10-K 1 v80439e10-k.txt FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13D 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 1-10321 THE ACKERLEY GROUP, INC. ------------------------ (Exact name of Registrant as specified in its charter) Delaware 91-1043807 ---------------------------------------- ------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1301 Fifth Avenue, Suite 4000 Seattle, Washington 98101 ---------------------------------------- ------------------------- (Address of principal executive offices) (Zip code) Registrant's telephone number, including area code: (206) 624-2888 -------------- Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of exchange on which registered Common Stock New York Stock Exchange, Inc. ------------------------------------- ------------------------------------ Securities registered pursuant to Section 12(g) of the Act: N/A --- (Title of class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter periods 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 the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K [ ] The aggregate market value of the voting stock held by nonaffiliates of the registrant as of March 1, 2002 was $252,689,416. The number of shares outstanding of each of the registrant's classes of common stock as of March 1, 2002 was: Title of Class Number of Shares Outstanding -------------- ---------------------------- Common Stock, $.01 Par Value 24,298,380 shares Class B Common Stock, $.01 Par Value 11,020,622 shares PART I ITEM 1 -- BUSINESS MERGER On October 5, 2001, we entered into a merger agreement (the "Merger Agreement") with Clear Channel Communications, Inc. ("Clear Channel"). Under the terms of the Merger Agreement, each share of our common stock and our Class B common stock will be converted into the right to receive 0.35 of a share of the common stock of Clear Channel. The transaction is intended to be tax-free to our stockholders. Our stockholders approved the transaction on January 24, 2002. The transaction, which we expect to consummate in the second quarter of 2002, is subject to customary regulatory approvals and closing conditions. GENERAL INFORMATION The Ackerley Group, Inc. was founded in 1975 as a Washington corporation. In 1978, we were reincorporated under Delaware law. We are a diversified media and entertainment company which engages in four principal businesses: outdoor media, television broadcasting, radio broadcasting, and interactive media. Our outdoor media, television broadcasting, radio broadcasting, and interactive media segments accounted for approximately 39%, 49%, 12%, and 0%, respectively, of our net revenue for the year ended December 31, 2001. On April 2, 2001, we sold our Seattle SuperSonics NBA franchise, along with our interests in the Seattle Storm WNBA team and our Full House Sports & Entertainment division, for approximately $200.0 million plus the assumption of certain liabilities. Accordingly, our sports & entertainment segment is now reported as "discontinued operations." - Outdoor Media. We engage in outdoor advertising in Massachusetts, New York, and New Jersey and the Pacific Northwest. We have 6,096 outdoor displays in our primary markets of Boston-Worcester, Massachusetts; Seattle-Tacoma, Washington; and Portland, Oregon. We believe that we have leading positions in the primary markets in which we operate, based upon the number of outdoor advertising displays. - Television Broadcasting. We engage in television broadcasting in New York, California, Oregon, Washington, and Alaska. We own sixteen television stations and provide programming and other services to two additional television stations under time brokerage or local marketing agreements ("LMAs"). Consistent with our strategy of local news leadership, ten of the sixteen network-affiliated television stations we own or program ranked first or second in their designated market areas ("DMAs"), in terms of local news ratings points delivered, according to the November 2001 Nielsen Station Index. - Radio Broadcasting. We own and operate four radio stations in the Seattle-Tacoma, Washington market. We also provide sales and other services for KFNK(FM), another station in the Seattle-Tacoma market, pursuant to a joint sales agreement with the owner of that station. KUBE(FM) is the highest ranked FM station in the market in its target demographic of adults 18 to 34 years old and is third overall in the market in terms of share of its market service area ("MSA"), according to the Fall 2001 Arbitron Radio Market Report; KJR(AM) is the only sports talk station in the market. - Interactive Media. We own and operate local market news and information Web sites in California and New York that are built through strategic partnerships with local media companies that provide promotional power, reliable news and information content and intimate knowledge of the local marketplace. We currently operate three portal sites: www.iknowbakersfield.com in Bakersfield, California, www.iknowcentralcoast.com in Salinas, California, and www.iknowrochester.com in Rochester, New York. These operations, known as the iKnow Network(TM), combine the live, multimedia aspects of television and radio with the depth of news and community information of newspapers. BUSINESS STRATEGY Our primary strategy is to develop and acquire media assets that enable us to offer advertisers a choice of media outlets for distributing their marketing messages. To this end, we have assembled a diverse portfolio of media assets. Our businesses are linked by a common goal of increasing the number of advertising impressions made, regardless of whether the impression is made via radio, television, outdoor media display, or web page. Following disposal of our sports & entertainment operations (which is described in greater detail in Note 5 to the Consolidated Financial Statements), we have evolved as a media company focused on these segments and pursuing our core competencies. We seek to grow by investing in the expansion of our existing operations through additions and upgrades to our facilities and programming. We also look to grow through opportunistic acquisitions in our existing business lines and by exploring new synergistic business ventures and investments. We target markets where we see an opportunity to improve market share, take advantage of regional efficiencies, and develop our television stations into local news franchises. We believe the following elements of our strategy provide us with competitive advantages: Maintain and Develop Leadership Positions in Markets Served. We seek to be a leader in each of our markets. We own the most outdoor advertising display faces in each of the primary geographic markets in which we operate, based on the Traffic Audit Bureau's online database of audited markets. Ten of the sixteen network-affiliated television stations we own or program ranked first or second in their DMAs, in terms of local news ratings points delivered, according to the November 2001 Nielsen Station Index. Our four radio stations include KUBE(FM), which is the highest ranked FM station in the Seattle-Tacoma market in its target 2 demographic of adults 18 to 34 years old and is fourth overall in the market in terms of share of its MSA, according to the Fall 2001 Arbitron Radio Market Report, and KJR(AM), the only sports talk station in the market. We believe this market leadership enables us to provide advertisers a cost-effective means of delivering a quality message to their target audiences. Use Advanced Communications Technology to Create Regional Television Groups. On April 6, 1999, we announced the launch of Digital CentralCasting(TM), a digital broadcast system which allows us to operate multiple television stations using the back-office functions of a single station. The system contemplates that all of our television stations in a geographic area will be linked through a fiber optic-based communications network, and that the stations themselves will switch from analog to digital broadcasting equipment. This permits the stations to share digital programming and other data along the fiber-optic network, as well as allowing a single station within the geographic area to perform back-office functions such as operations, programming and advertising scheduling, and accounting for all of our television stations in the area. To implement this strategy, we have organized sixteen of the television stations we own or program into the following regional station groups: New York (WIXT, WOKR, WIVT, WBGH, WUTR, WWTI, and WETM), Central California (KCOY, KKFX, KGPE and KGET), and North Coast (KCBA, KION, KMTR, KVIQ, and KFTY). While the advantages of owning multiple stations in a market are evident in radio broadcasting, current television ownership rules prohibit the ownership of more than one station in a designated market, with some exceptions. We believe that the confluence of falling prices for fiber-optic-based communications services and the advancement of digital transmission technology has created an opportunity to realize the benefits of multi-station ownership by linking several distinct television markets into one regional group. We believe that we are among the first companies to introduce this technology in the industry. We anticipate that Digital CentralCasting(TM) will enhance our operational efficiency through economies of scale and the sharing of resources and programming among our stations. However, we can give no assurance as to the timing or extent of the anticipated benefits of Digital CentralCasting(TM). Experienced Management; Decentralized Management Structure. We believe that our efficient management structure and the experience of our management team enable us to respond effectively to competitive challenges across our markets and our business segments. We have granted the management of our operating units the authority and autonomy necessary to run each unit as a business and to respond to changes in each market environment. Experienced local managers enhance our ability to respond to local challenges rapidly and effectively. The average experience of our 10 division managers in their respective industries is approximately 20 years. These local managers are supported and guided by an experienced and cohesive executive team. Our four executive officers collectively have an aggregate of 69 years of experience in the various industries in which we are involved. Barry A. Ackerley, one of our founders and our current Chairman and Chief Executive Officer, has been actively involved with this company since our inception in 1975. Early in our history, Mr. Ackerley recognized the synergies that could be achieved through ownership of outdoor advertising and television and radio broadcasting assets. With this vision, Mr. Ackerley 3 led our expansion from outdoor advertising into television and radio broadcasting and sports and entertainment well before the current trend toward consolidation among these industries. OUTDOOR MEDIA Our outdoor media business sells advertising space on outdoor displays and often participates in the design of advertisements and the construction of outdoor structures that carry those displays. Industry Overview. During the nineteenth century, companies began to lease out space on wooden boards for advertising messages, or "bills." Today, outdoor advertising extends nationwide, providing advertisers with a relatively low-cost means of reaching large audiences. Outdoor advertising is used by large national advertisers as part of multi-media and other advertising campaigns, as well as by local and regional advertisers seeking to reach local and regional markets. We believe that outdoor advertising is a cost-effective form of advertising, particularly when compared to television, radio, and print, on a "cost-per-rating point" basis (meaning cost per 1,000 impressions). Displays provide advertisers with the opportunity for their message to target a specified percentage of the general population. The displays are generally placed in appropriate well-traveled areas throughout a geographic area. This results in the advertisement's broad exposure within a market. Outdoor advertising companies generally establish and publish "rate cards" periodically, which list monthly rates for bulletins, posters, and junior posters. Rates are based, in part, on surveys made by independent traffic audits that determine a given display's exposure to the public. Actual rates charged to customers are subject to negotiation. Advertising contracts relating to bulletins, posters, and junior posters usually have terms of one year or less. Outdoor advertising has been a stable source of revenue for us over the last five years. The number and diversity of our advertisers have increased, broadening the use of outdoor advertising in a variety of business sectors. For example, we have seen an increase in outdoor advertising revenues from retail, real estate, entertainment, media, and financial services companies. In addition, we have seen an increase in customers who have not traditionally used outdoor advertising, such as fashion designers, internet service providers and internet-based businesses, and telecommunications companies. Operations. We operate primarily in the markets of Seattle-Tacoma, Washington; Portland, Oregon; and Boston-Worcester, Massachusetts. In 2000, we expanded our operations into the New York, New York market. Until we sold our Florida outdoor advertising business in January 2000, we also operated in Miami, Fort Lauderdale, West Palm Beach and Fort Pierce, Florida. Based on the Traffic Audit Bureau's online database of audited markets, we had more outdoor advertising displays in each of our primary markets than any other outdoor advertising company. 4 We believe that our presence in large markets, the geographic diversity of our operations, and our emphasis on local advertisers within each of our markets lend stability to our revenue base, reduce our reliance on any particular regional economy or advertiser, and mitigate the effects of fluctuations in national advertising expenditures. However, because of zoning and other regulatory limitations on the development of new outdoor advertising displays, we anticipate that future growth in our outdoor advertising business will result primarily through diversification of our customer base, creative marketing, upgrading our existing structures, increased rates, and increased demand brought about by advertisers who have not historically used outdoor media. Our outdoor advertising operations involve the sale of space on advertising display faces. They also include, in many cases, the design of advertisements and the construction of outdoor structures that carry those displays. Our principal outdoor advertising display is the billboard, of which there are generally three sizes: - Bulletins: Bulletins are generally 14 feet high and 48 feet wide. Generally, bulletins are covered with a single sheet of vinyl, called "Superflex," on which an image has been produced by a large format printer. The Superflex is then transported to the site of the billboard and mounted to the face of the display. To attract more attention, advertising may extend beyond the linear edges of the display face and may include three-dimensional embellishments. Bulletins are usually located near major highways for maximum impact. Space is usually sold to advertisers for periods of four to twelve months. - Posters: The most common type of billboard, posters are generally 12 feet high by 25 feet wide. Lithographed or silk-screened paper sheets are typically supplied by the advertiser. They are applied like wallpaper to the face of the display. Posters are usually located on major traffic arteries. Space is usually sold to advertisers for periods of one to twelve months. - Junior posters: Junior posters are generally 6 feet high by 12 feet wide. These displays are prepared and mounted in the same manner as posters. Most junior posters, because of their smaller size, are concentrated on city streets and are targeted to pedestrian traffic. Space on junior posters usually is sold to advertisers for periods of one to twelve months. 5 We have 1,105 bulletins, 4,711 posters, and 324 junior posters. The following chart itemizes markets we served and their designated market area (DMA) rank:
DMA JUNIOR MARKET RANK(1) BULLETINS POSTERS POSTERS ------ ------- --------- ------- ------- Seattle-Tacoma (2) ......... 12 338 1,691 243 Portland (2) ............... 23 275 1,057 0 Boston-Worcester ........... 6(3) 448 1,963 81 New York, New York: 1 44 -- --
------------- (1) Source: Television & Cable Factbook, 2001 Edition. DMA rank is a measure of market size in the United States based on population as reported by the Nielsen Rating Service. (2) In the first quarter of 2000, we purchased outdoor advertising assets in the Portland Metro and Salem, Oregon areas (which for operating purposes we deem to be part of the Portland market) and Bellingham, Washington (which for operating purposes we deem to be part of the Seattle-Tacoma market). See "--Acquisitions." (3) Reflects DMA rank for the Boston market. We own substantially all of our outdoor displays. These displays generally are located on leased property. The typical property lease provides for a term ranging from 5 to 15 years and for a reduction in or termination of rental payments if the display becomes obstructed during the lease term. In certain circumstances leases may be terminated, such as where the property owner develops or sells the property. If a lease is terminated, we generally seek to relocate the display in order to maintain our inventory of advertising displays in the particular geographic region. Display relocation is typically subject to local zoning laws. Sales and Marketing. We sell advertising space directly to advertisers and also sell to advertising agencies and specialized media buying services. These agencies charge us a commission for their services. In recent years, we have focused increasingly on selling directly to local and regional advertisers. Competition. We compete directly with other outdoor advertising companies, and with other types of advertising media companies, including television, radio, newspapers, magazines, transit advertising, yellow page directories, direct mail, local cable systems, and satellite broadcasting systems. Substantial competition exists among all advertising media on a cost-per-rating-point basis and on the ability to effectively reach a particular demographic section of the market. As a general matter, competition is confined to defined geographic markets. Regulation. Outdoor advertising displays are subject to governmental regulation at the federal, state, and local levels. These regulations, in some cases, limit the height, size, location, and operation of outdoor displays and, in some circumstances, regulate the content of the advertising copy displayed on outdoor displays. Certain jurisdictions have recently proposed or 6 enacted regulations restricting or banning outdoor advertising of tobacco or liquor. Likewise, regulations in certain jurisdictions prohibit the construction of new outdoor displays or the replacement, relocation, enlargement, or upgrading of existing structures. Our outdoor advertising operations are significantly affected by local zoning regulations. Some jurisdictions impose a limitation on the number of outdoor advertising structures permitted within the city limits. In addition, local zoning ordinances can restrict or prohibit outdoor advertising displays in specific areas. Most of our outdoor advertising structures are located in commercial and industrial zones subject to such regulations. Some states and municipalities have also enacted restrictions on the content of outdoor advertising signs. Federal and corresponding state outdoor advertising statutes require compensation payment for removal of existing structures by governmental order in some circumstances. Some jurisdictions have adopted ordinances which have sought the removal of existing structures without compensation. Ordinances requiring the removal of a billboard without compensation have been challenged in various state and federal courts on both statutory and constitutional grounds, with differing results. In our markets, however, we have generally prevailed in such challenges. Federal law also imposes additional regulations upon our operations. Under the Federal Highway Beautification Act of 1965, states are required to adopt programs regulating outdoor advertising along federal highways. The Act also provides for the payment of compensation to the owner of a lawfully erected outdoor advertising structure that is removed by operation of the statute. Our policy, when a governmental entity seeks to remove one of our outdoor advertising displays, is to actively resist unless adequate compensation is paid. Although we have been successful in the past in challenging circumstances in which our displays have been subject to removal, we cannot predict whether we will be successful in the future and what effect, if any, such regulations may have on our operations. In addition, we are unable to predict what additional regulations may be imposed on outdoor advertising in the future. Legislation regulating the content of billboard advertisements has been introduced in the U.S. Congress from time to time in the past. TELEVISION BROADCASTING Our television broadcasting operations involve the sale of advertising time to a broad range of national, regional, and local advertisers. We own and/or program eighteen television stations in markets that offer a large and affluent population base that is attractive to many advertisers. Industry Overview. Television stations in the United States are either "very high frequency" or "VHF" stations, transmitting on channels 2 through 13, or "ultra high frequency" or "UHF" stations, transmitting on channels 14 through 69. Broadcast licenses are issued by the Federal Communications Commission ("FCC"). Television station revenue comes primarily 7 from local, regional and national advertising. Revenue also comes, to a lesser extent, from network compensation and from studio rental and commercial production activities. Advertising rates are based upon (1) a program's popularity among the viewers whom an advertiser wishes to attract, (2) the number of advertisers competing for the available time, (3) the size and demographic makeup of the market, and (4) the availability of alternative advertising media in the market area. The size of a television station's audience is measured and reported by independent rating service surveys. Affiliation with a major network (e.g., ABC, NBC, CBS, or FOX) can have a significant impact on a station's revenue, expenses and operations. A typical affiliate receives a significant portion of its daily programming from a network. Networks provide programming, and in some cases cash payments, to the affiliate in exchange for a substantial majority of the advertising time during network programs. The network sells this advertising time and retains the revenues. A small portion of inventory contained within network programming is sold by the local affiliates who retain the corresponding revenue. Operations. We currently own sixteen television stations and program two stations under time brokerage or local marketing agreements ("LMAs"). The following table sets forth information about our portfolio of television stations and the markets in which they operate.
NO. OF COMMERCIAL DATE PROPOSED DMA TV STATIONS CALL ACQUIRED OR NETWORK NTSC DIGITAL MARKET RANKED IN MARKET LETTERS AFFILIATED AFFILIATION CHANNEL(1) CHANNEL RANK(2) MARKET(3) ------ ------- ----------- ----------- ---------- -------- ------- ----------- NEW YORK Syracuse, New York (owned)........ WIXT May 1982 ABC 9 17 80 3VHF 3UHF Rochester, New York (owned)....... WOKR April 1999 ABC 13 59 74 3VHF 1UHF Binghamton, New York (owned)...... WIVT July 1997(4) ABC 34 4 156 1VHF 2UHF Binghamton, New York (owned)...... WBGH-CA February 2000(5) NBC 8 --(6) 156 1VHF 2UHF Utica, New York (owned)........... WUTR June 1997(7) ABC 20 30 168 1VHF 2UHF Elmira, New York (LMA)............ WETM February 2000(8) NBC 18 2 171 3UHF Watertown, New York (owned)...... WWTI June 2000 ABC 50 21 176 1VHF 1UHF CENTRAL COAST Fresno-Visalia, California (owned) KGPE August 2000 CBS 47 34 54 10UHF
8
NO. OF COMMERCIAL DATE PROPOSED DMA TV STATIONS CALL ACQUIRED OR NETWORK NTSC DIGITAL MARKET RANKED IN MARKET LETTERS AFFILIATED AFFILIATION CHANNEL(1) CHANNEL RANK(2) MARKET(3) ------ ------- ----------- ----------- ---------- -------- ------- ----------- Santa Barbara-Santa Maria-San Luis Obispo, California (owned).............. KCOY January 1999(9) CBS 12 19 117 3VHF 2UHF Santa Barbara-Santa Maria-San Luis Obispo, California (owned).............. KKFX-CA May 2000(10) FOX 24 --(6) 117 3VHF 2UHF Bakersfield, California (owned)... KGET October 1983 NBC 17 25 130 4UHF(12) NORTH COAST Monterey-Salinas, California (owned).............. KION April 1999(10) CBS 46 32 118 2VHF 3UHF(11) Monterey-Salinas, California (LMA)................ KCBA June 1986(13) FOX 35 13 118 2VHF 3UHF(11) Eugene, Oregon (owned)............ KMTR December 1998(14) NBC 16 17 122 2VHF 3UHF Eureka, California (owned)........ KVIQ July 1998(15) CBS 6 17 191 2VHF 2UHF Santa Rosa, California (owned).... KFTY April 1996 None 50 54 --(16) 5VHF 12UHF PACIFIC NORTHWEST Fairbanks, Alaska (owned)......... KTVF August 1999 NBC/UPN 11 26 203 4VHF Vancouver, British Columbia and portions of Seattle, Washington (owned).............. KVOS June 1985 None 12 35 --(17) --(17)
(1) Refers to the current analog channel used by such station. (2) Source: November 2001 Nielsen Station Index. (3) Source: November 2001 Nielsen Station Index. The number of stations listed does not include digital television stations, public broadcasting stations, satellite stations, low-power stations, or translators that rebroadcast signals from distant stations, and also may not include smaller television stations whose rankings fall below reporting thresholds. (4) We acquired WIVT in August 1998. Pending closing of the transaction, we programmed the station under an LMA with the previous owner. The date in this column reflects the date the LMA was entered into. (5) In February 2000, we acquired substantially all of the assets of WBGH, other than the FCC license, which we acquired on May 1, 2000. Pending FCC approval of the transfer of the FCC license to us, we programmed the station under an LMA with the FCC licensee. The date in this column reflects the date the LMA was entered into. (6) Low power stations have not been assigned proposed digital channels. Our lower power stations, WBGH and KKFX, are Class A stations. (7) We acquired WUTR in January 2000. Pending closing of the transaction, we programmed the station under an LMA with the previous owner. The date in this column reflects the date the LMA was entered into. 9 (8) We do not own WETM but program the station under an LMA with the current owner of the station. The date in this column reflects the date the LMA was entered into. (9) In May 1999, we exchanged the assets of KKTV, our former television station in Colorado Springs, Colorado for the assets of KCOY and a cash payment. Pending closing of the transaction, we programmed KCOY under an LMA with the previous owner. The date in this column reflects the date that the LMA was entered into. (10) We acquired KION in January 2000. Pending closing of the transaction, we programmed the station under an LMA with the previous owner. The date in this column reflects the date the LMA was entered into. (11) One additional UHF channel has been allocated in the Salinas-Monterey market; however, there has been no construction activity to date with respect to this channel. (12) Two additional UHF channels have been allocated in the Bakersfield market; however, there has been no construction activity to date with respect to these channels. (13) In January 2000, we sold substantially all the assets of KCBA. We program up to 15% of the station's weekly broadcast hours and provide sales and other services under an LMA with the purchaser. The date in this column reflects the date we originally acquired the station. (14) We acquired KMTR in March 1999. Pending closing of the transaction, we programmed the station under an LMA with the previous owner. The date in this column reflects the date the LMA was entered into. The acquisition includes the assets of two satellite stations, KMTX (Roseburg, Oregon) and KMTZ (Coos Bay, Oregon), and one low power station, KMOR-LP (Eugene, Oregon). (15) We acquired KVIQ in January 1999. Pending closing of the transaction, we programmed the station under an LMA with the previous owner. The date in this column reflects the date this LMA was entered into. (16) While KFTY is included in the San Francisco-Oakland-San Jose DMA market, which has a DMA rank of 5, the station principally serves the community of Santa Rosa, which is not separately ranked. (17) KVOS, located in Bellingham, Washington, serves primarily the Vancouver, British Columbia market (located in size, according to the Nielsen Rating Service as of February 2001, between the markets of Denver, Colorado and Sacramento-Stockton-Modesto, California, which have DMA rankings of 18 and 19, respectively), and a portion of the Seattle, Washington market (DMA rank 12) and the Whatcom County, Washington market. The station's primary competition consists of five Canadian stations. The Canadian Radio and Television Commission granted license approval for an additional commercial station in Victoria and a religious station in Vancouver recently. It is likely that these stations will be operational by September 2001. DMA rankings are from the Television & Cable Factbook, 2001 Edition. Programming. Our network-affiliated television stations operate under standard contracts. These standard contracts are automatically renewed for successive terms unless we or the network exercises cancellation rights. The networks offer our network-affiliated stations a variety of programs. Our network-affiliated stations have a right of first refusal to broadcast network programs before those programs can be offered to any other television station in the same market. Our network-affiliated stations often pre-empt network programming with alternative programming. By emphasizing non-network programming during certain time periods, we increase the amount of commercial time available to us. Such programming includes locally produced news, as well as syndicated and first-run talk programs, children's programming and movies acquired from independent sources. KVOS(TV), which does not have a network affiliation, is located in Bellingham, Washington and serves primarily the market of Vancouver, British Columbia, Canada. Canadian regulations require Canadian cable television operators to delete the signals of U.S.-based stations broadcasting network programs in regularly scheduled time slots and to replace them with the signals of the Canadian-based network affiliates broadcasting at the same time. By 10 broadcasting non-network programming, and by securing exclusive programming rights for the Vancouver/Victoria Market, KVOS (TV) is not blacked out on Canadian cable systems. Acquisitions and Local Marketing Agreements. We seek to acquire television broadcast stations generally in DMA markets ranking from 50 to 175. We also enter into time brokerage or local marketing agreements ("LMAs") with owners of television stations. Under those agreements, we provide programming and sales services and make monthly payments to station owners in exchange for the right to receive revenues from advertising and, in some cases, network compensation. Sales and Marketing. We receive revenues from our television broadcasting operations from the sale of advertising time, usually in the form of local, regional, and national spot or schedule advertising, and, to a much lesser extent, network compensation. Spot or schedule advertising consists of short announcements and sponsored programs either on behalf of advertisers in the immediate area served by the station or on behalf of national and regional advertisers. During 2001, local spot or schedule advertising, which is sold by our personnel at each broadcast station, accounted for approximately 48% of our television stations' total revenue. National spot or schedule advertising, which is sold primarily through national sales representative firms on a commission-only basis, accounted for approximately 42% of our television stations' total revenue. In certain cases, we also receive revenue from our network affiliations. The networks pay us an hourly rate that is tied to the number of network programs that our television stations broadcast. Hourly rates are established in our agreements with the networks and are subject to change by the networks. We have the right, however, to terminate a network agreement if the network effects a decrease in hourly rates. Overall, network compensation revenue was not a significant portion of our television stations' total revenue for 2001. Competition. We compete directly with other television stations, and indirectly with other types of advertising media companies, including radio, magazines, newspapers, outdoor advertising, transit advertising, yellow page directories, direct mail marketing, local cable systems, and satellite broadcasting systems. Substantial competition exists among all advertising media on a cost-per-rating-point basis and on the ability to effectively reach a particular demographic section of the market. As a general matter, competition is confined to defined geographic markets. Maintenance of our competitive positions in our broadcast markets generally depends upon the management experience of each station's managers, the station's authorized broadcasting power, the station's assigned frequency, the station's network affiliation, the station's access to non-network programming, the audience's identification with the station and its acceptance of the station's programming, and the strength of the local competition. In addition, our television stations compete for both audience and advertising with cable television and other news and entertainment media serving the same markets. Cable television 11 systems, which operate generally on a subscriber-payment basis, compete by carrying television signals from outside the broadcast market and by distributing programming originated exclusively for cable systems. Historically, cable operators have not competed with local broadcast stations for a share of the local news audience. If they do, however, the increased competition for local news audiences could have an adverse effect on our advertising revenue. We also face competition from high-powered direct broadcast satellite services which transmit programming directly to homes equipped with special receiving antennas or to cable television systems for transmission to their subscribers. In addition, our television stations compete with other forms of home entertainment, such as home videotape and video disc players. Moreover, the television industry is continually faced with technological change and innovation, the possible rise in popularity of competing entertainment and communications media, and changes in labor conditions and government regulations. We believe that the advertising revenues generated by our television stations are significantly influenced by rankings of their local news programs in their respective markets. Of the sixteen network-affiliated television stations we currently own or program, ten rank first or second in their respective geographic markets in local news ratings points delivered, according to the November 2001 Nielsen Station Index. RADIO BROADCASTING Our radio broadcasting operations involve the sale of air time to a broad range of national, regional, and local advertisers. In addition, we earn revenue from the sale of sponsorships to a variety of events, such as concerts. We own and operate four radio stations and provide sales and other services to a fifth radio station in the Seattle-Tacoma area. Industry Overview. Radio stations in the United States operate either on the "amplitude modulation" ("AM") band, comprising 107 different frequencies located between 540 and 1700 kilohertz ("KHz") in the low frequency band of the electromagnetic spectrum, or the "frequency modulation" ("FM") band, comprising approximately 100 different frequencies located between 88 and 108 megahertz ("MHz") in the very high frequency band of the electromagnetic spectrum. FM radio stations have captured a high percentage of the listening audience, in part because of the public's perception that stereo broadcasting, which until recently was only available on FM radio stations, provides enhanced sound quality. Our radio stations derive most of their revenue from local, regional, and national advertising and, to a lesser extent, from network compensation. In 2001, approximately 72% of our radio broadcasting revenue was derived from local advertising generated by the stations' local sales staffs. National sales, on the other hand, are usually generated by national independent sales representatives acting as agents for the stations. The representatives obtain advertising from national advertising agencies and receive commissions based on a percentage of gross advertising revenue generated. The principal costs incurred in the operation of radio stations are salaries, programming, promotion and advertising, sports broadcasting rights fees, rental of premises for studios, costs of transmitting equipment, and music license royalty fees. 12 Operations. We own four radio stations, which consist of KHHO(AM) in Tacoma, Washington and KJR(AM), KBTB(FM) and KUBE(FM) in Seattle, Washington. We also provide sales and other services to KFNK(FM) in Eatonville, Washington. The following table sets forth information about our portfolio of radio stations.
