SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K Annual Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934 For the fiscal year ended December 31, 1996 Commission file number 0-13020 WESTWOOD ONE, INC. (Exact name of registrant as specified in its charter) Delaware 95-3980449 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 9540 Washington Boulevard Culver City, CA 90232 (Address of principal executive offices) (310) 204-5000 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b)of the Act: Name of Each Exchange on Title of each class Which Registered None None Securities registered pursuant to Section 12(g)of the Act: Common Stock (Title of Class) Seven Year Common Stock Purchase Warrants (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of Common Stock held by non-affiliates as of February 15, 1997 was approximately $433 million. As of February 15, 1997, 29,784,257 shares (excluding 2,090,395 treasury shares) of Common Stock were outstanding and 351,733 shares of Class B Stock were outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant's definitive proxy statement for its annual meeting of shareholders (which will be filed with the Commission within 120 days of the registrant's last fiscal year end) are incorporated in Part III of this Form 10-K. PART I Item 1. Business General Westwood One, Inc. (the "Company" or "Westwood One") is a leading producer and distributor of nationally sponsored radio programs and is the nation's second largest radio network. In addition, the Company owns and operates Westwood One Broadcasting Services, Inc. ("WBS"), which provides local traffic, news, sports and weather programming to radio stations and other media outlets in New York, Chicago, Los Angeles and Philadelphia. Westwood One is managed by Infinity Broadcasting Corporation (now an affiliate of CBS Radio) ("CBS Radio") pursuant to a five-year Management Agreement which expires on February 3, 1999. The Company's principal source of revenue is selling radio time to advertisers through one of its three operating divisions: Westwood One Radio Networks, Westwood One Entertainment (the "Network Divisions"), and, effective March 1996, WBS. The Company generates revenue principally by its Network Divisions entering into radio station affiliation agreements to obtain audience and commercial spots and then selling the spots to national advertisers. WBS generates revenue principally by selling audience it obtains from radio stations and other media outlets where it has operations to local as well as national advertisers. The Company is strategically positioned to provide a broad range of programming and services which both deliver audience to advertisers and news, talk, sports, and entertainment programs to radio stations. Westwood One Radio Networks offers radio stations three traditional news services, CNN Radio, NBC Radio Network and the Mutual Broadcasting System, plus youth-oriented network news and entertainment programming from The Source, in addition to eight 24-hour satellite-delivered continuous play music formats and weekday and weekend news and entertainment features and programs. Westwood One Entertainment produces music, sports, talk and special event programming. These programs include: countdown shows; music and interview programs; live concert broadcasts; major sporting events (principally covering the NFL, Notre Dame football and other college football and basketball games); live, personality intensive talk shows; and exclusive satellite simulcasts with HBO and other cable networks. The Company's programs are broadcast in every radio market in the United States measured by The Arbitron Ratings Company ("Arbitron"), the leading rating service, as well as being broadcast internationally. WBS provides radio stations and other media outlets, including television and cable companies, with local traffic, news, sports and weather programming in New York, Chicago, Los Angeles and Philadelphia. Westwood One, through its Divisions, enables national advertisers to purchase advertising time and to have their commercial messages broadcast on radio stations throughout the United States, reaching demographically defined listening audiences. The Company delivers both of the major demographic groups targeted by national advertisers: the 25 to 54-year old adult market and the 12 to 34-year-old youth market. The Company currently sells advertising time to over 300 national advertisers, including each of the 25 largest network radio advertisers. Radio stations are able to obtain quality programming from Westwood One to meet their objective of attracting larger listening audiences and increasing local advertising revenue. Westwood One, through the development of internal programming as well as through acquisitions, has developed an extensive tape library of previously aired programs, interviews, live concert performances, news and special events. Westwood One is managed by CBS Radio pursuant to a Management Agreement between the Company and CBS Radio pursuant to which (a) the Chief Executive Officer of CBS Radio, currently Mel Karmazin, became the Chief Executive Officer of the Company, (b) the Chief Financial Officer of CBS Radio, currently Farid Suleman, became the Chief Financial Officer of the Company and CBS Radio began managing the business and operations for an annual base fee of $2,000,000 (adjusted for inflation), an annual cash bonus (payable in the event of meeting certain financial targets) and warrants to acquire shares of Common Stock exercisable after the Company's Common Stock reaches certain market prices per share. In -1- addition, a Voting Agreement was executed providing for the reconstitution of the Board of Directors into a maximum nine-member Board (currently eight members due to the sale of Common Stock by Norman Pattiz) and the voting of Norman Pattiz's shares of the Company's Common Stock and Class B Stock and the shares of the Common Stock held by Infinity Network, Inc. ("INI"), a wholly-owned subsidiary of CBS Radio. Industry Background Radio Broadcasting As of January 1, 1997, there were approximately 9,750 commercial radio stations in the United States. A radio station selects a style of programming ("format") to attract a target listening audience and thereby attract commercial advertising directed at that audience. There are many formats from which a station may select, including news, talk, sports and various types of music and entertainment programming. The diversity in program formats has intensified competition among stations for local advertising revenue. A radio station has two principal ways of effectively competing for these revenues. First, it can differentiate itself in its local market by selecting and successfully executing a format targeted at a particular audience thus enabling advertisers to place their commercial messages on stations aimed at audiences with certain demographic characteristics. A station can also broadcast special programming, syndicated shows, sporting events or national news product, such as supplied by Westwood One, not available to its competitors within its format. National programming broadcast on an exclusive geographic basis can help differentiate a station within its market, and thereby enable a station to increase its audience and local advertising revenue. Radio Advertising Radio advertising time can be purchased on a local, regional or national basis. Local purchases allow an advertiser to select specific radio stations in chosen geographic markets for the broadcast of commercial messages. However, this process can be expensive and inefficient. Local and regional purchases are typically best suited for an advertiser whose business or ad campaign is in a specific geographic area. Advertising purchased from a radio network is one method by which an advertiser targets its commercial messages to a specific demographic audience, achieving national coverage on a cost efficient basis. In addition, an advertiser can choose to emphasize their message in a certain market or markets by supplementing a national purchase with local and/or regional purchases. In recent years the increase in the number of program formats has led to more demographically specific listening audiences, making radio an attractive, alternative medium for national advertisers. In addition, nationally broadcast news, concerts and special event programming have made radio an effective medium of reach (size of listening audiences) as well as frequency (number of exposures to the target audience). To verify audience delivery and demographic composition, specific measurement information is available to national advertisers by independent rating services such as Arbitron and Statistical Research, Inc.'s RADAR. These rating services provide demographic information such as the age and sex composition of the listening audiences. Consequently, national advertisers can verify that their advertisements are