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, 1998 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 - ------------------- ---------------- Common Stock New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None (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 March 1, 1999 was approximately $525 million. As of March 1, 1999, 28,034,435 shares (excluding 6,931,595 treasury shares) of Common Stock were outstanding and 351,733 shares of Class B Stock were outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant's definitive proxy statement for its annual meeting of shareholders (which will be filed with the Commission within 120 days of the registrant's last fiscal year end) are incorporated in Part III of this Form 10-K. PART I Item 1. Business General Westwood One, Inc. (the "Company" or "Westwood One") is a leading producer and distributor of nationally sponsored radio programs and is the nation's largest radio network. 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 16 major cities, including; New York, Chicago, Los Angeles, Philadelphia and Washington, D.C. Westwood One is managed by Infinity Broadcasting Corporation ("Infinity") pursuant to a five-year Management Agreement which expires on March 31, 1999 (an agreement in principal has been reached to renew the Management Agreement for an additional five-year period). The Company's principal source of revenue is selling radio time to advertisers through one of its two operating divisions: the Network Division and WBS. The Company generates revenue principally by its Network Division 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. The Network Division offers radio stations traditional news services, CBS Radio news, CNN Radio and Fox news, in addition to eight 24-hour satellite-delivered continuous play music formats and weekday and weekend news and entertainment features and programs. The Network Division also produces sports, talk, music and special event programming. These programs include: major sporting events (principally covering the NFL, Notre Dame football and other college football, basketball games, NHL and the Olympics); live, personality intensive talk shows; live concert broadcasts; countdown shows; music and interview programs; and exclusive satellite simulcasts with HBO and other cable networks. The Company's programs are broadcast in every radio market in the United States measured by The Arbitron Ratings Company ("Arbitron"), the leading rating service, as well as being broadcast internationally. WBS provides radio stations and other media outlets, including television and cable companies, with local traffic, news, sports and weather programming in New York, Chicago, Los Angeles, Philadelphia, Baltimore, Boston, Dallas, Detroit, Hartford, Houston, Miami, Minneapolis, San Diego, Sacramento, San Francisco and Washington, D.C. Westwood One, through its Divisions, enables national advertisers to purchase advertising time and 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. -1- Westwood One is managed by Infinity pursuant to a Management Agreement between the Company and Infinity. In 1999, an agreement in principal was reached to renew the Management Agreement for an additional five year period, ending on March 31, 2004. Pursuant to the renewed Agreement, Infinity will receive a base fee of $2,500,000 (adjusted for inflation) and warrants to acquire 1,000,000 shares of Common Stock exercisable after the Company's Common Stock reaches certain market prices per share. Industry Background Radio Broadcasting As of January 1, 1999, there were approximately 10,300 commercial radio stations in the United States. A radio station selects a style of programming ("format") to attract a target listening audience and thereby attract commercial advertising directed at that audience. There are many formats from which a station may select, including news, talk, sports and various types of music and entertainment programming. The diversity in program formats has intensified competition among stations for local advertising revenue. A radio station has two principal ways of effectively competing for these revenues. First, it can differentiate itself in its local market by selecting and successfully executing a format targeted at a particular audience thus enabling advertisers to place their commercial messages on stations aimed at audiences with certain demographic characteristics. A station can also broadcast special programming, syndicated shows, sporting events or national news product, such as supplied by Westwood One, not available to its competitors within its format. National programming broadcast on an exclusive geographic basis can help differentiate a station within its market, and thereby enable a station to increase its audience and local advertising revenue. Radio Advertising Radio advertising time can be purchased on a local, regional or national basis. Local purchases allow an advertiser to select specific radio stations in chosen geographic markets for the broadcast of commercial messages. However, this process can be expensive and inefficient for a national advertiser. Local and regional purchases are typically best suited for an advertiser whose business or ad campaign is in a specific geographic area. Advertising purchased from a radio network is one method by which an advertiser targets its commercial messages to a specific demographic audience, achieving national coverage on a cost efficient basis. In addition, an advertiser can choose to emphasize its message in a certain market or markets by supplementing a national purchase with local and/or regional purchases. In recent years, the increase in the number of program formats has led to more demographically specific listening audiences making radio an attractive alternative medium for national advertisers. In addition, nationally broadcast news, concerts and special event programming have made radio an effective medium of reach (size of listening audiences) as well as frequency (number of exposures to the target audience). To verify audience delivery and demographic composition, specific measurement information is available to national advertisers by independent rating services such as Arbitron and Statistical Research, Inc.'s RADAR. These rating services provide demographic information such as the age and sex composition of the listening audiences. Consequently, national advertisers can verify that their advertisements are being heard by their target listening audience. Business Strategy Westwood One's Network Division provides 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. -2- In 1996, the Company expanded its strategy to include providing local traffic, news, sports and weather programming to radio stations and other media outlets in selected cities across the United States. In March 1996, WBS acquired the operating assets of New York Shadow Traffic Limited Partnership, Chicago Shadow Traffic Limited Partnership, Los Angeles Shadow Traffic Limited Partnership, and Philadelphia Express Traffic Limited Partnership (collectively "Shadow Traffic"). In 1998, the Company acquired the remaining Shadow Traffic operations in Baltimore, Boston, Dallas, Detroit, Houston, Miami, Sacramento, San Diego, San Francisco and Washington, D.C. In addition, the Company opened offices in Hartford and Minneapolis in 1998. 