-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, NSEmk0CClaw03/7O3gtfxAZx4dupZ2lLIzfJqDk0fOCbWC/CI4K49F2mDRISBnfv vU65sVI5przK9+GM7rZ9Wg== 0001032210-99-000460.txt : 19990402 0001032210-99-000460.hdr.sgml : 19990402 ACCESSION NUMBER: 0001032210-99-000460 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990331 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ACKERLEY GROUP INC CENTRAL INDEX KEY: 0000319120 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-ADVERTISING [7310] IRS NUMBER: 911043807 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-10321 FILM NUMBER: 99581473 BUSINESS ADDRESS: STREET 1: 1301 5TH AVE STREET 2: SUITE 4000 CITY: SEATTLE STATE: WA ZIP: 98101- BUSINESS PHONE: 2066242888 MAIL ADDRESS: STREET 1: 1301 FIFTH AVE STE 4000 CITY: SEATTLE STATE: WA ZIP: 98101 FORMER COMPANY: FORMER CONFORMED NAME: ACKERLEY INC DATE OF NAME CHANGE: 19830814 10-K 1 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, 1998 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 (I.R.S. Employer of incorporation or organization) Identification No.) 1301 Fifth Avenue, Suite 4000 Seattle, Washington 98101 (Address of principal executive offices) (Zip code) (206) 624-2888 (Registrant's telephone number, including area code) ---------------- Securities registered pursuant to Section 12(b) of the Act: Common Stock New York Stock Exchange, Inc. Title of each class Name of exchange on which registered 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 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 on March 15, 1999 was $184,432,163. The number of shares outstanding of each of the registrant's classes of common stock as of March 15, 1999 was: Title of Class Number of Shares Outstanding Common Stock, $.01 Par Value 20,577,268 shares Class B Common Stock, $.01 Par Value 11,051,230 shares
DOCUMENTS INCORPORATED BY REFERENCE Portions of the Proxy Statement relating to the annual Meeting of Shareholders to be held on May 11, 1999, are incorporated by reference under Part III of this Report. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PART I ITEM 1--BUSINESS 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: out-of-home media, television broadcasting, radio broadcasting, and sports & entertainment. . Out-of-Home Media. We engage in outdoor advertising in Florida, Massachusetts, and the Pacific Northwest. At December 31, 1998, we had 8,522 outdoor displays in the markets of Miami/Fort Lauderdale and West Palm Beach/Fort Pierce, Florida; Boston/Worcester, Massachusetts; Seattle/Tacoma, Washington; and Portland, Oregon. We believe that we have leading positions in outdoor advertising in each of these markets, based upon the number of outdoor advertising displays. . Television Broadcasting. We engage in television broadcasting. Assuming completion of all pending transactions, we would own twelve television stations and operate two additional television stations under time brokerage agreements. . Radio Broadcasting. We also engage in radio broadcasting. Assuming completion of all pending transactions, we would own and operate six radio stations. . Sports & Entertainment. Our sports & entertainment business includes ownership of the Seattle SuperSonics, the National Basketball Association's Pacific Division Champions for the past three NBA seasons. In addition, we engage in sports marketing and promotion of the SuperSonics through our Full House Sports & Entertainment division. Business Strategy Our primary strategy is to develop and acquire media assets which enable us to offer advertisers a choice of media outlets for distributing their marketing messages. To this end, we assembled a diverse portfolio of media assets. We believe 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, or out-of-home media display. Further, we seek to exploit the operating synergies which we believe exist from our ownership of both distribution (the television broadcasting, radio broadcasting, and out-of-home businesses) and content (the sports & entertainment business) assets. 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. 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 certain competitive advantages: Leading Market Position in Outdoor Markets Served. We believe that we own the most outdoor advertising display faces in each of the five geographic markets in which we operate, based on the Traffic Audit Bureau's most recent Summary of Audited Markets, issued in October 1998. Our five outdoor advertising markets are Seattle/Tacoma, Washington; Portland, Oregon; Boston/Worcester, Massachusetts; Miami/Fort Lauderdale, Florida; and West Palm Beach/Fort Pierce, Florida. Focus on Local News Leadership as Driver of Broadcast Revenue. We believe local news leadership is an important contributor to audience and revenue growth for our television stations, and we seek to be the market leader in terms of local news ratings points delivered in the geographic markets served by our television 1 stations. We favor investing in the production of our own local news programming over the purchase of syndicated programming because we believe we have greater ability to improve the ratings of local news programming. For example, after we acquired KGET(TV) in Bakersfield, California and WIXT(TV) in Syracuse, New York, they both improved to be the first-ranked stations in their respective markets, in terms of local news ratings points delivered (the ratio of the number of viewers of a station's local news program to total viewers) according to the November 1998 Nielsen Station Index. Of the six network- affiliated television stations we currently own, three ranked number one in local news ratings points delivered, according to the November 1998 Nielsen Station Index. Over the last three years, we have increased local news programming at eight of the television stations we own or operate by one to three and a half hours per weekday. We believe that this has contributed to the improved financial performance of those stations, and we continue to invest in local news programming. Diversified Portfolio of Television Stations. Our television station portfolio is diversified across networks, including stations affiliated with major networks, and across geographic regions. We believe such diversification is beneficial, as it reduces our reliance upon any one network's programming, and mitigates our exposure to the economic cycles of any one geographic market. Strength in Seattle/Tacoma Radio Market. We have developed a strong presence in the Seattle/Tacoma radio market through our ownership and operation of four radio stations in the area. One of those stations, KUBE(FM), is the leading station in the market in terms of audience share, according to the Fall 1998 Arbitron Radio Market Report. We also seek to use our ownership of the Seattle SuperSonics to increase the audience share of these radio stations, as discussed in the paragraph below. Ownership of the Seattle SuperSonics. The Seattle SuperSonics have the second best aggregate regular season win/loss record of any NBA team over the past five completed seasons. We believe that our ownership of the Seattle SuperSonics enhances the effectiveness of our media operations by (i) providing regionally significant programming, (ii) generating listener loyalty for our radio stations, and (iii) increasing the number of individuals exposed to the advertising we provide. We seek to extract additional value from our ownership of the Seattle SuperSonics through the sale of team sponsorships, which includes sales of advertising on signs in Seattle's Key Arena and on radio and television broadcasts of SuperSonics games. We also receive revenue from our interest in activities coordinated by the NBA, such as advertising on nationally televised games and other licensing arrangements. As a result of our ownership of different media outlets, our sports & entertainment business can offer advertisers greater choice than a single outlet entity. We believe this helps our advertisers to more effectively reach their target audiences. Low Reliance Upon Tobacco Advertisers. Over the past several years, the U.S. Food and Drug Administration ("FDA") and other governmental entities have become more active in their regulation and scrutiny of tobacco, including its advertising. We expect that such increased scrutiny will continue, and will lead to additional restrictions or prohibition of outdoor advertising of tobacco products. We are proactively seeking to reduce our reliance upon tobacco advertising. Outdoor tobacco advertising represented approximately 3% of our consolidated revenue in 1998, down from 5% of our consolidated revenue in 1997. Leadership of Company Founder. Barry A. Ackerley, one of our founders and our current Chairman and Chief Executive Officer, has been actively involved with the Company since our inception in 1975. Early in our history, Mr. Ackerley recognized the synergies that could be achieved through ownership of outdoor advertising, television and radio broadcasting, and sports & entertainment assets. With this vision, Mr. Ackerley led our expansion from outdoor advertising into television and radio broadcasting and sports & entertainment well before the current trend toward consolidation among these industries. Experienced Corporate Management. While Mr. Ackerley remains significantly involved in our operations, and is the single largest stockholder in the Company, he has developed an experienced corporate management team to help us achieve the desired synergies among our business units. Four of our five executive 2 officers have worked together for eight years, and collectively have an aggregate of 98 years of experience in the various industries in which we are involved. Decentralized Management Structure; Experienced Management. We have granted the management of our operating units the authority and autonomy necessary to run each unit as a business and to respond effectively to changes in each market environment. Experienced local managers enhance our ability to respond to local market changes rapidly and effectively. The average experience of our 13 division managers in their respective industries is approximately 17 years. We aim to continue improving our operating performance through our team of experienced local managers and corporate staff. Out-of-Home Media Our out-of-home media business sells advertising space on outdoor displays. Until our airport advertising operations were sold on June 30, 1998, we sold advertising space on displays located in airport terminals. National advertisers generally categorize outdoor and airport advertising as "out-of- home media" because, unlike radio and television broadcasting, newspapers, and magazines, such advertising is disseminated outside the home. Outdoor Advertising 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 advertising targeted at a specified percentage of the general population and 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, typically once a year, 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. While outdoor advertising has been a stable source of revenue over the last five years, the number and diversity of our advertisers have increased. 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 telecommunications companies. Operations. We operate primarily in the greater metropolitan areas of Seattle and Tacoma, Washington; Portland, Oregon; Boston and Worcester, Massachusetts; and Miami, Fort Lauderdale, West Palm Beach and Fort Pierce, Florida. For purposes of defining our out-of-home markets, we consider Seattle/Tacoma, Boston/Worcester, Miami/Fort Lauderdale, and West Palm Beach/Fort Pierce to be single markets. Based on the Traffic Audit Bureau's Summary of Audited Markets issued in October 1998, we had more outdoor advertising displays in each of these markets than any other outdoor advertising company. 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 3 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, increased demand brought about by creative marketing, and increased rates. 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 three standard 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 printed by computer. The Superflex is then transported to the site of the billboard and mounted to the face of the display. To attract more attention, panels 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 and arrive prepasted and packaged in airtight bags. 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. At December 31, 1998, we had 1,418 bulletins, 5,784 posters, and 1,320 junior posters. The following chart itemizes markets we serve and their designated market area (DMA) rank:
DMA Junior Market Rank(1) Bulletins Posters Posters ------ ------ --------- ------- ------- Northwest: Seattle/Tacoma.......................... 12 224 1,613 316 Portland................................ 24 153 1,023 0 Boston: Boston/Worcester........................ 6 334 1,707 75 Florida: Miami/Fort Lauderdale................... 16 515 1,111 929 West Palm Beach/Fort Pierce............. 43 192 330 0
- -------- (1) Source: Television & Cable Factbook, 1998 Edition. DMA rank is a measure of market size in the United States based on population as reported by the Nielsen Rating Service. 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. 4 A broad cross-section of advertisers utilize our outdoor advertising displays, including tobacco, food and beverage, financial service, automotive and retail companies. We have actively sought to reduce the percentage of our revenue attributable to tobacco products and to any individual company. As a result of these efforts, no single outdoor advertiser accounted for more than 1% of our consolidated revenue in 1998. In addition, outdoor tobacco advertising accounted for approximately 3% of our consolidated revenue for that year. See "Regulation" below. Competition. We compete directly with other out-of-home 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 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 localities have also enacted restrictions on the content of outdoor advertising signs. Advertising for tobacco products has increasingly been the subject of regulation. Manufacturers of tobacco products, principally cigarettes, historically have been major users of outdoor advertising displays. Tobacco advertising is currently subject to regulation and legislation has been introduced from time to time in the U.S. Congress that would further regulate and in certain instances prohibit advertising of tobacco products. On November 23, 1998, the major tobacco companies and the Attorneys General of 46 states entered into a broad-based consent judgment in which, among other things, these companies agreed to terminate all cigarette advertising on outdoor advertising within 150 days. The consent judgment affects our operations in Massachusetts, Oregon and Washington (other than King County). In 1997, we voluntarily agreed to eliminate tobacco advertising on displays located in King County (Washington) effective January 1, 1998. In addition, the State of Florida previously entered into a settlement agreement with the tobacco industry that eliminated tobacco advertising on billboards throughout the state. As a result of these and other factors, it is likely that our advertising revenue from tobacco companies will continue to decrease. Federal and corresponding state outdoor advertising statutes require payment of compensation 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. 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. 5 Acquisition. On February 19, 1999, we purchased substantially all of the assets of an out-of-home advertising company in the Boston/Worcester, Massachusetts market for approximately $11.0 million. Airport Advertising On June 30, 1998, we sold substantially all of the assets of our 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, paid on the closing date of the transaction, and an additional cash payment of approximately $2.9 million, of which $1.2 million was paid in December 1998 and the remainder was paid in January 1999. Prior to the sale, we engaged in airport advertising for 18 years. Television Broadcasting Our television broadcasting operations involve the sale of air time to a broad range of national, regional, and local advertisers. We operate eleven 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 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 the majority of its daily programming from a network. Networks provide programming, together with 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. Operations. Assuming completion of all pending transactions, we would own 11 television stations and would operate two additional television stations under time brokerage agreements. We currently own nine television stations and operate three stations under time brokerage agreements. The following tables sets forth information about our portfolio of television stations (including television stations we plan to acquire and television stations operated under time brokerage agreements) and the markets in which they operate. 6
No. of Commercial TV DMA Stations Call Date Acquired Network Market Ranked in Market Letters or Affiliated Affiliation Rank(1) Market(2) Frequency ------ ------- ----------------- ----------- ------- ---------- --------- Central New York Syracuse, New York WIXT May 1982 ABC VHF 72 3 VHF (owned).................... 2 UHF(3) Rochester, New York WOKR -- (4) ABC VHF 75 3 VHF (pending acquisition)...... 1 UHF Binghamton, New York WIVT July 1997(5) ABC UHF 154 1 VHF (owned).................... 2 UHF Utica, New York (time 1 VHF brokerage agreement)....... WUTR June 1997(6) ABC UHF 169 2 UHF California Santa Barbara/Santa Maria/San Luis Obispo, California (pending acquisition; interim time brokerage agreement)....... KCOY January 1999(7) CBS VHF 115 3 VHF Salinas/Monterey, California (owned; pending sale; future time brokerage agreement)....... KCBA June 1986(8) FOX UHF 121 1 VHF 3 UHF(9) Salinas/Monterey, California (pending acquisition; interim time brokerage agreement)....... KION April 1996(10) CBS UHF 121 1 VHF 3 UHF(9) Bakersfield, California (owned).................... KGET October 1983 NBC UHF 131 4 UHF(11) Eureka, California (owned).................... KVIQ July 1998(12) CBS VHF 189 2 VHF 2 UHF Santa Rosa, California (owned).................... KFTY April 1996 None UHF -- (13) 6 VHF 11 UHF Other Colorado Springs/Pueblo, Colorado (owned; pending sale; purchaser operates under time brokerage agreement)................. KKTV January 1983(14) CBS VHF 94 3 VHF 1 UHF(15) Eugene, Oregon (owned)...... KMTR December 1998(16) NBC VHF 120 3 VHF 6 UHF Fairbanks, Alaska (pending acquisition)............... KTVF -- (17) NBC/UPN VHF 205 4 VHF Vancouver, British Columbia and portions of Seattle, Washington (owned)......... KVOS June 1985 None VHF -- (18) -- (18)
- -------- (1) Source: Television & Cable Fact Book, 1998 Edition. (2) Source: Television & Cable Fact Book, 1998 Edition. The number of stations listed does not include digital television stations, public broadcasting stations, satellite stations, or translators which rebroadcast signals from distant stations, and also may not include smaller television stations whose rankings fall below reporting thresholds. (3) Two additional UHF channels have been allocated in the Syracuse market; however, there has been no construction activity to date with respect to these channels. (4) In September 1998, we entered into an agreement to purchase WOKR. (5) We acquired WIVT in August 1998. Pending approval of the acquisition by the FCC, we operated the station under a time brokerage agreement with the previous owner. The date in this column reflects the date the time brokerage agreement was entered into. (6) We do not own WUTR but operate the station under a time brokerage agreement with the current owner. The date in this column reflects the date the time brokerage agreement was entered into. (7) In December 1998, we entered into an asset exchange agreement, pursuant to which we would exchange KKTV for KCOY and a cash payment. Pending approval of this transaction by the FCC, we are operating KCOY under a time brokerage agreement with the current owner. The date in this column reflects the date that the time brokerage agreement was entered into. (footnotes continued on next page) 7 (8) In November 1998, we entered into an agreement to sell substantially all the assets of KCBA. Subject to FCC approval, we would continue to operate the station after the sale pursuant to a time brokerage agreement with the purchaser. (9) 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. (10) In November 1998, we entered into a purchase agreement to acquire KION. The purchase of this station is contingent upon our sale of KCBA, as described in footnote (8). Pending approval of this acquisition by the FCC, we are operating the station under a time brokerage agreement with the current owner. The date in this column reflects the date the time brokerage agreement was entered into. (11) 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. (12) We acquired KVIQ in January 1999. Pending approval of this acquisition by the FCC, we operated the station under a time brokerage agreement with the former owner. The date in this column reflects the date this time brokerage agreement was entered into. (13) 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. (14) In December 1998, we entered into an asset exchange agreement, pursuant to which we would exchange KKTV for KCOY and a cash payment. Pending approval of this transaction by the FCC, the purchaser is operating KKTV under a time brokerage agreement. (15) Two additional UHF channels have been allocated in the Colorado Springs/Pueblo market; however, there has been no construction activity to date with respect to these channels. (16) We acquired KMTR in March 1999. Pending approval of this acquisition by the FCC, we operated the station under a time brokerage agreement with the former owner. The date in this column reflects the date the time brokerage agreement 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). (17) In August 1998, we entered into an agreement to purchase KTVF. (18) KVOS, located in Bellingham, Washington, serves primarily the Vancouver, British Columbia market (located in size, according to the Nielsen Rating Service as of February 1999, between the markets of Denver, Colorado and Pittsburgh, Pennsylvania, 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. DMA rankings are from the Television & Cable Factbook, 1998 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 broadcasting non-network programming, however, KVOS(TV) is able to increase the amount of time it is on the air in the Vancouver market. Acquisitions and Time Brokerage Agreements. We seek to acquire television broadcast stations generally in DMA markets ranking from 50 to 200. We also enter into time brokerage agreements 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 network compensation and advertising sold by the stations. Over the past year, we have acquired, or entered into time brokerage agreements to operate, the following stations: . On August 4, 1998, we entered into an agreement to purchase the assets of KTVF(TV), a NBC affiliate, for $7.2 million, and two radio stations, KXLR(FM) and KCBF(AM), for $0.8 million. All three stations are licensed to Fairbanks, Alaska. The transactions are subject to, among other things, FCC approval. In conjunction with this agreement, on August 5, 1998, we granted an option to a third party for $0.5 million to purchase the assets of KTVF(TV) for $6.7 million and the two radio stations for $0.8 million, plus certain additional payments. The option may be exercised at any time beginning on the 8 third anniversary of our acquisition of the stations through the seventh anniversary of the acquisition, subject to earlier termination under certain circumstances. In addition, the optionee may require us to repurchase the option for $0.5 million under certain circumstances. . On September 25, 1998, we entered into a purchase agreement with Sinclair Communications, Inc. to acquire substantially all of the assets of WOKR(TV), an ABC affiliate licensed to Rochester, New York. The purchase price is approximately $125.0 million, subject to possible adjustments under the terms of the purchase agreement, plus the assumption of certain liabilities. We have paid $12.5 million of the purchase price into an escrow account, with the balance due at closing. Closing of the transaction is subject to a number of conditions, including the acquisition of the station by Sinclair Communications, Inc. from Guy Gannett Communications and the receipt of approval from the FCC, which we have requested. We anticipate that the closing will occur in the second quarter of 1999. Either party may terminate the purchase agreement, subject to certain conditions, if closing has not occurred by September 4, 1999. . On November 2, 1998, we entered into an agreement to purchase substantially all of the assets of KION(TV), a CBS affiliate licensed to Monterey, California, for $7.7 million, subject to certain reductions. The purchase of this station is subject to FCC approval and is contingent upon our sale of KCBA(TV) as described below. Pending FCC approval of this transaction, we are operating the station pursuant to a time brokerage agreement with the current owner. . On November 3, 1998, we entered into an agreement to sell substantially all of the assets of KCBA(TV), our FOX affiliate licensed to Salinas, California, for $11.0 million. This transaction is subject to FCC approval and is contingent upon the Company's purchase of KION(TV), as described above. Subject to FCC approval, we would continue to operate the station after the sale pursuant to a time brokerage agreement with the purchaser. . On December 30, 1998, we entered into an asset exchange agreement with Benedek Broadcasting Corporation. Under the agreement, Benedek Broadcasting Corporation would acquire substantially all of the assets, and assume certain liabilities, of KKTV(TV), our CBS affiliate licensed to Colorado Springs, Colorado. In exchange, we would (i) acquire substantially all of the assets, and assume certain liabilities, of KCOY(TV), a CBS affiliate licensed to Santa Maria, California, and (ii) receive a cash payment of approximately $9.0 million (subject to certain adjustments). Closing is subject to, among other things, approval of the FCC. We anticipate closing will take place in the second quarter of 1999. Also on December 30, 1998, we entered into a time brokerage agreement to operate KCOY(TV) until closing, and a time brokerage agreement for Benedek to operate KKTV(TV) until closing. . Effective January 1, 1999, we purchased substantially all of the assets of KVIQ(TV), a CBS affiliate licensed to Eureka, California, for $5.5 million, pursuant to an agreement dated July 15, 1998. Pending closing of the transaction, we operated the station pursuant to a time brokerage agreement with the former owner. . Effective March 16, 1999, we purchased substantially all of the assets of KMTR(TV), a 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. Pending closing of the transaction, we operated the stations pursuant to a time brokerage agreement with the former owner since December 1, 1998. 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 1998, local spot or schedule advertising, which is sold by our personnel at each broadcast station, accounted for approximately 42% of our television stations' total revenue. National spot or schedule 9 advertising, which is sold primarily through national sales representative firms on a commission-only basis, accounted for approximately 53% of our television stations' total revenue. 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 1998. 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 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. Three of the seven network-affiliated television stations we currently own rank number one in their respective geographic markets in local news ratings points delivered, according to the November 1998 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 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 10 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 1998, approximately 71% 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. Operations. We own four radio stations, which consist of KHHO(AM) in Tacoma, Washington and KJR(AM), KJR-FM and KUBE(FM) in Seattle, Washington. In addition, we have entered into an agreement to acquire radio stations KXLR(FM) and KCBF(AM) in Fairbanks, Alaska. The following table sets forth information about our portfolio of radio stations (including radio stations we plan to acquire).
