10-K 1 v70704e10-k.txt FORM 10-K PERIOD ENDED DECEMBER 31, 2000 1 -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-K ------------------------ (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO COMMISSION FILE NUMBER 1-10321 THE ACKERLEY GROUP, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 91-1043807 (STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION) (I.R.S. EMPLOYER IDENTIFICATION NO.) 1301 FIFTH AVENUE, SUITE 4000 SEATTLE, WASHINGTON 98101 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (206) 624-2888 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
TITLE OF EACH CLASS NAME OF EXCHANGE ON WHICH REGISTERED ------------------- ------------------------------------ COMMON STOCK NEW YORK STOCK EXCHANGE, INC.
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: N/A (TITLE OF CLASS) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter periods that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the voting stock held by nonaffiliates of the registrant as of March 1, 2001 was $206,706,929. The number of shares outstanding of each of the registrant's classes of common stock as of March 1, 2001 was:
TITLE OF CLASS NUMBER OF SHARES OUTSTANDING -------------- ---------------------------- COMMON STOCK, $.01 PAR VALUE 24,020,548 SHARES CLASS B COMMON STOCK, $.01 PAR VALUE 11,039,588 SHARES
DOCUMENTS INCORPORATED BY REFERENCE Portions of the Proxy Statement relating to the Annual Meeting of Shareholders to be held on May 3, 2001, are incorporated by reference under Part III of this Report. -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- 2 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: outdoor media, television broadcasting, radio broadcasting, and interactive media. Our outdoor media, television broadcasting, radio broadcasting, and interactive media segments accounted for approximately 40%, 48%, 12%, and 0%, respectively, of our net revenue for the year ended December 31, 2000. On January 11, 2001, we signed an agreement to sell our Seattle SuperSonics NBA franchise, along with our interests in the Seattle Storm WNBA team and our Full House Sports & Entertainment division, for approximately $200.0 million. We expect the sale, which is pending approval of the NBA Board of Governors, to close before April 15, 2001. Accordingly, our sports & entertainment segment is now reported for financial purposes as "discontinued operations." - Outdoor Media. We engage in outdoor advertising in Massachusetts, New York, and New Jersey and the Pacific Northwest. We have 6,039 outdoor displays in our primary markets of Boston-Worcester, Massachusetts; Seattle-Tacoma, Washington; and Portland, Oregon. We believe that we have leading positions in the primary markets in which we operate, based upon the number of outdoor advertising displays. - Television Broadcasting. We engage in television broadcasting in New York, California, Oregon, Washington, and Alaska. We own sixteen television stations and program two additional television stations under time brokerage or local marketing agreements ("LMAs"). Consistent with our strategy of local news leadership, ten of the sixteen network-affiliated television stations we own or program ranked first or second in their designated market areas ("DMAs"), in terms of local news ratings points delivered, according to the November 2000 Nielsen Station Index. - Radio Broadcasting. We own and operate four radio stations in the Seattle-Tacoma, Washington market. We also provide sales and other services for KFNK(FM), another station in the Seattle-Tacoma market, pursuant to a joint sales agreement with the owner of that station. KUBE(FM) is the highest ranked FM station in the market in its target demographic of adults 18 to 34 years old and is third overall in the market in terms of share of its market service area ("MSA"), according to the Fall 2000 Arbitron Radio Market Report; KJR(AM) is the only sports talk station in the market. - Interactive Media. We own and operate local market news and information Web sites in California and New York that are built through strategic partnerships with local media companies that provide promotional power, reliable news and information content and intimate knowledge of the local marketplace. We currently operate two portal sites: www.iknowbakersfield.com in Bakersfield, California and www.iknowrochester.com in Rochester, New York. These operations, known as the iKnow Network(TM), combine the live, multimedia aspects of television and radio with the depth of news and community information of newspapers. BUSINESS STRATEGY Our primary strategy is to develop and acquire media assets that enable us to offer advertisers a choice of media outlets for distributing their marketing messages. To this end, we have assembled a diverse portfolio of media assets. 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, outdoor media display, or web page. Following disposal of our sports & entertainment operations (which is described in greater detail in Note 4 to the Consolidated Financial Statements), we intend to evolve as a media company focused on these segments and pursuing our core competencies. We seek to grow by investing in the expansion of our existing operations through additions and upgrades to our facilities and programming. We also look to grow through opportunistic acquisitions in our existing 1 3 business lines and by exploring new synergistic business ventures and investments. We target markets where we see an opportunity to improve market share, take advantage of regional efficiencies, and develop our television stations into local news franchises. We believe the following elements of our strategy provide us with competitive advantages: Maintain and Develop Leadership Positions in Markets Served. We seek to be a leader in each of our markets. We believe that we own the most outdoor advertising display faces in each of the primary geographic markets in which we operate, based on the Traffic Audit Bureau's most recent Summary of Audited Markets, issued in August 2000. Ten of the sixteen network-affiliated television stations we own or program ranked first or second in their DMAs, in terms of local news ratings points delivered, according to the November 2000 Nielsen Station Index. Our four radio stations include KUBE(FM), which is the highest ranked FM station in the Seattle-Tacoma market in its target demographic of adults 18 to 34 years old and is third overall in the market in terms of share of its MSA, according to the Fall 2000 Arbitron Radio Market Report, and KJR(AM), the only sports talk station in the market. We believe this market leadership enables us to provide advertisers a cost-effective means of delivering a quality message to their target audiences. Use Advanced Communications Technology to Create Regional Television Groups. On April 6, 1999, we announced the launch of Digital CentralCasting(TM), a digital broadcast system which allows us to operate multiple television stations using the back-office functions of a single station. The system contemplates that all of our television stations in a geographic area will be linked through a fiber optic-based communications network, and that the stations themselves will switch from analog to digital broadcasting equipment. This permits the stations to share digital programming and other data along the fiber-optic network, as well as allowing a single station within the geographic area to perform back-office functions such as operations, programming and advertising scheduling, and accounting for all of our television stations in the area. To implement this strategy, we have organized sixteen of the television stations we own or program into the following regional station groups: New York (WIXT, WOKR, WIVT, WBGH, WUTR, WWTI, and WETM), Central California (KCOY, KKFX, KGPE and KGET), and North Coast (KCBA, KION, KMTR, KVIQ, and KFTY). While the advantages of owning multiple stations in a market are evident in radio broadcasting, current television ownership rules prohibit the ownership of more than one station in a designated market, with some exceptions. We believe that the confluence of falling prices for fiber-optic-based communications services and the advancement of digital transmission technology has created an opportunity to realize the benefits of multi-station ownership by linking several distinct television markets into one regional group. We believe that we are among the first companies to introduce this technology in the industry. We anticipate that Digital CentralCasting(TM) will enhance our operational efficiency through economies of scale and the sharing of resources and programming among our stations. However, we cannot guarantee that the implementation of Digital CentralCasting(TM) will be achieved in an effective manner and can give no assurance as to the timing or extent of the anticipated benefits. Experienced Management; Decentralized Management Structure. We believe that our efficient management structure and the experience of our management team enable us to respond effectively to competitive challenges across our markets and our business segments. We have granted the management of our operating units the authority and autonomy necessary to run each unit as a business and to respond to changes in each market environment. Experienced local managers enhance our ability to respond to local challenges rapidly and effectively. The average experience of our nine division managers in their respective industries is approximately 18 years. These local managers are supported and guided by an experienced and cohesive executive team. Our five executive officers collectively have an aggregate of 90 years of experience in the various industries in which we are involved. Barry A. Ackerley, one of our founders and our current Chairman and Chief Executive Officer, has been actively involved with this company since our inception in 1975. Early in our history, Mr. Ackerley recognized the synergies that could be achieved through ownership of outdoor advertising and television and radio broadcasting assets. With this vision, Mr. Ackerley led our expansion from outdoor advertising into television 2 4 and radio broadcasting and sports and entertainment well before the current trend toward consolidation among these industries. OUTDOOR MEDIA Our outdoor media business sells advertising space on outdoor displays and often participates in the design of advertisements and the construction of outdoor structures that carry those displays. Until our airport advertising operations were sold on June 30, 1998, we sold advertising space on displays located in airport terminals. 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 for us 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 internet-based businesses, and telecommunications companies. Operations. We operate primarily in the markets of Seattle-Tacoma, Washington; Portland, Oregon; and Boston-Worcester, Massachusetts. In 2000, we expanded our operations into the New York, New York market. Until we sold our Florida outdoor advertising business in January 2000, we also operated in Miami, Fort Lauderdale, West Palm Beach and Fort Pierce, Florida. Based on the Traffic Audit Bureau's Summary of Audited Markets issued in August 2000, we had more outdoor advertising displays in each of our primary 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 on any particular regional economy or advertiser, and mitigate the effects of fluctuations in national advertising expenditures. However, because of zoning and other regulatory limitations on the development of new outdoor advertising displays, we anticipate that future growth in our outdoor advertising business will result primarily through diversification of our customer base, creative marketing, upgrading our existing structures, increased rates, and increased demand brought about by advertisers who have not historically used outdoor media, such as internet-related companies. 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 3 5 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. We have 944 bulletins, 4,735 posters, and 360 junior posters. The following chart itemizes markets we served and their designated market area (DMA) rank:
DMA JUNIOR MARKET RANK(1) BULLETINS POSTERS POSTERS ------ ------- --------- ------- ------- Seattle-Tacoma(2).............................. 12 249 1,691 279 Portland(2).................................... 23 266 1,047 0 Boston-Worcester............................... 6(3) 429 1,997 81 New York, New York............................. 1 44 -- --
--------------- (1) Source: Television & Cable Factbook, 2000 Edition. DMA rank is a measure of market size in the United States based on population as reported by the Nielsen Rating Service. (2) In the first quarter of 2000, we purchased outdoor advertising assets in the Portland Metro and Salem, Oregon areas (which for operating purposes we deem to be part of the Portland market) and Bellingham, Washington (which for operating purposes we deem to be part of the Seattle-Tacoma market). See "-- Acquisitions." (3) Reflects DMA rank for the Boston market. We own substantially all of our outdoor displays. These displays generally are located on leased property. The typical property lease provides for a term ranging from 5 to 15 years and for a reduction in or termination of rental payments if the display becomes obstructed during the lease term. In certain circumstances leases may be terminated, such as where the property owner develops or sells the property. If a lease is terminated, we generally seek to relocate the display in order to maintain our inventory of advertising displays in the particular geographic region. Display relocation is typically subject to local zoning laws. Sales and Marketing. We sell advertising space directly to advertisers and also sell to advertising agencies and specialized media buying services. These agencies charge us a commission for their services. In recent years, we have focused increasingly on selling directly to local and regional advertisers. Competition. We compete directly with other outdoor advertising companies, and with other types of advertising media companies, including television, radio, newspapers, magazines, transit advertising, yellow page directories, direct mail, local cable systems, and satellite broadcasting systems. Substantial competition exists among all advertising media on a cost-per-rating-point basis and on the ability to effectively reach a particular demographic section of the market. As a general matter, competition is confined to defined geographic markets. Regulation. Outdoor advertising displays are subject to governmental regulation at the federal, state, and local levels. These regulations, in some cases, limit the height, size, location, and operation of outdoor displays and, in some circumstances, regulate the content of the advertising copy displayed on outdoor displays. Certain jurisdictions have recently proposed or enacted regulations restricting or banning outdoor advertising 4 6 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. Federal and corresponding state outdoor advertising statutes require compensation payment for removal of existing structures by governmental order in some circumstances. Some jurisdictions have adopted ordinances which have sought the removal of existing structures without compensation. Ordinances requiring the removal of a billboard without compensation have been challenged in various state and federal courts on both statutory and constitutional grounds, with differing results. Federal law also imposes additional regulations upon our operations. Under the Federal Highway Beautification Act of 1965, states are required to adopt programs regulating outdoor advertising along federal highways. The Act also provides for the payment of compensation to the owner of a lawfully erected outdoor advertising structure that is removed by operation of the statute. Our policy, when a governmental entity seeks to remove one of our outdoor advertising displays, is to actively resist unless adequate compensation is paid. Although we have been successful in the past in challenging circumstances in which our displays have been subject to removal, we cannot predict whether we will be successful in the future and what effect, if any, such regulations may have on our operations. In addition, we are unable to predict what additional regulations may be imposed on outdoor advertising in the future. Legislation regulating the content of billboard advertisements has been introduced in the U.S. Congress from time to time in the past. Sale of Florida Outdoor Advertising Operations. On January 5, 2000, we sold substantially all of the assets of our Miami-Fort Lauderdale and West Palm Beach-Fort Pierce, Florida outdoor billboard operations to Eller Media Company, a subsidiary of Clear Channel Communications, Inc., for approximately $300.0 million in cash, plus the assumption of certain liabilities. We recognized a gain on the transaction of approximately $269.3 million. Acquisitions. In 2000, we acquired the following outdoor advertising companies: - On January 31, 2000, we purchased substantially all of the assets of an outdoor advertising company in Bellingham, Washington, for approximately $2.9 million. - On March 1, 2000, we purchased the assets of an outdoor advertising company serving portions of Washington and Oregon for approximately $14.6 million. - On March 31, 2000, we purchased substantially all of the assets of an outdoor advertising company in New Jersey and New York City for approximately $19.8 million. - On June 13, 2000, we purchased the assets of an outdoor advertising company in Oregon, for approximately $4.0 million. - On November 13, 2000, we purchased an outdoor advertising structure in New Jersey for $5.0 million. TELEVISION BROADCASTING Our television broadcasting operations involve the sale of advertising time to a broad range of national, regional, and local advertisers. We own and/or program eighteen television stations in markets that offer a large and affluent population base that is attractive to many advertisers. Industry Overview. Television stations in the United States are either "very high frequency" or "VHF" stations, transmitting on channels 2 through 13, or "ultra high frequency" or "UHF" stations, transmitting on channels 14 through 69. Broadcast licenses are issued by the Federal Communications Commission ("FCC"). 5 7 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 a significant portion of its daily programming from a network. Networks provide programming, and in some cases cash payments, to the affiliate in exchange for a substantial majority of the advertising time during network programs. The network sells this advertising time and retains the revenues. A small portion of inventory contained within network programming is sold by the local affiliates who retain the corresponding revenue. Operations. We currently own sixteen television stations and program two stations under time brokerage or local marketing agreements ("LMAs"). The following table sets forth information about our portfolio of television stations and the markets in which they operate.