RADIO NO. OF STATION FORMAT MSA COMMERCIAL AND PRIMARY CALL DATE MARKET STATION DEMOGRAPHIC MARKET LETTERS ACQUIRED RANK(1) IN MARKET(1) TARGET ------ -------- ------------- ------- ------------ ---------------------- Seattle-Tacoma, Washington KJR(AM) May 1984 14 11 AM SportsTalk; (2) Men 25-54 KBTB(FM) October 1987 19 FM Rhythmic Oldies (2) Women 25-54 KUBE(FM) July 1994 Rhythmic Contemporary (3) Hits; Persons 18-34 KHHO(AM) March 1998 SportsTalk; Men 24-54 KFNK(FM) September 1999 Alternative; (4) Men 18-24
--------------- (1) Source: Fall 2001 Arbitron Radio Market Report. Metro Service Area ("MSA") market rank is based on population as reported upon by The Arbitron Company. (2) Reflects the dates on which we originally acquired the stations. We contributed the stations' assets to New Century Seattle Partners L.P., a Delaware limited partnership ("the Partnership") in 1994. We first acquired a limited partnership interest in the Partnership in 1994 and, in 1998, the Partnership became a wholly-owned subsidiary. Since then, the broadcast licenses have been transferred to one of our other subsidiaries, and the Partnership has been dissolved. (3) The date shown in the column reflects the date on which the Partnership acquired the station. (4) The date shown in the column reflects the date on which we entered into an agreement to provide sales and other services. Sales and Marketing. Most of our radio broadcasting revenue comes from the sale of air time to local advertisers. Each station's advertising rates depend upon, among other things, (1) the station's ability to attract audiences in its target demographic group, and (2) the number of stations competing in the market area. The size of a radio station's audience is measured by independent rating service surveys. Much like our television broadcasting stations, the radio stations sell local spot or schedule advertising. During 2001, such advertising accounted for approximately 72% of the radio stations' revenue. In contrast, approximately 19% of the radio stations' 2001 revenue was received from national spot or schedule advertising, which is sold primarily through national sales representative firms on a commission-only basis. The remaining revenue consisted of tower rentals and production fees. Competition. We compete directly with other radio stations and indirectly with other types of advertising media companies, including television, newspapers, magazines, outdoor advertising, transit advertising, yellow page directories, direct mail, local cable systems, and satellite broadcasting systems. Substantial competition exists among all advertising media on a 13 cost-per-rating-point basis and on the ability to effectively reach a particular demographic section of the market. As a general matter, competition is confined to defined geographic markets. A radio station's ability to maintain its competitive position in a market is dependent upon a number of factors, including (1) the station's rank within the market, (2) transmitter power, (3) assigned frequency, (4) audience characteristics, (5) audience acceptance of the station's local programming, and (6) the number and types of other stations in the market area. Radio stations frequently change their broadcasting formats and radio personalities in order to seize a larger percentage of the market. Thus, our radio stations' ratings are regularly affected by changing formats. TELEVISION AND RADIO BROADCASTING REGULATION General. Our television and radio operations are heavily regulated under the Communications Act of 1934 and other federal laws. The Communications Act, for instance, limits the number of broadcast properties that we may acquire and operate. It also restricts ownership of broadcasting properties by foreign individuals and foreign companies. The Communications Act authorizes the FCC to supervise the administration of federal communications laws, and to adopt additional rules governing broadcasting. Thus, our television and radio broadcasting operations are primarily regulated by the FCC. The FCC, for example, approves all transfers, assignments and renewals of our broadcasting properties. KVOS(TV), which derives much of its revenue from the Vancouver, British Columbia market, is additionally regulated and affected by Canadian law. Unlike U.S. law, for instance, a Canadian firm cannot deduct expenses for advertising on a U.S.-based television station which broadcasts into a Canadian market. In order to compensate for this disparity, KVOS(TV) sells advertising time in Canada at a discounted rate. In addition, Canadian law limits KVOS(TV)'s ability to broadcast certain programming. Ownership. FCC rules limit the number and type of broadcasting properties that we may own in the same geographic market. Thus, in a particular geographic market, we cannot own the following combinations: more than one television station (with certain exceptions); or a radio station and a daily newspaper. In addition, there are limitations which vary according to the size of the market, on the number of radio stations that we may own in a market. In addition, the Communications Act and FCC rules prohibit aliens from owning of record or voting more than one-fifth of the capital stock of a corporation holding a radio or television station license or more than one-fourth of the capital stock of a corporation holding the stock of a broadcast licensee. Our Bylaws provide that none of our shares of capital stock may be issued or transferred to any person where such issuance or transfer will result in a violation of the Communications Act or any regulations promulgated thereunder, and that any purported transfer in violation of those restrictions is void. Digital Television. The Telecommunications Act requires the FCC to oversee the transition from current analog television broadcasting to Digital Television ("DTV") 14 broadcasting. During the transition period, the FCC will issue one digital broadcast license to each existing television licensee that files a license application. Network affiliates in larger broadcast markets were required to begin DTV broadcasts during 1999. Our stations that have received construction permits are required to complete construction of their digital transmission facilities by November 1, 2002. We currently estimate the cost to convert to DTV will be approximately $9 to $11 million. Most of the full power television stations that we own or program have received construction permits from the FCC for their DTV facilities. Some of our stations encountered regulatory delays in obtaining DTV construction permits. We anticipate that, eventually, all of our full power stations will be granted permits to construct DTV facilities. Following construction, the stations will then be allowed to broadcast two signals using two channels, one digital and one analog, during the transition period, which will extend until December 31, 2006. At the end of the transition period, broadcasters will be required to choose whether they will continue broadcasting on the digital or the analog channel, and to return the other channel to the FCC. Local Marketing Agreements. Prior to November 16, 1999, FCC rules prohibited the common ownership of two television stations in a single market. Under rules effective November 16, 1999, common ownership of two television stations (commonly known as a duopoly) in one market became permissible in certain limited circumstances. The new rules also permit a television station owner to program up to 15% of the weekly broadcast hours of another station in the same market pursuant to agreements known as time brokerage agreements or local marketing agreements ("LMAs"), provided that the licensee of the other station maintains ultimate control and responsibility for the programming and operations of the station and compliance with applicable FCC rules and policies. Currently there are no television duopolies in any of our markets. Programming and Advertising. The Communications Act requires broadcasters to serve the public interest. Thus, our television and radio stations are required to present some programming that is responsive to community problems, needs, and interests. We must also broadcast informational and educational programming for children, and limit the amount of commercials aired during children's programming. We are also required to maintain records demonstrating our broadcasting of public interest programming. FCC rules impose restrictions on the broadcasting of political advertising, sponsorship identifications, and the advertisement of contests and lotteries. Cable Television. In many parts of the country, cable television operators rebroadcast television signals via cable. In connection with cable rebroadcasts of those signals, each television station is granted, pursuant to the Cable Television Consumer Protection and Competition Act of 1992, either "must-carry rights" or "retransmission consent rights." Each television broadcaster must choose either must-carry rights or retransmission consent rights with regard to its local cable operators. If a broadcaster chooses must-carry rights, then the cable operator will probably will be required to carry the local broadcaster's signal. Must-carry rights are not absolute, however, and their exercise depends on variables such as the number of activated channels on, and the location 15 and size of, the cable system, and the amount of duplicative programming on the broadcast station which duplicates the programming of another broadcast station with must-carry rights. If a broadcaster chooses retransmission consent rights, the broadcaster is entitled to (1) prohibit a cable operator from carrying its signal, or (2) consent to a cable operator's rebroadcast of the broadcaster's signal, either without compensation or pursuant to a negotiated compensation arrangement. All of the television stations that we own or program have, in the majority of cases, chosen retransmission consent rights, rather than must-carry rights, within their respective markets. FCC Rule Changes. Communications laws and FCC rules are subject to change. For example, the FCC recently adopted rules that reduce the required distance between existing stations and allow the utilization of directional antennas, terrain shielding, and other engineering techniques. Other changes may result in the addition of more AM and FM stations, or increased broadcasting power for existing AM and FM stations, thus increasing competition to our broadcasting operations. Congress and the FCC are currently considering many new laws, regulations, and policies that could affect our broadcasting operations. For instance, Congress and/or the FCC currently are considering proposals to: - impose spectrum use or other fees upon broadcasters; - revise rules governing political broadcasting, which may require stations to provide free advertising time to political candidates; - restrict or prohibit broadcast advertising of alcoholic beverages; - change broadcast technical requirements; and - expand the operating hours of daytime-only stations. We cannot predict the likelihood of Congress or the FCC adopting any of these proposals. If any should be adopted, we cannot assess their impact on our broadcasting operations. In addition, we cannot predict the other changes that Congress or the FCC might consider in the future. In addition, FCC rules may be subjected to court challenges. We cannot predict whether any new or current rules will be sustained or struck down if reviewed in courts. Low Power FM. The FCC has adopted rules creating a new, low power FM (LPFM) radio service, which may create new competition in the radio industry. The new LPFM service is limited to non-commercial operation. The LPFM service will consist of two classes of LPFM radio stations with maximum power levels of 10 watts and 100 watts. The 10 watt stations will reach an area with a radius of between one and two miles; the 100 watt stations will reach an area with a radius of approximately three and a half miles. These LPFM stations will operate 16 throughout the FM band. There can be no assurance that the development and introduction of LPFM service will not have an adverse effect on the radio broadcast industry. Digital Audio Broadcasting. The radio broadcasting industry is subject to competition from new media technologies that are being developed or introduced, including the delivery of audio programming by digital audio broadcasting ("DAB"). The FCC has issued licenses for two companies which have begun to provide DAB service by satellite, delivering multiple new audio programming formats to local and national audiences. This new capability has provided an additional source of competition in our markets. Historically, the radio broadcasting industry has grown in terms of total revenues despite the introduction of new technologies for the delivery of entertainment and information, such as television broadcasting, cable television, audio tapes and compact disks. There can be no assurance, however, that the development or introduction in the future of any new media technology will not have an adverse effect on the radio broadcast industry. We are unable to predict the effect such technologies will have on our broadcasting operations. Equal Employment Opportunity Rules. On January 20, 2000, the FCC adopted new Equal Employment Opportunity ("EEO") rules in response to the D.C. Circuit Court of Appeals decision in 1998 in Lutheran Church Missouri Synod v. FCC (Lutheran Church), which held that certain aspects of the FCC's previous broadcast EEO outreach requirements were unconstitutional. On January 16, 2001, the Appeals Court found certain of these rules unlawful. On January 31, 2001, the FCC suspended its EEO Rules. On December 13, 2001, the FCC issued a notice of proposed rulemaking seeking public comment on proposed new EEO rules. Satellite Home Viewer Improvements Act. The Satellite Home Viewer Improvement Act of 1999 ("SHVIA"), signed into law on November 29, 1999, permits satellite companies to provide local broadcast TV signals to all subscribers who reside in a particular DMA. This ability to provide local broadcast channels is commonly referred to as "local into local" service. The SHVIA also permits satellite companies to provide "distant" network broadcast stations to eligible satellite subscribers. A distant network signal is a signal from a market other than the local market. To be eligible to receive a distant network signal, a television viewing household must be an unserved household unable to receive a local network signal, as determined pursuant to criteria established by the FCC. The SHVIA generally seeks to place satellite carriers on an equal footing with local cable television operators when it comes to the availability of broadcast programming, and thus gives consumers more and better choices in selecting a multichannel video program distributor (MVPD), such as cable or satellite service. Local-into-local service is not available in any of our television markets, however, and distant network signals are generally available only to a limited number of unserved television households which cannot receive our broadcast television signal using a conventional rooftop antenna. There can be no assurance that satellite delivered television programming will not have an adverse effect on our broadcasting operations. Low Power Television Stations. The Community Broadcasters Protection Act was signed into law on November 29, 1999. This law gives many low power television ("LPTV") stations the opportunity to achieve primary status. Presently, LPTV stations are secondary, meaning that they are not protected from interference from full power stations and are subject to being 17 displaced by applications to construct new or to modify existing full power stations. LPTV stations that qualify are entitled to receive protection from all other stations in their service area. This class of low power stations is known as "Class A". Our stations KKFX and WBGH are Class A stations. There can be no assurance that the development and introduction of a new class of low power stations will not have an adverse effect on the broadcasting operations of our full-power stations. Purchase and Sale Transactions. The FCC must approve applications to transfer or assign control of a broadcast license. In connection with the application to acquire a broadcasting license, the FCC considers factors generally similar to those discussed under "Renewal of Broadcasting Licenses" below. In addition, the filing by third parties of petitions to deny, informal objections or comments to a proposed transaction can result in significant delays to, as well as denial of, FCC action on a particular application. Renewal of Broadcasting Licenses. Our broadcasting operations' success depends upon our ability to renew our broadcasting licenses, and the ability of the station owners to renew the licenses for the stations we operate under LMAs. Television and radio licenses (including renewals) currently are issued for terms of eight years. In considering whether to renew a license, the FCC considers several factors, including the licensee's compliance with the FCC's children's television rules, the FCC's equal employment opportunity rules, and the FCC's radio frequency rules. The FCC also considers the Communications Act's limitations on license ownership by foreign individuals and foreign companies, and rules limiting common ownership of broadcast, cable and newspaper properties. The FCC also considers the licensee's general character, including the character of persons holding interests in the licensee. In addition, the FCC considers complaints from the public concerning the license holder, and applications from third parties to acquire an existing license. The FCC usually renews a license holder's broadcasting license. Because the FCC may not grant renewal, however, we have no assurance that any of our broadcasting licenses will be renewed, especially if third parties challenge our renewal applications or file competing applications to acquire our licenses. None of our primary broadcasting licenses, or broadcasting licenses owned by the owners of television stations we program under LMAs, are subject to renewal within the next two years. There are no pending challenges or competing applications with respect to any of our broadcasting licenses. INTERACTIVE MEDIA We believe our interactive media operations currently provide more in-depth local news and information than any other Web site covering the markets of Bakersfield, California, Salinas-Monterey, California, and Rochester, New York. Our operations known as the iKnow Network(TM), combine the live, multimedia aspects of television and radio with the depth of news and community information of newspapers. We believe this philosophy of independent partner- 18 built Web sites will make the iKnow Network a useful source for local news and information as well as creating a platform that maximizes the Internet's potential as a unique media outlet. Industry Overview Due to changes in traditional media over the past five years, broadcasters and publishers have struggled with how to stake a profitable claim in the Internet territory. At the heart of this struggle is the conflict between tradition and the new media model required to succeed on the Internet. Traditional media companies have moved en-masse to mirror their broadcast and print formats on-line. This strategy has been only marginally successful and traditional media companies have been largely unsuccessful in attracting the lion's share of the Internet audience. The Internet news and information experience is unlike its more traditional counterparts. Unlimited, on-demand, 24 X 7 multimedia content is rapidly becoming the experience most users expect. Online media is one of the most challenging areas for Internet ventures and content based Web sites have encountered some difficulty because they have had to invest in original content and spend large sums of money on marketing to attract national audiences. Also, startups must overcome the unwillingness of consumers to pay for Web content and therefore must become profitable through the sale of advertising on their Web sites. Despite the growth of local site competition, out-of-market competitors lack a significant advantage owned by every local TV station, radio station or newspaper--the intimate knowledge of the marketplace. The strength of the iKnow Network strategy rests in its local partnership model. By combining the news and information reporting resources of the local iKnow Network partners, we believe that we create a distinct advantage over other Web sites. The iKnow Network's existing ad sales, editorial and promotional staff have first-hand knowledge of the community and possess established relationships at the local market level which we believe increases the potential for success. Operations. Through separate joint venture arrangements with local media partners, we manage the iKnow Network operations in the markets of Bakersfield, California, and Rochester, New York.
