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DIAL > SEC Filings for DIAL > Form 10-Q on 14-Nov-2011All Recent SEC Filings

Show all filings for WESTWOOD ONE INC /DE/

Form 10-Q for WESTWOOD ONE INC /DE/


14-Nov-2011

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
(In thousands except share and per share amounts)

EXECUTIVE OVERVIEW

On October 21, 2011, we announced the consummation of the transactions contemplated by the Merger Agreement, dated as of July 30, 2011 (as amended, the "Merger Agreement"), by and among Westwood One, Inc., Radio Network Holdings, LLC, a Delaware corporation (since renamed Verge Media Companies, LLC) and the Merger Sub, and Verge . Verge merged with and into Merger Sub, with Merger Sub continuing as the surviving company (the "Merger"). The description of our businesses below is as of September 30, 2011, before the Merger was consummated.

The following discussion should be read in conjunction with our unaudited condensed consolidated financial statements and notes thereto included elsewhere in this report and the annual audited consolidated financial statements and notes thereto included in our Current Report on Form 8-K dated August 30, 2011 and filed with the SEC on September 6, 2011 to update our 2010 Form 10-K and retrospectively present our Metro Traffic business ("Metro") as a discontinued operation. The financial statements included herein do not incorporate the results of Verge, as our Merger did not close until after the end of the third quarter.

As described in more detail under Note 2 - Discontinued Operations, on April 29, 2011, we sold our Metro Traffic business to an affiliate of Clear Channel ("Metro Sale Transaction"). For all periods presented in this report, the results of the Metro Traffic Business are presented as a discontinued operation and will be presented as discontinued operations in all future filings in accordance with generally accepted accounting principles in the United States.

We are a provider of network radio programming, providing more than 5,000 radio stations with over 150 news, sports, talk, music and entertainment programs, features, live events and digital content reaching over 135 million people weekly. We exchange our content with radio stations for commercial airtime, which we then sell to local, regional and national advertisers. By aggregating and packaging commercial airtime across radio stations nationwide, we offer our advertising customers a cost-effective way to reach a broad audience, as well as to target their audience on a demographic and geographic basis.

Our goal is to maximize the yield of our available commercial airtime to optimize revenue and profitability. We derive substantially all of our revenue from the sale of 60 seconds and 30 seconds commercial airtime to advertisers. Our advertisers who target national audiences generally find that a cost effective way to reach their target consumers is to purchase longer 30 or 60 second advertisements, which are principally broadcast in our news, talk, sports, music and entertainment related programming and content.

There are a variety of factors that influence our revenue on a periodic basis, including but not limited to: (1) economic conditions and the relative strength or weakness in the United States economy; (2) advertiser spending patterns, the timing of the broadcasting of our programming, principally the seasonal nature of sports programming and the perceived quality and cost-effectiveness of our programming by advertisers and affiliates; (3) advertiser demand on a local/regional or national basis for radio-related advertising products; (4) increases or decreases in our portfolio of program offerings and the audiences of our programs, including changes in the demographic composition of our audience base; (5) increases or decreases in the size of our advertising sales force; and (6) competitive and alternative programs and advertising mediums.

Our commercial airtime is perishable and, accordingly, our revenue is significantly impacted by the commercial airtime available at the time we enter into an arrangement with an advertiser. Commercial airtime is sold and managed on an order-by-order basis; therefore, our ability to specifically isolate the relative historical aggregate impact of price and volume is not practical. We closely monitor advertiser commitments for the current calendar year, with particular emphasis placed on the annual upfront process, where advertisers make significant advance commitments to purchase advertising in the following year. We take the following factors, among others, into account when pricing commercial airtime: (1) the dollar value, length and breadth of the order; (2) the desired reach and audience demographic; (3) the quantity of commercial airtime available for the desired demographic requested by the advertiser for sale at the time their order is negotiated; and (4) the proximity of the date of the order placement to the desired broadcast date of the commercial airtime.


Results of Operations

We have one operating segment, Network Radio. We evaluate performance using revenue and Adjusted EBITDA as the primary measure of profit and loss for our operating segment. Adjusted EBITDA is defined as operating income adjusted for the following: (1) plus depreciation, amortization and other non-cash losses, charges or expenses (including impairment of intangible assets and goodwill);
(2) minus any "extraordinary," "unusual," "special" or "non-recurring" earnings or gains or plus any "extraordinary," "unusual," "special" or "non-recurring" losses, charges or expenses; (3) plus restructuring expenses or charges; and (4) plus non-cash compensation recorded from grants of stock appreciation or similar rights, stock options, restricted stock or other rights. We believe the presentation of Adjusted EBITDA is relevant and useful for investors because it allows investors to view segment performance in a manner similar to the primary method used by our management and enhances their ability to understand our operating performance.