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 1998 the Company produced and distributed numerous special event programs, including exclusive broadcasts of The Grammy Awards, the Rolling Stones, Shania Twain, Page-Plant and Fleetwood Mac. 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. -3- Affiliated Radio Stations The Network Division's business strategy is to provide for the programming needs of radio stations by supplying to radio stations programs and services that individual stations may not be able to produce on their own. 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. 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. -4- Competition The Company operates in a very competitive environment. In marketing its programs to national advertisers, the Company directly competes with other radio networks as well as with independent radio syndication producers and distributors. More recently, as a result of consolidations in the radio industry, companies owning large groups of stations have begun to create competing networks that has resulted in additional competition for network radio advertising expenditures. In addition, Westwood One competes for advertising revenue with network television, cable television, print and other forms of communications media. The Company believes that the high quality of its programming and the strength of its station relations and advertising sales forces enable it to compete effectively with other forms of communication media. Westwood One markets its programs to radio stations, including affiliates of other radio networks, that it believes will have the largest and most desirable listening audience for each of its programs. The Company often has different programs airing on a number of stations in the same geographic market at the same time. The Company believes that in comparison with any other independent radio syndication producer and distributor or radio network it has a more diversified selection of programming from which national advertisers and radio stations may choose. In addition, the Company both produces and distributes programs, thereby enabling it to respond more effectively to the demands of advertisers and radio stations. The increase in the number of program formats has led to increased competition among local radio stations for audience. As stations attempt to differentiate themselves in an increasingly competitive environment, their demand for quality programming available from outside programming sources increases. This demand has been intensified by high operating and production costs at local radio stations and increased competition for local advertising revenue. WBS, in the metropolitan areas in which it operates, competes for advertising revenue with local print and other forms of communications media. The Company's principal competitor providing local traffic is Metro Networks. Government Regulation Radio broadcasting and station ownership are regulated by the FCC. Westwood One, as a producer and distributor of radio programs and services, is generally not subject to regulation by the FCC. Shadow Traffic utilizes FCC regulated frequencies pursuant to licenses issued by the FCC. Employees On February 13, 1999, Westwood One had 806 full-time employees, including a domestic advertising sales force of 122 people. In addition, the Company maintains continuing relationships with approximately 86 independent writers, program hosts, technical personnel and producers. Certain employees at the Mutual Broadcasting System, NBC Radio Networks, Unistar Radio Networks ("Unistar") and WBS 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; Baltimore; Boston; Detroit; Dallas; Houston; Miami; Minneapolis; Philadelphia; San Diego; San Francisco; Arlington, Virginia, Washington, D.C. 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, 1998. -6- PART II Item 5. Market for Registrant's Common Stock and Related Shareholder Matters On February 13, 1999 there were approximately 220 holders of record of the Company's Common Stock, several of which represent "street accounts" of securities brokers. Based upon the number of proxies requested by brokers in conjunction with its shareholders' meeting on June 16, 1998, the Company estimates that the total number of beneficial holders of the Company's Common Stock exceeds 4,000. Since December 15, 1998, the Company's Common Stock has been traded on the New York Stock Exchange ("NYSE") under the symbol "WON". From the time of its initial public offering on April 24, 1984 through December 14, 1998 the Company's Common Stock was traded in the over-the-counter market. The following table sets forth the range of high and low last sales prices on the NYSE or NASDAQ/National Market System, as reported by NASDAQ, for the Common Stock for the calendar quarters indicated. 1998 High Low ---- ---- --- First Quarter 35 7/8 29 3/8 Second Quarter 30 3/8 24 5/8 Third Quarter 27 7/16 15 3/4 Fourth Quarter 30 9/16 16 1997 ---- First Quarter 19 11/16 16 3/4 Second Quarter 32 1/4 19 1/8 Third Quarter 33 5/8 27 5/16 Fourth Quarter 37 1/8 29 No cash dividend was paid on the Company's stock during 1998 or 1997, 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) 1998 1997 1996 1995 1994 OPERATING RESULTS FOR YEAR ENDED DECEMBER 31,: ---- ---- ---- ---- ---- NET REVENUES $259,310 $240,790 $171,784 $145,729 $136,340 OPERATING AND CORPORATE COSTS, EXCLUDING DEPRECIATION AND AMORTIZATION 206,996 191,854 132,247 112,661 112,198 DEPRECIATION AND AMORTIZATION 18,409 13,031 12,265 13,753 18,160 OPERATING INCOME 33,354 35,905 27,272 19,315 5,982 INCOME (LOSS) BEFORE EXTRAORDINARY ITEM 13,046 25,496 17,500 9,685 (2,730) EXTRAORDINARY (LOSS) - - - - (590) NET INCOME (LOSS) $13,046 $25,496 $17,500 $9,685 ($3,320) INCOME (LOSS) PER SHARE: BASIC: Income (Loss) Before Extraordinary Item $.43 $.83 $.56 $.31 ($ .09) Extraordinary Item - - - - ( .02) ---- ---- ---- ---- ------- Net Income (Loss) $.43 $.83 $.56 $.31 ($ .11) ==== ==== ==== ==== ======= DILUTED: Income (Loss) Before Extraordinary Item $.39 $.74 $.51 $.28 ($ .09) Extraordinary Item - - - - ( .02) ---- ---- ---- ---- ------- Net Income (Loss) $.39 $.74 $.51 $.28 ($ .11) ==== ==== ==== ==== ======= BALANCE SHEET DATA AT DECEMBER 31,: CURRENT ASSETS $85,663 $77,933 $48,379 $41,885 $46,157 WORKING CAPITAL 7,111 12,180 (3,647) 6,563 7,685 TOTAL ASSETS 345,279 317,695 273,046 245,595 260,112 LONG-TERM DEBT 170,000 115,000 130,443 107,943 115,443 TOTAL SHAREHOLDERS' EQUITY 77,218 124,678 86,848 94,123 95,454 OTHER FINANCIAL DATA FOR YEAR ENDED DECEMBER 31,: OPERATING CASH FLOW (EBITDA) $52,314 $48,936 $39,537 $32,579 $25,424 Results for the year ended December 31, 1998 include the remaining