NO. OF COMMERCIAL PROPOSED DMA TV STATIONS DATE ACQUIRED OR NETWORK NTSC DIGITAL MARKET RANKED IN MARKET CALL LETTERS AFFILIATED AFFILIATION CHANNEL(1) CHANNEL RANK(2) MARKET(3) ------ ------------ ---------------- ----------- ---------- -------- ------- ----------- NEW YORK Syracuse, New York (owned)................... WIXT May 1982 ABC 9 17 80 3 VHF 3 UHF Rochester, New York (owned)................... WOKR April 1999 ABC 13 59 74 3 VHF 1 UHF Binghamton, New York (owned)................... WIVT July 1997(4) ABC 34 4 156 1 VHF 2 UHF Binghamton, New York (owned)................... WBGH-CA February 2000(5) NBC 8 --(6) 154 1 VHF 2 UHF Utica, New York (owned)..... WUTR June 1997(7) ABC 20 30 168 1 VHF 2 UHF Elmira, New York (LMA)...... WETM February 2000(8) NBC 18 2 171 3 UHF Watertown, New York (owned)................... WWTI June 2000 ABC 50 21 176 1 VHF 1 UHF CENTRAL COAST Fresno-Visalia, California (owned)................... KGPE August 2000 CBS 47 34 54 10 UHF Santa Barbara-Santa Maria-San Luis Obispo, California (owned)........ KCOY January 1999(9) CBS 12 19 117 3 VHF Santa Barbara-Santa Maria-San Luis Obispo, California (owned)........ KKFX-CA May 2000(10) FOX 24 --(6) 117 3 VHF Bakersfield, California (owned)................... KGET October 1983 NBC 17 25 130 4 UHF (12) NORTH COAST Monterey-Salinas, California (owned)................... KION April 1999(10) CBS 46 32 118 1 VHF 3 UHF (11) Monterey-Salinas, California (LMA)..................... KCBA June 1986(13) FOX 35 13 118 1 VHF 3 UHF (11) Eugene, Oregon (owned)...... KMTR December 1998(14) NBC 16 17 122 2 VHF 3 UHF Eureka, California (owned)................... KVIQ July 1998(15) CBS 6 17 191 2 VHF 2 UHF Santa Rosa, California (owned)................... KFTY April 1996 None 50 54 -(16) 6 VHF 12 UHF
6 8
NO. OF COMMERCIAL PROPOSED DMA TV STATIONS DATE ACQUIRED OR NETWORK NTSC DIGITAL MARKET RANKED IN MARKET CALL LETTERS AFFILIATED AFFILIATION CHANNEL(1) CHANNEL RANK(2) MARKET(3) ------ ------------ ---------------- ----------- ---------- -------- ------- ----------- PACIFIC NORTHWEST Fairbanks, Alaska (owned)... KTVF August 1999 NBC/UPN 11 26 203 4 VHF Vancouver, British Columbia and portions of Seattle, Washington (owned)........ KVOS June 1985 None 12 35 -(17) -(17)
--------------- (1) Refers to the current analog channel used by such station. (2) Source: November 2000 Nielsen Station Index. (3) Source: November 2000 Nielsen Station Index. The number of stations listed does not include digital television stations, public broadcasting stations, satellite stations, low-power stations, or translators that rebroadcast signals from distant stations, and also may not include smaller television stations whose rankings fall below reporting thresholds. (4) We acquired WIVT in August 1998. Pending closing of the transaction, we programmed the station under an LMA with the previous owner. The date in this column reflects the date the LMA was entered into. (5) In February 2000, we acquired substantially all of the assets of WBGH, other than the FCC license, which we acquired on May 1, 2000. Pending FCC approval of the transfer of the FCC license to us, we programmed the station under an LMA with the FCC licensee. The date in this column reflects the date the LMA was entered into. (6) Low power stations have not been assigned proposed digital channels. We have applied for Class A status from the FCC for WBGH and have been granted Class A status for KKFX. (7) We acquired WUTR in January 2000. Pending closing of the transaction, we programmed the station under an LMA with the previous owner. The date in this column reflects the date the LMA was entered into. (8) We do not own WETM but program the station under an LMA with the current owner of the station. The date in this column reflects the date the LMA was entered into. See "-- Acquisitions and Local Marketing Agreements." (9) In May 1999, we exchanged the assets of KKTV, our former television station in Colorado Springs, Colorado for the assets of KCOY and a cash payment. Pending closing of the transaction, we programmed KCOY under an LMA with the previous owner. The date in this column reflects the date that the LMA was entered into. (10) We acquired KION in January 2000. Pending closing of the transaction, we programmed the station under an LMA with the previous owner. The date in this column reflects the date the LMA was entered into. (11) One additional UHF channel has been allocated in the Salinas-Monterey market; however, there has been no construction activity to date with respect to this channel. (12) Two additional UHF channels have been allocated in the Bakersfield market; however, there has been no construction activity to date with respect to these channels. (13) In January 2000, we sold substantially all the assets of KCBA. We program 15% of the station's weekly broadcast hours and provide sales and other services under an LMA with the purchaser. The date in this column reflects the date we originally acquired the station. (14) We acquired KMTR in March 1999. Pending closing of the transaction, we programmed the station under an LMA with the previous owner. The date in this column reflects the date the LMA was entered into. The acquisition includes the assets of two satellite stations, KMTX (Roseburg, Oregon) and KMTZ (Coos Bay, Oregon), and one low power station, KMOR-LP (Eugene, Oregon). 7 9 (15) We acquired KVIQ in January 1999. Pending closing of the transaction, we programmed the station under an LMA with the previous owner. The date in this column reflects the date this LMA was entered into. (16) While KFTY is included in the San Francisco-Oakland-San Jose DMA market, which has a DMA rank of 5, the station principally serves the community of Santa Rosa, which is not separately ranked. (17) KVOS, located in Bellingham, Washington, serves primarily the Vancouver, British Columbia market (located in size, according to the Nielsen Rating Service as of February 2000, between the markets of Denver, Colorado and Sacramento-Stockton-Modesto, California, which have DMA rankings of 18 and 19, respectively, and a portion of the Seattle, Washington market (DMA rank 12) and the Whatcom County, Washington market. The station's primary competition consists of five Canadian stations. The Canadian Radio and Television Commission granted license approval for an additional commercial station in Victoria and a religious station in Vancouver recently. It is likely that these stations will be operational by September 2001. DMA rankings are from the Television & Cable Factbook, 2000 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, and by securing exclusive programming rights for the Vancouver/Victoria Market, KVOS (TV) is not blacked out on Canadian cable systems. Acquisitions and Local Marketing Agreements. We seek to acquire television broadcast stations generally in DMA markets ranking from 50 to 175. We also enter into time brokerage or local marketing agreements ("LMAs") with owners of television stations. Under those agreements, we provide programming and sales services and make monthly payments to station owners in exchange for the right to receive revenues from advertising and, in some cases, network compensation. Over the past year, we have acquired, or entered into LMAs to provide programming services to, the following stations: - On January 12, 2000, we sold substantially all of the assets of KCBA(TV), the FOX affiliate licensed to Monterey, California, for approximately $11.0 million, and entered into an LMA with the purchaser to provide programming and sales services. We recorded a gain on the transaction of $8.8 million. Concurrent with this sale, we purchased substantially all of the assets of KION(TV), the CBS affiliate licensed to Salinas, California, for approximately $7.7 million, subject to certain reductions. From April 24, 1996 until closing of the transaction, we provided programming and sales services under an LMA with the previous owner. - On January 20, 2000, we purchased substantially all of the assets of WUTR(TV), the ABC affiliate licensed to Utica, New York, for approximately $7.9 million. From June 30, 1997 until closing of the transaction, we provided programming and sales services under an LMA with the previous owner. - On February 1, 2000, we entered into an LMA with Smith Television of New York, Inc. ("STNY") to provide programming and sales services to WETM(TV), the NBC affiliate licensed to Elmira, New York. We also purchased a non-voting minority equity interest in STNY for approximately $17.0 8 10 million. Beginning in August 2003, STNY may require us to exchange our interest in STNY, plus $11.0 million in cash, for all of the assets of WETM(TV). Under certain circumstances, we may have an option to purchase all or a controlling interest in STNY. - On February 1, 2000, we purchased substantially all of the assets, other than the FCC license, of WBGH-CA, a Class A low-power NBC affiliate licensed to Binghamton, New York for approximately $9.0 million. From that date until closing of the FCC license transfer, we provided programming and sales service under an LMA with the previous owner. - On June 1, 2000, we purchased substantially all of the assets and certain liabilities of WWTI, the ABC affiliate licensed to Watertown, New York, for a purchase price of approximately $6.0 million. - On May 9, 2000, we purchased substantially all of the assets and certain liabilities of Class A low power television station KKFX-CA, the FOX affiliate licensed to San Luis Obispo, California, for a purchase price of approximately $15.4 million. - On August 1, 2000, we purchased the membership interests of Fisher Broadcasting of Fresno, LLC, which owned all of the assets of television station KGPE, a CBS affiliate licensed to Fresno, California, for a purchase price of approximately $60.0 million. 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 2000, local spot or schedule advertising, which is sold by our personnel at each broadcast station, accounted for approximately 44% of our television stations' total revenue. National spot or schedule advertising, which is sold primarily through national sales representative firms on a commission-only basis, accounted for approximately 48% of our television stations' total revenue. In certain cases, we also receive revenue from our network affiliations. The networks pay us an hourly rate that is tied to the number of network programs that our television stations broadcast. Hourly rates are established in our agreements with the networks and are subject to change by the networks. We have the right, however, to terminate a network agreement if the network effects a decrease in hourly rates. Overall, network compensation revenue was not a significant portion of our television stations' total revenue for 2000. 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. 9 11 We also face competition from high-powered direct broadcast satellite services which transmit programming directly to homes equipped with special receiving antennas or to cable television systems for transmission to their subscribers. In addition, our television stations compete with other forms of home entertainment, such as home videotape and video disc players. Moreover, the television industry is continually faced with technological change and innovation, the possible rise in popularity of competing entertainment and communications media, and changes in labor conditions and government regulations. We believe that the advertising revenues generated by our television stations are significantly influenced by rankings of their local news programs in their respective markets. Of the sixteen network-affiliated television stations we currently own or program, ten rank first or second in their respective geographic markets in local news ratings points delivered, according to the November 2000 Nielsen Station Index. RADIO BROADCASTING Our radio broadcasting operations involve the sale of air time to a broad range of national, regional, and local advertisers. In addition, we earn revenue from the sale of sponsorships to a variety of events, such as concerts. We own and operate four radio stations and provide sales and other services to a fifth radio station in the Seattle-Tacoma area. Industry Overview. Radio stations in the United States operate either on the "amplitude modulation" ("AM") band, comprising 107 different frequencies located between 540 and 1700 kilohertz ("KHz") in the low frequency band of the electromagnetic spectrum, or the "frequency modulation" ("FM") band, comprising approximately 100 different frequencies located between 88 and 108 megahertz ("MHz") in the very high frequency band of the electromagnetic spectrum. FM radio stations have captured a high percentage of the listening audience, in part because of the public's perception that stereo broadcasting, which until recently was only available on FM radio stations, provides enhanced sound quality. Our radio stations derive most of their revenue from local, regional, and national advertising and, to a lesser extent, from network compensation. In 2000, approximately 67% 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), KBTB(FM) and KUBE(FM) in Seattle, Washington. We also provide sales and other services to KFNK(FM) in Eatonville, Washington. 10 12 The following table sets forth information about our portfolio of radio stations.
NO. OF COMMERCIAL RADIO STATION FORMAT AND MSA MARKET RADIO STATIONS PRIMARY DEMOGRAPHIC MARKET CALL LETTERS DATE ACQUIRED RANK(1) IN MARKET(1) TARGET ------ ------------ ----------------- -------------- -------------- ------------------------ Seattle-Tacoma, KJR(AM) May 1984(2) 14 11 AM Sports Talk; Men Washington..... 25-54(3) KBTB(FM) October 1987(2) 19 FM Rhythmic Oldies Women 25-54 KUBE(FM) July 1994(4) Rhythmic Contemporary Hits; Persons 18-34 KHHO(AM) March 1998 Sports Talk; Men 24-54 KFNK(FM) September 1999(5) Alternative; Men 18-24
--------------- (1) Source: Fall 2000 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) will continue as the Seattle SuperSonics' flagship radio station after the sale of our sports & entertainment operations through at least the end of the current NBA season. (4) The date shown in the column reflects the date on which the Partnership acquired the station. (5) The date shown in the column reflects the date on which we entered into an agreement to provide sales and other services. Acquisitions and Dispositions. Over the past year, we have not entered into any transactions. 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 2000, such advertising accounted for approximately 67% of the radio stations' revenue. In contrast, approximately 27% of the radio stations' 2000 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. 11 13 TELEVISION AND RADIO BROADCASTING REGULATION General. Our television and radio operations are heavily regulated under the Communications Act of 1934 and other federal laws. The Communications Act, for instance, limits the number of broadcast properties that we may acquire and operate. It also restricts ownership of broadcasting properties by foreign individuals and foreign companies. The Communications Act authorizes the FCC to supervise the administration of federal communications laws, and to adopt additional rules governing broadcasting. Thus, our television and radio broadcasting operations are primarily regulated by the FCC. The FCC, for example, approves all transfers, assignments and renewals of our broadcasting properties. KVOS(TV), which derives much of its revenue from the Vancouver, British Columbia market, is additionally regulated and affected by Canadian law. Unlike U.S. law, for instance, a Canadian firm cannot deduct expenses for advertising on a U.S.-based television station which broadcasts into a Canadian market. In order to compensate for this disparity, KVOS(TV) sells advertising time in Canada at a discounted rate. In addition, Canadian law limits KVOS(TV)'s ability to broadcast certain programming. Ownership. FCC rules limit the number and type of broadcasting properties that we may own in the same geographic market. Thus, in a particular geographic market, we cannot own the following combinations: more than one television station (with certain exceptions); 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. In addition, the Communications Act and FCC rules prohibit aliens from owning of record or voting more than one-fifth of the capital stock of a corporation holding a radio or television station license or more than one-fourth of the capital stock of a corporation holding the stock of a broadcast licensee. Our Bylaws provide that none of our shares of capital stock may be issued or transferred to any person where such issuance or transfer will result in a violation of the Communications Act or any regulations promulgated thereunder, and that any purported transfer in violation of those restrictions is void. Local Marketing Agreements. Prior to November 16, 1999, FCC rules prohibited the common ownership of two television stations in a single market. Under rules effective November 16, 1999, common ownership of two television stations (commonly known as a duopoly) in one market became permissible in certain limited circumstances. The new rules also permit a television station owner to program up to 15% of the weekly broadcast hours of another station in the same market pursuant to agreements known as time brokerage agreements or local marketing agreements ("LMAs"), provided that the licensee of the other station maintains ultimate control and responsibility for the programming and operations of the station and compliance with applicable FCC rules and policies. Currently there are no television duopolies in any of our markets. Programming and Advertising. The Communications Act requires broadcasters to serve the public interest. Thus, our television and radio stations are required to present some programming that is responsive to community problems, needs, and interests. We must also broadcast informational and educational programming for children, and limit the amount of commercials aired during children's programming. We are also required to maintain records demonstrating our broadcasting of public interest programming. FCC rules impose restrictions on the broadcasting of political advertising, sponsorship identifications, and the advertisement of contests and lotteries. Cable Television. In many parts of the country, cable television operators rebroadcast television signals via cable. In connection with cable rebroadcasts of those signals, each television station is granted, pursuant to the Cable Television Consumer Protection and Competition Act of 1992, either "must-carry rights" or "retransmission consent rights." Each television broadcaster must choose either must-carry rights or retransmission consent rights with regard to its local cable operators. If a broadcaster chooses must-carry rights, then the cable operator will probably will be required to carry the local broadcaster's signal. Must-carry rights are not absolute, however, and their exercise depends on 12 14 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 the broadcast station which duplicates the programming of another broadcast station with must-carry rights. If a broadcaster chooses retransmission consent rights, the broadcaster is entitled to (1) prohibit a cable operator from carrying its signal, or (2) consent to a cable operator's rebroadcast of the broadcaster's signal, either without compensation or pursuant to a negotiated compensation arrangement. All of the television stations that we own or program have, in the majority of cases, chosen retransmission consent rights, rather than must-carry rights, within their respective markets. 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 that files a license application. Network affiliates in larger broadcast markets were required to begin DTV broadcasts during 1999. Our stations are required to complete construction of their digital transmission facilities by May 1, 2002. We currently estimate the cost to convert to DTV will be approximately $6 to $10 million. All of the full power television stations that we own or program have received construction permits from the FCC for their DTV facilities. The stations will then be allowed to broadcast two signals using two channels, one digital and one analog, during the transition period, which will extend until December 31, 2006. At the end of the transition period, broadcasters will be required to choose whether they will continue broadcasting on the digital or the analog channel, and to return the other channel to the FCC. 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; - revise rules governing political broadcasting, which may require stations to provide free advertising time to political candidates; - restrict or prohibit broadcast advertising of alcoholic beverages; - change broadcast technical requirements; and - expand the operating hours of daytime-only stations. We cannot predict the likelihood of Congress or the FCC adopting any of these proposals. If any should be adopted, we cannot assess their impact on our broadcasting operations. In addition, we cannot predict the other changes that Congress or the FCC might consider in the future. Low Power FM. The FCC has adopted rules creating a new, low power FM (LPFM) radio service, which may create new competition in the radio industry. The new LPFM service is limited to non-commercial operation. The LPFM service will consist of two classes of LPFM radio stations with maximum power levels of 10 watts and 100 watts. The 10 watt stations will reach an area with a radius of between one and two miles; the 100 watt stations will reach an area with a radius of approximately three and a half miles. These LPFM stations will operate throughout the FM band. There can be no assurance that the development and introduction of LPFM service will not have an adverse effect on the radio broadcast industry. Digital Audio Broadcasting. The radio broadcasting industry is subject to competition from new media technologies that are being developed or introduced, including the delivery of audio programming by digital 13 15 audio broadcasting ("DAB"). The FCC has issued licenses for two companies to provide DAB service by satellite which will deliver multiple new audio programming formats to local and national audiences. This new capability will provide an additional source of competition in our markets. Historically, the radio broadcasting industry has grown in terms of total revenues despite the introduction of new technologies for the delivery of entertainment and information, such as television broadcasting, cable television, audio tapes and compact disks. There can be no assurance, however, that the development or introduction in the future of any new media technology will not have an adverse effect on the radio broadcast industry. We are unable to predict the effect such technologies will have on our broadcasting operations. Equal Employment Opportunity Rules. On January 20, 2000, the FCC adopted new Equal Employment Opportunity ("EEO") rules in response to the D.C. Circuit Court of Appeals decision in 1998 in Lutheran Church Missouri Synod v. FCC(Lutheran Church), which held that certain aspects of the FCC's previous broadcast EEO outreach requirements were unconstitutional. On January 16, 2001, the Appeals Court found certain of these rules unlawful. On January 31, 2001, the FCC suspended its EEO Rules. The FCC has petitioned the court for a rehearing. Satellite Home Viewer Improvements Act. The Satellite Home Viewer Improvement Act of 1999 ("SHVIA"), signed into law on November 29, 1999, permits satellite companies to provide local broadcast TV signals to all subscribers who reside in a particular DMA. This ability to provide local broadcast channels is commonly referred to as "local into local" service. The SHVIA also permits satellite companies to provide "distant" network broadcast stations to eligible satellite subscribers. A distant network signal is a signal from a market other than the local market. To be eligible to receive a distant network signal, a television viewing household must be an unserved household unable to receive a local network signal, as determined pursuant to criteria established by the FCC. The SHVIA generally seeks to place satellite carriers on an equal footing with local cable television operators when it comes to the availability of broadcast programming, and thus gives consumers more and better choices in selecting a multichannel video program distributor (MVPD), such as cable or satellite service. Local-into-local service is not available in any of our television markets, however, and distant network signals are generally available only to a limited number of unserved television households which cannot receive our broadcast television signal using a conventional rooftop antenna. There can be no assurance that satellite delivered television programming will not have an adverse effect on our broadcasting operations. Low Power Television Stations. The Community Broadcasters Protection Act was signed into law on November 29, 1999. This law gives many low power television ("LPTV") stations the opportunity to achieve primary status. Presently, LPTV stations are secondary, meaning that they are not protected from interference from full power stations and are subject to being displaced by applications to construct new or to modify existing full power stations. LPTV stations that qualify will now be entitled to receive protection from all other stations in their service area. This class of low power stations will now be known as "Class A". Our stations KKFX and WBGH are Class A stations. There can be no assurance that the development and introduction of a new class of low power stations will not have an adverse effect on the broadcasting operations of our full-power stations. Purchase and Sale Transactions. The FCC must approve applications to transfer or assign control of a broadcast license. In connection with the application to acquire a broadcasting license, the FCC considers factors generally similar to those discussed under "Renewal of Broadcasting Licenses" below. In addition, the filing by third parties of petitions to deny, informal objections or comments to a proposed transaction can result in significant delays to, as well as denial of, FCC action on a particular application. Renewal of Broadcasting Licenses. Our broadcasting operations' success depends upon our ability to renew our broadcasting licenses, and the ability of the station owners to renew the licenses for the stations we operate under LMAs. Television and radio licenses (including renewals) currently are issued for terms of eight years. In considering whether to renew a license, the FCC considers several factors, including the licensee's compliance with the FCC's children's television rules, the FCC's equal employment opportunity rules, and the FCC's radio frequency rules. The FCC also considers the Communications Act's limitations on license 14 16 ownership by foreign individuals and foreign companies, and rules limiting common ownership of broadcast, cable and newspaper properties. The FCC also considers the licensee's general character, including the character of persons holding interests in the licensee. In addition, the FCC considers complaints from the public concerning the license holder, and applications from third parties to acquire an existing license. The FCC usually renews a license holder's broadcasting license. Because the FCC may not grant renewal, however, we have no assurance that any of our broadcasting licenses will be renewed, especially if third parties challenge our renewal applications or file competing applications to acquire our licenses. None of our primary broadcasting licenses, or broadcasting licenses owned by the owners of television stations we program under LMAs, are subject to renewal within the next two years. There are no pending challenges or competing applications with respect to any of our broadcasting licenses. INTERACTIVE MEDIA We believe our interactive media operations currently provide more in-depth local news and information than any other Web site covering the markets of Bakersfield, California, and Rochester, New York. Our operations, known as the iKnow Network(TM), combines the live, multimedia aspects of television and radio with the depth of news and community information of newspapers. We believe this philosophy of independent partner-built Web sites will make the iKnow Network a powerful source for local news and information as well as creating a platform that maximizes the Internet's potential as a unique media outlet. INDUSTRY OVERVIEW Due to changes in traditional media over the past five years, broadcasters and publishers have struggled with how to stake a profitable claim in the Internet territory. At the heart of this struggle is the conflict between tradition and the new media model required to succeed on the Internet. "Getting onto the Internet," has been a common battle cry as traditional media companies have moved en-masse to mirror their broadcast and print formats on-line. This strategy has been marginally successful as revealed in a June 2000 study by the Pew Research Center for the People and the Press. This study concluded that more that 30% of Internet users go on-line weekly to receive their news, and about half of those users frequent the Internet on a daily basis for their news and information needs. While these statistics are promising, traditional media companies have been largely unsuccessful in attracting the lion's share of the Internet audience. The Internet news and information experience is unlike its more traditional counterparts. Unlimited, on-demand, 24 X 7 multimedia content is rapidly becoming the experience most users expect. Surprisingly, local newspapers and city guides are achieving greater success than television station Web sites, according to a recent Frank Magid Associates (FMA) study. The study reveals that local broadcast Web sites have fewer users, raise less money and devote fewer employees to running these sites than their print-based counterparts. Online media is one of the most challenging areas for Internet ventures and content based Web sites have encountered some difficulty because they have had to invest in original content and spend large sums of money on marketing to attract national audiences. Also, startups must overcome the unwillingness of consumers to pay for Web content and therefore must become profitable through the sale of advertising on their Web sites. Despite the growth of local site competition, out-of-market competitors lack a significant advantage owned by every local TV station, radio station or newspaper -- the intimate knowledge of the marketplace. The strength of the iKnow Network strategy rests in its local partnership model. By combining the news and information reporting resources of the local iKnow Network partners, we believe that we create a distinct advantage over other Web sites. The iKnow Network's existing ad sales, editorial and promotional staff have first-hand knowledge of the community and possess established relationships at the local market level which we believe increases the potential for success. 15 17 Operations. Through separate joint venture arrangements with local media partners, we manage the iKnow Network operations in the markets of Bakersfield, California, and Rochester, New York.