In Network Radio, our business strategy is focused on delivering the best sports, talk, music and entertainment programming, as well as key services, to affiliate and advertising customers. The goal of this strategy is to generate revenue by providing our customers with content and solutions that help them reach and attract their desired customers in the marketplace. To that end, in late 2010 and early 2011 we renewed key programs and partnerships, including our multi-year partnership with the National Football League (NFL) to continue as its primetime partner in Network Radio, including with respect to the NFL playoff games and Super Bowl and our long-standing partnership with the NCAA to be the exclusive Network Radio provider for the NCAA Men's Basketball Championship Tournament.

Our Network Radio content covers several categories and formats, including national news, sports, music, entertainment, and talk radio. In national news and sports, we distribute nationally-branded programs such as CBS Radio News, CNN Radio News, NBC Radio News, and major high-profile sporting events, including the NFL, NCAA football and basketball games and the Winter Olympic Games in 2010. Our Network business features shows that we produce with popular personalities including Dennis Miller, Dr. Oz, Charles Osgood and Billy Bush. We also broadcast signature award shows in the music industry including the Grammy Awards and the Academy of Country Music (ACM) Awards, both of whom we recently renewed our partnerships. Our music and entertainment programming includes concert broadcasts and countdown shows, including Country Music Countdown and CMT Radio Live in partnership with MTV. Our Network Radio business nationally syndicates proprietary and licensed content to radio stations, enabling them to meet their programming needs on a cost-effective basis. We generate revenue from the sale of 30 and 60 second commercial airtime, often embedded in our programming that we bundle and sell to advertisers who want to reach a national audience across numerous radio stations.

Three Months Ended September 30, 2011 Compared With Three Months Ended September 30, 2010

Revenue

For the three months ending September 30, 2011, revenue was $40,878 compared to $44,224 for the comparable period in 2010, a decrease of 7.6%, or $3,346. The decrease in revenue resulted from decreased barter revenue of approximately $2,300 from NFL related programs (which we believe will be utilized in the fourth quarter instead of the third quarter due to the NFL lock-out), lower sports advertising revenue of $1,331 (primarily from NFL related programs) and the absence of $713 of licensing fees related to the 24/7 formats which were sold in July 2011 to Excelsior Radio Networks, LLC ("Excelsior"), a subsidiary of Verge. These were partially offset by increased advertising revenue in our network news programming of $753 and talk and entertainment programs of $344.

Operating Costs

Operating costs for the three months ended September 30, 2011 and 2010 are as
follows:
                                                      Favorable / (Unfavorable)
                              2011        2010         $ Amount             %
Programming and operating   $ 18,804    $ 20,766    $      1,962            9.4  %
Station compensation          12,708      11,906            (802 )         (6.7 )%
Payroll and payroll related    5,177       5,365             188            3.5  %
Other operating expenses       2,539       3,573           1,034           28.9  %
                            $ 39,228    $ 41,610    $      2,382            5.7  %

Operating costs decreased $2,382, or 5.7%, to $39,228 in the third quarter of 2011 from $41,610 in the third quarter of 2010. The decrease in operating costs is a result of decreased broadcast rights costs of $1,739 related to the NFL lock-out (included in


programming and operating) and lower facility expenses of $615, insurance expense of $367 and promotion and travel expenses of $283 (included in other operating expenses). This was partially offset by higher station compensation of $802 and higher bad debt expense of $304 (included in other operating expenses).

Depreciation and Amortization

Depreciation and amortization increased $210, or 14.3%, to $1,677 in the third quarter of 2011 from $1,467 in the third quarter of 2010. The increase is primarily attributable to the absence in 2011 of $302 for amortization of unfavorable contracts that were recorded as a result of the April 23, 2009 recapitalization and refinancing (and fully amortized by the end of 2010) and our application of "push down" acquisition accounting, partially offset by decreased depreciation of $93.

Corporate General and Administrative Expenses

Corporate, general and administrative expenses decreased $152, or 7.3%, to $1,931 for the three months ending September 30, 2011 compared to $2,083 for the three months ending September 30, 2010. The decrease is principally due to the decreases in payroll and related costs of $456, partially offset by higher stock-based compensation of $196.

Restructuring Charges

During the three months ending September 30, 2011, we recorded $137 in restructuring charges for severance in connection with the 2011 Program. During the three months ending September 30, 2010, we recorded $84 for restructuring charges related to severance for the 2010 Program.