Shadow Traffic Operations from the time they were acquired in May 1998. Results for the year ended December 31, 1997 include the CBS Radio Networks from the effective date of the Representation Agreement in April 1997. Results for the year ended December 31, 1996 include the New York, Los Angeles, Chicago and Philadelphia Shadow Traffic Operations from the time they were acquired in March 1996. No cash dividend was paid on the Company's Common Stock during the periods presented above. Operating cash flow is defined as operating income plus depreciation and amortization and non-recurring items less capital spending for production costs. Operating cash flow is not determined in accordance with generally accepted accounting principles (GAAP), is not indicative of Cash Provided by Operating Activities and should not be considered in isolation from, or as an alternative to, other measures determined in accordance with GAAP. -8- Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (In thousands except for per share amounts) On May 1, 1998, the Company purchased the operating assets of the Shadow Traffic operations in Baltimore, Boston, Dallas, Detroit, Houston, Miami, Sacramento, San Diego, San Francisco and Washington, D.C. The results of operations for these additional cities are included in the consolidated financial statements of the Company from May 1, 1998. On March 31, 1997, the Company entered into a Representation Agreement with CBS Inc. to operate the CBS Radio Networks. The Company retains all revenue and is responsible for all expenses of the CBS Radio Networks from the effective date of the Representation Agreement. Results of Operations Westwood One derives substantially all of its revenue from the sale of advertising time to advertisers. Net revenues increased 8% to $259,310 in 1998 from $240,790 in 1997, and increased 40% in 1997 from $171,784 in 1996. The 1998 increase was primarily attributable to higher revenues from the Company's Shadow Traffic operations including those acquired in May 1998, partially offset by lower network revenues due to the elimination of certain programming including Major League Baseball. The increase in 1997 net revenues was primarily due to the inclusion of the results of the CBS Radio Networks, the 1996 acquisition of Shadow Traffic, and higher advertising rates for the Company's programs, partially offset by the non-recurrence of the 1996 Summer Olympics. Operating costs and expenses excluding depreciation and amortization increased 8% to $202,138 in 1998 from $186,918 in 1997, and increased 48% in 1997 from $126,702 in 1996. The 1998 increase was primarily attributable to the 1998 purchase of the additional Shadow Traffic operations, partially offset by the elimination of costs related to the termination of programming. The 1997 increase was primarily attributable to the inclusion of the CBS Radio Networks, including fees payable to CBS in connection with the Representation Agreement and the 1996 acquisition of Shadow Traffic, partially offset by lower station compensation expenses for the Company's network operation and the non-recurrence of costs associated with the Company's coverage of the 1996 Summer Olympics. Depreciation and amortization increased 41% to $18,409 in 1998 from $13,031 in 1997, and increased 6% in 1997 from $12,265 in 1996. The 1998 increase is principally attributable to depreciation and amortization related to fixed assets from capitalized leases and the recently acquired Shadow Traffic operations. The 1997 increase was principally related to amortization related to the CBS Representation Agreement. Corporate general and administrative expenses decreased 2% to $4,858 in 1998 from $4,936 in 1997, and decreased 11% in 1997 from $5,545 in 1996. The decreases in 1998 and 1997 are primarily attributable to lower compensation expense. Operating income decreased 7% to $33,354 in 1998 from $35,905 in 1997, and increased 32% in 1997 from $27,272 in 1996. The 1998 decrease is principally attributable to higher depreciation and amortization associated with the recently acquired Shadow Traffic operations. The 1997 improvement is principally attributable to higher revenue and consolidations in operations resulting from the inclusions of the CBS Radio Networks and the Shadow Traffic acquisition, partially offset by the non-recurrence of the 1996 Summer Olympics. Interest expense was $10,340, $8,513 and $8,749 in 1998, 1997 and 1996, respectively. The 1998 increase was principally attributable to higher debt levels as a result of the Company's purchase of the additional Shadow Traffic operations and repurchases of the Company's Common Stock. The 1997 decrease was primarily attributable to lower debt levels as a result of the conversion to Common Stock of the Company's 6 3/4% Convertible Subordinated Debentures (the "6 3/4% Debentures") and lower interest rates. The income tax provisions for 1998, 1997 and 1996 were based on annual effective tax rates of 44%, 8% and 7%, respectively. The 1998 provision is substantially all deferred taxes as the Company has tax net operating loss deductions to reduce cash taxes payable. The 1997 and 1996 provisions benefited from both book and tax net operating loss carryfowards. Net income in 1998 decreased 49% to $13,046 ($.43 per basic share and $.39 per diluted share) from $25,496 ($.83 per basic share and $.74 per diluted share) in 1997, and increased 46% in 1997 from $17,500 ($.56 per basic share and $.51 per diluted share) in 1996. -9- Weighted averages shares outstanding for purposes of computing basic earnings per share were 30,098, 30,750 and 31,018 in 1998, 1997 and 1996, respectively. The 1998 decrease was attributable to the Company's ongoing stock repurchase program. The 1997 decrease was attributable to the Company's stock repurchase program, partially offset by additional share issuances as a result of the conversion to Common Stock of the Company's 6 3/4% Convertible Debentures and approximately 2,036 shares of Common Stock being issued as a result of warrant exercises. Weighted average shares outstanding for purposes of computing diluted earnings per share were 33,434, 34,651 and 34,521 in 1998, 1997 and 1996, respectively. The changes in weighted average shares are due principally to the Company's stock repurchase program partially offset by the effect of stock option grants. Liquidity and Capital Resources At December 31, 1998, the Company's principal sources of liquidity were its cash and cash equivalents of $2,549 and available borrowings under its loan agreement of $25,000. For 1998, net cash from operating activities was $42,715, an increase of $22,784 from 1997. The increase was primarily attributable to lower working capital requirements and higher cash flows from operations. Cash flow from operations was principally used to fund the Company's stock buy-back program. At December 31, 1998, the Company had an unsecured $120,000 bank revolving credit facility and an unsecured $75,000 term loan (collectively "Revolving Credit Facility"). At