No. of MSA Commercial Radio Station Format Call Market Radio Stations and Primary Market Letters Date Acquired Rank(1) in Market(1) Demographic Target ------ -------- ------------- ------- -------------- --------------------- Seattle/Tacoma, Washington (owned) KJR(AM) May 1984 14 9 AM Sports Talk; (2) Men 25-54 (3) KJR-FM October 1987 19 FM Classic Hits; (4) (2) Adults 25-54 KUBE(FM) July 1994 Top 40 Contemporary (5) Hit Radio; Persons 18-34 KHHO(AM) March 1998 Sports Talk; Men 24-54 Fairbanks, Alaska KXLR(FM) --(6) --(7) 7 FM Oldies; Classic Rock; (pending acquisition) (8) Persons 25-49 (8) KCBF(AM) --(6) 3 AM Oldies; (8) Persons 35-54 (8)
- -------- (1) Source: Fall 1998 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) KJR (AM) serves as the Seattle SuperSonics' flagship radio station. (4) Formerly KLTX (FM). (5) The date shown in the column reflects the date on which the Partnership acquired the station from Cook Inlet, Inc. (6) On August 4, 1998, we entered into an agreement to acquire these stations. (7) Not ranked. (8) Source: Broadcasting & Cable Yearbook, 1997 Edition. 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 1998, such advertising accounted for approximately 71% of the radio stations' revenue. In contrast, 11 approximately 26% of the radio stations' 1998 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 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. Acquisitions. On August 4, 1998, we entered into an agreement to purchase the assets of KTVF(TV), a NBC affiliate, for $7.2 million, and two radio stations, KXLR(FM) and KCBF(AM), for $0.8 million. All three stations are licensed to Fairbanks, Alaska. The transactions are subject to, among other things, FCC approval. 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; a cable system and a television station; 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. Time Brokerage Agreements. Currently, the FCC's Duopoly Rule prevents the common ownership of more than one television station in a single market, or in two different markets if the stations have significantly overlapping service areas. Without regard to the Duopoly Rule, however, the FCC does permit a television station owner to program significant amounts of the broadcast time of another station under a time brokerage agreement, as long as the licensee of that other station maintains ultimate control and responsibility for the programming and operations of the station and compliance with applicable FCC rules and policies. In addition, 12 the FCC currently has a policy of granting waivers of the Duopoly Rule to permit common ownership of two stations with overlapping service areas in certain circumstances, provided the stations are located in different markets. These waivers are conditioned upon the outcome of the FCC's review of its television ownership rules. The FCC is considering whether to eliminate or amend the Duopoly Rule and whether to treat the programming of more than 15% of another station's weekly broadcast time under a time brokerage agreement as outright ownership of that station in counting the number of stations the programmer owns. The FCC has indicated that if it ultimately decides to treat time brokerage agreements as equivalent to ownership, it will either grandfather time brokerage agreements entered into before a specific date or provide a period of time for station owners to comply with the new rules by disposing of their interests in television stations and/or brokerage agreements for television stations operating in the same markets or with overlapping service areas. Currently, the only areas in which we both own a television station and operate another television station under a time brokerage agreement are (1) the Syracuse/Utica, New York area, where we own and operate WIXT(TV) in Syracuse and operate WUTR(TV) in Utica under a time brokerage agreement, and (2) the Monterey/Salinas, California area, where we own and operate KCBA(TV) in Salinas and operate KION(TV) in Monterey under a time brokerage agreement. We have applications pending with the FCC to acquire KION(TV) and to sell KCBA(TV). We also have a time brokerage agreement with the purchaser of KCBA(TV) which provides for us to operate KCBA(TV) following its sale. Thus, if the FCC were to treat time brokerage agreements as equivalent to outright station ownership without eliminating the Duopoly Rule or grandfathering our time brokerage agreements, we would be required to dispose of our interests in one of the stations in the Syracuse/Utica area and one of the stations in the Monterey/Salinas area, which could have a material adverse effect on our business, financial condition, or results of operations. If, prior to the time it acts on the KCBA(TV) application, the FCC changes its rules to prohibit time brokerage agreements with stations in the same markets, it is not certain that we would be permitted to operate KCBA(TV) under a time brokerage agreement following the sale. In addition, in August 1998 we acquired a television station (WIVT) in Binghamton, New York. Since the service areas of the Binghamton station and our television station (WIXT) in Syracuse, New York overlap, we obtained a waiver of the Duopoly Rule conditioned on the outcome of the FCC's review of its television ownership rules. Similarly, the service areas of WOKR(TV) and WIXT(TV) overlap and we have requested a waiver of the Duopoly Rule in connection with the acquisition of WOKR(TV). If the FCC decides to retain its current Duopoly Rule, we would be required to dispose of our interest in one of these stations. 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. Affirmative Action. FCC rules require us to develop and implement programs designed to promote equal employment opportunities. We must submit annual reports to the FCC documenting our compliance with those rules. 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. 13 If a broadcaster chooses must-carry rights, then the cable operator will probably 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 and size of, the cable system, and the amount of duplicative programming on a broadcast station. 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. The seven network-affiliated television stations (KKTV, KCBA, KGET, KVIQ, KMTR, WIVT, and WIXT) that we own have chosen retransmission consent rights, rather than must-carry rights, within their respective markets. These stations have granted consents to their local cable operators for the rebroadcast of their signals. The three network-affiliated stations that we operate under time brokerage agreements (KION, WUTR, and KCOY) have chosen retransmission consent rights within their respective markets. Digital Television. The Telecommunications Act requires the FCC to oversee the transition from current analog television broadcasting to digital television ("DTV") broadcasting. During the transition period, the FCC will issue one digital broadcast license to each existing television licensee which files a license application. The FCC has ordered network affiliates in larger broadcast markets to begin DTV broadcasts during 1999. Our stations are required to begin construction of their digital transmission facilities by May 1, 2002. 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 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. Microradio. On January 28, 1999, the FCC proposed to license new 1000 watt and 100 watt low power FM ("LPFM") radio stations throughout the U.S., and sought comment on also establishing a third "microradio" class at power levels from 1-10 watts. We cannot predict what effect such LPFM or microradio stations, if authorized by the FCC, would have on our broadcasting operations. 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. Another recent rule change resulted in the expansion of the AM radio band. 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; . amend the FCC's equal employment opportunity rules and other rules relating to minority and female employment in the broadcasting industry; . revise rules governing political broadcasting, which may require stations to provide free advertising time to political candidates; . permit expanded use of FM translator stations or the creation of microradio stations; . restrict or prohibit broadcast advertising of alcoholic beverages; . change broadcast technical requirements; . auction the right to use radio and television broadcast spectrum; . expand the operating hours of daytime-only stations; and . revise the FCC's television ownership and attribution rules. 14 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. Purchase and Sale Transactions. We are seeking FCC approval to acquire the broadcasting licenses for four television stations and two radio stations and will be required to obtain FCC approval to acquire additional broadcasting licenses in the future. 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. On May 21, 1996, certain local persons filed a Petition for Emergency Relief with the FCC, seeking an order terminating our existing time brokerage agreement for KION(TV) and the purchase option pursuant to which we are seeking to acquire KION(TV). This Petition for Emergency Relief is still pending before the FCC. The petitioners have filed comments in connection with the KCBA(TV) and KION(TV) assignment and license renewal applications noting the pendency of their petition. Also, a Petition to Deny the Company's application to acquire KTVF(TV), KXLR(FM), and KCBF(AM) has been filed by a competing radio station owner. Likewise, we are seeking to sell two television stations (KCBA and KKTV), which require that the purchasers obtain FCC approval as discussed above. 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. 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 time brokerage agreements. 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. The following chart lists our broadcasting licenses, and broadcasting licenses owned by the owners of television stations we operate under time brokerage agreements, which are subject to renewal within the next two years:
Expiration Broadcasting License Date -------------------- ---------- KVOS(1)....................... 3/1/99 KMTR(1)....................... 3/1/99 WIXT(1)....................... 6/1/99 WITV(1)....................... 6/1/99 WUTR(1)(2).................... 6/1/99
- -------- (1) Renewal applications for these stations are currently pending with the FCC. (2) We do not own this station, but we operate it pursuant to a time brokerage agreement. 15 No challenges or competing applications have been filed with respect to any of the broadcasting licenses set forth in the above table. Sports & Entertainment Our sports and entertainment business consists of ownership of our professional sports franchise, the Seattle SuperSonics, and our sports marketing business, Full House Sports & Entertainment ("Full House"). The SuperSonics franchise is one of 29 members of the National Basketball Association, or "NBA." NBA teams play a regular season schedule of 82 games from November through April, in addition to several preseason exhibition games. Due to the NBA lockout, however, the 1998-99 NBA preseason and regular season games scheduled through February 4, 1999, were cancelled. The season resumed on February 5, 1999 and consists of a shortened regular season in which each team will play 50 games (25 at home and 25 on the road) and playoffs in the usual NBA format. Based on their regular season records, 16 teams qualify for post- season play, which culminates in the NBA championship. The SuperSonics have qualified for post-season play in each of the last five years and played for the NBA championship in 1996. Industry Overview. We are a member of the NBA by virtue of our ownership of the SuperSonics franchise. Thus, we share in profits generated by the NBA as a whole, and share joint and several liability for the NBA's debts and other obligations. Revenues shared equally by NBA members include profits from television broadcasting agreements, merchandising, the award of new NBA franchises, and related activities. As a member of the NBA, we must abide by the NBA's Constitution and Bylaws, NBA rules, and by the NBA Board of Governors' implementation of those regulations. The Board of Governors consists of representatives appointed by each NBA member. The Board of Governors, in turn, elects a Commissioner. The Commissioner and the Board (1) arbitrate disputes between franchises, (2) assure that the conduct of franchises, players, and officials is in accordance with the NBA Constitution and Bylaws, (3) review and authorize player transactions between franchises and (4) impose sanctions (including fines and suspensions) on members, players, and officials who are found to have breached NBA rules. The sale of any NBA franchise is subject to the approval of a majority of the NBA's franchise owners. Operations. The NBA granted Seattle an NBA franchise in 1966. The SuperSonics, throughout their history, have played in the Seattle/Tacoma area. In November 1995, the team began using the Key Arena, a 17,100-seat events facility, under a 15-year lease with the City of Seattle. We acquired the SuperSonics in 1983. The SuperSonics franchise, as permitted by the NBA's Constitution and Bylaws, is authorized to operate for an indefinite term of years, so long as we maintain our NBA membership in good standing. Currently, the SuperSonics maintain a full roster of 12 active players. The minimum roster under NBA rules is 11 players. The SuperSonics acquire new players primarily through the college draft, by signing veteran free agents uncommitted to another NBA franchise or by trading players with another franchise. NBA rules limit the aggregate annual salaries payable by each team to its players. In addition, the SuperSonics' operations are subject to a NBA collective bargaining agreement, which is discussed under "Employees" below. Sales and Marketing. All sales and marketing activities for the SuperSonics are managed by Full House. Our revenues from the SuperSonics come from (1) our own activities, such as ticket sales, merchandising, concessions, and multi- media advertising packages (called sponsorship packages) that include local television and radio broadcast advertising and display and sign advertising in Key Arena, and (2) our share of NBA revenues, such as network broadcasting rights, merchandising, and the granting of new NBA franchises to new cities. In addition, Full House manages sales and operations of the luxury suites and concessions for all events at Key Arena. 16 A major source of revenue is ticket sales for home games. We receive substantially all of the revenue from SuperSonics ticket sales. Revenue from ticket sales depends highly on the SuperSonics win/loss record. Average paid attendance per game increased from 15,277 for the 1995-96 regular season to 15,632 for the 1996-97 regular season, and decreased to 15,424 for the 1997-98 regular season. We believe that overall growth in average paid attendance since the 1995-96 season was mainly due to the team's improved win/loss record and the team's move to the new Key Arena. A majority of the SuperSonics games are broadcast on three Seattle/Tacoma area television stations, KSTW, KONG and KTZZ, and one cable station, FOX. All of the SuperSonics' games are broadcast exclusively in the Seattle/Tacoma area over radio stations KJR(AM) and KHHO(AM), which we own. We also license radio stations owned by other broadcasting companies to carry SuperSonics games. We share equally with the other NBA franchises in revenues generated by the NBA as a whole. A large portion of these revenues consist of broadcast licenses granted to networks. Such broadcast rights have increased significantly in recent years and are expected to become a more significant portion of total NBA revenue, primarily due to the growth of cable television. In the spring of 1993, the NBA entered into new contracts with NBC and TBS/TNT providing for the television broadcast of certain league games through the 1997-98 season. These contracts provide for minimum total payments to the NBA over the four-year contract period of $1.1 billion. Recently, the NBA renewed its contracts with NBC and TBS/TNT through the 2001-2002 season. These contracts provided for minimum total payments to the NBA over the four-year contract period of $2.6 billion. However, as a result of the NBA lockout, the NBA may not receive the full $2.6 billion over the life of these contracts. See "Management's Discussion and Analysis of Financial Condition and Results of Operation" below. Competition. We compete directly with other professional and amateur sporting franchises and events, both in the Seattle/Tacoma market area and nationally via sports broadcasting. We also compete indirectly with other types of entertainment, including television, radio, newspapers, live performances, and other events. Because we own the only NBA franchise located in the Seattle/Tacoma metropolitan area, we experience no significant local competition involving professional basketball. We compete with professional football and baseball franchises located in the Seattle/Tacoma metropolitan area. Employees As of December 31, 1998, we employed 1,308 full-time persons. The following table sets forth a breakdown of employment in each of our operating segments and our corporate offices:
Operating Segment/Corporate Office Persons Employed ---------------------------------- ---------------- Out-of-Home Media....................................... 305 Television Broadcasting................................. 774 Radio Broadcasting...................................... 72 Sports & Entertainment.................................. 101 Corporate Offices....................................... 56
Approximately 346 of our employees are represented by unions under 13 collective bargaining agreements. Collective bargaining agreements covering approximately 8% of our employees are terminable during 1999. We believe that these collective bargaining agreements will be renegotiated or automatically extended and that any renegotiation will not materially adversely affect our operations. Players in the NBA are covered by the terms of a collective bargaining agreement, which was originally scheduled to expire on June 30, 2001. On March 23, 1998, the Board of Governors of the NBA voted to exercise their option to reopen the NBA's collective bargaining agreement with the National Basketball Players Association. As a result, the collective bargaining agreement expired on June 30, 1998 and the players were locked out. Preseason and regular season games scheduled through February 4, 1999 were cancelled. On 17 January 7, 1999, the NBA Board of Governors ratified a new six-year collective bargaining agreement between the NBA and the National Basketball Players Association. 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 (i) a credit agreement with various lending banks, dated January 22, 1999 (the "1999 Credit Agreement"), and (ii) 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: . apply cash flow in excess of certain levels, or use 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 ratio, and a minimum fixed charge coverage ratio. The 1999 Credit Agreement also provides that it is an event of default thereunder if the Ackerley family (as defined) owns less than a 51% of the outstanding voting stock of our company. Similarly, upon a Change of Control (as defined in the Indenture), the 9% Senior Subordinated Note holders may require us to repurchase their notes. We have pledged substantially all of the stock and material assets of our subsidiaries to secure our obligations under the 1999 Credit Agreement. In addition, nearly all of our subsidiaries are in the process of providing guarantees of our obligations under the 1999 Credit Agreement and the Indenture. In the event of a default under the 1999 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 1999 Credit Agreement or the Indenture could result in acceleration of indebtedness outstanding under other debt instruments. Additional information concerning the 1999 Credit Agreement and the Indenture is set forth in Note 7 to the Consolidated Financial Statements. 18 Financial Information Regarding Business Segments Financial information concerning each of our business segments is set forth in Note 14 to the Consolidated Financial Statements. 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, 1998:
Approximate Square Footage Approximate Square Location Nature of Facility Owned Footage Leased -------- ------------------ -------------- ------------------ Out-of-Home Media Seattle, Washington (Outdoor Advertising).. Plant 35,889 1,185 Boston Massachusetts (Outdoor Advertising).. Plant 31,882 4,900 Miami, Florida (Outdoor Advertising)........... Plant 242,980 -- Television Broadcasting Syracuse, New York (WIXT)................. Station Operations 40,000 -- Binghamton, New York (WIVT)................. Station Operations 10,819 -- Utica, New York (WUTR) (1).................... Station Operations 12,148 -- Colorado Springs, Colorado (KKTV)........ Station Operations 31,100 753 Bakersfield, California (KGET)................. Station Operations 30,450 -- Eureka, California (KVIQ)(1).............. Station Operations -- 10,162 Bellingham, Washington (KVOS)................. Station Operations 13,130 11,856 Salinas/Monterey, California (KION(1), KCBA).................. Station Operations 30,000 20,841 Santa Rosa, California (KFTY)................. Station Operations 13,000 700 Radio Broadcasting Seattle, Washington (KJR(AM), KJR-FM, KUBE(FM)).............. Station Operations -- 16,082 Tacoma, Washington (KHHO(AM))............. Station Operations -- 4,252 Sports & Entertainment Seattle, Washington..... Office & Operating 30,000 27,246 Facilities Other Seattle, Washington (Corporate Offices).... Offices -- 16,814 New York, New York (National Sales Offices)............... Offices -- 11,359 Los Angeles, California (National Sales Offices)............... Offices -- 1,841
- -------- (1) As of December 31, 1998, we operated these stations under time brokerage agreements. Accordingly, this table reflects data for the properties which are owned or leased by the station owners for whom we operate the stations. 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 1998, we paid aggregate annual rentals on office space and operating facilities of approximately $3.5 million. KJR(AM) broadcasts from transmission facilities located on property leased from the Port of Seattle, currently on a month-to-month basis. We have filed an application with the FCC to co-locate KJR(AM)'s transmission facilities with KHHO's facilities in Tacoma, Washington. On May 5, 1998 the FCC issued a construction permit granting us authority to begin construction of the transmission facilities at the KHHO site. We are negotiating with the Port of Seattle to continue broadcasting from the present tower location or from an alternative site KJR(AM) can broadcast from the KHHO site. However, we do not expect that KJR(AM) will be able to broadcast from the KHHO site for at least one to two years. We are exploring our legal options in the event that the Port of Seattle attempts to eject us from the current site before we are able to use the new site. 19 Effective October 1, 1995, we entered into a fifteen-year lease with the City of Seattle for the Key Arena, a 17,100-seat events facility. It was first occupied and used by the SuperSonics in November 1995, the beginning of the 1995-1996 season. At December 31, 1998, we owned 291 vehicles and leased 117 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 Learjet that is used for executive travel between our facilities. In February 1998, we purchased a Boeing 727 jet aircraft to replace the BAC 1-11 that we previously leased, which we use for travel involving the SuperSonics. 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. Lambert v. Ackerley. In December 1994, six former employees of one of our subsidiaries filed a complaint in King County (Washington) Superior Court against Seattle SuperSonics, Inc. and Full House Sports & Entertainment, Inc., both of which were, at that time, our wholly-owned subsidiaries, and two of our officers, Barry A. Ackerley, Chairman and Chief Executive Officer, and William N. Ackerley, former Co-President and Chief Operating Officer. The complaint alleged various violations of applicable wage and hour laws and breaches of employment contracts. The plaintiffs sought unspecified damages and injunctive relief. On or about January 10, 1995, those claims were removed on motion by the defendants to the U.S. District Court for the Western District of Washington in Seattle. On September 5, 1995, the plaintiffs amended the claims (1) to specify violations of Washington and U.S. federal labor laws and (2) to seek additional relief, including liquidated and punitive damages under the U.S. Fair Labor Standards Act and double damages under Washington law for willful refusal to pay overtime and minimum wages. On February 29, 1996, the jury rendered a verdict finding that the defendants had wrongfully terminated the plaintiffs' employment under Washington law and U.S. federal laws, and awarded compensatory damages of approximately $1.0 million for the plaintiffs and punitive damages against the defendants of $12.0 million. Following post-trial motions, the court reduced the punitive damages award to $4.2 million, comprised of $1.4 million against each of Barry A. Ackerley and William N. Ackerley, and $1.4 million against the corporate defendants collectively. On November 22, 1996, the defendants filed their Notice of Appeal from the U.S. District Court to the Ninth Circuit Court of Appeals in San Francisco. On October 1, 1998, the U.S. Court of Appeals for the Ninth Circuit issued an opinion ruling in our favor, holding that plaintiffs did not have a valid claim under the federal Fair Labor Standards Act and striking the award of damages, including all punitive damages that had been entered by the District Court. The Court of Appeals further reversed the lower court's award of $75,000 in emotional distress damages. Finally, the Court of Appeals remanded the cases for further consideration of whether or not the plaintiffs had a valid claim under the Washington State Fair Labor Standards Act and whether, if such was the case, the corporate officers named in the suit could have individual liability separate from the Company under State law. Subsequently, the plaintiffs filed a Motion for Rehearing or Reconsideration en banc. 20 On March 9, 1999, the Court of Appeals issued an order referring the case to an 11-judge panel for a new hearing. A hearing has been set for April 22, 1999. Van Alstyne v. The Ackerley Group, Inc. On June 7, 1996, a former sales manager for television station WIXT, Syracuse, New York filed a complaint in the U.S. District Court for the Northern District of New York against The Ackerley Group, Inc., WIXT and the current and former general managers of WIXT. The complaint seeks unspecified damages and injunctive relief for discrimination on the basis of gender and disability, as well as unlawful retaliation, under both state and federal law. A trial date has not been set, but is not likely to take place before December 1999. RSA Media Inc. v. AK Media Group, Inc. On June 4, 1997, RSA Media Inc., a supplier of out-of-home advertising in Massachusetts, filed a complaint in the U.S. District Court for the District of Massachusetts (the "Court") alleging that we have unlawfully monopolized the Boston-area billboard market in violation of the Sherman Antitrust Act, engaged in unlawful restraint of trade in violation of the Sherman Antitrust Act, and committed unfair trade practices in violation of Massachusetts state law. The plaintiff is seeking in excess of $20.0 million in damages. On May 22, 1998, the Court, in a ruling from the bench, dismissed count 2 of plaintiff's complaint, which alleged that the existence of leases between us and landowners restricted the landowners' ability to lease that same space to the plaintiff in violation of the Sherman Antitrust Act. We have filed a motion for summary judgment which is currently pending. 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 1998. EXECUTIVE OFFICERS OF THE REGISTRANT Our executive officers are:
Name Age Position ---- --- -------- Barry A. Ackerley.............. 64 Chairman and Chief Executive Officer Gail A. Ackerley............... 61 Co-Chairman and Co-President Denis M. Curley................ 51 Co-President and Chief Financial Officer, Secretary and Treasurer Christopher H. Ackerley........ 29 Executive Vice President, Operations and Development Keith W. Ritzmann.............. 46 Senior Vice President and Chief Information Officer, Assistant Secretary and Controller
Mr. Barry A. Ackerley, one of our founders, has been the Chief Executive Officer and a director of the Company 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. She became Co-Chairman in September 1996, and was elected as one of our Co- Presidents in November 1997. Ms. Ackerley has served as our Chairman of Ackerley Corporate Giving since 1986, supervising our charitable activities. Mr. Denis M. Curley, who joined us in December 1984, was elected as one of our Co-Presidents in November 1997. Previously, he served as Executive Vice President from March 1995 until his election as one of our Co-Presidents. Before then, he served as Senior Vice President from January 1990 through the date of his election as Executive Vice President. He has served as our Chief Financial Officer since May 1988. Mr. Curley also presently serves as our Secretary and Treasurer. Mr. Christopher H. Ackerley joined the Company in 1995. He was elected Vice President for Marketing and Development in May 1998, and was elected Executive Vice President, Operations and Development in December 1998. 21 Mr. Keith W. Ritzmann was named Senior Vice President and Chief Information Officer in January 1998. Before then, he served as a Vice President from January 1990 through the date of his election as Senior Vice President. He also presently serves as our Assistant Secretary and Controller. 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 directors and 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 On October 15, 1996, we effected a two-for-one stock split. All share and per share data in this report have been restated to reflect the split. As of March 15, 1999, 31,628,498 shares of our common stock were issued and outstanding, of which 20,577,268 shares were Common Stock and 11,051,230 shares were Class B Common Stock. The Common Stock was held by 566 shareholders of record; the Class B Common Stock was held by 31 shareholders of record. Our Board of Directors declared a cash dividend of $.02 per share in each of 1997 and 1998. Recently, the Board declared a cash dividend of $.02 per share payable on April 15, 1999 to shareholders of record on March 25, 1999. 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 1999 Credit Agreement and the Indenture impose certain limits upon our ability to pay dividends and make other distributions. In addition, we are subject to the General Corporation Law of Delaware, which restricts our ability to pay dividends in certain circumstances. Common Stock On December 15, 1997, our Common Stock became listed and began trading on the New York Stock Exchange under the symbol "AK." Our Common Stock previously traded on the American Stock Exchange. 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 American Stock Exchange, for the period ending December 14, 1997, and according to the New York Stock Exchange, for the period beginning December 15, 1997.