Special Charges

We incurred special charges aggregating $2,550 and $1,350 for the three months ended September 30, 2011 and 2010, respectively. Special charges in the third quarter of 2011 increased $1,200 compared to the third quarter of 2010 as a result of higher Merger-related costs of $2,150 and increased Gores fees of $224. These increases were partially offset by lower charges for debt amendment costs of $847 and costs for corporate development of $297.

Operating Loss

The operating loss for the three months ended September 30, 2011 increased $2,275 to $4,645 from $2,370 for the comparable period in 2010. This increase in the loss is primarily attributable to lower revenue of $3,346, higher special charges related to the Merger of $2,150 and higher depreciation and amortization of $210, partially offset by decreased operating costs of $2,382 and lower debt amendment costs of $847.

Adjusted EBITDA

We use revenue and Adjusted EBITDA as the primary measure of profit and loss for
our operating segment. We believe the presentation of Adjusted EBITDA is
relevant and useful for investors because it allows investors to view
performance in a manner similar to the primary method used by our management and
enhances their ability to understand our operating performance.

Adjusted EBITDA for the three months ended September 30, 2011 and 2010 is as
follows:
                                                    2011         2010        Change
Operating loss                                   $ (4,645 )   $ (2,370 )   $ (2,275 )
Depreciation and amortization                       1,677        1,467          210
Restructuring charges                                 137           84           53
Special charges and other                           2,550        1,350        1,200
Stock-based compensation (continuing operations)      474          527          (53 )
Adjusted EBITDA                                  $    193     $  1,058     $   (865 )

Adjusted EBITDA decreased by $865 to $193 for the three months ended September 30, 2011 compared to income of $1,058 for the comparable period in 2010. The decrease in Adjusted EBITDA was primarily due to decreased revenue of $3,346 (of which $2,300 was decreased barter revenue related to NFL programs), higher station compensation of $802 and higher other operating costs for bad debt expense of $304. The decrease was partially offset by lower operating costs for broadcast rights expense of $1,739, lower costs for facility expense of $615, insurance expense of $367 and promotion and travel expense of $283.


Interest Expense

Interest expense decreased $1,172, or 55.9%, to $923 in the third quarter of 2011 from $2,095 in the third quarter of 2010, reflecting lower amendment fees related to the Senior Notes of $748 and lower interest expense of $116 on the Credit Facility as a result of a lower average outstanding balance. Interest expense included in discontinued operations of $3,727 for the three months ended September 30, 2010, was related to the Senior Notes repaid in connection with the Metro Sale Transaction.

Other Income (Expense)

Other income in the third quarter of 2011 was $4,946, primarily from the $4,908 gain from the sale of our 24/7 formats. Other expense in the third quarter of 2010 was $1,920 which represents the fair market value adjustment related to the Gores $10,000 equity commitment. Such commitment constituted an embedded derivative and was valued in our third quarter 2010 financial statements in accordance with derivative accounting.

Income Tax Expense (Benefit)

Income tax expense in the third quarter of 2011 was $60 compared with a tax benefit of $(1,917) in the third quarter of 2010. Our effective tax rate for the quarter ended September 30, 2011 was approximately (9.6)% as compared to 30.0% for the comparable period in 2010. The higher income tax expense in 2011 compared to a benefit in 2010 and the change in the tax rate is primarily the result of an adjustment to the tax provision for prior quarters tax expense of $457. The higher income tax expense is also a result of a significantly lower pre-tax loss of $5,763 in 2011, primarily from the gain on sales our 24/7 networks of $4,908 and lower interest expense of $1,172.

Net Loss from Continuing Operations

Our net loss from continuing operations for the third quarter of 2011 decreased $3,786 to $682 from a net loss from continuing operations of $4,468 in the third quarter of 2010, which is primarily attributable to the 2011 gain on the sale of our 24/7 formats of $4,908, lower interest expense of $1,172 and the absence of the 2010 other expense related to the Gores $10,000 equity commitment of $1,920, partially offset by a higher income tax expense of $1,977. Net loss per share from continuing operations for basic and diluted shares was $(0.03) in the third quarter of 2011, compared with net loss per share from continuing operations for basic and diluted of $(0.21) in the third quarter of 2010. Weighted average shares outstanding were higher in the third quarter of 2011 compared to the third quarter of 2010 primarily due to the issuance to Gores of 769,231 common shares in September 2010 and 1,186,240 common shares in February 2011.