MARKET URL LAUNCH DATE DMA ------ ------------------------ ------------- --- Rochester, NY.................... www.iKnowRochester.com March 1997(1) 77 Bakersfield, CA.................. www.iKnowBakersfield.com November 2000 130
--------------- (1) Originally launched as RochesterToday.com, relaunched in March 2001 as iKnowRochester.com. Sales and Marketing. We sell advertising through banner ads, classified ads, business directory subscriptions, and Web sponsorships directly to local businesses. Competition. We compete directly with other local web sites and indirectly with other types of advertising media companies, including television, newspapers, magazines, outdoor advertising, transit advertising, yellow page directories, direct mail, local cable systems, and satellite broadcasting systems. As a general matter, competition is confined to defined geographic markets. SPORTS & ENTERTAINMENT On December 8, 2000, the Company executed a letter of intent to sell substantially all of the assets of its sports & entertainment operations to The Basketball Club of Seattle LLC for approximately $200.0 million in cash and the assumption of certain liabilities. These operations consist principally of the Seattle SuperSonics National Basketball Association franchise, operating rights to the Seattle Storm, a Woman's National Basketball Association franchise, and Full House Sports & Entertainment, the Company's sports marketing business. A definitive purchase agreement was signed on January 11, 2001 and the transaction is expected to close by April 15, 2001. We expect to recognize a pre-tax gain on the transaction of between approximately $150.0 million and $160.0 million. If the closing is delayed beyond April 15, 2001, the actual gain may differ materially from this estimate. In addition, the Company is seeking to sell separately its Boeing 727 aircraft used by the Seattle Supersonics for transportation to and from away games. The sale of the aircraft is anticipated to be for cash or a combination of cash and assumption of debt associated with the aircraft and is anticipated to be completed by approximately the end of the second quarter of 2001. There is no assurance, however, that a sale of the aircraft will occur within this timeframe. EMPLOYEES As of December 31, 2000, we employed 1,735 full-time persons. The following table sets forth a breakdown of employment in each of our operating segments and our corporate offices for that date:
OPERATING SEGMENT/CORPORATE OFFICE PERSONS EMPLOYED ---------------------------------- ---------------- Outdoor Media........................................ 272 Television Broadcasting.............................. 1,165 Radio Broadcasting................................... 106 Interactive Media.................................... 13 Sports & Entertainment(1)............................ 98 Corporate Offices.................................... 81
--------------- (1) On January 11, 2001 we entered into an agreement to sell our sports & entertainment business, which is now reported for financial purposes as "discontinued operations." Approximately 393 of our employees are represented by unions under 16 collective bargaining agreements. Collective bargaining agreements covering approximately 1% of our employees are terminable during 2001. We believe that these collective bargaining agreements will be renegotiated or automatically extended and that any renegotiation will not materially adversely affect our operations. 16 18 RESTRICTIONS ON OUR OPERATIONS In addition to restrictions on our operations imposed by governmental regulations, franchise relationships and other restrictions discussed above, our operations are subject to additional restrictions imposed by our current financing arrangements. Our operations are subject to restrictions imposed by (1) a credit agreement with various lending banks, dated January 22, 1999, as amended (the "1999 Credit Agreement"), and (2) an indenture (the "Indenture"), dated December 14, 1998, respecting our 9% Senior Subordinated Notes due 2009 (the "9% Senior Subordinated Notes"). Some of those provisions restrict our ability to: - apply cash flow in excess of certain levels or proceeds from our sale of capital stock, debt securities or certain asset dispositions; - incur additional indebtedness; - pay dividends on, redeem or repurchase our capital stock, or make investments; - issue or allow any person to own any preferred stock of restricted subsidiaries; - enter into sale and leaseback transactions; - incur or permit to exist certain liens; - sell assets; - in the case of our subsidiaries (other than unrestricted subsidiaries), guarantee indebtedness; - in the case of our subsidiaries (other than unrestricted subsidiaries), create or permit to exist dividend or payment restrictions with respect to The Ackerley Group, Inc.; - engage in transactions with affiliates; - enter into new lines of business; and - consolidate, merge, or transfer all or substantially all of our assets and the assets of our subsidiaries on a consolidated basis. In addition, we are required to maintain specified financial ratios, including maximum leverage ratios, a minimum interest 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 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. The 1999 Credit Agreement also requires, subject to certain exceptions, that we apply 50% of the net cash proceeds (as defined in the 1999 Credit Agreement) received by us from the sale of our capital stock, 100% of the net cash proceeds received by us from the sale of our debt securities, 100% of the net cash proceeds received by us from certain asset dispositions, and, under certain circumstances, up to 50% of our excess cash flow (as defined in the 1999 Credit Agreement) to repay borrowings under the 1999 Credit Agreement. It further provides that the amount of borrowings available under the 1999 Credit Agreement will be permanently reduced by the amount of such repayments. 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 have provided guarantees of 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. 17 19 Additional information concerning the 1999 Credit Agreement and the Indenture is set forth in Note 8 to the Consolidated Financial Statements. FINANCIAL INFORMATION REGARDING BUSINESS SEGMENTS Financial information concerning each of our business segments is set forth in Note 16 to the Consolidated Financial Statements. ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS The following risk factors and other information included in this report should be carefully considered. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us or that we currently deem immaterial also may impair our business operations. If any of the following risks actually occur, our business, financial condition, and operating results could be materially adversely affected. - Our television broadcasting segment typically enjoys significant revenues from political advertising in even numbered years. In 2000, we received over $12 million of revenue from political advertising that may not be replaced by other advertising categories in 2001. Our liquidity may be impacted negatively to the extent such political revenue is not replaced by other advertising categories in 2001. - National advertising may decrease as a result of the slowing national economy. Our liquidity may be impacted negatively depending on the magnitude of this trend, its duration, and our ability to offset decreased national sales with increased local sales. - We enjoyed a significant increase in revenues from the dot-com advertising category in 2000, primarily in our outdoor media segment. However, thus far in 2001 we are seeing a decline in revenue from this sector compared to 2000 levels. If this trend continues throughout 2001, our liquidity may be impacted negatively to the extent we are unable to offset such a decline by increasing revenue from other advertising categories. - As more fully described below, and in Note 4 to the Consolidated Financial Statements, we have entered into an agreement to sell our sports & entertainment operations. We are incurring losses from our sports & entertainment operations which will continue until the transaction closes. We expect the transaction will close by April 15, 2001. However, should the closing be delayed we would incur greater losses which would negatively impact our liquidity. In addition, we would be required to obtain waivers of compliance with certain covenants of our 1999 Credit Agreement and might need to seek additional sources of financing. LEVERAGE; RESTRICTIONS UNDER DEBT INSTRUMENTS; COVENANT COMPLIANCE Financial Leverage. As of March 1, 2001, we had approximately $415.1 million of outstanding indebtedness. We may continue to acquire additional outdoor media and television and radio broadcasting businesses, subject to the availability of required financing. We may assume the indebtedness of businesses that we acquire. We may also make acquisitions or capital expenditures that are financed with the proceeds from borrowings. As a result of such acquisitions, our outstanding indebtedness and interest expense will increase, perhaps substantially. Likewise, further acquisitions will likely increase our depreciation and amortization expenses, perhaps substantially. Our degree of leverage could have important consequences to investors, including the following: - our ability to obtain additional financing in the future for working capital, capital expenditures, acquisitions, general corporate purposes, or other purposes may be impaired; - restrictive covenants in debt instruments, as well as the need to apply cash to make debt service payments, may limit payment of dividends on our outstanding Common Stock and Class B Common Stock: 18 20 - EBITDA (defined as net revenue less operating and restructuring expenses before amortization, depreciation, interest, net gain on dispositions of assets, litigation, stock compensation expenses, and equity in losses of affiliates) available for purposes other than payment of principal and interest on indebtedness may be reduced; - we may be exposed to the risk of increased interest rates since a portion of our borrowings, including borrowings under the 1999 Credit Agreement (as defined below), bear interest at floating rates; - we may be at a competitive disadvantage compared to competitors that are less leveraged than we are; - we may have limited ability to adjust to changing market conditions; - we may have decreased ability to withstand competitive pressures; and - we may have increased vulnerability to a downturn in general economic conditions or our business. Our ability to make scheduled payments on or to refinance our indebtedness will depend on our financial and operating performance, which in turn will be subject to economic conditions and to financial, business, and other factors beyond our control. In order to fund our debt service and other obligations, we may be forced to reduce or delay planned expansion and capital expenditures, sell assets, obtain additional equity capital or debt financing (if available), or restructure our debt. Accordingly, we cannot guarantee that our operating results, EBITDA, and capital resources will be sufficient for future payments of our indebtedness, to make planned capital expenditures, to finance acquisitions, or to pay our other obligations. Restrictions Imposed by Debt Instruments. We are subject to a number of significant operating and financial restrictions and are required to maintain specified financial ratios, which restrict our operations. See "-- Restrictions on Our Operations." Our ability to comply with such covenants and financial ratios may be affected by events beyond our control. Covenant Compliance. In the past, we have from time to time obtained amendments or waivers to certain provisions of our debt instruments, including the 1999 Credit Agreement, in order to remain in compliance with the financial covenants thereunder. We are currently operating under waivers to compliance with certain covenants, including our leverage ratio, senior leverage ratio, interest coverage ratio, and fixed charge coverage ratio. There can be no assurance that we will not be required to seek additional waivers or amendments under our debt instruments in the future. Specifically, we will be required to seek additional waivers if the pending sale of our sports & entertainment operations does not close by April 15, 2001. Any failure to obtain a necessary amendment or waiver could result in a default under the relevant debt instrument. A default by us under our senior debt instruments could result in an acceleration of indebtedness under the senior debt instruments and other loan documents. If the indebtedness under any of these debt instruments were accelerated, there can be no assurance that we would be able to repay such indebtedness. REGULATION OF OUTDOOR ADVERTISING Outdoor advertising displays are subject to governmental regulation at the federal, state, and local levels. These regulations, in some cases, limit the height, size, location, and operation of outdoor displays and, in some circumstances, regulate the content of the advertising copy displayed on outdoor displays. Changes in laws and regulations affecting outdoor advertising at any level of government may have a material adverse effect on our business, financial condition, or results of operations. See "-- Outdoor Media -- Outdoor Advertising -- Regulation." TELEVISION AND RADIO BROADCASTING Government Regulation of Broadcasting Industry. Pursuant to the Communications Act, the domestic broadcasting industry is subject to extensive federal regulation. In addition, our television station, KVOS, which is located in Bellingham, Washington and broadcasts into Vancouver, British Columbia, is regulated and affected by Canadian law. The restrictions and obligations imposed by these laws and regulations, including their amendment, interpretation, or enforcement, could have a material adverse effect on our business, financial condition, or results of operations. See "-- Television and Radio Broadcasting Regulation." 19 21 Renewal of Broadcasting Licenses. Our business will continue to be dependent upon acquiring and maintaining broadcasting licenses issued by the FCC. Such licenses are currently issued for a term of eight years. Historically, we have been able to renew our broadcast licenses on a regular basis. However, we cannot guarantee that pending or future applications to acquire or renew broadcasting licenses will be approved, or will not include conditions or qualifications adversely affecting our operations, any of which could have a material adverse effect on us. Moreover, governmental regulations and policies may change over time and we cannot guarantee that such changes would not have a material adverse impact on our business, financial condition, or results of operations. See "-- Television and Radio Broadcasting Regulation -- Renewal of Broadcasting Licenses." Approval of Purchase and Sale Transactions. In connection with purchase and sales transactions, we are required to seek FCC approval. We cannot guarantee that the FCC will approve our applications. Failure to obtain FCC approval to transfer broadcasting licenses in connection with such transactions could adversely affect our business, financial condition, or results of operations. See "-- Television and Radio Broadcasting Regulation -- Purchase and Sale Transactions." KJR (AM) Transmission Facilities. One of our radio stations, KJR(AM), is currently licensed to broadcast from transmission facilities located on property leased from the Port of Seattle, currently on a month-to-month basis. In March 2001, the facilities were damaged during an earthquake. We had previously planned to transfer operations of KJR(AM) from the Port of Seattle location to a newly constructed tower in Tacoma, Washington. In March 2001, the FCC granted our application for special temporary authority to operate from our new site. See "Item 2 -- Properties." We subsequently filed an application with the FCC to permanently license KJR's new facilities in March 2001. While we expect that such application will be granted by the FCC, there can be no assurance that the FCC will grant our application. COMPETITION Our four business segments are in highly competitive industries. Our broadcasting and outdoor media businesses compete for audiences and advertising revenue with other broadcasting stations and outdoor media advertising companies, as well as with other media forms. Such other media forms may include newspapers, magazines, transit advertising, yellow page directories, direct mail, local cable systems, satellite broadcasting systems and other local Web sites. Audience ratings and market shares are subject to many variables. Any change, and any adverse change in a particular market, could have a material adverse effect on our business, financial condition, or results of operations. Changes which could have an adverse effect on us include economic conditions, both general and local; shifts in population and other demographics; the level of competition for advertising dollars; a station's market rank; broadcasting power, assigned frequency, network affiliation, and audience identification; fluctuations in operating costs; technological changes and innovations; changes in labor conditions; and changes in governmental regulations and policies and actions of federal regulatory bodies. There can be no assurance that we will be able to maintain or increase our current audience ratings and advertising revenue. In this respect, the entrance of a new television station in the Vancouver, British Columbia market in October 1997 has adversely affected the financial performance of our television station in Bellingham, Washington (KVOS). Certain of our competitors, including a few outdoor advertising and radio broadcasting companies that are substantially larger than our outdoor advertising and radio broadcasting operations have significantly greater financial, marketing, sales and other resources than we have. There can be no assurance that we will be able to compete successfully against our competitors in the future. The interactive media segment is also highly competitive. There do not exist significant barriers to entry for interactive media companies. We focus our interactive media operations primarily on the local television markets that we serve. We do not presently experience significant competition from other interactive media companies that operate on an international or national level. There can be no assurance that this competitive situation will not change in the future. 20 22 DEPENDENCE ON MANAGEMENT Certain of our executive officers and divisional managers, including Barry A. Ackerley, are especially important to our direction and management. The loss of the services of such persons could have a material adverse effect on the Company, and there can be no assurance that we would be able to find replacements for such persons with equivalent business experience. VOTING CONTROL BY PRINCIPAL STOCKHOLDER Each share of Common Stock has one vote per share and each share of Class B Common Stock has ten votes per share. As of March 1, 2001, Barry A. Ackerley, our Chairman of the Board and Chief Executive Officer, beneficially owned approximately 38% of the outstanding shares of Common Stock and approximately 99% of the outstanding shares of Class B Common Stock, giving him approximately 88% of the combined voting power of our voting securities. See "Item 12 -- Security Ownership of Certain Beneficial Owners and Management." As a director, the Chairman and Chief Executive Officer, and the majority stockholder of The Ackerley Group, Mr. Ackerley has certain fiduciary duties to minority stockholders under applicable law. However, so long as Mr. Ackerley continues to own or control stock having a majority of the combined voting power of our voting securities, he will have the power to elect all of our directors and effect fundamental corporate transactions, such as mergers, asset sales, and "going private" transactions, without the approval of any other stockholders. Moreover, Mr. Ackerley's voting control would effectively delay or prevent any other person or entity from acquiring or taking control of The Ackerley Group without his approval, whether or not the transaction could provide stockholders with a premium over the then-prevailing market price of their shares or would otherwise be in their best interests. RESTRICTIONS ON THE OWNERSHIP AND TRANSFER OF COMMON STOCK Our Bylaws contain certain restrictions on the transfer of our capital stock in order to comply with the prohibitions on foreign ownership of radio and television stations contained in the Communications Act of 1934 and FCC rules. See "-- Television and Radio Broadcasting Regulation -- Ownership." These restrictions in our Bylaws, as well as certain related provisions in our Certificate of Incorporation, may adversely affect the ability of investors to acquire, hold, or otherwise transfer our Common Stock. SHARES ELIGIBLE FOR FUTURE SALE As of March 1, 2001, 9,136,369 shares of Common Stock and 16,003,856 shares of Class B Common Stock were held by officers and directors who are considered to be our "affiliates" for purposes of Rule 144 under the Securities Act. As noted above, each share of Class B Common Stock is convertible by the holder at any time into one share of Common Stock. Our affiliates may sell these shares in the public market subject to the volume and other limitations (other than the holding Period limitations, which have been satisfied) of Rule 144 under the Securities Act. No prediction can be made as to the effect, if any, that future sales of shares, or the availability of shares for future sale, will have on the market price of the Common Stock from time to time. Sales of substantial amounts of Common Stock in the public market (including Common Stock issued upon conversion of Class B Common Stock), or the perception that such sales could occur, could have a material adverse effect on prevailing market prices for the Common Stock. ITEM 2 -- PROPERTIES Our principal executive offices are located at 1301 Fifth Avenue, Suite 4000, Seattle, Washington 98101. We lease the offices, which consist of approximately 16,800 square feet, pursuant to a lease that expires in 2006. 21 23 The following table sets forth certain information regarding our facilities as of December 31, 2000:
APPROXIMATE SQUARE FOOTAGE APPROXIMATE SQUARE LOCATION NATURE OF FACILITY OWNED FOOTAGE LEASED -------- ------------------ -------------- ------------------ OUTDOOR MEDIA Seattle, Washington (Outdoor Advertising)............................ Plant 24,966 1,185 Portland, Oregon (Outdoor Advertising)..... Plant 10,923 570 Boston, Massachusetts (Outdoor Advertising)............................ Plant 31,882 3,825 TELEVISION BROADCASTING Syracuse, New York (WIXT).................. Station Operations 40,000 -- Rochester, New York (WOKR)................. Station Operations 35,427 -- Binghamton, New York (WIVT, WBGH).......... Station Operations 10,819 -- Utica, New York (WUTR)..................... Station Operations 12,148 -- Watertown, New York (WWTI)................. Station Operations -- 10,000 Elmira, New York (WETM)(1)................. Station Operations 20,606 -- Santa Barbara -- Santa Maria -- San Luis Obispo, California (KCOY, KKFX)......... Station Operations 13,000 -- Salinas -- Monterey, California (KCBA(1), KION)................................... Station Operations 47,841 -- Bakersfield, California (KGET)............. Station Operations 30,450 -- Fresno, California (KGPE).................. Station Operations 6,500 -- Eugene, Oregon (KMTR)...................... Station Operations 9,230 3,000 Eureka, California (KVIQ).................. Station Operations 10,162 1,200 Santa Rosa, California (KFTY).............. Station Operations 13,000 -- Bellingham, Washington (KVOS).............. Station Operations 13,130 11,889 Fairbanks, Alaska (KTVF)................... Station Operations -- 10,732 RADIO BROADCASTING Seattle, Washington (KJR(AM), KBTB(FM), KUBE(FM))............................... Station Operations -- 42,816 Tacoma, Washington (KHHO(AM)).............. Station Operations -- 2,075 INTERACTIVE MEDIA(2)......................... -- -- -- SPORTS & ENTERTAINMENT(3) Seattle, Washington........................ Office & Operating 30,000 27,246 Facilities OTHER Seattle, Washington (Corporate Offices).... Offices -- 16,814 National Sales Offices in New York, Los Angeles, Chicago, and San Francisco..... Offices -- 9,164
--------------- (1) As of December 31, 2000, we programmed these stations under LMAs. Accordingly, this table reflects data for the properties which are owned or leased by the station owners for whom we program the stations. (2) Our interactive media operations utilizes equipment within our existing facilities and currently do not have separate designated facilities. (3) On January 11, 2001, we entered into an agreement to sell our sports & entertainment operations. 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 2000, we paid aggregate annual rentals on office space and operating facilities of approximately $5.7 million. KJR(AM) is licensed to broadcast from transmission facilities located on property leased from the Port of Seattle, currently on a month-to-month basis. In March 2001, the facilities at the Port of Seattle were damaged during an earthquake. We had previously planned to transfer operation of KJR(AM) from the Port 22 24 of Seattle location to a newly constructed tower in Tacoma, Washington. On May 5, 1998 the FCC issued a construction permit granting us authority to construct the new transmission facilities. Construction of the new site was substantially completed in February 2000, and testing of the facilities was substantially completed in February 2001. In March 2001, the FCC granted our application for special temporary authority to operate from our new site. We subsequently filed an application with the FCC to permanently license KJR's new facilities in March 2001. At December 31, 2000, we owned 203 vehicles and leased 200 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 private carrier agreements, a Gulfstream jet and a Lear jet. The Gulfstream jet is used for executive travel between our facilities and we are currently in the process of disposing of the Lear jet. We also lease a high definition mobile television broadcasting unit which is used to provide broadcast and production services for our television stations and outside parties. Finally, we own a Boeing 727 jet that we use for travel involving the Seattle SuperSonics. However, in conjunction with the sale of our sports & entertainment operations, as discussed in Note 4 to the Consolidated Financial Statements, we are currently seeking to sell this asset. 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. 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 sought 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. In September 2000, the Court granted defendant's Motion for Summary Judgment as to all federal claims and dismissed plaintiff's state law claims without prejudice. Plaintiff appealed that decision to the second Circuit, which is expected to hear argument sometime in the Spring of 2001. Plaintiff has re-filed her state law claims in state court, but is not expected to press those claims until the Court of Appeals rules. RSA Media Inc. v. AK Media Group, Inc. On June 4, 1997, RSA Media Inc., a supplier of outdoor 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 sought 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. On October 3, 2000, the Court granted our motion for summary judgment on the remaining counts of the Complaint. On October 26, 2000, RSA Media filed a Notice of Appeal with the United States Court of Appeals for the First Circuit. Under the Scheduling Order established by the First Circuit, substantive briefing will not commence until later in 2001. 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 2000. 23 25 EXECUTIVE OFFICERS OF THE REGISTRANT Our executive officers are:
NAME AGE POSITION ---- --- -------- Barry A. Ackerley..................... 66 Chairman and Chief Executive Officer Gail A. Ackerley...................... 63 Co-Chairman and Co-Chief Executive Officer Christopher H. Ackerley............... 31 Co-President Denis M. Curley....................... 53 Co-President and Secretary Kevin E. Hylton....................... 44 Senior Vice President, Chief Financial Officer, and Assistant Secretary
Mr. Barry A. Ackerley, one of our founders, has been the Chief Executive Officer and a director of The Ackerley Group and its predecessor and subsidiary companies since 1975. He currently serves as our Chairman. Ms. Gail A. Ackerley was elected to our Board of Directors in May 1995, and became Co-Chairman in September 1996. She served as one of our Co-Presidents from November 1997 to February 15, 2000. Ms. Ackerley has served as our Chairman of Ackerley Corporate Giving since 1986, supervising our charitable activities, and also serves as Chairman of the Seattle Storm. Mr. Christopher H. Ackerley was named Co-President on February 15, 2000, with principal responsibility for overseeing our marketing, investor relations, information technology, and technology-venture investments. He joined The Ackerley Group in 1995, and was elected Vice President for Marketing and Development in May 1998. He also served as Executive Vice President, Operations and Development from December 1998 until his election as Co-President. Mr. Denis M. Curley, who joined us in December 1984, was elected as Chief Operating Officer on February 15, 2000, and 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. Kevin E. Hylton was named Senior Vice President and Chief Financial Officer on June 5, 2000. Prior to joining us he served as Director of Finance for Nordstrom, Inc. from March 1999 to April 2000. From December 1987 to July 1998, he was Vice President and Corporate Controller for Westin Hotels and Resorts. Barry A. Ackerley and Gail A. Ackerley are husband and wife. Christopher H. Ackerley is their son. There are no other family relationships among any of our executive officers. All officers serve at the pleasure of our Board of Directors. PART II ITEM 5 -- MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS As of March 1, 2001, 35,060,136 shares of our common stock were issued and outstanding, of which 24,020,548 shares were Common Stock and 11,039,588 shares were Class B Common Stock. The Common Stock was held by 509 shareholders of record; the Class B Common Stock was held by 26 shareholders of record. Our Board of Directors declared a cash dividend of $.02 per share in each of 1999 and 2000. Our Board of Directors determined not to declare a dividend in 2001. Payment of any future dividends is at the discretion of the Board of Directors and depends on a number of conditions. Among other things, dividend payments depend upon our results of operations and financial condition, capital requirements and general economic conditions. The terms of our senior debt impose certain limits upon our ability to pay dividends and make 24 26 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 Our Common Stock is listed and trades on the New York Stock Exchange under the symbol "AK." The table below sets forth the high and low sales prices of our Common Stock for each full quarterly period in the two most recent fiscal years according to the New York Stock Exchange.