being heard by their target listening audience. Business Strategy Westwood One's Network Divisions provide targeted radio audiences and commercial spots to national advertisers through its recognized programming and other network products. The Company, through its various radio networks, produces and distributes quality programming to radio stations seeking to increase their listening audience and improve local and national advertising revenue. The Company sells advertising time within its programs to national advertisers desiring to reach large listening audiences nationwide with specific demographic characteristics. In 1996, the Company expanded its strategy to include providing local traffic, news, sports and weather programming to radio stations and other media outlets -2- in selected cities across the United States. In March 1996, WBS acquired the operating assets of New York Shadow Traffic Limited Partnership, Chicago Shadow Traffic Limited Partnership, Los Angeles Shadow Traffic Limited Partnership, and Philadelphia Express Traffic Limited Partnership (collectively "Shadow Traffic") for $20,000,000 plus expenses, subject to an adjustment based on actual cash flow for the twelve month period ending February 28, 1997 (See Note 2 to Consolidated Financial Statements). In addition, WBS has options to acquire the Shadow operations in other cities. Radio Programming The Company produces and distributes 24-hour continuous play formats, regularly scheduled and special syndicated programs, including exclusive live concerts, music and interview shows, national music countdowns, lifestyle short features, news broadcasts, talk programs, sporting events, and sports features. The Company controls most aspects of production of its programs, therefore being able to tailor its programs to respond to current and changing listening preferences. The Company produces regularly scheduled short-form programs (typically 5 minutes or less), long-form programs (typically 60 minutes or longer) and 24-hour continuous play formats. Typically, the short-form programs are produced at the Company's in-house facilities located in Culver City, California, New York, New York and Arlington, Virginia. The long-form programs include shows produced entirely at the Company's in-house production facilities and recordings of live concert performances and sports events made on location. The 24-hour continuous play formats are produced at the Company's facilities in Valencia, California. Westwood One also produces and distributes special event syndicated programs. In 1996 the Company produced and distributed numerous special event programs, including exclusive broadcasts of The Who: Quadrophenia Live from Madison Square Garden, Sting: Live from Houston, Texas, and Gloria Estefan: Live HBO Simulcast. Westwood One obtains most of the programming for its concert series by recording live concert performances of prominent recording artists. The agreements with these artists often provide the exclusive right to broadcast the concerts worldwide over the radio (whether live or pre-recorded) for a specific period of time. The Company may also obtain interviews with the recording artist and retain a copy of the recording of the concert and the interview for use in its radio programs and as additions to its extensive tape library. The agreements provide the artist with master recordings of their concerts and nationwide exposure on affiliated radio stations. In certain cases the artists may receive compensation. Westwood One's syndicated programs are produced at its in-house production facilities. The Company determines the content and style of a program based on the target audience it wishes to reach. The Company assigns a producer, writer, narrator or host, interviewer and other personnel to record and produce the programs. Because Westwood One controls the production process, it can refine the programs' content to respond to the needs of its affiliated stations and national advertisers. In addition, the Company can alter program content in response to current and anticipated audience demand. The Company produces and distributes eight 24-hour continuous play formats providing music, news and talk programming for Country, Hot Country, Adult Contemporary, Soft AC, Oldies, Adult Standards, Adult Rock and Roll and the 70's formats. Using its production facilities in Valencia, California, the Company provides all the programming for stations affiliated with each of these formats. Affiliates compensate the Company for these formats by providing the Company with a portion of their commercial air time and, in most cases, cash fees. The Company believes that its tape library is a valuable asset for its future programming and revenue generating capabilities. The library contains previously broadcast programs, live concert performances, interviews, daily news programs, sports and entertainment features, Capitol Hill hearings and other special events. New programs can be created and developed at a low cost by excerpting material from the library. Affiliated Radio Stations The Network Divisions' business strategy is to provide for the programming needs of radio stations by supplying to radio stations programs and services -3- that individual stations may not be able to produce on their own. The Company offers radio stations a wide selection of regularly scheduled and special event syndicated programming as well as 24-hour continuous play formats. These programs and formats are completely produced by the Company and, therefore, the stations have no production costs. Typically, each program is offered for broadcast by the Company exclusively to one station in its geographic market, which assists the station in competing for audience share in its local marketplace. In addition, except for news programming, Westwood One's programs contain available commercial air time that the stations may sell to local advertisers. Westwood One typically distributes promotional announcements to the stations and places advertisements in trade and consumer publications to further promote the upcoming broadcast of its programs. Westwood One's networks enter into affiliation agreements with radio stations. In the case of news and current events programming, the agreements commit the station to broadcast only the advertisements associated with these programs and allows the station flexibility to have the news headlined by their newscasters. The other affiliation agreements require a station to broadcast the Company's programs and to use a portion of the program's commercial slots to air national advertisements and any related promotional spots. With respect to the 24-hour formats, the Company may also receive a fee from the affiliated stations for the right to broadcast the formats. Radio stations in the top 200 national markets may also receive compensation for airing national advertising spots. Affiliation agreements specify the number of times and the approximate daypart each program and advertisement may be broadcast. Westwood One requires that each station complete and promptly return to the Company an affidavit (proof-of-performance) that verifies the time of each broadcast. Affiliation agreements for Westwood One's entertainment programming are non-cancelable for 26 weeks and are automatically renewed for subsequent 26-week periods, if not canceled 30 days prior to the end of the existing contract term. Affiliation agreements for Westwood One's news and current events programming generally run for a period of at least one year, are automatically renewable for subsequent periods and are cancelable by either the Company or the station upon 90 days' notice. The Company has a number of people responsible for station relations and marketing its programs to radio stations. Station relationships are managed geographically to allow the marketing staff to concentrate on specific geographical regions. This enables the Company's staff to develop and maintain close, professional relationships with radio station personnel and to provide them with quick programming assistance. National Advertisers Westwood One provides national advertisers with a cost-effective way to communicate their commercial messages to large listening audiences nationwide that have specific demographic characteristics. An advertiser can obtain both frequency (number of exposures to the target audience) and reach (size of listening audience) by purchasing advertising time in the Company`s programs. By purchasing time in programs directed to different formats, advertisers can be assured of obtaining high market penetration and visibility as their commercial messages will be broadcast on several stations in the same market at the same time. The Company supports its national sponsors with promotional announcements and advertisements in trade and consumer publications. This support promotes the upcoming broadcasts of Company programs and is designed to increase