1998 High Low 1997 High Low ---- ---- --- ---- ---- --- First Quarter $24 3/8 $14 5/8 First Quarter $13 3/4 $10 5/8 Second Quarter $22 1/2 $19 7/16 Second Quarter $13 7/8 $10 Third Quarter $24 7/8 $19 1/2 Third Quarter $18 1/2 $11 Fourth Quarter $21 1/16 $16 1/2 Fourth Quarter $18 1/8 $14
On March 15, 1999, the high and low sales prices of our Common Stock, according to the New York Stock Exchange, were $18 1/4 and $18 1/16, respectively. Class B Common Stock Our Class B Common Stock, which we initially issued in June 1987, 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. 22 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 the 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, -------------------------------------------------------- 1998 1997 1996 1995 1994 -------- -------- -------- -------- -------- (In thousands except per share data) Consolidated Statement of Operations Data: Revenue................. $292,907 $306,169 $279,662 $235,820 $211,728 Less agency commissions and discounts............. 36,256 (34,994) (32,364) (28,423) (25,626) -------- -------- -------- -------- -------- Net revenue............. 256,651 271,175 247,298 207,397 186,102 Expenses (other income): Operating expenses..... 209,030 210,752 186,954 156,343 142,812 Depreciation and amortization.......... 16,574 16,103 16,996 13,243 10,883 Interest expense....... 25,109 26,219 24,461 25,010 25,909 Stock compensation expense............... 452 9,344(1) -- -- -- Gain on disposition of assets................ (33,524)(2) -- -- -- (2,506) Litigation expense (adjustment).......... -- (5,000)(3) -- 14,200(3) -- -------- -------- -------- -------- -------- Total expenses and income.............. 217,641 257,418 228,411 208,796 177,098 -------- -------- -------- -------- -------- Income (loss) before income taxes and extraordinary item..... 39,010 13,757 18,887 (1,399) 9,004 Income tax benefit (expense).............. (15,487) 19,172(4) (2,758) (1,515) (73) -------- -------- -------- -------- -------- Income (loss) before extraordinary item..... 23,523 32,929 16,129 (2,914) 8,931 Extraordinary item--loss on extinguishment of debt in 1998, 1996 and 1994................... (4,346) -- (355) -- (2,099) -------- -------- -------- -------- -------- Net income (loss) applicable to common shares................. $ 19,177 $ 32,929 $ 15,774 $ (2,914) $ 6,832 ======== ======== ======== ======== ======== Per common share: Income (loss) before extraordinary item.... $ .75 $ 1.05 $ .52 $ (.09) $ .29 Extraordinary item..... (.14) -- (.01) -- (.07) -------- -------- -------- -------- -------- Net income (loss)...... $ .61 $ 1.05 $ .51 $ (.09) $ .22 ======== ======== ======== ======== ======== Common shares used in per share computation........... 31,627 31,345 31,166 31,052 30,929 Per common share-- assuming dilution: Income (loss) before extraordinary item.... $ .74 $ 1.04 $ .51 $ (.09) $ .28 Extraordinary item..... (.14) -- (.01) -- (.06) -------- -------- -------- -------- -------- Net income (loss)...... $ .60 $ 1.04 $ .50 $ (.09) $ .22 ======== ======== ======== ======== ======== Common shares used in per share computation--assuming dilution.............. 31,883 31,652 31,760 31,052 31,483 Dividends............... $ .02 $ .02 $ .02 $ .015 $ -- ======== ======== ======== ======== ======== Consolidated Balance Sheet Data (at end of period): Working capital......... $ 15,706 $ 12,019 $ 11,154 $ 15,110 $ 16,783 Total assets............ 316,126 266,385 224,912 189,882 170,783 Total long-term debt.... 266,999 213,294 229,350 215,328 225,613 Total debt.............. 270,100 229,424 235,141 220,147 228,646 Stockholder's deficiency............. (25,841) (44,909) (83,839) (99,093) (95,958)
- -------- (1) See Note 11 to the Consolidated Financial Statements. (2) See Note 3 to the Consolidated Financial Statements. (3) See Note 13 to the Consolidated Financial Statements. (4) See Note 8 to the Consolidated Financial Statements. 23 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, which are not historical in nature (including the discussions of the effects of recent acquisitions, 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 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 section. Important factors that could cause the results to differ materially from those expressed in this section include: . material adverse changes in general economic conditions, including changes in inflation and interest rates; . changes in laws and regulations affecting the outdoor advertising and television and radio broadcasting businesses, including changes in the FCC's treatment of time brokerage 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 sports & entertainment businesses; . material changes to accounting standards; . expiration or non-renewal of broadcasting licenses and time brokerage agreements; . labor matters, including the aftereffects of the NBA lockout, changes in labor costs, renegotiation of labor contracts, and risk of work stoppages or strikes; . matters relating to our level of indebtedness, including restrictions imposed by financial covenants; . the win-loss record of the SuperSonics, which has a substantial influence on attendance, and whether the team participates in the NBA playoffs; and . recessionary influences in the regional markets that we serve. Overview We reported net income of $19.2 million in 1998, compared to $32.9 million in 1997. This decrease in net income primarily reflects the $11.9 million decrease in Operating Cash Flow (as defined below) in our television broadcasting and sports & entertainment segments and an increase in income tax expense, offset by a $3.6 million increase in Operating Cash Flow in our out- of-home and radio broadcasting segments and a $33.5 million gain on the sale of our airport advertising operations in 1998. The 1998 decrease also reflects higher net income in 1997 that included a $19.2 million income tax benefit, resulting from recognition of our deferred tax asset, and $5.0 million reduction for litigation expenses, partially offset by a $9.3 million charge for stock compensation expense. Operating Cash Flow was $47.6 million in 1998, compared to $60.4 million in 1997. Refinancing. In January 1998, we replaced our $77.5 million credit agreement (the "1996 Credit Agreement") with a $265.0 million credit agreement (the "1998 Credit Agreement"). We replaced the 1998 Credit Agreement with the new $325.0 million 1999 Credit Agreement in January 1999. 24 In October 1998, we used borrowings under the term loan facility of the 1998 Credit Agreement to redeem our $120.0 million 10.75% Senior Secured Notes due 2003 (the "10.75% Senior Secured Notes"). This resulted in a charge of approximately $4.3 million, net of applicable taxes of $2.5 million, consisting of prepayment fees and the write-off of deferred financing costs. We issued 9% Senior Subordinated Notes in the aggregate principal amounts of $175.0 million in December 1998 and $25.0 million in February 1999. In March 1999, we redeemed the $20.0 million outstanding principal of our 10.48% Senior Subordinated Notes due December 15, 2000 (the "10.48% Senior Subordinated Notes"). This resulted in a charge of approximately $0.8 million net of applicable taxes of $0.4 million, consisting primarily of prepayment fees. For more information regarding these refinancing transactions, please see "- Liquidity and Capital Resources" and "- Subsequent Events" below. Disposition of Assets. In June 1998, we sold substantially all of the assets of our airport advertising operations for a base cash price of $40.0 million, paid on the closing date of the transaction, and an additional cash payment of approximately $2.9 million. We recorded a gain from this transaction of $33.5 million in 1998. Acquisitions and Time Brokerage Agreements. We have acquired or entered into agreements to acquire several television and radio stations, or to operate the stations under time brokerage agreements. The transactions are more fully described in "Item 1--Business" and Note 3 to the Consolidated Financial Statements. As with many media companies that have grown through acquisitions, our acquisitions and dispositions of television and radio stations have resulted in significant non-cash and non-recurring charges to income. For this reason, in addition to net income, our management believes that Operating Cash Flow (defined as net revenue less operating expenses before amortization, depreciation, interest, litigation, and stock compensation expenses) is an appropriate measure of our financial performance. Similarly, we believe that Segment Operating Cash Flow (defined as Operating Cash Flow before corporate overhead) 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 Operating Cash Flow to pay interest and principal on our long-term debt as well as to finance capital expenditures. Operating Cash Flow 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. 25 Results of Operations The following tables set forth certain historical financial and operating data for the three-year period ended December 31, 1998, including net revenue, operating expenses, and Operating Cash Flow information by segment:
Year Ended December 31, ----------------------------------------------------- 1998 1997 1996 ----------------- ----------------- ----------------- As % of As % of As % of Net Net Net Amount Revenue Amount Revenue Amount Revenue -------- ------- -------- ------- -------- ------- (Dollars in thousands) Net revenue............. $256,651 100.0% $271,175 100.0% $247,298 100.0% Segment operating expenses............... 194,539 75.8 200,739 74.0 178,721 72.3 Corporate overhead...... 14,491 5.6 10,013 3.7 8,233 3.3 -------- -------- -------- Total operating expenses............. 209,030 81.4 210,752 77.7 186,954 75.6 -------- -------- -------- Operating Cash Flow..... 47,621 18.6 60,423 22.3 60,344 24.4 Other expenses and (income): Depreciation and amortization......... 16,574 6.5 16,103 5.9 16,996 6.9 Interest expense...... 25,109 9.8 26,219 9.7 24,461 9.9 Stock compensation expense.............. 452 0.2 9,344 3.4 -- -- Gain on disposition of assets............... (33,524) (13.1) -- -- -- -- Litigation exp. (adjustment)......... -- -- (5,000) (1.8) -- -- -------- -------- -------- Total other expenses and (income)....... 8,611 3.4 46,666 17.2 41,457 16.8 Income before income taxes and extraordinary item................... 39,010 15.2 13,757 5.1 18,887 7.6 Income tax benefit (expense).............. (15,487) (6.0) 19,172 7.1 (2,758) (1.1) Income before extraordinary item 23,523 9.2 32,929 12.1 16,129 6.5 Extraordinary item...... (4,346) (1.7) -- -- (355) (0.1) -------- -------- -------- Net income.............. $ 19,177 7.5 $ 32,929 12.1 $ 15,774 6.4 ======== ======== ========
26
Year Ended December 31, ----------------------------- 1998 1997 1996 -------- -------- -------- (Dollars in thousands) Net revenue: Out-of-home media............................. $108,560 $113,162 $ 99,833 Television broadcasting....................... 68,467 63,611 57,863 Radio broadcasting............................ 24,474 20,970 17,955 Sports & entertainment........................ 55,150 73,432 71,647 -------- -------- -------- Total net revenue........................... $256,651 $271,175 $247,298 ======== ======== ======== Segment operating expenses: Out-of-home media............................. $ 65,605 $ 72,159 $ 63,924 Television broadcasting....................... 55,996 46,935 42,137 Radio broadcasting............................ 14,819 12,983 10,844 Sports & entertainment........................ 58,119 68,662 61,816 -------- -------- -------- Total segment operating expenses:........... $194,539 $200,739 $178,721 ======== ======== ======== Operating Cash Flow: Out-of-home media............................. $ 42,955 $ 41,003 $ 35,909 Television broadcasting....................... 12,471 16,676 15,726 Radio broadcasting............................ 9,655 7,987 7,111 Sports & entertainment........................ (2,969) 4,770 9,831 -------- -------- -------- Total Segment Operating Cash Flow........... 62,112 70,436 68,577 Corporate overhead............................ (14,491) (10,013) (8,233) -------- -------- -------- Operating Cash Flow......................... $ 47,621 $ 60,423 $ 60,344 ======== ======== ======== Change in net revenue from prior period: Out-of-home media............................. (4.1)% 13.4% 7.1% Television broadcasting....................... 7.6 9.9 20.6 Radio broadcasting............................ 16.7 16.8 21.9 Sports & entertainment........................ (24.9) 2.5 39.1 Change in total net revenue................. (5.4) 9.7 19.2 Operating data as a % of net revenue: Segment operating expenses as a % of net revenue: Out-of-home media........................... 60.4% 63.8% 64.0% Television broadcasting..................... 81.8 73.8 72.8 Radio broadcasting.......................... 60.5 61.9 60.4 Sports & entertainment...................... 105.4 93.5 86.3 Total segment operating expenses as a % of total net revenue: 75.8 74.0 72.3 Operating Cash Flow as a % of net revenue: Out-of-home media........................... 39.6% 36.2% 36.0% Television broadcasting..................... 18.2 26.2 27.2 Radio broadcasting.......................... 39.5 38.1 39.6 Sports & entertainment...................... (5.4) 6.5 13.7 Operating Cash Flow as a % of total net revenue.................................... 18.6 22.3 24.4
1998 Compared with 1997 Net Revenue. Our 1998 net revenue was $256.7 million. This represents a decrease of $14.5 million, or 5%, from $271.2 million in 1997. Changes in net revenue were as follows: . Out-of-Home Media. Our 1998 net revenue from our out-of-home media segment decreased by $4.6 million, or 4%, from 1997. This decrease was mainly due to the absence of airport advertising 27 operations in the third and fourth quarters of 1998, partially offset by increased national advertising sales. . Television Broadcasting. Our 1998 net revenue from our television broadcasting segment increased by $4.9 million, or 8%, from 1997. This increase resulted primarily from the addition of television station KVIQ in July 1998, the completion of a full 12 months of operations at WUTR(TV) and WIVT(TV), higher political advertising, and higher national and local sales. . Radio Broadcasting. Our 1998 net revenue from our radio broadcasting segment increased by $3.5 million, or 17%, from 1997. This increase was primarily due to an increase in both national and local sales. . Sports & Entertainment. Our 1998 net revenue from our sports & entertainment segment decreased by $18.2 million, or 25%, from 1997. This decrease was primarily due to decreased revenue in the fourth quarter as a result of the NBA lockout, partially offset by increased ticket and sponsorship sales during the 1997-98 basketball season. Segment Operating Expenses (Excluding Corporate Overhead). Our 1998 operating expenses were $194.5 million. This represents a decrease of $6.2 million, or 3%, from $200.7 in 1997. Changes in segment operating expenses (excluding corporate overhead) were as follows: . Out-of-Home Media. Our 1998 operating expenses from our out-of-home segment decreased by $6.6 million, or 9%, from 1997. This decrease was due mainly to the absence of airport advertising operations in the third and fourth quarters of 1998, partially offset by higher expenses related to increased sales activity. . Television Broadcasting. Our 1998 operating expenses from our television broadcasting segment increased by $9.1 million, or 19%, from 1997. This increase was primarily a result of the addition of television station KVIQ in July 1998, the completion of a full 12 months of operations at WUTR(TV) and WIVT(TV), and higher program, promotion and production expenses in conjunction with the expansion of local news programming. . Radio Broadcasting. Our 1998 operating expenses from our radio broadcasting segment increased by $1.8 million, or 14%, from 1997. This increase primarily resulted from higher expenses related to increased sales activity. . Sports & Entertainment. Our 1998 operating expenses from our sports & entertainment segment decreased by $10.6 million, or 15%, from 1997. This decrease is mainly attributable to decreased expenses in the fourth quarter due to the NBA lockout, partially offset by increased basketball operating expenses related to team costs during the 1997-98 basketball season. Corporate Overhead. Our corporate overhead expenses were $14.5 million in 1998. This represents an increase of $4.5 million, or 45%, from 1997. This increase was mainly due to personnel costs, travel and entertainment, insurance, and the utilization of outside services, primarily for public relations. Operating Cash Flow. As a result of the above, our Operating Cash Flow decreased from $60.4 million to $47.6 million. The decrease in Operating Cash Flow from our television broadcasting and sports & entertainment segments and the increase in our corporate overhead expenses were partially offset by the increase in our Operating Cash Flow from our out-of-home and radio broadcasting segments. Operating Cash Flow as a percentage of net revenue decreased to 19% in 1998 from 22% in 1997. Depreciation and Amortization Expense. Our depreciation and amortization expenses were $16.6 million in 1998. This represents an increase of $0.5 million, or 3%, from 1997. Interest Expense. Our interest expense was $25.1 million in 1998. This represents a decrease of $1.1 million, or 4%, from 1997. This decrease is primarily due to lower average interest rates and interest income from our interest rate swap agreements in 1998. 28 Stock Compensation Expense. In 1998, we recognized stock compensation expense of $0.5 million, primarily relating to the amendments of certain stock option agreements. In 1997, we recognized stock compensation expense of $9.3 million, which was primarily due to the conversion of certain incentive stock options into nonqualified stock options. Gain on Disposition of Assets. In 1998, we recognized a gain of $33.5 million relating to the sale of our airport advertising operations. There was no gain on disposition of assets in 1997. Litigation Expense Adjustment. In 1997, we reduced an accrual for litigation expense by $5.0 million. There was no such adjustment in 1998. Income Tax Expense. Our income tax expense was $15.5 million in 1998. In 1997, we incurred an income tax benefit of $19.2 million, which primarily resulted from the recognition of our deferred tax asset. Extraordinary Item. In October 1998, we redeemed our 10.75% Senior Secured Notes with proceeds under the 1998 Credit Agreement. This resulted in a charge of $4.3 million, net of applicable income taxes, consisting of prepayment fees and the write-off of deferred financing costs. There were no extraordinary items in 1997. Net Income. Our net income was $19.2 million in 1998. This represents a decrease of $13.7 million, or 42%, from 1997. This decrease was primarily due to decreased Operating Cash Flow and increased income tax expense in 1998, the litigation expense adjustment in 1997, and the recognition of our deferred tax asset in 1997, offset by the gain on the sale of our airport advertising operations in 1998 and stock compensation expense in 1997. Net income as a percentage of net revenue decreased to 8% in 1998 from 12% in 1997. 1997 Compared with 1996 Net Revenue. Our 1997 net revenue was $271.2 million. This represents an increase of $23.9 million, or 10%, from $247.3 million in 1996. Changes in net revenue were as follows: . Out-of-Home Media. Our 1997 net revenue from our out-of-home segment increased by $13.3 million, or 13%, from 1996. This increase was mainly due to an increase in both national and local advertising sales. . Television Broadcasting. Our 1997 net revenue from our television broadcasting segment increased by $5.7 million, or 10%, from 1996. This increase was mainly due to the effects of increased rates and sales volumes, the addition of time brokerage agreements with television stations WUTR and WIVT, and the completion of a full 12 months of operations at television stations KFTY and KION. . Radio Broadcasting. Our 1997 net revenue from our radio broadcasting segment increased by $3.0 million, or 17%, from 1996. This increase was primarily due to an increase in both national and local sales. . Sports & Entertainment. Our 1997 net revenue from our sports & entertainment segment increased by $1.8 million, or 3%, from 1996. This increase was primarily due to the combination of increased sponsorship and ticket sales, offset primarily by decreased revenues due to the SuperSonics participating in 12 games of the 1997 NBA playoffs compared to 21 games in the 1996 playoffs. Segment Operating Expenses (Excluding Corporate Overhead). Our 1997 segment operating expenses were $200.7 million. This represents an increase of $22.0 million, or 12%, from $178.7 million in 1996. Changes in our segment operating expenses (excluding corporate overhead) were as follows: . Out-of-Home Media. Our 1997 operating expenses from our out-of-home segment increased by $8.2 million, or 13% from 1996, to $72.2 million. This increase was primarily due to expenses related to increased sales activity. 29 . Television Broadcasting. Our 1997 operating expenses from our television broadcasting segment increased by $4.8 million from 1996, or 11%, to $46.9 million. This increase was primarily due to the effects of higher programming, promotion, and production expenses primarily reflecting the development and expansion of our local news programming. The addition of time brokerage agreements with the television stations WUTR and WITV, and a full 12 months of operations at television stations KFTY and KION, also contributed to the increase in operating expenses. . Radio Broadcasting. Our 1997 operating expenses from our radio broadcasting segment increased by $2.2 million from 1996, or 20%, to $13.0 million. This increase primarily resulted from higher expenses related to increased sales activity. . Sports & Entertainment. Our 1997 operating expenses from our sports & entertainment segment increased by $6.9 million from 1996, or 11%, to $68.7 million. This increase was primarily due to the combination of expenses related to increased team costs, offset in part by lower costs associated with the SuperSonics participating in 12 games of the 1997 NBA playoffs instead of 21 games in the 1996 NBA playoffs. Corporate Overhead. Our corporate overhead expenses were $10.0 million in 1997. This represents an increase of $1.8 million, or 22%, from 1996. This increase was mainly due to increased utilization of outside services, primarily for public relations, and insurance costs. Operating Cash Flow. Our Operating Cash Flow increased slightly from 1996 to $60.4 million. The increase in Operating Cash Flow in our out-of-home, television broadcasting, and radio broadcasting segments offset the decrease in the sports & entertainment segment's Operating Cash Flow and the increase in corporate overhead expenses. Operating Cash Flow as a percentage of net revenue decreased to 22% in 1997 from 24% in 1996. Depreciation and Amortization Expense. Our depreciation and amortization expenses were $16.1 million in 1997. This represents a decrease of $0.9 million, or 5%, from $17.0 million in 1996. This decrease is mainly due to certain intangible assets becoming fully amortized in 1997. Interest Expense. Our interest expenses were $26.2 million in 1997. This represents an increase of $1.7 million, or 7%, from $24.5 million in 1996. This increase is primarily due to higher average debt balances during 1997. Litigation Expense. In 1997, we reduced an accrual for litigation expense by $5.0 million to reflect a reduction in the amount of a judgment rendered against the Company and certain of its officers as described under "Legal Proceedings" above. No such adjustment was made in 1996. Stock Compensation Expense. In 1997, we recognized $9.3 million of stock compensation expense, which was primarily due to the conversion of incentive stock options into nonqualified stock options as described in Note 11 to the Consolidated Financial Statements. We did not recognize any stock compensation expense in 1996. Income Tax Expense. In 1997, we incurred a $19.2 million income tax benefit, compared to an income tax expense of $2.8 million in 1996. This benefit primarily resulted from the recognition of a deferred tax asset in 1997, offset in part by alternative minimum taxes and state income taxes. Recognition of this deferred tax asset in 1997 occurred as a result of a $27.2 million decrease in the Company's valuation allowance, primarily through utilization of net operating loss carryforwards and the reversal of the remaining valuation allowance. Our management expects to recognize income tax expense at approximately statutory rates in 1999. This forward looking statement is, however, subject to the qualifications set forth under "Forward Looking Statements" above. Extraordinary Item. In 1996, as a result of entering into the 1996 Credit Agreement, we wrote off deferred costs of $0.4 million related to the previous credit agreement. There were no extraordinary items in 1997. 30 Net Income. Our net income was $32.9 million in 1997. This represents an increase of $17.2 million, or 109%, from 1996. The increase was mainly due to the combination of the recognition of a deferred tax asset and the adjustment to the litigation accrual, offset in part by the recognition of stock compensation expense. Our net income as a percentage of net revenue increased to 12% in 1997 from 6% in 1996. Liquidity and Capital Resources On January 28, 1998, we replaced our existing $77.5 million 1996 Credit Agreement with the $265.0 million 1998 Credit Agreement. In addition, in February 1998 the Partnership replaced its previous credit agreement with a new credit agreement providing for borrowings up to $35.0 million (the "Partnership Credit Agreement"). On October 1, 1998, we used borrowings under the term loan facility of the 1998 Credit Agreement to redeem our $120.0 million 10.75% Senior Secured Notes. This resulted in a charge of approximately $4.3 million, net of applicable taxes, consisting of prepayment fees and the write-off of deferred financing costs. Also on October 1, 1998, we repaid all amounts outstanding under the Partnership Credit Agreement with proceeds from the revolving credit facility of the 1998 Credit Agreement. On December 14, 1998, we issued 9% Senior Subordinated Notes in the aggregate principal amount of $175.0 million. These notes were issued under the Indenture, which allows for an aggregate principal amount of up to $250.0 million of 9% Senior Subordinated Notes. The 9% Senior Subordinated Notes bear interest at 9%, which is payable semi-annually in January and July. Principal is payable in full in January 2009. In connection with our time brokerage agreements with the owners of television stations WUTR and KION, we have guaranteed certain bank loan obligations of the station owners. The aggregate principal balance outstanding on such obligations was $10.5 million at December 31, 1998. See Note 12 to the Consolidated Financial Statements. Our working capital was $15.7 million as of December 31, 1998, $12.0 million as of December 31, 1997, and $11.2 million as of December 31, 1996. We expended $32.7 million, $17.6 million, and $13.1 million for capital expenditures in 1998, 1997 and 1996, respectively. Our capital expenditures in 1998 included the acquisition and refurbishment of a new aircraft for the Seattle SuperSonics. This capital expenditure was financed by separate aircraft loans in the aggregate principal amount of $16.0 million, of which $15.4 million was outstanding as of December 31, 1998. Our management anticipates that 1999 capital expenditures, consisting primarily of construction and maintenance of billboard structures, broadcasting equipment, and other capital additions, will be between $10.0 million and $15.0 million. This forward looking statement is, however, subject to the qualifications set forth under "Forward Looking Statements" above. For the fiscal years 1996 through 1998, we have financed our working capital needs primarily from cash provided by operating activities. Over that period, our long-term liquidity needs, including for acquisitions, have been financed through additions to our long-term debt, principally through bank borrowings and the sale of senior and subordinated debt securities. Capital expenditures for new property and equipment have been financed with both cash provided by operating activities and long-term debt. Cash provided by operating activities for 1998 decreased to $14.8 million from $28.0 million in 1997. This decrease is mainly due to the decrease in Operating Cash Flow for 1998, as described above. Subsequent Events On January 22, 1999, we replaced the 1998 Credit Agreement with the new $325.0 million 1999 Credit Agreement, consisting of a $150.0 million term loan facility (the "Term Loan") and a $175.0 revolving credit facility (the "Revolver"), which includes up to $10.0 million in standby letters of credit. Under the 1999 31 Credit Agreement, we can choose to have interest calculated at rates based on either a base rate or LIBOR plus defined margins which vary based on our total leverage ratio. As of March 15, 1999, the annual interest rate of borrowings under the 1999 credit agreement was approximately 7.75%. As of March 15, 1999, we had borrowed $65.0 million of the Term Loan and $20.0 million of the Revolver. Principal repayments under the Term Loan are due quarterly from March 31, 2000 through December 31, 2005. The Revolver requires scheduled annual commitment reductions, with required principal prepayments of outstanding amounts in excess of the commitment levels, quarterly beginning March 31, 2001. On February 24, 1999, we issued additional 9% Senior Subordinated Notes under the Indenture in the aggregate principal amount of $25.0 million. The total aggregate principal amount of 9% Senior Subordinated Notes issued and outstanding is $200.0 million. On March 15, 1999, we redeemed the $20.0 million outstanding principal of our 10.48% Senior Subordinated Notes with borrowings under our 1999 Credit Agreement's Revolver. This resulted in a charge of approximately $0.8 million, net of applicable taxes, consisting of prepayment fees and the write-off of deferred financing costs. As a result of this redemption, we are in the process of providing our bank lenders and the holders of the 9% Senior Subordinated Notes with guarantees by certain of our subsidiaries of our obligations under the 1999 Credit Agreement and the Indenture. We have pledged substantially all of our subsidiaries' outstanding stock and assets as collateral for amounts due under the 1999 Credit Agreement. Thus, if we default under the 1999 Credit Agreement, the lenders may take possession of and sell some or substantially all of our subsidiaries. In addition, the 1999 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. See "Item 1--Business--Restrictions on Our Operations." In 1999, we have purchased the assets of an out-of-home advertising company in the Boston/Worcester, Massachusetts market and television stations KVIQ and KMTR. These acquisitions were financed with borrowings under the 1998 and 1999 Credit Agreements. We also have several pending television station acquisitions which we intend to finance with borrowings under the 1999 Credit Agreement. See "Item 1--Business." In 1999, we will launch Digital CentralCasting, a digital broadcasting system which will allow us to consolidate back-office functions such as operations, traffic, programming, and accounting for several television stations at one location. To implement this strategy, we have organized our television stations into the following three regional station groups: Central New York (WIXT, WIVT, WUTR, and WOKR), Central California (KGET, KCBA, KION, and KCOY), and North Coast (KFTY, KVIQ, and KMTR). Using Digital CentralCasting, one station will perform the back-office functions for all of the stations in a regional station group. We believe this strategy will enhance our operational efficiency through economies of scale and the sharing of resources and information among our stations. In addition, we will significantly enhance the quality of the picture that is seen by our viewers by taking advantage of digital technology. We plan to invest a portion of the anticipated cost savings in our stations' local news programming to increase its quality and quantity, and to increase our stations' presence in their communities. We expect to implement Digital CentralCasting in the Central New York regional station group by July 1, 1999, the Central California regional station group in the fourth quarter of 1999, and the North Coast regional station group in the first quarter of 2000. We believe this strategy will result in significant margin improvement in our television broadcasting segment within approximately two years of implementation. However, we cannot guarantee that the implementation of Digital CentralCasting will be achieved in a timely or effective manner, and, accordingly, we can give no assurance as to the timing or extent of the anticipated benefits. 