2000 HIGH LOW 1999 HIGH LOW ---- ------ ------ ---- ------ ------ First Quarter.............. $19.53 $12.36 First Quarter.............. $19.22 $16.47 Second Quarter............. $15.06 $10.94 Second Quarter............. $19.97 $16.60 Third Quarter.............. $14.13 $ 9.69 Third Quarter.............. $19.22 $11.11 Fourth Quarter............. $11.63 $ 7.88 Fourth Quarter............. $18.47 $11.36
On March 1, 2001, the high and low sales prices of our Common Stock, according to the New York Stock Exchange, were $14.00 and $13.75, respectively. CLASS B COMMON STOCK Our Class B Common Stock is not publicly traded. Persons owning shares of our Class B Common Stock may trade such shares only as permitted by our Certificate of Incorporation, which imposes restrictions on such transfer. Thus, there is no trading market for shares of our Class B Common Stock. 25 27 ITEM 6 -- SELECTED FINANCIAL DATA The table below sets forth selected consolidated financial data regarding our operations. The information in the table has been derived from audited Consolidated Financial Statements. You should read the information in the table in conjunction with the sections titled "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated Financial Statements (and Notes) included elsewhere in this report.
YEAR ENDED DECEMBER 31, --------------------------------------------------------- 2000 1999 1998 1997 1996 --------- -------- -------- -------- -------- (IN THOUSANDS, EXCEPT PER SHARE DATA) CONSOLIDATED STATEMENT OF OPERATIONS DATA: Revenue................................................... $ 263,305 $243,130 $235,516 $229,828 $205,049 Agency commissions and discounts.......................... 38,741 35,547 34,015 32,085 29,398 --------- -------- -------- -------- -------- Net revenue............................................... 224,564 207,583 201,501 197,743 175,651 Expenses (other income): Operating expenses...................................... 181,644 157,065 150,911 142,089 125,137 Restructuring expenses.................................. (178) 1,125 -- -- -- Depreciation and amortization expense................... 39,161 26,042 14,078 13,184 14,255 Interest expense........................................ 25,795 32,959 22,792 24,209 22,514 Net gain on dispositions of assets...................... (277,650)(1) (28,999)(1) (33,524)(1) -- -- Stock compensation expense.............................. 100 559 452 9,344 -- Equity in losses of affiliates.......................... 801 174 -- -- -- Litigation expense (adjustment)......................... -- -- -- (5,000)(2) -- --------- -------- -------- -------- -------- Total expenses (other income)..................... (30,327) 188,925 154,709 183,826 161,906 --------- -------- -------- -------- -------- Income from continuing operations before income taxes and extraordinary item...................................... 254,891 18,658 46,792 13,917 13,745 Income tax expense (benefit).............................. 96,284 7,917 18,576 (19,168) 2,007 --------- -------- -------- -------- -------- Income from continuing operations before extraordinary item.................................................... 158,607 10,741 28,216 33,085 11,738 Income (loss) from discontinued operations, net of taxes (3)..................................................... (9,707) (2,778) (4,693) (156) 4,391 --------- -------- -------- -------- -------- Income before extraordinary item.......................... 148,900 7,963 23,523 32,929 16,129 Extraordinary item -- loss on debt extinguishment, net of taxes................................................... -- (1,373) (4,346) -- (355) --------- -------- -------- -------- -------- Net income applicable to common shares.................... $ 148,900 $ 6,590 $ 19,177 $ 32,929 $ 15,774 ========= ======== ======== ======== ======== Per common share: Income from continuing operations before extraordinary item................................................ $ 4.54 $ .33 $ .89 $ 1.05 $ .38 Discontinued operations............................... (.28) (.09) (.14) -- .14 Extraordinary item.................................... -- (.04) (.14) -- (.01) --------- -------- -------- -------- -------- Net income............................................ $ 4.26 $ .20 $ .61 $ 1.05 $ .51 ========= ======== ======== ======== ======== Common shares used in per share computation........... 34,994 32,932 31,627 31,345 31,166 Per common share -- assuming dilution: Income before extraordinary item...................... $ 4.52 $ .32 $ .88 $ 1.04 $ .37 Discontinued operations............................... (.28) (.08) (.14) -- .14 Extraordinary item.................................... -- (.04) (.14) -- (.01) --------- -------- -------- -------- -------- Net income............................................ $ 4.24 $ .20 $ .60 $ 1.04 $ .50 ========= ======== ======== ======== ======== Common shares used in per share computation -- assuming dilution.................... 35,122 33,110 31,883 31,652 31,760 Dividends................................................. $ .02 $ .02 $ .02 $ .02 $ .02 ========= ======== ======== ======== ======== CONSOLIDATED BALANCE SHEET DATA (AT END OF PERIOD): Working capital........................................... $ 15,108 $ 21,704 $ 15,706 $ 12,019 $ 11,154 Total assets.............................................. 667,307 528,436 316,126 266,385 224,912 Total long-term debt...................................... 385,439 403,761 266,999 213,294 229,350 Total debt................................................ 394,671 414,593 270,100 229,424 235,141 Stockholders' equity (deficiency)......................... 175,980 27,289 (25,841) (44,909) (83,839)
--------------- (1) See Note 3 to the Consolidated Financial Statements. (2) See Note 14 to the Consolidated Financial Statements. (3) See Note 4 to the Consolidated Financial Statements 26 28 ITEM 7 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FORWARD-LOOKING STATEMENTS Statements appearing in this section, Management's Discussion and Analysis of Financial Condition and Results of Operations, and elsewhere in this report, which are not historical in nature (including the discussions of the effects of recent acquisitions and dispositions, business transactions, and similar information), are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. We caution our shareholders and potential investors that any forward-looking statements or projections set forth in this section and elsewhere in the annual report are subject to risks and uncertainties which may cause actual results to differ materially from those projected. After the date of this Annual Report, we will not make any public announcements updating any forward-looking statement contained in this report. Important factors that could cause the results to differ materially from those expressed in this section or elsewhere in the annual report include: - material adverse changes in general economic conditions, including changes in inflation and interest rates, changes in demand for advertising nationally or in the local markets that we serve, including cyclical aspects such as political advertising; - recessionary influences in the regional markets that we serve; - changes in laws and regulations affecting the outdoor advertising and television and radio broadcasting businesses, including changes in the FCC's treatment of local marketing agreements and related matters, and the possible inability to obtain FCC consent to proposed or pending acquisitions or dispositions of broadcasting stations; - competitive factors in the outdoor advertising, television broadcasting, radio broadcasting, and interactive media businesses; - expiration or non-renewal of broadcasting licenses and local marketing agreements; - labor matters, changes in labor costs, loss of key employees, including key broadcasting employees, renegotiation of labor contracts, and risk of work stoppages or strikes; - matters relating to our level of indebtedness, including restrictions imposed by financial covenants; - material changes to accounting standards. OVERVIEW We reported net income of $148.9 million in 2000, compared to $6.6 million in 1999. Our net income for 2000 includes a net gain on dispositions of assets of $277.7 million and a loss from discontinued operations of $9.7 million. By contrast, our 1999 net income includes a net gain on dispositions of assets of $29.0 million and a loss from discontinued operations of $2.8 million. Net revenue in 2000 increased by $17.0 million, or 8%, from 1999, and our EBITDA (as defined below) decreased by $6.3 million, or 13%. During 2000, we sold our Florida outdoor advertising operations and acquired five outdoor advertising companies. In addition, we acquired two television stations for which we previously provided programming and sales services under local marketing agreements, acquired four other television stations, and entered into a local marketing agreement for an additional station. In January 2001, we entered into an agreement to sell our sports & entertainment operations pursuant to a letter of intent signed on December 8, 2000. Accordingly, our sports & entertainment operations are reflected in our financial statements as a discontinued operation for all periods presented. This transaction is more fully discussed in Note 4 to the Consolidated Financial Statements. In the third quarter of 2000, our interactive media segment commenced operations. Currently, this segment consists of the iKnow Network, a group of independent local news and information portal sites created through partnerships between our interactive media group, our local television stations, and other local 27 29 media companies. At December 31, 2000, our portal sites in Bakersfield, California and Rochester, New York were operational. As with many media companies, our acquisitions and dispositions have resulted in significant non-cash and non-recurring charges to income. For this reason, in addition to net income, our management believes that EBITDA (defined as net revenue less operating expenses and restructuring expenses before amortization, depreciation, interest, net gain on dispositions of assets, stock compensation expense, and equity in losses of affiliates) is an appropriate measure of our financial performance. Similarly, we believe that Segment Operating Cash Flow (defined as EBITDA 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 EBITDA to pay interest and principal on our long-term debt as well as to finance capital expenditures. EBITDA and Segment Operating Cash Flow, however, are not to be considered as alternatives to net income as an indicator of our operating performance or to cash flows as a measure of our liquidity. RESULTS OF OPERATIONS The following tables set forth certain historical financial and operating data for each of the three years in the period ended December 31, 2000, including net revenue, operating expenses, and Segment Operating Cash Flow information by segment:
YEAR ENDED DECEMBER 31, ----------------------------------------------------------------- 2000 1999 1998 ------------------- ------------------- ------------------- AS % OF AS % OF AS % OF NET NET NET AMOUNT REVENUE AMOUNT REVENUE AMOUNT REVENUE -------- ------- -------- ------- -------- ------- (DOLLARS IN THOUSANDS) Net revenue................... $224,564 100.0% $207,583 100.0% $201,501 100.0% Segment operating expenses.... 157,674 70.2 142,048 68.4 136,420 67.7 Corporate overhead............ 23,792 10.6 16,142 7.8 14,491 7.2 -------- -------- -------- Total operating expenses.......... 181,466 80.8 158,190 76.2 150,911 74.9 -------- -------- -------- EBITDA........................ 43,098 19.2 49,393 23.8 50,590 25.1 Other expenses and (income): Depreciation and amortization expenses.... 39,161 17.4 26,042 12.5 14,078 7.0 Interest expense............ 25,795 11.5 32,959 15.9 22,792 11.3 Net gain on dispositions of assets................... (277,650) (123.6) (28,999) (14.0) (33,524) (16.6) Stock compensation expense.................. 100 -- 559 0.3 452 0.2 Equity in losses of affiliates............... 801 0.4 174 0.1 -- -- -------- -------- -------- Total other expenses and (income)...... (211,793) (94.3) 30,735 14.8 3,798 1.9 Income from continuing operations before income taxes and extraordinary item........................ 254,891 113.5 18,658 9.0 46,792 23.2 Income tax expense............ 96,284 42.9 7,917 3.8 18,576 9.2 -------- -------- -------- Income from continuing operations before extraordinary item.......... 158,607 70.6 10,741 5.2 28,216 14.0 Loss from discontinued operations, net of taxes.... (9,707) (4.3) (2,778) (1.4) (4,693) (2.3) -------- -------- -------- Income before extraordinary item........................ 148,900 66.3 7,963 3.8 23,523 11.7 Extraordinary item, net of taxes....................... -- -- (1,373) (0.6) (4,346) (2.2) -------- -------- -------- Net income.................... $148,900 66.3 $ 6,590 3.2 $ 19,177 9.5 ======== ======== ========
28 30
YEAR ENDED DECEMBER 31, -------------------------------- 2000 1999 1998 -------- -------- -------- (DOLLARS IN THOUSANDS) Net revenue: Outdoor media............................................ $ 89,309 $ 98,751 $108,560 Television broadcasting.................................. 107,615 81,669 68,467 Radio broadcasting....................................... 27,589 27,163 24,474 Interactive media........................................ 51 -- -- -------- -------- -------- Total net revenue................................ $224,564 $207,583 $201,501 ======== ======== ======== Segment operating expenses: Outdoor media............................................ $ 51,364 $ 56,877 $ 65,605 Television broadcasting.................................. 86,841 69,608 55,996 Radio broadcasting....................................... 19,018 15,563 14,819 Interactive media........................................ 451 -- -- -------- -------- -------- Total segment operating expenses................. $157,674 $142,048 $136,420 ======== ======== ======== Segment operating cash flow and EBITDA: Outdoor media............................................ $ 37,945 $ 41,874 $ 42,955 Television broadcasting.................................. 20,774 12,061 12,471 Radio broadcasting....................................... 8,571 11,600 9,655 Interactive media........................................ (400) -- -- -------- -------- -------- Total Segment Operating Cash Flow................ 66,890 65,535 65,081 Corporate overhead....................................... (23,792) (16,142) (14,491) -------- -------- -------- EBITDA........................................... $ 43,098 $ 49,393 $ 50,590 ======== ======== ======== Change in net revenue from prior periods: Outdoor media............................................ (9.6)% (9.0)% (4.1)% Television broadcasting.................................. 31.8 19.3 7.6 Radio broadcasting....................................... 1.6 11.0 16.7 Interactive media........................................ NA NA NA Change in total net revenue...................... 8.2 3.0 (1.9) Segment operating expenses as a % of net revenue: Outdoor media............................................ 57.5% 57.6% 60.4% Television broadcasting.................................. 80.7 85.2 81.8 Radio broadcasting....................................... 68.9 57.3 60.5 Interactive media........................................ 884.3 -- -- Total segment operating expenses as a % of total net revenue:................................... 70.2 68.4 67.7 Segment operating cash flow as a % of net revenue: Outdoor media............................................ 42.5% 42.4% 39.6% Television broadcasting.................................. 19.3 14.8 18.2 Radio broadcasting....................................... 31.1 42.7 39.5 Interactive media........................................ (784.3) -- -- Segment Operating Cash Flow as a % of total net revenue............................................. 29.8 31.6 32.3 EBITDA as a % of total net revenue......................... 19.2 23.8 25.1
2000 COMPARED WITH 1999 Net Revenue. Our 2000 net revenue was $224.6 million. This represented an increase of $17.0 million, or 8%, compared to $207.6 million in 1999. Changes in net revenue were as follows: - Outdoor Media. Net revenue from our outdoor media segment decreased by $9.5 million, or 10%, from 1999. This decrease was primarily due to the absence of our Florida outdoor advertising 29 31 operations, which we sold in January 2000. Excluding our Florida outdoor advertising operations, net revenue from our outdoor media segment increased by $16.4 million, or 23%, from 1999. This increase mainly resulted from growth in national and local sales in the Boston and Northwest markets. We completed the expansion of our national sales organization during 1999, which contributed to our national sales growth. Within this segment, dot com advertising increased 148% to $12.1 million in 2000. - Television Broadcasting. Net revenue from our television broadcasting segment increased by $25.9 million, or 32%, from 1999. This increase was mainly due mainly to the addition of stations WETM, WBGH, WWTI, KGPE, and KKFX in 2000; stations WOKR and KTVF in 1999; and the exchange of station KKTV for KCOY in 1999. Excluding these transactions, net revenue from our television broadcasting segment increased by $5.3 million, or 9%, from 1999. This increase was due primarily to political advertising revenue, which totaled approximately $12.0 million ($10.1 million excluding acquired stations) in 2000. - Radio Broadcasting. Net revenue from our radio broadcasting segment increased by $0.4 million, or 2%, from 1999. Revenue growth was negatively impacted by the format change with one of our FM stations. Segment Operating Expenses. Segment operating expenses (which exclude corporate overhead) were $157.7 million. This represented an increase of $15.7 million, or 11%, compared to $142.0 million in 1999. Changes in segment operating expenses were as follows: - Outdoor Media. Operating expenses from our outdoor media segment decreased by $5.5 million, or 10%, from 1999. This decrease was due primarily to the absence of our Florida outdoor advertising operations, which we sold in January 2000. Excluding our Florida outdoor advertising operations, operating expenses from our outdoor media segment increased by $11.7 million, or 30%, from 1999. This increase was primarily due to the acquisition of five outdoor media companies, higher lease costs, increased employment-related expenses, and increased expenses related to the expansion of our national sales force. - Television Broadcasting. Operating expenses from our television broadcasting segment increased by $17.2 million, or 25%, from 1999. This increase was due mainly to the addition of stations WETM, WBGH, WWTI, KGPE, and KKFX in 2000; stations WOKR and KTVF in 1999; and the exchange of station KKTV for KCOY in 1999. Our 1999 operating expenses included a restructuring charge of $1.1 million recognized in connection with our ongoing implementation of Digital CentralCasting. This restructuring charge consisted primarily of costs associated with employee staff reductions, contract terminations, legal, and other costs associated directly with the restructuring. Excluding these transactions, operating expenses from our television broadcasting segment increased by $2.4 million, or 4%, from 1999. This increase was primarily due to higher program, promotion, and production expenses relating to the expansion of our local news. - Radio Broadcasting. Operating expenses from our radio broadcasting segment increased by $3.5 million, or 22%, from 1999. This increase was primarily due to higher expenses associated with increased sales activity and the expense associated with the previously noted format change with one of our FM stations. Corporate Overhead Expenses. Our corporate overhead expenses were $23.8 million in 2000. This represented an increase of $7.7 million, or 47%, from 1999. Approximately $3.3 million of this increase was due to costs associated with the celebration of our 25th anniversary and the operating and estimated disposal costs of a company aircraft. The remainder of the increase was due primarily to increased travel costs, expansion of corporate staff to support our growth from our acquisitions, and greater utilization of outside services. EBITDA. Our EBITDA was $43.1 million in 2000. This represented a decrease of $6.3 million, or 13%, compared to $49.4 million in 1999. The decrease in Segment Operating Cash Flow from our outdoor media and radio broadcasting segments, and the increase in corporate overhead expenses, was partially offset by the 30 32 increase in Segment Operating Cash Flow from our television broadcasting segment. EBITDA as a percentage of total net revenue decreased to 19% in 2000 compared to 24% in 1999. Depreciation and Amortization Expenses. Our depreciation and amortization expenses were $39.2 million in 2000. This represented an increase of $13.2 million, or 51%, compared to $26.0 million in 1999. This increase resulted primarily from depreciation and amortization expenses relating to our business acquisitions during 2000. In addition, depreciation expense increased as a result of our investment in a new operating facility for our radio broadcasting, sports & entertainment (discontinued operations), and corporate technology operations, and our investment in the Digital CentralCasting and ParkerVision systems for our television broadcasting segment. Interest Expense. Our interest expense was $25.8 million in 2000. This represented a decrease of $7.2 million, or 22%, from $33.0 million in 1999. This decrease was due to lower average debt balances during 2000 resulting from the application of proceeds from the sale of our Florida outdoor advertising operations. Stock Compensation Expense. We recognized stock compensation expense of $0.1 million in 2000 compared to $0.6 million in 1999. The 1999 expense primarily related to the amendments of certain stock option agreements. Net Gain on Dispositions of Assets. We recognized a net gain on disposition of assets of $277.7 million. This gain consisted of a $269.3 million gain from the sale of our Florida outdoor advertising operations, an $8.8 million gain from the sale of station KCBA, and a $0.4 million loss on disposal of certain assets of our radio broadcasting segment resulting from it's relocation to a new facility. The net gain of $29.0 million in 1999 resulted from a $28.6 million gain from the exchange of the assets of television station KKTV for the assets of television station KCOY, a $1.6 million gain relating to the sale of our airport advertising operations, and a $1.2 million loss on the sale of a radio broadcasting tower. Income Tax Expense. We recognized income tax expense of $96.3 million based on our income from continuing operations before extraordinary item of $254.9 million in 2000 compared to $7.9 million based on our income from continuing operations before extraordinary item of $18.7 million in 1999. The effective tax rate in 2000 was 38% compared to 42% in 1999. Loss From Discontinued Operations. Our loss from discontinued operations was $9.7 million net of taxes for 2000 compared to $2.8 million in 1999. This increase was due primarily to increased operating expenses, particularly for SuperSonics player compensation and other team costs, which outpaced the growth in net revenue. Extraordinary Item. In 1999, we replaced our existing 1998 Credit Agreement with a new $325.0 million credit agreement and redeemed our $20.0 million 10.48% Senior Subordinated Notes. These transactions resulted in an aggregate charge of $1.4 million, net of taxes, primarily consisting of the write-off of deferred financing costs and prepayment fees. Net Income. Our net income was $148.9 million in 2000. This represented an increase of $142.3 million from $6.6 million in 1999. 