December 31, 1998, the Company had available borrowings of $25,000 on its Revolving Credit Facility. In addition, as part of the Representation Agreement with CBS, CBS provided a $9,000 working capital loan to the Company which is payable on March 31, 2004. During 1998, the Company purchased 3,375 shares of the Company's Common Stock for a total cost of $65,438. During 1997, the Company purchased 1,377 shares of the Company's Common Stock and 500 warrants for a total cost of $49,434. In 1999 (through March 1), the Company repurchased an additional 294 shares of Common Stock at a cost of $7,618. The stock buybacks have been funded principally from the Company's free cash flow and bank borrowings. The Company believes that its cash, other liquid assets, operating cash flows and available bank borrowings, taken together, provide adequate resources to fund ongoing operating requirements. Year 2000 Compliance The Company has been working to identify and evaluate the changes necessary to its existing computerized business systems to make those systems Year 2000 compliant. The Company's exposure to potential Year 2000 problems exists in two areas: technological operations in the sole control of the Company and technological operations in some way dependent on one or more third parties. These technological operations include information technology ("IT") systems and non-IT systems, including those with embedded technology, hardware and software. In respect to technological operations dependent in some way on one or more third parties the situation is much less in the Company's ability to predict or control. The Company has been replacing, upgrading or modifying key financial and operating systems in the normal course of business. Remediation with respect to technological operations in the sole control of the Company is expected to be fully complete by mid-1999. In addition, the Company's business is dependent on third parties that are themselves dependent on technology. For example, systems failures in satellite transmissions and communication systems could impact the Company and its ability to deliver programming and provide commercial air time to its customers. To mitigate this risk, the Company has contacted major third party vendors to ascertain their state of readiness with respect to being Year 2000 compliant. The Company's most significant vendors have indicated they believe they are or will be Year 2000 compliant by mid-1999. However, no assurances can be given that these third parties have corrected and identified all the Year 2000 problems and that such third party failure to correct or identify such problems would not have a material adverse effect on the Company. As the Company has been using existing resources to complete the modifications necessary to become Year 2000 compliant, the Company believes that the related -10- costs will not be material (approximately $500). These expenditures have been and are expected to continue to be sourced from the Company's operating cash flow and have not and are not expected to have a material impact on the Company's financial statements. In conjunction with the ongoing efforts to ensure Year 2000 compliance, the Company is establishing alternative contingency plans. Accordingly, the Company does not anticipate that internal system failures will result in any material effect to its operations. Forward-Looking Statements The Private Securities Litigation Reform Act of 1995 (the "Act") provides a safe harbor for forward-looking statements made by or on the behalf of the Company. All statements that express expectations and projections, including, but not limited to, the Year 2000 remediation efforts, are forward-looking statements within the meaning of the Act. These statements are based on management's views and assumptions at the time the statements are made, however no assurances can be given that management's expectations will come to pass. Item 7A. Qualitative and Quantitative Disclosures about Market Risk The Company is exposed to market risk related to changes in interest rates. The Company does not use derivative financial instruments. The interest rate on the Company's outstanding 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. 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-16 and by this reference incorporated herein. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. -11- 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. -12- PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K (a) Documents filed as part of this Report on Form 10-K 1. Financial statements and schedules to be filed thereunder are indexed on page F-1 hereof. 2. Exhibits EXHIBIT NUMBER DESCRIPTION 3.1 Certificate of Incorporation of Registrant. (1) 3.2 Agreement of Merger. (1) 3.3 Certificate of Amendment of Certificate of Incorporation, as filed on October 10, 1986. (2) 3.4 Certificate of Amendment of Certificate of Incorporation, as filed on October 9, 1986. (3) 3.5 Certificate of Amendment of Certificate of Incorporation, as filed on March 23, 1987. (3) 3.6 Certificate of Correction of Certificate of Amendment, as filed on March 31, 1987 at 10:00 a.m. (3) 3.7 Certificate of Correction of Certificate of Amendment, as filed on March 31, 1987 at 10:01 a.m. (3) 3.8 Bylaws of Registrant as currently in effect. (14) *10.1 Employment Agreement, dated April 29, 1998, between Registrant and Norman J. Pattiz. 10.2 Form of Indemnification Agreement between Registrant and its Directors and Executive Officers. (4) 10.3 Amended and Restated Credit Agreement, dated September 30, 1996, between Registrant and The Chase Manhattan Bank and Co-Agents. (14) 10.4 First Amendment dated September 11, 1998 to the Amended and Restated Credit Agreement dated September 30, 1996, between Registrant and The Chase Manhattan Bank and Co-Agents. (16) 10.5 Purchase Agreement, dated as of August 24, 1987, between Registrant and National Broadcasting Company, Inc. (5) 10.6 Securities Purchase Agreement, dated November 4, 1993, between Registrant and Infinity Network, Inc. (9) *10.7 Management Agreement, dated as of February 4, 1994, between Registrant and Infinity Broadcasting Corporation. (9) *10.8 Voting Agreement, dated as of February 4, 1994, among Registrant, Infinity Network, Inc., Infinity Broadcasting Corporation and Norman J. Pattiz. (9) 10.9 Representation Agreement, dated as of March 31, 1997, between Registrant and CBS, Inc. (15) 10.10 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. (12) 10.11 Westwood One, Inc. 1989 Stock Incentive Plan. (8) 10.12 Amendments to the Westwood One, Inc. Amended 1989 Stock Incentive Plan. (10) (13) 10.13 Lease, dated July 19, 1989, between First Ball Associates Limited Partnership and Registrant, relating to Arlington, Virginia offices. (6) 10.14 Lease, dated June 18, 1990, between Broadway 52nd Associates and Unistar Communications Group, Inc. relating to New York, New York offices. (11) 10.15 Lease, dated December 18, 1991, between Valencia Paragon Associates, Ltd., and Unistar