32 Year 2000 Many computer systems were originally designed to recognize calendar years by the last two digits in the date code field. Beginning in the year 2000, these date code fields will need to accept four-digit entries to distinguish twenty-first century dates from twentieth century dates. The issue is not limited to computer systems. Year 2000 issues may affect any system or equipment that has an embedded microchip that processes date sensitive information. State of Readiness We are committed to addressing the Year 2000 issue in a prompt and responsible manner, and have dedicated the resources to do so. Our management has completed an assessment of its automated systems and has implemented a program to complete all steps necessary to resolve identified issues. Our compliance program has several phases, including (1) project management; (2) assessment; (3) testing; and (4) remediation and implementation. Project Management: We formed a Year 2000 compliance team in December 1997. The team meets generally on a monthly basis to discuss project status, assign tasks, determine priorities, and monitor progress. The team also reports to senior management on a regular basis. Assessment: All of our mission-critical software programs have been identified. This phase is essentially complete. Our primary software vendors and business partners were also assessed during this phase, and vendors/business partners who provide mission-critical software have been contacted. In most cases, the vendors/business partners that are not already compliant have planned new Year 2000 compliant releases to be available early in 1999. We will continue to monitor and work with vendors and business partners to ensure that appropriate upgrades and/or testing is completed. Testing: Updating and testing of our automated systems is currently underway and we anticipate that testing will be complete by April 30, 1999. Upon completion, we will be able to identify any in-house developed computer systems that remain non-compliant. Remediation and Implementation: This phase involves obtaining and implementing renovated Year 2000 compliant software applications provided by our vendors and performing the necessary programming to render in-house developed systems Year 2000 compliant. This process also involves replacing non-compliant hardware. The remediation and implementation process will continue through 1999. Costs The total financial impact that Year 2000 issues will have on our company cannot be predicted with certainty at this time. In fact, in spite of all efforts being made to rectify these issues, the success of our efforts will not be known for sure until the year 2000 actually arrives. However, based on our assessment to date, we do not believe that expenses related to meeting Year 2000 challenges will exceed $750,000. Risks Related to Year 2000 Issues The year 2000 poses certain risks to our company and our operations. Some of these risks are present because we purchase technology and information systems applications from other parties who face Year 2000 challenges. Other risks are present simply because we transact business with organizations who also face Year 2000 challenges. Although it is impossible to identify all possible risks that we may face moving into the next millennium, our management has identified the following significant potential risks. The functions performed by our mission-critical software that are primarily at risk from Year 2000 challenges generally involve the scheduling of advertising and programming in our television broadcasting, radio broadcasting, and sports & entertainment segments, the scheduling of advertising in our out- of-home segment, and the scheduling of events in our sports & entertainment segment. In all of these cases, Year 2000 challenges could impact our ability to deliver our product with the same efficiency as it does now. However, we believe these functions can be performed manually or by other alternative means, as necessary, for an 33 indefinite period of time. In fact, we have had to perform these functions using alternative means in the past due to natural disasters, such as a tornadoes and hurricanes. In these instances, we were able to recover such that there were no material adverse effects on its operations. Our operations, like those of many other organizations, can be adversely affected by Year 2000 triggered failures of other companies upon whom we depend for the functioning of our mission-critical automated systems. As described above, we have identified our mission-critical vendors and are monitoring their Year 2000 compliance programs. Contingency Plans We have not yet developed specific contingency plans related to Year 2000 issues, other than those described above. As we continue the testing phase, and based on future ongoing assessment of the readiness of vendors and service providers, we will develop appropriate contingency plans. It is possible that certain circumstances may occur for which there are no completely satisfactory contingency plans. Quarterly Variations Our 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 television broadcasting, radio broadcasting, and sports & entertainment segments. In particular, our net revenue and Operating Cash Flow historically have been affected positively during the NBA basketball season (the first, second, and fourth quarters) and by increased advertising activity in the second and fourth quarters. Taxes At December 31, 1998, we had a net operating loss carryforward for federal income tax purposes of approximately $15.7 million that expires in the years 2006 and 2007, and an alternative minimum tax credit carryforward of approximately $2.3 million. Inflation The effects of inflation on our costs generally have been offset by our ability to correspondingly increase our rate structure. New Accounting Standards In June 1997, the Financial Accounting Standards Board issued Statement No. 130, Reporting Comprehensive Income. This statement establishes standards for reporting and disclosure of comprehensive income and its components. Comprehensive income includes net income and other comprehensive income which refers to unrealized gains and losses that under generally accepted accounting principles are excluded from net income. Adoption of this statement is required in 1998. Currently, we do not engage in any transactions that would result in the reporting of comprehensive income. In June 1998, the Financial Accounting Standards Board issued Statement No. 133, Accounting for Derivative Instruments and Hedging Activities, which is required to be adopted in years beginning after June 15, 1999. Because of our minimum use of derivatives, our management does not anticipate that the adoption of the new Statement will have a significant effect on our earnings or financial position. 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 either by borrowing on a long-term basis or entering into interest rate swap transactions. The table below provides information about our derivative financial instruments and other financial instruments that are sensitive to changes in interest rates, which consist of interest rate swaps and debt obligations. For debt obligations, the table presents principal cash flows and related weighted average interest 34 rates by maturity dates. For interest rate swaps, the table presents notional amounts and weighted average interest rates by expected (contractual) maturity dates. Notional amounts are used to calculate the contractual payments to be exchanged under the contracts. INTEREST RATE SENSITIVITY Principal (Notional) Amount by Expected Maturity Average Interest (Swap) Rate
Fair Value 1999 2000 2001 2002 2003 Thereafter Total 12/31/98 -------- ------ ------- ------- ------ ---------- -------- -------- (dollars in thousands) Long-term debt, including current portion Fixed rate............. $ 20,000 -- -- -- -- $175,000 $195,000 $195,875 Average interest rate.. 10.48% -- -- -- -- 9.00% Variable rate.......... -- $7,500 $15,000 $22,500 $6,811 -- $ 51,811 $ 51,811 Average Interest Rate.. -- (a) (a) (a) (a) -- Interest rate swaps Pay fixed/receive variable.............. $200,000 -- -- -- -- -- $200,000 $ 2,706 Average pay rate....... 4.61% -- -- -- -- -- Average receive rate... 5.20% -- -- -- -- --
- -------- (a) The interest rate is based on a base rate or LIBOR plus defined margins which vary based on our total leverage ratio. ITEM 8--FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Information called for by this item is included in Item 14, pages F-1 through F-21. ITEM 9--CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10--DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT For information concerning our directors and certain executive officers, see the sections entitled "Item 1--Election of Directors" and "Management Information" in our definitive Proxy Statement dated March 30, 1999, which is incorporated into this section by reference and "Executive Officers of the Registrant" under Part I of this report. ITEM 11--EXECUTIVE COMPENSATION For information concerning executive compensation, see the sections entitled "Item 1--Election of Directors" and "Management Information" in our definitive Proxy Statement dated March 30, 1999, which information is incorporated into this section by reference. ITEM 12--SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT As of March 15, 1999, 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. For information concerning these shareholders' holdings as well as the security ownership of management, see the section entitled "Management Information--Share Ownership" in our definitive Proxy Statement dated March 30, 1999, which information is incorporated into this section by reference. ITEM 13--CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS For information concerning certain relationships and related transactions, see the Section entitled "Management Information--Certain Relationships and Related Transactions" in our definitive Proxy Statement dated March 30, 1999, which information is incorporated into this section by reference. 35 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, 1998 and 1997........... F-2 Consolidated statements of operations for the years ended December 31, 1998, 1997 and 1996................................................... F-3 Consolidated statements of stockholders' deficiency for the years ended December 31, 1998, 1997 and 1996...................................... F-4 Consolidated statements of cash flows for the years ended December 31, 1998, 1997 and 1996................................................... 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 ------- ------- 3.1 Fourth Restated Certificate of Incorporation. (1) 3.2 Amended and Restated Bylaws. (2) 10.1 Credit Agreement dated January 22, 1999, by and among The Ackerley Group, Inc., First Union National Bank, Fleet Bank, N.A., Union Bank of California, N.A., KeyBank National Association, and Bank of Montreal, Chicago Branch. (3) 10.2 Security Agreement dated January 22, 1999 between The Ackerley Group, Inc. and First Union National Bank, as administrative agent. (3) 10.3 Pledge Agreement dated January 22, 1999 between The Ackerley Group, Inc. and First Union National Bank, as administrative agent. (3) 10.4 Composite Conformed Copies of Note Agreement between the Company and certain insurance companies, dated as of December 1, 1989. (4) 10.5 Amendment No. 1 dated October 18, 1991 to Note Agreements dated December 1, 1988 and December 1, 1989. (5) 10.6 Agreements of Waiver and Amendment dated as of September 30, 1990, relating to the Note Agreements. (6) 10.7 Implementation and Waiver Agreement dated October 18, 1991. (5) 10.8 The Company's Employee Stock Option Plan, as amended and restated on March 4, 1996. (7) 10.9 Nonemployee-Director's Equity Compensation Plan.(8) 10.10 Premises Use and Occupancy Agreement between The City of Seattle and SSI Sports, Inc. dated March 2, 1994. (9)
36
Exhibit No. Exhibit ------- ------- 10.11 Purchase and Sale Agreement between Sky Sites, Inc. and Ackerley Airport Advertising, Inc., dated as of May 19, 1998. (10) 10.12 Asset Purchase Agreement between Sinclair Communications, Inc. and The Ackerley Group, Inc., dated September 25, 1998 (relating to WOKR(TV), Rochester, New York). (11) 10.13 Acquisition Agreement between Wicks Broadcast Group Limited Partnership and AK Media Group, Inc., dated as of November 30, 1998 (relating to KMTR(TV), Eugene, Oregon). (12) 10.14 Asset Exchange Agreement among Benedek Broadcasting Corporation, Benedek License Corporation and AK Media Group, Inc., dated December 30, 1998 (relating to KKTV(TV), Colorado Springs, Colorado, and KCOY(TV), Santa Maria, California). (12) 10.15 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. (12) 10.16 Registration Rights Agreement dated December 14, 1998 among The Ackerley Group, Inc. and the Initial Purchasers named therein. (12) 10.17 Registration Rights Agreement dated February 24, 1999 between The Ackerley Group, Inc. and First Union Capital Markets. 21 Subsidiaries of the Company. (12) 24 Power of Attorney for each of Barry A. Ackerley, Gail A. Ackerley, Deborah L. Bevier, M. Ian G. Gilchrist and Michel C. Thielen dated March 24, 1999. 27 Financial Data Schedule.
- -------- (1) Incorporated by reference to Exhibit 3.0 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998. (2) Incorporated by reference to Exhibit 10.1 to the Company's Annual Report on Form 10-K for the year ended December 31, 1997. (3) Incorporated by reference to Exhibits 10.1, 10.2, 10.3, and 21 to Amendment No. 1 to the Company's Registration Statement on Form S-4, filed March 10, 1999, File No. 333-71583. (4) Incorporated by reference to Exhibits 10.13 and 10.16, respectively, to the Company's 1989 Annual Report on Form 10-K. (5) Incorporated by reference to Exhibits 10.9, 10.10 and 10.16, respectively, to the Company's 1991 Annual Report on Form 10-K. (6) Incorporated by reference to Exhibit 10.20 to the Company's 1990 Annual Report on Form 10-K. (7) Incorporated by reference to Exhibit 10.10 to the Company's 1995 Annual Report on Form 10-K. (8) Incorporated by reference to Exhibit 99.1 to the Company's Registration Statement on Form S-8, filed on May 14, 1996. (9) Incorporated by reference to Exhibit 10.22 to the Company's 1994 Annual Report of Form 10-K. (10) Incorporated by reference to Exhibit 10 to the Company's Current Report on Form 8-K, filed on July 15, 1998. (11) Incorporated by reference to Exhibit 10 to the Company's Quarterly Report on Form 10-Q for the quarter ending September 30, 1998. (12) Incorporated by reference to Exhibits 4.1, 4.3, 10.13, 10.14, and 21 to the Company's registration statement on Form S-4, filed February 2, 1999 (Reg. No. 333-71583). (b) Reports on Form 8-K. (1) Current Report on Form 8-K, filed December 7, 1998, reporting under Item 5 a proposed issuance and sale by the Company of its senior subordinated notes. (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. 37 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 30th day of March, 1999. THE ACKERLEY GROUP, INC. /s/ Barry A. Ackerley By: _________________________________ Barry A. Ackerley, Chairman of the Board and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Company and in the capacities and on the dates indicated, on the 30th day of March, 1999. A Majority of the Board of Directors: Principal Executive Officer: /s/ Barry A. Ackerley /s/ Barry A. Ackerley _____________________________________ By: _________________________________ Barry A. Ackerley, Chairman Barry A. Ackerley, Chairman of the Board and Chief Executive Officer /s/ Gail A. Ackerley* _____________________________________ Principal Executive Officer: Gail A. Ackerley, Co-Chairman /s/ Denis M. Curley /s/ Deborah L. Bevier* By: _________________________________ _____________________________________ Denis M. Curley, Co-President and Deborah L. Bevier, Director Chief Financial Officer, Treasurer and Secretary /s/ M. Ian G. Gilchrist* _____________________________________ Principal Executive Officer: M. Ian G. Gilchrist, Director /s/ Keith W. Ritzmann /s/ Michael C. Thielen* By: _________________________________ _____________________________________ Keith W. Ritzmann, Senior Vice Michael C. Thielen, Director President and Chief Information Officer, Assistant Secretary and Controller /s/ Denis M. Curley *By: ________________________________ Attorney-in-Fact 38 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS The Board of Directors The Ackerley Group, Inc. We have audited the accompanying consolidated balance sheets of The Ackerley Group, Inc. as of December 31, 1998 and 1997, and the related consolidated statements of income, stockholders' deficiency, and cash flows for each of the three years in the period ended December 31, 1998. 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 generally accepted auditing standards. 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 consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of The Ackerley Group, Inc. at December 31, 1998 and 1997, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. /s/ Ernst & Young LLP Seattle, Washington March 16, 1999 F-1 THE ACKERLEY GROUP, INC. CONSOLIDATED BALANCE SHEETS ASSETS
December 31, ------------------ 1998 1997 -------- -------- (In thousands) Current assets: Cash and cash equivalents................................ $ 4,630 $ 3,656 Accounts receivable, net of allowance ($1,435 in 1998, $1,498 in 1997)......................................... 44,680 52,923 Current portion of broadcast rights...................... 7,339 7,349 Prepaid expenses......................................... 10,212 12,360 Deferred tax asset....................................... 4,497 11,499 Other current assets..................................... 3,883 4,734 -------- -------- Total current assets................................... 75,241 92,521 Property and equipment, net................................ 113,108 94,968 Goodwill, net.............................................. 70,034 33,279 Other intangibles, net..................................... 7,780 9,039 Other assets............................................... 49,963 36,578 -------- -------- Total assets........................................... $316,126 $266,385 ======== ======== LIABILITIES AND STOCKHOLDERS' DEFICIENCY Current liabilities: Accounts payable......................................... $ 8,004 $ 9,103 Accrued interest......................................... 694 3,995 Other accrued liabilities................................ 11,861 19,071 Deferred revenue......................................... 27,736 23,857 Current portion of broadcasting obligations.............. 8,139 8,346 Current portion of long-term debt........................ 3,101 16,130 -------- -------- Total current liabilities.............................. 59,535 80,502 Long-term debt, less current portion....................... 266,999 213,294 Litigation accrual......................................... 8,016 8,072 Other long-term liabilities................................ 7,417 9,426 -------- -------- Total liabilities...................................... 341,967 311,294 Commitments and contingencies Stockholders' deficiency: Common stock, par value $.01 per share--authorized 50,000,000 shares; issued 21,951,380 and 21,855,398 shares at December 31, 1998 and 1997 respectively; and outstanding 20,576,434 and 20,480,452 shares at December 31, 1998 and 1997 respectively.......................... 219 218 Class B common stock, par value $.01 per share-- authorized 11,406,510 shares; issued and outstanding 11,051,230 and 11,053,510 shares at December 31, 1998 and 1997 respectively................................... 111 111 Capital in excess of par value............................. 10,339 9,816 Deficit.................................................... (26,421) (44,965) Less common stock in treasury, at cost (1,374,946 shares).. (10,089) (10,089) -------- -------- Total stockholders' deficiency........................... (25,841) (44,909) -------- -------- Total liabilities and stockholders' deficiency........... $316,126 $266,385 ======== ========
See accompanying notes F-2 THE ACKERLEY GROUP, INC. CONSOLIDATED STATEMENTS OF INCOME
Year Ended December 31, ---------------------------- 1998 1997 1996 -------- -------- -------- (In thousands, except per share amounts) Revenue......................................... $292,907 $306,169 $279,662 Less agency commissions and discounts........... 36,256 34,994 32,364 -------- -------- -------- Net revenue..................................... 256,651 271,175 247,298 Expenses (other income): Operating expenses............................ 209,030 210,752 186,954 Amortization.................................. 4,839 4,146 6,404 Depreciation.................................. 11,735 11,957 10,592 Interest expense.............................. 25,109 26,219 24,461 Stock compensation expense.................... 452 9,344 -- Gain on disposition of assets................. (33,524) -- -- Litigation expense (adjustment)............... -- (5,000) -- -------- -------- -------- Total expenses and other income................. 217,641 257,418 228,411 Income before income taxes and extraordinary item........................................... 39,010 13,757 18,887 Income tax benefit (expense).................... (15,487) 19,172 (2,758) -------- -------- -------- Income before extraordinary item................ 23,523 32,929 16,129 Extraordinary item: loss on debt extinguishment................................. (4,346) -- (355) -------- -------- -------- Net income...................................... $ 19,177 $ 32,929 $ 15,774 ======== ======== ======== Earnings per common share: Income per common share, before extraordinary item........................................... $ .75 $ 1.05 $ .52 Extraordinary item: loss on debt extinguishment................................. (.14) -- (.01) -------- -------- -------- Net income per common share..................... $ .61 $ 1.05 $ .51 ======== ======== ======== Earnings per common share--assuming dilution: Income per common share, before extraordinary item........................................... $ .74 $ 1.04 $ .51 Extraordinary item: loss on debt extinguishment................................. (.14) -- (.01) -------- -------- -------- Net income per common share..................... $ .60 $ 1.04 $ .50 ======== ======== ======== Weighted average number of shares............... 31,627 31,345 31,166 Weighted average number of shares--assuming dilution....................................... 31,883 31,652 31,760
See accompanying notes F-3 THE ACKERLEY GROUP, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIENCY (in thousands, except share information)
Class B common Capital Common Common stock stock in excess stock in ----------------- ------------------ of par treasuury Shares Amount Shares Amount value Deficit (at cost) ---------- ------ ---------- ------ --------- -------- --------- Balance, December 31, 1995................... 20,777,012 $208 11,731,522 $117 $ 3,093 $(92,422) $(10,089) Exercise of stock options and stock conversions............ 409,712 4 (377,712) (3) 102 -- -- Cash dividend, $0.02 per share.................. -- -- -- -- -- (623) -- Net income.............. -- -- -- -- -- 15,774 -- ---------- ---- ---------- ---- ------- -------- -------- Balance, December 31, 1996................... 21,186,724 212 11,353,810 114 3,195 (77,271) (10,089) Stock compensation, exercise of stock options and stock conversions............ 663,964 6 (300,300) (3) 6,561 -- -- Stock issued to directors.............. 4,710 -- -- -- 60 -- -- Cash dividend, $0.02 per share.................. -- -- -- -- -- (623) -- Net income.............. -- -- -- -- -- 32,929 -- ---------- ---- ---------- ---- ------- -------- -------- Balance, December 31, 1997................... 21,855,398 218 11,053,510 111 9,816 (44,965) (10,089) Stock compensation, exercise of stock options and stock conversions............ 92,880 1 (2,280) -- 463 -- -- Stock issued to directors.............. 3,102 -- -- -- 60 -- -- Cash dividend, $0.02 per share.................. -- -- -- -- -- (633) -- Net income.............. -- -- -- -- -- 19,177 -- ---------- ---- ---------- ---- ------- -------- -------- Balance, December 31, 1998................... 21,951,380 $219 11,051,230 $111 $10,339 $(26,421) $(10,089) ========== ==== ========== ==== ======= ======== ========
See accompanying notes. F-4 THE ACKERLEY GROUP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31, ----------------------------- 1998 1997 1996 --------- -------- -------- (In thousands) Cash flows from operating activities: Reconciliation of net income to net cash provided by operating activities: Net income.................................... $ 19,177 $ 32,929 $ 15,774 Adjustment to reconcile net income to net cash provided by operating activities: Litigation expense adjustment............... -- (5,000) -- Stock compensation expense.................. 452 9,344 -- Deferred tax expense (benefit).............. 15,130 (19,798) -- Debt extinguishment, net of taxes........... (394) -- 355 Depreciation and amortization............... 16,574 16,103 16,996 Amortization of deferred financing costs.... 713 1,790 1,379 Gain on disposition of assets............... (33,524) (155) (423) Amortization of broadcast rights............ 10,283 8,957 8,765 Income from barter transactions............. (1,645) (1,535) (2,480) Change in assets and liabilities: Accounts receivable......................... 7,760 (9,169) (164) Prepaid expenses............................ 1,958 976 (6,236) Other current assets and other assets....... (3,545) (3,418) (14,411) Accounts payable and accrued interest....... (4,483) 4,120 1,066 Other accrued liabilities and other long- term liabilities........................... (6,038) (1,663) 2,147 Deferred revenues........................... 3,879 3,807 1,781 Current portion of broadcast obligations.... (11,453) (9,278) (8,212) --------- -------- -------- Net cash provided by operating activities..... 14,844 28,010 16,337 Cash flows from investing activities: Proceeds from disposition of assets........... 41,237 -- -- Proceeds from sale of property and equipment.. 294 275 1,474 Payments for acquisitions..................... (55,759) (2,483) (20,445) Capital expenditures.......................... (32,719) (17,593) (13,124) --------- -------- -------- Net cash used in investing activities....... (46,947) (19,801) (32,095) Cash flows from financing activities: Borrowings under credit agreements............ 461,100 27,000 38,000 Repayments under credit agreements............ (419,588) (33,283) (23,825) Payments under capital lease obligations...... (765) (817) (714) Dividends paid................................ (633) (623) (623) Payments of deferred financing costs.......... (7,109) -- (694) Proceeds from the issuance of stock........... 72 260 103 --------- -------- -------- Net cash provided (used in) financing activities................................. 33,077 (7,463) 12,247 --------- -------- -------- Net increase (decrease) in cash and cash equivalents.................................... 974 746 (3,511) Cash and cash equivalents at beginning of period......................................... 3,656 2,910 6,421 --------- -------- -------- Cash and cash equivalents at end of period.... $ 4,630 $ 3,656 $ 2,910 ========= ======== ======== Supplemental cash flow information: Interest paid, net of capitalized interest.... $ 27,697 $ 23,163 $ 21,524 Income taxes paid............................. 1,069 836 2,157 Noncash transactions: Broadcast rights acquired and broadcast obligations assumed........................ $ 8,828 $ 12,201 $ 9,165 Assets acquired through barter.............. 1,234 1,053 1,342
