<PAGE> 1
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBERS:
ACME INTERMEDIATE HOLDINGS, LLC 333-40277
ACME TELEVISION, LLC 333-40281
----------------
ACME INTERMEDIATE HOLDINGS, LLC
AND
ACME TELEVISION, LLC
(Exact name of registrants as specified in their charter)
<TABLE>
<S> <C> <C>
DELAWARE ACME INTERMEDIATE HOLDINGS, LLC 52-2050589
DELAWARE ACME TELEVISION, LLC 52-2050588
- -----------------------------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
</TABLE>
2101 E. FOURTH STREET, SUITE 202A
SANTA ANA, CALIFORNIA, 92705
(714) 245-9499
(Address and Telephone number of Principal Executive Offices)
----------------
Indicate by check mark whether the registrants (1) have 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, and (2) have been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
92.14% of the membership units of ACME Intermediate Holdings, LLC are owned
directly or indirectly by ACME Television Holdings, LLC. 100% of the membership
units of ACME Television, LLC are owned directly or indirectly by ACME
Intermediate Holdings, LLC. Such membership units are not publicly traded.
As of November 12, 1999, ACME Intermediate Holdings, LLC had no common
membership units outstanding.
As of November 12, 1999, ACME Television, LLC had no common membership units
outstanding.
================================================================================
<PAGE> 2
ACME INTERMEDIATE HOLDINGS, LLC AND SUBSIDIARIES
ACME TELEVISION, LLC AND SUBSIDIARIES
FORM 10-Q
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
ACME INTERMEDIATE HOLDINGS, LLC and Subsidiaries and ACME
TELEVISION, LLC and Subsidiaries
Consolidated Balance Sheets as of December 31, 1998 and
September 30, 1999.......................................................... 3
Consolidated Statements of Operations for the Three Months
Ended September 30, 1998 and September 30, 1999............................. 4
Consolidated Statements of Operations for the Nine Months
Ended September 30, 1998 and September 30, 1999 ............................ 5
Consolidated Statements of Members' Capital as of September 30, 1999........ 6
Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 1998 and September 30, 1999............................. 7
Notes to Consolidated Financial Statements.................................. 9
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS......................................................... 11
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.................... 15
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS............................................................. 15
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.............................................. 15
</TABLE>
2
<PAGE> 3
ACME INTERMEDIATE HOLDINGS, LLC AND SUBSIDIARIES
ACME TELEVISION, LLC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1998 AS OF SEPTEMBER 30, 1999
------------------------------- -------------------------------
ACME ACME
INTERMEDIATE ACME INTERMEDIATE ACME
HOLDINGS, LLC TELEVISION, LLC HOLDINGS, LLC TELEVISION, LLC
------------- --------------- ------------- ---------------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 953 $ 953 $ 756 $ 756
Accounts receivable, net 10,609 10,609 12,921 12,921
Due from affiliates 4 131 -- --
Current portion of programming rights 6,357 6,357 10,745 10,745
Prepaid expenses and other current assets 414 414 2,070 2,070
--------- --------- --------- ---------
Total current assets 18,337 18,464 26,492 26,492
Property and equipment, net 16,441 16,441 24,792 24,792
Programming rights, net of current portion 8,046 8,046 16,277 16,277
Deposits 36 36 1,843 1,843
Deferred income taxes 3,811 3,811 3,688 3,688
Intangible assets, net 222,987 222,987 257,537 257,537
Other assets 17,187 15,592 10,322 8,765
