement. The Company
anticipates that its Annualized Consolidated Operating Cash Flow will continue to decline through
the end of the year. Accordingly, the Company may be forced to reduce its outstanding borrowings.
If the Company does not have sufficient liquidity to repay these borrowings and if it is unable to
obtain waivers or modifications to its senior loan agreement and Senior Unsecured Note purchase
agreements, it may default on one or more of such agreements. The Company and Advisors to the
Strategic Review Committee of the Board are actively evaluating options to avoid such an
occurrence, including but not limited to any assurance that it will not violate a covenant in the
next twelve months, the occurrence of which could result in all its debt becoming immediately due
and payable.
20
In conjunction with the Companys objective of enhancing shareholder value, the Companys
Board of Directors authorized a stock repurchase program in 1999. Most recently, on April 29,
2004, the Companys Board
of Directors authorized an additional $300 million for such stock repurchase program, which
gave the Company, as of April 29, 2004, authorization to repurchase up to $402,023 of its Common
stock. The Company did not purchase any shares of the Companys Common stock under its stock
repurchase program during the six months ended June 30, 2007 and does not plan to be repurchasing
stock in the foreseeable future due to its deteriorating financial performance. At the end of June
2007, the Company had authorization to repurchase up to an additional $290,490 of its Common stock.
On March 6, 2007, the Board of Directors declared a cash dividend of $0.02 per share of issued
and outstanding Common stock and $0.016 per share of issued and outstanding Class B stock payable
on March 30, 2007 to all record holders as of March 20, 2007. Dividend payments totaling $1,663
were made in the first six months of 2007. In May 2007, the Board of Directors elected to
discontinue the payment of a dividend and evaluate its reinvestment opportunities and resources
while the Company continues the process of negotiating and documenting the modification and
extension of its various agreements with CBS Radio. The Company does not plan to declare dividends
for the foreseeable future.
The Companys business does not require, and is not expected to require, significant cash
outlays for capital expenditures.
If the assumptions underlying our current expectations regarding future revenue and operating
expenses change, or if unexpected opportunities arise or strategic priorities change, we may need
to raise additional cash by future modifications to our existing debt instruments or seek to obtain
replacement financing. The Companys ability to obtain, if needed, amendments to its existing
financing or replacement financing may be impacted by the timing of the Companys ability, if at
all, to extend its programming and distribution arrangements with CBS Radio beyond March 31, 2009.
Critical Accounting Policies and Estimates
During the first half of 2007, there were no changes in our policies regarding the use of
estimates and other critical accounting policies. See Managements Discussion and Analysis of
Financial Condition and Results of Operations, found in our Annual Report on Form 10-K for the
year ended December 31, 2006, for additional information relating to our use of estimates and other
critical accounting policies.
Recent Accounting Pronouncements
In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, The
Fair Value Option for Financial Assets and Financial Liabilities Including an amendment of FASB
No. 115 (SFAS No. 159), which provides a fair value measurement option for eligible financial
assets and liabilities. Under SFAS No. 159, an entity is permitted to elect to apply fair value
accounting to a single eligible item, subject to certain exceptions, without electing it for other
identical items. Subsequent unrealized gains and losses on items for which the fair value option
has been elected will be included in earnings. The fair value option established by this Statement
is irrevocable, unless a new election date occurs. This standard reduces the complexity in
accounting for financial instruments and mitigates volatility in earnings caused by measuring
related assets and liabilities differently. SFAS No. 159 is effective as of the beginning of an
entitys first fiscal year beginning after November 15, 2007 which for the Company is January 1,
2008. The Company will adopt the provisions of this Statement beginning in fiscal 2008. Management
is currently evaluating the impact the adoption of SFAS No. 159 will have on the Companys
consolidated financial statements, but does not presently anticipate it will have a material effect
on its consolidated financial position or results of operations.