1999 COMPARED WITH 1998 Net Revenue. Our 1999 net revenue was $207.6 million. This represented an increase of $6.1 million, or 3%, compared to $201.5 million in 1998. Changes in net revenue were as follows: - Outdoor Media. Our 1999 net revenue from our outdoor media segment decreased by $9.8 million, or 9%, from 1998. This decrease was primarily due to the absence of our airport advertising operations, which we sold in June 1998. Excluding our airport advertising operations, our 1999 net revenue from our outdoor media segment increased by $6.4 million, or 7%, from 1998. This increase mainly resulted from an increase in both national and local sales. - Television Broadcasting. Our 1999 net revenue from our television broadcasting segment increased by $13.2 million, or 19%, from 1998. This increase was mainly due to the exchange of station KKTV for 31 33 station KCOY in January 1999 and the addition of stations KVIQ in July 1998, KMTR in December 1998, WOKR in April 1999, and KTFV in August 1999. Excluding these transactions, our 1999 net revenue from our television broadcasting segment decreased by $3.2 million, or 6%, from 1998. This decrease was primarily due to the lack of political advertising during 1999, partially offset by increased national and local sales. - Radio Broadcasting. Our 1999 net revenue from our radio broadcasting segment increased by $2.7 million, or 11%, from 1998. This increase was primarily due to an increase in both national and local sales. Segment Operating Expenses. Our 1999 segment operating expenses (which exclude corporate overhead) were $142.0 million. This represented an increase of $5.6 million, or 4%, compared to $136.4 million in 1998. Changes in segment operating expenses were as follows: - Outdoor Media. Our 1999 operating expenses from our outdoor media segment decreased by $8.7 million, or 13%, from 1998. This decrease was primarily due to the absence of our airport advertising operations, which we sold in June 1998. Excluding our airport advertising operations, our 1999 operating expenses from our outdoor media segment increased by $6.1 million, or 12%, from 1998. This increase was primarily due to higher lease costs, increased employment-related expenses, and increased expenses related to the expansion of our national sales force. - Television Broadcasting. Our 1999 operating expenses from our television broadcasting segment increased by $13.6 million, or 24%, from 1998. This increase was mainly due to the exchange of station KKTV for station KCOY in January 1999 and the addition of stations KVIQ in July 1998, KMTR in December 1998, WOKR in April 1999, and KTVF in August 1999. This increase was also due to a restructuring charge of $1.1 million recognized in connection with our ongoing implementation of Digital CentralCasting(TM). This restructuring charge consisted primarily of costs associated with employee staff reductions. See further discussion in Note 14 to the Consolidated Financial Statements. Excluding these transactions, our 1999 operating expenses from our television broadcasting segment increased by $0.8 million, or 2%, from 1998. This increase was primarily due to higher program, promotion, and production expenses relating to the expansion of local news. - Radio Broadcasting. Our 1999 operating expenses from our radio broadcasting segment increased by $0.8 million, or 5%, from 1998. This increase was primarily due to higher expenses relating to increased sales activity. Corporate Overhead Expenses. Our corporate overhead expenses were $16.1 million in 1999. This represented an increase of $1.7 million, or 11%, from 1998. This increase was primarily a result of increased marketing costs, increased travel costs, and higher utilization of outside services. EBITDA. Our EBITDA was $49.4 million in 1999. This represented a decrease of $1.2 million, or 2%, compared to $50.6 million in 1998. The increase in Segment Operating Cash Flow from our radio broadcasting segment was partially offset by the decrease in Segment Operating Cash Flow from our outdoor media and television broadcasting segments and the increase in corporate overhead expenses. EBITDA as a percentage of total net revenue decreased to 24% in 1999 compared to 25% in 1998. Depreciation and Amortization Expenses. Our depreciation and amortization expenses were $26.0 million in 1999. This represented an increase of $11.9 million, or 84%, compared to $14.1 million in 1998. This increase primarily resulted from depreciation and amortization expenses relating to our business acquisitions during 1999. Interest Expense. Our interest expense was $33.0 million in 1999. This represented an increase of $10.2 million, or 45%, from 1998. This increase was primarily due to higher average debt balances during 1999 reflecting the financing of our various acquisitions. Stock Compensation Expense. We recognized stock compensation expense of $0.6 million in 1999 compared to $0.5 million in 1998. These expenses primarily related to the amendment of certain stock option agreements. 32 34 Net Gain on Dispositions of Assets. We recognized a net gain on disposition of assets of $29.0 million. This gain consisted primarily of a $28.6 million gain from the exchange of the assets of television station KKTV for the assets of television station KCOY, a $1.6 million gain relating to the sale of our airport advertising operations, and a $1.2 million loss on the sale of a radio broadcasting tower. In 1998, we recognized a $33.5 million gain on disposition of assets primarily relating to the sale of our airport advertising operations in June 1998. Income Tax Expense. We recognized income tax expense of $7.9 million based on our income from continuing operations before extraordinary item of $18.7 million in 1999 compared to $18.6 million based on our income from continuing operations before extraordinary item of $46.8 million in 1998. The effective tax rate was 42% in 1999 compared to 40% in 1998. Loss From Discontinued Operations. Our loss from discontinued operations was $2.8 million net of taxes for 1999 compared to $4.7 million for 1998. This decrease was due primarily to the impact of the NBA lockout. Two full months of the NBA season were cancelled in 1998 whereas only one month was cancelled in 1999, resulting in greater losses in 1998 compared to 1999. Extraordinary Item. In 1999, we replaced our existing 1998 Credit Agreement with a new $325.0 million credit agreement and redeemed our $20.0 million 10.48% Senior Subordinated Notes. These transactions resulted in an aggregate charge of $1.4 million, net of taxes, primarily consisting of the write-off of deferred financing costs and prepayment fees. In 1998, we redeemed our 10.75% Senior Secured Notes with proceeds under the 1998 Credit Agreement. This transaction resulted in a charge of $4.3 million, net of taxes, consisting of the write-off of deferred financing costs and prepayment fees. Net Income. Our net income was $6.6 million in 1999. This represented a decrease of $12.6 million, or 66%, from $19.2 million in 1998. LIQUIDITY AND CAPITAL RESOURCES Cash used in operating activities was $78.3 million in 2000 compared to $0.2 million in 1999. However, cash paid for income taxes was $70.7 million in 2000 compared to only $0.7 million in 1999. The higher 2000 amount is due mainly to income taxes associated with the net gain on dispositions of assets of $277.7 million, which resulted primarily from the sale of our Florida outdoor advertising operations. In addition, our cash flow from operating activities was impacted negatively by the loss from our discontinued sports & entertainment operations. On a pre-tax basis, this loss amounted to $15.6 million in 2000 compared to $4.8 million in 1999. Finally, in the first quarter of 2000 we paid $7.5 million in damages in connection with a lawsuit, as more fully described in Note 14 to the Consolidated Financial Statements. Our working capital decreased to $15.1 million at December 31, 2000 from $21.7 million at December 31, 1999. This decrease was due primarily to the decrease in deferred tax assets, consisting principally of net operating loss, alternative minimum tax credit, and charitable contribution carryforwards. The gain on the sale of our Florida outdoor advertising operations enabled us to utilize these carryforwards in 2000. For the periods presented, we financed our working capital needs primarily from cash provided by operating activities and bank borrowings. Capital expenditures were $41.4 million in 2000, compared to $29.1 million in 1999. Capital expenditures in 2000 were primarily for the expansion of our radio broadcasting, corporate technology group, and sports & entertainment (discontinued operations) operating facilities in Seattle, broadcasting equipment in connection with the implementation of Digital CentralCasting and ParkerVision, computer equipment, and outdoor advertising signs. We anticipate that 2001 capital expenditures will be between $15.0 and $25.0 million. These amounts will consist mainly of broadcasting equipment to complete our Digital CentralCasting and ParkerVision implementations and the expansion of our outdoor advertising operating facilities in Portland, Oregon. This forward-looking statement is, however, subject to the qualification set forth under "Forward- Looking Statements" above. During 2000, we purchased five outdoor advertising companies for $46.3 million and six television stations for $112.3 million. We also invested $17.0 million in a company that operates several television stations in 33 35 New York. These transactions, which resulted in significant amounts of goodwill and other intangible assets, are more fully described in Notes 1 and 3 to the Consolidated Financial Statements. For the periods presented, our long-term liquidity needs have been principally for acquisitions, capital expenditures, and refinancing our indebtedness. We have financed these needs through proceeds from the sale of our airport advertising operations in 1998, proceeds from the sale of our Florida outdoor advertising operations in 2000, proceeds from the issuance of common stock in 1999, proceeds from the sale of subordinated debt securities in 1998 and 1999, and bank borrowings. Following is a summary of our financing activities and debt structure: On January 22, 1999, we replaced the $300.0 million 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 million revolving credit facility (the "Revolver"), which includes up to $10.0 million in standby letters of credit. This transaction resulted in a charge of approximately $0.6 million, net of taxes, consisting of the write-off of deferred financing costs. On January 5, 2000, we applied proceeds from the sale of our Florida outdoor advertising operations (as discussed in Note 3 to the Consolidated Financial Statements) to fully repay outstanding borrowings under our 1999 Credit Agreement, consisting of $43.0 million under the Revolver and $150.0 million under the Term Loan. In connection with the transaction, we amended the 1999 Credit Agreement to waive, on a one-time basis, the mandatory requirement to apply 100% of net proceeds from asset dispositions to permanently repay borrowings under the Revolver and to provide for a new commitment amount under the Revolver of approximately $147.9 million. Additionally, we amended the 1999 Credit Agreement to provide for a delayed-draw term loan facility of approximately $126.8 million (the "2000 Term Loan") allowing us to borrow, through no more than two separate borrowings, the maximum amount available under the 2000 Term Loan. On September 15, 2000 we borrowed $54.0 million under the 2000 Term Loan to acquire television station KGPE(TV). To accommodate recent acquisitions, particularly KGPE(TV), and the anticipated timing of the sale of our sports & entertainment operations (as discussed in Note 4 to the Consolidated Financial Statements), we amended the 1999 Credit Agreement to provide waivers of compliance with, and to change the requirements of, certain restrictive covenants effective for the period June 30, 2000 through April 15, 2001. We anticipate that we will be in compliance with these covenants upon closing of the sale of our sports & entertainment operations. Proceeds from the sale will be used to substantially repay amounts outstanding under the 1999 Credit Agreement. In connection with these amendments, the total available borrowings under the 2000 Term Loan were reduced to $59.0 million and total borrowings available under the Revolver were increased to $167.9 million. As of December 31, 2000, we had outstanding $51.3 million of the Term Loan and $125.0 million of the Revolver. Principal repayments under the Term Loan are due quarterly through December 31, 2005. The Revolver requires scheduled annual commitment reductions, with required principal repayments of outstanding amounts in excess of the commitment levels, through December 31, 2005. Under the 1999 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 December 31, 2000, the weighted average interest rate of borrowings under the 1999 Credit Agreement was approximately 10.1%. 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 substantially all of our subsidiaries and their assets. On February 24, 1999, we issued additional Senior Subordinated Notes due 2009 in the aggregate principal amount of $25.0 million. The total aggregate amount of Senior Subordinated Notes issued and outstanding is $200.0 million. The Senior Subordinated Notes bear interest at 9%, which is payable semi- annually in January and July. Principal is payable in full in January 2009. 34 36 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. On March 15, 1999, we redeemed the $20.0 million outstanding principal of our 10.48% Senior Subordinated Notes due 2000 with borrowings under the Revolver. This transaction resulted in a charge of approximately $0.8 million, net of taxes, consisting of prepayment fees and the write-off of deferred financing costs. On August 6, 1999, we issued 3,000,000 shares of common stock at a price of $15.25 per share pursuant to an underwritten public offering. Our net proceeds were approximately $42.9 million, which were used primarily to repay borrowings outstanding under the Revolver. On September 7, 1999, we received approximately $3.6 million in net proceeds from the issuance of 250,000 shares of common stock upon the exercise of the underwriters' overallotment option, which were also used to repay borrowings under the Revolver. Subject to the terms of the 1999 Credit Agreement, we are entitled to make further borrowings under the Revolver. Following are items that may impact our liquidity in 2001: - Our television broadcasting segment typically enjoys significant revenues from political advertising in even numbered years. In 2000, we received over $12 million of revenue from political advertising that may not be replaced by other advertising categories in 2001. Our liquidity may be impacted negatively to the extent such political revenue is not replaced by other advertising categories in 2001. - National advertising may decrease as a result of the slowing national economy. Our liquidity may be impacted negatively depending on the magnitude of this trend, its duration, and our ability to offset decreased national sales with increased local sales. - We enjoyed a significant increase in revenues from the dot-com advertising category in 2000, primarily in our outdoor media segment. However, thus far in 2001 we are seeing a decline in revenue from this sector compared to 2000 levels. If this trend continues throughout 2001, our liquidity may be impacted negatively to the extent we are unable to offset such a decline by increasing revenue from other advertising categories. - As more fully described below, and in Note 4 to the Consolidated Financial Statements, we have entered into an agreement to sell our sports & entertainment operations. We are incurring losses from our sports & entertainment operations which will continue until the transaction closes. We expect the transaction will close by April 15, 2001. However, should the closing be delayed we would incur greater losses which would negatively impact our liquidity. In addition, we would be required to obtain waivers of compliance with certain covenants of our 1999 Credit Agreement and might need to seek additional sources of financing. SUBSEQUENT EVENTS In January 2001, we signed an agreement to sell substantially all of our assets of our sports & entertainment operations, including our NBA SuperSonics franchise, our interests in the WNBA Seattle Storm, and substantially all of the assets of our Full House Sports & Entertainment division for approximately $200.0 million in cash, plus the assumption of certain liabilities. We anticipate the sale, which is subject to NBA Board of Governors approval, to close by April 15, 2001. Following closing, we expect to recognize a pre-tax gain on the transaction of between approximately $150.0 to $160.0 million. Concurrent with the transaction, we will apply net proceeds from the sale to substantially repay outstanding borrowings under the 1999 Credit Agreement. This transaction is more fully described in Note 4 to the Consolidated Financial Statements. 35 37 QUARTERLY VARIATIONS Our results of operations may vary from quarter to quarter due in part to the timing of acquisitions or dispositions and to seasonal variations in the operations of the television broadcasting and radio broadcasting segments. In particular, our net revenue and EBITDA historically have been affected positively by increased advertising activity in the second and fourth quarters. TAXES Due to the gain on the sale of our Florida outdoor advertising operations, our federal net operating loss, alternative minimum tax credit, and charitable contribution carryforwards will be fully utilized in our 2000 federal tax return. INFLATION The effects of inflation on our costs generally have been offset by our ability to correspondingly increase our rate structure. NEW ACCOUNTING STANDARD FASB statement 133, Accounting for Derivative Instruments and Hedging Activities, (as amended by statements 137 and 138), standardizes the accounting for derivative instruments. As required, we have adopted the statement effective January 1, 2001. However, because we had no derivative instruments at December 31, 2000, there was no impact on our Consolidated Financial Statements from the adoption of this statement. 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 the year ended December 31, 1999, and debt obligations for the year ended December 31, 2000. There were no interest rate swaps outstanding at December 31, 2000. For debt obligations, the table presents principal cash flows and related weighted average interest rates by maturity dates. For interest rate swaps, the 36 38 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 (DOLLARS IN THOUSANDS)
FAIR VALUE 2001 2002 2003 2004 2005 THEREAFTER TOTAL 12/31/00 2000: ------ ------- ------- ------- ------- ---------- -------- -------- Long-term debt, including current portion Fixed rate................................ -- -- -- -- -- $200,000 $200,000 $176,000 Average interest rate..................... -- -- -- -- -- 9.00% Variable rate............................. $5,400 $29,588 $40,375 $50,468 $50,469 -- $176,300 $176,300 Average interest rate..................... (a) (a) (a) (a) (a) --
FAIR VALUE 2000 2001 2002 2003 2004 THEREAFTER TOTAL 12/31/99 1999: ------ -------- ------- ------- ------- ---------- -------- --------- Long-term debt, including current portion Fixed rate............................... -- -- -- -- -- $200,000 $200,000 $194,000 Average interest rate.................... -- -- -- -- -- 9.00% Variable rate............................ $7,500 $ 19,300 $31,100 $38,600 $48,250 $ 48,250 $193,000 $193,000 Average interest rate.................... (a) (a) (a) (a) (a) (a) Interest rate swaps Pay fixed/receive variable................. -- $130,000 -- -- -- -- $130,000 $ 4,892 Average pay rate........................... -- 4.60% -- -- -- -- Average receive rate....................... -- 6.20% -- -- -- --
--------------- (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-22 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, 2001, 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, 2001, which information is incorporated into this section by reference. 37 39 ITEM 12 -- SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT As of March 1, 2001, 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, 2001, 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, 2001, which information is incorporated into this section by reference. 38 40 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, 2000 and 1999...................................................... F-2 Consolidated statements of income for the years ended December 31, 2000, 1999 and 1998.......................... F-3 Consolidated statements of stockholders' equity (deficiency) for the years ended December 31, 2000, 1999 and 1998...... F-4 Consolidated statements of cash flows for the years ended December 31, 2000, 1999 and 1998.......................... F-5 Notes to Consolidated Financial Statements.................. F-6
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 NUMBER EXHIBIT ------- ------- 3.1 Fourth Restated Certificate of Incorporation.(1) 3.2 Amended and Restated Bylaws. 10.1 Credit Agreement dated January 22, 1999, by and among The Ackerley Group, Inc., certain lenders named therein, and First Union National Bank, Fleet Bank, N.A., Union Bank of California, N.A., KeyBank National Association, and Bank of Montreal, Chicago Branch, as agents.(2) 10.2 First Amendment to Credit Agreement, dated as of June 11, 1999, among The Ackerley Group, Inc., certain lenders named therein, and First Union National Bank, Fleet Bank, N.A., Union Bank of California, N.A. and KeyBank National Association, as agents.(3) 10.3 Second Amendment to Credit Agreement, dated as of September 10, 1999, among The Ackerley Group, Inc., certain lenders named therein, and First Union National Bank, Fleet Bank, N.A., Union Bank of California, N.A. and KeyBank National Association, as agents.(3) 10.4 Third Amendment to Credit Agreement, dated as of January 7, 2000, among The Ackerley Group, Inc., certain lenders named therein, and First Union National Bank, Fleet Bank, N.A., Union Bank of California, N.A. and KeyBank National Association, as agents.(3) 10.5 Fourth Amendment to Credit Agreement, dated as of February 11, 2000, among The Ackerley Group, Inc., certain lenders named therein, and First Union National Bank, Fleet Bank, N.A., Union Bank of California, N.A. and KeyBank National Association, as agents.(3) 10.6 Fifth Amendment to Credit Agreement dated as of July 31, 2000, among The Ackerley Group, Inc., certain lenders named therein, and First Union National Bank, Fleet Bank, N.A., Union Bank of California, N.A. and KeyBank National Association, as agents.