the advertisers' target listening audience. The Company sells its commercial time to advertisers either as "bulk" or "flighted" purchases. Bulk purchases are long-term contracts (26 to 52 weeks) that are sold "up-front" (early advertiser commitments for national broadcast time). Flighted purchases are contracts for a specific, short-term period of time (one to six weeks) that are sold at or above prevailing market prices. Advertising prices vary significantly based on prevailing market conditions. Generally, the contracts provide that advertising orders are firm and non-cancelable. The Company's strategy for growth in advertising revenue is to increase the amount of advertising time sold on the usually more profitable flighted basis, to increase revenue of the non-RADAR rated programs, and to increase audience size for news, talk and current events programming. -4- Local Traffic and Information Programming In 1996, the Company expanded its business to include the production and distribution of local traffic, news, sports and weather programming in selected metropolitan areas (initially New York, Chicago, Los Angeles and Philadelphia). The programming is produced in facilities rented by the Company in those metropolitan areas. Local traffic information is obtained through the utilization of strategically placed cameras overlooking portions of major freeways, monitoring police radio bands, phone calls from drivers, and through patrolling freeways with rented aircraft. Competition The Company operates in a very competitive environment. In marketing its programs to national advertisers, the Company directly competes with other radio networks as well as with independent radio syndication producers and distributors. In addition, Westwood One competes for advertising revenue with network television, cable television, print and other forms of communications media. The Company believes that the high quality of its programming and the strength of its station relations and advertising sales forces enable it to compete effectively with other forms of communication media. Westwood One markets its programs to radio stations, including affiliates of other radio networks, that it believes will have the largest and most desirable listening audience for each of its programs. The Company often has different programs airing on a number of stations in the same geographic market at the same time. The Company believes that in comparison with any other independent radio syndication producer and distributor or radio network it has a more diversified selection of programming from which national advertisers and radio stations may choose. In addition, the Company both produces and distributes programs, thereby enabling it to respond more effectively to the demands of advertisers and radio stations. The increase in the number of program formats has led to increased competition among local radio stations for audience. As stations attempt to differentiate themselves in an increasingly competitive environment, their demand for quality programming available from outside programming sources increases. This demand has been intensified by high operating and production costs at local radio stations and increased competition for local advertising revenue. WBS, in the metropolitan areas in which it operates, competes for advertising revenue with local print and other forms of communications media. The Company's principal competitor providing local traffic, news, sports and weather programming is Metro Networks. Government Regulation Radio broadcasting and station ownership are regulated by the FCC. Westwood One, as a producer and distributor of radio programs, is generally not subject to regulation by the FCC. Shadow Traffic utilizes FCC regulated frequencies pursuant to licenses issued by the FCC. Employees On February 15, 1997, Westwood One had 576 full-time employees, including a domestic advertising sales force of 68 people. In addition, the Company maintains continuing relationships with approximately 53 independent writers, program hosts, technical personnel and producers. Certain employees at the Mutual Broadcasting System, NBC Radio Networks, and Unistar Radio Networks ("Unistar") are covered by collective bargaining agreements. The Company believes relations with its employees and independent contractors are good. -5- Item 2. Properties The Company owns a 7,600 square-foot building in Culver City, California in which its production facilities are located and a 14,000 square-foot building and an adjacent 10,000 square-foot building in Culver City, California which contains administrative, sales and marketing offices, and storage space. In addition, the Company leases offices in New York; Chicago; Detroit; Dallas; Philadelphia; San Francisco; Arlington, Virginia and Valencia, California. The Company believes that its facilities are adequate for its current level of operations. Item 3. Legal Proceedings - None - Item 4. Submission of Matters to a Vote of Security Holders No matters were submitted to a vote of the Company's shareholders during the fourth quarter of the year ended December 31, 1996. -6- PART II Item 5. Market for Registrant's Common Stock and Related Shareholder Matters On February 15, 1997 there were approximately 272 holders of record of the Company's Common Stock, several of which represent "street accounts" of securities brokers. Based upon the number of proxies requested by brokers in conjunction with its shareholders' meeting on June 17, 1996, the Company estimates that the total number of beneficial holders of the Company's Common Stock exceeds 4,500. The Company's Common Stock has been traded in the over-the-counter market under the NASDAQ symbol WONE since the Company's initial public offering on April 24, 1984. The following table sets forth the range of high and low last sales prices on the NASDAQ/National Market System, as reported by NASDAQ, for the Common Stock for the calendar quarters indicated. 1996 High Low First Quarter........................... 18 1/2 14 1/8 Second Quarter.......................... 18 5/8 15 1/8 Third Quarter........................... 18 3/8 13 1/2 Fourth Quarter.......................... 18 5/8 15 3/8 1995 First Quarter........................... 13 1/8 9 3/4 Second Quarter.......................... 15 1/8 12 1/8 Third Quarter........................... 19 3/8 14 3/4 Fourth Quarter.......................... 17 3/4 13 3/4 No cash dividend was paid on the Company's stock during 1996 or 1995, and the payment of dividends is restricted by the terms of its loan agreements. -7- Item 6. Selected Financial Data (In thousands except per share data) The table below summarizes selected consolidated financial data of the Company for each of the last five fiscal years: OPERATING RESULTS FOR YEAR ENDED: December 31, November 30, -------------------------------------- ---------------------- 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- NET REVENUES $171,784 $145,729 $136,340 $84,014 $86,376 OPERATING EXPENSES, EXCLUDING DEPRECIATION AND AMORTIZATION 132,247 112,661 112,198 69,821 85,415 DEPRECIATION AND AMORTIZATION 12,265 13,753 18,160 16,384 19,661 OPERATING INCOME (LOSS) 27,272 19,315 5,982 (2,191) (18,700) INCOME (LOSS) FROM CONTINUING OPERATIONS 17,500 9,685 (2,730) (8,682) (21,397) (LOSS) FROM DISCONTINUED OPERATIONS - - - (15,227) (2,721) INCOME (LOSS) BEFORE EXTRAORDINARY ITEM 17,500 9,685 (2,730) (23,909) (24,118) EXTRAORDINARY LOSS - - (590) - - NET INCOME (LOSS) $17,500 $9,685 ($3,320) ($23,909) ($24,118) INCOME (LOSS) PER SHARE: Continuing Operations $ .52 $ .28 ($ .09) ($ .57) ($1.44) Discontinued Operations - - - ( 1.01) ( .18) ------- ------- -------- --------- --------- Income (Loss) Before Extraordinary Item .52 .28 ( .09) ( 1.58) ( 1.62) Extraordinary Item - - ( .02) - - ------- ------- -------- --------- --------- Net Income (Loss) $ .52 $ .28 ($ .11) ($1.58) ($1.62) ======= ======= ======== ========= ========= BALANCE SHEET DATA AT: December, 31 November 30, ------------------------------------- ---------------------- 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- CURRENT ASSETS $48,379 $41,885 $46,157 $32,987 $51,091 WORKING CAPITAL (3,647) 6,563 7,685 (1,503) (11,942) TOTAL ASSETS 273,046 245,595 260,112 152,067 295,740 LONG-TERM DEBT 130,443 107,943 115,443 51,943 146,622 TOTAL SHAREHOLDERS' EQUITY 86,848 94,123 95,454 55,151 75,204 - -------------------------------------------------------- Results for the year ended December 31, 1996 include Shadow Traffic from the time it was acquired in March 1996. Results for the year ended December 31, 1994 include Unistar from the time it was acquired in February 1994. No cash dividend was paid on the Company's Common Stock during the periods presented above. -8- Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (In thousands except for per share amounts) Results of Operations Westwood One derives substantially all of its revenue from the sale of