See accompanying notes F-5 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) out-of-home media, including outdoor and, prior to June 30, 1998, airport advertising; (ii) television broadcasting; (iii) radio broadcasting; and (iv) sports marketing and promotion, primarily through ownership of the Seattle SuperSonics, a franchise of the National Basketball Association. Outdoor advertising operations are conducted principally in the Seattle, Portland, Boston, Miami, Ft. Lauderdale, and West Palm Beach markets, whereas airport advertising operations were conducted in airports throughout the United States. The markets served by the Company's television stations and their affiliations are as follows: Syracuse, New York (ABC); Utica, New York (ABC through a time brokerage agreement); Binghamton, New York (ABC); Colorado Springs, Colorado (CBS); Santa Rosa, California (independent); Bakersfield, California (NBC); Salinas/Monterey, California (CBS through a time brokerage agreement); Eureka, California (CBS through a time brokerage agreement and FOX); Eugene, Oregon (NBC through a time brokerage agreement); and Bellingham, Washington/Vancouver, British Columbia (independent). Radio broadcasting consists of two AM and two FM stations serving the Seattle/Tacoma area. (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--Out-of-home display 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. Ticket payments are recorded as deferred revenue when received and recognized as revenue ratably as home games are played. (d) Barter transactions--The Company engages in nonmonetary trades of advertising space or time in exchange for goods or services. These barter transactions are recorded at the estimated fair value of the asset or service received in accordance with Financial Accounting Standard No. 29, Accounting for Nonmonetary Transactions. 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. (e) Property and equipment--Property and equipment are carried at cost. The Company depreciates groups of large number 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) 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. (g) 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 F-6 THE ACKERLEY GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 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. (h) 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. (i) Earnings per share--The Company presents earnings per share in accordance with Financial Accounting Standard No. 128, Earnings Per Share. Earnings per common 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. Earnings per common share, assuming dilution 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 earnings per common share, assuming dilution were 256,079 shares, 306,982 shares, and 594,283 shares in 1998, 1997, and 1996, respectively. There were no differences between net income amounts used to calculate earnings per common share and earnings per common share, assuming dilution for any of the periods presented. (j) 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. (k) Concentration of credit risk and financial instruments--The Company sells advertising to local and national companies throughout the United States. The Company 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, receivables, payables, and long-term debt, approximates fair value at December 31, 1998. The Company uses interest rate swap agreements to modify the interest rate characteristics of its long-term debt. Each interest rate swap agreement is designated with all or a portion of the principal balance and term of a specific debt obligation. These agreements generally involve the exchange of floating for fixed-rate payment obligations over the life of the agreement without an exchange of underlying principal amount. The differential to be paid or received is accrued as interest rates change and is recognized as an adjustment to interest expense related to the debt (the accrual accounting method). The related net amount payable to or receivable from counterparties is included in other current liabilities or assets. The fair values of the swap agreements and changes in their fair value as a result of changes in market interest rates are not recognized in the financial statements. (l) Use of estimates--The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. (m) Reclassifications--Certain prior years' amounts have been reclassified to conform to the 1998 presentation. F-7 THE ACKERLEY GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 2. New accounting standards The Company adopted Financial Accounting Standard No. 130, Reporting Comprehensive Income. This statement establishes standards for reporting and disclosure of comprehensive income and its components. Comprehensive income includes net income and other comprehensive income which refers to unrealized gains and losses that under generally accepted accounting principles are excluded from net income. The Company had no other comprehensive income for any of the periods presented. In June 1998, the Financial Accounting Standards Board issued Statement No. 133, Accounting for Derivative Instruments and Hedging Activities, which is required to be adopted in years beginning after June 15, 1999. Management does not anticipate that the adoption of the new Statement will have a significant effect on the earnings or financial position of the Company. 3. Acquisitions and dispositions During 1996, the Company acquired a television station in Santa Rosa, California, and substantially all of the assets of an outdoor advertising company in Boston, Massachusetts. The Company recorded net assets with estimated fair values aggregating $4.7 million and goodwill of $15.8 million. The operations of the acquired businesses did not materially affect the consolidated financial statements of the Company. The Company's wholly-owned subsidiary, KJR Radio, Inc., was a limited partner in New Century Seattle Partners, L.P. (the "Partnership") which owned and operated radio stations in the Seattle/Tacoma area. The Company accounted for this investment using the consolidation method. On February 17, 1998, the Partnership redeemed the limited partnership interests and satisfied certain other obligations of the former limited partners for $18.0 million. Effective April 30, 1998, the Partnership redeemed all the interests of Century Management, Inc., its general partner, for approximately $17.8 million. Upon closing, KJR Radio, Inc., a wholly-owned subsidiary of the Company, became the Partnership's sole general partner and licensee of the radio stations held by the Partnership and at that same time, AK Media Group, Inc., the Company's principal operating subsidiary, became the Partnership's nominal and sole limited partner. Effective December 31, 1998, the Partnership was dissolved and KJR Radio, Inc. was merged into AK Media Group. Inc. 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, paid on the closing date of the transaction, and an additional cash payment of approximately $2.9 million (the "Contingent Payment"), of which $1.2 million was paid in December 1998 and the remainder was paid in January 1999. The pre- tax gain recognized in 1998 from this transaction (after giving effect to the Contingent Payment) was approximately $33.5 million. Pending Acquisition of KTVF(TV), KXLR(FM), and KCBF(AM). On August 4, 1998, the Company entered into an agreement to purchase the assets of KTVF-TV, a NBC affiliate, for $7.2 million, and two radio stations, KXLR(FM) and KCBF(AM), for $0.8 million. All three stations are licensed to Fairbanks, Alaska. The transaction is currently pending FCC approval, which must be obtained separately for the television and radio stations. The purchase of the radio stations is contingent on the purchase of the television station. In conjunction with this agreement, on August 5, 1998, the Company granted an option to a third party (the "Optionee") for $0.5 million to purchase from the Company the assets of KTVF(TV) for $6.7 million and the two radio stations for $0.8 million, plus a 15% annual return based on the actual purchase price for the Company's acquisition of the stations. The option may be exercised at any time starting on the third F-8 THE ACKERLEY GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) anniversary of the Company's acquisition of the stations through the seventh anniversary of such acquisition. The option may terminate earlier if the FCC makes certain changes to certain of its ownership rules. In addition, the Optionee may require the Company to repurchase the option for $0.5 million under certain circumstances. Acquisition of WIVT(TV). On August 31, 1998, the Company exercised its option to purchase the assets of WIVT(TV), an ABC affiliate licensed to Binghamton, New York, for $9.0 million. The Company recorded net assets with estimated fair values aggregating $1.2 million and goodwill of $7.8 million. The Company previously operated the station under a time brokerage agreement. Acquisition of Out-of-Home Advertising Company in Miami, Florida. On September 4, 1998, the Company purchased substantially all of the assets of an out-of-home advertising company in Miami, Florida for approximately $2.4 million. Pending Acquisition of WOKR(TV). On September 25, 1998, the Company entered into a purchase agreement with Sinclair Communications, Inc. to acquire substantially all of the assets of WOKR(TV), an ABC affiliate licensed to Rochester, New York. The purchase price is approximately $125.0 million, subject to possible adjustments under the terms of the purchase agreement, plus the assumption of certain liabilities. The Company has paid $12.5 million of the purchase price into an escrow account, which is recorded in other assets, with the balance due at closing. Closing of the transaction is subject to a number of conditions, including the acquisition of the station by Sinclair Communications, Inc. from Guy Gannett Communications and the receipt of approval from the FCC, which has been requested. Either party may terminate the purchase agreement, subject to certain conditions, if closing has not occurred by September 4, 1999. Pending Sale of KCBA(TV) and Acquisition of KION(TV). On November 2, 1998, the Company entered into an agreement to purchase substantially all of the assets of KION(TV), a CBS affiliate licensed to Monterey, California, for $7.7 million, subject to certain reductions. The purchase of this station is subject to FCC approval and is contingent upon the sale of KCBA(TV) as described below. Pending FCC approval of this transaction, the Company is operating the station pursuant to a time brokerage agreement with the current owner. On November 3, 1998, the Company entered into an agreement to sell substantially all of the assets of KCBA(TV), a FOX affiliate licensed to Salinas, California, for $11.0 million. This transaction is subject to FCC approval and is contingent upon the Company's purchase of KION(TV), as described above. Subject to FCC approval, the Company would continue to operate the station after the sale pursuant to a time brokerage agreement with the purchaser. Pending Exchange of KKTV(TV) for KCOY(TV). On December 30, 1998, the Company entered into an asset exchange agreement with Benedek Broadcasting Corporation ("Benedek"). Under the agreement, Benedek would acquire substantially all of the assets, and assume certain liabilities, of KKTV(TV), a CBS affiliate licensed to Colorado Springs, Colorado. In exchange, the Company would (i) acquire substantially all of the assets, and assume certain liabilities, of KCOY(TV), a CBS affiliate licensed to Santa Maria, California, and (ii) receive a cash payment of approximately $9.0 million (subject to certain adjustment). Closing is subject to, among other things, approval of the FCC and expiration of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976. Also on December 30, 1998, the Company entered into a time brokerage agreement to operate KCOY(TV) until closing and a time brokerage agreement for Benedek to operate KKTV(TV) until closing. Acquisition of KVIQ(TV). Effective January 1, 1999, the Company purchased substantially all of the assets of KVIQ(TV), a CBS affiliate licensed to Eureka, California, for $5.5 million, pursuant to an agreement F-9 THE ACKERLEY GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) dated July 15, 1998. Pending closing of the transaction, the Company operated the station pursuant to a time brokerage agreement with the former owner. The Company recorded net assets with estimated fair values aggregating $0.5 million and goodwill of $5.0 million. Acquisition of Out-of-Home Advertising Company in Boston, Massachusetts. On February 19, 1999, the company purchased substantially all of the assets of an out-of-home advertising company in the Boston/ Worcester, Massachusetts market for approximately $11.0 million. Acquisition of KMTR(TV). Effective March 16, 1999, the Company purchased substantially all of the assets of KMTR(TV), a 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. Pending closing of the transaction, the Company operated the stations pursuant to a time brokerage agreement with the former owner since December 1, 1998. The Company recorded net assets with estimated fair values aggregating $3.0 million and goodwill of $23.0 million. 4. Accounts receivable and allowance for doubtful accounts As of December 31, 1998 and 1997, accounts receivable includes employee receivables of $2.4 million and $2.9 million, respectively. The activity in the allowance for doubtful accounts is summarized as follows:
1998 1997 1996 ------ ------ ------ Balance at beginning of year....................... $1,498 $1,426 $1,163 Additions charged to operating expense............. 1,023 814 1,386 Write-offs of receivables, net of recoveries....... (1,086) (742) (1,123) ------ ------ ------ Balance at end of year............................. $1,435 $1,498 $1,426 ====== ====== ======
5. Property and equipment At December 31, 1998 and 1997, property and equipment consisted of the following:
Estimated useful 1998 1997 life -------- ------- ---------- Land........................................... $ 7,719 $ 7,468 Advertising structures......................... 82,789 86,737 6-20 years Broadcast equipment............................ 57,891 56,065 6-20 years Building and improvements...................... 40,387 38,351 3-40 years Office furniture and equipment................. 26,909 25,482 5-10 years Transportation and other equipment............. 29,573 10,335 5-6 years Equipment under capital leases................. 8,008 7,982 10 years -------- ------- 253,276 232,420 Less accumulated depreciation.................. 140,168 137,452 -------- ------- $113,108 $94,968 ======== =======
F-10 THE ACKERLEY GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 6. Intangibles At December 31, 1998 and 1997, intangibles consisted of the following:
Estimated 1998 1997 useful life ------- ------- ----------- Goodwill....................................... $84,032 $46,229 15-40 years Favorable leases and contracts................. 17,462 17,462 20 years Broadcasting agreements........................ 4,000 4,000 15 years Other.......................................... 6,196 6,196 5-30 years ------- ------- ----------- 111,690 73,887 Less accumulated amortization.................. 33,876 31,569 ------- ------- $77,814 $42,318 ======= =======
The increase in intangibles in 1998 is primarily due to the recording of goodwill related to the Partnership redemption and acquisition of WIVT(TV), as discussed in Note 3. 7. Debt On September 30, 1996, the Company entered into a credit agreement (the "1996 Credit Agreement") with various banks which increased the aggregate principal amount of borrowings available under the lending facility from $65.0 million to $77.5 million. The refinancing of the Company's debt in 1996 resulted in an extraordinary loss of $0.4 million. In January 1998, the Company replaced the 1996 Credit Agreement with a $265.0 million credit agreement (the "1998 Credit Agreement") and in October 1998 used borrowings therefrom to redeem its $120.0 million 10.75% Senior Secured Notes. This resulted in a charge of approximately $4.3 million, net of applicable taxes of $2.5 million, consisting of prepayment fees and the write- off of deferred financing costs. On January 22, 1999, the Company replaced the 1998 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. At closing of this transaction, the Company had available borrowings of $85.0 million under the Term Loan and $166.3 million under the Revolver. The commitment fees under the Revolver are payable quarterly at a rate based on the Company's total leverage ratio. The Company can choose to have interest calculated under the 1999 Credit Agreement at rates based on either a base rate or LIBOR plus defined margins which vary based on the Company's total leverage ratio. At January 22, 1999, the interest rate under the 1999 Credit Agreement was LIBOR (5.00%) plus 2.75%. Principal repayments under the Term Loan are due quarterly from March 31, 2000 through December 31, 2005. The Revolver requires scheduled annual commitment reductions, with required principal prepayments of outstanding amounts in excess of the commitment levels, quarterly beginning March 31, 2001 through December 31, 2005. 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 were issued under an indenture which allows for an aggregate principal amount of up to $250.0 million. On February 24, 1999, the Company issued additional 9% Senior Subordinated Notes under the indenture in the aggregate amount of $25.0 million, for a total aggregate amount of 9% Senior Subordinated Notes issued of $200.0 million. These notes bear interest at 9% which is payable semi-annual in January and July. Principal is payable in full in January 2009. F-11 THE ACKERLEY GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) At December 31, 1998 and 1997, outstanding balances under letter of credit agreements totaled $3.8 million and $1.1 million, respectively. At December 31, 1998, senior subordinated notes consisted of $175.0 million of the 9% Senior Subordinated Notes and $20.0 million 10.48% Senior Subordinated Notes due December 15, 2000 payable to several insurance companies (the "10.48% Senior Subordinated Notes"). On March 15, 1999, the 10.48% Senior Subordinated Notes were repaid with borrowings under the 1999 Credit Agreement Revolver. This transaction resulted in a charge of approximately $0.8 million, net of applicable taxes, consisting of prepayment fees and the write-off of deferred financing costs. Other debt consists primarily of notes payable related to the acquisition of a new aircraft for the Seattle SuperSonics in 1998 and obligations under deferred compensation agreements in 1998 and 1997. At December 31, 1998 and 1997, long-term debt consisted of the following:
1998 1997 -------- -------- Credit agreements...................................... $ 51,811 $ 59,000 Senior notes........................................... -- 120,000 Senior subordinated notes.............................. 195,000 32,500 Partnership debt....................................... -- 8,888 Capital lease obligation (net of imputed interest of $987 in 1998 and $1,434 in 1997)...................... 5,686 6,451 Other debt............................................. 17,603 2,585 -------- -------- 270,100 229,424 Less amounts classified as current..................... 3,101 16,130 -------- -------- $266,999 $213,294 ======== ========
Approximately $0.8 million of interest was capitalized in 1998. There was no capitalized interest in 1997 or 1996. Aggregate annual payments of long-term debt during the next five years, reflecting the terms of the 1999 Credit Agreement and the repayment of the 10.48% Senior Subordinated Notes are as follows:
Credit agreement Capital lease and notes Other obligation Total --------- ------- ------------- -------- 1999.............................. $ -- $ 2,198 $ 903 $ 3,101 2000.............................. 7,500 2,482 963 10,945 2001.............................. 15,000 2,546 1,027 18,573 2002.............................. 22,500 2,775 1,094 26,369 2003.............................. 6,811 3,012 1,699 11,522 Later years....................... 195,000 4,590 -- 199,590 -------- ------- ------ -------- Total............................. $246,811 $17,603 $5,686 $270,100 ======== ======= ====== ========
Substantially all of the outstanding stock and material assets of the Company's subsidiaries are pledged as collateral under the 1999 Credit Agreement. In addition, the 1999 Credit Agreement and the Indenture 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. F-12 THE ACKERLEY GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) At December 31, 1998, the Company had outstanding interest rate contacts with financial institutions which involve the exchange of fixed for floating rate of LIBOR (5.688% at December 27, 1998) on a notional principal amount of $200.0 million. The Company's risk in this transaction is the cost of replacing, at current market rates, the contracts in the event of default by the counterparties. At December 31, 1998, the fair value of the contracts, as quoted by the counterparties, were $2.7 million. Management believes the risk of incurring a loss as a result of non-performance by the counterparties is remote as the contracts are with major financial institutions. 8. Income taxes 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, 1998 and 1997 significant components of the Company's deferred tax liabilities and assets are as follows:
1998 1997 ------- ------- Deferred tax assets: Net operating loss carryforwards........................ $ 5,497 $14,579 Litigation accrual...................................... 3,046 3,067 Tax credit carryforwards................................ 2,346 2,133 Capital lease obligation................................ 2,160 2,451 Deferred NBA expansion revenue.......................... -- 772 Deferred compensation agreements........................ 828 730 Other................................................... 3,095 5,494 ------- ------- Total deferred tax assets................................. 16,972 29,226 Deferred tax liabilities: Tax over book depreciation.............................. 7,562 7,131 Other................................................... 348 297 ------- ------- Total deferred tax liabilities............................ 7,910 7,428 ------- ------- Net deferred tax assets................................... $ 9,062 $21,798 ======= =======
In 1997, the Company's valuation allowance decreased by $27.2 million, primarily through utilization of net operating loss carryforwards and the elimination of the remaining balance due to improved recent and anticipated future operating results. Significant components of the income tax expense (benefit) are as follows:
1998 1997 1996 ------- -------- ------ Current: Federal....................................... $ 387 $ 263 $1,561 State......................................... (30) 363 1,197 ------- -------- ------ 357 626 2,758 Deferred: Federal....................................... 14,094 (18,235) -- State......................................... 1,036 (1,563) -- ------- -------- ------ 15,130 (19,798) -- ------- -------- ------ Income tax expense (benefit).................... $15,487 $(19,172) $2,758 ======= ======== ======
F-13 THE ACKERLEY GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The reconciliation of income taxes computed at the U.S. federal statutory tax rate to income tax expense (benefit) is as follows:
1998 1997 1996 ------- -------- ------- Tax at U.S. statutory rate...................... $13,654 $ 4,815 $ 6,422 Non-deductible expenses......................... 831 929 582 State taxes and other........................... 1,002 363 1,197 Net operating loss carryforwards................ -- (5,744) (7,004) Alternative minimum tax......................... -- -- 1,561 Change in valuation account..................... -- (19,535) -- ------- -------- ------- Provision (benefit) for income taxes............ $15,487 $(19,172) $ 2,758 ======= ======== =======
At December 31, 1998, the Company has net operating loss carryforwards of approximately $15.7 million that expire in the years 2006 and 2007 and alternative minimum tax credit carryforwards of approximately $2.3 million. 9. 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 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 1998, $1.1 million in 1997, and $1.1 million in 1996. 10. Stockholders' deficiency 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. In 1981, the Company entered into 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 at the time the agreements were executed. The agreements expire in 1999. The stock purchase agreements provide 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 common stock is purchased. At December 31, 1998 and 1997, there were an aggregate of 37,500 and 52,500 shares, respectively, of common stock and an equal number of shares of Class B common stock available for purchase at $2.00 per share of common stock. In 1998, 15,000 shares of common stock and 15,000 shares of Class B common stock were purchased under these agreements. No shares were purchased under these agreements in 1997 and 1996. 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 and reserved for issuance under the Directors Plan. At December 31, 1998, the Company had 11,051,230 shares of common stock reserved for conversion of Class B common stock, 490,250 shares reserved under the Employee Stock Option Plan, 75,000 shares reserved under stock purchase agreements, and 92,188 shares reserved under the Directors Plan. F-14 THE ACKERLEY GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 11. Stock Option Plan The Company's Employee Stock Option Plan (the "Plan") was approved by the Board of Directors and the stockholders of the Company in 1983. In 1994, the Plan was amended to extend the term of the Plan and to increase the amount of common stock reserved for issuance to 1,000,000 shares. As of December 31, 1998 and 1997, there were 230,250 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. In 1998, the Company recognized stock compensation expense of $0.4 million primarily due to the amendments of certain stock option agreements. In 1997, the Company amended certain employees' stock option agreements, converting 338,000 incentive stock options to nonqualified stock options. In conjunction with this transaction, the Company declared bonuses to the option holders to pass on the Company's projected tax savings, representing deductions attributable to the exercise of these nonqualified options, to the option holders. Accordingly, the Company recognized total compensation expense of $8.3 million, consisting of stock compensation expense of $5.4 million and bonus expense of $2.9 million. The Company also granted 70,000 nonqualified options at below-market exercise prices and recorded compensation expense of $1.0 million. A summary of the Company's stock option activity and related information for the years ended December 31 follows:
1998 1997 1996 ----------------- ------------------ ----------------- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Options Price Options Price Options Price ------- -------- -------- -------- ------- -------- Options outstanding at beginning of year...... 320,600 $4.75 658,000 $2.96 690,000 $2.97 Granted................. -- -- 70,000 0.69 -- -- Exercised............... (60,600) 0.69 (367,400) 0.69 (32,000) 3.23 Canceled................ -- -- (40,000) 5.53 -- -- ------- ----- -------- ----- ------- ----- Options outstanding at end of year............ 260,000 $5.69 320,600 $4.75 658,000 $2.96 Exercisable at end of year................... -- -- 60,600 $0.69 -- -- Weighted average fair value of options granted during year.... -- $ 14.00 --
Exercise prices for options outstanding at December 31, 1998 ranged from $3.44 to $7.63. A summary of options outstanding as of December 31, 1998 is as follows:
Weighted- Average Weighted- Remaining Average Options Contractual Exercise Range of Exercise Price Outstanding Life Price Exercisable ----------------------- ----------- ----------- --------- ----------- $0.70 - 3.44............... 120,000 6.1 $3.44 -- 3.45 - 7.63............... 140,000 7.0 7.63 -- ------- $0.70 - $7.63............... 260,000 6.6 years $5.69
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 F-15 THE ACKERLEY GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in 1997 (there were no grants in 1998 and 1996): Dividend yield of 0%; expected volatility of 55%; risk-free interest rate of 6%; 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:
1998 1997 1995 ------- ------- ------- Pro forma net income............................. $18,971 $32,742 $15,554 Pro forma net income per common share............ $0.60 $1.04 $0.50 Pro forma net income per common share, assuming dilution........................................ $0.60 $1.03 $0.49
12. 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, except for the matters discussed in Note 13. The Company has employment contracts with certain employees, including basketball coaches and players of the Seattle SuperSonics, extending beyond December 31, 1998. Most of these contracts require that payments continue to be made if the individual should be unable to perform because of death or disability. Future minimum obligations under these contracts are as follows: 1999.............................................................. $27,535 2000.............................................................. 25,947 2001.............................................................. 22,048 2002.............................................................. 13,625 2003.............................................................. 8,542 Later years....................................................... -- ------- $97,697 =======
The Seattle SuperSonics maintains disability and life insurance policies on most of its key players. The level of insurance coverage maintained is based on the determination of the insurance proceeds which would be required to meet its guaranteed obligations in the event of permanent or total disability of its key players. The Company is required to make minimum payments for equipment and facilities under non-cancelable operating lease agreements and broadcast agreements which expire in more than one year as follows:
Broadcast Equipment/Facilities Obligations -------------------- ----------- 1999...................................... $ 4,376 $ 8,753 2000...................................... 3,608 3,897 2001...................................... 3,241 2,063 2002...................................... 2,673 816 2003...................................... 2,382 -- Later years............................... 9,820 -- ------- ------- $26,100 $15,529 ======= =======
