10-K405 1 d10k405.txt FORM 10-K405 FOR SUSQUEHANNA MEDIA CO. =============================================================================== UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------------------- FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2001 ----------------- OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ___________ to ____________ Commission file number: 333-80523 SUSQUEHANNA MEDIA CO. (Exact name of registrant as specified in its charter) DELAWARE 23-2722964 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 140 E. Market Street, York, PA 17401 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (717) 848-5500 Securities Registered Pursuant To Section 12(b) of The Act: None Securities Registered Pursuant To Section 12(g) of The Act: None ----------------------------- 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 [X] ----------------------------- As of March 27, 2002, there were 1,100,000 shares of Common Stock outstanding all of which was held by Susquehanna Pfaltzgraff Co., the Company's parent. DOCUMENTS INCORPORATED BY REFERENCE NONE =============================================================================== INDEX CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS..........................2 PART I........................................................................3 Item 1. Business.......................................................3 Item 2. Properties....................................................27 Item 3. Legal Proceedings.............................................27 Item 4. Submission of Matters to a Vote of Security Holders...........27 PART II......................................................................28 Item 5. Market for Registrant's Common Equity and Related Stockholder Matters..................................................... 28 Item 6. Selected Annual and Quarterly Financial Data..................29 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.................................... 32 Item 7A. Quantitative and Qualitative Disclosure About Market Risk.....40 Item 8. Financial Statements and Supplementary Data...................41 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure......................................62 PART III.....................................................................63 Item 10. Directors and Executive Officers of the Registrant............63 Item 11. Executive Compensation........................................64 Item 12. Security Ownership of Certain Beneficial Owners and Management....................................................65 Item 13. Certain Relationships and Related Transactions................67 PART IV.....................................................................70 Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K...........................................................70 1 CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS Some of the statements in this Form 10-K, as well as statements made by us in filings with government regulatory bodies, including the Securities and Exchange Commission, and in periodic press releases and other public comments and communications, constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Certain, but not necessarily all, of such forward-looking statements can be identified by the use of forward-looking terminology, such as "believes," "expects," "may," "will," "should," "approximately," or "anticipates" or the negative thereof or other variations thereof or comparable terminology, or by discussion of strategies, each of which involves risks and uncertainties. All statements other than of historical facts included herein or therein, including those regarding market trends, our financial position, business strategy, projected plans and objectives of management for future operations, are forward-looking statements. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results or performance to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. Such factors include, but are not limited to: . general economic and business conditions, both nationally and in our markets; . terrorists' acts or adverse reactions to United States anti- terrorism activities; . expectations and estimates concerning future financial performance; . the possibly material impact and timing of compensation expenses related to changes in performance share values and the change in value of minority interests subject to required repurchase; . acquisition opportunities and our ability to successfully integrate acquired businesses, properties or other assets and realize anticipated benefits of such acquisitions; . financing plans and access to adequate capital on favorable terms; . our ability to service our outstanding indebtedness and the impact such indebtedness may have on the way we operate our businesses; . the impact of competition from other radio stations, media forms and communication service providers; . the impact of existing and future regulations affecting our businesses, including radio licensing and ownership rules and cable television regulations; . the possible non-renewal of cable franchises; . increases in programming costs; . the accuracy of anticipated trends in our businesses, including those discussed in "Management's Discussion and Analysis of Financial Condition and Results of Operations" herein; . advances in technology and our ability to adapt to and capitalize on such advances; . decreases in our customers' advertising and entertainment expenditures; and . other factors over which we may have little or no control. All forward-looking statements attributable to us or to persons acting on our behalf are expressly qualified in their entirety by this cautionary statement. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. In light of these risks and uncertainties, the forward-looking events and circumstances discussed in this Form 10-K might not transpire. 2 PART I ITEM 1. BUSINESS OVERVIEW OF SUSQUEHANNA MEDIA Susquehanna Media was incorporated in 1993 as a cable and radio broadcasting holding company subsidiary of Susquehanna Pfaltzgraff. Susquehanna Pfaltzgraff was founded in 1941 by Louis J. Appell, Sr. to own and operate WSBA-AM, our flagship radio station in York, Pennsylvania. In 1954, The Pfaltzgraff Co., a leading manufacturer of ceramic dinnerware, was merged into Susquehanna Pfaltzgraff. The Pfaltzgraff Co. had been owned by the family of Mrs. Louis J. Appell, Sr. We entered the cable television business in 1965 when we were awarded a franchise to operate in York, Pennsylvania. We are a diversified communications company with operations in radio broadcasting and cable television. We are the second largest privately owned radio broadcaster and the 11th largest radio broadcaster overall in the United States based on 2000 revenues. As of December 31, 2001, we owned and operated 18 FM and 9 AM stations that serve four of the nation's ten largest radio markets (San Francisco, Dallas, Houston and Atlanta), as well as four other markets (Cincinnati, Indianapolis, Kansas City, and York, Pennsylvania). We were also the 19th largest cable multiple system operator in the United States based on subscribers with seven cable systems serving approximately 195,000 subscribers as of December 31, 2001. We also provide Internet access and enhanced services to residential and business customers under the tradename "BlazeNet." Our services include (i) Internet access via telephone dial-up service or cable modem, (ii) website creation, hosting and maintenance, and (iii) local and wide area network design, construction and operation. Custom designed web integrated solutions and services for the media and entertainment, retail and associations and not-for-profit markets are provided to commercial customers under the tradename of "Susquehanna Technologies." RADIO BROADCASTING Our radio broadcasting business focuses on operating, acquiring and developing radio stations in the 40 largest markets in the United States. We have over 50 years of experience operating radio properties and currently own stations serving the demographically attractive San Francisco, Dallas, Houston and Atlanta markets, four of the top ten radio markets in the United States. Our radio stations offer a broad range of programming formats, such as country, top 40, adult contemporary, oldies, rock, and sports and talk radio, each targeted to a specific demographic audience within a market. We believe that our large market radio presence and variety of programming formats makes us attractive to a diverse base of local and national advertisers and enables us to capitalize on our ratings to generate higher market revenue share. Our business strategy for radio includes the following key elements intended to establish leadership positions in the markets we serve and to enhance our operating and financial performance: . Focus on large markets. For the year ended December 31, 2001, we generated approximately 73% of our radio revenues from the ten largest markets in the United States and more than 96% from top 40 markets. We intend to continue focusing on large markets. 3 . Employ targeted programming and market research. We seek to maximize station operating performance through extensive market research, innovative programming, and distinctive marketing campaigns. . Emphasize sales and marketing. We place great emphasis on being familiar with our listening audience and their lifestyle characteristics in order to match effectively our audience's demographics with the specific target audiences of our advertisers. . Decentralize management. We decentralize much of our operations to regional and local levels. Each of our regional and local station groups is managed by a team of experienced broadcasters who understand the musical tastes, demographics and competitive opportunities of their particular market. . Selectively pursue strategic acquisitions. In addition to seeking continued internal growth, we intend to pursue acquisition opportunities that would allow us to continue to compete more effectively for advertising revenues and to increase our growth rate of revenues and cash flow. THE RADIO BROADCASTING INDUSTRY The radio broadcasting industry is characterized by the following key factors: Significant growth. The sale of advertising time to local and national spot advertisers and to national network advertisers is the primary source of revenues for radio stations. Local and national spot advertising is generally used to target the market where a station is located or to cover regions larger than the markets where a station is located. National network advertising is included in national syndicated programming aired on radio stations. The growth in total radio advertising revenue tends to be fairly stable, growing over the last 25 years at an approximately 8.8% compound annual rate, compared to a gross domestic product growth rate of approximately 7.1%. Broad market coverage. According to the Radio Advertising Bureau's Radio Marketing Guide and Fact Book for Advertisers 2001-2002, each week radio reaches approximately 96% of all Americans over 12 years of age. More than one-half of all radio listening occurs outside the home, and three out of four adults are reached by car radio each week. The average listener spends approximately three hours and 2 minutes per day listening to radio. The highest portion of radio listening occurs during the morning, particularly between the time a listener wakes up and the time he reaches work. This "morning drive time" period reaches more than 80% of people over 12 years of age, and as a result, radio advertising sold during this period achieves premium advertising rates. Low-cost advertising. The cost to reach a thousand listeners, or impressions, is the benchmark for comparing different media with different reach and frequency aspects. Radio is recognized by the advertising community for its ability to generate a high frequency of commercial impressions cost efficiently. This is caused by its low cost per minute, or low cost per rating point. Stations are generally classified by their on-air format, such as country, adult contemporary, oldies and news/talk. A station's format and style of presentation enables it to efficiently target certain demographics. By capturing a specific share of a market's radio listening audience, with particular concentration in a targeted demographic, a station is able to market its broadcasting time to enable advertisers to maximize their reach for each dollar of advertising expenditures. RADIO PROPERTIES 4 Our radio subsidiary, Susquehanna Radio Corp., operates radio stations in San Francisco, Dallas, Houston and Atlanta, all of which are top ten markets, as well as radio stations in Cincinnati, Indianapolis, Kansas City, and York, Pennsylvania. The following table sets forth certain information regarding our radio stations and their respective markets as of December 31, 2001. The table excludes WABZ-FM in Albemarle, North Carolina and KIKT-FM and KGVL-AM in Greenville, Texas, which are owned by us, but operated by third parties under a time brokerage agreement. Market rank by revenue is based upon market revenue size of the primary radio market served by the station among all radio markets in the United States, as reported in Duncan's 2001 Radio Market Guide for the year 2000. Station rank and audience share are based upon a station's share of its primary demographic target for the period Monday through Sunday, 6 a.m. to 12 midnight by market, as reported by Arbitron in Fall 2001. Combined market revenue share represents our share of the total radio advertising revenue from the market, as reported in Duncan's 2001 Radio Market Guide. Combined market revenue rank represents our rank in the market as measured by the amount of its radio advertising revenue from the market, as reported in Duncan's 2001 Radio Market Guide.
Station Station Audience Market Rank Share In Combined Combined Rank Station Primary In Primary Primary Market Market By Programming Year Demographic Demographic Demographic Revenue Revenue Market And Stations Revenue Format Acquired Target Target Target Share Rank ------------------- ------- ------ -------- ------ ------ ------ ----- ---- San Francisco, CA...... 4 18.9% 3 KFOG/KFFG-FM/(1)/.... Adult Album 1983/1995 A 25-44 1 4.2% Alternative KNBR-AM.............. Sports/Talk 1989 M 25-54 5 3.8% KSAN-FM.............. Classic Rock 1997 M 25-44 5 5.1% KTCT-AM.............. Sports/Talk 1997 M 25-54 19 1.3% Dallas/Ft. Worth, TX... 5 13.1% 4 KTCK/KTBK-AM/ KTDK-FM/(1)/....... Sports/Talk 1996 M 25-54 1 8.5% KPLX-FM.............. Country 1974 A 25-54 1 5.7% KLIF/KKLF-AM/(1)/ Talk 1980/1998 A 35-64 21 1.6% KKMR-FM (2) Adult Album 1996/1998 A 25-44 18 2.6% Alternative Atlanta, GA............ 6 6.4% 6 WNNX-FM.............. Modern Rock 1974 M 18-34 1 8.5% WWWQ-FM/(3)/......... Contemporary 1997 W 18-34 9 -- Hit Radio Houston, TX............ 9 7.1% 6 KRBE-FM.............. Contemporary 1986 W 18-34 3 10.1% Hit Radio Cincinnati, OH......... 20 12.0% 3 WRRM-FM.............. Adult 1972 W 25-54 1 11.5% Contemporary WMOJ-FM.............. Rhythmic 1997 W 35-64 4 9.4% Oldies Indianapolis, IN....... 31 23.5% 3 WFMS-FM.............. Country 1972 A 25-54 2 13.7% WGLD-FM.............. Oldies 1993 A 35-54 2 9.4% WGRL-FM/(4)/......... Young 1997 A 25-54 18 1.3%
5
Station Station Audience Market Rank Share In Combined Combined Rank Station Primary In Primary Primary Market Market By Programming Year Demographic Demographic Demographic Revenue Revenue Market And Stations Revenue Format Acquired Target Target Target Share Rank ------------------- ------- ------ -------- ------ ------ ------ ----- ---- Country Kansas City, KS........ 29 16.0% 3 KCMO-FM.............. Oldies 2000 A 35-54 1 6.4% KCFX-FM.............. Classic Rock 2000 A 25-54 2 6.0% KCMO-AM.............. Talk 2000 M 35-64 13 3.6% KFME-FM/(5)/......... Hot Adult 2001 A 25-49 6 4.9% Contemporary York, PA............... 99 39.1% 1 WARM-FM.............. Adult 1962 W 25-54 1 12.5% Contemporary WSBA-AM.............. Talk 1942 A 35-64 5 3.1%
---------------------- /(1)/ These stations are simulcast and have been combined for market rank and ratings. /(2)/ KKMR-FM changed its format to classic rock on January 3, 2002. The station changed its call letters to KDBN-FM effective January 28, 2002. /(3)/ In November 2000, the Federal Communication Commission (FCC) granted our petition to move WHMA-FM from Anniston, Alabama to College Park, Georgia. Station call letters were changed from WHMA-FM to WWWQ-FM when it debuted in the Atlanta market on January 22, 2001. /(4)/ WGRL-FM changed its format from Young Country to Eighties' Hits on December 26, 2001. Audience ratings in the table are a result of the station's format prior to this change. /(5)/ KFME-FM signed on June 18, 2001. Our Kansas City sales staff is selling the station's commercial airtime under a joint sales agreement with Jesscom, Inc., which is programming and operating the station. MARKET OVERVIEWS We own and operate radio stations in the following markets: San Francisco. We have operated in the San Francisco market since 1983, and currently own three FM and two AM stations in the area. We own KNBR-AM, one of the original 50,000 watt, clear channel AM licenses, which provides clear reception throughout northern California and as far inland as eastern Nevada. The station is currently programmed with a sports talk format and has the broadcast rights to the San Francisco Giants and the Golden State Warriors. Three of our stations, KNBR-AM, KFOG/KFFG-FM and KSAN-FM, are each ranked among the top 5 stations in their respective target demographics. Dallas/Ft. Worth. We have been operating in the Dallas/Ft. Worth market since 1974, and currently own four FM and five AM stations in the area. Three of our stations, KTCK-AM, KTBK-AM, and KTDK-FM, which are programmed with a sports talk format and are simulcast, are each ranked 1st in the market among males 25 to 54. KPLX, which is programmed with a "Texas" country format, is rated 1st in the market among persons 12 and older. KIKT-FM and KGVL-AM in Greenville, Texas, are owned by us, but operated by third parties under a time brokerage agreement. 6 Houston. We entered the Houston market in 1986 when we acquired KRBE-FM, which serves the Houston market with a Top 40 radio format. KRBE-FM has been a dominant radio station in Houston since the 1970s and is ranked 3rd among women 18 to 34. This station attracts over 700,000 listeners each week. Atlanta. Atlanta represents one of the most desirable radio broadcast markets in the country, with only 20 FM and 30 total radio stations serving the market. We currently own two FM stations in the market. We entered the Atlanta market in 1974 with the acquisition of WNNX-FM, which is programmed with modern rock and ranked 1st among men 18 to 34. In November 2000, the FCC granted our petition to move WHMA-FM, a sports-talk format station in Anniston, Alabama, to the Atlanta market. Station call letters were changed to WWWQ-FM when it debuted in the Atlanta market on January 22, 2001 with a Top 40 format. Cincinnati. We have operated in Cincinnati since 1972, and currently own two FM stations in the market. WRRM-FM, which is programmed with adult contemporary, is the sole adult contemporary station in the market and is ranked 1st among women 25 to 54. WMOJ-FM, which is programmed as a rhythmic oldies station, is a strong contender, placing 4th among women 35 to 64. Indianapolis. We have operated in Indianapolis since 1972, and currently own three FM stations in the market. WFMS-FM, which is programmed with contemporary country, is the second ranked station among women 25 to 54 and has ranked either 1st or 2nd in the market since 1992. Oldies WGLD, with its 50 kilowatt transmitting power, effectively targets adults 35-54, ranking 2nd in the market. Since switching its format from Young Country to Eighties' Hits on December 26, 2001, WGRL-FM has seen improvement in audience ratings and renewed interest from the advertising community. Kansas City. In July 2000, we acquired three radio stations serving the Kansas City market. Oldies KCMO-FM dominates the market as the number one radio station in its target adult 35-54 demographic. KCFX-FM ranks 2nd among adults 25 to 54 and is the flagship station for the Kansas City Chiefs. KCMO-AM is one of the oldest continuously operated radio stations in the United States, on the air since 1936. In 2001, the Company agreed to sell KFME-FM's commercial airtime under a joint sales agreement with Jesscom, Inc., which is programming and operating the station. The Company holds a 40% interest in joint venture with Jesscom, Inc. to operate KFME-FM. York. We have operated in York since 1942, and currently own two stations in the market. WARM-FM, which is programmed with an adult contemporary format, ranking 1st among women 25 to 54. WSBA-AM, which is programmed talk and news, is the AM ratings leader in York. ADVERTISING Most of our radio revenues are generated from the sale of local, regional and national advertising for broadcast on our radio stations. In 2001, approximately 81% of our radio revenues were generated from the sale of local and regional advertising, compared to 78% in 2000 and 71% in 1999. We generate additional radio revenues by marketing our proprietary database of listeners, selling print advertising and sponsoring local events. These important and growing sources of revenue supplement our traditional advertising revenues without increasing on-air commercial time. Each radio station's local sales staff solicits advertising either directly from local advertisers or indirectly through advertising agencies. We employ personnel in each of our markets to produce commercials for advertisers. National advertising sales are made by a firm specializing in such sales in exchange for a commission from us based on our gross revenue, net of agency commission from the 7 advertising sold. Regional advertising sales, which we define as sales in regions surrounding our markets to companies that advertise in our markets, are generally made by our local sales staff. We estimate the optimum number of advertisements available for sale by a station for a particular time period. The number of advertisements that can be broadcast without jeopardizing listening levels (and resulting ratings) is limited in part by the programming format of a particular station. We seek to maximize revenue by managing on-air inventory of advertising time and adjusting prices to local market conditions and to our ability, through our marketing efforts, to provide advertisers with an effective means of reaching a targeted demographic group. Each of our stations has a general target level of on-air inventory that it makes available for advertising. This target level may vary at different times of the day but tends to remain stable over time. Much of our selling activity is based on demand for our on-air inventory, and in general, we respond to this demand by varying prices rather than varying our target inventory level for a particular station. As a result, most changes in revenue are explained by demand-driven pricing changes rather than changes in available inventory. We believe that radio is one of the most efficient and cost-effective means for advertisers to reach specific demographic groups. Advertising rates charged by radio stations are based primarily on: . a station's share of audiences in the demographic groups targeted by advertisers; . the number of stations in the market competing for the same demographic groups; . the supply of and demand for radio advertising time; and . certain qualitative factors. Rates are generally highest during morning and afternoon commuting hours. A station's listenership is reflected in ratings surveys that estimate the number of listeners tuned to the station and the time they spend listening. Each station's ratings are used by its advertisers and advertising representatives in connection with advertising sales and are used by us to chart audience growth, set advertising rates and adjust programming. The radio broadcast industry's and our principal rating agency is Arbitron, which publishes periodic ratings surveys for significant domestic radio markets. COMPETITION The radio broadcasting industry is very competitive. The success of each of our stations depends largely upon its audience ratings and its share of the overall advertising revenues within its market. Our audience ratings and advertising revenue are subject to change, and any adverse change in a particular market affecting advertising expenditures or an adverse change in the relative market positions of the stations located in a particular market could have a material adverse effect on the revenues of our radio stations located in that market. There can be no assurance that any one or all of our radio stations will be able to maintain or increase current audience ratings or advertising revenue market share. Our stations compete directly for listeners and advertising revenues with other radio stations within their respective markets. Radio stations compete for listeners primarily on the basis of program content that appeals to a particular demographic group. By building a strong listener base comprised of specific demographic groups in each of its markets, we are able to attract advertisers seeking to reach those listeners. Radio stations periodically change their formats to compete directly with other stations for listeners and advertisers. Another station's decision to convert to a format similar to that of one of our radio stations in the same geographic area or launch an aggressive promotional campaign may result in 8 lower ratings and advertising revenue, increased promotion and other expenses and, accordingly, lower our broadcast cash flow. Factors that are material to a radio station's competitive position include management experience, the station's local audience rank in its market, transmitter power, assigned frequency, audience characteristics, local program acceptance and the number and characteristics of other radio stations in the market area. We attempt to improve our competitive position in each of our markets by extensively researching our stations' programming, by implementing advertising campaigns aimed at the demographic groups for which our stations program and by managing our sales efforts to attract a larger share of advertising dollars for each individual station. In selling advertising, however, we compete with many organizations that have substantially greater financial and other resources. Recent changes in the Communications Act and the FCC's rules and policies permit increased ownership and operation of multiple local radio stations. As a result, organizations are acquiring and operating larger blocks of radio stations. We compete with these organizations, as well as other radio station groups, to purchase additional stations. Some of these groups are owned or operated by companies that have substantially greater financial and other resources. Although the radio broadcasting industry is highly competitive, and competition is enhanced to some extent by changes in existing radio station formats and upgrades of power, certain regulatory limitations on market entry continue to exist. The operation of a radio broadcast station requires a license from the FCC, and the number of radio stations that an entity can operate in a given market is limited by the availability of FM and AM radio frequencies allotted or assigned by the FCC to communities in that market, as well as by the FCC's multiple ownership rules regulating the number of stations that may be owned and controlled by a single entity. See "Federal Regulation of Radio Broadcasting." In addition to other radio stations, we compete for advertising revenues with other media, including newspapers, broadcast television, cable television, magazines, direct mail, coupons and outdoor advertising. The radio broadcasting industry also competes with new media technologies, such as the delivery of audio programming by cable television systems, over the Internet, and by satellite digital audio radio services. Digital audio radio services may deliver by satellite to nationwide and regional audiences, multi-channel, multi-format, digital radio services with sound quality equivalent to compact discs. The delivery of information through the presently unregulated Internet also could create a new form of competition. Despite the introduction of new technologies for the delivery of entertainment and information, including television broadcasting, cable television, audio tapes and compact discs, the radio broadcasting industry historically has grown. A growing population and greater availability of radios, particularly car and portable radios, have contributed to this growth. There can be no assurance, however, that the introduction of new media technology will not have an adverse effect on the radio broadcasting industry. CABLE TELEVISION We entered the cable television industry in 1965, when we were awarded the franchise to operate in York, Pennsylvania. Our cable systems currently serve approximately 195,000 subscribers as of December 31, 2001 through 11 signal receiving and transmitting facilities (headends) in Pennsylvania, Mississippi, Maine, Illinois and Indiana. We own, develop and operate geographically clustered cable television systems in small and medium-sized communities. We believe that these systems are less susceptible to competition and subscriber turnover than urban cable television systems and result in more predictable revenue and cash flow. 9 Our business strategy for cable television includes the following key elements intended to enhance our operating and financial performance: . Build strategic clusters. To maximize operating efficiencies, we have pursued the development and acquisition of cable television systems in communities that are within close proximity to our existing systems. . Focus on customer satisfaction. To maximize customer satisfaction, we strive to provide reliable, high-quality service offerings, superior customer service and attractive programming choices at reasonable rates. . Continue upgrade of technical facilities. We seek to provide reliable, high-quality cable television services to our customers. To achieve this goal we are continually expanding and upgrading our cable systems to increase channel capacity, enhance signal quality, improve technical reliability and reduce the number of headends in existing systems. . Develop new sources of revenues. The investment we have made in our cable systems has enabled us to generate additional revenue by providing expanded tiers of basic programming, digital cable services, premium services, and additional pay-per-view services. In addition, we are expanding new services, such as Internet access, high- speed data, video-on-demand and other interactive services. THE CABLE TELEVISION INDUSTRY A cable customer generally pays an initial installation charge and fixed monthly fees for cable television services and for other services (such as the rental of converters and remote control devices). Such monthly service fees constitute the primary source of revenue for cable television operators. In addition to these services, cable television operators generate revenue from additional fees paid by customers for pay-per-view programming of movies and special events and from the sale of available advertising spots on advertiser-supported programming. Additionally, cable television operators frequently offer their customers home shopping services, from which the systems receive a share of revenue from sales of products in the systems' service areas. Cable television operators are also generating increasing revenues from the sale of enhanced data services. Cable television revenues tend to be stable, growing over the last 15 years at a 10.8% compound annual rate, compared to a gross domestic product growth rate of 6.1%. Cable television did not experience a single down year in revenue during this period of time. Cable television systems offer customers various levels (or "tiers") of cable television services consisting of: . a limited basic service, comprised of off-air broadcast television signals, local origination programming produced by the cable system and/or public access groups, and a limited number of satellite services such as home shopping channels and C-Span; and . an expanded basic service, comprised of satellite delivered, non-broadcast channels such as: Cable News Network (CNN), Entertainment and Sports Programming Network (ESPN) and Lifetime Network (LIFE). For an extra monthly charge, cable television systems also offer premium television services. These services (such as Home Box Office, Cinemax and Showtime) are satellite delivered channels offering feature films, live sporting events, concerts and other special entertainment features presented without commercial interruption. 10 Digital cable, offers enhanced television viewing with interactive guides, compact disc quality music channels, theater sound quality, and multiple services of premium and pay-per-view channels. These additional product offerings are made possible by use of bandwidth-saving digital compression. For an additional monthly charge, our basic subscribers can also get cable modem Internet access, which offers broadband access to the Internet at speeds exceeding standard dial-up access. Services offered include residential and commercial Internet access, e-mail and commercial point-to-point circuits. Cable modem revenues from Cable subscribers are included in the Cable segment. A cable television system receives television, radio and data signals that are transmitted to the system's headend by means of off-air antennae, microwave relay systems and satellite earth stations. These signals are then modulated, amplified and distributed, primarily through coaxial cable, and in some instances fiber optic cable, to customers who pay a fee for this service. Cable television systems may also originate their own television programming and other information services for distribution through the system. Cable television systems generally are constructed and operated pursuant to non-exclusive franchises or similar licenses granted by local governmental authorities for a specified term of years, generally for extended periods of up to 15 years. CABLE PROPERTIES The following table sets forth certain information regarding our cable systems as of December 31, 2001. Homes passed represents the maximum number of homes that could become subscribers in the particular cable system. Basic penetration represents basic subscribers as a percentage of homes passed. Digital penetration represents digital terminals as a percentage of basic subscribers. Premium penetration represents premium units as a percentage of basic subscribers. Premium units represents the aggregate number of individual premium services (e.g., HBO, Cinemax, Showtime) for which customers have subscribed. Cable modem penetration represents cable modem subscribers as a percentage of homes passed. Average monthly revenue per basic subscriber (television and cable modem) represents revenues divided by 12 divided by the weighted average number of subscribers for the year.