39 41
EXHIBIT NUMBER EXHIBIT ------- ------- 10.7 Sixth Amendment to Credit Agreement dated as of December 15, 2000, among The Ackerley Group, Inc., certain lenders named therein, and First Union National Bank, Fleet Bank, N.A., Union Bank of California, N.A. and KeyBank National Association, as agents. 10.8 Seventh Amendment to Credit Agreement dated as of February 28, 2001, among The Ackerley Group, Inc., certain lenders named therein, and First Union National Bank, Fleet Bank, N.A., Union Bank of California, N.A. and KeyBank National Association, as agents. 10.9 Security Agreement dated January 22, 1999 between The Ackerley Group, Inc. and First Union National Bank, as administrative agent.(2) 10.10 Pledge Agreement dated January 22, 1999 between The Ackerley Group, Inc. and First Union National Bank, as administrative agent.(2) 10.11 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.(4) 10.12 First Supplemental Indenture dated as of April 8, 1999 between The Ackerley Group, Inc., the guarantors named therein, and The Bank of New York, as Trustee.(3) 10.13 Employees Stock Option Plan, as amended and restated on May 11, 1999.(5) 10.14 Nonemployee -- Director's Equity Compensation Plan, as amended and restated on March 12, 1997. 10.15 Employee Stock Purchase Plan.(6) 10.16 Premises Use and Occupancy Agreement between The City of Seattle and SSI Sports, Inc. dated March 2, 1994.(7) 10.17 Purchase and Sale Agreement between Sky Sites, Inc. and Ackerley Airport Advertising, Inc., dated as of May 19, 1998.(8) 10.18 Asset Purchase Agreement dated as of November 10, 1999 between AK Media, Inc. and Eller Media Company.(9) 10.19 Amendment No. 1 to Asset Purchase Agreement dated as of December 28, 1999 between AK Media, Inc., AK Florida, Inc. and Eller Media Company.(10) 10.20 Purchase Agreement dated as of May 8, 2000 between AK Media Group, Inc., Fisher Broadcasting Inc. and Fisher Broadcasting -- Fresno, L.L.C. 10.21 Asset Purchase Agreement dated as of January 11, 2001 between The Ackerley Group, Inc., Ackerley Media Group, Inc., SSI, Inc., and T.C. Aviation, Inc., as seller, and The Basketball Club of Seattle, LLC, as buyer. 21 Subsidiaries of The Ackerley Group. 23 Consent of Independent Auditors. 24 Powers of Attorney.
--------------- (1) Incorporated by reference to Exhibit 3.0 to The Ackerley Group's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998. (2) Incorporated by reference to Exhibits 10.1, 10.2, and 10.3, respectively, to Amendment No. 1 to The Ackerley Group's Registration Statement on Form S-4 (Registration No. 333-71583), filed March 10, 1999. (3) Incorporated by reference to Exhibits 10.2, 10.3, 10.4, 10.5 and 10.9, respectively, to The Ackerley Group's Annual Report on Form 10-K for the year ended December 31, 1999. (4) Incorporated by reference to Exhibit 4.1 to The Ackerley Group's Registration Statement on Form S-4 (Registration No. 333-71583), filed February 2, 1999. 40 42 (5) Incorporated by reference to Exhibit 10 to The Ackerley Group's Quarterly Report on Form 10-Q for the quarter ended March 31, 1999. (6) Incorporated by reference to Exhibit 4.1 to The Ackerley Group's Registration Statement on Form S-8, filed on December 27, 1999. (7) Incorporated by reference to Exhibit 10.22 to The Ackerley Group's 1994 Annual Report of Form 10-K. (8) Incorporated by reference to Exhibit 10 to The Ackerley Group's Current Report on Form 8-K, filed on July 15, 1998. (9) Incorporated by reference to Exhibits 10.1 and 10.2, respectively, to The Ackerley Group's Current Report on Form 8-K, filed on January 12, 2000. (b) Reports on Form 8-K. Current Report on Form 8-K, filed December 21, 2000, reporting the Company's Sixth Amendment to its Credit Agreement with senior bank lenders. (c) Exhibits required by Item 601 of Regulation S-K are being filed herewith. See Item 14(a)(3) above. (d) Financial statements required by Regulation S-X are being filed herewith. See Item 14(a)(1) and (2) above. 41 43 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, The Ackerley Group has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 28th day of March, 2001. THE ACKERLEY GROUP, INC. By: /s/ KEVIN E. HYLTON ------------------------------------ Kevin E. Hylton, Senior Vice President, Chief Financial Officer and Assistant Secretary Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of The Ackerley Group and in the capacities on the 28th day of March, 2001.
A Majority of the Board of Directors: Principal Executive Officer: /s/ BARRY A. ACKERLEY* By: /s/ BARRY A. ACKERLEY* ----------------------------------------------------- ------------------------------------------------- Barry A. Ackerley, Chairman Barry A. Ackerley, Chairman and Chief Executive Officer /s/ GAIL A. ACKERLEY* Principal Financial Officer: ----------------------------------------------------- Gail A. Ackerley, Co-Chairman /s/ CHRISTOPHER H. ACKERLEY* /s/ KEVIN E. HYLTON ----------------------------------------------------- ---------------------------------------------------- Christopher H. Ackerley, Director Kevin E. Hylton, Senior Vice President, Chief Financial Officer and Assistant Secretary /s/ EDWARD G ACKERLEY* Principal Accounting Officer: ----------------------------------------------------- Edward G. Ackerley, Director /s/ DEBORAH L. BEVIER* /s/ SEAN TALLARICO ----------------------------------------------------- ---------------------------------------------------- Deborah L. Bevier, Director Sean Tallarico, Group Controller /s/ CHRIS W. BIRKELAND* ----------------------------------------------------- Chris W. Birkeland, Director /s/ KIMBERLEY A. CLEWORTH* ----------------------------------------------------- Kimberley A. Cleworth, Director /s/ KEITH D. GRINSTEIN* ----------------------------------------------------- Keith D. Grinstein, Director /s/ MICHAEL T. LENNON* ----------------------------------------------------- Michael T. Lennon, Director /s/ MICHEL C. THIELEN* ----------------------------------------------------- Michel C. Thielen, Director *By: /s/ KEVIN E. HYLTON ------------------------------------------------ Kevin E. Hylton, Attorney-in-Fact
42 44 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS The Board of Directors and Stockholders The Ackerley Group, Inc. We have audited the accompanying consolidated balance sheets of The Ackerley Group, Inc. (the Company) as of December 31, 2000 and 1999, and the related consolidated statements of income, stockholders' equity (deficiency), and cash flows for each of the three years in the period ended December 31, 2000. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company at December 31, 2000 and 1999, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States. /s/ Ernst & Young LLP Seattle, Washington February 9, 2001 F-1 45 THE ACKERLEY GROUP, INC. CONSOLIDATED BALANCE SHEETS ASSETS
DECEMBER 31, -------------------- 2000 1999 (IN THOUSANDS, EXCEPT SHARE AMOUNTS) -------- -------- Current assets: Cash and cash equivalents................................. $ 4,687 $ 2,808 Accounts receivable, net of allowance (2000 -- $1,903, 1999 -- $1,865)........................................ 60,742 61,133 Current portion of broadcast rights....................... 9,023 6,752 Prepaid expenses.......................................... 14,345 15,777 Deferred tax asset........................................ 1,619 13,819 Other current assets...................................... 6,879 3,607 -------- -------- Total current assets.............................. 97,295 103,896 Property and equipment, net................................. 170,473 142,851 Goodwill, net............................................... 210,961 219,478 Other intangibles, net...................................... 142,171 22,899 Investment in affiliates.................................... 19,896 832 Other assets................................................ 26,511 38,480 -------- -------- Total assets...................................... $667,307 $528,436 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable.......................................... $ 7,426 $ 6,827 Accrued interest.......................................... 8,950 10,936 Accrued wages and commissions............................. 6,398 5,475 Other accrued liabilities................................. 21,595 10,902 Deferred revenue.......................................... 19,022 21,067 Current portion of broadcasting obligations............... 9,564 8,242 Current portion of long-term debt......................... 9,232 10,832 Litigation accrual........................................ -- 7,911 -------- -------- Total current liabilities......................... 82,187 82,192 Long-term debt, less current portion........................ 385,439 403,761 Other long-term liabilities................................. 23,701 15,194 -------- -------- Total liabilities................................. 491,327 501,147 Commitments and contingencies Stockholders' equity Common stock, par value $.01 per share -- authorized 50,000,000 shares; issued 2000 -- 25,342,929 and 1999 -- 25,251,419 shares; and outstanding 2000 -- 23,967,983 and 1999 -- 23,876,473 shares....... 253 252 Class B common stock, par value $.01 per share -- authorized 11,406,510 shares; issued and outstanding 2000 -- 11,051,200 and 1999 -- 11,088,730 shares................................................. 111 111 Capital in excess of par value............................ 57,967 57,478 Retained earnings (deficit)............................... 127,738 (20,463) Less common stock in treasury, at cost (1,374,946 shares)................................................ (10,089) (10,089) -------- -------- Total stockholders' equity........................ 175,980 27,289 -------- -------- Total liabilities and stockholders' equity........ $667,307 $528,436 ======== ========
See accompanying notes F-2 46 THE ACKERLEY GROUP, INC. CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31, --------------------------------- 2000 1999 1998 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) --------- -------- -------- Revenue................................................... $ 263,305 $243,130 $235,516 Less agency commissions and discounts..................... 38,741 35,547 34,015 --------- -------- -------- Net revenue............................................... 224,564 207,583 201,501 Expenses (other income): Operating expenses...................................... 181,644 157,065 150,911 Restructuring expenses.................................. (178) 1,125 -- Amortization expense.................................... 23,713 14,175 4,709 Depreciation expense.................................... 15,448 11,867 9,369 Interest expense........................................ 25,795 32,959 22,792 Net gain on dispositions of assets...................... (277,650) (28,999) (33,524) Stock compensation expense.............................. 100 559 452 Equity in losses of affiliates.......................... 801 174 -- --------- -------- -------- Total expenses (other income)................... (30,327) 188,925 154,709 Income from continuing operations before income taxes and extraordinary item...................................... 254,891 18,658 46,792 Income tax expense........................................ 96,284 7,917 18,576 --------- -------- -------- Income from continuing operations before extraordinary item.................................................... 158,607 10,741 28,216 Loss from discontinued operations, net of taxes 2000 -- $5,892, 1999 -- $2,054, and 1998 -- $3,089...... (9,707) (2,778) (4,693) --------- -------- -------- Income before extraordinary item.......................... 148,900 7,963 23,523 Extraordinary item: loss on debt extinguishment, net of taxes 1999 -- $842 and 1998 -- $2,491................... -- (1,373) (4,346) --------- -------- -------- Net income................................................ $ 148,900 $ 6,590 $ 19,177 ========= ======== ======== Earnings per common share: Income from continuing operations, before extraordinary item.................................................... $ 4.54 $ 0.33 $ 0.89 Discontinued operations................................... (.28) (.09) (.14) Extraordinary item: loss on debt extinguishment........... -- (.04) (.14) --------- -------- -------- Net income................................................ $ 4.26 $ .20 $ .61 ========= ======== ======== Earnings per common share -- assuming dilution: Income from continuing operations, before extraordinary item.................................................... $ 4.52 $ 0.32 $ 0.88 Discontinued operations................................... (.28) (.08) (.14) Extraordinary item: loss on debt extinguishment........... -- (.04) (.14) --------- -------- -------- Net income -- assuming dilution........................... $ 4.24 $ .20 $ .60 ========= ======== ======== Weighted average number of shares......................... 34,994 32,932 31,627 Weighted average number of shares -- assuming dilution.... 35,122 33,110 31,883
See accompanying notes F-3 47 THE ACKERLEY GROUP, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
CLASS B COMMON COMMON STOCK COMMON STOCK CAPITAL IN RETAINED STOCK IN ------------------- ------------------- EXCESS OF EARNINGS TREASURY SHARES AMOUNT SHARES AMOUNT PAR VALUE (DEFICIT) (AT COST) TOTAL (IN THOUSANDS, EXCEPT SHARE INFORMATION) ---------- ------ ---------- ------ ---------- --------- --------- -------- Balance, January 1, 1998.............. 21,855,398 $218 11,053,510 $111 $ 9,816 $(44,965) $(10,089) $(44,909) Stock compensation, exercise of stock options and stock conversions....... 95,982 1 (2,280) -- 523 -- -- 524 Cash dividend, $0.02 per share........ -- -- -- -- -- (633) -- (633) Net income............................ -- -- -- -- -- 19,177 -- 19,177 ---------- ---- ---------- ---- ------- -------- -------- -------- Balance, December 31, 1998............ 21,951,380 219 11,051,230 111 10,339 (26,421) (10,089) (25,841) Stock compensation, exercise of stock options and stock conversions....... 50,039 -- 37,500 -- 693 -- -- 693 Stock issued at $15.25 per share, net of stock issuance costs of $3,084... 3,250,000 33 -- -- 46,446 -- -- 46,479 Cash dividend, $0.02 per share........ -- -- -- -- -- (632) -- (632) Net income............................ -- -- -- -- -- 6,590 -- 6,590 ---------- ---- ---------- ---- ------- -------- -------- -------- Balance, December 31, 1999............ 25,251,419 252 11,088,730 111 57,478 (20,463) (10,089) 27,289 Stock compensation, exercise of stock options and stock conversions....... 52,455 1 (37,530) -- 76 -- -- 77 Stock issued at $10.58 per share under Employee Stock Purchase Plan........ 39,055 -- -- -- 413 -- -- 413 Cash dividend, $0.02 per share........ -- -- -- -- -- (699) -- (699) Net income............................ -- -- -- -- -- 148,900 -- 148,900 ---------- ---- ---------- ---- ------- -------- -------- -------- Balance, December 31, 2000............ 25,342,929 $253 11,051,200 $111 $57,967 $127,738 $(10,089) $175,980 ========== ==== ========== ==== ======= ======== ======== ========
See accompanying notes F-4 48 THE ACKERLEY GROUP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, ----------------------------------- 2000 1999 1998 --------- --------- --------- (IN THOUSANDS) Cash flows from operating activities: Net income............................................ $ 148,900 $ 6,590 $ 19,177 Adjustment to reconcile net income to net cash provided (used in) by operating activities: Depreciation and amortization...................... 41,695 28,348 16,574 Equity in losses of affiliates..................... 801 -- -- Net gain on dispositions of assets................. (276,849) (28,999) (33,524) Amortization of broadcast rights................... 9,935 11,094 10,283 Deferred tax expense............................... 19,938 5,453 15,130 Stock compensation expense......................... 100 559 452 Loss on debt extinguishment, net of taxes.......... -- 1,373 (394) Amortization of deferred financing costs........... 1,972 1,648 713 Income from barter transactions.................... (1,022) (1,785) (1,645) Amortization of deferred gain on termination of interest rate swap agreements.................... (1,087) (371) -- Change in assets and liabilities: Accounts receivable................................ (1,853) (13,184) 7,760 Prepaid expenses................................... (3,165) (5,353) 1,958 Other current assets and other assets.............. (2,485) 1,413 (3,545) Accounts payable, accrued interest, and accrued wages and commissions............................ (825) 13,154 (7,239) Other accrued liabilities and other long-term liabilities...................................... 6,507 (2,560) (3,282) Litigation accrual................................. (7,911) -- -- Deferred revenues.................................. (2,045) (6,669) 3,879 Current portion of broadcast obligations........... (10,855) (10,878) (11,453) --------- --------- --------- Net cash provided by (used in) operating activities.................................. (78,249) (167) 14,844 Cash flows from investing activities: Proceeds from disposition of assets................... 306,986 13,933 41,531 Payments for acquisitions............................. (147,173) (166,625) (55,759) Capital expenditures.................................. (41,360) (29,114) (32,719) Payments for investments.............................. (19,925) (5,000) -- --------- --------- --------- Net cash provided by (used in) investing activities.................................. 98,528 (186,806) (46,947) Cash flows from financing activities: Borrowings under credit agreements.................... 194,000 309,063 461,100 Repayments under credit agreements.................... (210,704) (163,704) (419,588) Payments under capital lease obligations.............. (3,106) (903) (765) Note redemption prepayment fees....................... -- (1,208) -- Dividends paid........................................ (699) (632) (633) Payments of deferred financing costs.................. (487) (6,083) (7,109) Net proceeds from stock issuance...................... 447 46,613 72 Proceeds from termination of interest rate swap agreements......................................... 2,149 2,005 -- --------- --------- --------- Net cash provided by (used in) financing activities.................................. (18,400) 185,151 33,077 --------- --------- --------- Net increase (decrease) in cash and cash equivalents.... 1,879 (1,822) 974 Cash and cash equivalents at beginning of period........ 2,808 4,630 3,656 --------- --------- --------- Cash and cash equivalents at end of period.............. $ 4,687 $ 2,808 $ 4,630 ========= ========= ========= Supplemental cash flow information: Interest paid, net of capitalized interest............ $ 27,072 $ 22,073 $ 27,697 Income taxes paid..................................... 70,669 670 1,069 Noncash transactions: Broadcast rights acquired and broadcast obligations assumed.......................................... $ 12,732 $ 7,531 $ 8,828 Property and equipment acquired through barter..... 330 969 1,234 Exchange of television station assets.............. -- 24,000 --
See accompanying notes F-5 49 THE ACKERLEY GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) Organization -- The Ackerley Group, Inc. and its subsidiaries (the "Company") is a diversified media and entertainment company that engages in four principal business segments: (i) outdoor media, (ii) television broadcasting; (iii) radio broadcasting; and (iv) interactive media. The Company currently conducts its outdoor media advertising operations principally in the markets of Seattle-Tacoma, Washington; Portland, Oregon; and Boston-Worcester, Massachusetts and New York, New York. In New York, California, Oregon, Washington, and Alaska, the Company currently owns sixteen television stations and provides programming and sales services to two television stations. The Company currently owns two AM and two FM radio stations and provides sales and other services to a third FM radio station in the Seattle-Tacoma market. The interactive media segment commenced in the second half of 2000. It consists of the iKnow Network, a group of local news and information portal sites. At December 31, 2000, the portal sites in Bakersfield, California and Rochester, New York were operational. (b) Principles of consolidation -- The accompanying financial statements consolidate the accounts of The Ackerley Group, Inc. and its subsidiaries, all of which are wholly-owned. All significant intercompany transactions have been eliminated in consolidation. (c) Revenue recognition -- Outdoor media advertising revenue is recognized ratably on a monthly basis over the period in which advertisement displays are posted on the advertising structures or in the display units. Broadcast revenue is recognized in the period in which the advertisements are aired. Payments from clients received in excess of one month's advertising are recorded as deferred revenue. (d) Barter transactions -- The Company also accepts nonmonetary compensation, such as goods and services, for its advertising space or time. These barter transactions are recorded at the estimated fair value of the asset or service received. Revenue is recognized when the advertising is provided and assets or expenses are recorded when assets are received or services are used. Goods and services due to the Company in excess of advertising provided are recorded in other current assets. Advertising to be provided in excess of goods and services received are recorded in other accrued liabilities. Barter revenue was $4.3 million, $5.0 million, and $4.5 million in 2000, 1999, and 1998, respectively. Barter expenses were $3.3 million, $3.1 million, and $2.8 million in 2000, 1999, and 1998, respectively. (e) Property and equipment -- Property and equipment are carried at cost. The Company depreciates large groups of assets with homogeneous characteristics and useful lives. Under group depreciation, no gain or loss on disposals is recognized unless the asset group is fully depreciated. For assets accounted for under group depreciation, the Company recognizes gains on disposals primarily from proceeds received from condemnations of fully-depreciated advertising structures. The Company recognizes gains and losses on disposals of individual, non-homogeneous assets. Depreciation of property and equipment, including the cost of assets recorded under capital lease agreements, is provided on the straight-line and accelerated methods over the estimated useful lives of the assets or lease terms. (f) Intangible assets -- Intangible assets are carried at cost and amortized principally on the straight-line method over estimated useful lives. Goodwill represents the cost of acquired businesses in excess of amounts assigned to certain tangible and intangible assets at the dates of acquisition. Long-lived assets (including related goodwill and other intangible assets) are reviewed on a regular basis for the existence of facts or circumstances that may suggest impairment. If such impairment is identified, the impairment loss will be measured by comparing the estimated future undiscounted cash flows to the asset's carrying value. (g) Broadcast rights and obligations -- Television films and syndication rights acquired under license agreements (broadcast rights) and the related obligations incurred are recorded as assets and liabilities for the gross amount of the contract at the time the rights are available for broadcasting. Broadcast rights are amortized on an accelerated basis over the contract period or the estimated number of showings, whichever F-6 50 THE ACKERLEY GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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 -- Basic earnings per share excludes dilution and is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflect the potential dilution that could occur if options and rights to purchase common stock were exercised. The dilutive effects of the weighted-average number of shares representing options and rights included in the calculation of diluted earnings per share were 128,431 shares, 177,587 shares, and 256,079 shares in 2000, 1999, and 1998, respectively. There were no differences between net income amounts used to calculate basic and diluted earnings per share 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 senior debt, approximates fair value at December 31, 2000. The trading price of our Senior-Subordinated Notes, based on quoted market prices, was 88% at December 31, 2000. The Company uses periodically 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 related net amount payable to or receivable from counterparties is included in accrued interest. 