Communications Group, Inc. relating to Valencia, California offices. (11) 10.16 Digital Audio Transmission Service Agreement, dated June 5, 1990, between Registrant and GE American Communications, Inc. (7) 22 List of Subsidiaries 24 Consent of Independent Accountants 27 Financial Data Schedule ********************** * Indicates a management contract or compensatory plan. -13- (1) Filed as an exhibit to Registrant's registration statement on Form S-1 (File Number 2-98695) and incorporated herein by reference. (2) Filed as an exhibit to Registrant's registration statement on Form S-1 (Registration Number 33-9006) and incorporated herein by reference. (3) Filed as an exhibit to Registrant's Form 8 dated March 1, 1988 (File Number 0-13020), and incorporated herein by reference. (4) Filed as part of Registrant's September 25, 1986 proxy statement (File Number 0-13020) and incorporated herein by reference. (5) Filed an exhibit to Registrant's current report on Form 8-K dated September 4, 1987 (File Number 0-13020) and incorporated herein by reference. (6) Filed as an exhibit to Registrant's Annual Report on Form 10-K for the fiscal year ended November 30, 1989 (File Number 0-13020) and incorporated herein by reference. (7) Filed as an exhibit to Registrant's Annual Report on Form 10-K for the fiscal year ended November 30, 1990 (File Number 0-13020) and incorporated herein by reference. (8) Filed as part of Registrant's March 27, 1992 proxy statement (File Number 0-13020) and incorporated herein by reference. (9) Filed as part of Registrant's January 7, 1994 proxy statement (File Number 0-13020) and incorporated herein by reference. (10) Filed as an exhibit to Registrant's July 20, 1994 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 year ended December 31, 1994 (File Number 0-13020) and incorporated herein by reference. (12) Filed as an exhibit to Registrant's Annual Report on Form 10-K for the year ended December 31, 1995 (File Number 0-13020) and incorporated herein by reference. (13) Filed as an exhibit to Registrant's May 17, 1996 proxy statement (File Number 0-13020) and incorporated herein by reference. (14) Filed as an exhibit to Registrant's Quarterly report on Form 10-Q for the quarter ended September 30, 1996 (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, 1997 (File Number 0-13020) and incorporated herein by reference. (16) Filed as an exhibit to Registrant's Quarterly report on Form 10-Q for the quarter ended September 30, 1998 (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 1998. -14- 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 30, 1999 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/JOEL HOLLANDER President and March 30, 1999 - ---------------------- Joel Hollander Chief Executive Officer Principal Financial Officer and Chief Accounting Officer: /s/FARID SULEMAN Director, Secretary and March 30, 1999 - ---------------------- Farid Suleman Chief Financial Officer Additional Directors: /s/NORMAN J. PATTIZ Chairman of the Board of March 30, 1999 - ---------------------- Norman J. Pattiz Directors /s/DAVID L. DENNIS Director March 30, 1999 - ---------------------- David L. Dennis /s/GERALD GREENBERG Director March 30, 1999 - ---------------------- Gerald Greenberg /s/MEL A. KARMAZIN Director March 30, 1999 - ---------------------- Mel A. Karmazin /s/STEVEN A. LERMAN Director March 30, 1999 - ---------------------- Steven A. Lerman /s/PAUL KRASNOW Director March 30, 1999 - ---------------------- Paul Krasnow /s/JOSEPH B. SMITH Director March 30, 1999 - ---------------------- Joseph B. Smith -15- 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, 1998 and 1997 F-3 --Consolidated Statements of Operations for the years ended December 31, 1998, 1997 and 1996 F-4 --Consolidated Statements of Shareholders' Equity for the years ended December 31, 1998, 1997 and 1996 F-5 --Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1997 and 1996 F-6 --Notes to Consolidated Financial Statements F-7 - F-15 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, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, 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. /s/PRICEWATERHOUSECOOPERS LLP - ----------------------------------- PricewaterhouseCoopers LLP Century City, California March 17, 1999 F-2 WESTWOOD ONE, INC. CONSOLIDATED BALANCE SHEETS (In thousands, except share amounts) December 31, ------------ 1998 1997 ---- ---- ASSETS ------ CURRENT ASSETS: Cash and cash equivalents $ 2,549 $ 2,763 Accounts receivable, net of allowance for doubtful accounts of $3,720 (1998) and $2,907 (1997) 75,402 67,765 Other current assets 7,712 7,405 -------- -------- Total Current Assets 85,663 77,933 PROPERTY AND EQUIPMENT, NET 24,353 15,516 INTANGIBLE ASSETS, NET 224,242 204,339 OTHER ASSETS 11,021 19,907 -------- -------- TOTAL ASSETS $345,279 $317,695 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY ------------------------------------ CURRENT LIABILITIES: Accounts payable $ 19,070 $ 15,511 Income taxes payable 4,586 3,564 Other accrued expenses and liabilities 39,120 31,747 Amounts payable to affiliates 15,776 14,931 -------- -------- Total Current Liabilities 78,552 65,753 LONG-TERM DEBT 170,000 115,000 OTHER LIABILITIES 19,509 12,264 -------- -------- TOTAL LIABILITIES 268,061 193,017 -------- -------- COMMITMENTS AND CONTINGENCIES - - SHAREHOLDERS' EQUITY Preferred stock: authorized 10,000,000 shares, none outstanding - - Common stock, $.01 par value: authorized, 117,000,000 shares; issued and outstanding, 34,962,230 (1998) and 34,641,730 (1997) 350 347 Class B stock, $.01 par value: authorized, 3,000,000 shares: issued and outstanding, 351,733 (1998 and 1997) 4 4 Additional paid-in capital 206,688 201,759 Accumulated earnings (deficit) 1,143 (11,903) -------- -------- 208,185 190,207 Less treasury stock, at cost; 6,647,095 (1998) and 3,272,295 (1997) shares (130,967) (65,529) -------- -------- TOTAL SHAREHOLDERS' EQUITY 77,218 124,678 -------- -------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $345,279 $317,695 ======== ======== 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, ----------------------- 1998 1997 1996 ---- ---- ---- GROSS REVENUES $298,888 $278,978 $198,988 Less Agency Commissions 39,578 38,188 27,204 -------- -------- -------- NET REVENUES 259,310 240,790 171,784 -------- -------- -------- Operating Costs and Expenses Excluding Depreciation and Amortization 202,138 186,918 126,702 Depreciation and Amortization 18,409 13,031 12,265 Corporate General and Administrative Expenses 4,858 4,936 5,545 Non-recurring Items, Net Expense 551 - - -------- -------- -------- 225,956 204,885 144,512 -------- -------- -------- OPERATING INCOME 33,354 35,905 27,272 Interest Expense 10,340 8,513 8,749 Other Income (432) (334) (307) -------- -------- -------- INCOME BEFORE TAXES 23,446 27,726 18,830 INCOME TAXES 10,400 2,230 1,330 -------- -------- -------- NET INCOME $13,046 $25,496 $17,500 ======= ======= ======= INCOME PER SHARE: Basic $ .43 $ .83 $ .56 Diluted $ .39 $ .74 $ .51 WEIGHTED AVERAGE SHARES