Income (Loss) from Discontinued Operations

Income from discontinued operations for Metro Traffic for the third quarter of 2011of $1,678 included a tax benefit of $1,642 related to capital gain offsets related to the sale of assets. This compared to a loss of $2,771 in the third quarter of 2010. The decrease in the loss is primarily from lower interest expense of $3,727 as a result of the repayment of the Senior Notes (excluding those held by Gores) on April 29, 2011 as part of the Metro Sale Transaction and the absence of the Metro operations in the 2011 results and the absence of the 2010 losses from operations of $743.

Gain on Metro Sale Transaction

We recorded an adjustment to the gain on the Metro Sale Transaction of $413 in the third quarter of 2011 related to certain employee- related benefit expenses. The Metro Sale Transaction resulted in a capital loss for income tax purposes due to the difference between book and tax basis in part due to a book goodwill impairment charge. In the third quarter we updated our analysis of our ability to utilize these losses in connection with the sale of the 24/7 formats. We do not expect to utilize any of the remaining losses as of September 30, 2011.

Net Income (Loss)

Our net income for the third quarter of 2011 increased $8,648 to $1,409 from a net loss of $7,239 in the third quarter of 2010, which is primarily attributable to higher income from continuing operations of $3,786 and a lower loss from discontinued operations of $4,449. Net income per share for basic and diluted shares was $0.06 in the third quarter of 2011, compared with net loss per share for basic and diluted of $(0.35) in the third quarter of 2010.


Nine Months Ended September 30, 2011 Compared With Nine Months Ended September 30, 2010

Revenue

For the nine months ending September 30, 2011, revenue decreased $6,463, or 4.6%, to $133,372 compared with $139,835 for the nine months ending September 30, 2010. The decrease in revenue resulted from lower sports advertising of $4,596 (primarily from NFL related programs, the absence of the Olympics and NCAA basketball), decreased barter revenue from NFL related programs of approximately $2,300, (which we believe will be utilized in the fourth quarter instead of the third quarter due to the NFL lock-out) and the absence of $713 of licensing fees related to the 24/7 formats which were sold in July 2011. These were partially offset by increased advertising revenue in our network news programming of $1,227 and music programs of $554.

Operating Costs

Operating costs for the nine months ended September 30, 2011 and 2010 are as
follows:
                                                        Favorable / (Unfavorable)
                               2011         2010          $ Amount            %
Programming and operating   $  68,371    $  67,028    $      (1,343 )        (2.0 )%
Station compensation           37,951       34,729           (3,222 )        (9.3 )%
Payroll and payroll related    15,938       16,535              597           3.6  %
Other operating expenses       11,712       12,046              334           2.8  %
                            $ 133,972    $ 130,338    $      (3,634 )        (2.8 )%

Operating costs increased $3,634, or 2.8%, to $133,972 in the nine months ended September 30, 2011 from $130,338 in the nine months ended September 30, 2010. The increase in operating costs is a result of increased station compensation of $3,222, higher broadcast rights costs of $2,220, bad debt expense of $911 and computer services of $295. This was partially offset by a decrease in facilities expenses of $1,039 (included in other operating expense), lower payroll and related expenses of $597 and lower distribution costs of $456 (included in programming and operating).

Depreciation and Amortization

Depreciation and amortization increased $757, or 17.6%, to $5,070 in the first nine months of 2011 from $4,313 in the first nine months of 2010. The increase is primarily attributable to the absence in 2011 of $809 for amortization from unfavorable contracts that were recorded as a result of the April 23, 2009 recapitalization and refinancing (and fully amortized by the end of 2010).

Corporate General and Administrative Expenses

Corporate, general and administrative expenses decreased $1,650, or 20.0%, to $6,604 for the nine months ending September 30, 2011 compared to $8,254 for the nine months ending September 30, 2010. The decrease is principally due to the decreases in payroll and related costs of $1,066 and accounting and audit fees of $998, partially offset by an increase in insurance and related costs of $214 and legal fees of $280.

Restructuring Charges

During the nine months ending September 30, 2011 and 2010, we recorded $1,911 and $243, respectively, for restructuring charges. For the 2011 period, restructuring charges included $850 related to the termination of a programming agreement and $1,061 for severance costs related to the 2011 Program. For the 2010 period, the costs incurred were for severance of $243.

Special Charges

We incurred special charges aggregating $4,474 and $3,878 in the first nine months of 2011 and 2010, respectively. Special charges in the first nine months of 2011 increased $596 compared to the first nine months of 2010 as a result of higher Merger-related costs of $2,150 and increased Gores fees of $431. These increases were partially offset by lower debt amendment costs of $1,211, absence of the 2010 charge for an employment claim settlement of $493, fees related to the the April 23, 2009 recapitalization and refinancing of $192 and costs for corporate development of $89.