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. Gains and losses on termination of interest rate swap agreements are deferred and amortized as an adjustment to interest expense related to the debt over the remaining term of the original contract life of the terminated swap agreement. (l) Use of estimates -- The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. (m) Reclassifications -- Certain prior years' amounts have been reclassified to conform to the 2000 presentation. F-7 51 THE ACKERLEY GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 2. NEW ACCOUNTING STANDARD FASB statement 133, Accounting for Derivative Instruments and Hedging Activities (as amended by statements 137 and 138), standardizes the accounting for derivative instruments. As required, the Company has adopted the statement effective January 1, 2001. However, because the Company had no derivative instruments at December 31, 2000, there was no impact on the Consolidated Financial Statements from the adoption of this statement. 3. ACQUISITIONS AND DISPOSITIONS Partnership Redemption. 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. 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. 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, received on the closing date of the transaction, and an additional cash receipt of approximately $2.8 million, of which $1.2 million was received in December 1998 and the remainder was received in January 1999. The pre-tax gain recognized from this transaction was approximately $33.5 million in 1998 and approximately $1.6 million in 1999. Acquisition of Outdoor Advertising Company in Boston-Worcester, Massachusetts. On February 19, 1999, the Company purchased substantially all of the assets of an outdoor advertising company in the Boston-Worcester, Massachusetts market for approximately $11.0 million. The Company recorded net tangible assets with estimated fair values aggregating $0.6 million and goodwill of $10.4 million in connection with the transaction. Acquisition of KMTR(TV). On March 16, 1999, the Company purchased substantially all of the assets of KMTR(TV), the NBC affiliate licensed to Eugene, Oregon, together with two satellite stations licensed to Roseburg and Coos Bay, Oregon, and a low power station licensed to Eugene. The purchase price was approximately $26.0 million. From December 1, 1998 until closing of the transaction, the Company provided programming and sales services under a local marketing agreement with the previous owner. The Company recorded net tangible assets with estimated fair values aggregating $3.0 million and goodwill of $23.0 million in connection with the transaction. Acquisition of WOKR(TV). On April 12, 1999, the Company purchased substantially all of the assets of WOKR(TV), the ABC affiliate licensed to Rochester, New York, for approximately $128.2 million. In September 1998, the Company paid $12.5 million of the purchase price into an escrow account, with the balance paid at closing. The Company initially recorded net tangible assets with estimated fair values aggregating $10.4 million and goodwill of $117.8 million in connection with the transaction. In 2000, the Company finalized the allocation of the purchase price with the end result that the Company recorded net tangible assets of $10.4 million, goodwill of $59.3 million, and other intangible assets, consisting principally of an FCC license and network affiliation agreement, of $58.5 million. The effect on net income from the adjustment to amortization expense was not material. F-8 52 THE ACKERLEY GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The following table summarizes, on an unaudited pro forma basis, the consolidated results of operations of the Company for the year ended December 31, 1999 and 1998, giving pro forma effect to the acquisition of WOKR(TV) as if the acquisition had been made at the beginning of the periods presented. These pro forma consolidated statements do not necessarily reflect the results of operations which would have occurred had such an acquisition taken place as of the beginning of each period indicated (in thousands, except per share amounts).
FOR THE YEAR ENDED DECEMBER 31, ---------------------- 1999 1998 --------- --------- Net revenue.......................................... $ 211,481 $ 219,791 Operating expenses................................... (159,617) (165,933) Income from continuing operations before extraordinary item................................. 10,856 30,134 Net income........................................... 6,705 21,095 Net income per common share.......................... .20 .67 Net income per common share, assuming dilution....... .20 .66
Exchange of KKTV(TV) for KCOY(TV). On May 1, 1999, the Company exchanged substantially all of the assets plus certain liabilities of KKTV(TV), the CBS affiliate licensed to Colorado Springs, Colorado, for substantially all of the assets plus certain liabilities of KCOY(TV), the CBS affiliate licensed to Santa Maria, California. In conjunction with the transaction, the Company received a cash payment of approximately $9.0 million. The Company recorded net tangible assets with estimated fair values aggregating $7.2 million, intangible assets of $16.8 million, and a gain of $28.6 million in the second quarter of 1999. Pending closing of the transaction, the Company programmed KCOY(TV) and the previous owner of KCOY(TV) programmed KKTV(TV) under local marketing agreements. Investment in KFNK(FM). On September 13, 1999, the Company entered into a joint sales agreement with the owner of radio station KFNK(FM) in Eatonville, Washington. Under the agreement, the Company pays the owner a monthly fee for the right to sell advertising on the station. In connection with the transaction, the Company paid $4.0 million under a put and call agreement whereby the Company may elect, or be required by the owner, to purchase the station's assets any time after November 2002. The gross purchase price of the station's assets, which is primarily based on the station's ratings at the time of the sale, ranges from $4.5 million to $11.7 million. The gross purchase price would be reduced by the Company's $4.0 million payment under the put and call agreement plus accrued interest. Sale of Florida Outdoor Advertising Operations. On January 5, 2000, the Company sold substantially all of the assets of its outdoor advertising operations serving the Miami-Fort Lauderdale and West Palm Beach-Fort Pierce, Florida markets to Eller Media Company, a subsidiary of Clear Channel Communications, Inc. for approximately $300.0 million in cash, plus the assumption of certain liabilities. The Company recognized a gain on the transaction of $269.3 million. Sale of KCBA(TV) and Acquisition of KION(TV). On January 12, 2000, the Company sold substantially all of the assets of KCBA(TV), the FOX affiliate licensed to Monterey, California, for approximately $11.0 million and entered into a local marketing agreement with the purchaser to provide programming and sales services. The Company recorded a gain on the sale of KCBA(TV) of approximately $8.8 million. Concurrent with this sale, the Company exercised its option to purchase substantially all the assets of KION(TV), the CBS affiliate licensed to Salinas, California. The Company paid approximately $6.3 million in 1996 and 1997 for the option, plus the purchase price for the station's assets of approximately $7.7 million. The Company recorded net tangible assets with estimated fair values aggregating $1.9 million, goodwill of $4.8 million, and other intangible assets, consisting principally of an FCC license and network affiliation agreement, of $7.3 million in connection with the transaction. From April 24, 1996 until closing of the F-9 53 THE ACKERLEY GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) transaction, the Company provided programming and sales services under a local marketing agreement with the previous owner. Acquisition of Outdoor Advertising Company in Washington and Oregon. On January 13, 2000, the Company entered into agreements to purchase substantially all of the assets of an outdoor advertising company serving portions of Washington and Oregon for approximately $14.6 million plus the assumption of certain liabilities. The Company paid $7.5 million of the purchase price on February 1, 2000 and the remaining balance on March 1, 2000. The Company recorded net tangible assets with estimated fair values aggregating $2.9 million and goodwill of $11.7 million in connection with the transaction. Investment in WETM(TV). On February 1, 2000, the Company entered into a local marketing agreement with Smith Television of New York, Inc. ("STNY") to provide programming and sales services to WETM(TV), the NBC affiliate licensed to Elmira, New York. The Company also purchased a minority non-voting equity interest in STNY for approximately $17.0 million. Beginning in August 2003, STNY may require the Company to exchange the interest in STNY, plus $11.0 million in cash, for all the assets of WETM(TV). Under certain circumstances, the Company may have an option to purchase all or a controlling interest in STNY. Acquisition of Outdoor Advertising Company in New Jersey and New York City. On March 31, 2000, the Company acquired substantially all of the assets of an outdoor advertising company in New Jersey and New York City for approximately $19.8 million. The Company recorded net tangible assets with fair values aggregating $4.9 million and goodwill of $14.9 million in connection with the transaction. Acquisition of KKFX-CA. On May 9, 2000, the Company purchased substantially all of the assets of a low-power television station KKFX-CA, the FOX affiliate licensed to the Santa Barbara-Santa Maria-San Luis Obispo, California market for approximately $15.4 million. From April 1, 2000 until closing of the transaction, the Company provided programming and sales services under a local marketing agreement with the previous owner. The Company recorded net tangible assets with fair values aggregating $0.4 million, goodwill of $6.0 million and other intangible assets, consisting principally of an FCC license and network affiliation agreement, of $9.0 million in connection with the transaction. Acquisition of KGPE(TV). On August 1, 2000, the Company purchased the membership interests of Fisher Broadcasting -- Fresno, LLC, which owned television station KGPE(TV), the CBS affiliate licensed to Fresno, California, for approximately $60.0 million. The Company recorded net tangible assets with estimated fair values aggregating $5.9 million, goodwill of $13.3 million, and other intangible assets, consisting principally of an FCC license and network affiliation agreement, of $40.8 million in connection with the transaction. Other Acquisitions. In addition to the acquisitions described above, the Company purchased one television station in 1998, two stations in 1999, three stations in 2000, and three outdoor advertising companies in 2000. The aggregate purchase price and estimated fair values of the assets for these transactions were as follows (in millions):
YEAR ENDED DECEMBER 31, ------------------------- 2000 1999 1998 ------ ------ ----- Net tangible assets.................................. $ 5.9 $ 2.3 $1.2 Goodwill............................................. 12.4 9.9 7.8 Other intangible assets.............................. 16.5 -- -- ----- ----- ---- $34.8 $12.2 $9.0 ===== ===== ====
F-10 54 THE ACKERLEY GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 4. DISCONTINUED OPERATIONS On December 8, 2000, the Company executed a letter of intent to sell substantially all of the assets of its sports & entertainment operations to The Basketball Club of Seattle LLC for approximately $200.0 million in cash and the assumption of certain liabilities. These operations consist principally of the Seattle SuperSonics National Basketball Association franchise, operating rights to the Seattle Storm, a Woman's National Basketball Association franchise, and Full House Sports & Entertainment, the Company's sports marketing business. A definitive purchase agreement was signed on January 11, 2001 and the transaction is expected to close by April 15, 2001. In addition, the Company is seeking to sell separately its Boeing 727 aircraft used by the Seattle Supersonics for transportation to and from away games. The sale of the aircraft is anticipated to be for cash or a combination of cash and assumption of debt associated with the aircraft and is anticipated to be completed by approximately the end of the second quarter of 2001. The loss from operations of the sports & entertainment operations from December 8 through December 31, 2000 was approximately $2.9 million, which included net revenue of approximately $8.4 million. This loss from operations is recorded in other current assets pending closing of the sale, at which time it will be recognized as a reduction of the net gain anticipated from the transaction. Net revenue included in discontinued operations was $67.5 million, $70.6 million, and $55.1 million for 2000, 1999, and 1998, respectively. At December 31, 2000, assets of the sports & entertainment operations to be sold, including the aircraft, consisted primarily of property and equipment amounting to approximately $35.3 million. The remaining assets of the Sports & Entertainment operations at December 31, 2000 consist principally of receivables, prepaid expenses, and intangible assets. Liabilities at December 31, 2000 consisted primarily of a capital lease obligation and long-term debt amounting to approximately $15.2 million. Interest expense included in discontinued operations is comprised of interest on obligations related to the assets to be sold as well as interest allocated to the sports & entertainment operations. Such interest is allocated based on the Company's incremental borrowing rate applied to the initial acquisition price of the Seattle SuperSonics franchise. Total interest expense included in discontinued operations was approximately $2.2 million, $2.7 million, and $2.3 million for 2000, 1999, and 1998, respectively. 5. ACCOUNTS RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS As of December 31, 2000 and 1999, accounts receivable includes employee receivables of $0.5 million and $0.7 million, respectively. The activity in the allowance for doubtful accounts is summarized as follows (in thousands):
2000 1999 1998 ------- ------- ------- Balance at beginning of year.......................... $ 1,865 $ 1,435 $ 1,498 Additions charged to operating expense................ 2,155 1,611 1,023 Write-offs of receivables, net of recoveries.......... (2,117) (1,181) (1,086) ------- ------- ------- Balance at end of year................................ $ 1,903 $ 1,865 $ 1,435 ======= ======= =======
F-11 55 THE ACKERLEY GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 6. PROPERTY AND EQUIPMENT At December 31, 2000 and 1999, property and equipment consisted of the following (in thousands):
ESTIMATED USEFUL 2000 1999 LIFE (YEARS) -------- -------- ---------------- Land........................................... $ 8,741 $ 9,735 Advertising structures......................... 53,716 79,171 6 - 20 Broadcast equipment............................ 70,300 57,841 6 - 20 Building and improvements...................... 57,546 50,310 3 - 40 Office furniture and equipment................. 42,667 32,341 5 - 10 Transportation and other equipment............. 28,764 31,870 5 - 6 Equipment under capital leases................. 8,008 8,008 10 Construction in progress....................... 22,032 11,680 -------- -------- 291,774 280,956 Less accumulated depreciation.................. 121,301 138,105 -------- -------- $170,473 $142,851 ======== ========
7. INTANGIBLE ASSETS At December 31, 2000 and 1999, intangible assets consisted of the following (in thousands):
ESTIMATED USEFUL 2000 1999 LIFE (YEARS) -------- -------- ---------------- Goodwill....................................... $248,222 $245,033 15 - 40 Broadcasting licenses.......................... 58,453 19,487 15 - 30 Network affiliation agreements................. 91,881 4,278 15 - 30 Favorable leases and contracts................. 4,797 17,422 20 - 40 Other.......................................... 4,323 3,112 5 - 30 -------- -------- 407,676 289,332 Less accumulated amortization.................. 54,544 46,955 -------- -------- $353,132 $242,377 ======== ========
The increase in intangible assets in 2000 is primarily due to the acquisitions discussed in Note 3. 8. DEBT Credit Agreements On January 28, 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 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. F-12 56 THE ACKERLEY GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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. The transaction resulted in a charge of approximately $0.6 million, net of applicable taxes of $0.4 million, consisting of the write-off of deferred financing costs. 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 repayments of outstanding amounts in excess of the commitment levels, quarterly beginning March 31, 2001 through December 31, 2005. The Company can choose to have interest calculated at rates based on either a base rate or LIBOR plus defined margins which vary based on the Company's total leverage ratio. The commitment fees under the Revolver and Term Loan are payable quarterly at a rate based on the Company's total leverage ratio. At December 31, 2000, the weighted average interest rate of borrowings under the 1999 Credit Agreement was approximately 10.1%. On January 5, 2000, the Company applied proceeds from the sale of its Florida outdoor advertising operations (as discussed in Note 3) to fully repay outstanding borrowings under the 1999 Credit Agreement, consisting of $43.0 million under the Revolver and $150.0 million under the Term Loan. In connection with the transaction, the Company amended the 1999 Credit Agreement to waive, on a one-time basis, the mandatory requirement to apply 100% of net proceeds from asset dispositions to permanently repay borrowings under the Revolver and to provide for a new commitment amount under the Revolver of approximately $147.9 million. Additionally, the Company amended the 1999 Credit Agreement to provide for a delayed-draw term loan facility of approximately $126.8 million (the "2000 Term Loan") allowing the Company to borrow, through no more than two separate borrowings, the maximum amount available under the 2000 Term Loan. On September 15, 2000 the Company borrowed $54.0 million under the 2000 Term Loan to acquire KGPE(TV). To accommodate recent acquisitions, particularly KGPE(TV), and the anticipated timing of the sale of the Company's sports & entertainment operations (Note 4), the Company amended the 1999 Credit Agreement to provide waivers of compliance with, and to change the requirements of, certain restrictive covenants effective for the period June 30, 2000 through April 15, 2001. The Company anticipates that it will be in compliance with these covenants upon closing of the sale of the sports & entertainment operations. Proceeds from the sale will be used to substantially repay amounts outstanding under the 1999 Credit Agreement. In connection with these amendments, the total available borrowings under the 2000 Term Loan were reduced to $59.0 million and total borrowings available under the Revolver were increased to $167.9 million. At December 31, 2000 and 1999, outstanding standby letter of credit agreements totaled $1.3 million and $1.1 million, respectively. Senior Subordinated Notes On December 14, 1998, the Company issued 9% Senior Subordinated Notes due 2009 (the "9% Senior Subordinated Notes") in the aggregate principal amount of $175.0 million. These notes bear interest at 9% which is payable semi-annually in January and July. Principal is payable in full in January 2009. These notes were issued under an indenture which allows for an aggregate principal amount of up to $250.0 million and on February 24, 1999, the Company issued additional notes in the aggregate amount of $25.0 million. In connection with the transaction, the Company recorded a premium of $1.1 million, which is being amortized over the remaining term of the notes. At December 31, 2000, the total aggregate amount of 9% Senior Subordinated Notes issued and outstanding was $200.0 million. F-13 57 THE ACKERLEY GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) On March 15, 1999, the Company redeemed its $20.0 million outstanding principal of the 10.48% Senior Subordinated Notes due 2000 with borrowings under the Revolver. This transaction resulted in a charge of approximately $0.8 million, net of applicable taxes of $0.5 million, consisting of prepayment fees and the write-off of deferred financing costs. Other On August 6, 1999, the Company received proceeds of $2.0 million upon the termination of an interest rate swap agreement with a notional principal amount of $70.0 million. On December 8, 2000, the Company received proceeds of $2.1 million upon the termination of its three remaining interest rate swap agreements with notional principal amounts aggregating $130.0 million. In connection with these transactions, the gains on the termination of these agreements have been deferred and are being amortized as an adjustment to interest expense over the remaining terms of the original contract lives, which expire in October, 2001. Other debt consists of a capital lease obligation for equipment that will be assumed by the buyer upon closing of the sale of the sports & entertainment operations (Note 4), obligations under deferred compensation agreements, and notes payable related to the acquisition of an aircraft for the Seattle SuperSonics. At December 31, 2000 and 1999, long-term debt consisted of the following (in thousands):