Average Monthly Cable Revenue Homes Basic Basic Digital Premium Modem Per Basic Cable System Passed Subscribers Penetration Penetration Penetration Penetration Subscriber ------------ ------ ----------- ----------- ----------- ----------- ----------- ---------- Pennsylvania York.............. 120,451 90,746 75.3% 17.3% 40.0% 5.8% $45.27 Williamsport...... 53,600 41,022 76.5 13.7 28.3 6.1 45.51 Mississippi Rankin............ 37,434 23,150 61.8 22.8 48.1 NA 45.07 Maine Brunswick......... 29,902 20,466 68.4 12.8 27.3 17.2 50.07 Illinois/Indiana Midwest........... 27,524 19,506 70.9 14.7 35.9 0.6 40.24 ------ ------ ---- ---- ---- --- ----- Totals 268,911 194,890 72.5% 16.5% 36.8% 5.8% $45.28
CABLE SYSTEMS The following table sets forth certain selected technical, operating and financial data for each of our cable systems as of and for the year ended December 31, 2001. Density represents homes passed divided by miles of plant. Plant bandwidth represents percentage of plant mileage within a system served 11 by the indicated plant bandwidth. Increased bandwidth offers greater capacity for signals and resultant additional revenues. Basic penetration represents basic subscribers as a percentage of homes passed. Digital terminals represents the number of active terminals for which customers have subscribed to digital services. Digital penetration represents digital terminals as a percentage of basic subscribers. Premium units represents the aggregate number of individual premium services (e.g., HBO, Cinemax, Showtime) for which customers have subscribed. Premium penetration represents premium units as a percentage of basic subscribers. Cable modem penetration represents cable modem subscribers as a percentage of homes passed. Average monthly revenue per basic subscriber represents revenues divided by 12 divided by the weighted average number of subscribers for the year.
YORK WILLIAMSPORT RANKIN BRUNSWICK MIDWEST TOTAL ---- ------------ ------ --------- ------- ----- TECHNICAL DATA: Miles of Plant..................... 1,754 1,022 730 779 553 4,818 Density............................ 69 52 51 42 50 56 Head-ends.......................... 1 2 2 2 4 11 Planned 2002 Headend eliminations 0 1 0 1 0 2 Plant Bandwidth: 330-450MHz................... 0.0% 15.0% 69.0% 16.0% 17.0% 18.0% 550 MHz...................... 0.0% 0.0% 25.0% 33.0% 83.0% 18.0% 750 MHz...................... 100.0% 85.0% 6.0% 51.0% 0.0% 64.0% OPERATING DATA: Homes passed....................... 120,451 53,600 37,434 29,902 27,524 268,911 Basic subscribers.................. 90,746 41,022 23,150 20,466 19,506 194,890 Basic penetration.................. 75.3% 76.5% 61.8% 68.4% 70.9% 72.5% Digital terminals.................. 15,688 5,609 5,285 2,625 2,868 32,075 Digital penetration................ 17.3% 13.7% 22.8% 12.8% 14.7% 16.5% Premium units...................... 36,278 11,607 11,145 5,592 7,005 71,627 Premium penetration................ 40.0% 28.3% 48.1% 27.3% 35.9% 36.8% Cable modems....................... 6,966 3,271 NA 5,137 165 15,539 Cable modem penetration............ 5.8% 6.1% NA 17.2% 0.6% 5.8% FINANCIAL DATA: Revenue (in thousands)............. $ 49,397 $ 21,026 $ 12,509 $ 12,217 $ 9,609 $ 104,758 Average monthly revenue per basic subscriber................ $ 45.27 $ 45.51 $ 45.07 $ 50.07 $ 40.24 $ 45.28
York. The York, Pennsylvania cable system is our largest, serving subscribers in 51 municipalities and accounting for 47% of our total subscribers and 47% of our 2001 Cable revenues. A hybrid fiber/coaxial rebuild of the York system began in 1995 and is now completed. The entire cable plant now has a capacity of 750 MHz. The York system is two-way capable, which allows cable modem service and other interactive services. Cable modem service has been provided to customers since 1997, with approximately 6% penetration to homes passed as of December 31, 2001. During the year, York transitioned the cable modem product from our BlazeNet ISP to @Home. When @Home declared bankruptcy and discontinued their service to York, cable modem customers were transitioned to an in-house Internet platform with backbone connectivity supplied by AT&T. (This transition also similarly impacted our Williamsport cable system.) We believe the transition slowed cable modem subscriber growth in December 2001, but not on a long-term basis. Digital services were launched in October 1999, with penetration exceeding 17% of basic customers as of December 31, 2001. The York system was one of the first systems in the country to launch interactive shopping and games on digital terminals. Williamsport. The Williamsport system accounts for 21% of our total subscribers and 20% of our 2001 Cable revenues. During the third quarter we acquired approximately 3,800 subscribers from River Valley Communications. The subscribers are being managed by our Williamsport system and will be technically merged to the existing system after a rebuild that is expected to be complete during 2002. 12 With the exception of the River Valley acquisition, the system has been completely rebuilt to 750 MHz and is two-way capable. Cable modem services are presently offered to residential and commercial customers with penetration exceeding 6% of homes passed as of December 31, 2001. Williamsport system cable modem subscribers also experienced a transition from @Home to an in-house Internet platform similar to York. Digital services were launched in June 2000 with penetration of nearly 14% of basic customers as of December 31, 2001. Rankin. The Rankin County, Mississippi cable system encompasses three small towns, many upscale suburban developments and the southeastern shore of an attractive reservoir recreation area just east of the state capital of Jackson. The area continues to experience housing growth. Over the past five years, the average annual compound internal growth rate of new subscribers to the Rankin system has been 3.3%, and the system accounts for 12% of our total subscribers and 12% of our 2001 Cable revenues. Approximately 31% of the Rankin system currently has a bandwidth of 550 MHz or greater. The system launched digital technology in February 2000, and digital penetration is approximately 23% of basic customers as of December 31, 2001. Rankin does not offer cable modem service. Brunswick. The Brunswick cable system serves the communities of Brunswick, Freeport, Bath, Harpswell and Woolwich, Maine and accounts for 11% of our total subscribers and 12% of our 2001 Cable revenues. Approximately 84% of the Brunswick system has been rebuilt to a minimum of 550 MHz. The primary headend in Brunswick serves approximately 98% of the subscribers. The remaining small headend acquired in December 1998 will be eliminated over the next 12 months and linked to the Brunswick headend. The Brunswick system is two-way capable. The system has been providing cable modem service since 1996 to commercial customers and since 1998 to residential customers. Cable modem penetration exceeds 15% of homes passed as of December 31, 2001. Digital services were launched in August 2000, and achieved nearly 13% penetration to basic customers at December 31, 2001. Midwest. The Midwest cable group serves Shelbyville, Indiana and Olney and DuQuoin, Illinois. Shelbyville offers attractive demographics and growth opportunities as a result of its proximity to the growing Indianapolis market. The Midwest group accounts for 9% of our total subscribers and approximately 9% of our 2001 Cable revenues. The system currently has bandwidth ranging from 450 MHz to 550 MHz, with 83% at 550 MHz. Digital services were launched in 2000, in both Indiana and Illinois with penetration of nearly 15% of basic customers as of December 31, 2001. On January 15, 2002, we entered into an asset purchase agreement with Fairbanks Communications, Inc. to acquire the cable system serving Lawrenceburg, Indiana. The cable system serves approximately 11,000 basic subscribers on one headend. We expect a second quarter 2002 closing. PROGRAMMING We have various contracts to obtain basic, satellite and premium programming for our cable systems from the National Cable Television Cooperative, Comcast Corporation and in some cases directly from program suppliers, including, in limited circumstances, some broadcast stations, with compensation generally based on a fixed fee per customer or a percentage of the gross receipts for the particular service. Some program suppliers provide volume discount pricing structures and some offer marketing support. Programming costs are expected to increase in the ordinary course of our business as a result of increases in the number of basic subscribers, increased costs to purchase cable programming, expansion of the number of channels provided to customers and contractual rate increases from programming suppliers. In the event that we acquire Comcast's ownership interests in Susquehanna Cable, our programming costs will increase faster than they would otherwise. See Part III, Item 13 of this annual report for additional details regarding our relationship with Comcast. 13 MARKETING, CUSTOMER SERVICE AND COMMUNITY RELATIONS Our cable marketing strategy is designed to increase total revenues and revenues per subscriber by: . aggressively promoting and marketing our current services; . expanding our product offerings; and . providing superior customer service. We believe that this strategy will enable us to acquire new customers and maintain a positive relationship with existing customers to retain their business and sell them additional products. Implementation strategies include: . targeted marketing campaigns using door-to-door sales, direct mail and telemarketing; . price promotions, such as installation specials, to attract new subscribers and discounts for premium packages for multi-pay customers; . introduction of multiplexed premium channels to improve their price/value perception; and . advertisement and sponsorship of community-based events to enhance our local presence. We believe that providing superior customer service is a key element of our long-term success because the quality of customer service affects our ability to retain customers. We believe that it also contributes to subscriber growth and positions us to sell additional products and services. To enhance customer service, we have initiated programs to improve the skills of our employees. In 2000, we introduced an initiative for customer service employees entitled Sales Training for Excellence in Leadership, Learning and Retention (STELLAR, then STELLAR+ in 2001), which includes extensive training, performance follow-up and standardized customer service and sales skills for all customer service representatives. Recognizing that positive franchise and public relations are crucial to our overall success, we emphasize maintaining good working relationships with municipal officials in our franchise areas and with the communities that we serve. Our local management meets regularly with municipal officials to keep them informed of both our activities and trends in the industry. As a result of these working relationships, we receive valuable feedback on our standing with the municipalities and the satisfaction of our customers. Local management is also responsible for maintaining a high level of visibility for us, which is accomplished through active involvement in various community and nonprofit organizations. TECHNOLOGY As part of our commitment to customer service, we seek to provide reliable, high-quality cable television service. As such, our primary objective with respect to Susquehanna Cable's capital expenditures is to maintain, expand and upgrade its cable plant to improve and expand its cable television services. Through a capital investment program, we have expanded channel capacity, enhancing signal quality, improving technical reliability and providing a platform to deliver high-speed data services, including Internet access. We believe that such technical improvements and upgrades create additional revenue opportunities, enhance operating efficiencies, improve franchising relations and increase 14 customer satisfaction. We expect capital spending in 2002 for rebuild activities to total approximately $12.0 million, which we expect to be funded by operations and existing credit facilities. The following table summarizes, as of December 31, 2001, our existing bandwidth profile and our bandwidth profile upon completion of work-in-progress projects (which are generally expected to be completed by the end of 2002).