--------- --------- --------- ---------
Total assets $ 286,845 $ 285,377 $ 340,951 $ 339,394
========= ========= ========= =========
LIABILITIES AND MEMBERS' CAPITAL
Current liabilities:
Accounts payable $ 4,425 $ 4,425 $ 5,094 $ 5,094
Accrued liabilities 4,210 4,210 11,202 11,202
Due from affiliates -- -- 237 111
Current portion of programming rights
payable 7,649 7,649 10,135 10,135
Current portion of obligations under
lease 1,273 1,273 1,426 1,426
--------- --------- --------- ---------
Total current liabilities 17,557 17,557 28,094 27,968
Bank borrowings 8,000 8,000 40,000 40,000
Programming rights payable, net of
current portion 6,512 6,512 15,299 15,299
Obligations under lease, net of
current portion 4,199 4,199 4,646 4,646
Other liabilities 1,125 1,125 250 250
Deferred income taxes 31,241 31,241 29,666 29,666
10 7/8% senior discount notes 145,448 145,448 157,415 157,415
12% senior secured notes 42,051 -- 46,392 --
--------- --------- --------- ---------
Total liabilities 256,133 214,082 321,762 275,244
--------- --------- --------- ---------
Redeemable members' capital -- -- 16,250 --
--------- --------- --------- ---------
Members' capital 58,402 92,563 96,708 147,119
Accumulated deficit (27,690) (21,268) (93,769) (82,969)
--------- --------- --------- ---------
Total members' capital 30,712 71,295 2,939 64,150
--------- --------- --------- ---------
Total liabilities and members' capital $ 286,845 $ 285,377 $ 340,951 $ 339,394
========= ========= ========= =========
</TABLE>
See the notes to the consolidated financial statements
3
<PAGE> 4
ACME INTERMEDIATE HOLDINGS, LLC AND SUBSIDIARIES
ACME TELEVISION, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED SEPTEMBER 30,
--------------------------------------------------------------
1998 1999
------------------------------ ------------------------------
ACME ACME
INTERMEDIATE ACME INTERMEDIATE ACME
HOLDINGS, LLC TELEVISION, LLC HOLDINGS, LLC TELEVISION, LLC
------------- --------------- ------------- ---------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Net revenues $ 11,805 $ 11,805 $ 15,803 $ 15,803
Operating expenses:
Station operating expenses 8,962 8,962 12,829 12,829
Depreciation and amortization 3,534 3,534 4,847 4,847
Corporate 882 882 3,897 3,897
Equity-based compensation -- -- 28,856 28,856
-------- -------- -------- --------
Operating loss (1,573) (1,573) (34,626) (34,626)
Other income (expenses):
Interest income 20 20 49 49
Interest expense (5,404) (4,102) (6,752) (5,259)
Gain on sale of asset 1,112 1,112 -- --
-------- -------- -------- --------
Net loss before income taxes (5,845) (4,543) (41,329) (39,836)
Income tax benefit 402 402 3,421 3,421
-------- -------- -------- --------
Net loss $ (5,443) $ (4,141) $(37,908) $(36,415)
-------- -------- -------- --------
</TABLE>
See the notes to the consolidated financial statements
4
<PAGE> 5
ACME INTERMEDIATE HOLDINGS, LLC AND SUBSIDIARIES
ACME TELEVISION, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
--------------------------------------------------------------
1998 1999
------------------------------ ------------------------------
ACME ACME
INTERMEDIATE ACME INTERMEDIATE ACME
HOLDINGS, LLC TELEVISION, LLC HOLDINGS, LLC TELEVISION, LLC
------------- --------------- ------------- ---------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Net revenues $ 31,132 $ 31,132 $ 42,438 $ 42,438
Operating expenses:
Station operating expenses 24,127 24,127 32,819 32,819
Depreciation and amortization 7,715 7,715 13,006 13,006
Corporate 2,076 2,076 5,380 5,380
Equity-based compensation -- -- 39,556 39,556
-------- -------- -------- --------
Operating loss (2,786) (2,786) (48,323) (48,323)
Other income (expenses):
Interest income 208 208 69 69
Interest expense (15,600) (11,785) (19,182) (14,804)