Operating Loss

The operating loss for the nine months ended September 30, 2011 increased to $18,659 from $7,191 for the comparable period in 2010. This increased loss is primarily attributable to lower revenue of $6,463, increased operating costs of $3,634 and increased restructuring costs of $1,668, partially offset by lower corporate expense of $1,650.

Adjusted EBITDA

Adjusted EBITDA for the nine months ended September 30, 2011 and 2010 are as
follows:
                                                    2011          2010        Change
Operating loss                                   $ (18,659 )   $ (7,191 )   $ (11,468 )
Depreciation and amortization                        5,070        4,313           757
Restructuring charges                                1,911          243         1,668
Special charges and other (1)                        4,474        4,474             -
Stock-based compensation (continuing operations)     1,543        1,751          (208 )
Adjusted EBITDA                                  $  (5,661 )   $  3,590     $  (9,251 )

(1) Special charges and other includes expense of $596 are classified as general and administrative expense on the Statement of Operations for the nine month period ended September 30, 2010.

Adjusted EBITDA (loss) increased by $9,251 to a loss of $(5,661) in 2011 compared to income of $3,590 in 2010. The increase in Adjusted EBITDA (loss) was primarily due to decreases in revenue of $6,463 (which included $2,300 of decreased barter revenue related to NFL programs), as described above, and increases in operating costs for station compensation expense of $3,222, broadcast rights expense of $2,220 (which included $2,372 of non-cash broadcast rights related to a new sports programming agreement), bad debt expense of $911 and computer services expense of $295, partially offset by lower distribution expense of $456.

Interest Expense

Interest expense decreased $1,831, or 34.3%, to $3,512 in the first nine months of 2011 from $5,343 in the first nine months of 2010, reflecting lower amendment fees related to the Senior Notes of $1,496. Interest expense included in the loss from discontinued operations of $5,000 and $11,848 for the nine months ended September 30, 2011 and 2010, respectively, is related to the Senior Notes that were repaid in connection with the Metro Sale Transaction.

Other Income (Expense)

Other income in the first nine months of 2011 was $6,042, which included $4,908 for a gain from the sale of our 24/7 formats and $1,096 for the fair market value adjustment related to the Gores $10,000 equity commitment. Such commitment constituted an embedded derivative and expired on February 28, 2011, the date Gores satisfied the $10,000 Gores equity commitment (see Note 7 - Debt). Other (expense) in the first nine months of 2010 was $(1,920), which represented the fair market value adjustment related to the Gores $10,000 equity commitment.

Income Tax Benefit

Income tax benefit in the first nine months of 2011 was $6,908 compared with a tax benefit of $5,816 in the first nine months of 2010. Our effective tax rate for the nine months ended September 30, 2011 was approximately 42.8% as compared to 40.2% for the comparable period in 2010. The higher income tax benefit in 2011 is primarily the result of higher pre-tax losses, excluding the gain on sale of assets, and the net tax benefit of $508 related primarily to the release of certain state and local tax positions and settlements, partially offset by the 2011 valuation allowance of $281.

Net Loss from Continuing Operations

Our net loss from continuing operations for the nine months ended September 30, 2011 increased $585 to $9,221 from a net loss from continuing operations of $8,636 in the comparable period of 2010, which is primarily attributable to a lower revenue of $6,463, higher operating costs of $3,364, higher restructuring expense of $1,668 and higher special charges of $596, partially offset by a gain from the sale of our 24/7 formats of $4,908, the change of $3,016 in the fair value of the Gores $10,000 equity commitment, lower corporate expense of $1,650, higher income tax benefit of $1,092 and lower interest expense of $1,831. Net loss per share from continuing operations for basic and diluted shares was $(0.41) for the nine months ended September 30, 2011,


compared with net loss per share from continuing operations for basic and diluted of $(0.42) for the nine months ended September 30, 2010. Weighted average shares outstanding were higher in the first nine months of 2011 compared to the first nine months of 2010 primarily due to the issuance to Gores of 769,231 common shares in September 2010 and 1,186,240 common shares in February 2011.

Loss from Discontinued Operations

Loss from discontinued operations for Metro Traffic for the nine months ended September 30, 2011 decreased $5,865 to a loss of $4,879 from a loss of $10,744 in the comparable period of 2010. The decrease is primarily from lower interest expense of $6,848 as a result of repayment of the Senior Notes (excluding those . . .

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