Cautionary Statement Concerning Forward-Looking Statements and Factors Affecting Forward-Looking
Statements
This quarterly report on Form 10-Q, including Item 2Managements Discussion and Analysis of
Results of Operations and Financial Condition, contains both historical and forward-looking
statements. All statements other than statements of historical fact are, or may be deemed to be,
forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934, as
amended (the Exchange Act).
21
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 not based on historical fact but rather are based on
managements views and assumptions concerning future events and results at the time the
statements are made. No assurances can be given that managements expectations will come to
pass. There may be additional risks, uncertainties and factors that the Company does not currently
view as material or that are not necessarily known. Any 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.
A wide range of factors could materially affect future developments and performance including
the following:
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|
|
As a result of deterioration in the Companys operating performance, the Company amended
its senior loan agreement in October 2006 with a syndicate of banks in order to remain in
compliance with the covenants under such agreement, including the total debt ratio covenant
which was amended to 4.00 to 1 through March 31, 2008 and 3.5 to 1, thereafter. Further
changes in the Companys operating performance may cause the Company to seek further
amendments to the covenants under the senior loan agreement or to seek to replace the
senior loan agreement, which matures on February 28, 2009. The Companys ability and
timing to obtain, if needed, additional amendments or additional financing, or to refinance
the existing senior loan agreement, may be adversely impacted by the timing of the
Companys ability, if at all, to extend its relationship with CBS Radio beyond the March
31, 2009 expiration of the Management Agreement and related agreements. A continued
deterioration in operating results could also result in the Company violating one or more
financial covenants on its Senior Unsecured Notes, thereby resulting in all such notes
becoming immediately due and payable. If the Company defaulting on one or more of its loan
agreements, the Company might be required to unwind its current interest rate swap
agreements. |
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|
The Company is party to a Management Agreement, a Representation Agreement and other
related programming agreements and arrangements with CBS Radio, which expire on March 31,
2009. While the Company provides programming to all major radio station groups, the
Company has affiliation agreements with most of the radio stations owned and operated by
CBS Radio which, in the aggregate, provide the Company with a significant portion of the
audience and/or commercial inventory that it sells to advertisers. While the Company is
currently involved in discussions with CBS Radio regarding the modification and/or
extension of such agreements and arrangements, there can be no assurance the Company and
CBS Radio will be able to agree on extensions or modifications to such agreements on
similar economic terms. If the Company is unable to secure agreements with CBS Radio
beyond March 31, 2009, the Companys operations and financial condition could be materially
affected. |
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|
Under the terms of the Management Agreement, CBS Radio manages the business and
operations of the Company, including by providing individuals to serve as the CEO and CFO
of the Company (CBS Radio employs the CEO and reimburses to the Company the cash
compensation of the CFO, who is employed directly by the Company). CBS Radio receives a
management fee for its management services. The Management Agreement also includes certain
non-competition provisions in favor the Company and a right of first refusal on syndication
opportunities to the Company where CBS Radio determines, in its sole discretion, to
syndicate programming. An executive of CBS Radio serves on the Companys Board of
Directors, and CBS Radio owns approximately 18.4% of the Companys Common stock. In
addition, CBS Radio competes with the Company in advertising sales and most of the radio
stations owned and operated by CBS Radio have affiliation agreements with the Company. The
foregoing could create, or appear to create, potential conflicts of interest for CBS Radio
in its decisions regarding the day-to-day operation of its business and in providing its
management services to the Company under the Management Agreement. |
22
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|
The foregoing could
materially adversely impact the Companys future business, financial condition and
operating performance. |
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|
While the Company provides programming to all major radio station groups, the Company
has affiliation agreements with most of CBS Radios owned and operated radio stations
which, in the aggregate, provide the Company with a significant portion of the audience
and/or commercial inventory that it sells to advertisers. In addition, the Company
operates the CBS Radio Network and syndicates and/or distributes several other programs
from CBS and its affiliates. In 2006, the Company experienced a material decline in the
amount of audience and quantity and quality of commercial inventory delivered by the CBS
Radio owned and operated radio stations. Reasons for the decline include: (1) the
cancellation of, and loss of syndication opportunities associated with, key national
programming; (2) the sale of CBS radio stations as described in more detail below and (3)
the reduction of commercial inventory levels, including certain RADAR inventory, provided
to the Company under affiliation agreements. At the same time, other than for reductions
in compensation paid to CBS Radio to reflect reduced commercial inventory levels the
economic arrangement between the Company and CBS Radio has remained substantially fixed
pursuant to the terms of many of the existing agreements between the Company and CBS Radio.