MARKET URL LAUNCH DATE DMA ------ --- ----------- --- ROCHESTER, NY www.iKnowRochester.com March 1997(1) 74 BAKERSFIELD, CA www.iKnowBakersfield.com November 2000 130 MONTEREY-SALINAS, CA www.iKnowCentralCoast.com May 2001 118
---------- (1) Originally launched as RochesterToday.com, relaunched in March 2001 as iKnowRochester.com. 19 Sales and Marketing. We sell advertising through banner ads, classified ads, business directory subscriptions, and Web sponsorships directly to local businesses. Competition. We compete directly with other local web sites and indirectly with other types of advertising media companies, including television, newspapers, magazines, outdoor advertising, transit advertising, yellow page directories, direct mail, local cable systems, and satellite broadcasting systems. As a general matter, competition is confined to defined geographic markets. EMPLOYEES As of December 31, 2001, we employed 1,338 full-time persons. The following table sets forth a breakdown of employment in each of our operating segments and our corporate offices for that date: OPERATING SEGMENT/CORPORATE OFFICE PERSONS EMPLOYED ---------------------------------- ---------------- Outdoor Media 243 Television Broadcasting 919 Radio Broadcasting 107 Interactive Media 14 Corporate Offices 55 Approximately 323 of our employees are represented by unions under 15 collective bargaining agreements. Collective bargaining agreements covering approximately 4% of our employees are terminable during 2002. We believe that these collective bargaining agreements will be renegotiated or automatically extended and that any renegotiation will not have a material adverse effect on our operations. RESTRICTIONS ON OUR OPERATIONS In addition to restrictions on our operations imposed by governmental regulations, franchise relationships and other restrictions discussed above, our operations are subject to additional restrictions imposed by our current financing arrangements. Our operations are subject to restrictions imposed by (1) a credit agreement with various lending banks, dated September 7, 2001, as amended (the "2001 Credit Agreement"), and (2) an indenture (the "Indenture"), dated December 14, 1998, respecting our 9% Senior Subordinated Notes due 2009 (the "9% Senior Subordinated Notes"). Some of those provisions restrict our ability to: 20 - apply cash flow in excess of certain levels or proceeds from our sale of capital stock, debt securities or certain asset dispositions; - incur additional indebtedness; - pay dividends on, redeem or repurchase our capital stock, or make investments; - issue or allow any person to own any preferred stock of restricted subsidiaries; - enter into sale and leaseback transactions; - incur or permit to exist certain liens; - sell assets; - in the case of our subsidiaries (other than unrestricted subsidiaries), guarantee indebtedness; - in the case of our subsidiaries (other than unrestricted subsidiaries), create or permit to exist dividend or payment restrictions with respect to The Ackerley Group, Inc.; - engage in transactions with affiliates; - enter into new lines of business; and - consolidate, merge, or transfer all or substantially all of our assets and the assets of our subsidiaries on a consolidated basis. In addition, we are required to maintain specified financial ratios, including maximum leverage ratios, a minimum interest coverage ratio, and a minimum fixed charge coverage ratio. The 2001 Credit Agreement also provides that it is an event of default thereunder if a change of control occurs (as defined in the 2001 Credit Agreement). Assuming that our proposed merger with Clear Channel is consummated, all outstanding amounts under the 2001 Credit Agreement will become due and payable. Similarly, upon a Change of Control (as defined in the Indenture), within 30 days after the closing of the Change of Control transaction, we are required to make an offer to repurchase all of the outstanding 9% Senior Subordinated Notes, on the terms set forth in the Indenture. The 2001 Credit Agreement also requires, subject to certain exceptions, that we apply (i) 100% of the net cash proceeds (as defined in the 2001 Credit Agreement) received by us from the sale of our capital stock (reduced to 50% of the net proceeds if our interest coverage ratio exceeds a certain amount); (ii) 100% of the net cash proceeds received by us from the sale of our debt securities; (iii) 100% of the net cash proceeds received by us from asset dispositions, subject to certain exceptions; (iv) under certain circumstances, 100% of the net insurance or condemnation proceeds (as defined in the 2001 Credit Agreement) received by us; and (v) 100% 21 of our excess cash flow (as defined in the 2001 Credit Agreement) to repay borrowings under the 2001 Credit Agreement (reduced to 75% of the excess cash flow if our interest coverage ratio exceeds a certain amount). It further provides that the amount of borrowings available under the 2001 Credit Agreement will be permanently reduced by the amount of such repayments. In addition, with the exception of repayments derived from excess cash flows, it provides that we must pay a prepayment penalty in certain circumstances. We have pledged substantially all of the stock and material assets of our subsidiaries to secure our obligations under the 2001 Credit Agreement. In addition, nearly all of our subsidiaries have provided guarantees of obligations under the 2001 Credit Agreement and the Indenture. In the event of a default under the 2001 Credit Agreement, the bank lenders could demand immediate payment of the principal of and interest on all such indebtedness, and could force a sale of all or a portion of our subsidiaries to satisfy our obligations. Likewise, because of cross-default provisions in our debt instruments, a default under the 2001 Credit Agreement or the Indenture could result in acceleration of indebtedness outstanding under other debt instruments. Additional information concerning the 2001 Credit Agreement and the Indenture is set forth in Item 7--MD&A--Liquidity and Capital Resources, and in Note 9 to the Consolidated Financial Statements. FINANCIAL INFORMATION REGARDING BUSINESS SEGMENTS Financial information concerning each of our business segments is set forth in Note 17 to the Consolidated Financial Statements. ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS The following risk factors and other information included in this report should be carefully considered. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us or that we currently deem immaterial also may impair our business operations. If any of the following risks actually occur, it could have a material adverse effect on our business, financial condition, and operating results. - After May 31, 2002, we would likely need to extend our waivers of compliance with certain restrictive covenants of our 2001 Credit Agreement or secure other financing arrangements. There can be no guarantee as to whether we would be able to obtain such extensions or financing arrangements. - National advertising may continue to decrease or remain at current levels as a result of current national economic conditions. Our liquidity may be impacted negatively depending on the magnitude of this trend, its duration, and our ability to offset decreased national sales with increased local sales. - Under current FCC regulations, we will need to construct DTV facilities for several of our television stations by November 1, 2002. We estimate that this will cost approximately $9 to $11 million. 22 LEVERAGE; RESTRICTIONS UNDER DEBT INSTRUMENTS; COVENANT COMPLIANCE Financial Leverage. As of March 1, 2002, we had approximately $290.6 million of outstanding indebtedness. Historically, we have acquired additional outdoor media, television and radio broadcasting businesses. We may make acquisitions or capital expenditures in the future that are financed with the proceeds from borrowings. As a result of such transactions, our outstanding indebtedness and interest expense would increase, perhaps substantially. Likewise, such transactions would increase our depreciation and amortization expenses, perhaps substantially. Our degree of leverage could have important consequences to investors, including the following: - our ability to obtain additional financing in the future for working capital, capital expenditures, acquisitions, general corporate purposes, or other purposes may be impaired; - restrictive covenants in debt instruments, as well as the need to apply cash to make debt service payments, may limit payment of dividends on our outstanding Common Stock and Class B Common Stock: - EBITDA (defined as net revenue less operating expenses, workforce reduction costs, and restructuring expenses before amortization, depreciation, interest, net gain (loss) on dispositions of assets, litigation and other expenses) available for purposes other than payment of principal and interest on indebtedness may be reduced; - we may be exposed to the risk of increased interest rates since a portion of our borrowings, including borrowings under the 2001 Credit Agreement (as defined below), bear interest at floating rates; - we may be at a competitive disadvantage compared to competitors that are less leveraged than we are; - we may have limited ability to adjust to changing market conditions; - we may have decreased ability to withstand competitive pressures; and - we may have increased vulnerability to a downturn in general economic conditions or our business. Our ability to make scheduled payments on or to refinance our indebtedness will depend on our financial and operating performance, which in turn will be subject to economic conditions and to financial, business, and other factors beyond our control. In order to fund our debt service and other obligations, we may be forced to reduce or delay planned expansion and capital expenditures, sell assets, obtain additional equity capital or debt financing (if available), or restructure our debt. Accordingly, we cannot guarantee that our operating results, EBITDA, and 23 capital resources will be sufficient for future payments of our indebtedness, to make planned capital expenditures, to finance acquisitions, or to pay our other obligations. Restrictions Imposed by Debt Instruments. We are subject to a number of significant operating and financial restrictions and are required to maintain specified financial ratios, which restrict our operations. See "--Restrictions on Our Operations." Our ability to comply with such covenants and financial ratios may be affected by events beyond our control. Covenant Compliance. In the past, we have from time to time obtained amendments or waivers to certain provisions of our debt instruments, including the 2001 Credit Agreement, in order to remain in compliance with the financial covenants thereunder. We are currently operating under waivers to compliance with certain covenants, including our senior leverage ratio, interest coverage ratio, and fixed charge coverage ratio. There can be no assurance that we will not be required to seek additional waivers or amendments under our debt instruments in the future. Any failure to obtain a necessary amendment or waiver could result in a default under the relevant debt instrument and acceleration of the indebtedness thereunder. An acceleration of our senior debt instruments could result in an acceleration of indebtedness under the 9% senior subordinated notes and other loan documents. If the indebtedness under any of these debt instruments were accelerated, there can be no assurance that we would be able to repay such indebtedness. REGULATION OF OUTDOOR ADVERTISING Outdoor advertising displays are subject to governmental regulation at the federal, state, and local levels. These regulations, in some cases, limit the height, size, location, and operation of outdoor displays and, in some circumstances, regulate the content of the advertising copy displayed on outdoor displays. Changes in laws and regulations affecting outdoor advertising at any level of government may have a material adverse effect on our business, financial condition, or results of operations. See "--Outdoor Media--Outdoor Advertising--Regulation." TELEVISION AND RADIO BROADCASTING Government Regulation of Broadcasting Industry. Pursuant to the Communications Act, the domestic broadcasting industry is subject to extensive federal regulation. In addition, our television station, KVOS, which is located in Bellingham, Washington and broadcasts into Vancouver, British Columbia, is regulated and affected by Canadian law. The restrictions and obligations imposed by these laws and regulations, including their amendment, interpretation, or enforcement, could have a material adverse effect on our business, financial condition, or results of operations. See "--Television and Radio Broadcasting Regulation." Renewal of Broadcasting Licenses. Our business will continue to be dependent upon acquiring and maintaining broadcasting licenses issued by the FCC. Such licenses are currently issued for a term of eight years. Historically, we have been able to renew our broadcast licenses on a regular basis. However, we cannot guarantee that pending or future applications to acquire or renew broadcasting licenses will be approved, or will not include conditions or qualifications adversely affecting our operations, any of which could have a material adverse effect on us. 24 Moreover, governmental regulations and policies may change over time and we cannot guarantee that such changes would not have a material adverse impact on our business, financial condition, or results of operations. See "--Television and Radio Broadcasting Regulation--Renewal of Broadcasting Licenses." Approval of Purchase and Sale Transactions. In connection with purchase and sales transactions, we are required to seek FCC approval. We cannot guarantee that the FCC will approve our applications. Failure to obtain FCC approval to transfer broadcasting licenses in connection with such transactions could adversely affect our business, financial condition, or results of operations. See "--Television and Radio Broadcasting Regulation--Purchase and Sale Transactions." COMPETITION Our four business segments are in highly competitive industries. Our broadcasting and outdoor media businesses compete for audiences and advertising revenue with other broadcasting stations and outdoor media advertising companies, as well as with other media forms. Such other media forms may include newspapers, magazines, transit advertising, yellow page directories, direct mail, local cable systems, satellite broadcasting systems and other local Web sites. Audience ratings and market shares are subject to many variables. Any change, and any adverse change in a particular market, could have a material adverse effect on our business, financial condition, or results of operations. Changes which could have an adverse effect on us include economic conditions, both general and local; shifts in population and other demographics; the level of competition for advertising dollars; a station's market rank; broadcasting power, assigned frequency, network affiliation, and audience identification; fluctuations in operating costs; technological changes and innovations; changes in labor conditions; and changes in governmental regulations and policies and actions of federal regulatory bodies. There can be no assurance that we will be able to maintain or increase our current audience ratings and advertising revenue. In this respect, the entrance of a new television station in the Vancouver, British Columbia market in October 1997 has adversely affected the financial performance of our television station in Bellingham, Washington (KVOS). Certain of our competitors, including a few outdoor advertising and radio broadcasting companies that are substantially larger than our outdoor advertising and radio broadcasting operations have significantly greater financial, marketing, sales and other resources than we have. There can be no assurance that we will be able to compete successfully against our competitors in the future. The interactive media segment is also highly competitive. There do not exist significant barriers to entry for interactive media companies. We focus our interactive media operations primarily on the local television markets that we serve. We do not presently experience significant competition from other interactive media companies that operate on an international or national level. There can be no assurance that this competitive situation will not change in the future. DEPENDENCE ON MANAGEMENT 25 Certain of our executive officers and divisional managers, including Barry A. Ackerley, are especially important to our direction and management. The loss of the services of such persons could have a material adverse effect on the Company, and there can be no assurance that we would be able to find replacements for such persons with equivalent business experience. VOTING CONTROL BY PRINCIPAL STOCKHOLDER Each share of Common Stock has one vote per share and each share of Class B Common Stock has ten votes per share. As of March 1, 2002, Barry A. Ackerley, our Chairman of the Board and Chief Executive Officer, beneficially owned approximately 37% of the outstanding shares of Common Stock and approximately 99% of the outstanding shares of Class B Common Stock, giving him approximately 88% of the combined voting power of our voting securities. See "Item 12--Security Ownership of Certain Beneficial Owners and Management." As a director, the Chairman and Chief Executive Officer, and the majority stockholder of The Ackerley Group, Mr. Ackerley has certain fiduciary duties to minority stockholders under applicable law. However, so long as Mr. Ackerley continues to own or control stock having a majority of the combined voting power of our voting securities, he will have the power to elect all of our directors and effect fundamental corporate transactions, such as mergers, asset sales, and "going private" transactions, without the approval of any other stockholders. Moreover, Mr. Ackerley's voting control would effectively delay or prevent any other person or entity from acquiring or taking control of The Ackerley Group without his approval, whether or not the transaction could provide stockholders with a premium over the then-prevailing market price of their shares or would otherwise be in their best interests. RESTRICTIONS ON THE OWNERSHIP AND TRANSFER OF COMMON STOCK Our Bylaws contain certain restrictions on the transfer of our capital stock in order to comply with the prohibitions on foreign ownership of radio and television stations contained in the Communications Act of 1934 and FCC rules. See "--Television and Radio Broadcasting Regulation--Ownership." These restrictions in our Bylaws, as well as certain related provisions in our Certificate of Incorporation, may adversely affect the ability of investors to acquire, hold, or otherwise transfer our Common Stock. SHARES ELIGIBLE FOR FUTURE SALE As of March 1, 2002, 9,089,652 shares of Common Stock and 11,007,096 shares of Class B Common Stock were held by officers and directors who are considered to be our "affiliates" for purposes of Rule 144 under the Securities Act. As noted above, each share of Class B Common Stock is convertible by the holder at any time into one share of Common Stock. Our affiliates may sell these shares in the public market subject to the volume and other limitations (other than the holding Period limitations, which have been satisfied) of Rule 144 under the Securities Act. No prediction can be made as to the effect, if any, that future sales of shares, or the availability of shares for future sale, will have on the market price of the Common Stock from time to time. Sales of substantial amounts of Common Stock in the public market (including Common Stock issued upon conversion of Class B Common Stock), or the perception 26 that such sales could occur, could have a material adverse effect on prevailing market prices for the Common Stock. ITEM 2 - PROPERTIES Our principal executive offices are located at 1301 Fifth Avenue, Suite 4000, Seattle, Washington 98101. We lease the offices, which consist of approximately 16,800 square feet, pursuant to a lease that expires in 2006. The following table sets forth certain information regarding our facilities as of December 31, 2001:
Approximate Square Approximate Footage Square Location Nature of Facility Owned Footage Leased -------- ------------------ ----- -------------- OUTDOOR MEDIA Seattle, Washington (Outdoor Advertising) Plant 24,966 1,185 Portland, Oregon (Outdoor Advertising) Plant 10,923 570 Boston Massachusetts (Outdoor Advertising) Plant 31,882 3,825 TELEVISION BROADCASTING Syracuse, New York (WIXT) Station Operations 40,000 -- Rochester, New York (WOKR) Station Operations 35,427 -- Binghamton, New York (WIVT, WBGH) Station Operations 10,819 -- Utica, New York (WUTR) Station Operations 12,148 -- Watertown, New York (WWTI) Station Operations -- 10,000 Elmira, New York (WETM)(1) Station Operations 20,606 -- Santa Barbara-Santa Maria-San Luis Obispo, California (KCOY, KKFX) Station Operations 13,000 -- Salinas-Monterey, California (KCBA(1), KION) Station Operations 47,841 -- Bakersfield, California (KGET) Station Operations 30,450 -- Fresno, California (KGPE) Station Operations 6,500 -- Eugene, Oregon (KMTR) Station Operations 9,230 3,000 Eureka, California (KVIQ) Station Operations 10,162 1,200 Santa Rosa, California (KFTY) Station Operations 13,000 -- Bellingham, Washington (KVOS) Station Operations 13,130 11,889 Fairbanks, Alaska (KTVF) Station Operations -- 13,872 RADIO BROADCASTING Seattle, Washington (KJR(AM), KBTB(FM), KUBE(FM)) Station Operations -- 42,816 Tacoma, Washington (KHHO(AM)) Station Operations -- 2,075 INTERACTIVE MEDIA(2) -- -- -- OTHER Seattle, Washington (Corporate Offices) Offices -- 16,814 National Sales Offices in New York, Los Angeles, and Chicago Offices -- 9,164
-------------------- (1) As of December 31, 2001, we programmed these stations under LMAs. Accordingly, this table reflects data for the properties which are owned or leased by the station owners for whom we program the stations. (2) Our interactive media operations utilizes equipment within our existing facilities and currently do not have separate designated facilities. In general, we believe that our facilities are adequate for our present business and that additional space is generally available for expansion without significant delay. In 2001, we paid aggregate annual rentals on office space and operating facilities of approximately $4.3 million. 27 At December 31, 2001, we owned 205 vehicles and leased 214 vehicles of various types for use in our operations. We own a variety of broadcast-related equipment, including broadcast towers, transmitters, generators, microwave systems and audio and video equipment used in our broadcasting business. We presently lease, under a private carrier agreement, a Gulfstream jet which is used for executive travel between our facilities. We also lease a high definition mobile television broadcasting unit which is used to provide broadcast and production services for our television stations and outside parties. We believe that all of our buildings and equipment are adequately insured in accordance with industry practice. ITEM 3 - LEGAL PROCEEDINGS We become involved, from time to time, in various claims and lawsuits incidental to the ordinary course of our operations, including such matters as contract and lease disputes and complaints alleging employment discrimination. In addition, we participate in various governmental and administrative proceedings relating to, among other things, condemnation of outdoor advertising structures without payment of just compensation and matters affecting the operation of broadcasting facilities. Malecki v. The Ackerley Group, Inc. On February 25, 2002, a complaint was filed in the Superior Court of Washington against The Ackerley Group, Inc. by James Malecki, a photographer in Seattle, Washington, who in 1998 provided photography services to the Company. The complaint alleges that a contract existed between the Company and plaintiff and that the Company breached that alleged contract by not returning certain photographs to plaintiff. Plaintiff claims damages in excess of $1.5 million plus interest and attorneys' fees as redress for the alleged breach. ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders in the fourth quarter of 2001. EXECUTIVE OFFICERS OF THE REGISTRANT Our executive officers are:
Name Age Position ---- --- -------- Barry A. Ackerley 67 Chairman and Chief Executive Officer Gail A. Ackerley 64 Co-Chairman and Co-Chief Executive Officer Christopher H. Ackerley 32 President Kevin E. Hylton 45 Senior Vice President, Chief Financial Officer, Treasurer and Assistant Secretary Sean M. Tallarico 36 Corporate Controller
28 Mr. Barry A. Ackerley, one of our founders, has been the Chief Executive Officer and a director of The Ackerley Group and its predecessor and subsidiary companies since 1975. He currently serves as our Chairman. Ms. Gail A. Ackerley was elected to our Board of Directors in May 1995, and became Co-Chairman in September 1996. She served as one of our Co-Presidents from November 1997 to February 15, 2000. Ms. Ackerley has served as our Chairman of Ackerley Corporate Giving since 1986, supervising our charitable activities. Mr. Christopher H. Ackerley was named President on July 31, 2001, with principal responsibility for overseeing our operating segments and corporate functions. As Co-President, he was responsible for overseeing our marketing, investor relations, information technology, and technology-venture investments. He joined The Ackerley Group in 1995, and was elected Vice President for Marketing and Development in May 1998. He also served as Executive Vice President, Operations and Development from December 1998 until his election as Co-President in 2000. Mr. Kevin E. Hylton was named Senior Vice President and Chief Financial Officer on June 5, 2000. Prior to joining us he served as Director of Finance for Nordstrom, Inc. from March 1999 to April 2000. From December 1987 to July 1998, he was Vice President and Corporate Controller for Westin Hotels and Resorts. Mr. Sean M. Tallarico was named Corporate Controller on April 1, 1998. He joined The Ackerley Group in 1996 as Controller of the Sports & Entertainment segment. Prior to joining us, Mr. Tallarico served in the audit practice of Ernst & Young, LLP, from December 1990 to June 1996, leaving as an Audit Manager. Barry A. Ackerley and Gail A. Ackerley are husband and wife. Christopher H. Ackerley is their son. There are no other family relationships among any of our executive officers. All officers serve at the pleasure of our Board of Directors. PART II ITEM 5 - MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS As of March 1, 2002, 35,319,002 shares of our common stock were issued and outstanding, of which 24,298,380 shares were Common Stock and 11,020,622 shares were Class B Common Stock. The Common Stock was held by 491 shareholders of record; the Class B Common Stock was held by 22 shareholders of record. Our Board of Directors declared a cash dividend of $.02 per share in 2000. Our Board of Directors determined not to declare a dividend in 2001. Payment of any future dividends is at the discretion of the Board of Directors and depends on a number of conditions. Among other things, dividend payments depend upon our results of operations and financial condition, capital requirements and general economic conditions. The terms of our senior debt impose certain limits upon our ability to pay dividends and make other distributions. In addition, we are subject 29 to the General Corporation Law of Delaware, which restricts our ability to pay dividends in certain circumstances. COMMON STOCK Our Common Stock is listed and trades on the New York Stock Exchange under the symbol "AK." The table below sets forth the high and low sales prices of our Common Stock for each full quarterly period in the two most recent fiscal years according to the New York Stock Exchange.
2001 High Low 2000 High Low ---- ---- --- ---- ---- --- First Quarter $15.06 $ 8.69 First Quarter $19.53 $12.36 Second Quarter $12.80 $10.33 Second Quarter $15.06 $10.94 Third Quarter $14.85 $ 8.50 Third Quarter $14.13 $ 9.69 Fourth Quarter $17.89 $ 9.40 Fourth Quarter $11.63 $ 7.88
On March 1, 2002, the high and low sales prices of our Common Stock, according to the New York Stock Exchange, were $16.73 and $16.15, respectively. CLASS B COMMON STOCK Our Class B Common Stock is not publicly traded. Persons owning shares of our Class B Common Stock may trade such shares only as permitted by our Certificate of Incorporation, which imposes restrictions on such transfer. Thus, there is no trading market for shares of our Class B Common Stock. 30 ITEM 6 - SELECTED FINANCIAL DATA The table below sets forth selected consolidated financial data regarding our operations. The information in the table has been derived from audited Consolidated Financial Statements. You should read the information in the table in conjunction with the sections titled "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated Financial Statements (and Notes) included elsewhere in this report.