2000 1999 -------- -------- Credit agreements........................................... $176,300 $193,000 Senior subordinated notes................................... 200,953 201,027 Notes payable for Seattle SuperSonics aircraft.............. 11,508 13,532 Capital lease obligation (net of imputed interest of $370 in 2000 and $648 in 1999).................................... 3,736 4,782 Deferred compensation agreements............................ 2,174 2,252 -------- -------- 394,671 414,593 Less amounts classified as current.......................... 9,232 10,832 -------- -------- $385,439 $403,761 ======== ========
Approximately $0.2 million and $0.8 million of interest was capitalized in 2000 and 1998, respectively. There was no capitalized interest in 1999. Future aggregate annual payments of long-term debt for the years ending December 31 are as follows (in thousands):
CREDIT AGREEMENT CAPITAL LEASE OTHER AND NOTES OBLIGATION DEBT TOTAL --------- ------------- ------- -------- 2001................................... $ 5,480 $ 944 $ 2,808 $ 9,232 2002................................... 29,676 1,094 2,605 33,375 2003................................... 40,470 1,698 2,881 45,049 2004................................... 50,572 -- 1,335 51,907 2005................................... 50,581 -- 1,192 51,773 Later years............................ 200,474 -- 2,861 203,335 -------- ------ ------- -------- Total.................................. $377,253 $3,736 $13,682 $394,671 ======== ====== ======= ========
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 under the 9% Senior Subordinated Notes restrict, among other things, the Company's borrowings, dividend F-14 58 THE ACKERLEY GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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. 9. INCOME TAXES Significant components of income tax expense are as follows (in thousands):
2000 1999 1998 ------- ------ ------- Current: Federal.............................................. $72,072 $ 554 $ 464 State................................................ 2,974 -- (36) ------- ------ ------- 75,046 554 428 Deferred: Federal.............................................. 18,437 6,846 16,905 State................................................ 2,801 517 1,243 ------- ------ ------- 21,238 7,363 18,148 ------- ------ ------- Income tax expense..................................... $96,284 $7,917 $18,576 ======= ====== =======
The reconciliation of income taxes computed at the U.S. federal statutory tax rate to income tax expense is as follows (in thousands):
2000 1999 1998 ------- ------ ------- Tax at U.S. statutory rate............................. $89,292 $6,530 $16,377 Non-deductible expenses................................ 1,138 659 831 State taxes and other.................................. 5,854 728 1,368 ------- ------ ------- Income tax expense..................................... $96,284 $7,917 $18,576 ======= ====== =======
At December 31, 1999, the Company had net operating loss carryforwards for federal income tax purposes of approximately $17.7 million and alternative minimum tax credit carryforwards of approximately $2.8 million. Due to the gain on the sale of the Florida outdoor advertising operations in 2000, all of the net operating loss carryforwards and alternative minimum tax credit carryforwards will be utilized on the 2000 tax return. 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 F-15 59 THE ACKERLEY GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) December 31, 2000 and 1999 significant components of the Company's deferred tax assets and liabilities are as follows (in thousands):
2000 1999 -------- ------- Deferred tax assets: Net operating loss carryforwards........................ $ -- $ 6,329 Litigation accrual...................................... -- 3,006 Tax credit carryforwards................................ -- 2,750 Capital lease obligation................................ 1,355 1,817 Deferred compensation agreements........................ 788 855 Other................................................... 3,855 3,723 -------- ------- Total deferred tax assets............................... 5,998 18,480 Deferred tax liabilities: Basis difference in depreciable assets.................. 12,040 8,328 Basis difference in intangible assets................... 5,734 5,707 Other................................................... 1,074 -- -------- ------- Total deferred tax liabilities.......................... 18,848 14,035 -------- ------- Net deferred tax asset (liability)...................... $(12,850) $ 4,445 ======== =======
10. 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 $1.8 million in 2000, $1.3 million in 1999, and $1.4 million in 1998. 11. STOCKHOLDERS' EQUITY The Class B common stock has the same rights as common stock, except that the Class B common stock has ten times the voting rights of common stock and is restricted as to its transfer. Each outstanding share of Class B common stock may be converted into one share of common stock at any time at the option of the stockholder. During the third quarter of 1999, the Company issued 3,250,000 shares of common stock at $15.25 per share pursuant to an underwritten public offering. In conjunction with the transaction, the Company received net proceeds of approximately $46.5 million. The Company had various stock purchase agreements to sell shares of its common stock and Class B common stock to key employees and officers at fair market value. These agreements expired in 1999. The agreements provided for distribution of one share of Class B common stock at no extra cost to the holder for each share of common stock at the time the shares were purchased. In 1998, 15,000 shares of common stock and 15,000 shares of Class B common stock were purchased under these agreements. In 1999, the remaining 37,500 shares of common stock and 37,500 shares of Class B common stock were purchased under these agreements. The Company's Nonemployee-Directors' Equity Compensation Plan (the "Directors' Plan") was approved by the Board of Directors in 1995 and the stockholders of the Company in 1996. The Directors Plan's purpose is to allow nonemployee directors to elect to receive directors' fees in the form of common stock instead of cash. There are 100,000 shares of common stock authorized under the Directors' Plan. F-16 60 THE ACKERLEY GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) At December 31, 2000, the Company had an aggregate of 13,562,858 shares of common stock reserved for future issuance, consisting of 11,051,200 shares reserved for conversion of Class B common stock, 1,460,945 reserved for issuance under the 2000 Employee Stock Purchase Plan, 970,250 shares reserved under the Fourth Amended and Restated Employees Stock Option Plan, and 78,264 shares reserved under the Directors' Plan. 12. STOCK OPTION PLAN The Company's Employees Stock Option Plan (the "Plan") was approved by the Board of Directors and the stockholders of the Company in 1983. 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. On May 11, 1999, the Company amended the Plan to increase the amount of common stock reserved for issuance to 1,500,000 shares. As of December 31, 2000, there were 308,250 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 2000, 1999 and 1998, the Company recognized stock compensation expense of $0.1 million, $0.6 million and $0.5 million, respectively. The 1999 and 1998 amounts are higher primarily due to the amendment of certain stock option agreements. A summary of the Company's stock option activity and related information for the years ended December 31 is as follows:
2000 1999 1998 ------------------- ------------------- ------------------ WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE EXERCISE EXERCISE EXERCISE OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE -------- -------- -------- -------- ------- -------- Options outstanding at beginning of year................................. 460,000 $11.95 260,000 $ 5.69 320,600 $4.75 Granted................................ 212,000 16.69 210,000 19.50 -- -- Exercised.............................. (10,000) 3.44 (10,000) 7.63 (60,600) 0.69 -------- -------- ------- Options outstanding at end of year..... 662,000 $13.60 460,000 $11.95 260,000 $5.69 Exercisable at end of year............. 110,000 $ 3.44 -- -- 10,000 $7.63 Weighted average fair value of options granted during year.................. $ 8.07 $ 12.05 --
Exercise prices for options outstanding at December 31, 2000 ranged from $3.44 to $19.50. A summary of options outstanding as of December 31, 2000 is as follows:
WEIGHTED-AVERAGE REMAINING WEIGHTED- RANGE OF OPTIONS CONTRACTUAL LIFE AVERAGE EXERCISE PRICE OUTSTANDING (YEARS) EXERCISE PRICE EXERCISABLE -------------- ----------- ---------------- -------------- ----------- $ 0.00 - $ 3.44.. 110,000 4.1 $3.44 110,000 $ 3.45 - $ 7.63.. 130,000 5.0 7.63 -- $ 7.64 - $16.69.. 212,000 9.1 16.69 -- $16.70 - $19.50.. 210,000 8.5 19.50 -- ------- ------- $ 0.00 - $19.50.. 662,000 7.3 13.60 110,000 ======= =======
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 F-17 61 THE ACKERLEY GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) employee stock options under the fair value method of that statement. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in 2000 and 1999, respectively (there were no grants in 1998) and dividend yield of 0%; expected volatility of 29% and 52%; risk-free interest rate of 6.6% and 5.7%; and a weighted-average expected life of the options of 7.5 years. For purposes of pro forma disclosures, the estimated fair value of the options is amortized over the options' vesting period. The Company's pro forma net income and earnings per common share follows (in thousands, except per share amounts):
2000 1999 1998 -------- ------ ------- Pro forma net income.................................. $147,933 $6,103 $18,971 Pro forma net income per common share................. $ 4.23 $ 0.19 $ 0.60 Pro forma net income per common share -- assuming dilution............................................ $ 4.21 $ 0.18 $ 0.60
The pro forma amounts above may not be representative of the pro forma effect on reported net income in future years because options vest over several years, additional options may be granted each year, and assumptions can change. 13. 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 14. The Company has employment contracts with certain employees, including basketball coaches and players of the Seattle SuperSonics, extending beyond December 31, 2000. Most of these contracts require that payments continue to be made if the individual should be unable to perform because of death or disability. The contracts related to the Seattle SuperSonics will be assumed by the buyer upon closing of the sale of the sports & entertainment operations (Note 4). Future minimum obligations under these contracts for the years ending December 31 are as follows (in thousands):
SEATTLE SUPERSONICS OTHER CONTRACTS CONTRACTS TOTAL ------------------- --------- -------- 2001.................................. $ 38,706 $ 5,764 $ 44,470 2002.................................. 30,800 3,581 34,381 2003.................................. 25,463 2,588 28,051 2004.................................. 16,729 1,800 18,529 2005.................................. 13,714 150 13,864 Later years........................... 10,868 154 11,022 -------- ------- -------- $136,280 $14,037 $150,317 ======== ======= ========
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. F-18 62 THE ACKERLEY GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The Company is required to make future minimum payments for equipment and facilities under non-cancelable operating lease agreements and broadcast agreements which expire in more than one year for the years ending December 31 as follows (in thousands):
EQUIPMENT/FACILITIES BROADCAST OBLIGATIONS -------------------- --------------------- 2001.................................... 7,821 10,904 2002.................................... 6,630 4,293 2003.................................... 5,639 1,271 2004.................................... 5,152 806 2005.................................... 4,700 546 Later years............................. 15,312 20 ------- ------- $45,254 $17,840 ======= =======
Included in the operating leases is a lease for a high-definition mobile television broadcast unit which contains renewal and purchase options in 2002, 2003 and 2004, and a purchase option in 2005. In the event the Company elects not to exercise a renewal option, the Company must guarantee a minimum residual value to the lessor. Rent expense for operating leases aggregated $9.1 million in 2000, $5.8 million in 1999, and $5.2 million in 1998. Broadcasting film and programming expense aggregated $11.4 million in 2000, $11.2 million in 1999, and $10.4 million in 1998. The Company incurred transportation costs under an operating lease agreement of $1.3 million in 1998 to a company controlled by the Company's major stockholder. There were no such amounts in 2000 or 1999. Principal amounts outstanding on loans to the Company's major stockholder was approximately $0.1 million at December 31, 2000. There were no outstanding amounts at December 31, 1999. 14. 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. 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, which was held on April 23, 1999. On June 10, 1999, the Court of Appeals reinstated the District Court verdict in favor of the plaintiffs. The Company petitioned for review of this decision by the U.S. Supreme Court, which was denied without comment by the Court on January 18, 2000. Accordingly, the Company paid awarded damages, accrued interest thereon, and plaintiff attorney's fees, of approximately $7.5 million in the first quarter of 2000. F-19 63 THE ACKERLEY GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 15. TELEVISION BROADCASTING GROUP RESTRUCTURING On April 6, 1999, the Company announced the launch of Digital CentralCasting(TM), a digital broadcasting system which allows the Company to consolidate back-office functions such as operations, programming, advertising scheduling, and accounting for all of the television stations within a regional group at one station. To implement this strategy, the Company organized 16 of the television stations it owns and/or programs into the following three regional station groups: New York (WIXT, WOKR, WIVT, WBGH-CA, WUTR, WETM, and WWTI), Central California (KCOY, KKFX-CA, KGPE, and KGET), and North Coast (KCBA, KION, KMTR, KVIQ, and KFTY). The Company expects to complete the implementation of Digital CentralCasting(TM) for all of its television station groups in the first quarter of 2001. The Company recorded a $1.1 million restructuring charge in the second quarter of 1999 relating to the implementation of Digital CentralCasting(TM). This restructuring charge consisted primarily of costs associated with employee staff reductions, contract terminations, legal, and other costs associated directly with the restructuring. As of December 31, 2000, termination benefits of approximately $0.4 million, representing approximately 44 employees, had been paid and charged to the restructuring accrual. Forty-five total employees are estimated to be terminated in connection with the restructuring. 16. INDUSTRY SEGMENT INFORMATION The Company organizes its segments based on the products and services from which revenues are generated. The Company evaluates segment performance and allocates resources based on Segment Operating Cash Flow. The Company defines EBITDA as net revenue less operating and restructuring expenses before amortization, depreciation, interest, stock compensation expenses, and net gain on dispositions of assets, and equity in losses of affiliates. Segment Operating Cash Flow is defined as EBITDA before corporate overhead. Selected financial information for these segments for the years ended December 31, 2000, 1999 and 1998 is presented as follows (in thousands):
OUTDOOR TELEVISION RADIO INTERACTIVE MEDIA BROADCASTING BROADCASTING MEDIA TOTAL -------- ------------ ------------ ----------- --------- 2000 Net revenue.............................. $ 89,309 $107,615 $ 27,589 $ 51 $ 224,564 Segment operating expenses............... (51,364) (86,841) (19,018) (451) (157,674) -------- -------- -------- ------ --------- Segment Operating Cash Flow.............. $ 37,945 $ 20,774 $ 8,571 $ (400) $ 66,890 ======== ======== ======== ====== ========= Segment assets........................... $109,294 $392,230 $ 62,684 $1,156 $ 565,364 Capital expenditures..................... $ 4,235 $ 17,535 $ 7,461 $ 978 $ 30,209 1999 Net revenue.............................. $ 98,751 $ 81,669 $ 27,163 $ -- $ 207,583 Segment operating expenses............... (56,877) (69,608) (15,563) -- (142,048) -------- -------- -------- ------ --------- Segment Operating Cash Flow.............. $ 41,874 $ 12,061 $ 11,600 $ -- $ 65,535 ======== ======== ======== ====== ========= Segment assets........................... $ 92,911 $273,072 $ 59,873 $ -- $ 425,856 Capital expenditures..................... $ 7,346 $ 7,765 $ 3,780 $ -- $ 18,891 1998 Net revenue.............................. $108,560 $ 68,467 $ 24,474 $ -- $ 201,501 Segment operating expenses............... (65,605) (55,996) (14,819) -- (136,420) -------- -------- -------- ------ --------- Segment Operating Cash Flow.............. $ 42,955 $ 12,471 $ 9,655 $ -- 65,081 ======== ======== ======== ====== ========= Segment assets........................... $ 75,113 $ 87,308 $ 59,650 $ -- $ 222,071 Capital expenditures..................... $ 6,986 $ 4,415 $ 1,389 $ -- $ 12,790
F-20 64 THE ACKERLEY GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) A reconciliation from the segment information to the consolidated balances for Segment Operating Cash Flow, segment assets, and segment capital expenditures is set forth below (in thousands):
2000 1999 1998 -------- -------- -------- Segment Operating Cash Flow............................ $ 66,890 $ 65,535 $ 65,081 Corporate overhead..................................... (23,792) (16,142) (14,491) -------- -------- -------- EBITDA................................................. 43,098 49,393 50,590 Depreciation and amortization.......................... (39,161) (26,042) (14,078) Interest expense....................................... (25,795) (32,959) (22,792) Net gain on dispositions of assets..................... 227,650 28,999 33,524 Stock compensation expense............................. (100) (559) (452) Equity in losses of affiliates......................... (801) (174) -- -------- -------- -------- Income from continuing operations before income taxes and extraordinary item............................... $254,891 $ 18,658 $ 46,792 ======== ======== ======== Segment assets......................................... $565,364 $425,856 $222,071 Corporate assets....................................... 34,996 40,551 45,899 Assets of discontinued operations...................... 66,947 62,029 48,156 -------- -------- -------- Consolidated total assets.............................. $667,307 $528,436 $316,126 ======== ======== ======== Segment capital expenditures........................... $ 30,209 $ 18,891 $ 12,790 Corporate capital expenditures......................... 7,548 4,545 3,082 Capital expenditures of discontinued operations........ 3,601 5,678 16,847 -------- -------- -------- Consolidated capital expenditures...................... $ 41,358 $ 29,114 $ 32,719 ======== ======== ========
17. SUMMARY OF QUARTERLY FINANCIAL DATA (UNAUDITED) The Company's results of operations may vary from quarter to quarter due in part to the timing of acquisitions and to seasonal variations in the operations of the outdoor media and television broadcasting segments. In particular, the Company's net revenue and EBITDA historically have been affected positively by increased advertising activity in the second and fourth quarters. The following table sets forth a summary of the quarterly results of operations for the years ended December 31, 2000 and 1999 (in thousands, except per share amounts). Net revenue, EBITDA, and income F-21 65 THE ACKERLEY GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (loss) from continuing operations have been adjusted from amounts reported previously to reflect the accounting for the sports & entertainment operations as a discontinued operation.
FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER -------- ------- ------- ------- 2000 Net revenue........................................ $ 46,769 $60,226 $57,296 $60,273 EBITDA............................................. 6,480 14,354 10,963 11,301 Income (loss) from continuing operations........... 164,677(1) (131)(1) (3,494) (2,445)(1) Income (loss) from discontinued operations......... 574 (2,107) (2,744) (5,430) Net income (loss).................................. 165,251 (2,238) (6,238) (7,875) Net income (loss) per share........................ 4.73 (.06) (.18) (.22) Net income (loss) per share -- assuming dilution... 4.72 (.06) (.18) (.22) 1999 Net revenue........................................ $ 41,462 $54,108 $54,046 $57,967 EBITDA............................................. 4,950 13,701 14,323 16,419 Income (loss) from continuing operations before extraordinary item............................... (3,575) 16,418(1) (1,311) (791) Income (loss) from discontinued operations......... 1,027 (846) (2,431) (528) Extraordinary loss................................. (1,373)(2) -- -- -- Net income (loss).................................. (3,921) 15,572 (3,742) (1,319) Net income (loss) per share........................ (.12) .49 (.11) (.04) Net income (loss) per share -- assuming dilution... (.12) .49 (.11) (.04)
--------------- (1) Includes net gain on dispositions of assets, as discussed in Note 3. (2) Represents loss on debt extinguishment, as discussed in Note 8. F-22