At this time, it is unclear whether such decline is permanent. To the extent the decline
is permanent or new economic terms to its agreements with CBS Radio and its affiliates
cannot be negotiated, the Companys operating performance could be materially adversely
impacted by this decline in audience and commercial inventory. |
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|
In connection with its agreements with CBS Radio dating back to 1994, the Company has
benefited from the historical practice of long-term distribution relationships for its
programming, including pursuant to affiliation agreements with most of CBSs owned and
operated radio stations, many of which operate on a month-to-month basis or contain 90-day
termination provisions which historically have not been exercised by the CBS radio
stations. During 2006, CBS Radio reached agreements to sell 39 radio stations in ten of
its smaller markets; to date, the sale of 24 of those stations have been completed. To the
extent CBS Radio continues to sell and/or restructure its portfolio of radio assets and
these existing distribution arrangements are terminated and/or not continued on a long-term
basis by the new owners of the former CBS radio stations, as was the case with certain of
the radio stations sold by CBS in 2006, there is a greater likelihood that the Company will
not be able to continue to benefit from the long-term distribution relationship it has with
CBS Radio on substantially similar economic terms and conditions or at all. If a
significant number of additional radio stations or radio stations in key markets affiliated
with the Company are sold by CBS Radio, and the new owners of such stations terminate
and/or do not continue the affiliation agreements with the Company on a long-term basis, or
if the Company cannot enter into new affiliation agreements with other radio stations in
such markets on similar terms and conditions, the Companys operating performance would be
materially and adversely impacted. |
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The Company and CBS Radio are presently seeking to resolve a dispute as to whether the
manner of sale of certain short duration commercial inventory conducted by or on behalf of
radio stations owned by CBS Radio is permitted under the terms of existing agreements
between the parties, including the non-competition provisions of the Management Agreement.
If this dispute cannot be resolved, the Companys relationship with CBS Radio could be
adversely affected, which could, in turn, have a material and adverse impact on the
Company. |
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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
performance-based revenue arrangements are subject to change and any adverse change in a
particular geographic area could have a material and adverse effect on the Companys
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 Companys financial performance. These factors include: |
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economic conditions, both generally and relative to the broadcasting industry; |
23
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|
advertiser spending patterns, including the notion that orders are being placed
in close proximity to air, limiting visibility of demand; |
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|
the level of competition for advertising dollars, including by new entrants into
the radio advertising sales market, including Google; |
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|
new competitors or existing competitors with expanded resources, including as a
result of consolidation (as described below), NAVTEQs purchase of Traffic.com or
the announced proposed merger between XM Satellite Radio and Sirius Satellite
Radio; |
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lower than anticipated market acceptance of new or existing products; |
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technological changes and innovations; |
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fluctuations in programming costs; |
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shifts in population and other demographics; |
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changes in labor conditions; and |
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changes in governmental regulations and policies and actions of federal and
state regulatory bodies. |
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There can be no assurance that the Company will be able to maintain or increase the current
audience ratings and advertising revenue. |
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The radio broadcasting industry has continued to experience significant change,
including as a result of a significant amount of consolidation in recent years, and
increased business transactions in 2006 by key players in the radio industry (e.g., Clear
Channel, Citadel, ABC, CBS Radio). In connection therewith, certain major station groups
have: (1) recently modified overall amounts of commercial inventory broadcast on their
radio stations, (2) experienced significant declines in audience and (3) increased their
supply of shorter duration advertisements which is directly competitive to the Company. 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. Additionally, if the size and financial resources of certain station groups
continue to increase, the station groups 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 Companys competitors. Any such occurrences, or merely the threat of
such occurrences, could adversely affect the Companys ability to negotiate favorable terms
with its station affiliates, to attract audiences and to attract advertisers. |
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Changes in U.S. financial and equity markets, including market disruptions and
significant interest rate fluctuations, could impede the Companys access to, or increase
the cost of, external financing for its operations and investments. |
The Company, in connection with its annual impairment test, recorded an impairment of goodwill
of $515,916 in the fourth quarter of 2006. Goodwill represents the residual value remaining after
ascribing estimated fair values to a reporting units tangible and intangible assets and
liabilities. In order to estimate the fair values of assets and liabilities the Company is required
to make important assumptions and judgments about future operating results, cash flows, discount
rates, and the probability of various event scenarios, as well as the proportional contribution of
various assets to results and other judgmental allocations. If actual future conditions or events
differ from the Companys estimates, an additional impairment charge may be necessary to further
reduce the carrying value of goodwill, which charge could be material to the Companys operations.