YEAR ENDED DECEMBER 31, ---------------------------------------------------------------------------------- 2001 2000 1999 1998 1997 --------- --------- --------- --------- --------- Consolidated Statement of Income Data: (IN THOUSANDS, EXCEPT PER SHARE DATA) Revenue ........................... $ 231,425 $ 263,305 $ 243,130 $ 235,516 $ 229,828 Agency commissions and discounts 32,568 38,741 35,547 34,015 32,085 --------- --------- --------- --------- --------- Net revenue ....................... 198,857 224,564 207,583 201,501 197,743 Expenses (other income): Operating expenses ............ 179,715 181,644 157,065 150,911 142,089 Workforce reduction costs ..... 2,442 -- -- -- -- Restructuring expenses ........ -- (178) 1,125 -- -- Depreciation and amortization expense...................... 45,193 39,161 26,042 14,078 13,184 Interest expense .............. 28,834 27,687 33,510 23,151 24,666 Interest Income ............... (348) (1,892) (551) (359) (457) Net loss (gain) on dispositions of assets....... 2,202 (277,650)(1) (28,999)(1) (33,524)(1) -- Litigation expense (adjustment) -- -- -- -- (5,000) Other ......................... 2,056 901 733 452 9,344 --------- --------- --------- --------- --------- Total expenses (other income).................... 260,094 (30,327) 188,925 154,709 183,826 --------- --------- --------- --------- --------- Income (loss) from continuing operations before income taxes and extraordinary items.. (61,237) 254,891 18,658 46,792 13,917 Income tax benefit (expense) ...... 21,206 (96,284) (7,917) (18,576) 19,168 --------- --------- --------- --------- --------- Income (loss) from continuing operations before extraordinary items.......................... (40,031) 158,607 10,741 28,216 33,085 Income (loss) from discontinued operations, net of taxes(2) ... 92,681 (9,707) (2,778) (4,693) (156) --------- --------- --------- --------- --------- Income before extraordinary items 52,650 148,900 7,963 23,523 32,929 Extraordinary items - loss on debt extinguishment and merger costs, net of taxes .... (7,115) -- (1,373) (4,346) -- --------- --------- --------- --------- --------- Net income applicable to common shares......................... $ 45,535 $ 148,900 $ 6,590 $ 19,177 $ 32,929 ========= ========= ========= ========= ========= Per common share: Income from continuing operations before extraordinary items.......... $ (1.14) $ 4.54 $ .33 $ .89 $ 1.05 Discontinued operations ....... 2.64 (.28) (.09) (.14) -- Extraordinary items ........... (.20) -- (.04) (.14) -- --------- --------- --------- --------- --------- Net income .................... $ 1.30 $ 4.26 $ .20 $ .61 $ 1.05 ========= ========= ========= ========= ========= Common shares used in per share computation.............. 35,088 34,994 32,932 31,627 31,345 Per common share -- assuming dilution: Income before extraordinary items....................... $ (1.14) $ 4.52 $ .32 $ .88 $ 1.04 Discontinued operations ....... 2.64 (.28) (.08) (.14) -- Extraordinary items ........... (.20) -- (.04) (.14) -- --------- --------- --------- --------- --------- Net income .................... $ 1.30 $ 4.24 $ .20 $ .60 $ 1.04 ========= ========= ========= ========= ========= Common shares used in per share computation -- assuming dilution .................... 35,088 35,122 33,110 31,883 31,652 Dividends ........................ $--- $ .02 $ .02 $ .02 $ .02 ========= ========= ========= ========= ========= Consolidated Balance Sheet Data (at end of period): Working capital (deficit) ........ ($233,991) $ 15,310 $ 21,704 $ 15,706 $ 12,019 Total assets ..................... 576,841 667,307 528,436 316,126 266,385 Total long-term debt ............. 1,493 385,641 403,761 266,999 213,294 Total debt ....................... 290,579 394,671 414,593 270,100 229,424 Stockholders' equity (deficiency). 223,005 175,980 27,289 (25,841) (44,909)
-------------------- (1) See Note 4 to the Consolidated Financial Statements. (2) See Note 5 to the Consolidated Financial Statements. 31 ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FORWARD-LOOKING STATEMENTS Statements appearing in this section, Management's Discussion and Analysis of Financial Condition and Results of Operations, and elsewhere in this report, which are not historical in nature (including the discussions of the effects of recent acquisitions and dispositions, business transactions, and similar information), are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. We caution our shareholders and potential investors that any forward-looking statements or projections set forth in this section and elsewhere in the annual report are subject to risks and uncertainties which may cause actual results to differ materially from those projected. After the date of this Annual Report, we will not make any public announcements updating any forward-looking statement contained in this report. Important factors that could cause the results to differ materially from those expressed in this section or elsewhere in the annual report include: - material adverse changes in general economic conditions, including changes in inflation and interest rates, changes in demand for advertising nationally or in the local markets that we serve, including cyclical aspects such as political advertising; - recessionary influences in the regional markets that we serve; - changes in laws and regulations affecting the outdoor advertising and television and radio broadcasting businesses, including changes in the FCC's treatment of local marketing agreements and related matters, and the possible inability to obtain FCC consent to proposed or pending acquisitions or dispositions of broadcasting stations; - competitive factors in the outdoor advertising, television broadcasting, radio broadcasting, and interactive media businesses; - expiration or non-renewal of broadcasting licenses and local marketing agreements; - labor matters, changes in labor costs, loss of key employees, including key broadcasting employees, renegotiation of labor contracts, and risk of work stoppages or strikes; - matters relating to our level of indebtedness, including restrictions imposed by financial covenants; - material changes to accounting standards. 32 OVERVIEW We reported net income of $45.5 million in 2001, compared to $148.9 million in 2000. Our net income for 2001 includes a net gain from disposal of discontinued operations of $92.7 million and extraordinary losses of $7.1 million. By contrast, our 2000 net income includes a net gain on dispositions of assets of $277.7 million and a loss from discontinued operations of $9.7 million. Net revenue in 2001 decreased by $25.7 million, or 11%, from 2000, and our EBITDA (as defined below) decreased by $26.4 million, or 61%. On October 5, 2001, we entered into a merger agreement (the "Merger Agreement") with Clear Channel Communications, Inc. ("Clear Channel"). Under the terms of Merger Agreement, each share of the common stock and the Class B common stock of Ackerley will be converted into the right to receive 0.35 of a share of the common stock of Clear Channel. The transaction is intended to be tax-free to the Company's stockholders. Our stockholders approved the transaction on January 24, 2002. The transaction, which we expect to consummate in the second quarter of 2002, is subject to customary regulatory approvals and closing conditions. On April 2, 2001, we sold our sports & entertainment operations pursuant to a letter of intent signed on December 8, 2000. Accordingly, our sports & entertainment operations are reflected in our financial statements as a discontinued operation for all periods presented. This transaction is more fully discussed in Note 5 to the Consolidated Financial Statements. As with many media companies, our acquisitions and dispositions have resulted in significant non-cash and non-recurring charges to income. For this reason, in addition to net income, our management believes that EBITDA (defined as net revenue less operating expenses, work force reduction costs, and restructuring expenses before amortization, depreciation, interest, net gain (loss) on dispositions of assets and other expenses) is an appropriate measure of our financial performance. Similarly, we believe that Segment Operating Cash Flow (defined as EBITDA before corporate overhead and workforce reduction costs) is an appropriate measure of our segments' financial performance. These measures exclude certain expenses that management does not consider to be costs of ongoing operations. We use EBITDA to pay interest and principal on our long-term debt as well as to finance capital expenditures. EBITDA and Segment Operating Cash Flow, however, are not to be considered as alternatives to net income as an indicator of our operating performance or to cash flows as a measure of our liquidity. RESULTS OF OPERATIONS The following tables set forth certain historical financial and operating data for each of the three years in the period ended December 31, 2001, including net revenue, operating expenses, and Segment Operating Cash Flow information by segment: 33
YEAR ENDED DECEMBER 31, ---------------------------------------------------------------- 2001 2000 1999 ------------------- ------------------- ------------------- AS % OF AS % OF AS % OF NET NET NET AMOUNT REVENUE AMOUNT REVENUE AMOUNT REVENUE -------- ------- -------- ------- -------- ------- Net revenue $198,857 100.0% $224,564 100.0% $207,583 100.0% Segment operating expenses 162,668 81.8 157,674 70.2 142,048 68.4 Corporate overhead 17,047 8.6 23,792 10.6 16,142 7.8 Workforce reduction costs 2,442 1.2 -- -- -- -- -------- -------- -------- Total operating expenses 182,157 91.6 181,466 80.8 158,190 76.2 -------- -------- -------- EBITDA 16,700 8.4 43,098 19.2 49,393 23.8 Other expenses and (income): Depreciation and amortization expenses 45,193 22.7 39,161 17.4 26,042 12.5 Interest expense 28,834 14.5 27,687 12.3 33,510 16.1 Interest Income (348) (0.2) (1,892) (0.8) (551) (0.3) Net loss (gain) on dispositions of assets 2,202 1.1 (277,650) (123.6) (28,999) (14.0) Other 2,056 1.0 901 0.4 733 0.4 -------- -------- -------- Total other expenses and (income) 77,937 39.2 (211,793) (94.3) 30,735 14.8 Income (loss) from continuing operations before income taxes and extraordinary items (61,237) (30.8) 254,891 113.5 18,658 9.0 Income tax benefit (expense) 21,206 10.7 (96,284) (42.9) (7,917) (3.8) -------- -------- -------- Income (loss) from continuing operations 5.2 before extraordinary items (40,031) (20.1) 158,607 70.6 10,741 Gain (loss) from discontinued operations, net of taxes 92,681 46.6 (9,707) (4.3) (2,778) (1.4) -------- -------- -------- Income before extraordinary items 52,650 26.5 148,900 66.3 7,963 3.8 Extraordinary items, net of taxes (7,115) (3.6) -- -- (1,373) (0.6) -------- -------- -------- Net income $45,535 22.9 $148,900 66.3 $ 6,590 3.2 ======= ======== ======
34
YEAR ENDED DECEMBER 31, ----------------------------------------- 2001 2000 1999 --------- --------- --------- (DOLLARS IN THOUSANDS) NET REVENUE: Outdoor media $ 77,912 $ 89,309 $ 98,751 Television broadcasting 98,222 107,615 81,669 Radio broadcasting 22,509 27,589 27,163 Interactive media 214 51 -- --------- --------- --------- Total net revenue $ 198,857 $ 224,564 $ 207,583 ========= ========= ========= SEGMENT OPERATING EXPENSES: Outdoor media $ 48,927 $ 51,364 $ 56,877 Television broadcasting 92,307 86,841 69,608 Radio broadcasting 20,058 19,018 15,563 Interactive media 1,376 451 -- --------- --------- --------- Total segment operating expenses $ 162,668 $ 157,674 $ 142,048 ========= ========= ========= SEGMENT OPERATING CASH FLOW AND EBITDA: Outdoor media $ 28,985 $ 37,945 $ 41,874 Television broadcasting 5,915 20,774 12,061 Radio broadcasting 2,451 8,571 11,600 Interactive media (1,162) (400) -- --------- --------- --------- Total Segment Operating Cash Flow 36,189 66,890 65,535 Corporate overhead (17,047) (23,792) (16,142) Workforce reduction costs (2,442) -- -- --------- --------- --------- EBITDA $ 16,700 $ 43,098 $ 49,393 ========= ========= ========= CHANGE IN NET REVENUE FROM PRIOR PERIODS: Outdoor media (12.8)% (9.6)% (9.0)% Television broadcasting (8.7) 31.8 19.3 Radio broadcasting (18.4) 1.6 11.0 Interactive media 319.6 NA NA Change in total net revenue (11.4) 8.2 3.0 SEGMENT OPERATING EXPENSES AS A % OF NET REVENUE: Outdoor media 62.8% 57.5% 57.6% Television broadcasting 94.0 80.7 85.2 Radio broadcasting 89.1 68.9 57.3 Interactive media 643.0 884.3 -- Total segment operating expenses as a % of total net revenue: 81.8 70.2 68.4 SEGMENT OPERATING CASH FLOW AS A % OF NET REVENUE: Outdoor media 37.2% 42.5% 42.4% Television broadcasting 6.0 19.3 14.8 Radio broadcasting 10.9 31.1 42.7 Interactive media (543.0) (784.3) -- Segment Operating Cash Flow as a % of total net revenue 18.2 29.8 31.6 EBITDA AS A % OF TOTAL NET REVENUE 8.4 19.2 23.8
35 2001 COMPARED WITH 2000 Net Revenue. Our 2001 net revenue was $198.9 million. This represented a decrease of $25.7 million, or 11%, compared to $224.6 million in 2000. Changes in net revenue were as follows: - Outdoor Media. 2001 net revenue from our outdoor media segment decreased by $11.4 million, or 13%, from 2000. This decrease resulted primarily from a decrease in national sales, particularly in the dot-com and automotive advertising categories. While our local sales were also impacted negatively by declines in dot-com advertising, they were partially offset by increases in a variety of other categories. - Television Broadcasting. 2001 net revenue from our television broadcasting segment decreased by $9.4 million, or 9%, from 2000. These results include television stations WETM and WBGH acquired in February 2000, WWTI in April 2000, KKFX in May 2000, and KGPE in August 2000. Excluding these transactions, net revenue for 2001 decreased $13.8 million, or 15% compared to 2000. This decrease was due primarily to decreases in political revenue and national sales, particularly in the automotive advertising category. - Radio Broadcasting. 2001 net revenue from our radio broadcasting segment decreased by $5.1 million, or 18%, from 2000. This decrease was due primarily to a decrease in both national and local sales, particularly in the dot-com and automotive advertising categories, and is consistent with industry trends. Segment Operating Expenses. 2001 segment operating expenses (which exclude corporate overhead) were $162.7 million. This represented an increase of $5.0 million, or 3%, compared to $157.7 million in 2000. Changes in segment operating expenses were as follows: - Outdoor Media. 2001 operating expenses from our outdoor media segment decreased by $2.5 million, or 5%, from 2000. This decrease was due primarily to cost reduction initiatives implemented in the second quarter of 2001. - Television Broadcasting. 2001 operating expenses from our television broadcasting segment increased by $5.5 million, or 6%, from 2000. This increase was mainly due to the addition of stations WETM and WBGH in February 2000, WWTI in April 2000, KKFX in May 2000, and KGPE in August 2000. Excluding those transactions, operating expenses for 2001 increased $1.0 million, or 1%, compared to 2000. The increase was due to increased programming and fiber optic connection costs, offset partially by cost reduction initiatives implemented in the second quarter of 2001. - Radio Broadcasting. 2001 operating expenses from our radio broadcasting segment increased by $1.0 million, or 6%, from 2000. This increase was primarily due to increased costs of on-air talent and increased costs related to the radio broadcasting segment's new operating facility. 36 Corporate Overhead Expenses. Corporate overhead expenses were $17.0 million in 2001. This represented a decrease of $6.7 million, or 28%, from 2000. This decrease was a result primarily of cost reduction initiatives implemented in the second quarter of 2001 and one-time costs associated with celebrating our 25th anniversary in the second quarter of 2000. Workforce Reduction Costs. As more fully described in Note 16 to the consolidated financial statements, we recorded a charge of $2.4 million in the second quarter of 2001 consisting of termination benefits for employees whose positions were eliminated in connection with a company-wide cost reduction initiative, which included a senior management transition. EBITDA. Our EBITDA was $16.7 million in 2001. This represented a decrease of $26.4 million, or 61%, compared to $43.1 million in 2000. Depreciation and Amortization Expenses. Our depreciation and amortization expenses were $45.2 million in 2001. This represented an increase of $6.0 million, or 15%, compared to $39.2 million in 2000. This increase resulted primarily from depreciation and amortization expenses relating to our business acquisitions during 2000, depreciation expense from construction of a new operating facility for our radio broadcasting operations and our corporate technology group, and depreciation expense from our investment in Digital CentralCasting and automated news production systems for our television broadcasting segment. Interest Expenses. Our interest expense was $28.8 million in 2001. This represented an increase of $1.1 million, or 4%, from $27.7 million. This increase was due primarily to higher average debt balances during 2001, which resulted primarily from borrowings to fund the acquisition of television station KGPE in the third quarter of 2000 and our funding of operating losses associated with our discontinued sports & entertainment operations through April 2, 2001. Our debt balances were lower in 2000 due to the application of proceeds from the sale of our Florida outdoor advertising operations in January 2000. Interest Income. We recognized interest income of $0.3 million in 2001 compared to $1.9 million in 2000. The 2000 amount was higher due primarily to interest income received on the proceeds from the sale of our Florida outdoor advertising operations in January 2000. Other. We hold investments in several closely held companies. During 2001, impairment charges of $1.7 million were recorded with respect to these investments as we considered these impairments to be other than temporary. The remaining items in other expenses include $0.3 million and $0.1 million of stock compensation expense in 2001 and 2000, respectively, and equity in losses of affiliates of $0.8 million in 2000. Net Gain on Dispositions of Assets. As described in Note 4 to the consolidated financial statements, we recognized a net loss of $2.2 million on the disposal of radio broadcasting transmission facilities in the second quarter of 2001. We recognized a net gain at $277.7 million in 2000 due to the sale of our Florida outdoor advertising operations and television station KCBA in California in January 2000. 37 Income Taxes. We recognized an income tax benefit of $21.2 million based on our loss from continuing operations before extraordinary items of $61.2 million in 2001 compared to income tax expense of $96.3 million based on our income from continuing operations before extraordinary item of $254.9 million in 2000. The effective tax rate was 35% in 2001 compared to 38% in 2000. Discontinued Operations. As more fully described in Note 5 to the consolidated financial statements, we recorded an after-tax gain of $92.7 million in 2001 on the sale of our discontinued sports & entertainment operations. For 2000, we recorded an after-tax loss of $9.7 million from our discontinued sports & entertainment operations. Extraordinary Items. In 2001, we incurred costs of $6.7 million in connection with our proposed merger with Clear Channel. In addition, we recorded a pre-tax charge of $2.0 million for the write-off of deferred financing costs in connection with the replacement of our bank credit facilities. Net of the income tax benefit of $1.6 million, these two items totaled $7.1 million. There were no such charges in 2000. Net Income. Our net income was $45.5 million in 2001. This represented a decrease of $103.4 million, or 69%, from $148.9 million in 2000. 2000 COMPARED WITH 1999 Net Revenue. Our 2000 net revenue was $224.6 million. This represented an increase of $17.0 million, or 8%, compared to $207.6 million in 1999. Changes in net revenue were as follows: - Outdoor Media. Net revenue from our outdoor media segment decreased by $9.5 million, or 10%, from 1999. This decrease was primarily due to the absence of our Florida outdoor advertising operations, which we sold in January 2000. Excluding our Florida outdoor advertising operations, net revenue from our outdoor media segment increased by $16.4 million, or 23%, from 1999. This increase mainly resulted from growth in national and local sales in the Boston and Northwest markets. We completed the expansion of our national sales organization during 1999, which contributed to our national sales growth. Within this segment, dot-com advertising increased 148% to $12.1 million in 2000. - Television Broadcasting. Net revenue from our television broadcasting segment increased by $25.9 million, or 32%, from 1999. This increase was mainly due mainly to the addition of stations WETM, WBGH, WWTI, KGPE, and KKFX in 2000; stations WOKR and KTVF in 1999; and the exchange of station KKTV for KCOY in 1999. Excluding these transactions, net revenue from our television broadcasting segment increased by $5.3 million, or 9%, from 1999. This increase was due primarily to political advertising revenue, which totaled approximately $12.0 million ($10.1 million excluding acquired stations) in 2000. 38 - Radio Broadcasting. Net revenue from our radio broadcasting segment increased by $0.4 million, or 2%, from 1999. Revenue growth was negatively impacted by the format change with one of our FM stations. Segment Operating Expenses. Segment operating expenses (which exclude corporate overhead) were $157.7 million in 2000. This represented an increase of $15.7 million, or 11%, compared to $142.0 million in 1999. Changes in segment operating expenses were as follows: - Outdoor Media. Operating expenses from our outdoor media segment decreased by $5.5 million, or 10%, from 1999. This decrease was due primarily to the absence of our Florida outdoor advertising operations, which we sold in January 2000. Excluding our Florida outdoor advertising operations, operating expenses from our outdoor media segment increased by $11.7 million, or 30%, from 1999. This increase was primarily due to the acquisition of five outdoor media companies, higher lease costs, increased employment-related expenses, and increased expenses related to the expansion of our national sales force. - Television Broadcasting. Operating expenses from our television broadcasting segment increased by $17.2 million, or 25%, from 1999. This increase was due mainly to the addition of stations WETM, WBGH, WWTI, KGPE, and KKFX in 2000; stations WOKR and KTVF in 1999; and the exchange of station KKTV for KCOY in 1999. Our 1999 operating expenses included a restructuring charge of $1.1 million recognized in connection with our implementation of Digital CentralCasting. This restructuring charge consisted primarily of costs associated with employee staff reductions, contract terminations, legal, and other costs associated directly with the restructuring. Excluding these transactions, operating expenses from our television broadcasting segment increased by $2.4 million, or 4%, from 1999. This increase was primarily due to higher program, promotion, and production expenses relating to the expansion of our local news. - Radio Broadcasting. Operating expenses from our radio broadcasting segment increased by $3.5 million, or 22%, from 1999. This increase was primarily due to higher expenses associated with increased sales activity and the expense associated with the previously noted format change with one of our FM stations. Corporate Overhead Expenses. Our corporate overhead expenses were $23.8 million in 2000. This represented an increase of $7.7 million, or 47%, from 1999. Approximately $3.3 million of this increase was due to costs associated with the celebration of our 25th anniversary and the operating and estimated disposal costs of a company aircraft. The remainder of the increase was due primarily to increased travel costs, expansion of corporate staff to support our growth from our acquisitions, and greater utilization of outside services. EBITDA. Our EBITDA was $43.1 million in 2000. This represented a decrease of $6.3 million, or 13%, compared to $49.4 million in 1999. The decrease in Segment Operating Cash Flow from our outdoor media and radio broadcasting segments, and the increase in corporate overhead expenses, was partially offset by the increase in Segment Operating Cash 39 Flow from our television broadcasting segment. EBITDA as a percentage of total net revenue decreased to 19% in 2000 compared to 24% in 1999. Depreciation and Amortization Expenses. Our depreciation and amortization expenses were $39.2 million in 2000. This represented an increase of $13.2 million, or 51%, compared to $26.0 million in 1999. This increase resulted primarily from depreciation and amortization expenses relating to our business acquisitions during 2000. In addition, depreciation expense increased as a result of our investment in a new operating facility for our radio broadcasting and corporate technology operations, and our investment in the Digital CentralCasting and ParkerVision systems for our television broadcasting segment. Interest Expense. Our interest expense was $27.7 million in 2000. This represented a decrease of $5.8 million, or 17%, from $33.5 million in 1999. This decrease was due to lower average debt balances during 2000 resulting from the application of proceeds from the sale of our Florida outdoor advertising operations. Interest Income. We recognized interest income of $1.9 million in 2000 compared to $0.6 million in 1999. The 2000 amount was higher due primarily to interest income received on the proceeds from the sale of our Florida outdoor advertising operations in January 2000. Other. We recognized stock compensation expense of $0.1 million in 2000 compared to $0.6 million in 1999. The 1999 expense primarily related to the amendments of certain stock option agreements. Other expenses also includes equity in losses of affiliates of $0.8 million in 2000 and $0.2 million in 1999. Net Gain on Dispositions of Assets. We recognized a net gain on disposition of assets of $277.7 million. This gain consisted of a $269.3 million gain from the sale of our Florida outdoor advertising operations, an $8.8 million gain from the sale of station KCBA, and a $0.4 million loss on disposal of certain assets of our radio broadcasting segment resulting from its relocation to a new facility. The net gain of $29.0 million in 1999 resulted from a $28.6 million gain from the exchange of the assets of television station KKTV for the assets of television station KCOY, a $1.6 million gain relating to the sale of our airport advertising operations, and a $1.2 million loss on the sale of a radio broadcasting tower. Income Tax Expense. We recognized income tax expense of $96.3 million based on our income from continuing operations before extraordinary item of $254.9 million in 2000 compared to $7.9 million based on our income from continuing operations before extraordinary item of $18.7 million in 1999. The effective tax rate in 2000 was 38% compared to 42% in 1999. Loss From Discontinued Operations. Our loss from discontinued operations was $9.7 million net of taxes for 2000 compared to $2.8 million in 1999. This increase was due primarily to increased operating expenses, particularly for SuperSonics player compensation and other team costs, which outpaced the growth in net revenue. 40 Extraordinary Item. In 1999, we replaced our existing 1998 Credit Agreement with a new $325.0 million credit agreement and redeemed our $20.0 million 10.48% Senior Subordinated Notes. These transactions resulted in an aggregate charge of $1.4 million, net of taxes, primarily consisting of the write-off of deferred financing costs and prepayment fees. Net Income. Our net income was $148.9 million in 2000. This represented an increase of $142.3 million from $6.6 million in 1999. LIQUIDITY AND CAPITAL RESOURCES Cash used in operating activities was $63.2 million in 2001 compared to $78.3 million in 2000. Included in these amounts are cash paid for income taxes of $35.8 and $70.7 million in 2001 and 2000, respectively. These income tax payments resulted primarily from the gain on sale of our sports & entertainment operations in 2001 and the gain on sale of our Florida outdoor advertising operations in 2000. In addition, our cash flow from operating activities was impacted negatively by the operating losses from our discontinued sports & entertainment operations for all of 2000 and the first quarter of 2001. On a pre-tax basis, this loss amounted to $15.6 million in 2000. Finally, in the first quarter of 2000 we paid $7.5 million in damages in connection with a lawsuit. Our working capital decreased to a deficit of $234.0 million at December 31, 2001 from $15.1 million at December 31, 2000. This decrease was due primarily to the reclassification of outstanding borrowings under our 2001 Credit Agreement and our 9% Senior Subordinated Notes as a current liability, as discussed below. This was offset partially by a decrease in accrued liabilities and deferred revenue due to the sale of our sports & entertainment operations in April 2001. Capital expenditures were $8.3 million in 2001, compared to $41.4 million in 2000. Capital expenditures in 2001 were primarily for equipment to complete our Digital CentralCasting implementation, automated news production systems and news sets, upgrades to our operating facilities for television station KGPE in Fresno, California, and for outdoor advertising structures in Washington. For the periods presented, our long-term liquidity needs have been principally for acquisitions, capital expenditures, and refinancing our indebtedness. We have financed these needs through proceeds from the sale of our sports & entertainment operations in 2001, proceeds from the sale of our Florida outdoor advertising operations in 2000, proceeds from the issuance of common stock in 1999, proceeds from the sale of subordinated debt securities in 1999, and bank borrowings. Following is a summary of our financing activities and debt structure: On January 22, 1999, we replaced our previous credit agreement with a new $325.0 million credit agreement (the "1999 Credit Agreement"), consisting of a $150.0 million term loan facility (the "Term Loan") and a $175.0 million revolving credit facility (the "Revolver"), which includes up to $10.0 million in standby letters of credit. This transaction resulted in a 41 charge of approximately $0.6 million, net of taxes, consisting of the write-off of deferred financing costs. On January 5, 2000, we applied proceeds from the sale of our Florida outdoor advertising operations (as discussed in Note 4 to the Consolidated Financial Statements) to fully repay outstanding borrowings under our 1999 Credit Agreement, consisting of $43.0 million under the Revolver and $150.0 million under the Term Loan. In connection with the transaction, we amended the 1999 Credit Agreement to waive, on a one-time basis, the mandatory requirement to apply 100% of net proceeds from asset dispositions to permanently repay borrowings under the Revolver and to provide for a new commitment amount under the Revolver of approximately $147.9 million. Additionally, we amended the 1999 Credit Agreement to provide for a delayed-draw term loan facility of approximately $126.8 million (the "2000 Term Loan") allowing us to borrow, through no more than two separate borrowings, the maximum amount available under the 2000 Term Loan. On September 15, 2000 we borrowed $54.0 million under the 2000 Term Loan to acquire television station KGPE(TV). On September 7, 2001, we replaced our 1999 Credit Agreement with a new $120.0 million credit agreement (the "2001 Credit Agreement"), consisting of a $100.0 million term loan (the "2001 Term Loan") and a $20.0 revolving credit facility (the "2001 Revolver"). The 2001 Revolver includes up to $5.0 million in standby letters of credit. The transaction resulted in a charge of $1.6 million, net of applicable taxes of $0.9 million, consisting of the write-off of deferred financing costs. In addition, the transaction included a discount of $3.6 million, which is being amortized in interest expense over the term of the 2001 Credit Agreement. At closing, a portion of the 2001 Term Loan was placed in escrow to fund our estimated federal income tax payments due in October and December of 2001 and the interest payment on our senior subordinated notes due in January 2002. The estimated federal income tax payments were funded, leaving $9.0 million in escrow to fund the January 15, 2002 interest payment. Accordingly, the interest payment was funded out of escrow on January 15, 2002. The $9.0 million is classified as restricted cash on our consolidated balance sheet. Principal payments under the 2001 Term Loan are due in quarterly installments of $250,000 each for the period commencing on December 31, 2001 and ending on September 30, 2005, and $24.0 million each for the period commencing on December 31, 2005 and ending on August 31, 2006. Any outstanding borrowings under the 2001 Revolver will be due on August 31, 2004. At December 31, 2001, outstanding borrowings under the 2001 Term Loan were $91.3 million. The unamortized discount at December 31, 2001 was $3.3 million. There were no outstanding borrowings under the 2001 Revolver at December 31, 2001. In addition, the 2001 Credit Agreement and the 9% Senior Subordinated Notes restrict, among other things, our ability to borrow, pay dividends, repurchase outstanding shares of our stock, and sell or transfer our assets. They also contain restrictive covenants requiring us to maintain certain financial ratios. We can choose to have interest calculated at rates based on either LIBOR or a base rate plus defined margins. The interest rate applicable to the 2001 Revolver will be subject to certain 42 reductions based on our interest coverage ratio. Commitment fees on the unused portion of the 2001 Revolver are payable quarterly at an annual rate of 1.5%. We have obtained waivers of compliance with certain restrictive covenants effective for the period December 31, 2001 through May 31, 2002. Pursuant to the terms of the waivers, we cannot access the 2001 Revolver during the waiver period. After May 31, 2002, our lenders would have the right to accelerate the payment of our indebtedness, unless we were to obtain an extension of the waivers. In addition, an acceleration of our indebtedness under the 2001 Credit Agreement could cause an acceleration of our indebtedness under the 9% Senior Subordinated Notes. As the waivers currently expire prior to December 31, 2002, all outstanding borrowings under the 2001 Credit Agreement and the 9% Senior Subordinated Notes have been classified as current at December 31, 2001. If the merger does not close by May 31, 2002, we will need to obtain extensions of the waivers or make other financing arrangements. There can be no guarantee that we will be able to do so. Under the change of control provisions of the 2001 Credit Agreement, all outstanding borrowings thereunder will be repaid fully upon closing of the merger with Clear Channel. We have pledged substantially all of our subsidiaries' outstanding stock and assets as collateral for amounts due under the 2001 Credit Agreement. Thus, if we default under the 2001 Credit Agreement, the lenders may take possession of and sell substantially all of our subsidiaries and their assets. On February 24, 1999, we issued additional Senior Subordinated Notes due 2009 in the aggregate principal amount of $25.0 million. The total aggregate amount of Senior Subordinated Notes issued and outstanding is $200.0 million. The Senior Subordinated Notes bear interest at 9%, which is payable semi-annually in January and July. Principal is payable in full in January 2009. Under the change of control provisions of the Indenture, within 30 days after the closing of the merger with Clear Channel, the Company will be required to make an offer to repurchase all of the outstanding 9% Senior Subordinated Notes at a price of 101% plus accrued interest to the date of repurchase. Such repurchase must occur no less than 30 days and no later than 45 days after the date of the repurchase offer. On March 15, 1999, we redeemed the $20.0 million outstanding principal of our 10.48% Senior Subordinated Notes due 2000 with borrowings under the 1999 Credit Agreement. This transaction resulted in a charge of approximately $0.8 million, net of taxes, consisting of prepayment fees and the write-off of deferred financing costs. On August 6, 1999, we issued 3,000,000 shares of common stock at a price of $15.25 per share pursuant to an underwritten public offering. Our net proceeds were approximately $42.9 million, which were used primarily to repay borrowings outstanding under the 1999 Credit Agreement. On September 7, 1999, we received approximately $3.6 million in net proceeds from the issuance of 250,000 shares of common stock upon the exercise of the underwriters' overallotment option, which were also used to repay borrowings under the 1999 Credit Agreement. 