advertising time to advertisers. Net revenues increased 18% to $171,784 in 1996 from $145,729 in 1995, and increased 7% in 1995 from $136,340 in 1994. The increase in 1996 net revenues was primarily due to the acquisition of Shadow Traffic effective March 1, 1996 and the Company's exclusive radio rights to the 1996 Summer Olympics. The increase in 1995 net revenues was primarily a result of the purchase of Unistar in February 1994. Operating costs and expenses excluding depreciation and amortization increased 19% to $126,702 in 1996 from $106,685 in 1995, and increased 1% in 1995 from $105,389 in 1994. The 1996 increase was primarily attributable to the acquisition of Shadow Traffic and costs associated with the 1996 Summer Olympics, partially offset by lower station compensation expenses. The 1995 increase was primarily attributable to the purchase of Unistar, partially offset by reductions in affiliate compensation expenses. Depreciation and amortization decreased 11% to $12,265 in 1996 from $13,753 in 1995, and decreased 24% in 1995 from $18,160 in 1994. The 1996 decrease is principally attributable to lower amortization of programming costs and rights due to lower capitalized balances, partially offset by higher depreciation and amortization associated with the acquisition of Shadow Traffic. The 1995 decrease was primarily a result of lower amortization of programming costs and rights from lower levels of capitalized costs. Corporate general and administrative expenses decreased 7% to $5,545 in 1996 from $5,976 in 1995, and increased 36% in 1995 from $4,404 in 1994. The decrease in 1996 was principally attributable to a reduction in corporate staff. The increase in 1995 was primarily a result of fees attributable to management fees under the CBS Radio Management Agreement and higher compensation for the Company's chairman. As a result of the purchase of Unistar, the Company accrued restructuring costs of $2,405 in the first quarter of 1994 principally relating to the consolidation of certain facilities and operations. Operating income increased 41% to $27,272 in 1996 from $19,315 in 1995, and increased 223% in 1995 from $5,982 in 1994. The significant improvement in 1996 was attributable to the acquisition of Shadow Traffic, the 1996 Summer Olympics, controlling costs and lower amortization of programming costs and rights. The improvement in 1995 was attributable to the acquisition of Unistar and lower amortization of programming costs and rights, partially offset by higher corporate general and administrative expenses. Interest expense was $8,749, $9,524 and $8,802 in 1996, 1995 and 1994, respectively. The decrease in 1996 was primarily attributable to lower interest rates, partially offset by higher debt levels due to the purchase of Shadow Traffic. The increase in 1995 was primarily attributable to twelve months' interest in the year for debt incurred as a result of the Unistar acquisition and higher interest rates, partially offset by lower debt levels. Net income in 1996 increased 81% to $17,500 ($.52 per share) from $9,685 ($.28 per share) in 1995. Net income in 1995 was $9,685 as compared to a 1994 net loss of $3,320 ($.11 per share). The 1994 net loss includes an extraordinary loss of $590 ($.02 per share) as a result of refinancing its senior debt facility in that year. Weighted average shares outstanding (including common stock equivalents) decreased 2% to 33,563 in 1996 from 34,310 in 1995, and increased 17% in 1995 from 29,414 in 1994. The weighted average shares outstanding decreased in 1996 due principally to the Company's stock repurchase program. The 1995 increase is primarily attributable to the full year impact of share issuances made in 1994 (conversion of 9% Senior Debentures and sale of 5,000 shares to INI). Liquidity and Capital Resources At December 31, 1996, the Company's cash and cash equivalents were $2,655 an increase of $2,399 from December 31, 1995. In addition, the Company had available borrowings under its loan agreement of $35,000. -9- For 1996, net cash from operating activities was $33,237, an increase of $9,014 from 1995. The increase was primarily attributable to higher cash flow from operations. In 1994, net cash from operating activities was much lower due to high working capital requirements as a result of the Unistar acquisition. Net cash used for investing activities increased $24,238 due principally to the purchase of Shadow Traffic. Cash provided before financing activities was $5,364 in 1996. The Company's amended and restated loan agreement (the "Agreement") permits the Company to repurchase up to $50,000 of its Common Stock from September 30, 1996 through the end of the Agreement. In November 1996, the Company's Board of Directors authorized a new Common Stock repurchase program in the amount of $50,000. During 1996, the Company purchased 1,288 shares of the Company's Common Stock and 500 warrants for a total cost of $25,689. During 1995, the Company purchased 607 shares of the Company's Common Stock and 500 warrants for a total cost of $14,475. At December 31, 1996, the Company had the ability to repurchase $39,454 of its Common Stock pursuant to the Agreement. In 1997 (through February 14), the Company repurchased an additional 195 shares of Common Stock at a cost of $3,517. The stock buybacks have been funded principally from the Company's free cash flow. On March 1, 1996, the Company purchased the operating assets of New York Shadow Traffic Limited Partnership, Chicago Shadow Traffic Limited Partnership, Los Angeles Shadow Traffic Limited Partnership, and Philadelphia Express Traffic Limited Partnership (collectively "Shadow Traffic") for $20,000 plus expenses, subject to an adjustment based on the actual cash flow of Shadow Traffic for the twelve month period ending February 28, 1997. The acquisition was financed using the Company's existing cash and available bank borrowings. Item 8. Financial Statements and Supplementary Data The Consolidated Financial Statements and the related notes and schedules of the Company are indexed on page F-1 of this Report, and attached hereto as pages F-1 through F-15 and by this reference incorporated herein. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. -10- PART III Item 10. Directors and Executive Officers of the Registrant This information is incorporated by reference to the Company's definitive proxy statement to be filed pursuant to Regulation 14A not later than 120 days after the end of the Company's fiscal year. Item 11. Executive Compensation This information is incorporated by reference to the Company's definitive proxy statement to be filed pursuant to Regulation 14A not later than 120 days after the end of the Company's fiscal year. Item 12. Security Ownership of Certain Beneficial Owners and Management This information is incorporated by reference to the Company's definitive proxy statement to be filed pursuant to Regulation 14A not later than 120 days after then end of the Company's fiscal year. Item 13. Certain Relationships and Related Transactions This information is incorporated by reference to the Company's definitive proxy statement to be filed pursuant to Regulation 14A not later than 120 days after the end of the Company's fiscal year. -11- PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K (a) Documents filed as part of this Report on Form 10-K 1. Financial statements and schedules to be filed thereunder are indexed on page F-1 hereof. 2. Exhibits EXHIBIT NUMBER DESCRIPTION 3.1 Certificate of Incorporation of Registrant. (1) 3.2 Agreement of Merger. (1) 3.3 Certificate of Amendment of Certificate of Incorporation, as filed on October 10, 1986. (2) 3.4 Certificate of Amendment of Certificate of Incorporation, as filed on October 9, 1986. (3) 3.5 Certificate of Amendment of Certificate of Incorporation, as filed on March 23, 1987. (3) 3.6 Certificate of Correction of Certificate of Amendment, as filed on March 31, 1987 at 10:00 a.m. (3) 3.7 Certificate of Correction of Certificate of Amendment, as filed on March 31, 1987 at 10:01 a.m. (3) 3.8 Bylaws of Registrant as currently in effect. (15) 4 Form of Indenture for 6 3/4% Convertible Subordinated Debentures (including the form of the Debenture). (2) 4.1 Warrant Agreement dated August 27, 1990 between Registrant and Security Pacific National Bank, as Warrant Agent. (7) *10.1 Employment Agreement and Registration Rights Agreement, dated October 18, 1993, between Registrant and Norman J. Pattiz. (13) *10.2 First Amendment to Employment Agreement, dated January 26, 1994, between Registrant and Norman J. Pattiz. (13) *10.3 Second Amendment to Employment Agreement, dated February 2, 1994, between Registrant and Norman J. Pattiz. (15) *10.4 Employment Agreement, dated June 1, 1995, between Registrant and Gregory P. Batusic. (16) *10.5 Employment Agreement, dated April 10, 1995, between Registrant and Jeffrey Lawenda. (16) 10.6 Form of Indemnification Agreement Between Registrant