330 TO 450 MHz 550 MHz 750 to 860 MHz (Approximately 60 (Approximately 82 (Approximately 82 Analog Channels) Analog Channels) Analog Channels)/(1)/ ---------------- ---------------- -------------------- EXISTING BANDWIDTH PROFILE Miles of plant 875 886 3039 % miles of plant 18% 18% 64% BANDWIDTH PROFILE UPON COMPLETION OF WORK IN PROGRESS Miles of plant 497 981 3,322 % miles of plant 10% 20% 70%
/(1)/ Plus 200 MHz of additional bandwidth for digital programming and other enhanced services. Our use of fiber optic technology as an enhancement to coaxial is enabling us to consolidate headends and reduce amplifier cascades, thereby improving picture quality and system reliability and reducing headend and maintenance expenditures. Fiber optic strands are capable of carrying hundreds of video, data and voice channels over extended distances without the extensive signal amplification typically required for coaxial cable. We anticipate that the installation of fiber optic cable will allow us to consolidate from 11 headends as of December 31, 2001 to 9 headends by the end of 2002. In our larger systems, fiber optic technology is deployed in a "ring" design providing a redundant path for video and data signals being delivered to large subscriber groups. This approach provides an extra degree of reliability in the event that fiber optic cable is damaged on the primary path. Digital compression is a technology that enables cable operators to increase channel capacity of cable television systems by permitting a significantly increased number of digitalized video signals to fit within a cable television system's existing bandwidth. At December 31, 2001, digitally compressed services were available to 99% of our customer base. The provision of high-speed cable modems to residential and business customers has recently become a source of additional revenue to the cable industry. Cable modem revenues represented approximately 5% of 2001 Cable revenues. Cable modems provide Internet access at higher speeds and lower costs than the technologies offered by other communication providers. For example, a 10 megabit-capable cable modem provides Internet access at download speeds approximately 10 times faster than typical 56.0 kilobit dial-up telephone modem connections. Cable modem service is available in York and Williamsport, Pennsylvania and Brunswick, Maine and on a more limited basis in Shelbyville, Indiana. In 2000 we signed a contract with @Home Solutions, a company formed to provide smaller cable operators Internet connectivity and content services from @Home. Our York and Williamsport, Pennsylvania cable systems relaunched cable modem service using @Home Internet connectivity and content in the third quarter 2001. @Home declared bankruptcy in the fourth quarter 2001 and discontinued service to our cable systems on December 5, 2001. We transitioned customers to in-house Internet access facilities (utilizing Internet backbone circuits of Blazenet on a temporary basis) with an approximate 12-hour service disruption. We subsequently transitioned our Internet backbone circuits to AT&T. Other than slowing our internal growth of cable modem customers, which we believe was 15 temporary, there was little impact to the customer base because of the transition from @Home. We incurred approximately $400,000 of additional capital expenditures to create our in-house Internet platform. DATA AND OTHER SERVICES For the years ended December 31, 2001 and 2000, our Data segment accounted for approximately 3.4% and 2.1% of our total revenues. Susquehanna Data Services. Susquehanna Data Services, Inc., a subsidiary of ours, was formed in 1996 to provide Internet and data networking services to residential and business customers. Marketing its products and services under the tradename "BlazeNet," Susquehanna Data Services offers Internet access over both telephone and cable modems, website creation, hosting and maintenance, local and wide area network design, construction and operation, and telecommunications products from Susquehanna Adelphia Telecommunications and other local telephone companies. As a website host, we provide a central computer that is connected to the Internet 24 hours a day. We store all of our customers' website files on our computer so that each website and all of its content are available to users worldwide at all times. Our local and wide area network services enable us to provide network services in both a limited area, such as a building or campus, or a larger area extending beyond a single building or campus. As of December 31, 2001, BlazeNet provided access service to approximately 11,300 business and consumer accounts. Susquehanna Technologies. The web design company that we acquired in October 2000 has been remarketed as Susquehanna Technologies. Susquehanna Technologies' focus is on custom designed web integration solutions and services to the media and entertainment, retail and associations and not-for-profit industries. These three market verticals were selected for our focus because of existing in-house expertise. We are positioning for the future with proven success in web based procurement systems, website content management systems and e-commerce applications as well as web site design. Because of the collapse of the Internet sector in 2001 and customer uncertainty caused by the terror events in September, sales for Susquehanna Technologies have been stagnant. Adelphia Partnership. In 1997, Susquehanna Media, through its wholly-owned subsidiary Susquehanna Fiber Systems, Inc., entered into a 50/50 partnership with Hyperion Telecommunications of Pennsylvania, Inc., now Adelphia Business Solutions, Inc., a subsidiary of Adelphia Communications Corp., to enter the competitive local exchange carrier business in the York, Pennsylvania market. The partnership provides long distance access circuits to businesses bypassing the local telephone company, point-to-point data circuits and switched business access services. Susquehanna Cable has constructed and maintains a 242 mile fiber optic SONET ring network that is leased to the partnership under a long-term contract. As of December 31, 2001, the partnership provided service to 92 buildings in the York area and had over 8,300 access lines installed. FRANCHISES Cable television systems are constructed and operated under fixed-term non-exclusive franchises or other types of operating permits that are granted by local governmental authorities. These franchises contain many conditions, such as: . time limitations on commencement and completion of construction; 16 . conditions of service, including mix of programming required to meet the needs and interests of the community; . the provision of free service to schools and certain other public institutions; . the maintenance of insurance and indemnity bonds; and . the payment of fees to communities. Certain of these franchises may require the imposition of penalties if the franchise agreements are violated. Certain provisions of these local franchises are subject to limits imposed by federal law. As of December 31, 2001, we held a total of 136 franchises. Franchise agreements with many of these franchises require the payment of fees to the issuing authorities ranging from 1% to 5% of gross revenues (with the majority in the 3% to 5% range) from the related cable system. The Cable Communications Policy Act of 1984 (1984 Cable Act) prohibits franchising authorities from imposing annual franchise fees in excess of 5% of gross annual revenues and permits the cable television system operator to seek renegotiation and modification of franchise requirements if warranted by changed circumstances that render performance commercially impracticable. Our cable franchises expire at various times through 2016. The following table sets forth certain information relating to our franchises:
Number of Percentage of Total Percentage of Total Year of Franchise Expiration Franchises Franchises Basic Subscribers ---------------------------- ----------- ---------- ----------------- 2002 - 2004.................... 41 30% 40% 2005 and after................. 95 70% 60% -- --- --- Total 136 100% 100% === ==== ====
The 1984 Cable Act and the Cable Television Consumer Protection and Competition Act of 1992 (1992 Cable Act) provide, among other things, for an orderly franchise renewal process, which limits a franchising authority's ability to deny a franchise renewal if the incumbent operator follows prescribed renewal procedures. In addition, the 1984 and 1992 Cable Acts establish comprehensive renewal procedures, which require, when properly elected by an operator, that an incumbent franchisee's renewal application be assessed on its own merits and not as part of a comparative process with competing applications. Upon a franchise renewal request, however, a franchise authority may seek to add new and more onerous requirements upon the cable operator, such as significant upgrades in facilities and services or increased franchise fees, as a condition or renewal. We believe that our relationship with local franchise authorities is good. Although we cannot provide guarantees, we anticipate our franchises will be renewed upon expiration. COMPETITION Cable television systems face competition from alternative methods of distributing video programming and from other sources of news, information and entertainment. These sources include direct broadcast satellite, off-air television broadcast programming, newspapers, movie theaters, live sporting events, interactive online computer services and home video products, including DVDs and videotape cassette recorders. The extent to which a cable television system is competitive depends, in 17 part, upon that system's ability to provide, at a reasonable price to customers, a greater variety of programming and other communications services than those available off-air or through alternative delivery sources and upon superior technical performance and customer service. Competing Franchises. Cable television systems generally operate pursuant to franchises granted on a non-exclusive basis. Franchising authorities may not unreasonably deny requests for additional franchises and may operate cable television systems themselves. Well-financed businesses from outside the cable television industry (such as the public utilities that own the poles to which cable is attached) or neighboring cable operators may become competitors for franchises or providers of competing services. Within Susquehanna Cable Co. systems there exists a small overbuild by a neighboring cable operator consisting of approximately 3,000 homes passed (1% of total homes passed) which started ten years ago by two cable operators no longer in the business. Susquehanna acquired one of the operators in 1999. In the last three years the boundaries of the overbuild area has not expanded. Additional cable television systems may be constructed in the future in our other franchise areas. Digital Broadcast Satellites. The fastest growing method of satellite distribution is by high-powered direct broadcast satellites utilizing video compression technology, which provides more than 200 channels of programming over a single high-powered digital broadcast satellite. Digital broadcast satellite service can be received virtually anywhere in the United States through small rooftop or side-mounted antennae/dishes and is not subject to certain local restrictions on the location and use of digital broadcast satellite and other satellite receiver dishes. Digital broadcast satellite service is presently being heavily marketed on a nationwide basis by two service providers. Digital broadcast satellite systems offer all of their programming with digital quality, but may have higher up-front costs or require long-term agreements and may lack local programming and service. Both digital broadcast satellite providers offer some local signals in a limited number of large markets. Digital broadcast satellite providers in the Indiana portion of our Midwest market offer some local programming. During 2001, a proposed merger between the two primary digital broadcast satellite providers was announced. At this point in time the merger is in regulatory review and is being contested by the National Association of Broadcasters. It is uncertain whether this potential merger will result in additional competition in our markets or the impact such potential competition may have on our cable operations. Satellite Master Antenna Television Systems. Cable television operators also face competition from private satellite master antenna television systems that serve condominiums, apartment and office complexes and private residential developments. Like cable television systems, satellite master antenna television systems offer both improved reception of local television stations and many of the same satellite-delivered program services. Satellite master antenna television operators often enter into exclusive agreements with building owners or homeowners associations, although some states have enacted laws that authorize franchised cable television operators access to such private complexes. Packages of data and video services are also being offered to private residential and commercial developments. As long as they do not use public rights-of-way, satellite master antenna television systems can interconnect non-commonly owned buildings without having to comply with many of the local, state and federal regulations that are imposed on cable television systems. Our ability to compete for customers in residential and commercial developments served by satellite master antenna television operators is uncertain. Local Multipoint Distribution Service. Local multipoint distribution service, a wireless service, can deliver over 100 channels of programming directly to consumers' homes. A large amount of this spectrum was auctioned in March 1998, and cable television operators and local telephone companies were restricted in their participation in this auction. It is uncertain whether this spectrum will be used to deliver multichannel video programming and other services to subscribers and thereby compete with franchised cable television systems. 18 Multichannel Multipoint Distribution Systems. Multichannel multipoint distribution systems use low power microwave frequencies to transmit video programming over the air to customers. Wireless distribution services provide many of the same programming services as cable television systems, and digital compression technology is likely to increase significantly the channel capacity of their systems. Multichannel multipoint distribution systems service requires unobstructed "line of sight" transmission paths. In the majority of our franchise service areas, prohibitive topography and "line of sight" access have limited, and are likely to continue to limit, competition from multichannel multipoint distribution systems. Moreover, in the majority of our franchise areas, multichannel multipoint distribution systems operators face significant barriers to growth because lower population densities make these areas less attractive. We are not aware of any significant multichannel multipoint distribution systems operation currently within our cable television franchise service areas. Wireless One, owned by MCI/Worldcom has announced that they are discontinuing their residential multichannel multipoint distribution system, which were in direct competition with our Rankin County Mississippi cable system. MCI has indicated that they intend to utilize the frequencies for commercial data transport. Local Exchange Carriers. The Telecommunications Act of 1996 (1996 Telecom Act) allows local exchange carriers and others to compete with cable television systems and other video services in their telephone service territory, subject to certain regulatory requirements. Local exchange carriers use a variety of distribution methods, including both broadband wire facilities and wireless transmission facilities within and outside of their telephone service areas. Local exchange carriers and other telephone companies have an existing relationship with the households in their service areas, have substantial financial resources, and may have an existing infrastructure capable of delivering cable television service. Unlike cable television systems, local exchange carriers are not required, under certain circumstances, to obtain local franchises to deliver video services and are not subject to certain obligations imposed under such franchises. We believe that our rural markets are unlikely to support competition in the provision of video and telecommunications broadband services given the lower population densities and higher capital costs per household of installing plant. However, Senate Bill 2646-Rural Broadband Access, passed on February 13, 2002. The bill proposes to provide $100.0 million in grants, loans and loan guarantees to eligible companies to construct or improve broadband facilities in eligible rural communities. To be eligible communities must not have more than 20,000 inhabitants and not be located in a designated standard metropolitan statistical area. Senate Bill 2646 is currently being considered in the House. It is uncertain whether this potential incentive will prompt additional competition in our markets or the impact such potential competition may have on our cable operations. Public Utilities. Registered utility holding companies and their subsidiaries may provide telecommunications services (including cable television). Electric utilities must establish separate subsidiaries known as "exempt telecommunications companies" and must apply to the FCC for operating authority. Due to their resources, electric utilities could be formidable competitors to traditional cable television systems. Electric utilities also have the potential to become significant competitors in the video marketplace, as many of them already possess fiber optic transmission lines in certain areas they serve. Other New Technologies. Other new technologies, including Internet-based services, may compete with cable television systems. Incumbent television broadcast licensees may obtain licenses for digital television, which can deliver high definition television pictures, multiple digital-quality program streams, as well as CD-quality audio programming and advanced digital services, such as data transfer or subscription video. Television broadcast stations are authorized to transmit textual and graphic information. Commercial and noncommercial FM stations may use their sub-carrier frequencies to provide non-broadcast services, including data transmissions. In addition, over-the-air interactive video and data service permits two-way interaction with commercial and educational programming, along with informational and data services. Local exchange carriers and other common carriers provide facilities for 19 the transmission and distribution of video services, including interactive computer-based services like the Internet, data and other non-video services. Advances in communications technology, as well as changes in the marketplace and the regulatory and legislative environments, are constantly occurring. We are not, therefore, able to predict the effect that current or future developments might have on the cable industry or on our operations. See "Cautionary Note Regarding Forward-Looking Statements." EMPLOYEES We have approximately 1,455 employees as of December 31, 2001. No employees are covered by collective bargaining agreements, and we consider relations with our employees to be good. CABLE PERFORMANCE SHARE PLAN On July 1, 2000, the first of a three-step change in the valuation of Susquehanna Cable's performance share plan occurred. Performance shares were previously valued using a formula. On July 1, 2000, performance shares were revalued based 2/3 on the former formula and 1/3 on fair value as determined by an independent valuation of Susquehanna Pfaltzgraff Co. for ESOP purposes performed as of December 31, 1999. On April 1, 2001, performance shares were valued based 1/3 on the former formula and 2/3 on fair value as of December 31, 2000. On April 1, 2002, performance shares values will be wholly based on fair value as of December 31, 2001. In the first step of the valuation change, the Cable and Data segments recognized charges against operating income and Adjusted EBITDA of $1.9 million and $1.1 million, respectively. (See definition of Adjusted EBITDA with Selected Financial Data.) In the second step of the valuation change, the Cable and Data segments recognized charges against operating income and Adjusted EBITDA of $2.6 million and $1.6 million, respectively. We expect that charges against operating income and Adjusted EBITDA for the final step in the valuation change will be $2.5 million in the Cable segment and $1.4 million in the Data segment in second quarter 2002. RADIO EMPLOYEE STOCK PLAN On July 1, 2000, the Radio Employee Stock Plan's non-voting Class B common stock, was revalued in a similar manner to the Cable performance share plan. Radio Class B common stock, which was previously valued using a formula, will also transition to fair value by April 1, 2002, like the Cable performance share plan. While there was no expense recognized for the Radio plan's July 2000 change in valuation, minority interests increased approximately $19 million. Radio minority interests increased an additional $22.3 million in April 2001 due to the next step in the valuation change. We expect Radio minority interests to increase an additional $16.8 million in April 2002 due to the final step to fair value. Net income will not be affected by the 2002 change in minority interests. FEDERAL REGULATION OF RADIO BROADCASTING INTRODUCTION The ownership, operation and sale of broadcast stations, including those licensed to us, are subject to the jurisdiction of the FCC, which acts under authority derived from the Communications Act of 1934 (the Communications Act). The Communications Act was amended in 1996 by the 1996 Telecom Act to make changes in several broadcast laws. Among other things, the FCC grants permits 20 and licenses to construct and operate radio stations; assigns frequency bands for broadcasting; determines whether to approve changes in ownership or control of station licenses; regulates equipment used by stations and the operating power and other technical parameters of stations; adopts and implements regulations and policies that directly or indirectly affect the ownership, operation and employment practices of stations; regulates some forms of radio broadcasting programming; and has the power to impose penalties for violations of its rules under the Communications Act. LICENSE GRANT AND RENEWAL Radio broadcast licenses are granted and renewed for maximum terms of eight years. Licenses must be renewed through an application to the FCC. The Communications Act requires that the FCC grant the renewal of a station's license if the FCC finds that, during the preceding term of the license, the station has served the public interest, convenience and necessity, that there have been no serious violations by the licensee of the Communications Act or the rules and regulations of the FCC, and that there have been no other violations by the licensee of the Communications Act or the rules and regulations of the FCC that, when taken together, would constitute a pattern of abuse. Petitions to deny license renewal applications can be filed by interested parties, including members of the public. Such petitions may raise various issues before the FCC. The FCC is required to hold hearings on renewal applications if it is unable to determine that renewal of a license would serve the public interest, convenience and necessity, or if a petition to deny raises a "substantial and material question of fact" as to whether the grant of the renewal application would be prima facie inconsistent with the public interest, convenience and necessity. Also, during certain periods when a renewal application is pending, the transferability of the applicant's license may be restricted. Historically, we have not experienced any material problems renewing our licenses to operate our radio stations and are not currently aware of any facts that would prevent the timely renewal of our licenses. There can be no assurance, however, that our licenses will be renewed. The following table sets forth certain regulatory information regarding each of the stations owned by us. "HAAT," which applies to FM stations only, represents height above average terrain. Height above average terrain means the actual height of the station's transmitting antenna above the ground level of the surrounding terrain and is used to measure the coverage of an FM station. The FCC class determines the maximum power and maximum height above average terrain for the particular station. Height Above Average Terrain is not applicable to AM stations.
Frequency City of (FM-MHZ) FCC HAAT Power in Expiration Date of Market and Stations License (AM-KHZ) Class (Meters) Kilowatts (Day) License ------------------- ------- -------- ----- -------- --------------- ------- San Francisco, CA KNBR-AM......... San Francisco 680 KHz A -- 50 KW December 1, 2005 KFOG-FM......... San Francisco 104.5 MHz B 459 7.1 KW December 1, 2005 KFFG-FM......... Los Altos 97.7 MHz A 137 3.3 KW December 1, 2005 KSAN-FM......... San Mateo 107.7 MHz B 354 8.9 KW December 1, 2005 KTCT-AM......... San Mateo 1050 KHz B -- 50 KW December 1, 2005 Dallas/Ft. Worth, TX KLIF-AM......... Dallas 570 KHz B -- 5 KW August 1, 2005 KKLF-AM......... Dennison/Sherman 950 KHz B -- .5 KW August 1, 2005 KTCK-AM......... Dallas 1310 KHz B -- 9 KW August 1, 2005 KPLX-FM......... Ft. Worth 99.5 MHz C 511 100 KW August 1, 2005 KKMR-FM/(1)/.... Haltom City 93.3 MHz C2 120 50 KW August 1, 2005 KTDK-FM......... Sanger 104.1 MHz C3 150 11 KW August 1, 2005 KTBK-AM......... Sherman 1700 KHz B -- 10 KW August 1, 2005 KGVL-AM/(2)/.... Greenville 1400 KHz C -- 1 KW August 1, 2005 KIKT-FM/(2)/.... Greenville 93.5 MHz A 100 1.8 KW August 1, 2005 Houston, TX KRBE-FM......... Houston 104.1 MHz C 585 100 KW August 1, 2005 Atlanta, GA WNNX-FM......... Atlanta 99.7 MHz C 315 100 KW April 1, 2004 WWWQ-FM College Park 100.5 MHz C3 291 3 KW Pending Cincinnati, OH WRRM-FM......... Cincinnati 98.5 MHz B 246 17.5 KW October 1, 2004 WMOJ-FM......... Fairfield 94.9 MHz B 322 10.5 KW October 1, 2004