F-16 THE ACKERLEY GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Rent expense for operating leases aggregated $5.5 million in 1998, $5.4 million in 1997, and $4.5 million in 1996. Broadcasting film and programming expense aggregated $10.3 million in 1998, $8.3 million in 1997, and $8.2 million in 1996. On June 30, 1997, the Company entered into a time brokerage agreement with Utica Television Partners, L.L.C., the owner of television station WUTR licensed to Utica, New York. In conjunction with the transaction, the Company guaranteed a bank loan obligation of the licensee which had an aggregate principal amount of $7.9 million at December 31, 1998, maturing in December 2001. To date, there has been no default under the bank loan obligation and revenues from WUTR have been and are expected to continue to service the bank loan obligation. On April 24, 1996, the Company entered into a time brokerage agreement with Harron Television of Monterey, the owner of television station KION licensed to Monterey, California. In conjunction with the transaction, the Company guaranteed a bank loan obligation of the licensee which had an aggregate principal amount of $4.8 million maturing in December 1999. At December 31, 1998 and 1997, the outstanding principal amount of the bank loan obligation under the guarantee was $2.6 million and $3.7 million, respectively. To date, there has been no default under the bank loan obligation and revenues from KION have been and are expected to continue to service the bank loan obligation. The Company has incurred transportation costs of $1.3 million in 1998, $2.0 million in 1997, and $2.0 million in 1996, and made advance payments of $0.3 million at December 31, 1998, to a company controlled by the Company's major stockholder. At December 31, 1998, principal amounts outstanding on loans to the Company's major stockholder were $2.0 million. 13. Litigation accrual The Company and two of its executive officers were defendants in a wrongful termination suit brought by former employees. On February 29, 1996, a jury issued a verdict awarding the plaintiffs compensatory and punitive damages of approximately $13.0 million. At December 31, 1995, the Company initially recorded an accrual of $14.2 million, including estimated additional legal costs, related to the verdict. Following post-trial motions, the punitive damages award was reduced, and in 1997, the Company reduced the accrual related to this litigation by $5.0 million, leaving a total accrual of approximately $8.0 million. On October 1, 1998, the U.S. Court of Appeals for the Ninth Circuit ruled in the Company's favor, holding that the plaintiffs did not have a valid claim under the Federal Fair Labor Standards Act and striking the award of damages, including all punitive damages. The Court of Appeals remanded the case for further consideration of whether the plaintiffs have a valid claim under the Washington State Fair Labor Standards Act. On March 9, 1999, the Court of Appeals issued an order referring the case to an 11-judge panel for a new hearing. A hearing has been set for April 22, 1999. 14. Industry segment information In 1997, the Company adopted Financial Accounting Standards Board Statement No. 131. The Company organizes its segments based on the products and services from which revenues are generated. Segment information has been restated to present the out-of-home media, television broadcasting, radio broadcasting, and sports & entertainment segments. The Company evaluates segment performance and allocates resources based on Segment Operating Cash Flow. The Company defines Operating Cash Flow as net revenue less operating expenses before amortization, depreciation, interest, litigation, and stock compensation expenses. Segment Operating Cash Flow is defined as Operating Cash Flow before corporate overhead. Selected financial information for these segments for the years ended December 31, 1998, 1997 and 1996 is presented as follows: F-17 THE ACKERLEY GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Out-of-Home Television Radio Sports & Media Broadcasting Broadcasting Entertainment Consolidated ----------- ------------ ------------ ------------- ------------ 1998: Net revenue............. $108,560 $ 68,467 $ 24,474 $ 55,150 $ 256,651 Segment operating expenses............... (65,605) (55,996) (14,819) (58,119) (194,539) -------- -------- -------- -------- --------- Segment Operating Cash Flow................... $ 42,955 $ 12,471 $ 9,655 $ (2,969) 62,112 ======== ======== ======== ======== Corporate overhead...... (14,491) --------- Operating Cash Flow..... 47,621 Other expenses: Depreciation and amortization.......... 16,574 Interest expense....... 25,109 Stock compensation expense............... 452 Gain on disposition of assets................ (33,524) --------- Income before income taxes and extraordinary item................... $ 39,010 ========= Segment assets.......... $ 75,113 $ 87,308 $ 59,650 $ 31,546 $ 253,617 ======== ======== ======== ======== Corporate assets........ 62,509 --------- Total assets............ $ 316,126 ========= Capital expenditures.... $ 6,986 $ 4,415 $ 1,389 $ 238 $ 13,028 ======== ======== ======== ======== Corporate capital expenditures........... 19,691 --------- Total capital expenditures........... $ 32,719 ========= 1997: Net revenue............. $113,162 $ 63,611 $ 20,970 $ 73,432 $ 271,175 Segment operating expenses............... (72,159) (46,935) (12,983) (68,662) (200,739) -------- -------- -------- -------- --------- Segment Operating Cash Flow................... $ 41,003 $ 16,676 $ 7,987 $ 4,770 70,436 ======== ======== ======== ======== Corporate overhead...... (10,013) --------- Operating Cash Flow..... 60,423 Other expenses: Depreciation and amortization.......... (16,103) Interest expense....... (26,219) Litigation credit...... 5,000 Stock compensation expense............... (9,344) --------- Income before income taxes and extraordinary item................... $ 13,757 ========= Segment assets.......... $ 79,208 $ 75,955 $ 29,568 $ 45,261 $ 229,992 ======== ======== ======== ======== Corporate assets........ 36,393 --------- Total assets............ $ 266,385 ========= Capital expenditures.... $ 6,523 $ 7,211 $ 873 $ 1,706 $ 16,313 ======== ======== ======== ======== Corporate capital expenditures........... 1,280 --------- Total capital expenditures........... $ 17,593 ========= 1996: Net revenue............. $ 99,833 $ 57,863 $ 17,955 $ 71,647 $ 247,298 Segment operating expenses............... (63,924) (42,137) (10,844) (61,816) (178,721) -------- -------- -------- -------- --------- Segment Operating Cash Flow................... $ 35,909 $ 15,726 $ 7,111 $ 9,831 68,577 ======== ======== ======== ======== Corporate overhead...... (8,233) --------- Operating Cash Flow..... 60,344 Other expenses: Depreciation and amortization.......... (16,996) Interest expense....... (24,461) --------- Income before income taxes and extraordinary item................... $ 18,887 ========= Segment assets.......... $ 67,918 $ 62,915 $ 31,925 $ 49,546 $ 212,304 ======== ======== ======== ======== Corporate assets........ 12,608 --------- Total assets............ $ 224,912 ========= Capital expenditures.... $ 4,674 $ 3,770 $ 393 $ 1,652 $ 10,489 ======== ======== ======== ======== ========= Corporate capital expenditures........... 2,635 --------- Total capital expenditures........... $ 13,124 =========
F-18 THE ACKERLEY GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 15. 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 broadcasting segment. In particular, the Company's net revenue and Operating Cash Flow historically have been affected positively during the NBA basketball season (the first, second, and fourth quarters) and by increased advertising activity in the second and fourth quarters. For the fourth quarter of 1998, net revenue and Operating Cash Flow were adversely affected by the NBA lockout. The following table sets forth a summary of the quarterly results of operations for the years ended December 31, 1998 and 1997:
First Second Third Fourth Quarter Quarter Quarter Quarter ------- ------- ------- ------- 1998 Net revenue........................ $81,046 $75,837 $48,087 $51,681 Operating Cash Flow................ 11,658 13,940 10,903 11,120 Income before extraordinary item... 809 22,398* 229 87 Extraordinary loss................. -- -- -- (4,346) Net income......................... 809 22,398 229 (4,259) Net income per share............... .03 .71 .01 (.14) Net income per share--assuming dilution........................... .03 .70 .01 (.14) 1997 Net revenue........................ $71,454 $68,207 $52,605 $78,909 Operating Cash Flow................ 12,212 18,718 10,182 19,311 Net income......................... 3,194 10,469 940** 18,326*** Net income per share............... .10 .34 .03 .58 Net income per share--assuming dilution........................... .10 .33 .03 .58
- -------- * Includes a gain on the sale of the Company's airport advertising operations. ** Includes stock compensation expense of $4.7 million and adjustment to litigation accrual of $5.0 million. *** Includes adjustment to deferred tax valuation allowance of $14.6 million and additional stock compensation expense of $4.6 million. F-19 EXHIBIT INDEX
Exhibit No. Exhibit ------- ------- 3.1 Fourth Restated Certificate of Incorporation. (1) 3.2 Amended and Restated Bylaws. (2) 10.1 Credit Agreement dated January 22, 1999, by and among The Ackerley Group, Inc., First Union National Bank, Fleet Bank, N.A., Union Bank of California, N.A., KeyBank National Association, and Bank of Montreal, Chicago Branch. (3) 10.2 Security Agreement dated January 22, 1999 between The Ackerley Group, Inc. and First Union National Bank, as administrative agent. (3) 10.3 Pledge Agreement dated January 22, 1999 between The Ackerley Group, Inc. and First Union National Bank, as administrative agent. (3) 10.4 Composite Conformed Copies of Note Agreement between the Company and certain insurance companies, dated as of December 1, 1989. (4) 10.5 Amendment No. 1 dated October 18, 1991 to Note Agreements dated December 1, 1988 and December 1, 1989. (5) 10.6 Agreements of Waiver and Amendment dated as of September 30, 1990, relating to the Note Agreements. (6) 10.7 Implementation and Waiver Agreement dated October 18, 1991. (5) 10.8 The Company's Employee Stock Option Plan, as amended and restated on March 4, 1996. (7) 10.9 Nonemployee-Director's Equity Compensation Plan.(8) 10.10 Premises Use and Occupancy Agreement between The City of Seattle and SSI Sports, Inc. dated March 2, 1994. (9) 10.11 Purchase and Sale Agreement between Sky Sites, Inc. and Ackerley Airport Advertising, Inc., dated as of May 19, 1998. (10) 10.12 Asset Purchase Agreement between Sinclair Communications, Inc. and The Ackerley Group, Inc., dated September 25, 1998 (relating to WOKR(TV), Rochester, New York). (11) 10.13 Acquisition Agreement between Wicks Broadcast Group Limited Partnership and AK Media Group, Inc., dated as of November 30, 1998 (relating to KMTR(TV), Eugene, Oregon). (12) 10.14 Asset Exchange Agreement among Benedek Broadcasting Corporation, Benedek License Corporation and AK Media Group, Inc., dated December 30, 1998 (relating to KKTV(TV), Colorado Springs, Colorado, and KCOY(TV), Santa Maria, California). (12) 10.15 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. (12) 10.16 Registration Rights Agreement dated December 14, 1998 among The Ackerley Group, Inc. and the Initial Purchasers named therein. (12) 10.17 Registration Rights Agreement dated February 24, 1999 between The Ackerley Group, Inc. and First Union Capital Markets. 21 Subsidiaries of the Company. (12) 24 Power of Attorney for each of Barry A. Ackerley, Gail A. Ackerley, Deborah L. Bevier, M. Ian G. Gilchrist and Michel C. Thielen dated March 24, 1999. 27 Financial Data Schedule.
- -------- (1) Incorporated by reference to Exhibit 3.0 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998. (2) Incorporated by reference to Exhibit 10.1 to the Company's Annual Report on Form 10-K for the year ended December 31, 1997. (3) Incorporated by reference to Exhibits 10.1, 10.2, 10.3, and 21 to Amendment No. 1 to the Company's Registration Statement on Form S-4, filed March 10, 1999, File No. 333-71583. (4) Incorporated by reference to Exhibits 10.13 and 10.16, respectively, to the Company's 1989 Annual Report on Form 10-K. (5) Incorporated by reference to Exhibits 10.9, 10.10 and 10.16, respectively, to the Company's 1991 Annual Report on Form 10-K. (6) Incorporated by reference to Exhibit 10.20 to the Company's 1990 Annual Report on Form 10-K. (7) Incorporated by reference to Exhibit 10.10 to the Company's 1995 Annual Report on Form 10-K. (8) Incorporated by reference to Exhibit 99.1 to the Company's Registration Statement on Form S-8, filed on May 14, 1996. (9) Incorporated by reference to Exhibit 10.22 to the Company's 1994 Annual Report of Form 10-K. (10) Incorporated by reference to Exhibit 10 to the Company's Current Report on Form 8-K, filed on July 15, 1998. (11) Incorporated by reference to Exhibit 10 to the Company's Quarterly Report on Form 10-Q for the quarter ending September 30, 1998. (12) Incorporated by reference to Exhibits 4.1, 4.3, 10.13, 10.14, and 21 to the Company's registration statement on Form S-4, filed February 2, 1999 (Reg. No. 333-71583). EX-10.17 2 REGISTRATION RIGHTS AGREEMENT Exhibit 10.17 ================================================================================ REGISTRATION RIGHTS AGREEMENT Dated as of February 24, 1999 by and among THE ACKERLEY GROUP, INC. and FIRST UNION CAPITAL MARKETS CORP., as Initial Purchaser ================================================================================ REGISTRATION RIGHTS AGREEMENT THIS REGISTRATION RIGHTS AGREEMENT (the "Agreement") is made and entered into as of February 24, 1999 by and among THE ACKERLEY GROUP, INC., a Delaware corporation (the "Company"), and FIRST UNION CAPITAL CORP. ("Union" or "Initial Purchaser"). This Agreement is made pursuant to the Purchase Agreement dated as of February 17, 1999 by and among the Company and the Initial Purchaser (the "Purchase Agreement"), which provides for, among other things, the sale by the Company to the Initial Purchaser of an aggregate of $25,000,000 principal amount of the Company's 9% Senior Subordinated Notes Due 2009 (the "Notes"). A prior registration rights agreement (the "Prior Agreement") was made and entered into as of December 14, 1998 by and among the Company and SALOMON SMITH BARNEY INC. ("Salomon"), First Union, FLEET SECURITIES, INC. ("Fleet" and together with Salomon and First Union, the "Prior Initial Purchasers") pursuant to a Purchase Agreement dated as of December 9, 1998 by and among the Company and the Prior Initial Purchasers (the "Prior Purchase Agreement") which purchase agreement provides for, among other things, the sale by the Company to the Prior Initial Purchasers of an aggregate of $175,000,000 principal amount of the Notes. In order to induce the Initial Purchaser to enter into the Purchase Agreement, the Company has agreed to provide to the Initial Purchaser and its direct and indirect transferees the registration rights set forth in this Agreement. The execution and delivery of this Agreement is a condition to the closing under the Purchase Agreement. In consideration of the foregoing, the parties hereto agree as follows: 1. Definitions. As used in this Agreement, the following capitalized defined terms shall have the following meanings: "Additional Interest" see Section 2(e) hereof. "Advice" see the last paragraph of Section 3 hereof. "Agreement" shall have the meaning set forth in the preamble to this Agreement. "Applicable Period" see Section 3(s) hereof. "Business Day" shall mean a day that is not a Saturday, a Sunday, or a day on which banking institutions in New York, New York are required to be closed. "Closing Date" shall mean the Closing Date as defined in the Purchase Agreement. "Company" shall have the meaning set forth in the preamble to this Agreement and also includes the Company's successors and permitted assigns. 2 "Depositary" shall mean The Depository Trust Company, or any other depositary appointed by the Company pursuant to the applicable provisions of the Indenture; provided, however, that such depositary must have an address in the Borough of Manhattan, in The City of New York. "Effectiveness Period" see Section 2(b) hereof. "Effectiveness Target Date" see Section 2(e) hereof. "Event Date" see Section 2(e) hereof. "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended and the rules and regulations of the SEC promulgated thereunder. "Exchange Notes" shall mean the 9% Senior Subordinated Notes Due 2009, Series B issued by the Company under the Indenture containing terms identical to the Notes (except that (i) interest thereon shall accrue from the last date on which interest was paid on the Notes or, if no such interest has been paid, from [December 14, 1998], (ii) the transfer restrictions with respect to the Notes and all registration rights in respect thereof shall be eliminated and (iii) the provisions relating to Additional Interest shall be eliminated) to be offered to Holders of Notes in exchange for Notes pursuant to the Exchange Offer. "Exchange Offer" shall mean the exchange offer by the Company of Exchange Notes for Notes pursuant to Section 2(a) hereof. "Exchange Offer Registration" shall mean a registration under the Securities Act effected pursuant to Section 2(a) hereof. "Exchange Offer Registration Statement" shall mean an exchange offer registration statement on Form S-1, S-3 or S-4 (or, if applicable, on another appropriate form), and all amendments and supplements to such registration statement, in each case including the Prospectus contained therein, all exhibits thereto and all material incorporated by reference therein. "Exchange Period" see Section 2(a) hereof. "Holders" shall mean the Initial Purchaser and the Prior Initial Purchasers, for so long as they own any Transfer Restricted Notes, each of their direct and indirect successors, assigns and transferees who become registered owners of Transfer Restricted Notes under the Indenture and each Participating Broker-Dealer that holds Exchange Notes for so long as such Participating Broker-Dealer is required to deliver a prospectus meeting the requirements of the Securities Act in connection with any resale of such Exchange Notes. 3 "Indenture" shall mean the Indenture relating to the Notes dated as of December 14, 1998 between the Company, and The Bank of New York, as trustee, as the same may be amended from time to time in accordance with the terms thereof. "Initial Purchaser" shall have the meaning set forth in the preamble to this Agreement. "Inspectors" see Section 3(m) hereof. "Issue Date" shall mean December 14, 1998. "Majority Holders" shall mean the Holders of a majority of the aggregate principal amount of outstanding Transfer Restricted Notes. "Notes" shall have the meaning set forth in the preamble to this Agreement. "Participating Broker-Dealer" shall have the meaning set forth in Section 3(s) hereof. "Person" shall mean an individual, partnership, corporation, limited liability company, unincorporated organization, trust or joint venture, or a government or agency or political subdivision thereof. "Prior Agreement" shall have the meaning set forth in the preamble to this Agreement. "Prior Closing Date" shall mean the Closing Date as defined in the Prior Purchase Agreement. "Prior Initial Purchasers" shall have the meaning set forth in the preamble to this Agreement. "Prior Purchase Agreement" shall have the meaning set forth in the preamble to this Agreement. "Private Exchange" see Section 2(a) hereof. "Private Exchange Notes" see Section 2(a) hereof. "Prospectus" shall mean the prospectus included in a Registration Statement, including any preliminary prospectus, and any such prospectus as amended or supplemented by any prospectus supplement, including a prospectus supplement with respect to the terms of the offering of any portion of the Transfer Restricted Notes covered by a Shelf Registration Statement, and by all other amendments and supplements to a prospectus, including post-effective amendments, and in each case including all material incorporated by reference therein. 4 "Purchase Agreement" shall have the meaning set forth in the preamble to this Agreement. "Records" see Section 3(m) hereof. "Registration Expenses" shall mean any and all expenses incident to performance of or compliance by the Company with this Agreement, including without limitation: (i) all applicable SEC, stock exchange or National Association of Securities Dealers, Inc. (the "NASD") registration and filing fees, (ii) all fees and expenses incurred in connection with compliance with state securities or blue sky laws (including reasonable fees and disbursements of one counsel for Holders that are either the Initial Purchaser or the Prior Initial Purchasers in connection with blue sky qualification of any of the Exchange Notes or Transfer Restricted Notes) and compliance with the rules of the NASD, (iii) all applicable expenses incurred by the Company in preparing or assisting in preparing, word processing, printing and distributing any Registration Statement, any Prospectus and any amendments or supplements thereto, and in preparing or assisting in preparing any other documents relating to the performance of and compliance with this Agreement, (iv) all rating agency fees, if any, (v) the fees and disbursements of counsel for the Company, (vii) all fees and expenses incurred in connection with the listing, if any, of any of the Transfer Restricted Notes on any securities exchange or exchanges, if the Company, in its discretion, elects to make any such listing; but excluding fees of counsel to the Holders and underwriting discounts and commissions and transfer taxes, if any, relating to the sale or disposition of Transfer Restricted Notes by a Holder. "Registration Statement" shall mean any registration statement (including, without limitation, the Exchange Offer Registration Statement and the Shelf Registration Statement) of the Company which covers any of the Exchange Notes or Transfer Restricted Notes pursuant to the provisions of this Agreement or the Prior Agreement, and all amendments and supplements to any such Registration Statement, including post-effective amendments, in each case including the Prospectus contained therein, all exhibits thereto and all material incorporated by reference therein. "SEC" shall mean the Securities and Exchange Commission. "Securities Act" shall mean the Securities Act of 1933, as amended, and the rules and regulations of the SEC promulgated thereunder. "Shelf Registration" shall mean a registration effected pursuant to Section 2(b) hereof. "Shelf Registration Event Date" see Section 2(b). "Shelf Registration Statement" shall mean a "shelf" registration statement of the Company pursuant to the provisions of Section 2(b) hereof which covers all of the Transfer Restricted Notes or all of the Private Exchange Notes, as the case may be, on an appropriate form under Rule 415 under the Securities Act, or any similar rule that may be 5 adopted by the SEC, and all amendments and supplements to such registration statement, including post-effective amendments, in each case including the Prospectus contained therein, all exhibits thereto and all material incorporated by reference therein. "Target Consummation Date" see Section 2(a). "Target Effectiveness Date" see Section 2(a). "TIA" shall have the meaning set forth in Section 3(k) hereof. "Transfer Restricted Notes" means each Note until (i) the date on which such Note has been exchanged by a person other than a broker-dealer for an Exchange Note in the Exchange Offer, (ii) following the exchange by a broker-dealer in the Exchange Offer of a Note for an Exchange Note, the date on which such Exchange Note is sold to a purchaser who receives from such broker-dealer on or prior to the date of such sale a copy of the prospectus contained in the Exchange Offer Registration Statement, (iii) the date on which such Note has been effectively registered under the Securities Act and disposed of in accordance with the Shelf Registration Statement, (iv) the date on which such Note is distributed to the public pursuant to Rule 144(k) under the Securities Act (or any similar provision then in force, but not Rule 144A under the Securities Act), (v) such Note shall have been otherwise transferred by the holder thereof and a new Note not bearing a legend restricting further transfer shall have been delivered by the Company and subsequent disposition of such Note shall not require registration or qualification under the Securities Act or any similar state law then in force or (vi) such Note ceases to be outstanding. "Trustee" shall mean the trustee with respect to the Notes under the Indenture or any successor appointed in accordance with the terms thereof. 2. Registration Under the Securities Act. (a) Exchange Offer. The Company shall, for the benefit of the Holders, at the Company's cost, (i) unless the Exchange Offer would not be permitted by applicable law or SEC policy, file with the SEC within 90 days after the Prior Closing Date an amendment to the Exchange Offer Registration Statement on an appropriate form under the Securities Act covering the offer by the Company to the Holders to exchange all of the Transfer Restricted Notes (other than Private Exchange Notes (as defined below)) which aggregate amount of Transfer Restricted Notes shall expressly include the $25,000,000 principal amount of the Notes sold to the Initial Purchaser pursuant to the Purchase Agreement for a like principal amount of Exchange Notes, (ii) unless the Exchange Offer would not be permitted by applicable law or SEC policy, use its best efforts to have such Exchange Offer Registration Statement declared effective under the Securities Act by the SEC not later than the date which is 120 days after the Prior Closing Date (the "Target Effectiveness Date"), (iii) have such Registration Statement remain effective until the closing of the Exchange Offer and (iv) unless the Exchange Offer would not be permitted by applicable law or SEC policy, commence the Exchange Offer and use its best efforts to issue, on or prior to the date which is 30 days after the date on which the Exchange Offer Registration 6 Statement was declared effective by the SEC (the "Target Consummation Date"), Exchange Notes in exchange for all Notes tendered prior thereto in the Exchange Offer. Upon the effectiveness of the Exchange Offer Registration Statement, the Company shall promptly commence the Exchange Offer, it being the objective of such Exchange Offer to enable each Holder eligible and electing to exchange Transfer Restricted Notes for Exchange Notes (assuming that such Holder is not an affiliate of the Company within the meaning of Rule 405 under the Securities Act and is not a broker-dealer tendering Transfer Restricted Notes acquired directly from the Company for its own account, acquires the Exchange Notes in the ordinary course of such Holder's business and has no arrangements or understandings with any Person to participate in the Exchange Offer for the purpose of distributing (within the meaning of the Securities Act) the Exchange Notes) and to transfer such Exchange Notes from and after their receipt without any limitations or restrictions under the Securities Act and under state securities or blue sky laws. In connection with the Exchange Offer, the Company shall: (i) mail to each Holder a copy of the Prospectus forming part of the Exchange Offer Registration Statement, together with an appropriate letter of transmittal and related documents; (ii) keep the Exchange Offer open for acceptance for a period of not less than 20 Business Days after the date notice thereof is mailed to the Holders (or longer if required by applicable law) (such period referred to herein as the "Exchange Period"); (iii) utilize the services of the Depositary for the Exchange Offer; (iv) permit Holders to withdraw tendered Notes at any time prior to the close of business, New York time, on the last Business Day of the Exchange Period, by sending to the institution specified in the notice, a telegram, telex, facsimile transmission or letter setting forth the name of such Holder, the principal amount of Notes delivered for exchange, and a statement that such Holder is withdrawing his election to have such Notes exchanged; and (v) otherwise comply in all material respects with all applicable laws relating to the Exchange Offer. If, prior to consummation of the Exchange Offer the Initial Purchaser holds or the Prior Initial Purchasers hold any Notes acquired by them and having the status of an unsold allotment in the respective initial distributions, the Company upon the request of the Initial Purchaser or any Prior Initial Purchaser shall, simultaneously with the delivery of the Exchange Notes in the Exchange Offer, issue and deliver to such Initial Purchaser or any such Prior Initial Purchaser in exchange (the "Private Exchange") for the Notes held by such Initial Purchaser or such Prior Initial Purchaser, a like principal amount of debt securities of the Company that are identical (except that such securities shall bear appropriate transfer restrictions and shall provide for the payment of Additional Interest) to the Exchange Notes (the "Private Exchange Notes"). 