and its Directors and Executive Officers. (4) 10.7 Amended and Restated Credit Agreement, dated September 30, 1996, between Registrant and The Chase Manhattan Bank and Co-Agents. (18) 10.8 Purchase Agreement, dated as of August 24, 1987, between Registrant and National Broadcasting Company, Inc. (5) 10.9 Stock Purchase Agreement, dated November 4, 1993, between Registrant and Unistar Communications Group, Inc., Unistar Radio Network, Inc., and Infinity Broadcasting Corporation. (12) 10.10 Securities Purchase Agreement, dated November 4, 1993, between Registrant and Infinity Network, Inc. (12) *10.11 Management Agreement, dated as of February 4, 1994, between Registrant and Infinity Broadcasting Corporation. (12) *10.12 Voting Agreement, dated as of February 4, 1994, among Registrant, Infinity Network, Inc., Infinity Broadcasting Corporation and Norman J. Pattiz. (12) 10.13 Asset Purchase Agreement, dated March 4, 1996, between Westwood One Broadcasting Services, Inc. and Chicago Shadow Traffic Limited Partnership, New York Shadow Traffic Limited Partnership, Los Angeles Shadow Traffic Limited Partnership, Philadelphia Express Traffic Limited Partnership, City Traffic Corp., Express Traffic Corp. and Alan Markowitz. (16) 10.14 Westwood One, Inc. 1989 Stock Incentive Plan. (10) 10.15 Amendments to the Westwood One, Inc. Amended 1989 Stock Incentive Plan. (14) (17) 10.16 Lease, dated July 19, 1989, between First Ball Associates Limited Partnership and Registrant, relating to Arlington, Virginia offices. (6) 10.17 Lease, dated June 18, 1990, between Broadway 52nd Associates and Unistar Communications Group, Inc. relating to New York, New York offices. (15) -12- 10.18 Lease, dated December 18, 1991, between Valencia Paragon Associates, Ltd., and Unistar Communications Group, Inc. relating to Valencia, California offices. (15) 10.19 Digital Audio Transmission Service Agreement, dated June 5, 1990, between Registrant and GE American Communications, Inc. (8) 10.20 Transmission Service Agreement, dated May 28, 1993, between IDB Communications Group, Inc. and Unistar Radio Networks, Inc. (15) 10.21 Stipulation of Settlement of Class Action Law Suit. (6) 10.22 Agreement for Cancellation of Loan Documents, Guarantees and Securities Purchase Documents, dated as of November 19, 1993, between Registrant, Westwood One Stations Group, Inc., Westwood One Stations-LA, Inc., Radio & Records, Inc. and Westinghouse Electric Corporation. (13) 22 List of Subsidiaries 24 Consent of Independent Accountants 27 Financial Data Schedule ********************** * Indicates a management contract or compensatory plan. (1) Filed as an exhibit to Registrant's registration statement on Form S-1 (File Number 2-98695) and incorporated herein by reference. (2) Filed as an exhibit to Registrant's registration statement on Form S-1 (Registration Number 33-9006) and incorporated herein by reference. (3) Filed as an exhibit to Registrant's Form 8 dated March 1, 1988 (File Number 0-13020), and incorporated herein by reference. (4) Filed as part of Registrant's September 25, 1986 proxy statement (File Number 0-13020) and incorporated herein by reference. (5) Filed an exhibit to Registrant's current report on Form 8-K dated September 4, 1987 (File Number 0-13020) and incorporated herein by reference. (6) Filed as an exhibit to Registrant's Annual Report on Form 10-K for the fiscal year ended November 30, 1989 (File Number 0-13020) and incorporated herein by reference. (7) Filed as an exhibit to Registrant's Quarterly report on Form 10-Q for the quarter ended August 31, 1990 (File Number 0-13020) and incorporated herein by reference. (8) Filed as an exhibit to Registrant's Annual Report on Form 10-K for the fiscal year ended November 30, 1990 (File Number 0-13020) and incorporated herein by reference. (9) Filed as an exhibit to Registrant's Annual Report on Form 10-K for the fiscal year ended November 30, 1991 (File Number 0-13020) and incorporated herein by reference. (10) Filed as part of Registrant's March 27, 1992 proxy statement (File Number 0-13020) and incorporated herein by reference. (11) Filed as an exhibit to Registrant's Annual Report on Form 10-K for the fiscal year ended November 30, 1992 (File Number 0-13020) and incorporated herein by reference. (12) Filed as part of Registrant's January 7, 1994 proxy statement (File Number 0-13020) and incorporated herein by reference. (13) Filed as an exhibit to Registrant's Annual Report on Form 10-K for the fiscal year ended November 30, 1993 (File Number 0-13020) and incorporated herein by reference. (14) Filed as an exhibit to Registrant's July 20, 1994 proxy statement (File Number 0-13020) and incorporated herein by reference. (15) Filed as an exhibit to Registrant's Annual Report on Form 10-K for the year ended December 31, 1994 (File Number 0-13020) and incorporated herein by reference. (16) Filed as an exhibit to Registrant's Annual Report on Form 10-K for the year ended December 31, 1995 (File Number 0-13020) and incorporated herein by reference. (17) Filed as an exhibit to Registrant's May 17, 1996 proxy statement (File Number 0-13020) and incorporated herein by reference. (18) Filed as an exhibit to Registrant's Quarterly report on Form 10-Q for the quarter ended September 30, 1996 (File Number 0-13020) and incorporated herein by reference. (b) Reports on Form 8-K No reports on Form 8-K were filed during the fourth quarter of 1996. -13- SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. WESTWOOD ONE, INC. March 7, 1997 By /s/ FARID SULEMAN --------------------- Farid Suleman Director, Secretary and Chief Financial Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature Title Date Principal Executive Officer: /s/ MEL A. KARMAZIN Director, President and March 7, 1997 - ---------------------------- Chief Executive Officer Mel A. Karmazin Principal Financial Officer and Chief Accounting Officer: /s/ FARID SULEMAN Director, Secretary and March 7, 1997 - ---------------------------- Chief Financial Officer Farid Suleman Additional Directors: /s/ NORMAN J. PATTIZ Chairman of the Board of March 7, 1997 - ---------------------------- Directors Norman J. Pattiz /s/ DAVID L. DENNIS Director March 7, 1997 - ---------------------------- David L. Dennis /s/ GERALD GREENBERG Director March 7, 1997 - ---------------------------- Gerald Greenberg /s/ STEVEN A. LERMAN Director March 7, 1997 - ---------------------------- Steven A. Lerman /s/ ARTHUR E. LEVINE Director March 7, 1997 - ---------------------------- Arthur E. Levine /s/ JOSEPH B. SMITH Director March 7, 1997 - ---------------------------- Joseph B. Smith -14- WESTWOOD ONE, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES 1. Consolidated Financial Statements Page ---- --Report of Independent Accountants F-2 --Consolidated Balance Sheets at December 31, 1996 and 1995 F-3 --Consolidated Statements of Operations for the years ended December 31, 1996, 1995 and 1994 F-4 --Consolidated Statements of Shareholders' Equity for the years ended December 31, 1996, 1995 and 1994 F-5 --Consolidated Statements of Cash Flows for the years ended December 31, 1996, 1995 and 1994 F-6 --Notes to Consolidated Financial Statements F-7 - F15 2. Financial Statement Schedules: IX. --Short-term Borrowings F-16 All other schedules have been omitted because they are not applicable, the required information is immaterial, or the required information is included in the consolidated financial statements or notes thereto. F-1 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Shareholders of Westwood One, Inc. In our opinion, the consolidated financial statements listed in the index to consolidated financial statements and financial statement schedules on page F-1 present fairly, in all material respects, the financial position of Westwood One, Inc. and its subsidiaries at December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. PRICE WATERHOUSE LLP Century City, California February 12, 1997 F-2 WESTWOOD ONE, INC. CONSOLIDATED BALANCE SHEETS (In thousands, except share amounts) December 31, ------------ 1996 1995 ---- ---- ASSETS ------ CURRENT ASSETS: Cash and cash equivalents $ 2,655 $ 256 Accounts receivable, net of allowance for doubtful accounts of $1,724 (1996) and $2,157 (1995) 41,325 36,591 Other current assets 4,399 5,038 --------- ---------- Total Current Assets 48,379 41,885 PROPERTY AND EQUIPMENT, NET 16,146 15,632 INTANGIBLE ASSETS, NET 201,730 184,441 OTHER ASSETS 6,791 3,637 --------- ---------- TOTAL ASSETS $ 273,046 $ 245,595 --------- ---------- LIABILITIES AND SHAREHOLDERS' EQUITY ------------------------------------ CURRENT LIABILITIES: Accounts payable $ 13,250 $ 14,468 Deferred revenue 3,767 2,028 Other accrued expenses and liabilities 24,166 12,647 Amounts payable to affiliates 10,843 6,179 --------- --------- Total Current Liabilities 52,026 35,322 LONG-TERM DEBT 130,443 107,943 OTHER LIABILITIES 3,729 8,207 --------- --------- TOTAL LIABILITIES 186,198 151,472 --------- --------- COMMITMENTS AND CONTINGENCIES -- -- SHAREHOLDERS' EQUITY Preferred stock: authorized 10,000,000 shares, none outstanding -- -- Common stock, $.01 par value: authorized, 117,000,000 shares; issued and outstanding, 31,817,652 (1996) and 31,507,027 (1995) 318 315 Class B stock, $.01 par value: authorized, 3,000,000 shares: issued and outstanding, 351,733 (1996 and 1995) 4 4 Additional paid-in capital 152,708 157,547 Accumulated deficit (37,399) (54,899) --------- ---------- 115,631 102,967 Less treasury stock, at cost; 1,895,395 (1996) and 607,395 (1995) shares (28,783) (8,844) --------- ---------- TOTAL SHAREHOLDERS' EQUITY 86,848 94,123 --------- --------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 273,046 $ 245,595 ========= ========= See accompanying notes to consolidated financial statements. F - 3 WESTWOOD ONE, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share amounts) Year Ended December 31, ----------------------- 1996 1995 1994 ---- ---- ---- GROSS REVENUES $ 198,988 $ 169,598 $ 158,780 Less Agency Commissions 27,204 23,869 22,440 ---------- ---------- ---------- NET REVENUES 171,784 145,729 136,340 ---------- ---------- ---------- Operating Costs and Expenses Excluding Depreciation and Amortization 126,702 106,685 105,389 Depreciation and Amortization 12,265 13,753 18,160 Corporate General and Administrative Expenses 5,545 5,976 4,404 Restructuring Costs -- -- 2,405 ---------- ---------- ---------- 144,512 126,414 130,358 ---------- ---------- ---------- OPERATING INCOME 27,272 19,315 5,982 Interest Expense 8,749 9,524 8,802 Other Income (307) (389) (290) ---------- ---------- ---------- INCOME (LOSS) BEFORE INCOME TAXES AND EXTRAORDINARY ITEM 18,830 10,180 (2,530) INCOME TAXES 1,330 495 200 ---------- ---------- ---------- INCOME (LOSS) BEFORE EXTRAORDINARY ITEM 17,500 9,685 (2,730) EXTRAORDINARY ITEM - (LOSS) ON RETIREMENT OF DEBT -- -- (590) ---------- ---------- ---------- NET INCOME (LOSS) $ 17,500 $ 9,685 ($ 3,320) ========== ========== ========== INCOME (LOSS) PER SHARE: Income (Loss) Before Extraordinary Item $ .52 $ .28 ($ .09) Extraordinary Item -- -- ( .02) ---------- ---------- ---------- Net Income (Loss) $ .52 $ .28 ($ .11) ========== ========== ========== WEIGHTED AVERAGE SHARES OUTSTANDING 33,563 34,310 29,414 ========== ========== ========== See accompanying notes to consolidated financial statements. F - 4 WESTWOOD ONE, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (In thousands) Common Stock Class B Stock Additional Treasury Stock ------------ ------------- Paid-in Accumulated -------------- Shares Amount Shares Amount Capital (Deficit) Shares Amount ------ ------ ------ ------ ------- --------- ------ ------ BALANCE AT DECEMBER 31, 1993 ............. 19,701 $197 352 $4 $123,443 ($61,264) - - Net loss for 1994 ....................... - - - - - (3,320) - - Issuance of common stock and warrants .............................. 5,000 50 - - 15,933 - - - Issuance of common stock under stock option plans .................... 629 7 - - 1,169 - - - Conversion of Senior Debentures to common stock .......................... 5,322 53 - - 19,170 - - - Issuance of common stock to 401-K plan... 1 - - - 12 - - - ------ ---- ----- --- --------- --------- ------ ----- BALANCE AT DECEMBER 31, 1994 ............. 30,653 307 352 4 159,727 (64,584) - - Net income for 1995 ..................... - - - - - 9,685 - - Issuance of common stock under stock option plans .................... 754 7 - - 3,215 - - - Issuance of common stock under warrants .............................. 100 1 - - 236 - - - Purchase and cancellation of warrant..... - - - - (5,631) - - - Purchase of treasury stock .............. - - - - - - 607 8,844 ------ ---- ----- --- --------- --------- ------ ------- BALANCE AT DECEMBER 31, 1995 ............. 31,507 315 352 4 157,547 (54,899) 607 8,844 Net income for 1996 ..................... - - - - - 17,500 - - Issuance of common stock under stock option plans .................... 311 3 - - 911 - - - Purchase and cancellation of warrant..... - - - - (5,750) - - - Purchase of treasury stock .............. - - - - - - 1,288 19,939 ------ ---- ----- --- --------- --------- ------ ------- BALANCE AT DECEMBER 31, 1996 ............. 31,818 $318 352 $4 $152,708 ($37,399) 1,895 $28,783 ====== ==== ===== === ========= ========= ====== ======== See accompanying notes to consolidated financial statements F - 5 WESTWOOD ONE, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) Year Ended December 31, 1996 1995 1994 ---- ---- ---- CASH FLOW FROM OPERATING ACTIVITIES: Net income (loss) $17,500 $ 9,685 ($3,320) Adjustments to reconcile net income (loss) to net cash provided by operating activities before cash payments related to extraordinary item: Depreciation and amortization 12,265 13,753 18,160 Extraordinary item - loss on retirement of debt -- -- 590 Other 403 (206) (677) Changes in assets and liabilities: Decrease (increase) in accounts receivable (489) 1,040 (19,191) Decrease (increase) in prepaid assets 310 (430) (377) Increase in accounts payable and accrued liabilities 3,248 381 7,510 -------- -------- -------- Net cash provided by operating activities before cash payments related to extraordinary item 33,237 24,223 2,695 Cash payments related to extraordinary item -- -- (250) -------- -------- --------- Net Cash Provided By Operating Activities 33,237 24,223 2,445 -------- -------- --------- CASH FLOW FROM INVESTING ACTIVITIES: Acquisition of companies and other (Shadow Traffic in 1996; Unistar in 1994) (26,172) (1,106) (108,206) Capital expenditures (1,701) (1,229) (1,487) -------- -------- --------- Net Cash Used For Investing Activities (27,873) (2,335) (109,693) -------- -------- --------- CASH PROVIDED (USED) BEFORE FINANCING ACTIVITIES 5,364 21,888 (107,248) -------- -------- --------- CASH FLOW FROM FINANCING ACTIVITIES: Debt repayments (1,250) (12,500) (14,515) Borrowings under debt arrangements 23,750 -- 110,000 Issuance of common stock 914 3,459 16,126 Repurchase of common stock and warrants (25,689) (14,475) -- Deferred financing costs (690) (555) (2,038) -------- -------- -------- NET CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES (2,965) (24,071) 109,573 -------- -------- --------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 2,399 (2,183) 2,325 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 256 2,439 114 -------- -------- --------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $2,655 $256 $2,439 ======== ======== ========= See accompanying notes to consolidated financial statements. F-6 WESTWOOD ONE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except share and per share amounts) NOTE 1 - Summary of Significant Accounting Policies: Principles of Consolidation The consolidated financial statements include the accounts of all wholly-owned subsidiaries. Revenue Recognition Revenue is recognized when commercial advertisements are broadcast. Cash Equivalents The Company considers all highly liquid instruments purchased with a maturity of less than three months to be cash equivalents. The carrying amount of cash equivalents approximates fair value because of the short maturity of these instruments. Depreciation Depreciation is computed using the straight line method over the estimated useful lives of the assets. Measurement of Intangible Asset Impairment At each balance sheet date, the Company determines whether an impairment of Intangible Assets has occurred based upon expectations of nondiscounted broadcast cash flow. Broadcast Cash Flow is based on the consolidated statement of operations, calculated by subtracting from net revenue, operating costs and expenses excluding depreciation and amortization. To date, the Company has not experienced an impairment in any of its intangible assets. However, should such an impairment exist, the impairment will be measured as the amount by which the carrying amount of the asset exceeds its fair value, as defined by Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of". Stock-Based Compensation Statement of Financial Accounting Standards No. 123 ("FAS 123"), "Accounting for Stock-Based Compensation," encourages, but does not require companies to record compensation cost for stock-based employee compensation plans at fair value. The Company has chosen to continue to account for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25 ("APB 25"), "Accounting for Stock Issued to Employees," and related Interpretations. Income Taxes Effective December 1, 1993, the Company implemented, on a prospective basis, Statement of Financial Accounting Standards No. 109 (FAS 109), "Accounting for Income Taxes" which requires the use of the asset and liability method of financial accounting and reporting for income taxes. Under FAS 109, deferred income taxes reflect the tax impact of temporary differences between the amount of assets and liabilities recognized for financial reporting purposes and the amounts recognized for tax purposes. Earnings (Loss) per Share Net income (loss) per share is based on the weighted average number of common shares and common equivalent shares (where inclusion of such equivalent shares would not be anti-dilutive) outstanding during the year. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and revenue and expenses during the reporting period. Actual results may differ from those estimates. F-7 WESTWOOD ONE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE 2 - Acquisition of companies: On February 3, 1994, the Company completed the acquisition of all of the issued and outstanding capital stock of Unistar Radio Networks, Inc. ("Unistar") for $101,300 plus expenses. The acquisition was accounted for as a purchase. Accordingly, the operating results of Unistar are included with those of the Company from the date of acquisition. Based on management's estimates, the purchase price has been allocated to the fair value of assets and liabilities acquired. The excess of cost over net assets of acquired company resulting from the transaction ($92,464) is being amortized over 40 years. On March 1, 1996, the Company through its wholly-owned subsidiary Westwood One Broadcasting Services Inc. acquired the operating assets of New York Shadow Traffic Limited Partnership, Chicago Shadow Traffic Limited Partnership, Los Angeles Shadow Traffic Limited Partnership and Philadelphia Express Traffic Limited Partnership (collectively "Shadow Traffic") for $20,000 plus expenses, subject to an adjustment based on the future cash flow of Shadow Traffic. The acquisition was accounted for as a purchase, and accordingly, Shadow Traffic's operating results are included with those of the Company from the date of acquisition. The purchase price has been allocated to the assets and liabilities acquired based on preliminary estimates of their respective fair values. The intangible assets acquired as part of the purchase ($25,093) are being amortized over 15 years. At December 31, 1996, the Company had included in Other Accrued Expenses, $5,405 related to the purchase price adjustment. NOTE 3 - Property and Equipment: Property and equipment is recorded at cost and is summarized as follows at: December 31, ------------ 1996 1995 ---- ---- Land............................................... $ 3,378 $ 3,378 Recording and studio equipment..................... 16,117 15,906 Buildings and leasehold improvements............... 7,972 7,574 Furniture and equipment............................ 6,734 5,788 Transportation equipment........................... 557 587 Construction-in-progress........................... 1,378 347 ------- ------- 36,136 33,580 Less: Accumulated depreciation and amortization... 19,990 17,948 ------- ------- Property and equipment, net................. $16,146 $15,632 ======= ======= Depreciation expense was $2,472 in 1996, $2,340 in 1995, and $3,238 in 1994. F-8 WESTWOOD ONE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE 4 - Intangible Assets: Intangible assets are summarized as follows at: December 31, 1996 1995 Goodwill, less accumulated amortization of $26,205 (1996) and $20,572 (1995) ................................................. $168,249 $148,967 Acquired station affiliation agreements, less accumulated amortization of $6,274 (1996) and $4,823 (1995) ............... 17,505 18,956 Other intangible assets, less accumulated amortization of $5,622 (1996) and $5,082 (1995) ................................ 15,978 16,518 -------- -------- Intangible assets, net ................................... $201,730 $184,441 ======== ======== Intangible assets, except for acquired station affiliation agreements, are amortized on a straight-line basis principally over 40 years. Station affiliation agreements are comprised of values assigned to agreements acquired as part of the purchase of radio networks and are amortized using an accelerated method over 40 years. The period of amortization is evaluated periodically to determine whether a revision to the estimated useful life is warranted. NOTE 5 - Debt: Long-term debt consists of the following at: December 31, 1996 1995 Revolving Credit Facility/Term Loans ...........................................$115,000 $ 92,500 6 3/4% Convertible Subordinated Debentures maturing 2011 ....................... 15,443 15,443 -------- -------- 130,443 107,943 Less current maturities ........................................................ -- -- -------- -------- $130,443 $107,943 ======== ======== The Company's amended senior loan agreement with a syndicate of banks, lead by Chase Manhattan Bank, provides for an unsecured $75,000 revolving credit facility and an unsecured $75,000 term loan (the "Facility"). The Facility is available until September 30, 2004. At December 31, 1996, the Company had available borrowings under the Facility of $35,000. Interest is payable at the prime rate plus an applicable margin of up to .25% or LIBOR plus an applicable margin of up to 1.25%, at the Company's option. At December 31, 1996, the applicable margin was LIBOR plus .75%. At December 31, 1996, the Company had borrowed $40,000 under the revolving credit facility and $75,000 under the term loan at an interest rate of 6.38%. The Facility contains covenants relating to dividends, liens, indebtedness, capital expenditures and interest coverage and leverage ratios. F-9 WESTWOOD ONE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) The 6 3/4% Convertible Subordinated Debentures ("Debentures") are unsecured and subordinated in right of payment to senior indebtedness. Interest on the Debentures is payable semiannually on April 15 and October 15. The Debentures are convertible at any time prior to maturity, unless previously redeemed, into shares of common stock of the Company at the conversion price of $24.58 per share, subject to adjustment upon the occurrence of certain events. The aggregate maturities of long-term debt for the next five fiscal years and thereafter, pursuant to the Company's debt agreements as in effect at December 31, 1996, are as follows: Year - ------ 2000................................ $ 10,000 2001................................. 10,000 Thereafter........................... 110,443 -------- $130,443 ======== With the exception of the Company's Debentures, the fair value of short and long-term debt approximates its carrying value. The fair value of the Debentures at December 31, 1996 was approximately $13,899, based on its quoted market price. NOTE 6 - Shareholders' Equity: The authorized capital stock of the Company consists of Common stock, Class B stock and Preferred stock. Common stock is entitled to one vote per share while Class B stock is entitled to 50 votes per share. In connection with the Company's purchase of Unistar, the Company sold 5 million shares of common stock and a warrant to purchase up to an additional 3 million shares of common stock at an exercise price of $3.00 per share (subject to certain vesting conditions) to Infinity Network, Inc. ("INI"), a wholly-owned subsidiary of Infinity Broadcasting Corporation ("CBS Radio") for $15,000. As part of a settlement relating to class action lawsuits filed against the Company, warrants to purchase 3,000,000 shares of the Company's common stock at $17.25 per share were issued. The warrants expire on September 4, 1997. Warrants not exercised may be redeemable under certain circumstances at $1.00 per warrant. NOTE 7 - Stock Options: The Company has a stock option plan established in 1989 which provides for the granting of options to directors, officers and key employees to purchase stock at its market value on the date the options are granted. There are 4,800,000 shares authorized under the 1989 Plan, as amended. Options granted generally become exercisable after one year in 20% increments per year and expire within ten years from the date of grant. F-10 WESTWOOD ONE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) The Company applies APB 25 and related interpretations in accounting for its plans. Accordingly, no compensation expense has been recognized for its stock option plans. Had compensation cost been determined in accordance with the methodology prescribed by FAS 123, the Company's net income and earnings per share would have been reduced by approximately $795 ($.02 per share) in 1996 and $134 in 1995. The weighted average fair value of the options granted in 1996 and 1995 is estimated at $24.30 and $20.74, respectively, on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions: 1996 1995 ---- ---- Risk Free Interest Rate 6.1% 5.8% Expected Life (In Years) 5 5 Expected Volatility 31.1% 38.7% Expected Dividend Yield - - Expected Forfeitures per Year 5% 5% Information concerning options outstanding under the Plan is as follows for the year ended: Year Ended December 31, ----------------------------------------------------------------------------------- 1996 1995 1994 ---- ---- ---- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price ------ ----- ------ ----- ------ ----- Outstanding at beginning of period 2,036,875 $ 9.02 1,686,875 $ 5.65 1,827,750 $2.87 Granted during the period 50,000 $17.50 675,000 $14.47 630,000 $9.64 Exercised during the period (310,625) $ 3.01 (304,375) $ 2.92 (629,000) $1.89 Forfeited or expired during the period (43,750) $10.61 (20,625) $ 2.19 (141,875) $4.26 ---------- ---------- ---------- Outstanding at end of period 1,732,500 $10.30 2,036,875 $ 9.02 1,686,875 $5.65 ========== ========== ========== Available for new stock options at end of period 971,500 977,750 1,632,125 ========== ========== ========== At December 31, 1996, options to purchase 642,250 shares of common stock were currently exerciseable at a weighted average exercise price of $7.94. F-11 WESTWOOD ONE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) The following table contains additional information with respect to options at December 31, 1996: Remaining Weighted Weighted Average Average Number of Exercise Contractual Options Price Life (In Years) Options Outstanding at Exercise Price Ranges of: $ 1.81 - $ 2.75 197,500 $ 2.22 5.3 $ 5.38 - $ 9.75 840,000 $ 8.58 7.6 $12.75 - $17.50 695,000 $14.69 8.9 --------- 1,732,500 $10.30 7.8 ========= On December 1, 1986, the Chairman of the Board was granted options not covered by the Plan to acquire 525,000 shares of common stock, which vested ratably over a seven-year term or immediately upon a change in control of the Company. The options became exercisable at the fair market value of the common stock, as defined, on the date of vesting. During 1995, options to acquire 450,000 shares were exercised at a weighted average exercise price of $5.39. At December 31, 1996, options covering 75,000 shares were exercisable at $16.31 per share. NOTE 8 - Income Taxes: The Company has approximately $68,000 of available U.S. net operating loss carryforwards for tax purposes, which begin to expire in 2002. Utilization of the carryforwards is dependent upon future taxable income and the absence of any significant changes in the stock ownership of the Company. For financial purposes, a valuation allowance of $15,539 has been recorded to offset the deferred tax assets related to those carryforwards. F-12 WESTWOOD ONE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities on the Company's balance sheet and the amounts used for income tax purposes. Significant components of the Company's deferred tax assets and liabilities follow: December 31, 1996 1995 Deferred tax liabilities: Affiliation agreements......................... $ 7,840 $ 8,475 Purchase accruals.............................. 7,705 7,956 Other.......................................... 594 1,643 ------- -------- Total deferred tax liabilities............... 16,139 18,074 ------- -------- Deferred tax assets: Net operating loss............................. 24,104 30,695 Accrued liabilities and reserves............... 5,724 6,673 Tax credits (AMT and ITC)...................... 1,850 1,345 ------- -------- Total deferred tax assets.................... 31,678 38,713 ------- -------- Valuation allowance.............................. 15,539 20,639 ------- -------- Total deferred income taxes......................... $ - $ - ======= ======== The components of the provision (benefit) for income taxes related to continuing operations is summarized as follows: Year Ended December 31, --------------------------------------- Current payable: 1996 1995 1994 ---- ---- ---- Federal...................... $ 520 $280 $ 70 State........................ 810 215 130 ------ ---- ---- Total income tax expense..... $1,330 $495 $200 ====== ==== ==== Note 9 - Related Party Transactions: In connection with the acquisition of Unistar, the Company sold 5,000,000 shares of the Company's common stock and a warrant to purchase up to an additional 3,000,000 shares to INI (See Note 6) and entered into a Management Agreement with CBS Radio. Pursuant to the Management Agreement, the Company paid or accrued expenses aggregating $2,825 to CBS Radio in 1996 ($2,709 in 1995). As part of the Management Agreement, CBS Radio was given 1,500,000 warrants to acquire shares of common stock after the Company's common stock reaches certain market prices per share. In November 1996, the Company purchased and cancelled CBS Radio's $4.00 incentive warrants covering 500,000 common shares for $5,750. In November 1995, the Company purchased and cancelled CBS Radio's $3.00 incentive warrants covering 500,000 common shares for $5,631. At December 31, 1996, CBS Radio held 500,000 incentive warrants that become exercisable at $5.00 per share when the market price of the Company's Common Stock is at least $20.00 for at least 20 out of thirty consecutive trading days. F-13 WESTWOOD ONE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) In addition, several of CBS Radio's radio stations are affiliated with the Company's radio networks and the Company purchases several programs from CBS Radio. During 1996 the Company incurred expenses aggregating approximately $22,886 for CBS Radio affiliations and programs ($14,657 in 1995). NOTE 10 - Restructuring Costs: As a result of the Company's February 1994 acquisition of Unistar, the Company consolidated certain facilities and operations. Accordingly, the Company recorded (and paid) an expense for the estimated restructuring charges, including the costs of facility consolidations ($865), eliminating programs ($426), and employee separations, relocations and related costs ($1,114). NOTE 11 - Commitments and Contingencies: The Company has various non-cancelable, long-term operating leases for office space and equipment. In addition, the Company is committed under various contractual agreements to pay for talent, broadcast rights, research, certain digital audio transmission services and the Management Agreement with Infinity. The approximate aggregate future minimum obligations under such operating leases and contractual agreements for the five years after December 31, 1996, are set forth below: Year ------- 1997.............................................. $19,944 1998.............................................. 16,139 1999.............................................. 13,983 2000.............................................. 7,419 2001.............................................. 4,033 ------- $61,519 ======= NOTE 12 - Supplemental Cash Flow Information: Supplemental Information on cash flows, including amounts from discontinued operations, and non-cash transactions is summarized as follows: Year Ended December 31, ------------------------------ 1996 1995 1994 ---- ---- ---- Cash paid for: Interest.................................. $6,837 $9,597 $7,763 Income taxes.............................. 754 326 125 Non-cash investing and financing activities: Conversion of Senior Debentures to common stock.......................... - - 19,223 F-14 WESTWOOD ONE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE 13 - Quarterly Results of Operations (unaudited): The following is a tabulation of the unaudited quarterly results of operations. The quarterly results are presented for the years ended December 31, 1996 and 1995. (In thousands, except per share data) First Second Third Fourth For the Quarter Quarter Quarter Quarter Year -------- ------- -------- -------- --------- 1996 ---- Net revenues ................................. $33,848 $45,392 $47,561 $44,983 $171,784 Operating income ............................. 1,330 9,548 8,956 7,438 27,272 Net income (loss) ............................ (639) 6,991 6,465 4,683 17,500 Net income (loss) per share .................. $ (0.02) $ 0.20 $ 0.19 $ 0.14 $ 0.52 1995 ---- Net revenues ................................. $31,421 $37,558 $38,305 $38,445 $145,729 Operating income ............................. 45 6,738 6,451 6,081 19,315 Net income (loss) ............................ (2,492) 4,235 4,099 3,843 9,685 Net income (loss) per share .................. $ (0.08) $ 0.12 $ 0.12 $ 0.11 $ 0.28 F-15 WESTWOOD ONE, INC. SCHEDULE IX CONSOLIDATED SHORT-TERM BORROWINGS (In thousands) MAXIMUM AVERAGE WEIGHTED AMOUNT AMOUNT AVERAGE CATEGORY OF BALANCE WEIGHTED OUT- OUT- INTEREST AGGREGATE AT AVERAGE STANDING STANDING RATE SHORT-TERM END OF INTEREST DURING THE DURING THE DURING THE BORROWINGS PERIOD RATE PERIOD PERIOD PERIOD - ---------- ------- -------- --------- ---------- ---------- Year ended December 31, 1996: Notes payable $ - - $10,000 $1,760 6.4 % Notes: Short-term borrowings during the years covered by this schedule consist of loans made under various established credit lines. The average amount outstanding during each period was computed by dividing the average outstanding principal balance by 365 days. The weighted average interest rate during each period was computed by dividing the actual interest expense on such borrowings by the average amount outstanding during that period. The Company did not have any short-term borrowings in 1995. F-16