21
Frequency City of (FM-MHZ) FCC HAAT Power in Expiration Date of Market and Stations License (AM-KHZ) Class (Meters) Kilowatts (Day) License ------------------- ------- -------- ----- -------- --------------- ------- Indianapolis, IN WFMS-FM......... Indianapolis 95.5 MHz B 302 13 KW August 1, 2004 WGRL-FM......... Noblesville 93.9 MHz A 138 3.3 KW August 1, 2004 WGLD-FM......... Indianapolis 104.5 MHz B 150 50 KW August 1, 2004 Kansas City, MO KCMO-FM......... Kansas City 94.9 MHz C 321 100 KW February 1, 2005 KCMO-AM......... Kansas City 710 KHz B -- 10 KW February 1, 2005 KCFX-FM......... Harrisonville,MO 101.1 MHz C1 303 97 KW February 1, 2005 KFME-FM......... Garden City, MO 105.1 MHz C1 299 100 KW Pending York/Lancaster, PA WSBA-AM......... York 910 KHz B -- 5 KW August 1, 2006 WARM-FM......... York 103.3 MHz B 398 6.4 KW August 1, 2006 Albemarle, NC WABZ-FM/(2)/.... Albemarle 100.9 MHz A 61 3 KW December 1, 2003 --------------------
/(1)/ KKMR-FM changed its call letters to KDBN-FM effective January 28, 2002. /(2)/ Operated by a third party under a time brokerage agreement. REGULATORY APPROVALS Broadcast licenses may not be assigned nor may the control of broadcast licenses be transferred without the prior approval of the FCC. In determining whether to assign, transfer, grant or renew a broadcast license, the FCC considers a number of factors pertaining to the proposed licensee, including limits on common ownership of media properties, financial qualifications of the proposed licensee, the "character" of the proposed licensee (including that no party to the application (i.e. officer, director, or 10% or greater owner) is subject to the denial of federal benefits that include FCC benefits pursuant to Section 5301 of the Anti-Drug Abuse Act of 1988, 21 U.S.C. sec. 862), limitations on alien ownership, and compliance with programming, public file and anti-discrimination requirements. Assigning a license or transferring control requires the filing of an application with the FCC. The FCC staff reviews the application and determines whether to grant the application. This process generally takes about four months. During the application process, interested parties and the public may file petitions, during specific periods of time, to deny or raise objections to the application. A full FCC review of staff action can be requested, and final FCC approval or disapproval is subject to judicial review. Absent a timely request for reconsideration, administrative review or judicial review, the FCC staff's grant of an application becomes final by operation of law and generally is no longer subject to administrative or judicial review. The pendency of a license renewal application may alter the aforementioned timetables, because the FCC might not issue an unconditional assignment grant if the station's license renewal is pending. OWNERSHIP MATTERS The 1996 Telecom Act and the FCC's broadcast multiple ownership rules do not restrict the number of radio stations one person or entity may own (including having an attributable interest in), operate or control on a national level, but do impose restrictions on a local level. These restrictions are: 22 (i) in a market with 45 or more commercial radio signals, an entity may own up to eight commercial radio stations, not more than five of which are in the same service (FM or AM); (ii) in a market with between 30 and 44 (inclusive) commercial radio signals, an entity may own up to seven commercial radio stations, not more than four of which are in the same service; (iii) in a market with between 15 and 29 (inclusive) commercial radio signals, an entity may own up to six commercial radio stations, not more than four of which are in the same service; and (iv) in a market with 14 or fewer commercial radio signals, an entity may own up to five commercial radio stations, not more than three of which are in the same service, except that an entity may not own more than 50% of the stations in such market. The foregoing summarizes the material radio broadcast industry regulations with which we must comply. However, it does not purport to describe all present and proposed regulations and legislation relating to the radio broadcasting industry, some of which may be subject to judicial and legislative review and change, and their impact on the radio broadcasting industry or us cannot be predicted at this time. REGULATION OF CABLE TELEVISION The cable television industry is regulated by the FCC, some state governments and substantially all local governments. In addition, various legislative and regulatory proposals under consideration from time to time by the Congress and various federal agencies have in the past, and may in the future, materially affect us and the cable television industry. The following is a summary of federal laws and regulations materially affecting the growth and operation of the cable television industry and a description of certain state and local laws. We believe that the regulation of the cable television industry remains a matter of interest to Congress, the FCC and other regulatory authorities. There can be no assurance as to what, if any, future actions such legislative and regulatory authorities may take or the effect thereof on us. FEDERAL LEGISLATION The principal federal statute governing the cable television industry is the Communications Act of 1934, as amended. As it affects the cable television industry, the Communications Act has been significantly amended on three occasions, by the 1984 Cable Act, the 1992 Cable Act and the 1996 Telecom Act. The 1996 Telecom Act altered the regulatory structure governing the nation's telecommunications providers. It removed barriers to competition in both the cable television market and the local telephone market. Among other things, it also reduced the scope of cable rate regulation. FEDERAL REGULATION The FCC is the principal federal regulatory agency with jurisdiction over cable television. It has adopted regulations covering such areas as cross-ownership between cable television systems and other communications businesses, carriage of television broadcast programming, cable rates, consumer protection and customer service, leased access, indecent programming, programmer access to cable television systems, programming agreements, technical standards, consumer electronics equipment compatibility, ownership of home wiring, program exclusivity, equal employment opportunity, consumer education and lockbox enforcement, origination cablecasting and sponsorship identification, political programming and advertising, advertising during children's programming, signal leakage and frequency 23 use, maintenance of various records, and antenna structure notification, marking and lighting. The FCC has the authority to enforce these regulations through the imposition of substantial fines, the issuance of cease and desist orders and/or the imposition of other administrative sanctions, such as the revocation of FCC licenses needed to operate certain transmission facilities often used in connection with cable operations. A brief summary of certain of these federal regulations as adopted to date follows. RATE REGULATION Where a cable television system is not subject to effective competition, the rates for the basic service tier (the lowest level of cable programming service which must include local broadcast channels and public access channels) and related equipment may be regulated by the local franchising authority at its option. Rates for cable programming service tiers, which generally include programming other than the channels carried on the basic service tier, and for programming offered on a per-channel or per-program basis are not subject to governmental regulations. If local franchising authorities choose to regulate basic service rates, they may order reductions and, in certain circumstances, refunds of existing monthly rates and charges for associated equipment. In carrying out their rate regulatory authority, however, local officials are subject to certain FCC standards such as the obligation to evaluate rates in accordance with FCC approved benchmark formulas or cost-of-service showings. Future rates of regulated cable systems may not exceed an inflation-indexed amount, plus increases in certain costs beyond the cable operator's control, such as taxes, franchise fees and increased programming costs. Cost-based adjustments to these capped rates also can be made in the event a cable televisions operator adds or deletes channels. There is also a streamlined cost-of-service methodology available to justify a rate increase for "significant" system rebuilds or upgrades. We currently are being regulated for basic services, installation and equipment rates in four of our franchise areas, three in Maine and one in Mississippi. Existing regulations require cable television systems to permit customers to purchase video programming on a per channel or a per program basis without the necessity of subscribing to any tier of service, other than the basic service tier, unless the cable television system is technically incapable of doing so. Generally, this exemption from compliance with the statute for cable television systems that do not have such technical capability is available until a cable television system obtains the capability, but not later than December 2002. CARRIAGE OF BROADCAST TELEVISION SIGNALS The 1992 Cable Act contains signal carriage requirements which allow commercial television broadcast stations that are "local" to a cable television system (i.e., the system is located in the station's designated market area) to elect every three years whether to require the cable television system to carry the station, subject to certain exceptions, or whether the cable television system will have to negotiate for "retransmission consent" to carry the station. The next election between must-carry and retransmission consent must occur by October 1, 2002. A cable television system is generally required to devote up to one-third of its activated channel capacity for the carriage of local commercial television stations whether pursuant to the mandatory carriage requirements or retransmission consent requirements of the 1992 Cable Act. Local non-commercial television stations are also given mandatory carriage rights, subject to certain exceptions, on cable systems with the principal headend located within the larger of: (i) a 50-mile radius from the station's city of license; or (ii) the station's Grade B contour (a measure of signal strength). Unlike commercial stations, noncommercial stations are not given the option to negotiate retransmission consent for the carriage of their signal. In addition, cable television systems have to obtain retransmission consent for the carriage of all "distant" commercial broadcast stations, except for certain "superstations" (i.e., commercial satellite-delivered independent stations such as WGN). To date, compliance with the "retransmission consent" and "must carry" provisions of the 1992 Cable Act has not had a material effect on us, although this result may change in the future depending on such factors as 24 market conditions, channel capacity and similar matters when such arrangements are renegotiated. The FCC has initiated a rulemaking proceeding on the carriage of television signals in high definition and digital formats. The final outcome of this proceeding could have a material effect on the number of services that a cable operator will be required to carry. RENEWAL OF FRANCHISES AND FRANCHISE FEES The 1984 Cable Act established renewal procedures and criteria designed to protect incumbent franchisees against arbitrary denials of renewal. While these formal procedures are not mandatory unless timely invoked by either the cable television operator or the franchising authority, they can provide substantial protection to incumbent franchisees. Even after the formal renewal procedures are invoked, franchising authorities and cable television operators remain free to negotiate a renewal outside the formal process. Nevertheless, renewal is by no means assured, as the franchisee must meet certain statutory standards. Even if a franchise is renewed, a franchising authority may impose new and more onerous requirements such as upgrading cable-related facilities and equipment and complying with voluntary commitments, although the municipality must take into account the cost of meeting such requirements. The 1984 Cable Act, under certain limited circumstances, permits a cable operator to obtain modifications of franchise obligations. Franchises have generally been renewed for cable television operators that have provided satisfactory services and have complied with the terms of their franchises. Historically, we have not experienced any material problems renewing our franchises for our cable television systems. We are not aware of any current or past material failure on our part to comply with our franchise agreements. We believe that we have generally complied with the terms of our franchises and have provided quality levels of service. The 1992 Cable Act makes several changes to the process under which a cable television operator seeks to enforce his renewal rights which could make it easier in some cases for a franchising authority to deny renewal. Franchising authorities may consider the "level" of programming service provided by a cable television operator in deciding whether to renew. For alleged franchise violations occurring after December 29, 1984, franchising authorities have the right to deny renewal because of an operator's failure to substantially comply with the material terms of the franchise even if the franchising authority has "effectively acquiesced" to such past violations. The franchising authority is, however, precluded from denying renewal if, after giving the cable television operator notice and opportunity to cure, it fails to respond to a written notice from the cable television operator of its failure or inability to cure. Courts may not reverse a denial of renewal based on procedural violations found to be "harmless error." Franchising authorities may generally impose franchise fees of up to 5% of a cable television system's annual gross revenues, excluding revenues derived from telecommunications services. However, they may be able to exact some compensation for cable systems' use of public rights-of-way to provide telecommunications service. In the past several years, substantial public controversy has arisen with regard to the ability of local franchise authorities to regulate high speed Internet access provided by cable television systems. Among the key issues in dispute are the franchise authority's ability to require cable operators to offer multiple unaffiliated Internet service providers access to their systems ("open access"), to impose franchise fees on revenues that cable systems earn from providing cable modem service or to impose service or other requirements on a cable system's Internet offerings. These issues currently are pending in several court proceedings and before the FCC. While the FCC tentatively has concluded that local franchise authorities lack authority to impose such requirements on cable operators, further agency proceedings are underway that could alter the initial conclusion. 25 CHANNEL SET-ASIDES The 1984 Cable Act permits local franchising authorities to require cable television operators to set aside certain television channels for public, educational and governmental access programming. The 1984 Cable Act further requires cable television systems with thirty-six or more activated channels to designate a portion of their channel capacity for commercial leased access by unaffiliated third parties to provide programming that may compete with services offered by the cable television operator. The 1992 Cable Act requires leased access rates to be set according to a formula determined by the FCC. COPYRIGHT MATTERS Cable systems must obtain copyright licenses for programming and television signals they carry. Copyright authority for programming on non-broadcast networks typically is obtained from the networks in question, and copyright authority for programming originated locally by the cable system must be obtained directly from copyright holders. The Copyright Act provides a blanket license for copyrighted material on television stations whose signals a cable system retransmits. Cable operators can obtain this license by filing semi-annual reports and paying a percentage of their revenues as a royalty fee to the U.S. Copyright Office, which then distributes the royalty pool to copyright holders. For larger cable systems, these payments vary with the numbers and type of distant television stations the system carries. From time to time, Congress considers proposals to alter the blanket copyright license, some of which could make the license more costly. STATE AND LOCAL REGULATION Cable television systems generally are operated pursuant to nonexclusive franchises, permits or licenses granted by a municipality or other state or local government entity. The terms and conditions of franchises vary materially from jurisdiction to jurisdiction. Franchises generally contain provisions governing fees to be paid to the franchising authority, length of the franchise term, renewal, sale or transfer of the franchise, territory of the franchise, design and technical performance of the system, use and occupancy of public streets and number and types of cable television services provided. The 1992 Cable Act prohibits exclusive franchises and allows franchising authorities to regulate customer service and rates. Franchising authorities may operate their own multichannel video distribution system without a franchise. States and local franchising authorities may adopt certain restrictions on cable television systems ownership. The foregoing summarizes the material cable television industry regulations with which we must comply. However, it does not purport to describe all present and proposed federal, state and local regulations and legislation relating to the cable television industry, some of which are subject to judicial and legislative review and change, and their impact on the cable television industry or us cannot be predicted at this time. 26 ITEM 2. PROPERTIES The headquarters of our cable television operations are located in York, Pennsylvania in office space leased from our parent. We do not have a separate headquarters for our radio broadcast operations. We lease nine studio facilities for our radio operations. We own broadcast towers for 12 of our radio stations and lease 14 other broadcast towers. We own the real property under seven of our broadcast towers and lease the land under our other 19 towers. We own nine, and lease two, headend facilities for our cable television operations. In connection with our cable operations, we own eight tower locations and lease nine others. In addition, we own the real estate for five and lease the real estate for two fiber optic hub sites. See also "Business--Radio Properties" in Item 1 of this annual report. Our principal physical assets with respect to our cable operations consist of cable television operating plant and equipment, including signal receiving, encoding and decoding devices, headends and distribution systems and customer house drop equipment for each of our cable television systems. The signal receiving apparatus typically includes a tower, antenna, ancillary electronic equipment and earth stations for reception of satellite signals. Headends, consisting of associated electronic equipment necessary for the reception, amplification and modulation of signals, are located near the receiving devices. Our distribution system consists primarily of coaxial and fiber optic cables and related electronic equipment. See also "Business--Cable Properties" and "--Cable Systems" in Item 1 of this annual report. We believe that our properties are in good condition and suitable for our operations. ITEM 3. LEGAL PROCEEDINGS We currently and from time to time are involved in litigation incidental to the conduct of our business, but we are not currently a party to any lawsuit or proceeding which, in our opinion, is likely to have a material adverse effect on us. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to security holders for a vote during the fourth quarter of 2001. 27 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS There is no market for our common stock. All of our outstanding common stock is owned by our parent, Susquehanna Pfaltzgraff Co. 28 ITEM 6. SELECTED ANNUAL AND QUARTERLY FINANCIAL DATA The below selected financial data as of and for the years ended December 31, 2001, 2000, 1999, 1998 and 1997 is derived from our audited consolidated financial statements. Our audited consolidated financial statements and related notes for the years ended December 31, 2001, 2000 and 1999 are included elsewhere in this annual report. You should read this information and the accompanying notes in conjunction with the consolidated financial statements and related notes and the other financial information included elsewhere in this annual report.
Year Ended December 31, ----------------------- 2001 2000 1999 1998 1997 ---- ---- ---- ---- ---- (dollars in thousands) INCOME STATEMENT DATA: Revenues: Radio $198,039 $220,886 $185,193 $151,170 $131,438 Cable 104,758 93,113 82,720 70,641 65,122 Data and other 10,632 6,590 3,353 1,616 539 ------- ------- ------- ------- ------- Total revenues 313,429 320,589 271,266 223,427 197,099 Total operating expenses 264,490 240,004 203,218 172,224 154,389 ------- ------- ------- ------- ------- Operating income 48,939 80,585 68,048 51,203 42,710 Interest expense, net 37,887 37,523 28,573 20,506 18,890 Gain (loss) on sale of assets (4,185) (3,891) (1,499) 1,748 9,451 Interest income from loan to parent company 6,895 6,696 4,476 -- -- Pension curtailment gain -- -- 2,299 -- -- Other income (loss) (256) (1,474) 379 334 426 ------- ------- ------- ------- ------- Income before income taxes 13,506 44,393 45,130 32,779 33,697 Provision for income taxes 6,538 16,661 18,044 14,523 14,033 ------- ------- ------ ------ ------- Income before extraordinary loss 6,968 27,732 27,086 18,256 19,664 Loss related to early retirement of debt -- -- (3,316) -- -- ------- ------- ------- ------- ------- Income before minority interests 6,968 27,732 23,770 18,256 19,664 Minority interests (2,261) (5,185) (4,140) (4,304) (3,070) ------- ------- ------- ------- ------- Net income $ 4,707 $ 22,547 $ 19,630 $ 13,952 $ 16,594 ======= ======== ======== ======== ======== BALANCE SHEET DATA (at end of period): Total assets $669,082 $659,457 $526,142 $355,141 $333,476 Total debt 495,105 500,600 405,621 272,776 265,500 Stockholders' equity (deficit) 15,493 33,230 31,281 9,201 (2,295) RATIO OF EARNINGS TO FIXED 1.3x 2.1x 2.4x 2.3x 2.7x CHARGES/(1)/: SUPPLEMENTARY FINANCIAL DATA: Adjusted EBITDA:/(2)/ Radio $ 61,324 $ 83,332 $ 64,744 $ 42,553 $ 34,062 Cable 40,082 36,664 35,458 31,699 29,511 Data and Other (2,728) 1,663 2,167 (386) (692) -------- -------- -------- ------- ------- Total Adjusted EBITDA $ 98,678 $121,659 $102,369 $73,866 $62,881 ======== ======== ======== ======= ======= Cash flows related to: Operating activities $ 66,954 $ 67,105 $ 60,211 $ 36,843 $ 36,347 Investing activities (60,760) (163,478) (182,944) (38,842) (70,399) Financing activities (6,194) 95,734 121,430 3,941 33,334 Capital expenditures $ 31,739 $ 36,913 $ 33,066 $ 29,592 $ 22,610
-------------------- /(1)/ The ratio of earnings to fixed charges is expressed as the ratio of income before income taxes and extraordinary items plus fixed charges (excluding capitalized interest) to fixed charges. Fixed charges consist of interest expense, capitalized interest and one-third of rental expense (the portion deemed representative of the interest factor). 29 /(2)/ We define Adjusted EBITDA as net income before income taxes, extraordinary items, interest expense, interest income, depreciation and amortization, employee stock ownership plan expense, pension curtailment gain, minority interest, and any gain or loss on the disposition of assets. Employee stock ownership plan expense recognized for the years ended December 31, 2001, 2000 and 1999 was $9.1 million, $8.3 million, and $6.4 million, respectively. Although Adjusted EBITDA is not a measure of performance calculated in accordance with generally accepted accounting principles (GAAP), we believe that Adjusted EBITDA is a meaningful measure of performance because it is commonly used in the radio and cable television industries to analyze and compare radio and cable television companies on the basis of operating performance, leverage and liquidity. In addition, our new senior credit facility and the indenture that governs our 8.5% senior subordinated notes contain certain covenants in which compliance is measured by computations substantially similar to those used in determining Adjusted EBITDA. There are no legal restrictions on the use of Adjusted EBITDA, other than those contained in our new senior credit facility and indenture. Management expects that Adjusted EBITDA will be used to satisfy working capital, debt service and capital expenditure requirements and other commitments and contingencies. Adjusted EBITDA should not be considered in isolation or as a substitute for or an alternative to net income, cash flow from operating activities or other income or cash flow data prepared in accordance with GAAP. Adjusted EBITDA should not be considered as a measure of a company's operating performance or liquidity. Adjusted EBITDA as presented may not be comparable to other similarly titled measures used by other companies. 30 UNAUDITED QUARTERLY FINANCIAL INFORMATION (IN THOUSANDS, EXCEPT PER SHARE DATA) The following unaudited quarterly financial information for 2001 and 2000 was derived from our unaudited financial statements and includes, in the opinion of our management, only those normal and recurring adjustments that our management considers necessary for a fair presentation of the results of operations for these periods. These unadited quarterly operating results are not necessarily indicative of the results that may be achieved for a full fiscal year or for future periods.