OUTSTANDING: Basic 30,098 30,750 31,018 Diluted 33,434 34,651 34,521 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 Accumulated Treasury Stock ------------ ------------- Paid-in Earnings -------------- Shares Amount Shares Amount Capital (Deficit) Shares Amount ------ ------ ------ ------ ------- --------- ------ ------ BALANCE AT DECEMBER 31, 1995 31,507 $315 352 $ 4 $157,547 $(54,899) 607 $ 8,844 Net income for 1996 - - - - - 17,500 - - Issuance of common stock under stock option plans 311 3 - - 911 - - - Purchase and cancellation of warrant - - - - (5,750) - - - Purchase of treasury stock - - - - - - 1,288 19,939 ------ --- --- --- -------- ------- ----- ------ BALANCE AT DECEMBER 31, 1996 31,818 318 352 4 152,708 (37,399) 1,895 28,783 Net income for 1997 - - - - - 25,496 - - Issuance of common stock under stock option plans 164 2 - - 1,183 - - - Issuance of common stock under warrants 2,036 21 - - 35,093 - - - Conversion of 6 3/4% debentures to common stock 622 6 - - 14,896 - - - Purchase and cancellation of warrant - - - - (12,688) - - - Income tax benefit of option and warrant exercises - - - - 10,567 - - - Purchase of treasury stock - - - - - - 1,377 36,746 ------ --- --- --- -------- ------ ----- ------ BALANCE AT DECEMBER 31, 1997 34,640 347 352 4 201,759 (11,903) 3,272 65,529 Net income for 1998 - - - - - 13,046 - - Issuance of common stock under stock option plans 322 3 - - 4,929 - - - Purchase of treasury stock - - - - - - 3,375 65,438 ------ ---- --- --- -------- ------- ----- -------- BALANCE AT DECEMBER 31, 1998 34,962 $350 352 $ 4 $206,688 $ 1,143 6,647 $130,967 ====== ==== === === ======== ======= ===== ======== See accompanying notes to consolidated financial statements F - 5 WESTWOOD ONE, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) Year Ended December 31, ----------------------- 1998 1997 1996 ---- ---- ---- CASH FLOW FROM OPERATING ACTIVITIES: Net income $13,046 $25,496 $17,500 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 18,409 13,031 12,265 Deferred taxes 8,496 - - Other 315 320 403 ------- ------- ------- 40,266 38,847 30,168 Changes in assets and liabilities: Increase in accounts receivable (7,637) (26,440) (489) Decrease (increase) in prepaid assets 1,104 (3,006) 310 Increase in accounts payable and accrued liabilities 8,982 10,530 3,248 ------- ------- ------- Net Cash Provided By Operating Activities 42,715 19,931 33,237 ------- ------- ------- CASH FLOW FROM INVESTING ACTIVITIES: Acquisition of companies and other (CBS Radio Networks in 1997 and Shadow Traffic in 1998 and 1996) (30,987) (13,839) (26,172) Capital expenditures (1,945) (1,711) (1,701) ------- ------- ------- Net Cash Used For Investing Activities (32,932) (15,550) (27,873) ------- ------- ------- CASH PROVIDED BEFORE FINANCING ACTIVITIES 9,783 4,381 5,364 ------- ------- ------- CASH FLOW FROM FINANCING ACTIVITIES: Debt repayments and payments of capital lease obligations (2,758) - (1,250) Borrowings under bank and other long-term obligations 55,000 8,862 23,750 Issuance of common stock 3,199 36,299 914 Repurchase of common stock and warrants (65,438) (49,434) (25,689) Deferred financing costs - - (690) ------- ------- ------- NET CASH (USED FOR) FINANCING ACTIVITIES (9,997) (4,273) (2,965) ------- ------- ------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (214) 108 2,399 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 2,763 2,655 256 ------ ------ ------ CASH AND CASH EQUIVALENTS AT END OF PERIOD $2,549 $2,763 $2,655 ====== ====== ====== 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. Property under a capitalized lease is amortized over the term of the lease. Intangible Assets - ----------------- Intangible assets are amortized over periods ranging from five to forty years. At each balance sheet date, the Company determines whether an impairment of Intangible Assets has occurred based upon expectations of nondiscounted broadcast cash flow. Broadcast Cash Flow is based on the consolidated statement of operations, calculated by subtracting from net revenue, operating costs and expenses excluding depreciation and amortization. To date, the Company has not experienced an impairment in any of its intangible assets. However, should such an impairment exist, the impairment will be measured as the amount by which the carrying amount of the asset exceeds its fair value, as defined by Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of". Stock-Based Compensation - ------------------------ Statement of Financial Accounting Standards No. 123 ("FAS 123"), "Accounting for Stock-Based Compensation," encourages, but does not require companies to record compensation cost for stock-based employee compensation plans at fair value. The Company has chosen to continue to account for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25 ("APB 25"), "Accounting for Stock Issued to Employees," and related Interpretations. Income Taxes - ------------ The Company uses the asset and liability method of financial accounting and reporting for income taxes required by Statement of Financial Accounting Standards No. 109 ("FAS 109"), "Accounting for Income Taxes". Under FAS 109, deferred income taxes reflect the tax impact of temporary differences between the amount of assets and liabilities recognized for financial reporting purposes and the amounts recognized for tax purposes. Use of Estimates - ---------------- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and revenue and expenses during the reporting period. Actual results may differ from those estimates. F-7 WESTWOOD ONE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Earnings per Share - ------------------ Basic earnings per share excludes all dilution and is calculated using the weighted average number of common shares outstanding in the period. Diluted earnings per share amounts are based upon the weighted average number of common and common equivalent shares outstanding during the year. Common equivalent shares are related to warrants and stock options. The following number of common equivalent shares were added to the basic weighted average shares outstanding for each period: 1998 1997 1996 ---- ---- ---- Warrants 2,649,000 3,182,000 3,029,000 Options 688,000 719,000 474,000 Common equivalent shares are excluded in periods in which they are anti-dilutive. The following number of options and warrants were excluded from the calculation of diluted earnings per share because the exercise price was greater than the average market price of the Company's Common Stock for the years presented: 1998 1997 1996 ---- ---- ---- Options 1,340,000 790,000 50,000 Warrants - - 2,499,000 The per share exercise prices of the options were $26.00-$30.00 in 1998, $30.00 in 1997, and $17.50 in 1996. Reclassification - ---------------- Certain amounts have been reclassified to be comparable to the 1998 presentation. NOTE 2 - Acquisitions of Businesses: On March 1, 1996, the Company through its wholly-owned subsidiary Westwood One Broadcasting Services Inc. acquired the operating assets of