43 Following are items that may impact our liquidity in 2002: - After May 31, 2002, we would likely need to extend our waivers of compliance with certain restrictive covenants of our 2001 Credit Agreement. It is uncertain as to whether we would be able to obtain such extensions of the waivers. - National advertising may continue to decrease or remain at current levels as a result of the current national economic conditions. Our liquidity may be impacted negatively depending on the magnitude of this trend, its duration, and our ability to offset decreased national sales with increased local sales. - Under current FCC regulations, we will need to construct DTV facilities for several of our television stations by November 1, 2002. We estimate that this will cost approximately $9 to $11 million. QUARTERLY VARIATIONS Our results of operations may vary from quarter to quarter due in part to the timing of acquisitions or dispositions and to seasonal variations in the operations of the television broadcasting and radio broadcasting segments. In particular, our net revenue and EBITDA historically have been affected positively by increased advertising activity in the second and fourth quarters. TAXES Due to the gain on the sale of our Florida outdoor advertising operations, our federal net operating loss, alternative minimum tax credit, and charitable contribution carryforwards were fully utilized in our 2000 federal tax return. INFLATION The effects of inflation on our costs generally have been offset by our ability to correspondingly increase our rate structure. CRITICAL ACCOUNTING POLICIES Our significant accounting policies are included in Note 1 to the Consolidated Financial Statements. These policies, along with the underlying assumptions and judgments made in their application, may have a significant impact on our consolidated financial statements. We identify the most critical accounting policies as those that are the most pervasive and important to the portrayal of our financial position and results of operations, and that require the most difficult, subjective and/or complex judgments and estimates about matters that are inherently uncertain. Following are our most critical accounting policies. 44 Allowance for Doubtful Accounts We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. We determine the adequacy of this allowance by regularly reviewing our accounts receivable aging and evaluating individual customer receivables. This involves considering the customer's financial condition and credit history, current economic conditions, and overall historical bad debt experience. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. Business Combinations -- Purchase Price Allocation During 1999 and 2000, we completed acquisitions of other companies. The amounts assigned to the identifiable assets and liabilities acquired in connection with these acquisitions were based on estimated fair values as of the date of the acquisitions, with the remainder recorded as goodwill. The fair values were determined by our management, generally based on information supplied by the management of the acquired entities, and valuations prepared by independent appraisal experts. In connection with these acquisitions, we have recorded a significant amount of intangible assets, consisting primarily of FCC licenses, network affiliation agreements, and goodwill. The appraisal experts utilized a discounted cash flow analysis to determine the fair values of the FCC licenses and network affiliation agreements. Valuation of Investments We hold investments in several closely held companies. These investments are carried at cost, less adjustments to reflect any impairment deemed to be other than temporary. The investments are reviewed on a regular basis for the existence of facts or circumstances that may suggest impairment. This review includes an analysis of the companies' historical financial condition, results of operations, and cash flows, as well as forecasts of future financial performance. It also includes information obtained from discussions with members of the companies' senior management team and measurements based on the pricing of recent debt and/or equity financings and/or the anticipated pricing of financing expected over the coming year. If an impairment is identified and considered to be other than temporary, the impairment loss is measured by comparing the estimated fair value to the carrying value of the investment. During 2001, impairment charges of $1.7 million were recorded with respect to these investments. Long-lived Assets -- Impairment We assess our long-lived assets, including identifiable intangible assets and goodwill, for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors we consider important that could trigger an impairment review include the following: 45 - a significant underperformance relative to historical or projected future operating results that is other than temporary; - a significant change in the manner of our use of the acquired asset or the strategy for our overall business; - a significant negative industry or economic trend that is other than temporary; - our market capitalization relative to net book value. In addition, for 2001 we considered the value of our business represented by the common stock exchange ratio under terms of our merger with Clear Channel. The common stock exchange ratio, based on the closing price of Clear Channel shares on October 5, 2001, the trading day immediately prior to the date of public announcement of the merger, represented a 28% premium to the closing share price of our common stock on October 5, 2001. During the period from October 5, 2001 through March 1, 2002, based on the trading price of Clear Channel common stock, this premium has been maintained or increased. NEW ACCOUNTING STANDARDS In June 2001, the Financial Accounting Standards Board ("FASB") issued Statements of Financial Accounting Standards ("SFAS") No. 141, Business Combinations, effective for business combinations, occurring after June 30, 2001, and No. 142, Goodwill and Other Intangible Assets, effective for fiscal years beginning after December 12, 2001. Under the new rules, goodwill (and intangible assets deemed to have indefinite lives) will no longer be amortized, but will be subject to annual impairment tests in accordance with the Statements. Other intangible assets will continue to be amortized over their useful lives. We will apply the new rules on accounting for goodwill and other intangible assets beginning in the first quarter of 2002. Application of the no amortization provisions of SFAS No. 142 is expected to result in an increase in pre-tax income of approximately $19 million per year. During 2002, we will perform the first of the required impairment tests of goodwill and indefinite lived intangible assets as of January 1, 2002. We have not yet determined what the effect of these tests will be on our earnings and financial position. In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, effective for fiscal years beginning after December 15, 2001. SFAS No. 144 supersedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, providing a single model for long-lived assets to be disposed of. In addition, SFAS No. 144 amends certain provisions of Accounting Principles Board Opinion No. 30, Reporting the Results of Operations--Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions, with respect to the accounting for discontinued operations. The impact of the statement is currently being studied, and the effect of the new statement on the financial statements has not yet been determined. 46 ITEM 7A -- QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Our interest income and expense are most sensitive to changes in the general level of interest rates. In this regard, changes in LIBOR and U.S. interest rates affect the interest earned on our cash equivalents as well as interest paid on our debt. To mitigate the impact of fluctuations in interest rates, we generally maintain a portion of our debt as fixed rate in nature. The table below provides information about our financial instruments that are sensitive to changes in interest rates, which consist of debt obligations for the years ended December 31, 2001 and 2000. The table presents principal cash flows and related weighted average interest rates by maturity dates. INTEREST RATE SENSITIVITY PRINCIPAL AMOUNT BY EXPECTED MATURITY AVERAGE INTEREST RATE (Dollars in thousands)
Fair Value 2002 2003 2005 2005 2006 Thereafter Total 12/31/01 -------- ---- ---- ---- ---- ---------- ----- -------- 2001: Long-term debt, including current portion Fixed rate $200,000 -- -- -- -- -- $200,000 $211,000 Average interest rate 9.0% -- -- -- -- -- Variable rate $91,271 -- -- -- -- -- $ 91,271 $ 91,271 Average Interest Rate (a)
Fair Value 2001 2002 2003 2004 2005 Thereafter Total 12/31/00 ---- ---- ---- ---- ---- ---------- ----- -------- 2000: Long-term debt, including current portion Fixed rate -- -- -- -- -- $200,000 $200,000 $176,000 Average interest rate -- -- -- -- -- 9.00% Variable rate $5,400 $29,588 $40,375 $50,468 $50,469 -- $176,300 $176,300 Average Interest Rate (a) (a) (a) (a) (a) --
(a) The interest rate is based on a base rate or LIBOR plus defined margins which vary based on our total leverage ratio. 47 ITEM 8 -- FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Information called for by this item is included in Item 14, pages F-1 through F-25 ITEM 9 -- CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 48 PART III ITEM 10 -- DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT BOARD OF DIRECTORS Our Board of Directors cannot consist of less than one (1) director and cannot consist of more than fifteen (15) directors. Our Certificate of Incorporation provides that the presently sitting Board may change the number of directors from time to time. Once elected, Board members serve terms of one (1) year, and until their successors are elected and qualified. Our Board of Directors is currently fixed at ten (10) members, and the following persons are our current directors.
Company Director Nominee Age Since Principal Occupation and Professional Experience ------- --- -------- ------------------------------------------------ Barry A. Ackerley 67 1975 Mr. Ackerley, one of our founders, has been the Chief Executive Officer and a director of The Ackerley Group and its predecessor and subsidiary companies since 1975. He also currently serves as our Chairman. Gail A. Ackerley 64 1995 Ms. Ackerley was elected to our Board of Directors in May 1995. She became Co-Chairman in September 1996, in February 2001 was appointed Co-Chief Executive Officer. From November 1996 until February 15, 2000, she served as one of our Co-Presidents. Ms. Ackerley has served as Chairman of Ackerley Corporate Giving since 1986, supervising our charitable activities, and during 2000 served as Chairman of the Seattle Storm. Christopher H. Ackerley 32 2000 Mr. Ackerley was named President on July 31, 2001, with principal responsibility for overseeing our operating segments and corporate functions. As Co-President, he was responsible for overseeing our marketing, investor relations, information technology, and technology-ventures investments. He joined The Ackerley Group in 1995, and was elected Vice President for Marketing and Development in May 1998. He also served as Executive Vice President, Operations and Development from December 1998 until his election as Co-President in 2000.
Company Director Nominee Age Since Principal Occupation and Professional Experience ------- --- -------- ------------------------------------------------ Edward G. Ackerley 32 2000 Mr. Ackerley was elected to our Board of Directors in February 2000 and joined the Company as Vice President of Ackerley Ventures, Inc. in December 2000. He was a founder of VictoryCigars.com, a custom cigar company, and has served as its President since its inception in June 1997 until December, 2000. From June 1995 until May 1997, Mr. Ackerley served as President of Jet City Entertainment, an in-flight entertainment company. Deborah L. Bevier 50 1998 Ms. Bevier was elected to our Board of Directors in November 1998. She is the Chief Executive Officer and President of the Laird Norton Financial Group and The Laird Norton Trust Company, a personal investment and trust services company. She also serves as the Chief Executive Officer of Wentworth, Houser and Violich, Inc. (a registered investment adviser). She also serves as a member of the Board of Directors of Laird Norton Trust Company, the Laird Norton Financial Group, and Wentworth, Houser and Violich, Inc. Prior to joining Laird Norton in 1996, Ms. Bevier served as Chairman and Chief Executive Officer of Key Bank of Washington and Northwest Region Executive for Key Private Bank. Chris W. Birkeland 33 2000 Mr. Birkeland was elected to our Board of Directors in February 2000. He has been a managing member of Cedar Grove Investments, LLC, a private venture capital firm, since January 1, 2000. Prior to joining Cedar Grove Investments, he was self-employed as a consultant and technology-venture investor. Mr. Birkeland was a founding member of PhotoDisc, Inc. (now Getty Images) and served as their Vice President of Finance and Operations from 1992 to October 1998. Kimberly A. Cleworth 38 2000 Ms. Cleworth was elected to our Board of Directors in February 2000. She has served as the President and Executive Director of The Ginger and Barry Ackerley Foundation since June 1997. From February 1994 to June 1997, Ms. Cleworth served as The Ackerley Group's Vice President of Marketing.
50
Company Director Nominee Age Since Principal Occupation and Professional Experience ------- --- -------- ------------------------------------------------ Keith D. Grinstein 41 2000 Mr. Grinstein was elected to our Board of Directors in February 2000. He has served as Vice Chairman of Nextel International, Inc., a wireless telecommunications company, since March 1999. Previously, he held the title of President and CEO of Nextel International, from November 1995 until March 1999. From 1994 until he joined Nextel, he served as President of the Aviation Communications division of AT&T. Prior to that, Mr. Grinstein held a number of executive positions at McCaw Cellular Communications, Inc. and subsidiaries. Michael T. Lennon 39 2000 Mr. Lennon was elected to our Board of Directors in February 2000. He is Managing Director of Lennon Smith Advisors, LLC, a mergers and acquisitions advisors firm. Previously, he was a Managing Director of Emerge Corporation, a mergers and acquisitions advisory firm from March 1999 until January 2000. From September 1995 to March 1999, Mr. Lennon was a principal of Olympic Capital Partners LLC, an investment banking and mergers and acquisitions advisory firm, prior to which he served as Chief Operating Officer of The MWW Group, Inc., a full-service marketing, communications and public relations firm. Michel C. Thielen 67 1979 Mr. Thielen has served as one of our directors since 1979. Mr. Thielen has been President and Chief Executive Officer of Thielen & Associates, an advertising agency, since 1969. He is also Vice President of Executive Wings, Inc., an airport operations company.
Barry A. Ackerley and Gail A. Ackerley are husband and wife, and Christopher H. Ackerley, Edward G. Ackerley, and Kimberley A. Cleworth are their children. Additional information regarding transactions involving our operations and the Ackerley family is set forth under "Certain Relationships and Related Transactions" in Item 13 below. SECTION 16(a) -- BENEFICIAL OWNERSHIP COMPLIANCE Our directors and executive officers, and persons holding more than ten percent (10%) of our outstanding Common Stock and Class B Common Stock, are required to report their share ownership to the Securities and Exchange Commission. In general, those parties must report their share ownership (1) when they become directors, executive officers or ten percent shareholders, and (2) whenever they engage in share transactions involving our Common Stock and Class B Common Stock. 51 Based upon the written representations of our directors and executive officers, and copies of the reports that they have filed with the Securities and Exchange Commission, we have determined that our directors and executive officers have timely filed all of the reports that they were required to file during 2001, with the following exceptions: 1. Kimberly Cleworth did not report the ownership of 3,240 shares of Class B Stock that should have been reported on her Form 3, filed on February 15, 2000. She received the shares December 23, 1999, as a gift. The shares were reported on a Form 4 filed on March 11, 2002. 2. Michel C. Thielen inadvertently reported late the receipt of 409 shares of Common Stock received on May 1, 2001. The report, which was due on June 10, 2001, was reported on June 18, 2001. ITEM 11 -- EXECUTIVE COMPENSATION All of our executive officers receive compensation for their services. Compensation information concerning the Chief Executive Officer and concerning the four most highly compensated executive officers who received aggregate cash compensation in excess of $100,000 during the last fiscal year ("Named Executives") is set forth in this Item 11. SUMMARY COMPENSATION INFORMATION The following table sets forth compensation information concerning the Chief Executive Officer and concerning the four most highly compensated executive officers who received aggregate cash compensation in excess of $100,000 during the last fiscal year ("Named Executives"). The table covers compensation paid or accrued during the fiscal years ended December 31, 2001, 2000 and 1999. 52 SUMMARY COMPENSATION TABLE
Long Term Compensation ------------------- All Other Awards Payouts Compensation Annual Compensation ---------- ------- -------------------- -------------------------------------------- Securities Savings Other Annual Underlying LTIP and Name and Principal Compensation Options Payouts Retirement Other($) Position Year Salary($) Bonus($) ($)(1) (#) ($) Plan($)(2) (3) --------------------- ----- --------- --------- ------------ ---------- ------- ---------- -------- Barry A. Ackerley, 2001 699,519 -0- N/A -0- -0- 6,800 32,317 Chairman and Chief 2000 750,000 203,400 N/A -0- -0- 6,800 18,984 Executive Officer 1999 750,000 225,900 N/A -0- -0- 6,400 139,885 Gail A. Ackerley, 2001 296,154 -0- N/A -0- -0- 6,800 7,392 Co-Chairman and Co-Chief Executive 2000 400,000 -0- N/A -0- -0- 6,800 7,524 Officer (4) 1999 400,000 90,360 N/A -0- -0- -0- 9,261 Christopher H. 2001 489,135 375,000 N/A -0- -0- 6,800 4,127 Ackerley, President (5) 2000 400,000 81,375 N/A -0- -0- 6,800 1,783 1999 160,000 12,048 N/A -0- -0- 5,939 711 Kevin E. Hylton, 2001 163,221 145,000 N/A -0- -0- 6,529 793 Senior Vice President and Chief 2000 95,086 17,566 N/A -0- -0- 1,650 299 Financial Officer, (6) Sean M. Tallarico, 2001 107,797 52,500 N/A -0- -0- 4,030 168 Corporate Controller (7)
-------------------------------------- (1) None of the Named Executives received perquisites or other personal benefits, in any of the years shown, in an aggregate amount equal to or exceeding the lesser of (i) $50,000 or (ii) 10% of the executive's total annual salary and bonus for each year. (2) The amounts appearing in this column are our contributions and credits on behalf of each Named Executive under our Savings and Retirement Plan. (3) Includes value of life insurance in excess of $50,000 for each of the Named Executives. Includes imputed interest of $4,505, and $871 in 2000 and $122,776, and $508 in 1999, respectively, on indebtedness to us incurred by Messrs. Barry Ackerley and Christopher Ackerley and imputed interest of $14,478 on indebtedness to us incurred by Mr. Barry Ackerley in 2001. (4) Ms. Ackerley was named Co-Chief Executive Officer as of February 22, 2001. She also served as Co-President from November 3, 1997 to February 15, 2000. (5) Mr. Christopher Ackerley was elected Vice President for Marketing and Development on May 1, 1998; Executive Vice President, Operations and Development in December 1998; Co-President on February 15, 2000; and President on July 31, 2001. The 2001 bonus consists of a payment under the retention and severance program implemented in connection with our merger with Clear Channel, as discussed in greater detail later. (6) Mr. Hylton was hired as the Chief Financial Officer on June 5, 2000. The 2001 bonus includes of a payment under the retention and severance program implemented in connection with our merger with Clear Channel, as discussed in greater detail later. (7) Mr. Tallarico was named an executive officer on February 22, 2001. The 2001 bonus consists of a payment under the retention and severance program implemented in connection with our merger with Clear Channel, as discussed in greater detail later. 53 OPTION GRANTS IN LAST FISCAL YEAR Pursuant to our Stock Option Plan, we have, from time to time, granted options to acquire shares of our Common Stock to some of the Named Executives. There were no options granted to our Named Executives in the last fiscal year. OPTION EXERCISES IN LAST FISCAL YEAR This table includes the number of shares covered by both exercisable and non-exercisable stock options held by each of the Named Executives as of December 31, 2001. Also reported are the values for "in-the-money" options, which represent the positive spread between the exercise price of any such existing stock options and the year-end price of the Common Stock. AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
No. of Shares Value of Underlying Unexercised Unexercised In-the-Money Options at Options at Fiscal Fiscal Year-End Year-End Shares Acquired Value exercisable/ exercisable/ Name on Exercise Realized($) unexercisable(#) unexercisable($) ---- --------------- ----------- ---------------- ---------------- Barry A. Ackerley N/A N/A N/A N/A Gail A. Ackerley N/A N/A N/A N/A Christopher H. Ackerley -0- -0- -0-/35,000 -0-/20,145 Kevin E. Hylton -0- -0- -0-/-0- -0-/-0- Sean M. Tallarico -0- -0- -0-/-0- -0-/-0-
LONG TERM INCENTIVE PLANS We did not grant any long-term incentive compensation to any of our Named Executives during 2001. DEFINED BENEFIT OR ACTUARIAL PLANS We do not have a defined benefit or actuarial plan. COMPENSATION OF DIRECTORS Those directors who we do not employ as officers receive a quarterly fee of $5,000. In addition, we reimburse each nonemployee director up to $1,500 per quarter for his or her out-of-pocket expenses in connection with attendance at meetings of the Board of Directors. The following directors received additional compensation of $10,000 each in recognition of services performed as board members in connection with our proposed merger with Clear Channel: Edward G. Ackerley, Deborah L. Bevier, Chris W. Birkeland, Kimberly A. Cleworth, Keith D. Grinstein, Michael T. Lennon, and Michel C. Thielen. Nonemployee directors are eligible to receive their 54 directors' fees in the form of shares of our Common Stock, as discussed in "Nonemployee-- Directors' Equity Compensation Plan" below. NONEMPLOYEE-DIRECTORS' EQUITY COMPENSATION PLAN Our Nonemployee-Directors' Equity Compensation Plan was approved by our Board of Directors in 1995, and by our shareholders in 1996. Directors who do not also serve as employees are eligible to participate in the plan. The plan's purpose is to allow nonemployee directors to elect to receive directors' fees in the form of shares of our Common Stock instead of in cash. There are a total of 100,000 shares of Common Stock authorized and reserved for issuance under the plan. Nonemployee directors who want to receive their directors' fees in shares of Common Stock must submit a written election to us before their quarterly directors' fees become due and payable. We issue a number of shares to each nonemployee director as calculated against the closing price on the last trading day of the quarter, as quoted on the New York Stock Exchange. Thus, a nonemployee director receives the number of shares that he could have purchased for $5,000 on the open market as of closing on the last trading day of the quarter. As of December 31, 2001, we had 70,346 shares available for issuance under the Plan. At December 31, 2001, we had issued 21,793 shares of Common Stock under the Plan to the following directors in the following amounts:
SHARES ISSUED DIRECTOR TOTAL SHARES IN 2001 -------- ------------ ------------- Edward G. Ackerley........................ 1,260 -- Deborah L. Bevier......................... 4,256 1,507 Chris W. Birkeland........................ 2,767 1,507 Kimberly A. Cleworth...................... 1,164 1,164 Keith D. Grinstein........................ 1,986 726 Michael T. Lennon......................... 2,767 1,507 Michel C. Thielen......................... 7,593 1,507
RETENTION AND SEVERANCE PROGRAM In connection with the proposed merger with Clear Channel, in order to foster the continued employment of key employees, we have entered into agreements with employees that provide for retention and/or severance benefits, including agreements with each of the following executive officers: Christopher Ackerley, Kevin Hylton and Sean Tallarico. Mr. Barry Ackerley and Mrs. Gail Ackerley are not parties to any severance or retention agreements. Except for Mr. Christopher Ackerley, whose agreement is described below, the program provides that if the employee remains employed by The Ackerley Group until December 31, 2001, the employee will receive a lump sum retention bonus payment based on a percentage of 55 their annual compensation for 2001 ($105,000 for Mr. Hylton and $52,500 for Mr. Tallarico). If the employee remains employed until the closing date of the merger in the case of Mr. Hylton, or until 45 days after the closing date of the merger, in the case of Mr. Tallarico, the employee will receive an additional retention bonus payment of the same amount. Under this program, Mr. Hylton and Mr. Tallarico are also eligible for the following severance benefits if employment is terminated other than for "cause," or if employment is terminated as a result of a "constructive termination": - a lump sum cash payment equal to a percentage of their annual compensation for 2001 ($315,000 for Mr. Hylton and $13,552 for Mr. Tallarico); - continued medical and dental insurance coverage under COBRA for 12 months following the date of termination, subject to earlier termination if substitute coverage is obtained; - transfer of title of company automobile for Mr. Hylton and compensation for the tax liability resulting from the transfer; - a gross-up payment for certain employees of any excise tax imposed on the employee as a result of section 280G of the Internal Revenue Code; and - any unpaid retention bonus and any accrued but unpaid salary, bonus or other amounts. Under these agreements, "cause" is defined generally to include criminal convictions, material and willful misconduct, and deliberate non-performance of duties, and "constructive termination" is defined generally to include a reduction in position or authority, a reduction in compensation or benefits, a relocation of work location by more than 25 miles, or a failure to offer continued employment on comparable terms for two years following the completion of the merger. Mr. Hylton is subject to non-competition covenants for one year following termination of employment, and has agreed to provide consulting services for 45 days following termination of employment. The Agreement with Mr. Ackerley provides that in the event he remains in the service of The Ackerley Group until December 31, 2001, he will receive a retention bonus payment of $375,000, and an additional retention bonus payment of $375,000 if he remains in the service of The Ackerley Group until the closing date. If Mr. Ackerley's service with The Ackerley Group is terminated prior to a payment date by his death or disability or by The Ackerley Group other than for "cause," the agreement provides that the retention bonus payment will be accelerated. The agreement with Mr. Ackerley also requires him to provide consulting services to The Ackerley Group as an independent consultant for a period of five years following the closing date of the merger. Mr. Ackerley has also agreed to a non-competition restriction covering such five-year period. As consideration for the consulting services and the non-competition agreement, 56 Mr. Ackerley will receive an annual fee of $350,000. The agreement also provides for a gross-up payment equal to any excise tax imposed on Mr. Ackerley as a result of section 280G of the Internal Revenue Code. REPRICING, REPLACEMENT OR CANCELLATION AND REGRANT OF OPTIONS We did not adjust or amend the exercise price of stock options previously awarded to any of our Named Executives at any time during 2001. BOARD OF DIRECTORS INTERLOCKS AND INSIDER PARTICIPATION We did not have any Compensation Committee interlocks or insiders participating in compensation decisions at any time during 2001. COMPENSATION COMMITTEE REPORT OF EXECUTIVE COMPENSATION In determining the compensation paid to our executive officers in 2001, the Committee employed compensation policies designed to align the compensation with our overall business strategy, values and management initiatives. These policies are intended to reward executives for enhancing the long-term value of our assets, to support a performance-oriented environment that rewards achievement of internal goals and recognizes our performance compared to performance levels of companies in its industries, and to attract and retain executives whose abilities are critical to the long-term success and competitiveness of our operations. The Committee believes that by striving to best obtain these goals the executive officers should enhance shareholder value for the long-term. The key components of executive officer compensation are (1) salary, which is based on factors such as the individual officer's level of responsibility and comparisons to similar positions in our subsidiaries and comparable media and advertising companies; (2) cash bonus awards, which are based on individual performance and the performance of our operations, measured primarily in terms of increases in our EBITDA and accomplishment of our strategic goals; and (3) stock option awards which are intended to increase the motivation for an interest in our long-term success as measured by our share price. The Committee based the 2001 compensation of the executive officers on the policies described above. The executives' salaries in 2001 were based on a variety of factors including the salaries of the executive officers of comparable media advertising companies. Individual performance was also taken into account. The Committee based the 2001 compensation of the Chief Executive Officer on the policies described above. The Chief Executive Officer's salary in 2001 decreased to $699,519 from $750,000 in 2000. This decrease was part of a salary reduction program including all executive officers and senior management. This program was implemented in connection with an overall cost reduction initiative throughout the company in response to the decline in the Company's financial results due to the decline in the national economy. Based on comparisons to other media companies and other publicly-traded companies based in Washington, the Chief Executive 57 Officer's 2001 salary was in the range of salaries of the chief executive officers of comparable media advertising and Washington-based public companies. SHAREHOLDER RETURN PERFORMANCE PRESENTATION The following line-graph presentation compares cumulative, five-year shareholder returns on an indexed basis with the S&P 500 Stock Index or other broad market index performance and either a nationally recognized industry standard or an index of peer companies that we select. We have selected the S&P 500 Stock Index and the mutual fund, Fidelity Select Multimedia Portfolio, as an index of peer companies. The following chart compares total cumulative shareholder return for $100 invested in the Company's Common Stock on December 31, 1996 with the cumulative total return of the S&P 500 Stock Index and Fidelity Select Multimedia Portfolio for the five most recently completed fiscal years. [PERFORMANCE GRAPH]
BASE 1997 1998 1999 2000 2001 The Ackerley Group, Inc. $100 $144 $155 $154 $77 $149 S&P 500 Index $100 $131 $166 $198 $178 $155 Fidelity Select Multimedia $100 $124 $158 $221 $155 $153
58 ITEM 12 -- SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT As of March 1, 2002, Barry A. Ackerley and Gabelli Funds, Inc. were the only persons, to our knowledge, owning beneficially more than 5% of the outstanding shares of Common Stock and Class B Common Stock. All of our directors and executive officers own shares of our Common Stock; some of our directors and executive officers also own shares of our Class B Common Stock. Barry A. Ackerley beneficially owns in excess of five percent (5%) of the outstanding shares of our Common Stock and Class B Common Stock. The following table sets forth information regarding the share ownership of our nominees for director, current directors, executive officers and principal shareholders, as well as information for our directors and executive officers as a group. The information in the following table is current as of March 1, 2002.