2001 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr ---- ------- ------- ------- ------- Revenues Radio 39,780 53,418 54,773 50,068 Cable 24,663 25,745 26,595 27,754 Data and other 2,408 2,699 2,844 2,681 ------- ------- ------ ------- Total Revenues 66,851 81,862 84,213 80,503 Operating Expenses 60,528 70,115 68,301 65,546 ------- ------- ------ ------- Operating Income 6,323 11,747 15,912 14,957 Interest Expense, net 10,287 9,385 9,974 8,241 Depreciation and amortization 9,288 9,563 10,041 10,520 Net income (1,669) 1,473 2,755 2,149 Net income per common share (basic and diluted) (1.63) 1.23 2.39 1.84 Adjusted EBITDA 17,954 23,765 28,807 28,152
2000 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr ---- ------- ------- ------- ------- Revenues Radio 41,682 60,732 57,364 61,108 Cable 22,145 23,107 23,544 24,317 Data and other 1,270 1,457 1,592 2,271 ------- ------- ------- ------- Total Revenues 65,097 85,296 82,500 87,696 Operating expenses 51,480 60,592 63,821 64,111 ------- ------- ------- ------- Operating Income 13,617 24,704 18,679 23,585 Interest Expense, net 8,059 8,102 10,546 10,816 Depreciation and amortization 7,239 7,720 8,443 9,731 Net income 3,437 8,336 5,182 5,592 Net income per common share (basic and diluted) 3.01 7.47 4.60 4.97 Adjusted EBITDA 22,634 34,482 29,305 35,238
31 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis should be read in conjunction with "Selected Financial Data" and our financial statements and the notes thereto included elsewhere in this annual report. Much of the discussion in this section involves forward-looking statements. Our actual results may differ significantly from the results suggested by these forward-looking statements. CRITICAL ACCOUNTING POLICIES AND ESTIMATES Our management's discussion and analysis of its financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States, as described in Note 1 to the consolidated financial statements. In order to prepare these financial statements, we must make certain estimates and judgments that may affect the reported value of assets, liabilities, revenues and expenses as well as reported contingencies. These estimates and judgments are evaluated on an ongoing basis and change based upon business conditions and circumstances. Critical estimates involve the value of intangible assets (primarily FCC Broadcast licenses and cable franchise values), income taxes, fair value of financial instruments, allowances for doubtful accounts, contingencies and the impact of any litigation. These estimates are based on the known facts, our measured judgments of probable outcomes and values, historical experience and other factors that we believe are applicable and reasonable given the circumstances. We believe the following accounting policies are critical to preparation of our financial statements since they affect the more significant estimates reflected in the financial statements and related disclosures. Revenue Recognition. Revenues are recognized when related services are provided. Radio revenues are reported when advertising is aired and when events are held, net of agency commissions. Cable revenues are recognized when services are provided to our subscribers. Data and Other revenues are recognized when services are provided or performed. Revenues are recorded based on a reasonable expectation of collection. Estimates of uncollectible accounts are made and revised regularly based on customer history, economic conditions and other credit information judged relevant given the circumstances. Impairment of Long-Lived Assets. Approximately 84% of assets employed in our operations are comprised of intangible assets and property, plant and equipment. The fair value of intangible assets is based on their market values and the performance of the related businesses. Business performance, changes in technologies, condition and location of assets affect the fair values of long-lived tangible assets. In assessing the recoverability of long-lived assets' costs, we make assumptions and estimates regarding the future cash flows from operations to determine whether recoverability is probable. If these assumptions or related estimates change in the future, we may be required to recognize impairment charges for affected assets. Effective January 1, 2002, Media adopted Statement of Financial Accounting Standard No. 142, "Goodwill and Other Intangible Assets" which requires an initial assessment of FCC licenses, cable franchise values and goodwill within the first six months of 2002, and on at least an annual basis in subsequent years. Income Taxes. Our deferred income taxes reflect the probable future tax consequences of temporary differences between the tax bases of assets and liabilities and their financial reporting balances at each reported year-end. Changes in enacted tax rates are reflected as they occur. We routinely evaluate our effective income tax rates and adjust those rates based upon estimates and available information pertinent to the statutory rates, apportionment and other factors considered appropriate in the circumstances. Contingencies. We are involved in litigation and administrative proceedings primarily arising in the normal course of our business. Based on the outcome of these actions, we may be required to make payments or recognize a loss. On a regular basis, we evaluate circumstances related to these actions, which may include consultation with outside counsel. If a liability is probable and reasonably estimable, a liability is recognized. Where a significant liability is probable but not estimable, appropriate financial 32 statement disclosures are made. If circumstances surrounding a significant matter change in the future, our consolidated results of operations and financial position could be adversely affected. OVERVIEW We are a diversified communications company with operations in radio broadcasting and cable television. We are the second largest privately owned radio broadcaster and the 11th largest radio broadcaster overall in the United States based on revenues. As of December 21, 2001 we owned and operated 18 FM and 9 AM stations that serve four of the nation's ten largest radio markets (San Francisco, Dallas, Houston and Atlanta), as well as four other markets (Cincinnati, Indianapolis, Kansas City and York, Pennsylvania). We were also the 19th largest cable multiple system operator in the United States with seven cable systems serving approximately 195,000 subscribers as of December 31, 2001. For the year ended December 31, 2001, we had revenues and Adjusted EBITDA of $313.4 million and $98.7 million, respectively, with approximately 62% of Adjusted EBITDA generated by our radio broadcast operations and 41% by our cable television operations. For the year ended December 31, 2001, our net income was $4.7 million, our cash flows from (used in) operating, investing and financing activities were $66.9 million, $(60.8) million and $(6.1) million, respectively, and our ratio of earnings to fixed charges was 1.3x. We also provide Internet access and enhanced services to residential and business customers under the tradename "BlazeNet." The services include: . Internet access via telephone dial-up service or cable modem; . website creation, hosting and maintenance; and . local and wide area network design, construction and operation. The web design company that we acquired in October 2000 has been remarketed as Susquehanna Technologies. Susquehanna Technologies' focus is on custom designed web integration solutions and services to the media and entertainment, retail and associations and not-for-profit industries. Revenues. Our principal source of radio broadcasting revenue is the sale of broadcasting time on our stations for advertising. Radio revenue is reported net of agency commissions. Sales of advertising are affected by changes in demand for advertising time by national and local advertisers and by advertising rates charged by the stations. Radio station advertising rates are based on a station's ability to attract audiences that match the demographic groups that advertisers want to reach, the number of stations competing in a marketplace, and economic conditions. Radio stations attempt to maximize revenue by adjusting advertising rates based upon local market conditions, by controlling inventory, by creating demand, and by increasing audience ratings. Radio stations sometimes use barter or trade agreements to exchange merchandise or services for advertising time with advertisers, in lieu of cash. It is our policy not to pre-empt advertising paid in cash with advertising paid in trade. For the years ended December 31, 1999 through 2001, cash advertising revenue was 99% of broadcasting revenue. Seasonal revenue fluctuations are common in the radio broadcasting industry, due primarily to fluctuations in expenditure levels by local and national advertisers. Our radio revenues are lowest in the first quarter and are relatively level in the other quarters. 33 Most of our cable revenues are derived from monthly subscriber fees for cable television programming services, cable modem service and from fees incident to the provision of such services, such as installation fees and fees for converter rentals and rentals of remote control devices. Some revenues are derived from advertising. Since cable is subject to regulation at the federal, state and local levels, increases in rates charged for regulated services may be governed by the 1992 Cable Act and the 1996 Telecom Act. Cable revenues are affected by the timing of subscriber rate increases. Operating expenses. Radio operating expenses are comprised of employee salaries and commissions, depreciation and amortization, programming expenses, advertising expenses, promotion expenses and selling, general and administrative expenses. General and administrative expenses include office administration and other support functions that are handled on a centralized basis. Cable operating expenses include programming expenses, employee salaries and benefits, electricity, depreciation, amortization and selling, general and administrative expenses for accounting and billing services, franchise fees, office administration expenses and corporate charges. Depreciation and amortization expense relates to the depreciation of tangible assets used in the business and the amortization of franchise costs. Adjusted EBITDA. Adjusted EBITDA is net income before income taxes, extraordinary items, interest expense, interest income, depreciation and amortization, employee stock ownership plan expense, pension curtailment gain, minority interest and any gain or loss on the disposition of assets. RESULTS OF OPERATIONS The following table summarizes our consolidated historical results of operations and consolidated historical results of operations as a percentage of revenues for the years ended December 31, 2001, 2000 and 1999 (in millions of dollars):
2001 2000 1999 ---- ---- ---- Revenues Radio $198.0 63.2% $ 220.9 68.8% $ 185.2 68.3% Cable 104.8 33.4% 93.1 29.0% 82.7 30.5% Data and Other 10.6 3.4% 6.6 2.2% 3.4 1.2% ------- -------- -------- ------ ------- ------ Total revenues 313.4 100.0% 320.6 100.0% 271.3 100.0% ------- -------- -------- ------ ------- ------ Operating expenses: Operating, programming, selling, general and Administrative 225.1 71.8% 206.9 64.6% 175.7 64.7% Depreciation and amortization 39.4 12.6% 33.1 10.3% 27.6 10.2% ------- -------- -------- ------ ------- ------ Total operating expenses 264.5 84.4% 240.0 74.9% 203.3 74.9% ------- -------- -------- ------ ------- ------ Operating income $ 48.9 15.6% $ 80.6 25.1% $ 68.0 25.1% ======= ======== ======== ====== ======= ====== Net income $4.7 1.5 % $ 22.5 7.0% $ 19.6 7.2% ======= ======== ======== ====== ======= ====== Adjusted EBITDA $98.7 31.5% $ 121.7 38.0% $ 102.4 37.7% ======= ======== ======== ====== ======= ======
34 YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000 Revenues. Our revenues decreased $7.2 million, or 2%, from 2000 to 2001. Radio revenues decreased $22.9 million, or 10%, from 2000 to 2001. This reduction was related to the loss of advertising revenues from Internet businesses primarily in our San Francisco market, as well as the decline in the general U.S. economy and resultant weakening of the U.S. advertising market. Cable revenues increased $11.7 million, or 13%, from 2000 to 2001. Rate increases on basic and expanded basic services and to a lesser extent increased penetration of digital and cable modem services were responsible for the growth in cable revenues. Data and Other revenues grew $4.0 million from 2000 to 2001, due primarily to the acquisition of the web design company in October 2000. Depreciation and amortization. Depreciation and amortization increased $6.3 million, or 19%, from 2000 to 2001. Cable depreciation and amortization expenses comprised $4.0 million of the increase, and resulted from the continuation of our cable television system rebuilds and the continued roll-out of digital cable and cable modem services. Radio depreciation and amortization increased $2.0 million, or 20%, from 2000 to 2001. The July 2000 acquisition of three Kansas City radio stations was responsible for the increased radio depreciation and amortization. Operating income. Operating income decreased $31.7 million or 39% from 2000 to 2001. Depreciation and amortization increased while revenues decreased, due to cable plant rebuilds and the Kansas City radio stations acquisition. Other operating expenses increased approximately 10% from 2000 to 2001, also while revenues declined. Radio operating income decreased $25.2 million or 37% from 2000 to 2001. Same stations operating income, decreased $17.4 million or 25% from 2000 to 2001 primarily the result of the decrease in sales. The remaining decrease in Radio operating income is due to a full year of operation in 2001 of the Kansas City stations and the January 2001 launch of WWWQ in Atlanta. The Kansas City stations and WWWQ in Atlanta each generated operating losses during 2001. Cable programming costs increased a full percentage point of revenues from 2000 to 2001. Programming increases were the result of both program license fee increases and the launch of additional program channels. The second step of the valuation basis change to the Cable performance share plan increased other operating expenses $1.2 million from 2000 to 2001. Of the total charge for the performance share revaluation, $2.6 million was recognized in the Cable segment and $1.6 million in the Data segment. The web design company acquired in October 2000, generated $3.4 million more operating losses during 2001 compared to 2000. The operating losses were the result of the collapse of the Internet sector. Net income. Net income decreased $17.8 million or 79% from 2000 to 2001. The decrease in net income can be attributed to the decline in Radio sales which resulted in Radio net income declining $15.6 million or 47% from 2000 to 2001. Adjusted EBITDA. Adjusted EBITDA decreased $23.0 million, or 19%, from 2000 to 2001. Radio Adjusted EBITDA decreased $22.0 million or 26% from 2000 to 2001. Same stations Adjusted EBITDA decreased $17.5 million caused by the decrease in Radio sales from 2000 to 2001. The Cable Adjusted EBITDA increase of $3.4 million was offset by the decrease in operating income from the web design company acquired in 2000. Cable Adjusted EBITDA increased less than the growth in Cable revenues due to the increase in programming costs and the change in valuation basis of the Cable performance share plan. 35 Interest expense. Interest expense increased $0.4 million or 1% from 2000 and 2001. Interest expense from increased borrowings were offset by reductions in interest rates. Interest income of $6.9 million was recognized in 2001 from loans to our parent. YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999 Revenues. Revenues increased $49.3 million, or 18%, from 1999 to 2000. Radio revenues increased $35.7 million, or 19%, from 1999 to 2000. Radio's revenue grew primarily from higher advertising rates. On July 20, 2000, three radio stations were acquired in Kansas City, Missouri. The Kansas City radio stations contributed $7.7 million to revenues, or 22% of the increased radio revenues. Cable revenues increased $10.4 million, or 13%, from 1999 to 2000. Rate increases on basic and expanded basic services were responsible for the remaining growth in cable revenues. Data and Other revenues grew $3.2 million from 1999 to 2000, due primarily to Blazenet sales growth. Depreciation and amortization. Depreciation and amortization increased $5.5 million, or 20%, from 1999 to 2000. Cable depreciation and amortization expenses comprised $3.4 million of the increase, and resulted from the continuation of our cable television system rebuilds and launches of digitally compressed services. Radio depreciation and amortization increased $2.0 million, or 25%, from 1999 to 2000. The acquisition of the three Kansas City radio stations was responsible for $1.7 million or 85% of increased radio depreciation and amortization. Operating income. Operating income increased $12.6 million or 18% from 1999 to 2000. While depreciation and amortization increased faster than revenues due to cable plant rebuilds and the Kansas City radio stations acquisition, other operating expenses increased approximately 18%, or 5% faster than the increase in revenues. The two largest increases to the operating expenses were cable program costs caused by the loss of previous group discounts totaling $1.9 million and charges totaling $3.0 million related to the revaluation of the cable performance share plan. Of the total charge for the performance share revaluation, $1.9 million was recognized in the Cable segment and $1.1 million in the Data segment. There was no significant impact to operating income from the acquired Kansas City radio stations. Radio promotion and advertising costs and sales commissions grew commensurately with revenues. Net income. Net income increased $2.9 million or 15% from 1999 to 2000, largely due to increased operating income. Loss on the replacement of cable distribution plant was $2.4 million higher than in 1999. Interest expense, net of interest income, increased $6.7 million from 1999 to 2000. A $1.0 million loss was recognized due to the decline in value of certain investments. In 1999, net income included a pension curtailment gain of $2.3 million and a $3.3 million extraordinary loss related to the early retirement of debt. Adjusted EBITDA. Adjusted EBITDA increased $19.3 million, or 19%, from 1999 to 2000. Adjusted EBITDA as a percentage of revenues remained equal to 1999 at 38%. Higher operating income with increased depreciation and amortization caused Adjusted Radio EBITDA to increase $18.6 million, or 29%, from 1999 to 2000. Adjusted Cable EBITDA increased $1.2 million, or 3%, between 1999 and 2000. The significant cost increases experienced in 2000 were increased cable programming costs due to the loss of discounts totaling $1.9 million and a $3.0 million charge for the valuation change of Cable's performance share plan ($1.9 million was recognized in Cable and $1.1 million in the Data segment). Interest expense. Interest expense increased $9.0 million, or 31%, between 1999 and 2000. The increase was due to $95.0 million of additional debt incurred during 2000. Borrowings were used to acquire the assets of the three Kansas City radio stations and to finance a portion of our cable rebuild 36 projects. Interest income of $6.7 million was recognized in 2000 from the loan to our parent. The increase in interest expense, net of interest income, was $6.7 million, or 28% from 1999 to 2000. LIQUIDITY AND CAPITAL RESOURCES Historically, our primary sources of liquidity have been cash flow from operations and borrowings under our senior credit facilities. Our future needs for liquidity arise primarily from capital expenditures, potential acquisitions of radio stations and cable systems, potential repurchases of our common stock, and interest payable on our senior subordinated notes and our senior credit facility. Net cash provided by operating activities was $66.9 million and $67.1 million for the years ended December 31, 2001 and 2000, respectively. Our net cash provided by operating activities was generated primarily by normal operations. Net cash used by investing activities was $60.8 million for the year ended December 31, 2001. Acquisitions were $21.3 million for 2001. Capital expenditures, excluding acquisitions, were $31.7 million for the year ended December 31, 2001. Capital expenditures over this period were used primarily to upgrade and maintain our cable systems. In addition to a loan we made to our parent in 1999, we made a $14.6 million loan to our parent was made in 2001. The parent repaid $4.4 million on its outstanding loans in 2001. Net cash used by financing activities was primarily for a $5.7 million reduction of our revolving credit commitment. Net cash used by financing activities was $6.1 million for the year ended December 31, 2001. Our acquisitions of radio stations and cable systems and our capital expenditures have historically been financed with cash flow from operations and borrowings under our senior credit facility. Capital expenditures, excluding acquisitions, were $31.7 million, $36.9 million and $33.1 million for the years ended December 31, 2001, 2000 and 1999, respectively. Capital expenditures over this period were used primarily to upgrade and maintain our cable systems. We expect to make capital expenditures of approximately $33.0 million in 2002 to continue upgrading our current cable systems, for radio related maintenance and equipment and for information technology projects. We may be required to pay $10.0 million to the former owners of WHMA-FM in 2002 under the terms of the purchase agreement. See Note 12 to the Consolidated Financial Statements. On January 15, 2002, we entered into an asset purchase agreement with Fairbanks Communications, Inc. to acquire the cable system serving Lawrenceburg, Indiana for $26.5 million cash. The cable system serves approximately 11,000 basic subscribers on one headend. We expect a second quarter 2002 closing utilizing our existing credit facilities. On May 12, 1999, we sold $150 million of 8.5% Senior Subordinated Notes due 2009 for 99.75% of their face value. Proceeds to us were $145.5 million. As of December 31, 2001, the fair value of these notes was $153.8 million. Any change in interest rates will affect the market value of these notes, however cash outflows for semi-annual interest payments are fixed. On May 12, 1999, we also entered into a senior credit facility. The senior credit facility consists of a $250 million revolver, a $100 million term loan A, and a $100 million term loan B (which mature in 2007 and 2008, respectively), all collateralized by a pledge of all of our material assets (excluding real property) and voting common stock. The credit agreement governing the new senior credit facility requires us to maintain certain financial leverage and interest coverage ratios, which we are in compliance 37 with as of the date of this annual report. As of December 31, 2001, we had $105.0 million of borrowing availability under our senior credit facility. As of December 31, 2001, the average interest rate on all outstanding borrowings was approximately 5.7%. FUTURE COMMITMENTS The following tables reflect our contractual cash obligations in the respective periods in which they are due (in thousands).
Contractual Cash Total Amounts Obligations Committed 2002 2003 2004 2005 2006 Thereafter ----------- --------- ---- ---- ---- ---- ---- ---------- Long-term debt $495,105 $8,780 $17,033 $25,935 $71,038 $85,041 $287,278 Broadcast rights 31,800 8,200 8,450 8,900 3,050 3,200 -- Operating leases 31,484 4,214 3,981 4,008 4,056 3,985 11,240 --------- -------- -------- -------- ------- -------- --------- Total $558,389 $21,194 $29,464 $38,843 $78,144 $92,226 $298,518 ======== ======= ======= ======= ======= ======= ========
Information regarding our contractual obligations at December 31, 2001, is included in the notes to the consolidated financial statements. Future debt maturities, lease obligations and broadcast rights are included in Note 3, Note 10 and Note 12, respectively. We believe that funds generated from operations and the borrowing availability under our new senior credit facility will be sufficient to finance our current operations, our debt service obligations, including our obligations under the notes, cash obligations in connection with potential repurchases of our common stock and planned capital expenditures for the foreseeable future. From time to time, we evaluate potential acquisitions of radio stations, cable television systems, and Internet-related businesses. In connection with future acquisition opportunities, we may incur additional debt or issue additional equity or debt securities depending on market conditions and other factors. We have no current commitments or agreements with respect to any material acquisitions. RECENT ACCOUNTING PRONOUNCEMENTS In July 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 141, Business Combinations (SFAS 141), and Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets (SFAS 142). SFAS 141 requires all business combinations initiated after June 30, 2001 to be accounted for using the purchase method. SFAS 141 superseded APB Opinion No. 16, Business Combinations, and Statement of Financial Accounting Standards No. 38, Accounting for preacquisition Contingencies of Purchased Enterprises. SFAS 142 changes the financial accounting and reporting requirements for acquired goodwill and other intangible assets. Under SFAS 142, the Company is no longer required to amortize goodwill and other intangible assets with indefinite lives. However, goodwill and intangible assets with indefinite lives will be subject to at least annual testing for impairment. SFAS 142 supersedes APB Opinion No. 17, Intangible Assets. The Company will adopt SFAS 142 on January 1, 2002 and is in the process of evaluating the effect that adoption may have on its consolidated results of operations and financial position. The Company expects that its Federal Communications Commission licenses, Cable franchise values and goodwill intangible assets will cease being amortized in 2002. Amortization on these assets approximated $14.1 million and $12.2 million for the years ended December 31, 2001 and 2000, respectively. Accordingly, adoption of SFAS 142 will have a material effect on the Company's future results of operations. As part of the SFAS 38 142 adoption process, the Company is in the process of identifying its reporting units and evaluating the statement's effects on its results of operations and financial position. 39 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK. As of December 31, 2001, we had $344.9 million in variable rate debt. The fair value of this debt approximates its carrying value. Variable rate debt matures as follows (in thousands): 2002 $ 8,750 2006 $85,000 2003 17,000 2007 89,875 2004 25,900 2008 47,375 2005 71,000 Our interest rate exposure is primarily impacted by changes in LIBOR rates. At December 31, 2001, the weighted average interest rate for the variable rate debt was 4.7%. If LIBOR rates increased 1%, and sustained that increased rate for an entire year, annual interest expense on variable rate debt as of December 31, 2001 would increase by $3.4 million. 40 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The consolidated financial statements and report of independent accountants of Susquehanna Media Co. and Subsidiaries are set forth on the pages listed below:
Page ---- Report of Independent Accountants 42 Financial Statements Consolidated Balance Sheets 43 Consolidated Statements of Operations 44 Consolidated Statements of Cash Flows 45 Consolidated Statements of Stockholders' Equity 46 Notes to Consolidated Financial Statements 47-61
41 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of Susquehanna Media Co.: In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income and comprehensive income, statement of stockholders' equity, and cash flows present fairly, in all material respects, the financial position of Susquehanna Media Co. and Subsidiaries (Company) at December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001 in conformity with accounting principles generally accepted in the United States of America. 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 auditing standards generally accepted in the United States of America, 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 our opinion. /s/ PricewaterhouseCoopers LLP Philadelphia, PA March 18, 2002 42 SUSQUEHANNA MEDIA CO. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (dollars in thousands, except share data)
December 31, 2001 2000 ---- ---- ASSETS Current Assets Accounts receivable, less allowance for doubtful Accounts of $1,970 in 2001 and $1,990 in 2000 $ 44,778 $ 51,189 Deferred income taxes (Note 4) 2,252 - Prepaid income taxes - 1,028 Other current assets 6,140 4,683 --------- --------- Total Current Assets 53,170 56,900 --------- --------- Property, Plant and Equipment, at cost Land 5,625 4,480 Buildings and improvements 15,713 11,695 Equipment 231,419 206,856 Construction-in-progress 9,674 20,022 --------- --------- 262,431 243,053 Accumulated depreciation and amortization 118,308 102,429 --------- --------- Property, Plant and Equipment, net 144,123 140,624 --------- --------- Intangible Assets, net (Notes 2, 3 and 5) 316,160 323,578 --------- --------- Note Receivable from Parent (Note 9) 118,232 108,050 --------- --------- Investments and Other Assets (Notes 2, 3, 6 and 9) 37,397 30,305 --------- --------- $ 669,082 $ 659,457 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Cash overdrafts $ 2,687 $ 598 Current portion of long-term debt (Note 3) 8,780 62 Accounts payable 8,386 12,859 Accrued interest 5,291 3,573 Accrued income taxes 3,155 - Deferred income taxes (Note 4) - 494 Accrued salaries and benefits 5,020 4,940 Accrued franchise and licensing fees 2,647 2,897 Deferred income 1,256 3,044 Other accrued expenses 6,711 7,462 --------- --------- Total Current Liabilities 43,933 35,929 --------- --------- Long-term Debt (Note 3) 486,325 500,600 --------- --------- Other Liabilities (Note 7) 10,994 5,605 --------- --------- Deferred Income Taxes (Note 4) 45,108 38,988 --------- --------- Minority Interests (Note 7) 67,229 45,105 --------- --------- Stockholders' Equity (Notes 3 and 7) Preferred stock - Voting, 7% cumulative with par value of $100, 110,000 shares authorized 7,050 7,050 Common stock - Voting, $1 par value, 1,100,000 shares authorized 1,100 1,100 Retained earnings 7,343 25,080 --------- --------- Total Stockholders' Equity 15,493 33,230 --------- --------- $ 669,082 $ 659,457 ========= =========
The accompanying notes are an integral part of the consolidated financial statements. 43 SUSQUEHANNA MEDIA CO. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (dollars in thousands)
For the Years Ended December 31, 2001 2000 1999 ---- ---- ---- Revenues Radio $ 198,039 $ 220,886 $ 185,193 Cable 104,758 93,113 82,720 Data and other 10,632 6,590 3,353 --------- --------- --------- Total revenues 313,429 320,589 271,266 --------- --------- --------- Operating Expenses Operating and programming 123,336 113,633 95,145 Selling 36,727 36,710 32,286 General and administrative 65,015 56,528 48,215 Depreciation and amortization 39,412 33,133 27,572 --------- --------- --------- Total operating expenses 264,490 240,004 203,218 --------- --------- --------- Operating Income 48,939 80,585 68,048 Other Income (Expense) Interest expense (37,887) (37,523) (28,573) Interest income from loan to parent (Note 9) 6,895 6,696 4,476 Gain (loss) on sale of assets (Note 2) (4,185) (3,891) (1,499) Pension curtailment gain - - 2,299 Other (256) (1,474) 379 --------- --------- --------- Income Before Income Taxes, Extraordinary Loss and Minority Interests 13,506 44,393 45,130 Provision for Income Taxes (Note 4) (6,538) (16,661) (18,044) --------- --------- ---------- Income Before Extraordinary Loss and Minority Interests 6,968 27,732 27,086 Extraordinary Loss Related to Early Retirement of Debt, net of $2,165 tax benefit (Note 3) - - (3,316) --------- --------- ---------- Income Before Minority Interests 6,968 27,732 23,770 Minority Interests (2,261) (5,185) (4,140) --------- --------- ---------- Net Income and Comprehensive Income 4,707 22,547 19,630 Preferred Dividends Declared (493) (493) (493) --------- --------- ---------- Net Income Available for Common Shares $ 4,214 $ 22,054 $ 19,137 ========= ========= ========== Basic Net Income Per Common Share (Note 8) Income before extraordinary loss $ 3.83 $ 20.05 $ 20.41 Extraordinary loss - - (3.01) --------- --------- ---------- $ 3.83 $ 20.05 $ 17.40 ========= ========= ========== Diluted Net Income Per Common Share (Note 8) Income before extraordinary loss $ 3.83 $ 20.05 $ 20.13 Extraordinary loss - - (2.96) --------- --------- ---------- $ 3.83 $ 20.05 $ 17.17 ========= ========= ==========
The accompanying notes are an integral part of the consolidated financial statements. 44 SUSQUEHANNA MEDIA CO. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (dollars in thousands)
2001 2000 1999 ---- ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES Net Income $ 4,707 $ 22,547 $ 19,630 Adjustments to reconcile net income to net cash: Depreciation and amortization 39,412 33,133 27,572 Minority interests 2,261 5,185 4,140 Loss on sale of assets 4,185 3,891 1,499 Deferred income taxes 3,374 1,502 4,124 Deferred financing amortization 1,317 1,183 885 Investment write-downs 1,500 1,100 - Equity in (income) losses of investees 1,135 (342) (652) Extraordinary loss - - 3,316 Pension curtailment gain - - (2,299) Imputed deferred compensation - - 80 Changes in assets and liabilities: Decrease (increase) in accounts receivable, net 6,411 (8,171) (10,694) Increase in other current assets (3,456) (302) (484) Increase (decrease) in accounts payable (4,472) (2,491) 5,236 Increase in accrued interest 1,718 465 1,417 Change in prepaid/accrued income taxes 4,183 (1,254) 1,501 Increase (decrease) in accrued ESOP benefit cost (130) (1,240) 1,370 Increase (decrease) in other accrued expenses (580) 6,294 3,570 Increase in other liabilities 5,389 5,605 - --------- --------- --------- Net cash provided by operating activities 66,954 67,105 60,211 --------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES Parent's repayment of note 4,439 3,297 5,521 Purchase of property, plant and equipment, net (31,739) (36,913) (33,066) Acquisitions, net (21,300) (125,160) (33,571) Decrease (increase) in investments, other assets and intangible assets 2,462 (4,702) (4,978) Loan to parent (14,622) - (116,850) --------- --------- --------- Net cash used by investing activities (60,760) (163,478) (182,944) --------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES Increase (decrease) in revolving credit borrowings (5,700) 95,100 55,500 Increase in cash overdrafts 2,089 598 - Non-voting subsidiary common stock transactions (2,090) 529 9 Payments of preferred dividends (493) (493) (493) Proceeds from long-term debt - - 350,000 Repayment of prior debt - - (272,600) Payment of deferred financing costs - - (8,061) Debt prepayment penalties - - (2,925) --------- --------- --------- Net cash provided (used) by financing activities (6,194) 95,734 121,430 --------- --------- --------- NET DECREASE IN CASH - (639) (1,303) CASH AND CASH EQUIVALENTS, January 1, - 639 1,942 --------- --------- --------- CASH AND CASH EQUIVALENTS, December 31, $ - $ - $ 639 ========= ========= =========
The accompanying notes are an integral part of the consolidated financial statements. 45 SUSQUEHANNA MEDIA CO. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (in thousands) Preferred Stock Common Stock Stockholders' Shares Amounts Shares Amounts Retained Earnings Equity ------ ------- ------ ------- --------------------- ---------------- Balance, January 1, 1999 70 $7,050 1,100 $1,100 $ 1,051 $ 9,201 Net income 19,630 19,630 Preferred dividends declared (493) (493) Merger of cable subsidiaries 2,195 2,195 Adjustment of minority interest value 748 748 --------- -------- -------- --------- --------- --------- Balance, January 1, 2000 70 7,050 1,100 1,100 23,131 31,281 Net income 22,547 22,547 Preferred dividends declared (493) (493) Minority interest (18,904) (18,904) revaluation (Note 7) Adjustment of minority interest value (1,201) (1,201) --------- -------- -------- --------- --------- -------- Balance, January 1, 2001 70 7,050 1,100 1,100 25,080 33,230 Net income 4,707 4,707 Preferred dividends declared (493) (493) Minority interest revaluation (Note 7) (22,286) (22,286) Adjustment of minority interest value 335 335 --------- -------- -------- --------- --------- --------- Balance, December 31, 2001 70 $7,050 1,100 $1,100 $ 7,343 $ 15,493 == ====== ===== ====== ========= =========
The accompanying notes are an integral part of the consolidated financial statements. 46 SUSQUEHANNA MEDIA CO. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SIGNIFICANT ACCOUNTING POLICIES Nature of Operations - Susquehanna Media Co. (Media) and its subsidiaries, Susquehanna Radio Corp. (Radio), Susquehanna Cable Co. (Cable), Susquehanna Data Services, Inc. (Data), Susquehanna Fiber Systems, Inc., Susquehanna ET Investment Inc., and Media PCS Ventures, Inc. (collectively, the Company), are primarily in the businesses of radio broadcasting, cable television services, Internet services and other communications-related services. Susquehanna Fiber Systems, Inc. is a 50% general partner in Susquehanna Adelphia Business Solutions, a competitive access provider. Through its subsidiaries, the Company operates radio stations in major U.S. markets and cable television systems in Pennsylvania, Maine, Mississippi, Illinois, and Indiana. Internet services are provided in Pennsylvania, Maine and Mississippi. Radio advertising, cable television subscriptions, and Internet services account for approximately 63%, 33%, and 4% of 2001 consolidated revenues, respectively. Radio, cable and Internet services revenues were 69%, 29%, and 2% of 2000 consolidated revenues, respectively. Radio, cable and Internet services revenues were 68%, 31%, and 1% of 1999 consolidated revenues, respectively. Principles of Consolidation - The consolidated financial statements include the accounts of Media and its subsidiaries. All significant intercompany accounts and transactions are eliminated. All Media common stock is owned by Susquehanna Pfaltzgraff Co. (the Parent). Use of Estimates in the Preparation of Financial Statements - 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 and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Cash and Cash Equivalents - The Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. Credit Risk - The Company's accounts receivable are largely from consumers and consumer businesses whose ability to pay is subject to changes in general economic conditions. Property, Plant and Equipment - These assets are stated at cost. Depreciation and amortization are computed on the straight-line method for financial statement purposes based on the following estimated useful lives: Buildings and improvements - 10 to 40 years Equipment - 3 to 20 years Depreciation expense was approximately $24.7 million, $20.2 million, and $16.5 million for the years ended December 31, 2001, 2000, and 1999, respectively. Asset additions and major renovations are capitalized and depreciated over their estimated useful lives. Costs of maintenance, repairs and minor renovations are charged against income. Gains or losses on dispositions are credited to or charged against income, and the related costs and accumulated depreciation are removed from the balance sheet. 47 SUSQUEHANNA MEDIA CO. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Impairment of Long-Lived Assets - When events or changes in circumstances indicate that the carrying value of an asset or group of assets may be impaired, the estimated future undiscounted pretax cash flows from the affected asset(s) are compared with carrying value to determine if an impairment loss must be recognized. No impairment losses were recognized in 2001, 2000 or 1999. Derivative Financial Instruments - Derivative financial instruments are used solely to limit interest rate exposure on variable rate debt. Contracts may either be treated as hedges or marked to market as elected on a contract-by-contract basis. Disclosures about Fair Value of Financial Instruments - Financial instruments include cash and cash equivalents, investments and long-term debt. The fair value of investments and cash and cash equivalents approximate their carrying values. Floating rate debt is considered fair value. The Senior Subordinated Notes' fair value is based on market quotations. Investments and Other Assets - The Company's investments of less than 20% in other entities are reported using the cost method of accounting. Investments in other entities, which are at least 20% and not more than 50% owned, are reported using the equity method. Net Income Per Share - Basic net income per share excludes dilution and is computed by dividing consolidated net income available for common shareholders by the weighted-average number of common shares outstanding for the period (1.1 million shares for the years ended December 31, 2001, 2000, and 1999). Diluted net income per share in 1999 reflects the potential dilution that could occur if SRC common stock options were exercised; resulting in the issuance of additional common stock that would then share in SRC's earnings. Revenues - Revenues are recognized in the periods that services are provided. Radio revenues are reported when advertising is aired and when events are held, net of agency commissions. Agency commissions for the years ended December 31, 2001, 2000, and 1999 were $27.7 million, $30.8 million, and $25.3 million, respectively. Cable subscriber revenues are recognized when services are provided. Data and other revenues are recognized when services are provided or performed. Media's revenues were concentrated in the following media markets: 2001 2000 1999 ---- ---- ---- San Francisco 18% 25% 25% York, PA 21% 18% 19% Dallas - Fort Worth 15% 14% 13% Interest - Interest paid was $33.9 million, $36.8 million, and $27.3 million for the years ended December 31, 2001, 2000, and 1999, respectively. Interest relating to construction of buildings and equipment is capitalized as part of the related asset's cost. Approximately $0.5 million, $0.9 million, and $1.0 million of interest were capitalized during the years ended December 31, 2001, 2000 and 1999, respectively. Deferred financing costs are included in Investments and Other Assets and are amortized on a straight-line basis over the repayment period of the related debt. Income Taxes - Income taxes are based on the liability method of accounting. Deferred income taxes reflect the future tax consequences of temporary differences between the tax bases of assets and liabilities and their financial reporting balances at each year-end. Changes in enacted tax rates are reflected in the tax provision as they occur. 48 SUSQUEHANNA MEDIA CO. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS New Accounting Pronouncement - In July 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 141, Business Combinations (SFAS 141), and Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets (SFAS 142). SFAS 141 requires all business combinations initiated after June 30, 2001 to be accounted for using the purchase method. SFAS 141 superseded APB Opinion No. 16, Business Combinations, and Statement of Financial Accounting Standards No. 38, Accounting for Preacquisition Contingencies of Purchased Enterprises. SFAS 142 changes the financial accounting and reporting requirements for acquired goodwill and other intangible assets. Under SFAS 142, the Company is no longer required to amortize goodwill and other intangible assets with indefinite lives. However, goodwill and intangible assets with indefinite lives will be subject to at least annual testing for impairment. SFAS 142 supersedes APB Opinion No. 17, Intangible Assets. The Company will adopt SFAS 142 on January 1, 2002 and is in the process of evaluating the effect that adoption may have on its consolidated results of operations and financial position. The Company expects that its Federal Communications Commission licenses, Cable franchise values and goodwill intangible assets will cease being amortized in 2002. Amortization on these assets approximated $14.1 million and $12.2 million for the years ended December 31, 2001 and 2000, respectively. Accordingly, adoption of SFAS 142 will have a material effect on the Company's future results of operations. As part of the SFAS 142 adoption process, the Company is in the process of identifying its reporting units and evaluating the statement's effects on its results of operations and financial position. 2. ACQUISITIONS AND DISPOSITIONS All acquisitions during the years ended December 31, 2001, 2000 and 1999 have been accounted for as purchases. The results of acquired operations were included in the Consolidated Statements of Income since acquisition. On August 31, 2001, Cable acquired the assets of River Valley Cable for $8.0 million cash. Existing credit facilities were used to finance the acquisition. The River Valley cable system serves 3,800 customers and is contiguous to the Williamsport, PA cable system. The Company plans to eliminate the headend and upgrade the cable plant in 2002. On May 25, 2001, Radio purchased the stock of Sunnyside Communications, Inc. for $3.3 million. Sunnyside Communications, Inc. owns and operates WQKC-FM and WZZB-AM serving Seymour, Indiana and WAVG-AM serving Jeffersonville, Indiana and Louisville, Kentucky. Existing credit facilities were used to finance the acquisition. The purchase price has been included in Investments and Other Assets. These stations are being operated by an unrelated party under a local marketing agreement. On February 15, 2001, Radio purchased a forty-percent interest in 1051FM, LLC from Jesscom, Inc. for $10 million cash. Existing credit facilities were used to finance the acquisition. The purchase cost was included in Investments and Other Assets. 1051FM, LLC owned a construction permit to build a Class C-1 radio station with the call letters KFME-FM licensed to Garden City, Missouri, which serves the Kansas City market. Under the terms of a joint sales agreement, Radio sells commercial airtime on the station and Jesscom programs and operates the station. Radio is required to pay 1051FM, LLC's monthly operating expenses and additional fees. Radio may purchase the remaining sixty-percent interest in 1051FM, LLC during a one-year period beginning February 14, 2004, at a fair market value determined by an independent appraiser (for not less than $15 million and not more than $27 million). Operations commenced June 18, 2001. 49 SUSQUEHANNA MEDIA CO. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS On July 20, 2000, Radio purchased the assets of Kansas City, Missouri radio stations KCMO-AM, KCMO-FM and KCFX-FM for $113.2 million. Radio broadcast rights for the Kansas City Chiefs NFL franchise through the 2002 football season were included in the purchase. The Company's existing credit facilities were used to finance the acquisition. In Media's opinion, it was impracticable to obtain full financial statements for the stations acquired because they were not separate business units, certain expenses were not historically allocated and separate balance sheets were not prepared for the acquired stations. Accordingly, no proforma disclosures are included. On October 19, 2000, Data purchased the assets of Judd's Online, Inc., a web development company based in Winchester, Virginia for $8.5 million cash, including approximately $1.6 million in working capital. The Company is integrating its existing web development operations into Judd's and marketing the services through an existing subsidiary. On September 1, 2000, a Cable subsidiary purchased the assets serving approximately 2,200 cable subscribers in the Montgomery/Collomsville, Pennsylvania area for $3.8 million cash. On May 22, 2000, Data purchased the assets of Krone Group Inc., a full service marketing communications firm located in Harrisburg, Pennsylvania, for $1.3 million cash. On October 22, 1999, Radio purchased the assets of KIKT-FM and KGVL-AM in Greenville, Texas for $1.2 million. The Company simultaneously entered into a time brokerage agreement with a third party permitting them to operate the stations while FCC approval is pending on facility adjustments that will enhance signal coverage of another company-owned station, KKMR-FM, Dallas/Fort Worth, Texas. The purchase price has been included in Investments and Other Assets, since the station may be ultimately sold or swapped to facilitate a separate strategic acquisition. On January 29,1999, a Cable subsidiary purchased assets serving approximately 17,000 cable subscribers in the Hanover, Pennsylvania area for $33.4 million cash. The Company has allocated the costs of purchased assets, at their fair market values, excluding working capital, as follows (in thousands):
2001 2000 1999 ---- ---- ---- Radio Property, plant and equipment $ - $ 3,581 $ - Investments and other assets 13,300 - 1,171 Intangible assets - 109,597 - ---------- ---------- ---------- Total $ 13,300 $ 113,178 $ 1,171 =========== =========== ========== Cable Property, plant and equipment $ 696 $ 819 $ 9,566 Intangible assets 7,304 2,964 23,834 ---------- ---------- ---------- Total $ 8,000 $ 3,783 $ 33,400 ========== ========== ========== Data Property, plant and equipment $ - $ 566 $ - Intangible assets - 7,633 - ---------- ---------- ---------- Total $ - $ 8,199 $ - ========== ========== ==========
50 SUSQUEHANNA MEDIA CO. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Cable is involved in an extensive, phased rebuilding of its distribution systems. Assets replaced in the rebuilt phases were retired and related losses of $4.2 million in 2001, $3.9 million in 2000, and $1.5 million in 1999 were recognized. 3. LONG-TERM DEBT
2001 2000 ---- ---- Long-term debt includes (in thousands): 8.5% Senior Subordinated Notes $ 150,000 $ 150,000 Term Loan "A" 100,000 100,000 Term Loan "B" 100,000 100,000 Revolving Credit Commitment 144,900 150,600 Other 205 62 ----------- ----------- 495,105 500,662 Less amounts payable within one year 8,780 62 ----------- ----------- $ 486,325 $ 500,600 =========== ===========
At December 31, 2001, approximately $105.0 million was available for borrowing under the revolving credit commitment. On May 12, 1999, the Company sold $150.0 million of 8.5% Senior Subordinated Notes due in 2009. Proceeds to the Company totaled $145.5 million. Interest is payable semi-annually. The fair value of the Notes at December 31, 2001 was $153.8 million. On May 12, 1999, the prior Term Loan and Reducing Revolver Commitment were replaced by a new $450.0 million Senior Secured Credit Facility with a group of banks. The new facility's Revolving Credit Commitment allows the Company to borrow up to $250.0 million. The revolving loans begin reducing in 2002 and mature in 2007. The Company's two $100.0 million Term Loan commitments begin amortizing in 2002 and mature in 2007 and 2008. Both the Revolving Credit Commitment and Term Loans bear interest priced at the LIBOR rate plus an applicable margin based on certain ratios. The interest rate on the Revolving Credit Commitment was 3.37% and 7.86% at December 31, 2001 and 2000, respectively. The interest rate on Term Loan "A" was 6.31% and 7.97% and the interest rate on Term Loan "B" was 5.13 % and 9.19% at December 31, 2001 and 2000, respectively. Interest is payable quarterly or on maturity of a LIBOR-based tranche. The 8.61% Series A, 8.41% Series B and 11.15% Series C Senior Notes with insurance companies were repaid on April 16, 1999 along with a prepayment premium of $2.9 million. Coincident with the repayment of prior long-term debt, the Company incurred a $3.3 million extraordinary loss (net of related tax benefits) for payment of prepayment premiums and the write-off of unamortized deferred financing costs. Derivative financial instruments are used solely to limit interest rate exposure on its Revolving Credit Commitment and are not used for trading purposes. The Company has entered into a $50.0 million notional value interest rate swap, which expires in 2003. The effect of this agreement converts the interest rate on $50.0 million of variable rate debt to an effective interest rate of 6.5% as of December 31, 2001. The Company has not elected hedge accounting for this contract. The interest rate swap was recognized at its fair value at December 31, 2001. Approximately $1.5 million additional interest 51 SUSQUEHANNA MEDIA CO. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS expense related to the swap was recognized for the year ended December 31, 2001. Hedge accounting may be elected for future contracts. The banks have collateralized interests in certain FCC licenses and stock pledges from shareholders of the Company and its subsidiaries. The banks are further collateralized by a first lien on all assets (tangible and intangible) of the Company and its subsidiaries excluding realty and vehicles. The Company has agreed to maintain debt coverage and financial ratios at prescribed levels. The Company has further consented to restrict payment of common stock dividends, investment transactions with affiliates, ownership changes, sale of assets and issuance of additional debt. The non-current portion of long-term debt matures in the following years (in thousands): 2003 $17,033 2007 $89,903 2004 25,935 2008 47,375 2005 71,038 2009 150,000 2006 85,041 4. INCOME TAXES The provision for income taxes is summarized as follows for the years ended December 31, (in thousands):
2001 2000 1999 ---- ---- ---- Current Federal $ (2,212) $ (14,337) $ (11,195) State (952) (822) (2,726) ------------- ------------ ------------- Total current (3,164) (15,159) (13,921) ------------- ------------ ------------- Deferred Federal (2,710) (1,503) (4,393) State (664) 1 270 ------------- ------------ ------------- Total deferred (3,374) (1,502) (4,123) ------------- ------------ ------------- Provision for Income Taxes $ (6,538) $ (16,661) $ (18,044) ============= ============ =============
Income tax payments for the years ended December 31, 2001, 2000, and 1999 were approximately $1.2 million, $18.4 million, and $14.1 million, respectively. The Company is included in the consolidated federal income tax return of its Parent. The Company's tax provision is computed on a separate return basis. Losses utilized, from other companies, in the consolidated return may reduce the Company's tax payments. Reconciliations of the difference between the U.S. statutory income tax rate and the Company's effective book income tax rate follow: 52 SUSQUEHANNA MEDIA CO. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2001 2000 1999 ---- ---- ---- U.S. statutory rate 35.0% 35.0% 35.0% State income taxes, net of Federal income tax benefit 7.8 1.2 3.5 Non-deductible amortization and expenses 4.5 1.2 1.2 Other 1.1 0.1 0.3 ---- ---- ---- Effective book income tax rate 48.4% 37.5 % 40.0% ==== ==== ====
At December 31, 2001 and 2000, deferred tax assets and liabilities resulted from the following temporary differences (in thousands):