The Company believes it is possible it may have a further impairment of goodwill in the future as
further discussed in the Companys Annual Report on Form 10-K.
This list of factors that may affect future performance and the accuracy of forward-looking
statements are illustrative, but by no means all-inclusive or exhaustive. 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.
24
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 $25,000 notional value
of its outstanding borrowing to effectively float the majority of the interest rate at three-month
LIBOR plus 74 basis points and two ten-year interest rate swap agreements covering $75,000 notional
value of its outstanding borrowing to effectively float the majority of the interest rate at
three-month LIBOR plus 80 basis points. In total, the swaps cover $100,000 which represents 50% of
the notional amount of Senior Unsecured Notes.
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 instruments effectiveness offsets the exposure to changes in the
hedged items fair value or variability in cash flows attributable to the hedged risk.
With respect to the borrowings pursuant to the Companys 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 for every $2,000 of
outstanding debt. As of June 30, 2007, the Company had $170,000 outstanding under the 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
non-performance by the counterparties.
The Companys 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. Disclosure Controls and Procedures
The Companys management, under the supervision and with the participation of the
Companys Chief Executive Officer and Chief Financial Officer, carried out an evaluation of the
effectiveness of the Companys disclosure controls and procedures as of the end of the most recent
fiscal period (the Evaluation). Based upon the Evaluation, the Companys Chief Executive Officer
and Chief Financial Officer concluded that the Companys 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 SECs rules
and forms.
In addition, there were no changes in our internal control over financial reporting during the
first six months of 2007 that have materially affected, or are reasonably likely to materially
affect, our internal controls over financial reporting.
25
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
On September 12, 2006, Mark Randall, derivatively on behalf of Westwood One, Inc., filed suit in
the Supreme Court of the State of New York, County of New York (the
Court), against the Company and certain of
its current and former directors and certain former executive officers. The complaint alleges
breach of fiduciary duties and unjust enrichment in connection with the granting of certain options
to former directors and executives of the Company. Plaintiff seeks judgment against the individual
defendants in favor of the Company for an unstated amount of damages, disgorgement of the options
which are the subject of the suit (and any proceeds from the exercise of those options and
subsequent sale of the underlying stock) and equitable relief. Subsequently, on December 15, 2006,
Plaintiff filed an amended complaint which asserts claims against certain former directors and
executives of the Company who were not named in the initial complaint filed in September 2006 and
dismisses claims against other former directors and executives named in the initial complaint. On
March 2, 2007, the Company filed a motion to dismiss the suit. On April 23, 2007, Plaintiff filed
its response to the Companys motion to dismiss. On May 14, 2007, the Company filed its reply in
furtherance of its motion to dismiss Plaintiffs amended complaint. On August 3, 2007, the Court granted such motion to dismiss and denied Plaintiffs request for
leave to replead and file a further amended complaint.