Gain on sale of asset 1,112 1,112 -- --
-------- -------- -------- --------
Net loss before income taxes (17,066) (13,251) (67,436) (63,058)
Income tax benefit 767 767 1,357 1,357
-------- -------- -------- --------
Net loss $(16,299) $(12,484) $(66,079) $(61,701)
-------- -------- -------- --------
</TABLE>
See the notes to the consolidated financial statements
5
<PAGE> 6
ACME INTERMEDIATE HOLDINGS, LLC AND SUBSIDIARIES
ACME TELEVISION, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF MEMBERS' CAPITAL
ACME INTERMEDIATE HOLDINGS, LLC
-------------------------------
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON TOTAL
MEMBERS' ACCUMULATED MEMBERS'
CAPITAL DEFICIT CAPITAL
------- ------- -------
<S> <C> <C> <C>
Balance at December 31, 1998 58,402 (27,690) 30,712
Equity-based compensation 39,556 -- 39,556
Redeemable preferred dividend (1,250) -- (1,250)
Net loss -- (66,079) (66,079)
------- ------- -------
Balance at September 30, 1999 (unaudited) 96,708 (93,769) 2,939
======= ======= =======
</TABLE>
ACME TELEVISION, LLC
--------------------
(IN THOUSANDS)
<TABLE>
<CAPTION>
TOTAL
MEMBERS' ACCUMULATED MEMBERS'
CAPITAL DEFICIT CAPITAL
-------- -------- --------
<S> <C> <C> <C>
Balance at December 31, 1998 92,563 (21,268) 71,295
Equity-based compensation 39,556 -- 39,556
Contribution of Parent 15,000 -- 15,000
Net loss -- (61,701) (61,701)
-------- -------- --------
Balance at September 30, 1999 (unaudited) $147,119 $(82,969) $ 64,150
======== ======== ========
</TABLE>
See the notes to the consolidated financial statements
6
<PAGE> 7
ACME INTERMEDIATE HOLDINGS, LLC AND SUBSIDIARIES
ACME TELEVISION, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
---------------------------------------------------------------
SEPTEMBER 30, 1998 SEPTEMBER 30, 1999
---------------------------- -----------------------------
ACME ACME ACME ACME
INTERMEDIATE TELEVISION, INTERMEDIATE TELEVISION,
HOLDINGS, LLC LLC HOLDINGS, LLC LLC
------------- ----------- ------------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss $(16,299) $(12,484) $(66,079) $(61,701)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 7,715 7,715 13,006 13,006
Amortization of program rights 3,792 3,792 5,560 5,560
Amortization of debt issuance costs 289 279 441 404
Amortization of discount on 10 7/8% senior discount notes 10,765 10,765 11,967 11,967
Amortization of discount on 12% senior secured notes 3,804 -- 4,341 --
Gain on sale of assets (1,112) (1,112) -- --
Equity-based compensation -- -- 39,556 39,556
Deferred taxes (560) (560) 123 123
Changes in assets and liabilities:
Increase in accounts receivables, net (3,794) (3,794) (2,181) (2,181)
Increase in prepaid expenses (876) (876) (1,656) (1,656)
Decrease in due from affiliates 15 30 236 111
Increase in other assets -- -- (1,853) (1,853)
Increase (decrease) in accounts payable (1,697) (1,697) 669 669
Increase in deferred tax liability -- -- (1,575) (1,575)
Increase in accrued expenses 2,790 2,774 6,992 6,992
Payments on programming rights payable (4,570) (4,570) (6,906) (6,906)
Decrease in other liabilities (710) (710) (1,404) (1,279)
-------- -------- -------- --------
Net cash provided by (used in) operating activities (448) (448) 1,237 1,237
-------- -------- -------- --------
Cash flows from investing activities:
Purchase of property and equipment (2,213) (2,213) (4,333) (4,333)
Purchase of and deposits for station interests (16,675) (16,675) (43,071) (43,071)
Cash acquired in acquisition - St. Louis 779 779 -- --
Proceeds from sale of station interest 3,337 3,337 -- --
-------- -------- -------- --------
Net cash used in investing activities (14,772) (14,772) (47,404) (47,404)
-------- -------- -------- --------
</TABLE>
Continued
7
<PAGE> 8
ACME INTERMEDIATE HOLDINGS, LLC AND SUBSIDIARIES