2001 2000 ---- ---- Deferred tax assets: Allowance for doubtful accounts $ 649 $ 494 Investments 179 685 Self insured risks 177 119 Liabilities not recognized for tax purposes 293 163 Stock option benefits/deferred compensation 2,911 1,229 ----------- ---------- Total deferred tax assets 4,209 2,690 ----------- ---------- Deferred tax liabilities: Pension benefits 1,847 1,608 Book/Tax basis differences -tangible assets 21,283 20,277 Book/Tax basis differences -intangible assets 21,837 18,467 Investments in partnerships 1,844 1,516 Other liabilities 254 304 ----------- ---------- Total deferred tax liabilities 47,065 42,172 ----------- ---------- Net deferred tax liabilities $ 42,856 $ 39,482 =========== ==========
5. INTANGIBLE ASSETS Intangible assets, at cost, are comprised of the following (in thousands):
2001 2000 ---- ---- Federal Communications Commission license $ 266,775 $ 266,775 Cable franchise values 103,730 96,326 Goodwill 18,928 19,011 Cable subscriber lists 5,154 5,154 Favorable leases 3,348 3,629 Going concern and other values 12,048 11,673 -------- -------- 409,983 402,568 Accumulated Amortization 93,823 78,990 -------- --------
53 SUSQUEHANNA MEDIA CO. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS $ 316,160 $ 323,578 ========== ==========
Cable franchise values and cable subscriber lists are being amortized through 2014 and 2003, respectively. Favorable leases and covenants not-to-compete are amortized according to the life of the agreements. Federal Communications Commission (FCC) licenses, going concern values and goodwill are amortized over periods of up to 40 years for 2001, 2000 and 1999. Most intangible assets are being amortized using the straight-line method. Amortization for the years ended December 31, 2001, 2000, and 1999 was approximately $14.7 million, $13.0 million and $11.0 million, respectively. 6. INVESTMENTS AND OTHER ASSETS A subsidiary of the Company is a 50% general partner in Susquehanna Adelphia Business Solutions, a competitive access provider. A capital contribution of $1.3 million was made during the year ended December 31, 1999. For the years ended December 31, 2001, 2000, and 1999, $1.4 million, $1.3 million and $651 thousand of income was recognized from this investment, respectively. Unamortized deferred financing costs were $5.5 million at December 31, 2001 and $6.5 million at December 31, 2000. Investment losses totaling $1.5 million were recognized during the Year ended December 31, 2001 due to management's judgment that Media's investments in Radiowave and Etour were not realizable. Investment losses of $1.1 million were recognized during the year ended December 31, 2000. The losses were included in Other Expense. 7. STOCKHOLDERS' EQUITY Radio maintains an Employee Stock Plan to compensate certain key employees who may purchase Susquehanna Radio Corp. Class "B" non-voting common stock at the then current value. With each share purchased, participants receive options to purchase two additional shares at the same value. Options expire ten years and one month after the grant date. Total shares and options offered may not exceed 400,000 shares. Options awarded are subject to settlement in cash. Shares are subject to repurchase by Radio, generally at values determined annually in accordance with the Plan Agreement. The Plan's transaction year is April 1 through March 31. Although Radio may modify, suspend, or terminate the Plan at any time, previously offered purchase rights or options are not subject to change. Option activity in the Radio Employee Stock Plan was as follows: Shares Option Price ------ ------------ Balance as January 1, 1999 72,360 $ 1.26 - $ 18.82 Exercised (2,328) $ 1.26 - $ 18.82 ----- Balance at December 31, 1999 70,032 $ 1.26 - $ 18.82 ====== 54 SUSQUEHANNA MEDIA CO. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Balance as January 1, 2000 70,032 $ 1.26 - $ 18.82 Exercised (70,032) $ 1.26 - $ 18.82 ------ Balance at December 31, 2000 - ====== 2001 2000 1999 ---- ---- ---- Total compensation expense (in thousands) $ - $ - $ 80 Risk free rate N/A N/A N/A No options were granted in the years ended December 31, 2001 or 2000. The Susquehanna Cable Co. Performance Share Plan is a non-qualified deferred compensation plan designed to compensate certain key employees. Participants are granted performance share rights, which may be purchased by deferring compensation. Performance shares are valued using a formula based on stockholders' equity, earnings and Cable's appraised value as determined by Susquehanna Pfaltzgraff Co.'s annual independent ESOP valuation. There were no performance share rights granted in 2000 or 2001. On April 10, 2000, the Susquehanna Pfaltzgraff Co. Board of Directors changed the method of determining the repurchase value for Susquehanna Radio Corp.'s Employee Stock Plan and Susquehanna Cable Co.'s Performance Share Plan. Over a period ending April 1, 2002, repurchase values for both plans will transition to values based upon Susquehanna Pfaltzgraff Co.'s annual independent ESOP valuation. On July 1, 2000, repurchase values were based one-third on appraised value and two-thirds on the previous formula value. The revaluation of Radio's non-voting common shares increased minority interests by $18.9 million on July 1, 2000. The revaluation of Cable's performance shares resulted in recognition of a $3.0 million compensation expense on July 1, 2000. On April 1, 2001, repurchase values became based two-thirds on appraised value and one-third on the previous formula value. Radio minority interest values increased $22.3 million and Cable performance shares increased in value by $4.2 million on April 1, 2001. Other Liabilities include $7.2 million and $5.0 million related to Cable's performance shares at December 31, 2001 and 2000, respectively. On April 1, 2002 and thereafter, repurchase values will be based on appraised values for Radio and Cable as determined by Susquehanna Pfaltzgraff Co.'s annual independent ESOP valuation. Based on the ESOP valuation performed as of December 31, 2001, Radio minority interests is expected to increase $16.8 million as of April 1, 2002. A $3.9 million compensation charge against operating income is expected to be recognized as of April 1, 2002 for the final step in the revaluation of Cable performance shares. The increase in minority interests due to revaluation of Radio's non-voting common shares is a non-cash item for purposes of the Statements of Cash Flows. On April 25, 2001, Radio repurchased and retired 18,884 shares of SRC non-voting common stock from a former radio station manager for $1.8 million. The transaction was accounted for using the treasury stock method. As of December 31, 2001, former employees held 68,540 shares of Radio non-voting common stock with an approximate value of $11.7 million. The stock is subject to required repurchase by the Company. Certain minority interests are valued using a contractual formula, which differs from a pro rata valuation. Accordingly, the contractual value is used to determine the liability. Any adjustment to the pro rata amount is charged or credited to stockholders' equity. Other minority interest expense recognized in the income statement is adjusted for subsidiaries with a stockholders' deficit. 55 SUSQUEHANNA MEDIA CO. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS On August 1, 1999, two Cable subsidiaries merged with two other Cable subsidiaries. These mergers had no impact on the Company's results of operations. The mergers of a subsidiary with stockholders' deficit into a subsidiary with stockholders' equity resulted in a $2.2 million decrease in minority interests and a corresponding increase in consolidated stockholders' equity. 8. BASIC AND DILUTED NET INCOME PER COMMON SHARE The following table provides a reconciliation of the computation from basic to diluted net income per share (in thousands, except for per share data): 2001 2000 1999 ---- ---- ---- Net income before extraordinary loss $ 4,707 $ 22,547 $ 22,946 Extraordinary loss - - (3,316) -------- --------- --------- Net income 4,707 22,547 19,630 Preferred dividends declared (493) (493) (493) -------- --------- --------- Basic net income available for common shares 4,214 22,054 19,137 Dilutive effect of potential issuance of SRC common stock - - (248) -------- --------- --------- Dilutive net income available for common shares $ 4,214 $ 22,054 $ 18,889 ======== ========= ========= Basic and diluted weighted-average shares 1,100 1,100 1,100 ======== ========= ========= Basic net income per common share Income before extraordinary loss $ 3.83 $ 20.05 $ 20.41 Extraordinary loss - - (3.01) -------- --------- --------- $ 3.83 $ 20.05 $ 17.40 ======== ========= ========= Diluted net income per common share Income before extraordinary loss $ 3.83 $ 20.05 $ 20.13 Extraordinary loss - - (2.96) -------- --------- --------- $ 3.83 $ 20.05 $ 17.17 ======== ========= ========= 9. EMPLOYEE BENEFITS On March 19, 1999, the Parent's Board of Directors approved creation of an Employee Stock Ownership Plan (ESOP) for Susquehanna Pfaltzgraff Co. Full-time employees participate in the ESOP. ESOP expense of $9.1 million, $8.3 million and $6.4 million was recorded for the years ended December 31, 2001, 2000 and 1999, respectively. On May 12, 1999, the Company made a $116.9 million twenty-year loan to its Parent at a 6% interest rate. Loan proceeds were used to fund the Parent's ESOP. Principal and interest payments totaling $10.0 million are receivable annually in December. On July 18, 2001, the Company loaned its Parent an additional $14.6 million at a 6.5% interest rate, repayable in 18 annual installments of $1.4 million commencing December 30, 2001. The loan proceeds were ultimately used for the Susquehanna Pfaltzgraff Co. ESOP Trust's purchase of additional shares from Susquehanna Pfaltzgraff Co. shareholders. On December 30, 2001, 2000 and 1999, the Parent made principal payments of $4.4 million, $3.3 million and $5.5 million, respectively. Due to the Parent subsidiary relationship, it is impracticable to determine the note's fair values. 56 SUSQUEHANNA MEDIA CO. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Certain full-time employees of the Company and its subsidiaries are covered by the Susquehanna Pfaltzgraff Co. Pension Plan (the Plan), a noncontributory qualified defined benefit pension plan. Benefits under the Plan are based on employees' years of service and earnings over part or all of their careers through April 1999, when benefit accruals ceased. On March 19, 1999, the Parent's Board of Directors approved a cessation of benefit accruals under the Plan effective April 30, 1999. Based on an independent actuary's calculations, the Company was allocated a $2.3 million curtailment gain related to the Plan. 57 SUSQUEHANNA MEDIA CO. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The funded status of the Plan at December 31, was as follows (in thousands): 2001 2000 ---- ---- Benefit obligation, beginning of year $ 25,480 $ 24,352 Interest cost 1,787 1,770 Actuarial losses 726 559 Benefits paid (1,214) (1,201) ---------- ---------- Benefit obligation, end of year 26,779 25,480 --------- --------- Fair value of plan assets, beginning of year 38,054 40,033 Actual return on plan assets (1,403) (778) Benefits paid (1,214) (1,201) ---------- ---------- Fair value of plan assets, end of year 35,437 38,054 --------- --------- Excess of fair value of plan assets over benefit obligation at end of year 8,658 12,574 Unrecognized net actuarial gain 73 (5,195) Unrecognized prior service costs 665 709 --------- --------- Prepaid pension cost at December 31, $ 9,396 $ 8,088 ========= ========= The Plan's net pension costs for the years ended December 31, included the following components (in thousands): 2001 2000 1999 ---- ---- ---- Service cost $ 210 $ 230 $ 230 Interest cost 1,787 1,770 1,744 Expected return on plan assets (3,297) (3,074) (2,719) Amortization of net asset (53) - 4 Amortization of prior service cost 44 44 (41) -------- --------- --------- Net periodic pension cost $ (1,309) $ (1,030) $ (782) ========= ========== ========= Negative pension cost recognized for the years ended December 31, 2001, 2000 and 1999 was $530 thousand, $376 thousand and $219 thousand, respectively. Included in the Company's other assets are prepaid pension costs of $4.4 million and $3.9 million at December 31, 2001 and 2000. The Plan's funding policy is to make contributions, as required by various regulations, not to exceed the maximum amounts deductible for federal income tax purposes (none in 2001, 2000 or 1999). Plan assets, primarily listed bonds and stocks, are held by independent trustees. The weighted average discount rate used in determining the actuarial present value of projected benefit obligations was 7.0% and 7.25%, respectively, for 2001 and 2000. The expected long-term rate of return on Plan assets was 9% for both 2001 and 2000. The Parent also sponsors a defined contribution (401k) plan, which covers all full-time employees. Effective September 7, 2001, the match was suspended as a cost-savings measure. The plan formerly matched 75% of the first 2% of salary contributed by a participant. The Company contributed 58 SUSQUEHANNA MEDIA CO. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS approximately $584 thousand, $714 thousand, and $590 thousand to the plan for the years ended December 31, 2001, 2000 and 1999, respectively. 10. LEASE COMMITMENTS Rental expense for operating leases was $6.1 million, $5.2 million, and $4.6 million for the years ended December 31, 2001, 2000, and 1999, respectively. Annual aggregate minimum rental commitments under non-cancelable operating leases are as follows (in thousands of dollars): 2002 $4,214 2005 $4,056 2003 3,981 2006 3,985 2004 4,008 2007 and beyond 11,240 11. RELATED PARTIES The Company purchases management services, office space and administrative services from related parties, primarily its Parent. Included in general and administrative expenses for the years ended December 31, are charges for (in thousands):
2001 2000 1999 ---- ---- ---- Management fees $ 5,743 $ 4,103 $ 2,846 Accounting, internal audit and tax services 855 732 630 Human resources 957 988 1,119 Treasury 317 314 354 Occupancy, vehicle rentals and administrative services 870 897 857 ----------- ----------- ----------- $ 8,742 $ 7,034 $ 5,806 =========== =========== ===========
Expenses are allocated based on the Parent's best estimates of proportional or incremental costs, whichever is more representative of costs on a stand-alone basis. In management's opinion, expenses shown in the financial statements approximate expenses on a stand-alone basis. Media's preferred stock is owned by related parties. 12. CONTINGENCIES AND COMMITMENTS A Federal Communications Commission (FCC) Report and Order approved the move of Radio Station WHMA-FM to serve the Atlanta, Georgia Metro area. A mutually exclusive applicant filed a Petition for Reconsideration that was subsequently denied. Unless a further appeal is made, the FCC's Report and Order will become final. Once the Order becomes final, the Company must pay WHMA-FM's former owners $10.0 million in accordance with the original purchase agreement. The $10.0 million payment will be recognized as additional FCC License cost. The Company commenced operations in College Park, Georgia as WWWQ-FM in January 2001. KNBR, Inc., a subsidiary of the Company, is a limited partner in San Francisco Baseball 59 SUSQUEHANNA MEDIA CO. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Associates L.P. KNBR, Inc. has entered into a rights agreement that allows radio station KNBR-AM to broadcast Giants' baseball games through the 2004 baseball season. The agreement requires annual rights payments ranging to $6 million in 2004. KNBR, Inc. expensed rights payment of $5.4 million, $5.3 million, and $4.8 million during the 2001, 2000, and 1999 baseball seasons, respectively. On October 26, 2001, the National Football League (NFL) approved a contract extending KCFX-FM's broadcast rights for the Kansas City Chiefs NFL franchise through the 2006 football season. The contract, which was effective as of August 1, 2001, requires rights payments ranging from $2.0 million for the 2001 football season to $2.4 million for the 2006 football season. Rights payments totaling $2.2 million were paid and charged against income during the fourth quarter of 2000. An unrelated cable television Multiple System Operator (MSO) owns a 14.9% interest in Susquehanna Cable Co. and a 17.75% interest in each of Cable's operating subsidiaries. If the MSO offers to purchase the Company's interest in its cable television operations, the Company must either accept or reject the offer within sixty days. If the Company rejects the offer, the MSO may require the Company to repurchase the MSO's holdings at the offer price plus a fee equal to 3% of the MSO's $25.0 million investment, compounded annually from 1993. Through November 12, 2003, the MSO may require the Company to repurchase its ownership interest at a price to be determined by independent appraisers. The "Put Right" may not be exercised if exercise would create default under certain debt agreements. If the "Put Right" is exercised, the Company may, at its sole discretion and in lieu of acquiring the MSO's ownership interests, sell Cable and pay the MSO its pro rata share of net proceeds. In any event, the MSO must be offered a first right to purchase Cable. The Company is involved in litigation and administrative proceedings primarily arising in the normal course of its business. In the opinion of management, the Company's recovery, if any, or the Company's liability, if any, under any pending litigation or administrative proceeding would not materially affect its financial condition or operations. 13. SEGMENTS The Company's four business units have separate management teams and infrastructures that offer different products and services. The business units have been aggregated into three reportable segments: Radio, Cable, and Data and Other. Data and Other includes Internet access, hosting, and web creation revenues. The accounting policies of the segments are the same as those described in the summary of significant accounting policies. The Company evaluates performance based on operating income of the respective business units. Segment information for the years ended December 31, 2001, 2000, and 1999 was as follows (in thousands):
Data ---- Radio Cable and Other Consolidated ----- ----- --------- ------------ For the Year Ended December 31, 2001 Operating income $ 42,359 $ 11,788 $ (5,208) $ 48,939 Interest expense, net 9,099 11,861 16,927 37,887
60 SUSQUEHANNA MEDIA CO. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Depreciation and amortization 11,870 26,504 1,038 39,412 Income (loss) before income taxes and minority interests 32,199 (4,257) (14,435) 13,507 Provision (benefit) for income taxes 12,573 (832) (5,203) 6,538 Identifiable assets 342,356 191,412 135,314 669,082 Capital expenditures 8,539 22,772 428 31,739 For the Year Ended December 31, 2000 Operating income $ 67,579 $ 12,481 $ 525 $ 80,585 Interest expense, net 8,220 14,462 14,841 37,523 Depreciation and amortization 9,899 22,494 740 33,133 Income (loss) before income taxes, and minority interests 58,144 (5,872) (7,879) 44,393 Provision (benefit) for income taxes 21,092 (1,717) (2,714) 16,661 Identifiable assets 339,618 187,822 132,017 659,457 Capital expenditures 5,574 30,359 980 36,913 For the Year Ended December 31, 1999 Operating income (loss) $ 51,866 $ 15,225 $ 957 $ 68,048 Interest expense, net 6,310 11,802 10,461 28,573 Depreciation and amortization 7,965 19,048 559 27,572 Income (loss) before income taxes, and minority interests 47,212 2,290 (4,372) 45,130 Provision (benefit) for income taxes 18,531 1,024 (1,511) 18,044 Identifiable assets 222,462 177,797 125,883 526,142 Capital expenditures 3,400 28,375 1,291 33,066
14. SUBSEQUENT EVENT On January 15, 2002, Cable entered into an agreement to purchase certain assets of Fairbanks Communications, Inc. for $26.5 million cash. The assets comprise a single cable system that serves 11,000 customers in the Lawrenceburg, Indiana area. Existing credit facilities will be utilized to finance the acquisition. The closing is expected during the second quarter 2002. 61 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. 62 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Our by-laws provide that the number of directors shall not be less than three nor more than seven and may be fixed from time to time by resolution of our board of directors. Our board is currently comprised of six directors. All members of our board of directors are elected annually by our parent, Susquehanna Pfaltzgraff. The following table sets forth certain information with respect to our directors and executive officers and other key employees: Name Age Position(s) ---- --- ----------- Louis J. Appell, Jr. 77 Chairman of the Board of Directors Peter P. Brubaker 55 Director, Chief Executive Officer and President Craig W. Bremer 53 Director, Secretary and General Counsel John L. Finlayson 60 Director and Vice President David E. Kennedy 49 Director and Vice President William H. Simpson 60 Director Alan L. Brayman 50 Treasurer James D. Munchel 47 President and Chief Operating Officer of Susquehanna Cable Louis J. Appell, Jr. is the Chairman of the Board of Directors of Susquehanna Media, a position he has held since 1993. He is also Chairman of the Board of Susquehanna Pfaltzgraff. He has over fifty years of experience in the communications industry. Mr. Appell holds a BA degree from Harvard College. Peter P. Brubaker is a Director, the Chief Executive Officer and President of Susquehanna Media. He has been a director and officer of Susquehanna Media since 1993. Prior to 1995, Mr. Brubaker was Vice President/Finance of Susquehanna Pfaltzgraff. He joined Susquehanna Pfaltzgraff in 1977 and assumed responsibility for the cable operations in 1979. He holds a BA degree from Wesleyan University and an MBA degree from the Harvard Business School. Mr. Brubaker serves as a director of the National Cable Television Association. Craig W. Bremer is a Director and the Secretary and General Counsel of Susquehanna Media, positions he has held since 1993. He is also the Secretary of Susquehanna Pfaltzgraff. Mr. Bremer has been employed by Susquehanna Pfaltzgraff since 1978. Prior to joining Susquehanna Pfaltzgraff, Mr. Bremer was an associate with the law firm of Beckley & Madden, Harrisburg, Pennsylvania. He holds a JD degree from Dickinson School of Law and is a member of the Pennsylvania Bar. He earned a BS degree in History from Washington & Lee University. John L. Finlayson is a Director and Vice President of Susquehanna Media and the Chief Financial Officer of Susquehanna Pfaltzgraff, where he has been employed since 1978. He has been a Vice President of Susquehanna Media since 1993. Prior to 1978, Mr. Finlayson was an audit manager with Arthur Andersen & Co. He is a CPA and a graduate of Franklin and Marshall College. 63 David E. Kennedy is a Director and a Vice President of Susquehanna Media. He has also been President of Susquehanna Radio since 1993. Mr. Kennedy joined the radio group in 1973 as an on-air personality of its former Toledo, Ohio station. He has held positions in programming, planning and research during his career. Mr. Kennedy is a graduate of the University of Toledo and holds masters and doctoral degrees from Bowling Green State University. He serves as a director of the Radio Advertising Bureau and as a director of the National Association of Broadcasters. William H. Simpson is a Director of Susquehanna Media and has served as such since 1993. He has been employed by Susquehanna Pfaltzgraff or an affiliated corporation since 1971 and was promoted to his current position as President and Chief Executive Office on January 1, 2002. He was formerly President of The Pfaltzgraff Co. from 1981 to 2001 and Vice President and General Counsel of Susquehanna Pfaltzgraff from 1971 to 1981. Mr. Simpson is a graduate of the United States Air Force Academy and Harvard Law School. Alan L. Brayman is the Treasurer of Susquehanna Media. He is also Vice President, Treasury Operations, of Susquehanna Pfaltzgraff. Mr. Brayman joined Susquehanna Media in February 1998. Prior to that, he was a principal of Global Treasury Solutions from 1996 through January 1998. Mr. Brayman was also Assistant Treasurer and an officer of VF Corporation, an apparel manufacturer, from January 1993 to December 1995. Prior to that, Mr. Brayman was employed by Armstrong World Industries Inc., a diversified manufacturer, from 1973 to 1992, where he was Assistant Treasurer. Mr. Brayman is a graduate of the University of Delaware and has an MBA from Shippensburg University. James D. Munchel is the President and Chief Operating Officer of Susquehanna Cable. Mr. Munchel oversees the operations of all Susquehanna Cable systems. He joined a predecessor of Susquehanna Media in 1981 and was promoted to General Manager of the York cable system in 1986. Mr. Munchel was promoted to his current position in 1999. He is a graduate of Shippensburg University. ITEM 11. EXECUTIVE COMPENSATION We do not compensate directors for services provided in that capacity. We have no executive employees. All of our executive officers are also executive officers of Susquehanna Pfaltzgraff, (our parent company). Susquehanna Pfaltzgraff paid all compensation of our executive officers under a management agreement between Susquehanna Pfaltzgraff and us. Under that agreement, we pay a fee to Susquehanna Pfaltzgraff for executive office space, services of the legal department and management services, including compensation for the services rendered to us by the executive officers of Susquehanna Pfaltzgraff. Under the agreement, we paid a management fee in the amount of $5.7 million in 2001. As executive officers of Susquehanna Pfaltzgraff, our executive officers will continue to render services to Susquehanna Pfaltzgraff and its other subsidiaries in addition to us. 64 ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT SUSQUEHANNA MEDIA CO. We have the authority under our charter to issue 1,100,000 shares of common stock, par value $1.00 per share, and 110,000 shares of 7% cumulative preferred voting stock, par value $100.00 per share. As of December 31, 2001, we had outstanding 1,100,000 shares of common stock and 70,499.22 shares of preferred stock. The holders of our preferred stock are entitled to an annual cumulative preferential dividend of $7.00 per share. After payment of the preferred stock dividend, holders of our preferred stock do not participate in dividends on our common stock. In the event of a liquidation of our company, our preferred stockholders are entitled to a $100.00 liquidation preference and any accrued and unpaid preferred stock dividends. Thereafter, only common stockholders are entitled to distributions. Our preferred stock is not convertible into our common stock. The holders of our preferred stock and common stock vote together as one class on all matters voted upon by our stockholders. Both classes receive one vote per share. All of the outstanding common stock of Susquehanna Media is owned by our parent, Susquehanna Pfaltzgraff. All of our preferred stock is owned by related parties. The following table sets forth certain information regarding the beneficial ownership of our preferred stock as of December 31, 2001 by: . each of our directors and executive officers; . all of our directors and executive officers as a group; and . each person (or group of affiliated persons) known by us to beneficially own more than 5% of our outstanding preferred stock. Unless otherwise indicated, each person has sole voting and investment power with respect to the preferred shares shown as beneficially owned by such person.