New York Shadow Traffic Limited Partnership, Chicago Shadow Traffic Limited Partnership, Los Angeles Shadow Traffic Limited Partnership and Philadelphia Express Traffic Limited Partnership (collectively "Shadow Traffic") for approximately $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 intangible assets acquired as part of the purchase are being amortized over 20 years. On March 31, 1997, the Company entered into a representation and management agreement (the "Representation Agreement") with CBS Inc. ("CBS"), whereby the Company operates the CBS Radio Networks. In accordance with the Representation Agreement, the Company pays CBS a representation fee and reimburses CBS for certain programming costs, including news, that CBS provides to Westwood One. The Company retains all revenues from sales of commercial time and is responsible for all expenses of the CBS Radio Networks. Accordingly, the operating results of CBS Radio Network are included with those of the Company from the effective date of the Representation Agreement. In May 1998, the Company acquired the operating assets of the Shadow Traffic operations in Baltimore, Boston, Dallas, Detroit, Houston, Miami, Sacramento, San Diego, San Francisco and Washington, D.C. for approximately $20,000 plus costs and the assumption of certain obligations, including severance obligations and obligations to provide third parties with commercial airtime. The acquisition was accounted for as a purchase, and accordingly, the operating results are included with those of the Company from May 1, 1998. The purchase price has been allocated to the assets and liabilities acquired based on preliminary estimates of their respective fair values. The intangible assets acquired as part of the purchase are being amortized over 20 years. F-8 WESTWOOD ONE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE 3 - Property and Equipment: Property and equipment is recorded at cost and is summarized as follows at: December 31, -------------------- 1998 1997 ---- ---- Land, buildings and improvements $11,507 $11,355 Recording and studio equipment 8,404 17,522 Capitalized leases 11,123 - Furniture and equipment and other 9,115 7,808 ------- ------- 40,149 36,685 Less: Accumulated depreciation and amortization 15,796 21,169 ------- ------- Property and equipment, net $24,353 $15,516 ======= ======= Depreciation expense was $5,138 in 1998, $2,341 in 1997, and $2,472 in 1996. NOTE 4 - Intangible Assets: Intangible assets are summarized as follows at: December 31, -------------------- 1998 1997 ---- ---- Goodwill, less accumulated amortization of $38,659 (1998) and $32,166 (1997) $188,512 $164,862 Acquired station affiliation agreements, less accumulated amortization of $9,011 (1998) and $7,670 (1997) 14,768 16,109 Other intangible assets, less accumulated amortization of $9,968 (1998) and $7,562 (1997) 20,962 23,368 -------- -------- Intangible assets, net $224,242 $204,339 ======== ======== F-9 WESTWOOD ONE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE 5 - Debt: Long-term debt consists of the following at: December 31, ------------------- 1998 1997 ---- ---- Revolving Credit Facility/Term Loan $170,000 $115,000 ======== ======== The Company's amended senior loan agreement with a syndicate of banks, led by Chase Manhattan Bank, provides for an unsecured $120,000 revolving credit facility and an unsecured $75,000 term loan (the "Facility"). The Facility is available until September 30, 2004. At December 31, 1998, the Company had available borrowings under the Facility of $25,000. 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, 1998, the applicable margin was LIBOR plus .75%. At December 31, 1998, the Company had borrowed $95,000 under the revolving credit facility and $75,000 under the term loan at a weighted-average interest rate of 6.0%. The Facility contains covenants relating to dividends, liens, indebtedness, capital expenditures and interest coverage and leverage ratios. The aggregate maturities of long-term debt for the next five years and thereafter, pursuant to the Company's debt agreements as in effect at December 31, 1998, are as follows: Year ---- 2000 $ 10,000 2001 21,000 2002 39,000 2003 50,000 Thereafter 50,000 -------- $170,000 ======== The fair value of debt approximates its carrying value. 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 to a wholly-owned subsidiary of Infinity Broadcasting Corporation for $15,000. The warrants expire on February 4, 2004. 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 6,800,000 F-10 WESTWOOD ONE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) shares authorized under the 1989 Plan, as amended. Options granted generally become exercisable after one year in 20% increments per year and expire within ten years from the date of grant. The Company applies APB 25 and related interpretations in accounting for its plans. Accordingly, no compensation expense has been recognized for its stock option plans. Had compensation cost been determined in accordance with the methodology prescribed by FAS 123, the Company's net income and earnings per share would have been reduced by approximately $3,052 ($.10 per basic share and $.09 per diluted share) in 1998, $2,835 ($.09 per basic share and $.08 per diluted share) in 1997 and $795 ($.03 per basic share and $.02 per diluted share) in 1996. The weighted average fair value of the options granted in 1998, 1997 and 1996 is estimated at $9.93, $13.46 and $6.80, respectively, on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions: 1998 1997 1996 ---- ---- ---- Weighted Average Risk Free Interest Rate 5.4% 6.3% 6.1% Expected Life (In Years) 5 5 5 Expected Volatility 35.9% 53.9% 31.1% Expected Dividend Yield - - - Expected Forfeitures per Year 1% 5% 5% Information concerning options outstanding under the Plan is as follows for the year ended: Year Ended December 31, --------------------------------------------------------------------------- 1998 1997 1996 ---------------------- ---------------------- ----------------------- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price ------ ----- ------ ----- ------ ----- Outstanding at beginning of period 3,010,500 $17.48 1,732,500 $10.30 2,036,875 $ 9.02 Granted during the period 800,000 24.30 1,660,000 23.84 50,000 17.50 Exercised during the period (245,500) 8.29 (166,500) 7.24 (310,625) 3.01 Forfeited during the period (155,000) 16.80 (215,500) 16.65 (43,750) 10.61 --------- --------- --------- Outstanding at end of period 3,410,000 $19.77 3,010,500 $17.48 1,732,500 $10.30 ========= ========= ========= Available for new stock options at end of period 882,000 1,527,000 971,500 ======= ========= ======= F-11 WESTWOOD ONE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) At December 31, 1998, options to purchase 1,146,000 shares of common stock were currently exercisable at a weighted average exercise price of $13.63. The following table contains additional information with respect to options at December 31, 1998: Remaining Weighted Weighted Average Average Number of Exercise Contractual Options Price Life (In Years) ------- ----- --------------- Options Outstanding at Exercise Price Ranges of: $ 2.00 - $ 2.75 77,000 $ 2.29 2.8 $ 5.38 - $ 9.75 688,000 $ 9.25 5.7 $12.75 - $18.25 1,305,000 $16.73 8.1 $26.00 - $30.00 1,340,000 $29.15 8.8 --------- 3,410,000 $19.77 7.8 ========= NOTE 8 - Income Taxes: As of December 31, 1998, the Company had approximately $36,000 of available U.S. net operating loss carryforwards for tax purposes, which begin to expire in 2002. Utilization of the carryforwards is dependent upon future taxable income and the absence of any significant changes in the stock ownership of the Company. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities on the Company's balance sheet and the amounts used for income tax purposes. Significant components of the Company's deferred tax assets and liabilities follow: December 31, ----------------- 1998 1997 ---- ---- Deferred tax liabilities: Affiliation agreements $ 6,663 $ 7,237 Purchase accruals 9,689 10,705 Other 439 213 ------- ------- Total deferred tax liabilities 16,791 18,155 ------- ------- Deferred tax assets: Net operating loss 11,949 20,433 Accrued liabilities and reserves 6,501 6,986 Tax credits (AMT and ITC) 2,145 1,303 ------- ------- Total deferred tax assets 20,595 28,722 ------- ------- Net deferred tax assets $ 3,804 $10,567 ======= ======= In 1997, as a result of its trend of positive operating results, the Company determined that it no longer needed to maintain a valuation allowance for its net deferred tax assets. Accordingly, the benefit of the resulting net operating losses was credited to paid-in-capital as it was attributable to employee stock transactions. F-12 WESTWOOD ONE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) The components of the provision for income taxes follows: Year Ended December 31, ----------------------- Current 1998 1997 1996 ---- ---- ---- Federal $ 842 $ 483 $ 520 State 1,062 1,747 810 ------- ------- ------ 1,904 2,230 1,330 ------- ------- ------ Deferred Federal 8,562 - - State (66) - - ------- ------- ------ 8,496 - - ------- ------- ------ Income tax expense $10,400 $ 2,230 $1,330 ======= ======= ====== The reconciliation of the federal statutory income tax rate to the Company's effective income tax rate follows: Year Ended December 31, -------------------------- 1998 1997 1996 ---- ---- ---- Federal statutory rate 35.0% 35.0% 35.0% State taxes net of federal benefit 4.4 6.3 4.3 Nondeductible amortization of 5.4 4.5 7.0 intangible assets Net operating loss deduction - (37.8) (39.2) Other, net (.4) - - ----- ------ ------ Effective tax rate 44.4% 8.0% 7.1% ===== ====== ====== In 1998, $1,733 of income tax benefits attributable to employee stock transactions were allocated to shareholders' equity. NOTE 9 - Non-recurring Items: Non-recurring items include amounts attributable to the consolidation of the Company's news operations and one-time costs associated with evaluating various strategic alternatives to enhance shareholder value partially offset by a settlement with a satellite carrier whereby the Company received a refund for past services, resulting in a gain of approximately $2,494. The costs associated with the consolidation of the news operations were comprised of the following: Expense Unpaid at Accrued Paid 12/31/98 ------- ---- -------- Severance costs $1,166 $1,166 - Abandoned leases 696 120 $576 Other 413 413 - ------ ------ ---- $2,275 $1,699 $576 ====== ====== ==== NOTE 10 - Related Party Transactions: In connection with the acquisition of Unistar, the Company entered into a Management Agreement with Infinity Broadcasting Corporation ("Infinity"). Pursuant to the Management Agreement, the Company paid or accrued expenses aggregating $2,226 to Infinity in 1998 ($2,713 in 1997 and $2,825 in 1996). As F-13 WESTWOOD ONE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) part of the Management Agreement, Infinity was given 1,500,000 warrants to acquire shares of Common Stock after the Company's Common Stock reached certain market prices per share. On March 31, 1997, the Company entered into a Representation Agreement with CBS. In addition, many of Infinity's radio stations are affiliated with the Company's radio networks and the Company purchases several programs from Infinity. During 1998 the Company incurred expenses aggregating approximately $67,612 for the Representation Agreement and Infinity affiliations and programs ($61,564 in 1997 and $22,886 in 1996). NOTE 11 - Commitments and Contingencies: The Company has various non-cancelable, long-term operating leases for office space and equipment. In addition, the Company is committed under various contractual agreements to pay for talent, broadcast rights, research, the CBS Representation Agreement 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, 1998, are set forth below (See also Note 14 - Subsequent Event): Year ---- 1999 $30,789 2000 18,546 2001 10,692 2002 14,113 2003 5,077 ------- $79,217 ======= NOTE 12 - Supplemental Cash Flow Information: Supplemental Information on cash flows, is summarized as follows: Year Ended December 31, -------------------------------- 1998 1997 1996 ---- ---- ---- Cash paid for: Interest $10,119 $8,245 $6,837 Income taxes 883 1,174 754 The Company had certain non-cash investing and financing activities in 1998 and 1997. During 1998, $11,430 of lease assets and obligations were capitalized. In 1997, $15,293 principal amount of the Company's 6 3/4 % Convertible Subordinated Debentures were converted into approximately 622 shares of the Company's Common Stock. 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, 1998 and 1997. (In thousands, except per share data) First Second Third Fourth For the Quarter Quarter Quarter Quarter Year ------- ------- ------- ------- ------- 1998 ---- Net revenues $53,340 $63,487 $66,669 $75,814 $259,310 Operating income 1,982 9,596 9,695 12,081 33,354 Net income 49 4,078 3,876 5,043 13,046 Net income per share: Basic $ 0.00 $ 0.13 $ 0.14 $ 0.18 $ 0.43 Diluted 0.00 0.12 0.12 0.16 0.39 1997 ---- Net revenues $41,461 $66,117 $63,373 $69,839 $240,790 Operating income 2,758 11,960 10,778 10,409 35,905 Net income 504 8,983 7,866 8,143 25,496 Net income per share: Basic $ 0.02 $ 0.30 $ 0.25 $ 0.26 $ 0.83 Diluted 0.02 0.26 0.23 0.23 0.74 NOTE 14 - Subsequent Event: The Company has reached an agreement in principal to renew the Management Agreement with Infinity through March 31, 2004. Pursuant to the agreement in principal, Infinity will receive a base fee of $2,500 (adjusted for inflation) and warrants to acquire 1,000,000 shares of Common Stock exercisable after the Company's Common Stock reaches certain market prices per share. In addition, the Company has also reached an agreement in principal to renew the Representation Agreement with CBS through March 31, 2004. Under the terms of the agreement in principal, the Company will pay CBS an annual representation fee of $12,000. 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 1998 and 1997. F-16