7 The Exchange Notes and the Private Exchange Notes shall be issued under (i) the Indenture or (ii) an indenture identical to all material respects to the Indenture and which, in either case, has been qualified under the TIA or is exempt from such qualification and shall provide that the Exchange Notes shall not be subject to the transfer restrictions set forth in the Indenture. The Indenture or such indenture shall provide that the Exchange Notes, the Private Exchange Notes and the Notes shall vote and consent together on all matters as one class and that none of the Exchange Notes, the Private Exchange Notes or the Notes will have the right to vote or consent as a separate class on any matter. The Private Exchange Notes shall be of the same series as and the Company shall use all commercially reasonable efforts to have the Private Exchange Notes bear the same CUSIP number as the Exchange Notes. The Company shall not have any liability under this Agreement solely as a result of such Private Exchange Notes not bearing the same CUSIP number as the Exchange Notes. The Exchange Offer and the Private Exchange shall not be subject to any conditions, other than that (i) the Exchange Offer or Private Exchange, as the case may be, does not violate applicable law or any applicable interpretation of the staff of the SEC (ii) no action or proceeding shall have been instituted or threatened in any court or by any governmental agency which might materially impair the ability of the Company to proceed with the Exchange Offer or the Private Exchange, and no material adverse development shall have occurred in any existing action or proceeding with respect to the Company and (iii) all governmental approvals shall have been obtained, which approvals the Company deems necessary for the consummation of the Exchange Offer or Private Exchange. As soon as practicable after the close of the Exchange Offer and/or the Private Exchange, as the case may be, the Company shall: (i) accept for exchange all Transfer Restricted Notes or portions thereof properly tendered and not validly withdrawn pursuant to the Exchange Offer in accordance with the terms of the Exchange Offer Registration Statement and the letter of transmittal which is an exhibit thereto; (ii) accept for exchange all Notes properly tendered pursuant to the Private Exchange; and (iii) deliver, or cause to be delivered, to the Trustee for cancellation all Transfer Restricted Notes or portions thereof so accepted for exchange by the Company, and issue, and cause the Trustee under the Indenture to promptly authenticate and deliver to each Holder, a new Exchange Note or Private Exchange Note, as the case may be, equal in principal amount to the principal amount of the Transfer Restricted Notes surrendered by such Holder and accepted for exchange. To the extent not prohibited by any law or applicable interpretation of the staff of the SEC, the Company shall use its best efforts to complete the Exchange Offer as provided above, and shall comply with the applicable requirements of the Securities Act, the Exchange Act and other applicable laws in connection with the Exchange Offer. The Exchange Offer shall not be subject to any conditions, other than those set forth in the immediately preceding paragraph. Each Holder of Transfer Restricted Notes who wishes to exchange such Transfer Restricted 8 Notes for Exchange Notes in the Exchange Offer will be required to make certain customary representations in connection therewith, including representations that such Holder is not an affiliate of the Company within the meaning of Rule 405 under the Securities Act, that any Exchange Notes to be received by it will be acquired in the ordinary course of business and that at the time of the commencement of the Exchange Offer it has no arrangement with any Person to participate in the distribution (within the meaning of the Securities Act) of the Exchange Notes. The Company shall inform the Initial Purchaser and the Prior Initial Purchasers of the names and addresses of the Holders to whom the Exchange Offer is made, and the Initial Purchaser and the Initial Purchasers shall have the right to contact such Holders and otherwise facilitate the tender of Transfer Restricted Notes in the Exchange Offer. Upon consummation of the Exchange Offer in accordance with this Section 2(a), the provisions of this Agreement shall continue to apply, mutatis mutandis, solely with respect to Transfer Restricted Notes that are Private Exchange Notes and Exchange Notes held by Participating Broker-Dealers, and the Company shall have no further obligation to register Transfer Restricted Notes (other than Private Exchange Notes) pursuant to Section 2(b) hereof. (b) Shelf Registration. If (i) the Company is not permitted consummate the Exchange Offer because the Exchange Offer is not permitted by applicable law or SEC policy, (ii) the Exchange Offer is not for any other reason consummated by the Target Consummation Date, (iii) any holder of Notes notifies the Company within a specified time period that (a) due to a change in law or policy, in the opinion of counsel, it is not entitled to participate in the Exchange Offer, (b) due to a change in law or policy, in the opinion of counsel, it may not resell the Exchange Notes acquired by it in the Exchange Offer to the public without delivering a prospectus and (x) the prospectus contained in the Exchange Offer Registration Statement is not appropriate or available for such resales by such holder and (y) such prospectus is not promptly amended or modified in order to be suitable for use in connection with such resales for such holder and all similarly situated holders or (c) it is a broker-dealer and owns Notes acquired directly from the Company or an affiliate of the Company, (iv) the holders of a majority of the Notes may not resell the Exchange Notes acquired by them in the Exchange Offer to the public without restriction under the Securities Act and without restriction under applicable blue sky or state securities laws or (v) the Exchange Offer shall not have been consummated within 150 days after the Issue Date (the date of any of (i)-(v), the "Shelf Registration Event Date"), then the Company shall, at its cost, use its best efforts to cause to be filed a Shelf Registration Statement prior to the later of (A) 30 days after the Shelf Registration Event Date or (B) 120 days after the Issue Date and use its best efforts to cause the Shelf Registration Statement to be declared effective by the SEC on or prior to 60 days after such obligation arises. Each Holder as to which any Shelf Registration is being effected agrees to furnish to the Company all information with respect to such Holder necessary to make any information previously furnished to the Company by such Holder not materially misleading. The Company agrees to use its best efforts to keep the Shelf Registration Statement continuously effective for a period of two years from the Issue Date (subject to extension pursuant to the last paragraph of Section 3 hereof) (or such shorter period that will terminate when all of the Transfer Restricted Notes covered by such Shelf Registration Statement have 9 been sold pursuant thereto) or cease to be outstanding (the "Effectiveness Period"); provided, however, that the Effectiveness Period in respect of the Shelf Registration Statement shall be extended to the extent required to permit dealers to comply with the applicable prospectus delivery requirements of Rule 174 under the Securities Act and as otherwise provided herein. The Company shall not permit any securities other than Transfer Restricted Notes to be included in the Shelf Registration. The Company further agrees, if necessary, to supplement or amend the Shelf Registration Statement, if required by the rules, regulations or instructions applicable to the registration form used by the Company for such Shelf Registration Statement or by the Securities Act or by any other rules and regulations thereunder for shelf registrations, and the Company agrees to furnish to the Holders of Transfer Restricted Notes copies of any such supplement or amendment promptly after its being used or filed with the SEC. (c) Expenses. The Company shall pay all Registration Expenses in connection with the registration pursuant to Section 2(a) or 2(b) hereof and the reasonable fees and expenses of one counsel, if any, designated in writing by the Majority Holders to act as counsel for the Holders of the Transfer Restricted Notes in connection with a Shelf Registration Statement. Except as provided in the preceding sentence, each Holder shall pay all expenses of its counsel, underwriting discounts and commissions and transfer taxes, if any, relating to the sale or disposition of such Holder's Transfer Restricted Notes pursuant to the Shelf Registration Statement. (d) Effective Registration Statement. An Exchange Offer Registration Statement pursuant to Section 2(a) hereof or a Shelf Registration Statement pursuant to Section 2(b) hereof will not be deemed to have become effective unless it has been declared effective by the SEC; provided, however, that if, after it has been declared effective, the offering of Transfer Restricted Notes pursuant to a Shelf Registration Statement is interfered with by any stop order, injunction or other order or requirement of the SEC or any other governmental agency or court, such Registration Statement will be deemed not to have been effective during the period of such interference, until the offering of Transfer Restricted Notes may legally resume. The Company will be deemed not to have used its best efforts to cause the Exchange Offer Registration Statement or the Shelf Registration Statement, as the case may be, to become, or to remain, effective during the requisite period if it voluntarily takes any action that would result in any such Registration Statement not being declared effective or in the Holders of Transfer Restricted Notes covered thereby not being able to exchange or offer and sell such Transfer Restricted Notes during that period, unless such action is required by applicable law and except as otherwise provided in the second paragraph of Section 2(e) below. (e) Additional Interest. In the event that (i) the Shelf Registration Statement is not filed with the SEC on or prior to the date specified herein for such filing, (ii) the applicable Registration Statement is not declared effective on or prior to the date specified herein for such effectiveness after such obligation arises (the "Effectiveness Target Date"), (iii) if the Exchange Offer is required to be consummated hereunder, the Company fails to consummate the Exchange Offer within 30 days of the date on which the Exchange Offer Registration Statement is declared effective or (iv) the applicable Registration Statement is filed and declared effective during the period effectiveness is required by Section 2(e) and 3(a) but shall thereafter cease to be effective 10 or usable without being succeeded immediately by an additional Registration Statement covering the Transfer Restricted Notes which has been filed and declared effective (each such event referred to in clauses (i) through (iv), a "Registration Default"), then the interest rate on the Transfer Restricted Notes as to which such Registration Default relates will increase ("Additional Interest"), with respect to the first 90-day period (or portion thereof) while a Registration Default is continuing immediately following the occurrence of such Registration Default in an amount equal to 0.50% per annum of the principal amount of the Notes. The rate of Additional Interest will increase by an additional 0.50% per annum of the principal amount of the Notes for each subsequent 90-day period (or portion thereof) while a Registration Default is continuing until all Registration Defaults have been cured, up to a maximum amount of 1.50% of the principal amount of the Notes. Additional Interest shall be computed based on the actual number of days elapsed during which any such Registration Defaults exist. Following the cure of a Registration Default, the accrual of Additional Interest with respect to such Registration Default will cease. If the Company issues a notice that the Shelf Registration Statement is unusable due to the pendency of an announcement of a material corporate transaction, or such notice is required under applicable securities laws to be issued by the Company, and the aggregate number of days in any consecutive twelve-month period for which the Shelf Registration Statement shall not be usable due to all such notices issued or required to be issued exceeds 30 days in the aggregate, then the interest rate borne by the Notes will be increased by 0.50% per annum of the principal amount of the Notes for the first 90-day period (or portion thereof) beginning on the 31st such date that such Shelf Registration Statement ceases to be usable, which rate shall be increased by an additional 0.50% per annum of the principal amount of the Notes at the beginning of each subsequent 90-day period, up to a maximum amount of 1.50% of the principal amount of the Notes. Upon the Shelf Registration Statement once again becoming usable, the interest rate borne by the Notes will be reduced to the original interest rate if the Company is otherwise in compliance with this Agreement at such time. Additional Interest shall be computed based on the actual number of days elapsed in each 90-day period in which the Shelf Registration Statement is unusable. The Company shall notify the Trustee within three Business Days after each and every date on which an event occurs in respect of which Additional Interest is required to be paid (an "Event Date"). Additional Interest shall be paid by depositing with the Trustee, in trust, for the benefit of the Holders of Transfer Restricted Notes, on or before the applicable semiannual interest payment date, immediately available funds in sums sufficient to pay the Additional Interest then due. The Additional Interest due shall be payable on each interest payment date to the record Holder of Notes entitled to receive the interest payment to be paid on such date as set forth in the Indenture. Each obligation to pay Additional Interest shall be deemed to accrue from and including the day following the applicable Event Date. 3. Registration Procedures. In connection with the obligations of the Company with respect to the Registration Statements pursuant to Sections 2(a) and 2(b) hereof, the Company shall: 11 (a) prepare and file with the SEC an amendment to the Exchange Offer Registration Statement as prescribed by Section 2(a) hereof and prepare and file with the SEC a Shelf Registration Statement as prescribed by Section 2(b) hereof, within the relevant time period specified in Section 2 hereof on the appropriate form under the Securities Act, which form (i) shall be selected by the Company, (ii) shall, in the case of a Shelf Registration, be available for the sale of the Transfer Restricted Notes by the selling Holders thereof and (iii) shall comply as to form in all material respects with the requirements of the applicable form and include all financial statements required by the SEC to be filed therewith; and use their best efforts to cause such Registration Statement to become effective and remain effective in accordance with Section 2 hereof. The Company shall not file any Registration Statement or Prospectus or any amendments or supplements thereto in respect of which the Holders must provide information for inclusion therein without the Holders being afforded an opportunity to review such documentation a reasonable time prior to the filing of such document if the Majority Holders or such Participating Broker-Dealer, as the case may be, their counsel or the managing underwriters, if any, shall reasonably object; (b) prepare and file with the SEC such amendments and post-effective amendments to each Registration Statement as may be necessary to keep such Registration Statement effective for the Effectiveness Period or the Applicable Period, as the case may be; and cause each Prospectus to be supplemented by any required prospectus supplement and as so supplemented to be filed pursuant to Rule 424 (or any similar provision then in force) under the Securities Act, and comply with the provisions of the Securities Act, the Exchange Act and the rules and regulations promulgated thereunder applicable to it with respect to the disposition of all securities covered by each Registration Statement during the Effectiveness Period or the Applicable Period, as the case may be, in accordance with the intended method or methods of distribution by the selling Holders thereof described in this Agreement (including sales by any Participating Broker-Dealer); (c) in the case of a Shelf Registration, (i) notify each Holder of Transfer Restricted Notes, at least three Business Days prior to filing, that a Shelf Registration Statement with respect to the Transfer Restricted Notes is being filed and advising such Holder that the distribution of Transfer Restricted Notes will be made in accordance with the method selected by the Majority Holders; and (ii) furnish to each Holder of Transfer Restricted Notes, without charge, as many copies of each Prospectus, and any amendment or supplement thereto and such other documents as such Holder may reasonably request, in order to facilitate the disposition of the Transfer Restricted Notes; and (iii) subject to the last paragraph of Section 3 hereof, hereby consent to the use of the Prospectus or any amendment or supplement thereto by each of the selling Holders of Transfer Restricted Notes in connection with the offering and sale of the Transfer Restricted Notes covered by such Prospectus or any amendment or supplement thereto subject to the limitations on the use thereof provided in Sections 2(b) and 2(c); 12 (d) in the case of a Shelf Registration, use its best efforts to register or qualify, as may be required by applicable law, the Transfer Restricted Notes under all applicable state securities or "blue sky" laws of such jurisdictions by the time the applicable Registration Statement is declared effective by the SEC as any Holder of Transfer Restricted Notes covered by a Registration Statement shall reasonably request in advance of such date of effectiveness, and do any and all other acts and things which may be reasonably necessary or advisable to enable such Holder to consummate the disposition in each such jurisdiction of such Transfer Restricted Notes owned by such Holder; provided, however, that the Company shall not be required to (i) qualify as a foreign corporation or as a broker or dealer in securities in any jurisdiction where it would not otherwise be required to qualify but for this Section 3(d), (ii) file any general consent to service of process or (iii) subject itself to taxation in any such jurisdiction if it is not so subject; (e) in the case of (1) a Shelf Registration or (2) Participating Broker-Dealers who have notified the Company that they will be utilizing the Prospectus contained in the Exchange Offer Registration Statement as provided in Section 3(s) hereof, notify each Holder of Transfer Restricted Notes, or such Participating Broker-Dealers, as the case may be, their counsel, if any, promptly and confirm such notice in writing (i) when a Registration Statement has become effective and when any post-effective amendments and supplements thereto become effective, (ii) of any request by the SEC or any state securities authority for amendments and supplements to a Registration Statement or Prospectus or for additional information after the Registration Statement has become effective, (iii) of the issuance by the SEC or any state securities authority of any stop order suspending the effectiveness of a Registration Statement or the initiation of any proceedings for that purpose, (iv) if the Company receives any notification with respect to the suspension of the qualification of the Transfer Restricted Notes or the Exchange Notes to be sold by any Participating Broker-Dealer for offer or sale in any jurisdiction or the initiation of any proceeding for such purpose, (v) of the happening of any event or the failure of any event to occur or the discovery of any facts or otherwise, during the period a Shelf Registration Statement is effective which makes any statement made in such Registration Statement or the related Prospectus untrue in any material respect or which causes such Registration Statement or Prospectus to omit to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading and (vi) the Company's reasonable determination that a post-effective amendment to the Registration Statement would be appropriate; (f) make every reasonable effort to obtain the withdrawal of any order suspending the effectiveness of a Registration Statement as soon as practicable; (g) in the case of a Shelf Registration, furnish to each Holder of Transfer Restricted Notes, without charge, at least one conformed copy of each Registration Statement relating to such Shelf Registration and any post-effective amendment thereto (without documents incorporated therein by reference or exhibits thereto, unless requested); 13 (h) in the case of a Shelf Registration, cooperate with the selling Holders of Transfer Restricted Notes to facilitate the timely preparation and delivery of certificates not bearing any restrictive legends representing Notes covered by such Shelf Registration to be sold and relating to the subsequent transfer of such Notes; and cause such Transfer Restricted Notes to be in such denominations (consistent with the provisions of the Indenture) and registered in such names as the selling Holders may reasonably request at least two Business Days prior to the closing of any sale of Transfer Restricted Notes; (i) in the case of a Shelf Registration or an Exchange Offer Registration, upon the occurrence of any circumstance contemplated by Section 3(e)(ii), 3(e)(iii), 3(e)(iv), 3(e)(v) or 3(e)(vi) hereof, use their best efforts to prepare a supplement or post-effective amendment to a Registration Statement or the related Prospectus or any document incorporated therein by reference or file any other required document so that, as thereafter delivered to the purchasers of the Transfer Restricted Notes, such Prospectus will not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; and to notify each Holder to suspend use of the Prospectus as promptly as practicable after the occurrence of such an event, and each Holder hereby agrees to suspend use of the Prospectus until the Company has amended or supplemented the Prospectus to correct such misstatement or omission; (j) obtain a CUSIP number for all Exchange Notes or Transfer Restricted Notes, as the case may be, not later than the effective date of a Registration Statement, and provide the Trustee with certificates for the Exchange Notes or the Transfer Restricted Notes, as the case may be, in a form eligible for deposit with the Depositary; (k) cause the Indenture to be qualified under the Trust Indenture Act of 1939, as amended, (the "TIA") in connection with the registration of the Exchange Notes or Transfer Restricted Notes, as the case may be, cooperate with the Trustee and the Holders to effect such changes to the Indenture as may be required for the Indenture to be so qualified in accordance with the terms of the TIA and execute, and use its best efforts to cause the Trustee to execute, all documents as may be required to effect such changes, and all other forms and documents required to be filed with the SEC to enable the Indenture to be so qualified in a timely manner; (l) in the case of a Shelf Registration, enter into such agreements (including underwriting agreements) and take all such other appropriate actions as are reasonably requested in order to expedite or facilitate the registration or the disposition of such Transfer Restricted Notes, and in such connection, (i) make such representations and warranties to Holders of such Transfer Restricted Notes with respect to the business of the Company and its subsidiaries as then conducted and the Registration Statement, Prospectus and documents, if any, incorporated or deemed to be incorporated by reference therein, in each case, as are customarily made by issuers to underwriters in underwritten offerings, and confirm the same if and when requested; (ii) obtain opinions of counsel to the Company and updates thereof in form and substance reasonably 14 satisfactory to the Holders of a majority in principal amount of the Transfer Restricted Notes being sold, addressed to each selling Holder covering the matters customarily covered in opinions requested in underwritten offerings and such other matters as may be reasonably requested by such Holders; (iii) obtain "cold comfort" letters and updates thereof from the independent certified public accountants of the Company (and, if necessary, any other independent certified public accountants of any subsidiary of the Company or of any business acquired by the Company for which financial statements and financial data are, or are required to be, included in the Registration Statement, addressed to the selling Holders of Transfer Restricted Notes, such letters to be in customary form and covering matters of the type customarily covered in "cold comfort" letters in connection with underwritten offerings and such other matters as reasonably requested by such selling Holders; and (iv) if an underwriting agreement is entered into, the same shall contain indemnification provisions and procedures no less favorable than those set forth in Section 4 hereof (or such other provisions and procedures acceptable to the Company and the Holders of a majority in aggregate principal amount of Transfer Restricted Notes covered by such Registration with respect to all parties to be indemnified pursuant to said Section (including, without limitation, such selling Holders). The above shall be done at each closing in respect of the sale of Transfer Restricted Notes, or as and to the extent required thereunder; (m) if (1) a Shelf Registration is filed pursuant to Section 2(b) or (2) a Prospectus contained in an Exchange Offer Registration Statement filed pursuant to Section 2(a) is required to be delivered under the Securities Act by any Participating Broker-Dealer who seeks to sell Exchange Notes during the Applicable Period, make available for inspection by each such person who would be an "underwriter" as a result of either (i) the sale by such person of Notes covered by such Shelf Registration Statement or (ii) the sale during the Applicable Period by a Participating Broker-Dealer of Exchange Notes (provided that a Participating Broker- Dealer shall not be deemed to be an underwriter solely as a result of it being required to deliver a prospectus in connection with any resale of Exchange Notes) and any attorney, accountant or other agent retained by any such person (collectively, the "Inspectors"), at the offices where normally kept, during reasonable business hours, all financial and other records, pertinent corporate documents and properties of the Company and its subsidiaries (collectively, the "Records") as shall be reasonably necessary to enable them to exercise any applicable due diligence responsibilities, and cause the officers, directors and employees of the Company and its subsidiaries to supply all information in each case reasonably requested by any such Inspector in connection with such Registration Statement. Records which the Company determines, in good faith, to be confidential and any Records which it notifies the Inspectors are confidential shall not be disclosed by the Inspectors unless (i) the disclosure of such Records is necessary to avoid or correct a material misstatement or omission in such Registration Statement, (ii) the release of such Records is ordered pursuant to a subpoena or other order from a court of competent jurisdiction or (iii) the information in such Records has been made generally available to the public. Each selling Holder of such Transfer Restricted Notes and each such Participating Broker-Dealer will be required to agree that information obtained by it as a result of such 15 inspections shall be deemed confidential and shall not be used by it as the basis for any market transactions in the securities of the Company unless and until such is made generally available to the public. Each selling Holder of such Transfer Restricted Notes and each such Participating Broker-Dealer will be required to further agree that it will, upon learning that disclosure of such Records is sought in a court of competent jurisdiction, give notice to the Company and allow the Company at its expense to undertake appropriate action to prevent disclosure of the Records deemed confidential; (n) comply with all applicable rules and regulations of the SEC and make generally available to its securityholders earnings statements satisfying the provisions of Section 11(a) of the Securities Act and Rule 158 thereunder (or any similar rule promulgated under the Securities Act) no later than 60 days after the end of any 12-month period (or 135 days after the end of any 12-month period if such period is a fiscal year) (i) commencing at the end of any fiscal quarter in which Transfer Restricted Notes are sold to underwriters in a firm commitment or best efforts underwritten offering and (ii) if not sold to underwriters in such an offering, commencing on the first day of the first fiscal quarter of the Company after the effective date of a Registration Statement, which statements shall cover said 12-month periods; (o) upon consummation of an Exchange Offer or a Private Exchange, obtain an opinion of counsel to the Company addressed to the Trustee for the benefit of all Holders of Transfer Restricted Notes participating in the Exchange Offer or the Private Exchange, as the case may be, and which includes an opinion that (i) the Company has duly authorized, executed and delivered the Exchange Notes and Private Exchange Notes, and (ii) each of the Exchange Notes or the Private Exchange Notes, as the case may be, constitute a legal, valid and binding obligation of the Company, enforceable against the Company in accordance with its respective terms (in each case, with customary exceptions); (p) if an Exchange Offer or a Private Exchange is to be consummated, upon proper delivery of the Transfer Restricted Notes by Holders to the Company (or to such other Person as directed by the Company) in exchange for the Exchange Notes or the Private Exchange Notes, as the case may be, the Company shall mark, or cause to be marked, on such Transfer Restricted Notes and on the books of the Trustee, the Transfer Agent, the Registrar and the Depositary delivered by such Holders that such Transfer Restricted Notes are being canceled in exchange for the Exchange Notes or the Private Exchange Notes, as the case may be; but in no event shall such Transfer Restricted Notes be marked as paid or otherwise satisfied solely as a result of being exchanged for Exchange Notes or Private Exchange Notes in the Exchange Offer or the Private Exchange, as the case may be; (q) cooperate with each seller of Transfer Restricted Notes covered by any Registration Statement participating in the disposition of such Transfer Restricted Notes and one counsel acting on behalf of all such sellers in connection with the filings, if any, required to be made with the NASD; 16 (r) use its best efforts to take all other steps necessary to effect the registration of the Transfer Restricted Notes covered by a Registration Statement contemplated hereby; and (s) (A) in the case of the Exchange Offer Registration Statement (i) include in the Exchange Offer Registration Statement a section entitled "Plan of Distribution," which section shall be reasonably acceptable to Salomon, as representative of the Initial Purchaser and the Prior Initial Purchasers, and which shall contain a summary statement of the positions taken or policies made by the staff of the SEC with respect to the potential "underwriter" status of any broker-dealer (a "Participating Broker-Dealer") that holds Transfer Restricted Notes acquired for its own account as a result of market-making activities or other trading activities and that will be the beneficial owner (as defined in Rule 13d-3 under the Exchange Act) of Exchange Notes to be received by such broker-dealer in the Exchange Offer, whether such positions or policies have been publicly disseminated by the staff of the SEC or such positions or policies, in the reasonable judgment of Salomon, as representative of the Initial Purchaser and the Prior Initial Purchasers or such other representative, represent the prevailing views of the staff of the SEC, including a statement that any such broker-dealer who receives Exchange Notes for Transfer Restricted Notes pursuant to the Exchange Offer may be deemed a statutory underwriter and must deliver a prospectus meeting the requirements of the Securities Act in connection with any resale of such Exchange Notes, (ii) furnish to each Participating Broker-Dealer who has delivered to the Company the notice referred to in Section 3(e), without charge, as many copies of each Prospectus included in the Exchange Offer Registration Statement, and any amendment or supplement thereto, as such Participating Broker-Dealer may reasonably request; (iii) hereby consent to the use of the Prospectus forming part of the Exchange Offer Registration Statement or any amendment or supplement thereto, by any Person subject to the prospectus delivery requirements of the SEC, including all Participating Broker-Dealers, in connection with the sale or transfer of the Exchange Notes covered by the Prospectus or any amendment or supplement thereto, (iv) use their best efforts to keep the Exchange Offer Registration Statement effective and to amend and supplement the Prospectus contained therein in order to permit such Prospectus to be lawfully delivered by all Persons subject to the prospectus delivery requirements of the Securities Act for such period of time as such Persons must comply with such requirements in order to resell the Exchange Notes; provided, however, that such period shall not be required to exceed 90 days (or such longer period if extended pursuant to the last sentence of Section 3 hereof) (the "Applicable Period"), and (iv) include in the transmittal letter or similar documentation to be executed by an exchange offeree in order to participate in the Exchange Offer (x) the following provision: "If the exchange offeree is a broker-dealer holding Transfer Restricted Notes acquired for its own account as a result of market- making activities or other trading activities, it will deliver a prospectus meeting the requirements of the Securities Act in connection with any resale of Exchange Notes received in respect of such Transfer Restricted Notes pursuant to the Exchange Offer"; 17 and (y) a statement to the effect that by a broker-dealer making the acknowledgment described in clause (x) and by delivering a Prospectus in connection with the exchange of Transfer Restricted Notes, such broker- dealer will not be deemed to admit that it is an underwriter within the meaning of the Securities Act; and (B) in the case of any Exchange Offer Registration Statement, the Company agrees to deliver, upon request, to the Trustee or to Participating Broker-Dealers upon consummation of the Exchange Offer (i) an opinion of counsel substantially in the form attached hereto as Exhibit A, and (ii) an officers' certificate containing certifications substantially similar to those set forth in Section 6(e) of the Purchase Agreement. The Company may require each seller of Transfer Restricted Notes as to which any registration is being effected to furnish to the Company such information regarding such seller and the proposed distribution of such Transfer Restricted Notes, as the Company may from time to time reasonably request in writing. The Company may exclude from such registration the Transfer Restricted Notes of any seller who fails to furnish such information within a reasonable time (not to exceed 10 Business Days) after receiving such request and shall be under no obligation to compensate any such seller for any lost income, interest or other opportunity forgone, or any liability incurred, as a result of the Company's decision to exclude such seller. In the case of (1) a Shelf Registration Statement or (2) Participating Broker-Dealers who have notified the Company that they will be utilizing the Prospectus contained in the Exchange Offer Registration Statement as provided in Section 3(t) hereof, that are seeking to sell Exchange Notes and are required to deliver Prospectuses, each Holder agrees that, upon receipt of any notice from the Company of the happening of any event of the kind described in Section 3(e)(ii), 3(e)(iii), 3(e)(v), 3(e)(vi) or 3(e)(vii) hereof, such Holder will forthwith discontinue disposition of Transfer Restricted Notes pursuant to a Registration Statement until such Holder's receipt of the copies of the supplemented or amended Prospectus contemplated by Section 3(i) hereof or until it is advised in writing (the "Advice") by the Company that the use of the applicable Prospectus may be resumed, and, if so directed by the Company, such Holder will deliver to the Company (at the Company's expense) all copies in such Holder's possession, other than permanent file copies then in such Holder's possession, of the Prospectus covering such Transfer Restricted Notes or Exchange Notes, as the case may be, current at the time of receipt of such notice. If the Company shall give any such notice to suspend the disposition of Transfer Restricted Notes or Exchange Notes, as the case may be, pursuant to a Registration Statement, the Company shall use its best efforts to file and have declared effective (if an amendment) as soon as practicable an amendment or supplement to the Registration Statement and, in the case of an amendment, have such amendment declared effective as soon as practicable and shall extend the period during which such Registration Statement shall be maintained effective pursuant to this Agreement by the number of days in the period from and including the date of the giving of such notice to and including the date when the Company shall have made available to the Holders (x) copies of the supplemented or amended Prospectus necessary to resume such dispositions or (y) the Advice. 