Shares of the Company's Common Stock Name, Age and and Class B Common Stock and Percent Position with The Ackerley Group, Inc. of Class Beneficially Owned (1) ----------------------------------------- ------------------------------------------------------ Class B Common Stock Percent Common Stock Percent ------------ ------- ------------ ------- Barry A. Ackerley, 67 8,929,043(2) 36.7 10,949,299(2) 99.4 Chairman, Chief Executive Officer, and Director Gail A. Ackerley, 64 8,929,043(3) 36.7 10,949,299(3) 99.4 Co-Chairman, Co-Chief Executive Officer and Director Christopher H. Ackerley, 32 18,928 * 13,698 * President and Director Edward G. Ackerley, 32 16,845 * 13,530 * Director Deborah L. Bevier, 50 6,068 * -0- * Director Chris W. Birkeland, 37 3,079 * -0- * Director Kimberley A. Cleworth, 38 24,614(4) * 30,569 * Director Keith D. Grinstein, 41 2,298 * -0- * Director Michael T. Lennon, 39 3,079 * -0- * Director
59
Shares of the Company's Common Stock Name, Age and and Class B Common Stock and Percent Position with The Ackerley Group, Inc. of Class Beneficially Owned (1) ----------------------------------------- ------------------------------------------------------ Class B Common Stock Percent Common Stock Percent ------------ ------- ------------ ------- Michel C. Thielen, 67 8,255 * -0- * Director Kevin E. Hylton, 45 740 * -0- * Senior Vice President and Chief Financial Officer Sean M. Tallarico, 36 2,891 * -0- * Corporate Controller Gabelli Funds, Inc. 5,147,220 21.2 -0- * One Corporate Center Rye, NY 10580-1434 All Directors and Executive 9,089,652 37.4 11,007,096 99.9 Officers as a group (13 persons)
---------- (1) Unless otherwise indicated, represents shares over which each nominee exercises sole voting or investment power. (2) Mr. Barry Ackerley and Ms. Ackerley are husband and wife. Includes 7,264 shares of Common Stock and 264 shares of Class B Common Stock held by Ms. Ackerley, of which Mr. Ackerley disclaims beneficial ownership. (3) Mr. Barry Ackerley and Ms. Ackerley are husband and wife. The amount shown includes 8,921,779 shares of Common Stock and 10,949,035 shares of Class B Common Stock held by Mr. Ackerley, of which Ms. Ackerley disclaims beneficial ownership. (4) Includes 4,000 shares of Common Stock held by Ms. Cleworth's husband and 14,675 shares of Class B Common Stock owned by Ms. Cleworth's children, of which Ms. Cleworth disclaims beneficial ownership. * Indicates amounts equal to less than 1% of the outstanding shares. ITEM 13 -- CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS FAMILY RELATIONSHIPS During 2001, we continued to employ Christopher H. Ackerley, who is the son of Barry A. Ackerley and Gail A. Ackerley. Christopher H. Ackerley was elected Vice President on May 1, 1998, Executive Vice President on December 28, 1998, Co-President and a director on February 15, 2000, and President on July 31, 2001. In addition, Kimberley A. Cleworth and Edward G. Ackerley, who are also children of Barry A. Ackerley and Gail A. Ackerley, were elected as directors on February 15, 2000. Effective December 18, 2000, Edward G. Ackerley joined the Company as Vice President of Ackerley Ventures, Inc., our technology ventures subsidiary, and receives an annual salary of $100,000. Details regarding their compensation, stock ownership, and related matters are set forth above. Kathy Savitt, the wife of Michael T. Lennon, is President of MWW/Savitt, our public relations firm. In 2001, we paid $1,056,204 in fees to MWW/Savitt. 60 ADVANCES From time to time we have advanced funds to certain executive officers for their personal use. Interest on that indebtedness accrues at the same rate as that charged to us on our senior bank debt, which is presently 6.9%. Since January 1, 1999, the highest aggregate amount of such loans to Barry A. Ackerley was $2,871,642. At December 31, 2001, 2000, and 1999, the aggregate outstanding principal amounts of such loans were $117,846, $67,230, and $23,608, respectively. 61 PART IV ITEM 14 -- EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a)(1) and (2) Financial Statements and Schedules. The following documents are being filed as part of this Report: INDEX TO FINANCIAL STATEMENTS
Page Number ------ Report of Ernst & Young LLP, Independent Auditors.........................F-1 Consolidated balance sheets as of December 31, 2001 and 2000..............F-2 Consolidated statements of income for the years ended December 31, 2001, 2000 and 1999..........................................F-3 Consolidated statements of stockholders' equity for the years ended December 31, 2001, 2000 and 1999..........................F-4 Consolidated statements of cash flows for the years ended December 31, 2001, 2000 and 1999..........................................F-5 Notes to Consolidated Financial Statements................................F-7
Schedules are omitted for the reason that they are not required or are not applicable, or the required information is shown in the Consolidated Financial Statements or notes thereto. Columns omitted from schedules filed have been omitted because the information is not applicable. (3) Exhibits: Exhibit No. Exhibit ------- ------- 2.1 Agreement and Plan of Merger dated October 5, 2001, among Clear Channel Communications, Inc., CCMM Sub, Inc. and The Ackerley Group, Inc.(1) 3.1 Fourth Restated Certificate of Incorporation.(2) 3.2 Amended and Restated Bylaws.(3) 9.1 Stockholder Voting and Support Agreement, dated as of October 5, 2001, by and between Clear Channel Communications, Inc. and Barry A. Ackerley.(4) 62 Exhibit No. Exhibit ------- ------- 10.1 Credit Agreement dated September 7, 2001 among The Ackerley Group, Inc., certain lenders named therein, and Credit Suisse First Boston and General Electric Capital Corporation, as agents.(5) 10.2 Limited Waiver regarding Financial Covenants, dated March 18, 2002 among The Ackerley Group, Inc., certain lenders named therein, and Credit Suisse First Boston and General Electric Capital Corporation, as agents. 10.3 Limited Waiver regarding Financial Covenant Calculations, dated October 31, 2001 among The Ackerley Group, Inc., certain lenders named therein, and Credit Suisse First Boston and General Electric Capital Corporation, as agents. 10.4 Retirement Agreement, effective August 13, 2001 between Denis Curley and The Ackerley Group, Inc.(6) 10.5 Consulting Agreement, dated July 24, 2001 between Denis Curley and The Ackerley Group, Inc.(7) 10.6 Asset Purchase Agreement dated as of January 11, 2001 between The Ackerley Group, Inc., Ackerley Media Group, Inc., SSI, Inc., and T.C. Aviation, Inc., as seller, and The Basketball Club of Seattle, LLC, as buyer.(8) 10.7 Amendment No. 1 to Asset Purchase Agreement dated as of March 22, 2001 between The Ackerley Group, Inc., Ackerley Media Group, Inc., SSI, Inc., and T.C. Aviation, Inc., as seller, and The Basketball Club of Seattle, LLC, as buyer.(9) 10.8 Amendment No. 2 to Asset Purchase Agreement dated as of March 30, 2001 between The Ackerley Group, Inc., Ackerley Media Group, Inc., SSI, Inc., and T.C. Aviation, Inc., as seller, and The Basketball Club of Seattle, LLC, as buyer.(10) 10.9 Indenture dated December 14, 1998 between The Ackerley Group, Inc. and The Bank of New York, as Trustee, relating to the 9% Senior Subordinated Notes due 2009.(11) 10.10 First Supplemental Indenture dated as of April 8, 1999 between The Ackerley Group, Inc., the guarantors named therein, and The Bank of New York, as Trustee.(12) 10.11 Employees Stock Option Plan, as amended and restated on May 11, 1999.(13) 10.12 Nonemployee-Director's Equity Compensation Plan, as amended and restated on March 12, 1997.(14) 10.13 Credit Agreement dated January 22, 1999, by and among The Ackerley Group, Inc., certain lenders named therein, and First Union National Bank, Fleet Bank, N.A., Union Bank of California, N.A., KeyBank National Association, and Bank of Montreal, Chicago Branch, as agents.(15) 10.14 First Amendment to Credit Agreement, dated as of June 11, 1999, among The Ackerley Group, Inc., certain lenders named therein, and First Union National Bank, Fleet Bank, N.A., Union Bank of California, N.A. and KeyBank National Association, as agents.(16) 63 Exhibit No. Exhibit ------- ------- 10.15 Second Amendment to Credit Agreement, dated as of September 10, 1999, among The Ackerley Group, Inc., certain lenders named therein, and First Union National Bank, Fleet Bank, N.A., Union Bank of California, N.A. and KeyBank National Association, as agents.(17) 10.16 Third Amendment to Credit Agreement, dated as of January 7, 2000, among The Ackerley Group, Inc., certain lenders named therein, and First Union National Bank, Fleet Bank, N.A., Union Bank of California, N.A. and KeyBank National Association, as agents.(18) 10.17 Fourth Amendment to Credit Agreement, dated as of February 11, 2000, among The Ackerley Group, Inc., certain lenders named therein, and First Union National Bank, Fleet Bank, N.A., Union Bank of California, N.A. and KeyBank National Association, as agents.(19) 10.18 Fifth Amendment to Credit Agreement dated as of July 31, 2000, among The Ackerley Group, Inc., certain lenders named therein, and First Union National Bank, Fleet Bank, N.A., Union Bank of California, N.A. and KeyBank National Association, as agents.(20) 10.19 Sixth Amendment to Credit Agreement dated as of December 15, 2000, among The Ackerley Group, Inc., certain lenders named therein, and First Union National Bank, Fleet Bank, N.A., Union Bank of California, N.A. and KeyBank National Association, as agents.(21) 10.20 Seventh Amendment to Credit Agreement dated as of February 28, 2001, among The Ackerley Group, Inc., certain lenders named therein, and First Union National Bank, Fleet Bank, N.A., Union Bank of California, N.A. and KeyBank National Association, as agents.(22) 10.21 Purchase Agreement dated as of May 8, 2000 between AK Media Group, Inc., Fisher Broadcasting Inc. and Fisher Broadcasting--Fresno, L.L.C.(23) 21 Subsidiaries of The Ackerley Group. 23 Consent of Independent Auditors 24 Powers of Attorney. ----------------- (1) Incorporated by reference to Exhibit 2.1 to The Ackerley Group's Current Report on Form 8-K, filed on October 9, 2001. (2) Incorporated by reference to Exhibit 3.0 to The Ackerley Group's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998. (3) Incorporated by reference to Exhibit 3.2 to The Ackerley Group's Annual Report on Form 10-K for the year ended December 31, 2000. (4) Incorporated by reference to Exhibit 2.2 to The Ackerley Group's Current Report on Form 8-K, filed on October 9, 2001. 64 (5) Incorporated by reference to Exhibit 99.1 to The Ackerley Group's Current Report on Form 8-K, filed on September 14, 2001. (6) Incorporated by reference to Exhibit 10.1 to The Ackerley Group's Quarterly Report on Form 10-Q for the quarter ended September 30, 2001. (7) Incorporated by reference to Exhibit 10.2 to The Ackerley Group's Quarterly Report on Form 10-Q for the quarter ended September 30, 2001. (8) Incorporated by reference to Exhibit 10.21 to The Ackerley Group's Annual Report on Form 10-K for the year ended December 31, 2000. (9) Incorporated by reference to Exhibit 10.2 to The Ackerley Group's Current Report on Form 8-K, filed on April 16, 2001. (10) Incorporated by reference to Exhibit 10.3 to The Ackerley Group's Current Report on Form 8-K, filed on April 16, 2001. (11) Incorporated by reference to Exhibit 4.1 to The Ackerley Group's Registration Statement on Form S-4 (Registration No. 333-71583), filed February 2, 1999. (12) Incorporated by reference to Exhibit 10.9 to The Ackerley Group's Annual Report on Form 10-K for the year ended December 31, 1999. (13) Incorporated by reference to Exhibit 10 to The Ackerley Group's Quarterly Report on Form 10-Q for the quarter ended March 31, 1999. (14) Incorporated by reference to Exhibit 10.14 to The Ackerley Group's Annual Report on Form 10-K for the year ended December 31, 2000. (15) Incorporated by reference to Exhibit 10.1 to The Ackerley Group's Registration Statement on Form S-4/A (Registration No. 333-71583), filed March 10, 1999. (16) Incorporated by reference to Exhibit 10.2 to The Ackerley Group's Annual Report on Form 10-K for the year ended December 31, 1999. (17) Incorporated by reference to Exhibit 10.3 to The Ackerley Group's Annual Report on Form 10-K for the year ended December 31, 1999. (18) Incorporated by reference to Exhibit 10.4 to The Ackerley Group's Annual Report on Form 10-K for the year ended December 31, 1999. (19) Incorporated by reference to Exhibit 10.5 to The Ackerley Group's Annual Report on Form 10-K for the year ended December 31, 1999. (20) Incorporated by reference to Exhibit 10.6 to The Ackerley Group's Annual Report on Form 10-K for the year ended December 31, 2000. (21) Incorporated by reference to Exhibit 10.7 to The Ackerley Group's Annual Report on Form 10-K for the year ended December 31, 2000. (22) Incorporated by reference to Exhibit 10.8 to The Ackerley Group's Annual Report on Form 10-K for the year ended December 31, 2000. (23) Incorporated by reference to Exhibit 10.20 to The Ackerley Group's Annual Report on Form 10-K for the year ended December 31, 2000. (b) Reports on Form 8-K. Current Report on Form 8-K, filed October 9, 2001, announcing the Company's proposed merger with Clear Channel Communications, Inc. 65 Current Report on Form 8-K, filed November 6, 2001, regarding the press release and conference call transcript with respect to the Company's financial results for the quarter ended September 30, 2001. (c) Exhibits required by Item 601 of Regulation S-K are being filed herewith. See Item 14(a)(3) above. (d) Financial statements required by Regulation S-X are being filed herewith. See Item 14(a)(1) and (2) above. 66 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, The Ackerley Group has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 28th day of March, 2002. THE ACKERLEY GROUP, INC. By: /s/ Kevin E. Hylton ---------------------------------- Kevin E. Hylton, Senior Vice President, Chief Financial Officer and Assistant Secretary Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of The Ackerley Group and in the capacities on the 28th day of March, 2001. A Majority of the Board of Directors: Principal Executive Officer: /s/ Barry A. Ackerley * By: /s/ Barry A. Ackerley *. ------------------------------------ ---------------------------------- Barry A. Ackerley, Chairman Barry A. Ackerley, Chairman and Chief Executive Officer /s/ Gail A. Ackerley * Principal Financial Officer: ------------------------------------ Gail A. Ackerley, Co-Chairman /s/ Christopher H. Ackerley * /s/ Kevin E. Hylton ------------------------------------ -------------------------------------- Christopher H. Ackerley, Director Kevin E. Hylton, Senior Vice President, Chief Financial Officer and Assistant Secretary /s/ Edward G Ackerley * Principal Accounting Officer: ------------------------------------ Edward G. Ackerley, Director /s/ Deborah L. Bevier * /s/ Sean M. Tallarico ------------------------------------ -------------------------------------- Deborah L. Bevier, Director Sean M. Tallarico, Corporate Controller /s/ Chris W. Birkeland * ------------------------------------ Chris W. Birkeland, Director 67 /s/ Kimberley A. Cleworth * ------------------------------------ Kimberley A. Cleworth, Director /s/ Keith D. Grinstein * ------------------------------------ Keith D. Grinstein, Director /s/ Michael T. Lennon * ------------------------------------ Michael T. Lennon, Director /s/ Michel C. Thielen * ------------------------------------ Michel C. Thielen, Director *By: /s/ Kevin E. Hylton --------------------------------- Kevin E. Hylton, Attorney-in-Fact 68 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS The Board of Directors and Stockholders The Ackerley Group, Inc. We have audited the accompanying consolidated balance sheets of The Ackerley Group, Inc. (the Company) as of December 31, 2001 and 2000, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2001. 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 in accordance with auditing standards generally accepted in the United States. Those standards 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. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company at December 31, 2001 and 2000, and the consolidated results of its operations and its 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. /s/ Ernst & Young LLP ------------------------------ Seattle, Washington February 8, 2002 except for Note 9 as to which the date is March 18, 2002 F-1 THE ACKERLEY GROUP, INC. CONSOLIDATED BALANCE SHEETS ASSETS
December 31, --------------------------- 2001 2000 --------- --------- (In thousands, except share amounts) Current assets: Cash and cash equivalents $ 16,794 $ 4,687 Restricted cash 9,000 -- Accounts receivable, net of allowance (2001-$1,075, 2000-$1,903) 42,607 60,742 Current portion of broadcast rights 8,591 9,023 Prepaid expenses 5,347 13,569 Deferred tax asset 1,573 1,619 Other current assets 6,835 7,655 --------- --------- Total current assets 90,747 97,295 Property and equipment, net 121,794 170,473 Goodwill, net 194,207 210,961 Other intangibles, net 131,069 142,171 Investments 19,278 19,896 Other assets 19,746 26,511 --------- --------- Total assets $ 576,841 $ 667,307 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 4,332 $ 7,426 Accrued interest 8,491 8,950 Accrued wages and commissions 1,967 6,398 Other accrued liabilities 12,697 21,595 Deferred revenue 558 19,022 Current portion of broadcasting obligations 7,607 9,564 Current portion of long-term debt 289,086 9,030 --------- --------- Total current liabilities 324,738 81,985 Long-term debt, less current portion 1,493 385,641 Deferred tax liabilities 11,874 14,469 Other long-term liabilities 15,731 9,232 --------- --------- Total liabilities 353,836 491,327 Commitments and contingencies Stockholders' equity Common stock, par value $.01 per share--authorized 50,000,000 shares; issued 2001-25,582,269 and 2000-25,342,929 shares; and outstanding 2001-24,207,323 256 253 and 2000-23,967,983 shares Class B common stock, par value $.01 per share--authorized 11,406,510 shares; issued and outstanding 2001-11,020,622 and 2000-11,051,200 shares 110 111 Capital in excess of par value 59,455 57,967 Retained earnings 173,273 127,738 Less common stock in treasury, at cost (1,374,946 shares) (10,089) (10,089) --------- --------- Total stockholders' equity 223,005 175,980 --------- --------- Total liabilities and stockholders' equity $ 576,841 $ 667,307 ========= =========
See accompanying notes F-2 THE ACKERLEY GROUP, INC. CONSOLIDATED STATEMENTS OF INCOME
Year Ended December 31, --------------------------------------- 2001 2000 1999 --------- --------- --------- (In thousands, except per share amounts) Revenue $ 231,425 $ 263,305 $ 243,130 Less agency commissions and discounts 32,568 38,741 35,547 --------- --------- --------- Net revenue 198,857 224,564 207,583 Expenses (other income): Operating expenses 179,715 181,644 157,065 Workforce reduction costs 2,442 -- -- Restructuring expenses -- (178) 1,125 Amortization expense 26,867 23,713 14,175 Depreciation expense 18,326 15,448 11,867 Interest expense 28,834 27,687 33,510 Interest Income (348) (1,892) (551) Net loss (gain) on dispositions of assets 2,202 (277,650) (28,999) Other 2,056 901 733 --------- --------- --------- Total expenses (other income) 260,094 (30,327) 188,925 Income (loss) from continuing operations before income taxes and extraordinary items (61,237) 254,891 18,658 Income tax benefit (expense) 21,206 (96,284) (7,917) --------- --------- --------- Income (loss) from continuing operations before extraordinary items (40,031) 158,607 10,741 Gain (loss) from discontinued operations, net of taxes 2001-$(49,905) and 2000-$5,892 92,681 (9,707) (2,778) --------- --------- --------- Income before extraordinary items 52,650 148,900 7,963 Extraordinary items: loss on debt extinguishment and merger costs, net of taxes 2001-$1,589 and 1999-$842 (7,115) -- (1,373) --------- --------- --------- Net income $ 45,535 $ 148,900 $ 6,590 ========= ========= ========= Earnings per common share: Income (loss) from continuing operations, before extraordinary items $ (1.14) $ 4.54 $ 0.33 Discontinued operations 2.64 (.28) (.09) Extraordinary items (.20) -- (.04) --------- --------- --------- Net income $ 1.30 $ 4.26 $ .20 ========= ========= ========= Earnings per common share -- assuming dilution: Income (loss) from continuing operations, before extraordinary items $ (1.14) $ 4.52 $ 0.32 Discontinued operations 2.64 (.28) (.08) Extraordinary items (.20) -- (.04) --------- --------- --------- Net income -- assuming dilution $ 1.30 $ 4.24 $ .20 ========= ========= ========= Weighted average number of shares 35,088 34,994 32,932 Weighted average number of shares -- assuming dilution 35,088 35,122 33,110
See accompanying notes F-3 THE ACKERLEY GROUP, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (In thousands, except share information)
Class B Common Common Stock Common Stock Capital in Retained Stock in ------------------- ------------------- Excess of Earnings Treasury Shares Amount Shares Amount Par Value (Deficit) (at cost) Total ---------- ------ ---------- ------ --------- --------- --------- --------- Balance, January 1, 1999 21,951,380 219 11,051,230 111 10,339 (26,421) (10,089) (25,841) Stock compensation, exercise of stock options and stock conversions 50,039 -- 37,500 -- 693 -- -- 693 Stock issued at $15.25 per share, net of stock issuance costs of $3,084 3,250,000 33 -- -- 46,446 -- -- 46,479 Cash dividend, $0.02 per share -- -- -- -- -- (632) -- (632) Net income -- -- -- -- -- 6,590 -- 6,590 ----------- ---- ---------- ---- ------- -------- -------- -------- Balance, December 31, 1999 25,251,419 252 11,088,730 111 57,478 (20,463) (10,089) 27,289 Stock compensation, exercise of stock options and stock conversions 52,455 1 (37,530) -- 76 -- -- 77 Stock issued at $10.58 per share under Employee Stock Purchase Plan 39,055 -- -- -- 413 -- -- 413 Cash dividend, $0.02 per share -- -- -- -- -- (699) -- (699) Net income -- -- -- -- -- 148,900 -- 148,900 ----------- ---- ---------- ---- ------- -------- -------- -------- Balance, December 31, 2000 25,342,929 $253 11,051,200 $111 $57,967 $127,738 $(10,089) $175,980 Stock compensation, exercise of stock options and stock conversions 165,487 2 (30,578) (1) 898 -- -- 899 Stock issued under Employee Stock Purchase Plan: 39,424 shares at $8.10 and 34,429 shares at $7.88 73,853 1 -- -- 590 -- -- 591 Net income -- -- -- -- -- 45,535 -- 45,535 ----------- ---- ---------- ---- ------- -------- -------- -------- Balance, December 31, 2001 $25,582,269 $256 11,020,622 $110 $59,455 $173,273 $(10,089) $223,005 =========== ==== ========== ==== ======= ======== ========= ========
See accompanying notes F-4 THE ACKERLEY GROUP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31, --------------------------------------- 2001 2000 1999 --------- --------- --------- (In thousands) Cash flows from operating activities: Net income $ 45,535 $ 148,900 $ 6,590 Adjustment to reconcile net income to net cash provided (used in) by operating activities: Depreciation and amortization 45,648 41,695 28,348 Net (gain) loss on dispositions of assets 2,202 (276,849) (28,999) Amortization of broadcast rights 11,300 9,935 11,094 Deferred tax expense (benefit) (2,534) 19,938 5,453 Stock compensation expense 330 100 559 Equity in losses of affiliates -- 801 174 Amortization of deferred financing costs, discount and premium 2,454 1,972 1,648 Net income from barter transactions (902) (1,022) (1,785) Amortization of deferred gain on termination of interest rate swap agreements (2,157) (1,087) (371) Loss on debt extinguishment, net of taxes 1,245 -- 1,373 Gain on disposal of discontinued operations, net of taxes (92,681) -- -- Investment impairment charge 1,726 -- -- Change in assets and liabilities: Accounts receivable 4,808 (1,853) (13,184) Prepaid expenses 5,498 (3,165) (5,353) Other current assets and other assets (7,402) (2,485) 1,239 Accounts payable, accrued interest, and accrued wages and commissions (7,984) (825) 13,154 Other accrued liabilities and other long-term liabilities (45,095) 6,507 (2,560) Litigation accrual -- (7,911) -- Deferred revenue (13,147) (2,045) (6,669) Broadcast obligations (12,039) (10,855) (10,878) --------- --------- --------- Net cash used in operating activities (63,195) (78,249) (167) Cash flows from investing activities: Proceeds from dispositions of assets 833 306,986 13,933 Proceeds from sale of discontinued operations 195,429 -- -- Payments for acquisitions -- (147,173) (166,625) Capital expenditures (8,273) (41,360) (29,114) Payments for investments (1,050) (19,925) (5,000) --------- --------- --------- Net cash provided by (used in) investing activities 186,939 98,528 (186,806) Cash flows from financing activities: Borrowings under credit agreements 129,400 194,000 309,063 Repayments under credit agreements (238,537) (210,704) (163,704) Payments under capital lease obligations (251) (3,106) (903) Note redemption prepayment fees -- -- (1,208) Dividends paid -- (699) (632) Payments of deferred financing costs (3,473) (487) (6,083) Net proceeds from stock issuance 1,224 447 46,613 Proceeds from termination of interest rate swap agreements -- 2,149 2,005 --------- --------- --------- Net cash provided by (used in) financing activities (111,637) (18,400) 185,151 --------- --------- ---------
F-5
Year Ended December 31, --------------------------------------- 2001 2000 1999 --------- --------- --------- (In thousands) Net increase (decrease) in cash and cash equivalents 12,107 1,879 (1,822) Cash and cash equivalents at beginning of period 4,687 2,808 4,630 --------- --------- --------- Cash and cash equivalents at end of period $ 16,794 $ 4,687 $ 2,808 ========= ========= =========