Item 1A. Risk Factors
A restated description of the risk factors associated with our business is included under
Cautionary Statement Concerning Forward-Looking Statements and Factors Affecting Forward-Looking
Statements in Managements Discussion and Analysis of Financial Condition and Results of
Operations, contained in Item 2 of Part I of this report. This description includes any material
changes to and supersedes the description of the risk factors associated with our business
previously disclosed in Item 1A of the Companys Annual Report on Form 10-K and is incorporated
herein by reference.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
During the quarter ended June 30, 2007 the Company did not purchase any of its Common stock
under its existing stock purchase program which was publicly announced on September 23, 1999.
Issuer Purchases of Equity Securities
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the Plans or |
Period |
|
Period |
|
Per Share |
|
Program |
|
Programs (A) |
4/1/07 4/30/07 |
|
|
|
|
|
|
N/A |
|
|
|
21,001,424 |
|
|
$ |
290,490,000 |
|
5/1/07 5/31/07 |
|
|
|
|
|
|
N/A |
|
|
|
21,001,424 |
|
|
$ |
290,490,000 |
|
6/1/07 6/30/07 |
|
|
|
|
|
|
N/A |
|
|
|
21,001,424 |
|
|
$ |
290,490,000 |
|
|
|
|
(A) |
|
Represents remaining authorization from the $250 million repurchase authorization approved on
February 24, 2004 and the additional $300 million authorization approved on April 29, 2004. |
26
Items 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None. Further, no material changes have been made to the Companys procedures regarding how
security holders may recommend nominees to the Companys Board.
Item 6. Exhibits
See
Exhibit Index.
27
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:
Name:
|
|
/S/ Peter Kosann
Peter Kosann
|
|
|
|
|
Title:
|
|
Chief Executive Officer |
|
|
|
|
|
|
|
|
|
|
|
By:
Name:
|
|
/S/ Gary J. Yusko
Gary J. Yusko
|
|
|
|
|
Title:
|
|
Chief Financial Officer |
|
|
|
|
|
|
|
|
|
|
|
Date: August 9, 2007 |
|
|
28
EXHIBIT INDEX
|
|
|
Exhibit |
|
|
Number (A) |
|
Description of Exhibit |
3.1
|
|
Restated Certificate of Incorporation of the Company, as filed on October 25, 2002. (1) |
|
|
|
3.2
|
|
Bylaws of Company as currently in effect. (2) |
|
|
|
4.1
|
|
Note Purchase Agreement, dated as of December 3, 2002, between the Company and the
Purchasers parties thereto. (3) |
|
|
|
10.1+
|
|
Amendment No. 2 to Employment Agreement, dated May 4, 2007, between Registrant and Paul
Gregrey (4) |
|
|
|
10.2+
|
|
Employment Agreement, effective as of July 16, 2007, by and between the Company and Gary
Yusko. (5) |
|
|
|
10.3+
|
|
Amendment No. 2, effective July 10, 2007, to the Employment Agreement, entered into by and
between the Company and David Hillman, effective as of October 16, 2004, as amended. (5) |
|
|
|
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. |
|
|
|
* |
|
Filed herewith. |
|
** |
|
Furnished herewith. |
|
+ |
|
Indicates a management contract or compensatory plan. |
|
(A) |
|
The Company agrees to furnish supplementally a copy of any omitted schedule to the SEC upon
request. |
|
(1) |
|
Filed as an exhibit to Companys quarterly report on Form 10-Q for the quarter ended
September 30, 2002 and incorporated herein by reference. |
|
(2) |
|
Filed as an exhibit to Companys annual report on Form 10-K for the year ended December 31,
1994 and incorporated herein by reference. |
|
(3) |
|
Filed as an exhibit to Companys current report on Form 8-K dated December 3, 2002 and
incorporated herein by reference. |
|
(4) |
|
Filed as an exhibit to Companys quarterly report on Form 10-Q for the quarter ended March
31, 2007 and incorporated herein by reference. |
|
(5) |
|
Filed as an exhibit to Companys current report on Form 8-K dated July 10, 2007 and
incorporated herein by reference. |
29