Shares Beneficially Owned ------------------------- Name Of Beneficial Owner Number Percent ------------------------ ------ ------- Directors and Executive Officers Louis J. Appell, Jr./(1)/ 5,095.98 7.2% Peter P. Brubaker 793.77 1.1% Craig W. Bremer -- -- William H. Simpson -- -- John L. Finlayson -- -- Alan L. Brayman -- -- David E. Kennedy -- -- All directors and executive officers as a group (7 persons) 5,889.75 8.3% Other 5% Holders Louis J. Appell, III/(2)/ 7,513.71 10.7% Helen F. Appell, II/(3)/ 7,513.71 10.7% Barbara F. Appell/(4)/ 7,513.71 10.7% Walter M. Norton/(5)/ 32,085.41 45.5%
____________________ /(1)/ Shares held by Louis J. Appell, Jr. and Josephine S. Appell, as trustees of the Louis J. Appell, Jr. revocable trust. Address is 140 East Market Street, York, PA 17401. 65 /(2)/ Address is 1331 Via Colonna Terrace, Davis, CA 95616. /(3)/ Address is 1700 Powder Mill Road, York, PA 17403. /(4)/ Address is 306 West Princess Street, York, PA 17404. /(5)/ Of these shares, (a) 8,324.26 are held jointly with Helen A. Norton; (b) 5,109.81 are held individually; (c) 277.48 are held by Helen A. and Walter M. Norton as trustees of the Helen A. Norton revocable trust; and (d) 18,373.86 are held in trust by Walter M. Norton. Address is 126 Skassen Lane, Harpswell, ME 04079. SUSQUEHANNA PFALTZGRAFF Susquehanna Pfaltzgraff Co. (Susquehanna Pfaltzgraff) has the authority under its charter to issue 40,000,000 shares of common stock, par value $.01 per share, 50,000,000 shares of ESOP common stock, par value $.01 per share, and 10,000,000 shares of Class A nonvoting common stock, par value $.01 per share. At December 31, 2001, we had outstanding 18,241,800 shares of common stock, 7,023,727 shares of ESOP common stock and 2,301,555 shares of Class A nonvoting common stock. The holders of the ESOP common stock are entitled to an annual cumulative preferential dividend of approximately $1.05 per share. After payment of the ESOP common stock dividend, the ESOP common stock, the common stock and the Class A nonvoting common stock share equally and ratably on a share for share basis in dividends. In the event of a liquidation of Susquehanna Pfaltzgraff, the holders of ESOP common stock are entitled to the payment of all accrued and unpaid dividends before any distributions to holders of common stock or Class A common stock. Thereafter, all three classes of stock share in distributions on a pro rata basis. Except as required by law, the holders of Class A nonvoting common stock have no voting rights. Each share of common stock and ESOP common stock is entitled to one vote on all matters submitted to a vote of stockholders. The following table sets forth certain information regarding the beneficial ownership of Susquehanna Pfaltzgraff's common stock, ESOP common stock and Class A nonvoting common stock as of December 31, 2001 by: . each of our directors and executive officers; . all of our directors and executive officers as a group; and . each person (or group of affiliated persons) known by us to beneficially own more than 5% of our outstanding common stock. Unless otherwise indicated, each person has sole voting and investment power with respect to the shares shown as beneficially owned by such person. 66
Percentage Number of Percentage Number of Number of of ESOP of ESOP Class A Common Common Common Common Common Percentage Shares Shares Shares Shares Shares of Class A Common Total Beneficially Beneficially Beneficially Beneficially Beneficially Shares Beneficially Voting Name of Beneficial Owner Ownend Owned Owned Owned Owned Owned Power/(5)/ ------------------------ ----- ----- ----- ----- ----- ----- ---------- Directors and Executive Officers Louis J. Appell, Jr./(1)//(2)/ 64,204 0.3% 30 -- 1,252,900 54.4% 0.3% William H. Simpson/(1)/ -- -- 1,537 -- 426,085 18.5% -- Peter B. Brubaker/(1)/ -- -- 1,906 -- 311,085 13.5% -- John L. Finlayson/(1)/ -- -- 1,751 -- 311,485 13.5% -- Craig W. Bremer/(1)/ -- -- 1,751 -- -- -- -- Alan L. Brayman/(1)/ -- -- 1,750 -- -- -- -- David E. Kennedy/(1)/ -- -- 1,906 -- -- -- -- Officers and directors as a group (7 persons) -- -- -- -- 2,301,555 100% -- Other 5% Holders Louis J. Appell Trusts/(3)/ 16,824,300 90.4% -- -- -- -- 66.4% Susquehanna Pfaltzgraff ESOP/(4)/ -- -- 6,088,336 85.5% -- -- 27.8%
____________________ /(1)/ All addresses are 140 East Market Street, York, PA 17401. /(2)/ Includes common shares held by Nathan Appell Trust for the benefit of Louis J. Appell, Jr. /(3)/ Includes shares held as follows: (a) Louis J. Appell residuary trust for the benefit of Louis J. Appell, Jr. (5,861,800 shares); (b) Louis J. Appell residuary trust for the benefit of Helen A. Norton (5,968,900 shares); and (c) Louis J. Appell residuary trust for the benefit of George N. Appell and his descendants (4,993,600 shares). Addresses for each trust are 140 East Market Street, York, PA 17401. /(4)/ Held of record by State Street Bank and Trust Co., as trustee of the Susquehanna Pfaltzgraff Co. Employee Stock Ownership Plan. Address is P.O. Box 1521, Boston, MA 02104-9818. /(5)/ Except in limited circumstances, the ESOP trustee votes all allocated ESOP shares held in trust. Therefore, voting power reflects the voting of all allocated trust shares. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS RELATED PARTY TRANSACTIONS Susquehanna Pfaltzgraff, our parent company, provides us with management services, executive office space and services of the legal department. Under an agreement between Susquehanna Pfaltzgraff and us, we paid a management fee for such services in 2001 and 2000 in the amount of $5.7 million and $4.1 million, respectively. Susquehanna Pfaltzgraff also provides us, at cost, accounting and tax services, human resources services, treasury services and administrative services. For such services in 2001 and 2000, we paid Susquehanna Pfaltzgraff an aggregate of $2.7 million and $2.6 million, respectively. Expenses are allocated based on the parent's best estimates of proportional or incremental cost, whichever is deemed more representative of cost on a stand-alone basis. 67 An indirect subsidiary of ours leases vehicles and equipment from Queen Street Leasing. Radio leases a studio property from G-III Partners. We paid Queen Street Leasing and G-III Partners approximately $95,000 and $178,000, respectively, in 2001 under such leases. Queen Street Leasing and G-III Partners are limited partnerships owned directly and indirectly by Susquehanna Pfaltzgraff Co. and certain members of the Appell families. We and certain of our subsidiaries have entered into a Tax Sharing Agreement with Susquehanna Pfaltzgraff, The Pfaltzgraff Co. and certain subsidiaries of The Pfaltzgraff Co. for the payment of federal income taxes on a consolidated basis. The Tax Sharing Agreement establishes a method for the computation, collection and payment of taxes by Susquehanna Pfaltzgraff and the contribution to such payment by us and The Pfaltzgraff Co. Upon completion of the 1999 offering of senior subordinated notes, we loaned $116.9 million to Susquehanna Pfaltzgraff, which it then loaned to its newly formed employee stock ownership plan. The employee stock ownership plan used the proceeds of the loan to purchase approximately $116.9 million of Susquehanna Pfaltzgraff Co.'s common stock from trusts for the benefit of Mr. Appell, his siblings and certain members of their families. On July 18, 2001, we loaned $14.6 million to Susquehanna Pfaltzgraff, which it then loaned to its employee stock ownership plan. The employee stock ownership plan used the proceeds of the loan to purchase a similar amount of Susquehanna Pfalzgraff stock from members of the Appell families. Our employees participate in the employee stock ownership plan. The loans to Susquehanna Pfaltzgraff Co. matures on December 30, 2018 and bears interest at a per annum rate of 6.0% on the original loan and 6.5% on the 2001 loan. We expect the loan to be repaid in annual installments of principal and interest. Related interest income was $6.9 million and $6.7 million in 2001 and 2000, respectively. We have 70,499.22 shares of voting preferred stock, $100 par value per share outstanding. The holders of the preferred stock are entitled to a cumulative annual dividend of 7.0%. The total amount of dividends paid on the preferred stock in 2001 was $0.5 million. The preferred stock is held by certain members of Mr. Appell's family, trusts of which such persons are trustees or beneficiaries and Peter P. Brubaker. The holders of the preferred stock have no right to require us to redeem their preferred stock. Each of these transactions was on terms and conditions no less favorable to us than we would be able to obtain from unaffiliated third parties. THE LENFEST AGREEMENT Pursuant to an agreement among Lenfest Communications, Inc. (Lenfest), Susquehanna Cable and certain of its subsidiaries (as amended, the "Agreement"), Lenfest held minority ownership interests equal to 14.9% of Susquehanna Cable and 17.75% of each of its principal operating subsidiaries. Lenfest's ownership interests were acquired in exchange for capital contributions of $11.0 million in cash in May 1993 and cable television systems in December 1993 valued at $14.0 million. The cable systems are located in Red Lion and Mount Wolf, Pennsylvania and are now part of the York system. In January 2000, Comcast Corporation acquired Lenfest Communications, Inc. and consequently, Lenfest's interest in Susquehanna Cable and certain of its subsidiaries. Comcast has succeeded to the Agreement's rights and obligations. Programming costs for 2001 and 2000 were approximately $2.1 million and $1.9 million, respectively, higher than expected due to the loss of programming discounts due to the change in ownership. We anticipate that the cost of cable 68 programming will increase in the future as cable programming rates increase and additional sources of cable programming become available. The Agreement provides for a right of first refusal whereby neither Comcast nor Susquehanna Cable may sell its ownership interests without offering them first to the other party. In addition, Susquehanna Cable may not sell any cable television systems without offering them first to Comcast. If Susquehanna Cable decides to sell the assets of a cable system and Comcast does not exercise its right of first refusal, Susquehanna Cable must offer to repurchase Comcast's shares in the subsidiary that is selling assets. The Agreement contains a buy-sell provision granting Susquehanna Media, Susquehanna Cable or Comcast the right to make an offer to purchase the other party's ownership interests in Susquehanna Cable and its subsidiaries. If such an offer is made and rejected, the party to whom the offer was made is then obligated to purchase the offering party's ownership interests in Susquehanna Cable and its subsidiaries on the same terms and conditions. If we purchase Comcast's interests pursuant to the buy-sell agreement, Comcast is entitled to receive a fee equal to 3.0% of the original $25.0 million investment compounded annually. This fee is not payable if Comcast buys Susquehanna Cable's interests. The Agreement grants Comcast the right to resell to us (the "Put Right") all of its ownership interests in Susquehanna Cable and its subsidiaries for a three-year period beginning 18 months after the closing on the new senior credit facility. Accordingly, the Put Right will expire on November 12, 2003. The Put Right may not be exercised during any period when a default exists under our new senior credit facility or if consummation of the Put Right would create a default under our new senior credit facility or under the senior subordinated notes. The value of Comcast's ownership interests in Susquehanna Cable and its subsidiaries upon exercise of the Put Right would be the average of the values determined by two independent appraisers with expertise in the cable industry. In exchange for its ownership interests upon exercise of the Put Right, Comcast would receive cash up to the amount of borrowing availability under our new senior credit facility and would receive a note for the balance, so long as the issuance of such note would comply with the terms of the new senior credit facility and the covenant described above. Upon Comcast's exercise of the Put Right, we would have the right, in our sole discretion and in lieu of acquiring Comcast's ownership interests, to sell Susquehanna Cable and its subsidiaries to a third party and Comcast would receive a pro rata share of the proceeds of such sale. 69 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K a) THE FOLLOWING DOCUMENTS ARE FILED AS PART OF THIS REPORT: 1. Consolidated Financial Statements Filed: Please refer to Item 6 - Selected Annual and Quarterly Financial Data and Item 8 - Consolidated Financial Statement and Supplementary Data. 2. Consolidated Financial Statement Scheduled Filed: Please refer to Item 6 - Selected Annual and Quarterly Financial Data and Item 8 - Consolidated Financial Statement and Supplementary Data. 3. Exhibits Filed: Exhibit Number Description -------------- ----------- 2 Asset Purchase Agreement, dated May 11, 2000, among Susquehanna Radio Corp. and Entercom Communications Corp., Entercom Kansas City, LLC and Entercom Kansas City License, LLC (incorporated herein by reference from Exhibit 2 to the Company's Current Report on Form 8-K filed August 2, 2000, file no. 333-80523) 3.1 Certificate of Incorporation of Susquehanna Media Co., as amended (incorporated herein by reference from Exhibit 3.1 to the Company's Registration Statement on Form S-4, file No. 333-80523) 3.2 By-laws of Susquehanna Media Co. (incorporated herein by reference from Exhibit 3.2 to the Company's Registration Statement on Form S-4, file No. 333-80523) 4.1 Indenture for the 8 1/2% Senior Subordinated Notes due 2009, dated as of May 12, 1999, between Susquehanna Media Co. and Chase Manhattan Trust Company, National Association, as Trustee (incorporated herein by reference from Exhibit 4.1 to the Company's Registration Statement on Form S-4, file No. 333-80523) 4.2 Form of Exchange Global Note for 8 1/2% Senior Subordinated Note due 2009 (incorporated herein by reference from Exhibit 4.2 to the Company's Registration Statement on Form S-4, file No. 333-80523) 4.3 Form of Exchange Certificated note for 8 1/2% Senior Subordinated Note due 2009 (incorporated herein by reference from Exhibit 4.3 to the Company's Registration Statement on Form S-4, file No. 333-80523) 10.1 $450 million syndicated credit facility arranged by First Union Capital Markets Corp. (incorporated herein by reference from Exhibit 10.1 to the Company's Registration Statement on Form S-4, file No. 333-80523) 10.2 Agreement dated November 6, 1992, by and among Lenfest Communications, Inc., Susquehanna Cable Co. and certain subsidiaries of Susquehanna Cable Co., as amended (incorporated herein by reference from Exhibit 10.2 to the Company's Registration Statement on Form S-4, file No. 333-80523) 10.3 Management Agreement dated May 24, 1993 by and between Susquehanna Pfaltzgraff Co. and Susquehanna Media Co. (incorporated herein by reference from Exhibit 10.3 to the Company's Registration Statement on Form S-4, file No. 333-80523) 70 12 Computation of ratios of earnings to fixed charges 21 Subsidiaries of Susquehanna Media Co. (incorporated herein by reference from Exhibit 21 to the Company's Registration Statement on Form S-4, file No. 333-80523) b) FOURTH QUARTER 2001 REPORTS ON FORM 8-K. We filed a Current Report on Form 8-K (Item 5) on November 2, 2001 with respect to our earnings press release for the three and nine months ended September 30, 2001. 71 SUPPLEMENTARY INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION 15(D) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES PURSUANT TO SECTION 12 OF THE ACT. No annual report or proxy materials have been sent to security holders during the fiscal year ended December 31, 2001. No annual report or proxy materials will be sent to security holders subsequent to the filing of this annual report on Form 10-K. 72 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. SUSQUEHANNA MEDIA CO. /s/ Peter P. Brubaker --------------------------------- By: Peter P. Brubaker, Chief Executive Officer and President Date: March 27, 2002 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature Title Date --------- ----- ---- /s/ Louis J. Appell, Jr. Chairman of the Board of March 27, 2002 --------------------------------------------------- Directors Louis J. Appell, Jr. /s/ Peter P. Brubaker Director, Chief Executive March 27, 2002 --------------------------------------------------- Officer and President Peter P. Brubaker /s/ David E. Kennedy Director, Vice President March 27, 2002 --------------------------------------------------- David E. Kennedy /s/ Craig W. Bremer Director, Secretary and General March 27, 2002 --------------------------------------------------- Counsel Craig W. Bremer /s/ William H. Simpson Director March 27, 2002 --------------------------------------------------- William H. Simpson /s/ John L. Finlayson Director, Vice President (and March 27, 2002 --------------------------------------------------- principal accounting officer) John L. Finlayson