ACME TELEVISION, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Unaudited)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
---------------------------------------------------------------
SEPTEMBER 30, 1998 SEPTEMBER 30, 1999
----------------------------- -----------------------------
ACME ACME ACME ACME
INTERMEDIATE TELEVISION, INTERMEDIATE TELEVISION,
HOLDINGS, LLC LLC HOLDINGS, LLC LLC
------------- ----------- ------------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Cash flows from financing activities:
Increase in notes payable to bank 11,000 11,000 32,000 32,000
Payments on notes payable to bank (3,000) (3,000) -- --
Payments of capital lease obligations (312) (312) (1,030) (1,030)
Issuance of redeemable preferred membership units -- -- 15,000 --
Issuance of membership units -- -- -- 15,000
-------- -------- -------- --------
Net cash provided by financing activities 7,688 7,688 45,970 45,970
-------- -------- -------- --------
Net decrease in cash (7,532) (7,532) (197) (197)
Cash at beginning of period 8,820 8,820 953 953
-------- -------- -------- --------
Cash at end of period $ 1,288 $ 1,288 $ 756 $ 756
======== ======== ======== ========
Cash Payments for:
Interest $ 422 $ 422 $ 2,069 $ 2,069
Taxes $ -- $ -- $ 102 $ 102
======== ======== ======== ========
Non-Cash Transactions:
Purchases of property and equipment in exchange
for capital lease obligation $ 2,746 $ 2,746 $ 1,591 $ 1,591
Exchange of note receivable and option deposit as
purchase consideration for station interest -- -- 7,000 7,000
Dividend on redeemable preferred stock -- -- 1,250 --
Contribution of Parent for membership units $ 7,050 $ 7,050 $ -- $ --
======== ======== ======== ========
</TABLE>
See the notes to the consolidated financial statements
8
<PAGE> 9
ACME INTERMEDIATE HOLDINGS, LLC AND SUBSIDIARIES
ACME TELEVISION, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Nine Months Ended September 30,
1998 and September 30, 1999
(Unaudited)
(1) PRESENTATION OF INTERIM FINANCIAL STATEMENTS
Financial statements are presented for each of ACME Intermediate Holdings, LLC
and its subsidiary, ACME Television, LLC. Unless the context requires otherwise,
references to the "Company" refers to ACME Intermediate Holdings; LLC and its
consolidated subsidiaries and references to "ACME Television" refer to ACME
Television, LLC and its consolidated subsidiaries. Segment information is not
presented since all of the Company's revenue is attributed to a single
reportable segment. Certain amounts previously reported for 1998 have been
reclassified to conform to the 1999 financial statement presentation.
The accompanying consolidated financial statements for the nine months ended
September 30, 1999 and 1998 are unaudited and have been prepared in accordance
with generally accepted accounting principles, the instructions to this Form
10-Q and Article 10 of Regulation S-X. In the opinion of management, such
financial statements include all adjustments (consisting of normal recurring
accruals) considered necessary for the fair presentation of the financial
position and the results of operations, and cash flows for these periods. As
permitted under the applicable rules and regulations of the Securities and
Exchange Commission, these financials statements do not include all disclosures
and footnotes normally included with audited consolidated financial statements,
and accordingly, should be read in conjunction with the consolidated financial
statements, and the notes thereto, included in the integrated Annual Report on
Form 10-K for ACME Television and ACME Intermediate for the year ended December
31, 1998. The results of operations presented in the accompanying financial
statements are not necessarily indicative of the results that may be expected
for the year ending December 31, 1999.