F-6 THE ACKERLEY GROUP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31, ------------------------------- 2001 2000 1999 ------- ------- ------- (In thousands) Supplemental cash flow information: Interest paid, net of capitalized interest $32,121 $27,072 $22,073 Income taxes paid 35,824 70,669 670 Noncash transactions: Broadcast rights acquired and broadcast obligations assumed $11,778 $12,732 $ 7,531 Property and equipment acquired through barter 443 330 969 Exchange of television station assets -- -- 24,000
See accompanying notes F-7 THE ACKERLEY GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Summary of significant accounting policies (a) Organization -- The Ackerley Group, Inc. and its subsidiaries (the "Company") is a diversified media and entertainment company that engages in four principal business segments: (i) outdoor media, (ii) television broadcasting; (iii) radio broadcasting; and (iv) interactive media. The Company currently conducts its outdoor media advertising operations principally in the markets of Seattle-Tacoma, Washington; Portland, Oregon; and Boston-Worcester, Massachusetts and New York, New York. In New York, California, Oregon, Washington, and Alaska, the Company currently owns sixteen television stations and provides programming and sales services to two television stations. The Company currently owns two AM and two FM radio stations and provides sales and other services to a third FM radio station in the Seattle-Tacoma market. The interactive media segment commenced in the second half of 2000. It consists of the iKnow Network, a group of local news and information portal sites. At December 31, 2000, the portal sites in Bakersfield and Salinas, California and Rochester, New York were operational. (b) Principles of consolidation -- The accompanying financial statements consolidate the accounts of The Ackerley Group, Inc. and its subsidiaries, all of which are wholly-owned. All significant intercompany transactions have been eliminated in consolidation. (c) Revenue recognition -- Outdoor media advertising revenue is recognized ratably on a monthly basis over the period in which advertisement displays are posted on the advertising structures or in the display units. Broadcast revenue is recognized in the period in which the advertisements are aired. Payments from clients received in excess of one month's advertising are recorded as deferred revenue. (d) Barter transactions -- The Company also accepts nonmonetary compensation, such as goods and services, for its advertising space or time. These barter transactions are recorded at the estimated fair value of the asset or service received. Revenue is recognized when the advertising is provided and assets or expenses are recorded when assets are received or services are used. Goods and services due to the Company in excess of advertising provided are recorded in other current assets. Advertising to be provided in excess of goods and services received are recorded in other accrued liabilities. Barter revenue was $4.5 million, $4.3 million, and $5.0 million in 2001, 2000, and 1999, respectively. Barter expenses were $4.1 million, $3.3 million, and $3.1 million in 2001, 2000 and 1999, respectively. (e) Property and equipment -- Property and equipment are carried at cost. The Company depreciates large groups of assets with homogeneous characteristics and useful lives. Under group depreciation, no gain or loss on disposals is recognized unless the asset group is fully depreciated. For assets accounted for under group depreciation, the Company recognizes gains on disposals primarily from proceeds received from condemnations of fully-depreciated advertising structures. The Company recognizes gains and losses on disposals of individual, non-homogeneous assets. Depreciation of property and equipment, including the cost of assets recorded under capital lease agreements, is provided on the straight-line and accelerated methods over the estimated useful lives of the assets or lease terms. F-8 (f) Intangible assets -- Intangible assets are carried at cost and amortized principally on the straight-line method over estimated useful lives. Goodwill represents the cost of acquired businesses in excess of amounts assigned to certain tangible and intangible assets at the dates of acquisition. Long-lived assets (including related goodwill and other intangible assets) are reviewed on a regular basis for the existence of facts or circumstances that may suggest impairment. If such impairment is identified, the impairment loss will be measured by comparing the estimated future undiscounted cash flows to the asset's carrying value. (g) Investments -- The Company holds investments in several closely held companies. These investments are carried at cost, less adjustments to reflect any impairment deemed to be other than temporary. The investments are reviewed on a regular basis for the existence of facts or circumstances that may suggest impairment. If such impairment is identified, the impairment loss is measured by comparing the estimated fair value to the carrying value of the investment. During the fourth quarter of 2001, impairment charges of $1.7 million were recorded with respect to these investments. (h) Broadcast rights and obligations -- Television films and syndication rights acquired under license agreements (broadcast rights) and the related obligations incurred are recorded as assets and liabilities for the gross amount of the contract at the time the rights are available for broadcasting. Broadcast rights are amortized on an accelerated basis over the contract period or the estimated number of showings, whichever results in the greater aggregate monthly amortization. Broadcast rights are carried at the lower of unamortized cost or net realizable value. The estimated cost of broadcast rights to be amortized during the next year has been classified as a current asset. Broadcast obligations are stated at contractual amounts and balances due within one year are reported as current obligations. (i) Stock based compensation -- The Company generally grants stock options for a fixed number of shares to employees with an exercise price equal to the fair value of the shares at the date of grant. The Company has elected to account for stock option grants in accordance with APB Opinion No. 25, Accounting for Stock Issued to Employees and related Interpretations, and recognizes compensation expense for incentive stock option grants using the intrinsic method. (j) Earnings per share -- Basic earnings per share excludes dilution and is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflect the potential dilution that could occur if options and rights to purchase common stock were exercised. The dilutive effects of the weighted-average number of shares representing options and rights included in the calculation of diluted earnings per share were 128,431 shares and 177,587 shares in 2000 and 1999, respectively. Due to the loss from continuing operations in 2001, the dilutive effects of options were excluded from diluted earnings per share in 2001 as the effect would be antidilutive. There were no differences between net income amounts used to calculate basic and diluted earnings per share for any of the periods presented. (k) Cash equivalents -- The Company considers investments in highly liquid debt instruments with a maturity of three months or less when purchased to be cash equivalents. (l) Concentration of credit risk and financial instruments -- The Company sells advertising to local and national companies throughout the United States. The Company F-9 performs ongoing credit evaluations of its customers and generally does not require collateral. The Company maintains an allowance for doubtful accounts at a level which management believes is sufficient to cover potential credit losses. The Company invests its excess cash in short-term investments with major banks. The carrying value of financial instruments, which include cash and cash equivalents, receivables, investments, payables, and senior debt, approximates fair value at December 31, 2001. The trading price of our Senior Subordinated Notes, based on quoted market prices, was 105.5% at December 31, 2001. (m) Use of estimates -- The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. (n) Reclassifications -- Certain prior years' amounts have been reclassified to conform to the 2001 presentation. 2. New accounting standards In June 2001, the Financial Accounting Standards Board ("FASB") issued Statements of Financial Accounting Standards ("SFAS") No. 141, Business Combinations, effective for business combinations occurring after June 30, 2001, and No. 142, Goodwill and Other Intangible Assets, effective for fiscal years beginning after December 15, 2001. Under the new rules, goodwill (and intangible assets deemed to have indefinite lives) will no longer be amortized, but will be subject to annual impairment tests in accordance with the Statements. Other intangible assets will continue to be amortized over their useful lives. The Company will apply the new rules on accounting for goodwill and other intangible assets beginning in the first quarter of 2002. Application of the no amortization provisions of SFAS No. 142 is expected to result in an increase in pre-tax income of approximately $19 million per year. During 2002, the Company will perform the first of the required impairment tests of goodwill and indefinite lived intangible assets as of January 1, 2002. The Company has not yet determined what the effect of these tests will be on its earnings and financial position. In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, effective for fiscal years beginning after December 15, 2001. SFAS No. 144 supersedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, providing a single model for long-lived assets to be disposed of. In addition, SFAS No. 144 amends certain provisions of Accounting Principles Board Opinion No. 30 Reporting the Results of Operations -- Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions with respect to the accounting for discontinued operations. The impact of the statement is currently being studied, and the effect of the new statement on the financial statements has not yet been determined. 3. Merger On October 5, 2001, the Company entered into a merger agreement (the "Merger Agreement") with Clear Channel Communications, Inc. ("Clear Channel"). Under the terms of the Merger Agreement, each share of the common stock and the Class B common stock of the F-10 Company will be converted into the right to receive 0.35 of a share of the common stock of Clear Channel. The transaction is intended to be tax-free to the Company's stockholders. The Company's stockholders approved the transaction on January 24, 2002. The transaction, which is expected to be consummated in the second quarter of 2002, is subject to customary regulatory approvals and closing conditions. In connection with the merger, as of December 31, 2001 the Company had incurred costs of $5.8 million, net of applicable taxes of $0.9 million, consisting primarily of legal and financial advisory fees and termination benefits. These costs were recorded in extraordinary items. 4. Acquisitions and dispositions Sale of Airport Advertising Operations. On June 30, 1998, the Company sold substantially all of the assets of its airport advertising operations to Sky Sites, Inc., a subsidiary of Havas, S.A., pursuant to an agreement dated May 19, 1998. The sale price consisted of a base cash price of $40.0 million, received on the closing date of the transaction, and an additional cash receipt of approximately $2.8 million, of which $1.2 million was received in December 1998 and the remainder was received in January 1999. The pre-tax gain recognized from this transaction was approximately $33.5 million in 1998 and approximately $1.6 million in 1999. Acquisition of Outdoor Advertising Company in Boston-Worcester, Massachusetts. On February 19, 1999, the Company purchased substantially all of the assets of an outdoor advertising company in the Boston-Worcester, Massachusetts market for approximately $11.0 million. The Company recorded net tangible assets with estimated fair values aggregating $0.6 million and goodwill of $10.4 million in connection with the transaction. Acquisition of KMTR(TV). On March 16, 1999, the Company purchased substantially all of the assets of KMTR(TV), the NBC affiliate licensed to Eugene, Oregon, together with two satellite stations licensed to Roseburg and Coos Bay, Oregon, and a low power station licensed to Eugene. The purchase price was approximately $26.0 million. From December 1, 1998 until closing of the transaction, the Company provided programming and sales services under a local marketing agreement with the previous owner. The Company recorded net tangible assets with estimated fair values aggregating $3.0 million and goodwill of $23.0 million in connection with the transaction. Acquisition of WOKR(TV). On April 12, 1999, the Company purchased substantially all of the assets of WOKR(TV), the ABC affiliate licensed to Rochester, New York, for approximately $128.2 million. In September 1998, the Company paid $12.5 million of the purchase price into an escrow account, with the balance paid at closing. The Company initially recorded net tangible assets with estimated fair values aggregating $10.4 million and goodwill of $117.8 million in connection with the transaction. In 2000, the Company finalized the allocation of the purchase price with the end result that the Company recorded net tangible assets of $10.4 million, goodwill of $59.3 million, and other intangible assets, consisting principally of an FCC license and network affiliation agreement, of $58.5 million. The effect on net income from the adjustment to amortization expense was not material. The following table summarizes, on an unaudited pro forma basis, the consolidated results of operations of the Company for the year ended December 31, 1999, giving pro forma effect to the acquisition of WOKR(TV) as if the acquisition had been made at the beginning of F-11 the period presented. These pro forma consolidated statements do not necessarily reflect the results of operations which would have occurred had such an acquisition taken place as of the beginning of the period indicated (in thousands, except per share amounts). Net revenue $ 211,481 Operating expenses (159,617) Income from continuing operations before extraordinary item 10,856 Net income 6,705 Net income per common share .20 Net income per common share, assuming dilution .20 Exchange of KKTV(TV) for KCOY(TV). On May 1, 1999, the Company exchanged substantially all of the assets plus certain liabilities of KKTV(TV), the CBS affiliate licensed to Colorado Springs, Colorado, for substantially all of the assets plus certain liabilities of KCOY(TV), the CBS affiliate licensed to Santa Maria, California. In conjunction with the transaction, the Company received a cash payment of approximately $9.0 million. The Company recorded net tangible assets with estimated fair values aggregating $7.2 million, intangible assets of $16.8 million, and a gain of $28.6 million in the second quarter of 1999. Pending closing of the transaction, the Company programmed KCOY(TV) and the previous owner of KCOY(TV) programmed KKTV(TV) under local marketing agreements. Investment in KFNK(FM). On September 13, 1999, the Company entered into a joint sales agreement with the owner of radio station KFNK(FM) in Eatonville, Washington. Under the agreement, the Company pays the owner a monthly fee for the right to sell advertising on the station. In connection with the transaction, the Company paid $4.0 million under a put and call agreement whereby the Company may elect, or be required by the owner, to purchase the station's assets any time after November 2002. The gross purchase price of the station's assets, which is primarily based on the station's ratings at the time of the sale, ranges from $4.5 million to $11.7 million. The gross purchase price would be reduced by the Company's $4.0 million payment under the put and call agreement plus accrued interest. Sale of Florida Outdoor Advertising Operations. On January 5, 2000, the Company sold substantially all of the assets of its outdoor advertising operations serving the Miami-Fort Lauderdale and West Palm Beach-Fort Pierce, Florida markets to Eller Media Company, a subsidiary of Clear Channel Communications, Inc., for approximately $300.0 million in cash, plus the assumption of certain liabilities. The Company recognized a gain on the transaction of $269.3 million. Sale of KCBA(TV) and Acquisition of KION(TV). On January 12, 2000, the Company sold substantially all of the assets of KCBA(TV), the FOX affiliate licensed to Monterey, California, for approximately $11.0 million and entered into a local marketing agreement with the purchaser to provide programming and sales services. The Company recorded a gain on the sale of KCBA(TV) of approximately $8.8 million. Concurrent with this sale, the Company exercised its option to purchase substantially all the assets of KION(TV), the CBS affiliate licensed to Salinas, California. The Company paid approximately $6.3 million in 1996 and 1997 for the option, plus the purchase price for the station's assets of approximately $7.7 million. The F-12 Company recorded net tangible assets with estimated fair values aggregating $1.9 million, goodwill of $4.8 million, and other intangible assets, consisting principally of an FCC license and network affiliation agreement, of $7.3 million in connection with the transaction. From April 24, 1996 until closing of the transaction, the Company provided programming and sales services under a local marketing agreement with the previous owner. Acquisition of Outdoor Advertising Company in Washington and Oregon. On January 13, 2000, the Company entered into agreements to purchase substantially all of the assets of an outdoor advertising company serving portions of Washington and Oregon for approximately $14.6 million plus the assumption of certain liabilities. The Company paid $7.5 million of the purchase price on February 1, 2000 and the remaining balance on March 1, 2000. The Company recorded net tangible assets with estimated fair values aggregating $2.9 million and goodwill of $11.7 million in connection with the transaction. Investment in WETM(TV). On February 1, 2000, the Company entered into a local marketing agreement with Smith Television of New York, Inc. ("STNY") to provide programming and sales services to WETM(TV), the NBC affiliate licensed to Elmira, New York. The Company also purchased a minority non-voting equity interest in STNY for approximately $17.0 million. Beginning in August 2003, STNY may require the Company to exchange the interest in STNY, plus $11.0 million in cash, for all the assets of WETM(TV). Under certain circumstances, the Company may have an option to purchase all or a controlling interest in STNY. Acquisition of Outdoor Advertising Company in New Jersey and New York City. On March 31, 2000, the Company acquired substantially all of the assets of an outdoor advertising company in New Jersey and New York City for approximately $19.8 million. The Company recorded net tangible assets with fair values aggregating $4.9 million and goodwill of $14.9 million in connection with the transaction. Acquisition of KKFX-CA. On May 9, 2000, the Company purchased substantially all of the assets of a low-power television station KKFX-CA, the FOX affiliate licensed to the Santa Barbara-Santa Maria-San Luis Obispo, California market for approximately $15.4 million. From April 1, 2000 until closing of the transaction, the Company provided programming and sales services under a local marketing agreement with the previous owner. The Company recorded net tangible assets with fair values aggregating $0.4 million, goodwill of $6.0 million and other intangible assets, consisting principally of an FCC license and network affiliation agreement, of $9.0 million in connection with the transaction. Acquisition of KGPE(TV). On August 1, 2000, the Company purchased the membership interests of Fisher Broadcasting -- Fresno, LLC, which owned television station KGPE(TV), the CBS affiliate licensed to Fresno, California, for approximately $60.0 million. The Company recorded net tangible assets with estimated fair values aggregating $5.9 million, goodwill of $13.3 million, and other intangible assets, consisting principally of an FCC license and network affiliation agreement, of $40.8 million in connection with the transaction. Other Acquisitions. In addition to the acquisitions described above, the Company purchased two television stations in 1999, three stations in 2000, and three outdoor advertising companies in 2000. The aggregate purchase price and estimated fair values of the assets for F-13 these transactions were as follows (in millions): Year Ended December 31, 2000 1999 ----- ----- Net tangible assets $ 5.9 $ 2.3 Goodwill 12.4 9.9 Other intangible assets 16.5 -- ----- ----- $34.8 $12.2 ===== ===== 5. Discontinued Operations On December 8, 2000, the Company executed a letter of intent to sell substantially all of the assets of its sports & entertainment operations to The Basketball Club of Seattle LLC for approximately $200.0 million in cash and the assumption of certain liabilities. These operations consist principally of the Seattle SuperSonics National Basketball Association franchise, operating rights to the Seattle Storm, a Woman's National Basketball Association franchise, and Full House Sports & Entertainment, the Company's sports marketing business. A definitive purchase agreement was signed on January 11, 2001 and the transaction closed on April 2, 2001 (Sonics Sale). In addition, the Company sold separately its Boeing 727 aircraft used by the Seattle Supersonics for transportation to and from away games. Operating results of the discontinued sports & entertainment operations are as follows (in thousands):
Year Ended December 31, 2001 2000 1999 --------- --------- --------- Loss from discontinued operations $ -- $ (15,599) $ (4,832) Gain on disposal of discontinued operations 142,586 -- -- Income tax (expense) benefit (49,905) 5,892 2,054 --------- --------- --------- Net income (loss) from discontinued operations $ 92,681 $ (9,707) $ 2,778 ========= ========= ========= Net revenue included in loss from discontinued operations $ -- $ 67,527 $ 70,605 Interest expense included in loss from discontinued operations $ -- $ 2,167 $ 2,673
The loss from operations of the sports & entertainment operations from December 8, 2000 through December 31, 2001 was $10.6 million, which included $43.8 million in net revenue and $0.9 million of interest expense. These losses from operations were recognized in the second quarter of 2001 as a reduction of the combined net gain from the Sonics Sale and the sale of the Boeing 727 aircraft. Interest expense included in discontinued operations is comprised of interest on obligations related to the assets sold as well as interest allocated to the sports & entertainment operations. Such interest is allocated based on the Company's incremental borrowing rate applied to the initial acquisition price of the Seattle SuperSonics franchise. F-14 6. Accounts receivable and allowance for doubtful accounts As of December 31, 2001 and 2000, accounts receivable includes employee receivables of $0.3 million and $0.5 million, respectively. The activity in the allowance for doubtful accounts is summarized as follows (in thousands):
2001 2000 1999 ------- ------- ------- Balance at beginning of year $ 1,903 $ 1,865 $ 1,435 Additions charged to operating expense 1,960 2,155 1,611 Write-offs of receivables, net of recoveries (2,788) (2,117) (1,181) ------- ------- ------- Balance at end of year $ 1,075 $ 1,903 $ 1,865 ======= ======= =======
7. Property and equipment At December 31, 2001 and 2000, property and equipment consisted of the following (in thousands):
Estimated 2001 2000 Useful Life -------- -------- ------------ Land $ 8,741 $ 8,741 Advertising structures 54,485 53,716 6-20 years Broadcast equipment 87,857 70,300 6-20 years Building and improvements 42,421 57,546 3-40 years Office furniture and equipment 39,054 42,667 5-10 years Transportation and other equipment 11,596 28,764 5-6 years Equipment under capital leases -- 8,008 10 years Construction in progress 155 22,032 -------- -------- 244,309 291,774 Less accumulated depreciation 122,515 121,301 --------- -------- $121,794 $170,473 ========= ========
8. Intangible Assets At December 31, 2001 and 2000, intangible assets consisted of the following (in thousands):
Estimated 2001 2000 Useful Life -------- -------- ----------- Goodwill $246,927 $248,222 15-40 years Broadcasting licenses 58,453 58,453 15-30 years Network affiliation agreements 91,881 91,881 15-30 years Favorable leases and contracts 4,797 4,797 20-40 years Other 3,730 4,323 5-30 years -------- -------- 405,788 407,676 Less accumulated amortization 80,512 54,544 -------- -------- $325,276 $353,132 ======== ========