18 4. Indemnification and Contribution. (a) The Company shall indemnify and hold harmless the Initial Purchaser, each Holder, each Participating Broker-Dealer, each underwriter who participates in an offering of Transfer Restricted Notes, their respective affiliates, each Person, if any, who controls any of such parties within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act, as follows: (i) against any and all loss, liability, claim, damage and expense whatsoever, joint or several, as incurred, arising out of any untrue statement or alleged untrue statement of a material fact contained in any Registration Statement (or any amendment or supplement thereto), covering Transfer Restricted Notes or Exchange Notes, including all documents incorporated therein by reference, or the omission or alleged omission therefrom of a material fact required to be stated therein or necessary to make the statements therein not misleading or arising out of any untrue statement or alleged untrue statement of a material fact contained in any Prospectus (or any amendment or supplement thereto) or the omission or alleged omission therefrom of a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; (ii) against any and all loss, liability, claim, damage and expense whatsoever, joint or several, as incurred, to the extent of the aggregate amount paid in settlement of any litigation, or any investigation or proceeding by any court or governmental agency or body, commenced or threatened, or of any claim whatsoever based upon any such untrue statement or omission, or any such alleged untrue statement or omission; provided that (subject to Sections 4(c) and 4(d) below) any such settlement is effected with the prior written consent of the Company; and (iii) against any and all expenses whatsoever, as incurred (including reasonable fees and disbursements of one counsel (in addition to any local counsel) chosen by Salomon, such Holder, such Participating Broker-Dealer or any underwriter (except to the extent otherwise expressly provided in Section 4(c) hereof)), reasonably incurred in investigating, preparing or defending against any litigation, or any investigation or proceeding by any court or governmental agency or body, commenced or threatened, or any claim whatsoever based upon any such untrue statement or omission, or any such alleged untrue statement or omission, to the extent that any such expense is not paid under subparagraph (i) or (ii) of this Section 4(a); provided, however, that this indemnity does not apply to any loss, liability, claim, damage or expense to the extent arising out of an untrue statement or omission or alleged untrue statement or omission (i) made in reliance upon and in conformity with written information furnished in writing to the Company by or on behalf of the Initial Purchaser, such Holder, such Participating Broker- Dealer or any underwriter with respect to the Initial Purchaser, Holder, Participating Broker-Dealer or underwriter, as the case may be, expressly for use in the Registration Statement (or any amendment or supplement thereto) or any Prospectus (or any amendment or supplement 19 thereto) or (ii) contained in any preliminary prospectus if the Initial Purchaser, such Holder, such Participating Broker-Dealer or such underwriter failed to send or deliver a copy of the Prospectus (in the form it was first provided to such parties for confirmation of sales) to the Person asserting such losses, claims, damages or liabilities on or prior to the delivery of written confirmation of any sale of securities covered thereby to such Person in any case where the Company shall have previously furnished copies thereof to the Initial Purchaser, such Holder, such Participating Broker-Dealer or such underwriter, as the case may be, in accordance with this Agreement, at or prior to the written confirmation of the sale of such Notes to such Person and the untrue statement contained in or the omission from the preliminary prospectus was corrected in the Final Prospectus (or any amendment or supplement thereto). Any amounts advanced by the Company to an indemnified party pursuant to this Section 4 as a result of such losses shall be returned to the Company if it shall be finally determined by a court of competent jurisdiction in a judgment not subject to appeal or final review that such indemnified party was not entitled to indemnification by the Company. (b) Each Holder agrees, severally and not jointly, to indemnify and hold harmless the Company, the Initial Purchaser, each underwriter who participates in an offering of Transfer Restricted Notes and the other selling Holders and each of their respective directors and each Person, if any, who controls any of the Company, the Initial Purchaser, any underwriter or any other selling Holder within the meaning of Section 15 of the Act or Section 20 of the Exchange Act, against any and all loss, liability, claim, damage and expense whatsoever described in the indemnity contained in Section 4(a) hereof, as incurred, but only with respect to untrue statements or omissions, or alleged untrue statements or omissions, made in the Registration Statement (or any amendment or supplement thereto) or any Prospectus (or any amendment or supplement thereto) in reliance upon and in conformity with written information furnished to the Company by or on behalf of such selling Holder with respect to such Holder expressly for use in the Registration Statement (or any supplement thereto), or any such Prospectus (or any amendment thereto); provided, however, that, in the case of the Shelf Registration Statement, no such Holder shall be liable for any claims hereunder in excess of the amount of net proceeds received by such Holder from the sale of Transfer Restricted Notes pursuant to the Shelf Registration Statement; provided, further, however, that for purposes of Section 4(a)(iii), such counsel shall (subject to Section 4(c) hereof) be chosen by the Company. (c) Each indemnified party shall give notice as promptly as reasonably practicable to each indemnifying party of any action commenced against it in respect of which indemnity may be sought hereunder, but failure to so notify an indemnifying party shall not relieve such indemnifying party from any liability hereunder to the extent it is not materially prejudiced as a result thereof and in any event shall not relieve it from any liability which it may have otherwise than on account of this indemnity agreement. In the case of parties indemnified pursuant to Section 4(a) above, one counsel to all the indemnified parties shall be selected by Salomon, and, in the case of parties indemnified pursuant to Section 4(b) above, counsel to all the indemnified parties shall be selected by the Company. An indemnifying party may participate at its own expense in the defense of any such action; provided, however, that counsel to the indemnifying party shall not (except with the consent of the indemnified party) also be counsel to the indemnified party. Notwithstanding the foregoing, if it so elects within a reasonable time after 20 receipt of such notice, an indemnifying party, jointly with any other indemnifying parties receiving such notice, may assume the defense of such action with counsel chosen by it and approved by the indemnified parties defendant in such action (which approval shall not be unreasonably withheld), unless such indemnified parties reasonably object to such assumption on the ground that there may be legal defenses available to them which are different from or in addition to those available to such indemnifying party. If an indemnifying party assumes the defense of such action, the indemnifying parties shall not be liable for any fees and expenses of counsel for the indemnified parties incurred thereafter in connection with such action. In no event shall the indemnifying parties be liable for fees and expenses of more than one counsel (in addition to any local counsel) separate from their own counsel for all indemnified parties in connection with any one action or separate but similar or related actions arising out of the same general allegations or circumstances. No indemnifying party shall, without the prior written consent of the indemnified parties, settle or compromise or consent to the entry of any judgment with respect to any litigation, or any investigation or proceeding by any governmental agency or body, commenced or threatened, or any claim whatsoever in respect of which indemnification or contribution could be sought under this Section 4 (whether or not the indemnified parties are actual or potential parties thereto), unless such settlement, compromise or consent (i) includes a full and unconditional release of each indemnified party from all liability arising out of such litigation, investigation, proceeding or claim and the offer and sale of any Notes and (ii) does not include a statement as to or an admission of fault, culpability or a failure to act by or on behalf of any indemnified party. (d) If at any time an indemnified party shall have requested an indemnifying party to reimburse the indemnified party for reasonable fees and expenses of counsel pursuant to Section 4(a)(iii) above, then such indemnifying party agrees that it shall be liable for any settlement of the nature contemplated by Section 4(a)(ii) effected without its written consent if (i) such settlement is entered into more than 45 days after receipt by such indemnifying party of the aforesaid request, (ii) such indemnifying party shall have received notice of the terms of such settlement at least 30 days prior to such settlement being entered into and (iii) such indemnifying party shall not have reimbursed such indemnified party in accordance with such request prior to the date of such settlement. (e) In order to provide for just and equitable contribution in circumstances under which any of the indemnity provisions set forth in this Section 4 is for any reason held to be unavailable to the indemnified parties although applicable in accordance with its terms, the Company, the Initial Purchaser and the Holders, as applicable, shall contribute to the aggregate losses, liabilities, claims, damages and expenses of the nature contemplated by such indemnity agreement incurred by the Company, the Initial Purchaser and the Holders; provided, however, that no Person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any Person that was not guilty of such fraudulent misrepresentation. As between the Company and the Initial Purchaser and the Holders, such parties shall contribute to such aggregate losses, liabilities, claims, damages and expenses of the nature contemplated by such indemnity agreement in such proportion as shall be appropriate to reflect the relative fault of the Company on the one hand and of the Holder of Transfer Restricted Notes, the Participating Broker-Dealer or the Initial Purchaser, as the case 21 may be, on the other hand in connection with the statements or omissions which resulted in such losses, liabilities, claims, damages or expenses, as well as any other relevant equitable considerations. The relative fault of the Company on the one hand and the Holder of Transfer Restricted Notes, the Participating Broker-Dealer or the Initial Purchaser, as the case may be, on the other hand shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company, or by the Holder of Transfer Restricted Notes, the Participating Broker-Dealer or the Initial Purchaser, as the case may be, and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company and the Holders of the Transfer Restricted Notes and the Initial Purchaser agree that it would not be just and equitable if contribution pursuant to this Section 4 were determined by pro rata allocation or by any other method of allocation which does not take account of the equitable considerations referred to above in this Section 4. For purposes of this Section 4, each affiliate of any Person, if any, who controls a Holder of Transfer Restricted Notes, the Initial Purchaser or a Participating Broker-Dealer within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act shall have the same rights to contribution as such other Person, and each director of the Company, each affiliate of the Company, each executive officer of the Company who signed the Registration Statement, and each Person, if any, who controls the Company within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act shall have the same rights to contribution as the Company. 5. Miscellaneous. (a) Rule 144 and Rule 144A. The Company shall provide to each Holder such reports as are required under Section 10.23 of the Indenture and, upon the request of any Holder of Transfer Restricted Notes (a) make publicly available such information as is necessary to permit sales pursuant to Rule 144 under the Securities Act, (b) deliver such information to a prospective purchaser as is necessary to permit sales pursuant to Rule 144A under the Securities Act and it will take such further action as any Holder of Transfer Restricted Notes may reasonably request, and (c) take such further action, if any, that is reasonable in the circumstances, in each case, to the extent required from time to time to enable such Holder to sell its Transfer Restricted Notes without registration under the Securities Act within the limitation of the exemptions provided by (i) Rule 144 under the Securities Act, as such rule may be amended from time to time, (ii) Rule 144A under the Securities Act, as such rule may be amended from time to time, or (iii) any similar rules or regulations hereafter adopted by the SEC. Upon the reasonable request of any Holder of Transfer Restricted Notes, the Company will deliver to such Holder a written statement as to whether they have complied with such requirements. (b) No Inconsistent Agreements. The rights granted to the Holders hereunder do not, and will not for the term of this Agreement in any way conflict with and are not, and will not 22 during the term of this Agreement be inconsistent with the rights granted to the holders of the Company's other issued and outstanding securities under any other agreements entered into by the Company. (c) Amendments and Waivers. The provisions of this Agreement, including provisions of this sentence, may not be amended, modified or supplemented, and waivers or consents to departures from the provisions hereof may not be given, otherwise than with the prior written consent of the Company and the Majority Holders; provided, however, that no amendment, modification, or supplement or waiver or consent to the departure with respect to the provisions of Section 4 hereof shall be effective as against any Holder of Transfer Restricted Notes or the Company unless consented to in writing by such Holder of Transfer Restricted Notes or the Company, as the case may be. (d) Notices. All notices and other communications provided for or permitted hereunder shall be made in writing by hand-delivery, registered first- class mail, telex, telecopier, or any courier guaranteeing overnight delivery (i) if to a Holder, at the most current address given by such Holder to the Company by means of a notice given in accordance with the provisions of this Section 5(d), which address initially is, with respect to the Initial Purchaser, the address set forth in the Purchase Agreement; and (ii) if to the Company, initially at the Company's address set forth in the Purchase Agreement and thereafter at such other address, notice of which is given in accordance with the provisions of this Section 5(d). All such notices and communications shall be deemed to have been duly given: at the time delivered by hand, if personally delivered; five Business Days after being deposited in the mail, postage prepaid, if mailed; when answered back, if telexed; when receipt is acknowledged, if telecopied; and on the next Business Day, if timely delivered to an air courier guaranteeing overnight delivery. Copies of all such notices, demands, or other communications shall be concurrently delivered by the Person giving the same to the Trustee, at the address specified in the Indenture. (e) Successors and Assigns. This Agreement shall inure to the benefit of and be binding upon the successors, assigns and transferees of the Initial Purchaser, including, without limitation and without the need for an express assignment, subsequent Holders; provided, however, that nothing herein shall be deemed to permit any assignment, transfer or other disposition of Transfer Restricted Notes in violation of the terms of the Purchase Agreement or the Indenture. If any transferee of any Holder shall acquire Transfer Restricted Notes, in any manner, whether by operation of law or otherwise, such Transfer Restricted Notes shall be held subject to all of the terms of this Agreement, and by taking and holding such Transfer Restricted Notes, such Person shall be conclusively deemed to have agreed to be bound by and to perform all of the terms and provisions of this Agreement and such Person shall be entitled to receive the benefits hereof. (f) Third Party Beneficiary. The Initial Purchaser and each Holder shall be a third party beneficiary of the agreements made hereunder between the Company, on the one hand, and the Initial Purchaser, on the other hand, and shall have the right to enforce such agreements 23 directly to the extent it deems such enforcement necessary or advisable to protect its rights or the rights of Holders hereunder. (g) Counterparts. This Agreement may be executed in any number of counterparts and by the parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. (h) Headings. The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning hereof. (i) GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT GIVING EFFECT TO ANY PROVISIONS RELATING TO CONFLICTS OF LAWS. Specified times of day refer to New York City time. (j) Severability. In the event that any one or more of the provisions contained herein, or the application thereof in any circumstance, is held invalid, illegal or unenforceable, the validity, legality and enforceability of any such provision in every other respect and of the remaining provisions contained herein shall not be affected or impaired thereby. (k) Notes Held by the Company or any of its Affiliates. Whenever the consent or approval of Holders of a specified percentage of Transfer Restricted Notes is required hereunder, Transfer Restricted Notes held by the Company or any of their affiliates (as such term is defined in Rule 405 under the Securities Act) shall not be counted in determining whether such consent or approval was given by the Holders of such required percentage. [Signature Page Follows] 24 IN WITNESS WHEREOF, the parties have executed this Registration Rights Agreement as of the date first written above. THE ACKERLEY GROUP, INC. By: /s/ Keith W. Ritzmann ---------------------- Name: Keith W. Ritzmann Title: Senior Vice President, Chief Information Officer, Assistant Secretary and Controller Confirmed and accepted as of the date first above written: FIRST UNION CAPITAL MARKETS CORP. By: /s/ John J. Braden ------------------------ Name: John J. Braden Title: Managing Director S-1 Exhibit A Form of Opinion of Counsel 1. Each of the Exchange Offer Registration Statement and the Prospectus (other than the financial statements, notes or schedules thereto and other financial and statistical information and supplemental schedules included or referred to therein or omitted therefrom and the Form T-1, as to which such counsel need express no opinion), complies as to form in all material respects with the applicable requirements of the Securities Act and the applicable rules and regulations promulgated under the Securities Act. 2. In the course of such counsel's review and discussion of the contents of the Exchange Offer Registration Statement and the Prospectus with certain officers and other representatives of the Company and representatives of the independent certified public accountants of the Company, but without independent check or verification or responsibility for the accuracy, completeness or fairness of the statements contained therein, on the basis of the foregoing (relying as to materiality to a large extent upon representations and opinions of officers and other representatives of the Company), no facts have come to such counsel's attention which cause such counsel to believe that the Exchange Offer Registration Statement (other than the financial statements, notes and schedules thereto and other financial and statistical information contained or referred to therein and the Form T-1, as to which such counsel need express no belief), at the time the Exchange Offer Registration Statement became effective and at the time of the consummation of the Exchange Offer, contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements contained therein not misleading, or that the Prospectus (other than the financial statements, notes and schedules thereto and other financial and statistical information contained or referred to therein, as to which such counsel need express no belief) contains any untrue statement of a material fact or omits to state a material fact necessary to make the statements contained therein, in the light of the circumstances under which they were made, not misleading. A-1 EX-24 3 POWER OF ATTORNEY EXHIBIT 24 POWER OF ATTORNEY The undersigned Director of The Ackerley Group, Inc. ("Company") appoints each of Barry A. Ackerley, Denis M. Curley, Christopher H. Ackerley, and Keith W. Ritzmann as his or her true and lawful attorney and agent, in name and on behalf of the undersigned, to do any and all acts and things and execute any and all instruments which the attorney and agent may deem necessary or advisable to cause the Corporation's Annual Report on Form 10-K for the year- ended December 31, 1998 to be filed with the Securities and Exchange Commission, and likewise to sign any and all amendments (the signing of any such instrument to be conclusive evidence that the attorney considers such instrument necessary or desirable), without the other and with full power of substitution and revocation, and hereby ratifying all that any such attorney or his substitute may do by virtue hereby. Pursuant to the requirements of the Securities and Exchange Act of 1934, this Power of Attorney has been signed by the following person in the capacity indicated on this 24th day of March, 1999. /s/ Barry A. Ackerley ------------------------------ Barry A. Ackerley POWER OF ATTORNEY The undersigned Director of The Ackerley Group, Inc. ("Company") appoints each of Barry A. Ackerley, Denis M. Curley, Christopher H. Ackerley, and Keith W. Ritzmann as his or her true and lawful attorney and agent, in name and on behalf of the undersigned, to do any and all acts and things and execute any and all instruments which the attorney and agent may deem necessary or advisable to cause the Corporation's Annual Report on Form 10-K for the year- ended December 31, 1998 to be filed with the Securities and Exchange Commission, and likewise to sign any and all amendments (the signing of any such instrument to be conclusive evidence that the attorney considers such instrument necessary or desirable), without the other and with full power of substitution and revocation, and hereby ratifying all that any such attorney or his substitute may do by virtue hereby. Pursuant to the requirements of the Securities and Exchange Act of 1934, this Power of Attorney has been signed by the following person in the capacity indicated on this 24th day of March, 1999. /s/ Gail A. Ackerley -------------------------- Gail A. Ackerley POWER OF ATTORNEY The undersigned Director of The Ackerley Group, Inc. ("Company") appoints each of Barry A. Ackerley, Denis M. Curley, Christopher H. Ackerley, and Keith W. Ritzmann as his or her true and lawful attorney and agent, in name and on behalf of the undersigned, to do any and all acts and things and execute any and all instruments which the attorney and agent may deem necessary or advisable to cause the Corporation's Annual Report on Form 10-K for the year- ended December 31, 1998 to be filed with the Securities and Exchange Commission, and likewise to sign any and all amendments (the signing of any such instrument to be conclusive evidence that the attorney considers such instrument necessary or desirable), without the other and with full power of substitution and revocation, and hereby ratifying all that any such attorney or his substitute may do by virtue hereby. Pursuant to the requirements of the Securities and Exchange Act of 1934, this Power of Attorney has been signed by the following person in the capacity indicated on this 24th day of March, 1999. /s/ Deborah L. Bevier ----------------------------- Deborah L. Bevier POWER OF ATTORNEY The undersigned Director of The Ackerley Group, Inc. ("Company") appoints each of Barry A. Ackerley, Denis M. Curley, Christopher H. Ackerley, and Keith W. Ritzmann as his or her true and lawful attorney and agent, in name and on behalf of the undersigned, to do any and all acts and things and execute any and all instruments which the attorney and agent may deem necessary or advisable to cause the Corporation's Annual Report on Form 10-K for the year- ended December 31, 1998 to be filed with the Securities and Exchange Commission, and likewise to sign any and all amendments (the signing of any such instrument to be conclusive evidence that the attorney considers such instrument necessary or desirable), without the other and with full power of substitution and revocation, and hereby ratifying all that any such attorney or his substitute may do by virtue hereby. Pursuant to the requirements of the Securities and Exchange Act of 1934, this Power of Attorney has been signed by the following person in the capacity indicated on this 24th day of March, 1999. /s/ M. Ian G. Gilchrist ---------------------------------- M. Ian G. Gilchrist POWER OF ATTORNEY The undersigned Director of The Ackerley Group, Inc. ("Company") appoints each of Barry A. Ackerley, Denis M. Curley, Christopher H. Ackerley, and Keith W. Ritzmann as his or her true and lawful attorney and agent, in name and on behalf of the undersigned, to do any and all acts and things and execute any and all instruments which the attorney and agent may deem necessary or advisable to cause the Corporation's Annual Report on Form 10-K for the year- ended December 31, 1998 to be filed with the Securities and Exchange Commission, and likewise to sign any and all amendments (the signing of any such instrument to be conclusive evidence that the attorney considers such instrument necessary or desirable), without the other and with full power of substitution and revocation, and hereby ratifying all that any such attorney or his substitute may do by virtue hereby. Pursuant to the requirements of the Securities and Exchange Act of 1934, this Power of Attorney has been signed by the following person in the capacity indicated on this 24th day of March, 1999. /s/ Michel C. Thielen --------------------------- Michel C. Thielen EX-27 4 FINANCIAL DATA SCHEDULE
5 1,000 12-MOS DEC-31-1998 DEC-31-1998 4,630 0 44,680 1,435 0 75,241 113,108 11,735 316,126 59,535 0 0 0 330 (26,171) 316,126 0 256,651 0 209,030 8,611 1,023 25,109 39,010 15,487 23,523 0 (4,346) 0 19,177 0.61 0.60
-----END PRIVACY-ENHANCED MESSAGE-----