(2) FORMATION AND DESCRIPTION OF THE BUSINESS
ACME Intermediate Holdings, LLC is a holding company with no assets or
independent operations other than its wholly-owned subsidiary, ACME Television,
LLC. ACME Television, through its subsidiaries, owns and operates the following
nine commercially licensed broadcast television stations (the "Stations" or
"Subsidiaries") located throughout the United States:
<TABLE>
<CAPTION>
NETWORK
STATION MARKET AFFILIATION
------- ------ -----------
<S> <C> <C>
KPLR - 11 St. Louis WB
KWBP - 32 Portland, OR WB
KUWB - 30 Salt Lake City WB
KWBQ - 19 Albuquerque WB
WBXX - 20 Knoxville WB
WTVK - 46 Ft. Myers/Naples WB
WBDT - 26 Dayton WB
WIWB - 14 Green Bay WB
WBUI - 23 Champaign-Springfield-Decatur WB
</TABLE>
(3) ACQUISITIONS
On February 16, 1999, ACME Television acquired the remaining 51% interest in
Station KUPX in exchange for the payment of $8.0 million consisting of (i) $3.0
million paid in December 1997 for an option to acquire the remaining 51% of
Station KUPX; (ii) $4.0 million in repayment of a loan from ACME Parent to the
sellers of this station and (iii) approximately $1.0 million in cash. In March
1999, the FCC approved the swap of station KUPX for station KUWB. ACME
Television has been operating KUWB under an LMA since April 1998, and station
KUPX has been operated by the seller of station KUWB since May 1998, under a
reciprocal LMA agreement. The station swap closed on September 14, 1999, and the
LMAs terminated. ACME Television accounted for the swap as a
9
<PAGE> 10
business combination using fair market value. There was no material difference
between the fair value of KUWB and our book carrying value of KUPX.
On February 19, 1999, ACME Television entered into an agreement in principle
with Ramar Communications ("Ramar") to acquire Ramar's KASY TV-50, serving the
Albuquerque market for approximately $27 million. This transaction has been
approved by the FCC and is expected to close in the fourth quarter of 1999.
On April 23, 1999, ACME Television through its newly created subsidiaries ACME
Television of Ohio, LLC ("ACME Ohio"), ACME Television of Illinois, LLC ("ACME
Illinois") and ACME Television of Wisconsin, LLC ("ACME Wisconsin"), acquired
all of the property and equipment of three wholly-owned subsidiaries of Paxson
Communications Corporation ("Paxson"): Paxson Communications of Dayton-26, Inc.
(Station WBDT, Channel 26, which is licensed to broadcast in the Dayton, Ohio
market), Paxson Communications of Green Bay-14, Inc. (Station WIWB, Channel 14,
which is licensed to broadcast in the Green Bay, Wisconsin market) and Paxson
Communications of Decatur-23, Inc. (Station WBUI, Channel 23, which is licensed
to broadcast in the Champaign-Decatur, Illinois market) (collectively, the
"Acquired Stations") for an aggregate purchase price of $32 million. Following
FCC approval of the transfer of the broadcast licenses and pursuant to the same
Asset Purchase Agreement , ACME acquired the licenses of the Acquired Stations
(the "Licenses Acquisition") for an additional aggregate consideration of $8
million on June 23, 1999. ACME Television operated the three stations under an
interim LMA agreement beginning June 2, 1999 and ending at the close of the
Licenses Acquisition on June 23, 1999. The operating results of the three
stations (excluding depreciation and amortization expense) for the LMA period
are included in the Company's results of operations.
(4) ISSUANCE OF REDEEMABLE PREFERRED MEMBERSHIP UNITS
On April 23, 1999, in connection with the acquisition of the property and
equipment assets of the Paxson Acquired Stations, ACME Intermediate issued 7,000
units of a newly created class of mandatory redeemable preferred membership
units to ACME Parent in exchange for a $7 million cash contribution. On June 23,
1999, an additional $8 million contribution was received by ACME Intermediate
from ACME Parent in exchange for 8,000 preferred units. ACME Intermediate, on
the same days of receipt from ACME Parent, contributed to ACME Television the
aggregate $15 million.
The terms of the ACME Intermediate preferred units provided for dividend
accruals at the rate of 22.5% per annum for the first six months following
issuance and were mandatorily redeemable to ACME Parent on the earlier of (a)
the completion of new permanent financing, including an initial public offering
or a debt offering or (b) October 1, 2005. ACME Intermediate redeemed all of the
preferred units at the close of its initial public offering on October 5, 1999
(see Note 7).