9. Debt Credit Agreements F-15 On January 22, 1999, the Company replaced its previous credit agreement with a $325.0 million credit agreement (the "1999 Credit Agreement"). The transaction resulted in a charge of $0.6 million, net of applicable taxes of $0.4 million, consisting of the write-off of deferred financing costs. On September 7, 2001, the Company replaced its 1999 Credit Agreement with a new $120.0 million credit agreement (the "2001 Credit Agreement"), consisting of a $100.0 million term loan (the "2001 Term Loan") and a $20.0 million revolving credit facility (the "2001 Revolver"). The 2001 Revolver includes up to $5.0 million in standby letters of credit. The transaction resulted in a charge of $1.6 million, net of applicable taxes of $0.9 million, consisting of the write-off of deferred financing costs. In addition, the transaction included a discount of $3.6 million, which is being amortized to interest expense over the term of the 2001 Credit Agreement. At closing of the 2001 Credit Agreement, a portion of the 2001 Term Loan was placed in escrow to fund the Company's estimated federal income tax payments due in October and December of 2001 and the Company's interest payment on its senior subordinated notes due in January 2002. The estimated federal income tax payments were funded, leaving $9.0 million in escrow to fund the January 15, 2002 interest payment. The $9.0 million is classified as restricted cash on the consolidated balance sheet. Principal payments under the 2001 Term Loan are due in quarterly installments of $250,000 each for the period commencing on December 31, 2001 and ending on September 30, 2005, and $24.0 million each for the period commencing on December 31, 2005 and ending on September 30, 2006. Any outstanding borrowings under the 2001 Revolver will be due on August 31, 2004. At December 31, 2001, outstanding borrowings under the 2001 Term loan were $91.3 million. The unamortized discount at December 31, 2001, was $3.3 million. There were no outstanding borrowings under the 2001 Revolver at December 31, 2001. The Company can choose to have interest calculated at rates based on either LIBOR or a base rate plus defined margins. The interest rate applicable to the 2001 Revolver will be subject to certain reductions based on the Company's interest coverage ratio. Commitment fees on the unused portion of the 2001 Revolver are payable quarterly at an annual rate of 1.5%. At December 31, 2001 and 2000, outstanding standby letter of credit agreements totaled $2.3 million and $1.3 million, respectively. The Company has obtained waivers of compliance with certain restrictive covenants effective for the period December 31, 2001 through May 31, 2002. Pursuant to the terms of the waivers, the Company cannot access the 2001 Revolver during the waiver period. After May 31, 2002, the Company's lenders would have the right to accelerate the payment of the Company's indebtedness, unless the Company were to obtain an extension of the waivers. In addition, an acceleration of indebtedness under the 2001 Credit Agreement could cause an acceleration of the Company's indebtedness under the 9% Senior Subordinated Notes (discussed below). As these waivers currently expire prior to December 31, 2002, all outstanding borrowings under the 2001 Credit Agreement and the 9% Senior Subordinated Notes have been classified as current at December 31, 2001. If the merger does not close by May 31, 2002, the Company will likely need to obtain extensions of the waivers or make other financing arrangements. Under the change of F-16 control provisions of the 2001 Credit Agreement, all outstanding borrowings thereunder will be repaid fully upon closing of the merger discussed in Note 3. 9% Senior Subordinated Notes On December 14, 1998, the Company issued 9% Senior Subordinated Notes due 2009 (the "9% Senior Subordinated Notes") in the aggregate principal amount of $175.0 million. These notes bear interest at 9% which is payable semi-annually in January and July. Principal is payable in full in January 2009. These notes were issued under an indenture (the "Indenture"), which allows for an aggregate principal amount of up to $250.0 million and on February 24, 1999, the Company issued additional notes in the aggregate amount of $25.0 million. In connection with the transaction, the Company recorded a premium of $1.1 million, which is being amortized over the remaining term of the notes. At December 31, 2001, the total aggregate amount of 9% Senior Subordinated Notes issued and outstanding was $200.0 million. The unamortized premium at December 31, 2001, was $0.9 million. Under the change of control provisions of the Indenture, within 30 days after the closing of the merger with Clear Channel, the Company will be required to make an offer to repurchase all of the outstanding 9% Senior Subordinated Notes at a price of 101% plus accrued interest to the date of repurchase. Such repurchase must occur no less than 30 days and no later than 45 days after the date of the repurchase offer. On March 15, 1999, the Company redeemed its $20.0 million outstanding principal of the 10.48% Senior Subordinated Notes due 2000 with borrowings under the 1999 Credit Agreement. This transaction resulted in a charge of approximately $0.8 million, net of applicable taxes of $0.5 million, consisting of prepayment fees and the write-off of deferred financing costs. Other On August 6, 1999, the Company received proceeds of $2.0 million upon the termination of an interest rate swap agreement with a notional principal amount of $70.0 million. On December 8, 2000, the Company received proceeds of $2.1 million upon the termination of its three remaining interest rate swap agreements with notional principal amounts aggregating $130.0 million. In connection with these transactions, the gains on the termination of these agreements were deferred and amortized as an adjustment to interest expense over the remaining terms of the original contract lives, until the 1999 Credit Agreement was replaced in September 2001. At that time, the remaining unamortized gain of $0.3 million, net of applicable taxes of $0.2 million, was recorded in extraordinary items in connection with the write-off of deferred financing costs related to the 1999 Credit Agreement. At December 31, 2001 and 2000, long-term debt consisted of the following (in thousands):
2001 2000 -------- -------- Credit agreements, net of unamortized discount $ 87,950 $176,300 Senior subordinated notes and unamortized premium 200,872 200,953 Notes payable for Seattle SuperSonics aircraft -- 11,508 Capital lease obligation (net of imputed interest of $370) -- 3,736 Deferred compensation agreements 1,757 2,174 -------- -------- 290,579 394,671 Less amounts classified as current 289,086 9,030 -------- -------- $ 1,493 $385,641 ======== ========
F-17 Approximately $0.2 million of interest was capitalized in 2000. There was no capitalized interest in 2001 or 1999. Future aggregate annual payments of long-term debt for the years ending December 31 are as follows (in thousands):
Senior Deferred Credit Subordinated Compensation Agreement Notes Agreements Total --------- ------------ ------------ -------- 2002 $87,950 $200,872 $264 $289,086 2003 --- -- 371 371 2004 --- -- 333 333 2005 --- -- 147 147 2006 --- -- 161 161 Later years --- -- 481 481 ------- -------- ------ -------- Total $87,950 $200,872 $1,757 $290,579 ======= ======== ====== ========
Substantially all of the outstanding stock and material assets of the Company's subsidiaries are pledged as collateral under the 2001 Credit Agreement. In addition, the 2001 Credit Agreement and the indenture under the 9% Senior Subordinated Notes restrict, among other things, the Company's borrowings, dividend payments, stock repurchases, sales or transfers of assets and contain certain other restrictive covenants which require the Company to maintain certain debt coverage and other financial ratios. 10. Income taxes Significant components of income tax expense (benefit) are as follows (in thousands):
2001 2000 1999 -------- -------- -------- Current: Federal ($18,393) $ 72,072 $ 554 State (379) 2,974 -- -------- -------- -------- (18,772) 75,046 554 Deferred: Federal (1,496) 18,437 6,846 State (938) 2,801 517 -------- -------- -------- (2,434) 21,238 7,363 -------- -------- -------- Income tax expense (benefit) $(21,206) $ 96,284 $ 7,917 ======== ======== ========
The reconciliation of income taxes computed at the U.S. federal statutory tax rate to income tax expense (benefit) is as follows (in thousands): F-18
2001 2000 1999 -------- -------- -------- Tax at U.S. statutory rate $(21,433) $ 89,292 $ 6,530 Non-deductible expenses 1,544 1,138 659 State taxes and other (1,317) 5,854 728 -------- -------- -------- Income tax expense $(21,206) $ 96,284 $ 7,917 ======== ======== ========
At December 31, 1999, the Company had net operating loss carryforwards for federal income tax purposes of approximately $17.7 million and alternative minimum tax credit carryforwards of approximately $2.8 million. Due to the gain on the sale of the Florida outdoor advertising operations in 2000, all of the net operating loss carryforwards and alternative minimum tax credit carryforwards for federal income taxes were utilized on the 2000 federal tax return. At December 31, 2001, the Company had net operating loss carryforwards for state income tax purposes of $78.6 million, which expire in 2006 through 2026. Income taxes paid were $35.8 million, $70.7 million, and $0.7 million in 2001, 2000 and 1999, respectively. The amounts in 2001 and 2000 are substantially greater than 1999 as they include income taxes paid on the gains from the sale of the Sports & Entertainment operations in 2001 and the sale of the Florida outdoor advertising operations in 2000. Under SFAS No. 95, Statement of Cash Flows, the cash received from these sales are reported as an investing cash flow. However, all income tax payments, including those resulting from the gains from these sales, must be reported as an operating cash flow. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. At December 31, 2001 and 2000 significant components of the Company's deferred tax assets and liabilities are as follows (in thousands):
2001 2000 -------- -------- Deferred tax assets: State net operating loss carryforwards $ 998 $ -- Investment impairment charge 626 -- Accrued retirement benefits 692 -- Capital lease obligation -- 1,355 Deferred compensation agreements 637 788 Other 1,973 3,855 -------- -------- Total deferred tax assets 4,926 5,998 Deferred tax liabilities: Basis difference in depreciable assets 9,834 12,040 Basis difference in intangible assets 5,393 5,734 Other -- 1,074 -------- -------- Total deferred tax liabilities 15,227 18,848 -------- -------- Net deferred tax liability $(10,301) $(12,850) ======== ========
11. Employee benefit plan The Company has a voluntary defined contribution 401(k) savings and retirement plan for the benefit of its nonunion employees, who may contribute from 1% to 15% of their F-19 compensation up to a limit imposed by the Internal Revenue Code. The Company matches participating employee contributions up to 4% of their compensation and may also make an additional voluntary contribution to the plan. The Company's contributions totaled $1.4 million in 2001, $1.8 million in 2000, and $1.3 million in 1999. 12. Stockholders' equity The Class B common stock has the same rights as common stock, except that the Class B common stock has ten times the voting rights of common stock and is restricted as to its transfer. Each outstanding share of Class B common stock may be converted into one share of common stock at any time at the option of the stockholder. During the third quarter of 1999, the Company issued 3,250,000 shares of common stock at $15.25 per share pursuant to an underwritten public offering. In conjunction with the transaction, the Company received net proceeds of approximately $46.5 million. The Company had various stock purchase agreements to sell shares of its common stock and Class B common stock to key employees and officers at fair market value. These agreements expired in 1999. The agreements provided for distribution of one share of Class B common stock at no extra cost to the holder for each share of common stock at the time the shares were purchased. In 1999, the remaining 37,500 shares of common stock and 37,500 shares of Class B common stock were purchased under these agreements. The Company's Nonemployee-Directors' Equity Compensation Plan (the "Directors' Plan") was approved by the Board of Directors in 1995 and the stockholders of the Company in 1996. The Directors Plan's purpose is to allow nonemployee directors to elect to receive directors' fees in the form of common stock instead of cash. There are 100,000 shares of common stock authorized under the Directors' Plan. At December 31, 2001, the Company had an aggregate of 13,843,770 shares of common stock reserved for future issuance, consisting of 11,020,622 shares reserved for conversion of Class B common stock, 1,387,902 reserved for issuance under the 2000 Employee Stock Purchase Plan, 1,364,900 shares reserved under the Fifth Amended and Restated Employees Stock Option Plan, and 70,346 shares reserved under the Directors' Plan. 13. Stock Option Plan The Company's Employees Stock Option Plan (the "Plan") was approved by the Board of Directors and the stockholders of the Company in 1983. The Plan has been amended from time to time to extend the term of the Plan and to increase the amount of common stock reserved for issuance to 2,000,000 shares. As of December 31, 2001, there were 898,000 shares of common stock available for future grants under the Plan. Under the Plan, the exercise price of the options equals the market price of the Company's stock on the date of grant and the options' maximum life is 10 years. The options vest at the end of five years of continuous employment. F-20 In 2001, 2000 and 1999, the Company recognized stock compensation expense of $0.3 million, $0.1 million and $0.6 million, respectively. The 1999 amount is higher primarily due to the amendment of certain stock option agreements. A summary of the Company's stock option activity and related information for the years ended December 31 is as follows:
2001 2000 1999 ---------------------- --------------------- -------------------- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Options Price Options Price Options Price -------- -------- ------- -------- ------- -------- Options outstanding at beginning of year 647,000 $13.71 450,000 $11.95 250,000 $ 5.69 Granted -- -- 212,000 16.69 210,000 19.50 Cancelled (35,000) 17.89 (5,000) 19.50 -- -- Exercised (145,100) 6.04 (10,000) 3.44 (10,000) 7.63 -------- ------- ------- Options outstanding at end of year 466,900 $15.78 647,000 $13.71 450,000 $11.95 Exercisable at end of year 84,900 $5.41 110,000 $3.44 -- -- Weighted average fair value of options granted during year -- $8.07 $12.05
Exercise prices for options outstanding at December 31, 2001 ranged from $3.44 to $19.50. A summary of options outstanding as of December 31, 2001 is as follows:
Weighted-Average Remaining Weighted- Range of Options Contractual Life Average Exercise Price Outstanding (Years) Exercise Price Exercisable ---------------- ----------- ---------------- -------------- ----------- $0.00 - $ 3.44 45,000 3.1 $3.44 45,000 $3.45 - $ 7.63 39,900 4.0 7.63 39,900 $7.64 - $16.69 192,000 8.1 16.69 -- $16.70 - $19.50 190,000 7.5 19.50 -- ------- ------ $0.00 - $19.50 466,900 7.0 15.78 84,900 ======= ======
As required by Financial Accounting Standards Board Statement No. 123, the pro forma information regarding net income and earnings per share has been calculated as if the Company had accounted for its employee stock options under the fair value method of that statement. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in 2000 and 1999, respectively (there were no grants in 2001) and dividend yield of 0%; expected volatility of F-21 29% and 52%; risk-free interest rate of 6.6% and 5.7%; and a weighted-average expected life of the options of 7.5 years. For purposes of pro forma disclosures, the estimated fair value of the options is amortized over the options' vesting period. The Company's pro forma net income and earnings per common share follows (in thousands, except per share amounts):
2001 2000 1999 ------- -------- ------ Pro forma net income $44,853 $147,962 $6,122 Pro forma net income per common share $ 1.28 $ 4.23 $ 0.19 Pro forma net income per common share -- assuming dilution $ 1.28 $ 4.21 $ 0.18
The pro forma amounts above may not be representative of the pro forma effect on reported net income in future years because options vest over several years, additional options may be granted each year, and assumptions can change. In connection with the merger discussed in Note 3, all previously unexercisable options will become exercisable upon the closing of the merger. In addition, each outstanding option to purchase one share of the Company's common stock will be converted to an option to purchase 0.35 shares of Clear Channel common stock. 14. Commitments and contingencies The Company becomes involved from time to time in various claims and lawsuits incidental to the ordinary course of its operations, including such matters as contract and lease disputes and complaints alleging employment discrimination. In addition, the Company participates in various governmental and administrative proceedings relating to, among other things, condemnation of outdoor advertising structures without payment of just compensation and matters affecting the operation of broadcasting facilities. The Company believes that the outcome of any such pending claims or proceedings individually or in the aggregate, will not have a material adverse effect upon its business or financial condition. The Company has employment contracts with certain employees extending beyond December 31, 2001. Some of these contracts require that payments continue to be made if the individual should be unable to perform because of death or disability. In addition, the Company is required to make payments for equipment, facilities, and television programming under non-cancelable operating lease and broadcast agreements. Future minimum payments under such contracts that expire in more than one year for the years ending December 31 are as follows (in thousands): Equipment/Facilities Broadcast Obligations Employment -------------------- --------------------- ---------- 2002 $ 5,601 $9,104 $ 5,572 2003 5,123 5,188 4,087 2004 4,630 3,179 2,563 2005 4,011 563 671 2006 3,302 14 320 Later years 8,427 -- 1,020 ------- ------- ------- $31,094 $18,048 $14,233 ======= ======= =======
F-22 Included in the operating leases is a lease for a high-definition mobile television broadcast unit which contains renewal and purchase options in 2002, 2003 and 2004, and a purchase option in 2005. In the event the Company elects not to exercise a renewal option, the Company must guarantee a minimum residual value to the lessor of $3.0 million in 2002, $2.5 million in 2003, $1.7 million in 2004, and $0.8 million in 2005. These amounts would be reduced by any proceeds received by the lessor from the sale of the broadcast unit. Rent expense for operating leases aggregated $9.3 million in 2001, $9.1 million in 2000, and $5.8 million in 1999. Broadcasting film and programming expense aggregated $12.6 million in 2001, $11.4 million in 2000, and $11.2 million in 1999. Principal amounts outstanding on loans to the Company's major stockholder was approximately $0.1 million at December 31, 2001 and 2000. 15. Television Broadcasting Group Restructuring On April 6, 1999, the Company announced the launch of Digital CentralCasting(TM), a digital broadcasting system which allows the Company to consolidate back-office functions such as operations, programming, advertising scheduling, and accounting for all of the television stations within a regional group at one station. To implement this strategy, the Company organized 16 of the television stations it owns and/or programs into the following three regional station groups: New York (WIXT, WOKR, WIVT, WBGH-CA, WUTR, WETM, and WWTI), Central California (KCOY, KKFX-CA, KGPE, and KGET), and North Coast (KCBA, KION, KMTR, KVIQ, and KFTY). The Company completed the implementation of Digital CentralCasting(TM) for all of its television station groups in the first quarter of 2001. The Company recorded a $1.1 million restructuring charge in the second quarter of 1999 relating to the implementation of Digital CentralCasting(TM). This restructuring charge consisted primarily of costs associated with employee staff reductions, contract terminations, legal, and other costs associated directly with the restructuring. As of December 31, 2001, termination benefits of approximately $0.5 million, representing approximately 50 employees, had been paid and charged to the restructuring accrual. At December 31, 2001, the remaining accrual was approximately $30,000, which consists of an obligation under a noncancellable software system contract expiring in December 2002. 16. Workforce Reduction Costs In the second quarter of 2001, the Company implemented a cost reduction initiative in all of its business segments and the corporate office in order to mitigate decreases in national advertising revenue due to the slowing national economy. The Company recorded a charge of $2.4 million in the second quarter consisting of termination benefits for employees whose positions were eliminated in connection with this cost reduction initiative. Seventy-five positions representing a wide variety of functions across all business segments and the corporate office were eliminated. As of December 31, 2001, all of the termination benefits had been paid and charged to the workforce reduction accrual. F-23 17. Industry segment information The Company organizes its segments based on the products and services from which revenues are generated. The Company evaluates segment performance and allocates resources based on Segment Operating Cash Flow. The Company defines EBITDA as net revenue less operating expenses, workforce reduction costs, and restructuring expenses before amortization, depreciation, interest, net gain (loss) on dispositions of assets, and other expenses. Segment Operating Cash Flow is defined as EBITDA before corporate overhead and workforce reduction costs. Selected financial information for these segments for the years ended December 31, 2001, 2000 and 1999 is presented as follows (in thousands):
Outdoor Television Radio Interactive Media Broadcasting Broadcasting Media Total --------- --------- --------- --------- --------- 2001 Net revenue $ 77,912 $ 98,222 $ 22,509 $ 214 $ 198,857 Segment operating expenses (48,927) (92,307) (20,058) (1,376) (162,668) --------- --------- --------- --------- --------- Segment Operating Cash Flow $ 28,985 $ 5,915 $ 2,451 $ (1,162) 36,189 ========= ========= ========= ========= ========= Segment assets $ 100,337 $ 363,875 $ 55,341 $ 1,226 $ 520,779 Capital expenditures $ 1,515 $ 3,973 $ 586 $ 585 $ 6,659 2000 Net revenue $ 89,309 $ 107,615 $ 27,589 $ 51 $ 224,564 Segment operating expenses (51,364) (86,841) (19,018) (451) (157,674) --------- --------- --------- --------- --------- Segment Operating Cash Flow $ 37,945 $ 20,774 $ 8,571 $ (400) $ 66,890 ========= ========= ========= ========= ========= Segment assets $ 109,294 $ 392,230 $ 62,684 $ 1,156 $ 565,364 Capital expenditures $ 4,235 $ 17,535 $ 7,461 $ 978 $ 30,209 1999 Net revenue $ 98,751 $ 81,669 $ 27,163 $ -- $ 207,583 Segment operating expenses (56,877) (69,608) (15,563) -- (142,048) --------- --------- --------- --------- --------- Segment Operating Cash Flow $ 41,874 $ 12,061 $ 11,600 $ -- $ 65,535 ========= ========= ========= ========= ========= Segment assets $ 92,911 $ 273,072 $ 59,873 $ -- $ 425,856 Capital expenditures $ 7,346 $ 7,765 $ 3,780 $ -- $ 18,891
A reconciliation from the segment information to the consolidated balances for Segment Operating Cash Flow, segment assets, and segment capital expenditures is set forth below (in thousands):
2001 2000 1999 --------- --------- --------- Segment Operating Cash Flow $ 36,189 $ 66,890 $ 65,535 Corporate overhead (17,047) (23,792) (16,142) Workforce reduction costs (2,442) -- -- --------- --------- --------- EBITDA 16,700 43,098 49,393 Depreciation and amortization (45,193) (39,161) (26,042) Interest expense (28,486) (25,795) (32,959) Net gain (loss) on dispositions of assets (2,202) 227,650 28,999 Other (2,056) (901) (733) --------- --------- --------- Income (loss) from continuing operations before income taxes and extraordinary items $ (61,237) $ 254,891 $ 18,658 ========= ========= ========= Segment assets $ 520,779 $ 565,364 $ 425,856
F-24
2001 2000 1999 --------- --------- --------- Corporate assets 55,376 34,996 40,551 Assets of discontinued operations 686 66,947 62,029 --------- --------- --------- Consolidated total assets $ 576,841 $ 667,307 $ 528,436 ========= ========= ========= Segment capital expenditures 6,659 $ 30,209 $ 18,891 Corporate capital expenditures 534 7,548 4,545 Capital expenditures of discontinued operations 1,080 3,601 5,678 --------- --------- --------- Consolidated capital expenditures $ 8,273 $ 41,358 $ 29,114 ========= ========= =========
18. Summary of quarterly financial data (unaudited) The Company's results of operations may vary from quarter to quarter due in part to the timing of acquisitions and to seasonal variations in the operations of the outdoor media and television broadcasting segments. In particular, the Company's net revenue and EBITDA historically have been affected positively by increased advertising activity in the second and fourth quarters. The following table sets forth a summary of the quarterly results of operations for the years ended December 31, 2001 and 2000 (in thousands, except per share amounts). Net revenue, EBITDA, and income (loss) from continuing operations have been adjusted from amounts reported previously to reflect the accounting for the sports & entertainment operations as a discontinued operation.
First Second Third Fourth 2001 Quarter Quarter Quarter Quarter ---- --------- --------- --------- --------- Net revenue $ 44,873 $ 55,566 $ 48,489 $ 49,929 EBITDA (3,005) 6,442 6,746 6,517 Loss from continuing operations before extraordinary items (15,236) (7,136)(1) (7,897) (9,762) Gain (loss) from discontinued operations -- 90,808 1,881 (8) Extraordinary items --(2) -- (2,650) (4,465) Net income (loss) (15,236) 83,672 (8,666) (14,235) Net income (loss) per share (.43) 2.39 (.25) (.41) Net income (loss) per share -- assuming dilution (.43) 2.39 (.25) (.41) 2000 ---- Net revenue $ 46,769 $ 60,226 $ 57,296 $ 60,273 EBITDA 6,480 14,354 10,963 11,301 Income (loss) from continuing 164,677(1) (131)(1) (3,494) (2,445)(1) operations Income (loss) from discontinued 574 (2,107) (2,744) (5,430) operations Net income (loss) 165,251 (2,238) (6,238) (7,875) Net income (loss) per share 4.73 (.06) (.18) (.22) Net income (loss) per share -- 4.72 (.06) (.18) (.22) assuming dilution
(1) Includes net gain on dispositions of assets, as discussed in Note 4. (2) Represents merger costs and loss on debt extinguishment, as discussed in Notes 3 and 9. F-25