(5) RELATED PARTY TRANSACTIONS
In February 1999, ACME Parent acquired a 25% membership interest in Sylvan
Tower, LLC - an entity formed for the sole purpose of building digital
transmission facilities to service the Portland, Oregon marketplace - for
approximately $2.5 million. ACME Parent subsequently entered into an agreement
to enter into a long-term lease with ACME Television of Oregon, LLC (a
subsidiary of ACME Television ("ACME Oregon") which allows station KWBP to
install and operate a digital television antenna and transmitter at the site. In
connection with the acquisition of this lease, ACME Oregon paid to ACME Parent
approximately $2.5 million, which has been treated as deferred tower rent and is
included in other non-current assets as of September 30, 1999.
Also in February 1999, ACME Oregon exercised its option to purchase the property
where KWBP's corporate and studio facilities are located for $1.5 million from a
member of ACME Parent. Before this purchase, the same facility was leased from
an affiliate of this same member.
(6) CERTAIN COMPENSATION ARRANGEMENTS
In June 1997 ACME Parent issued Management Carry Units ("MCUs") to certain
founding members of management. These units entitle the holders to certain
distribution rights, payable by ACME Parent, upon achievement of certain returns
by non-management investors. In connection with the initial public offering of
ACME Parent (see note 7), these MCUs were exchanged for shares of stock in ACME
Parent. The fair value of the shares, based on the initial offering price, less
amounts provided for in prior periods, have been treated as an equity-based
compensation charge. The expense incurred by the Company is deemed to have been
funded by a capital contribution from ACME Parent. For the nine months ended
September 30, 1999 the Company has recorded compensation expense and a
corresponding capital contribution of $39.6 million related to the MCUs.
10
<PAGE> 11
For the nine months ended September 30, 1998, no expense or related capital
contribution was recorded by the Company. No further compensation charge related
to the MCUs will be recorded by the Company.
(7) SUBSEQUENT EVENTS
On October 5, 1999, ACME Parent completed its initial public offering and in
connection therewith, effected a reorganization that included the exchange of
ACME Parent shares for the minority interest in ACME Intermediate. ACME Parent
received the net proceeds from the initial public offering (approximately $107
million) on October 5, 1999, and concurrently repaid the balance due, including
accrued interest, on the Company's revolving credit facility (approximately $40
million). Also concurrent with the receipt of the proceeds, ACME Intermediate
redeemed all of the 15,000 mandatory redeemable preferred units issued to ACME
Parent, and ACME Parent repaid its bridge note and its related accrued interest
(approximately $16.3 million).
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
We derive our revenues primarily from the sale of advertising time to local,
regional and national advertisers. Our revenues depend on our ability to provide
popular programming that attracts audiences in the demographic groups targeted
by advertisers, thereby allowing us to sell advertising time at satisfactory
rates. Our revenues also depend significantly on factors such as the national
and local economy and the level of local competition.
Our revenues are generally highest during the fourth quarter of each year,
primarily due to increased expenditures by advertisers in anticipation of
holiday season consumer spending and an increase in viewership during this
period. We generally pay commissions to advertising agencies on local, regional
and national advertising and to national sales representatives on national
advertising. Our revenues reflect deductions from gross revenues for commissions
payable to advertising agencies and national sales representatives.
Our primary operating expenses are programming costs, employee compensation,
advertising and promotion expenditures and depreciation and amortization.
Programming expense consists primarily of amortization of broadcast rights
relating to syndicated programs as well as news production and sports rights
fees. Changes in employee compensation expense result primarily from increases
in total staffing levels, from adjustments to fixed salaries based on individual
performance and inflation and from changes in sales commissions paid to our
sales staff based on levels of advertising revenues. Advertising and promotion
expenses consist primarily of media and related production costs resulting from
the promotion of our stations and programs. This amount is net of any
reimbursement received or due to us for such advertisement and promotion from
The WB Network or from other program suppliers.
The carrying value of long-lived assets, consisting of tangible, identifiable
intangible, and goodwill, is reviewed if the facts and circumstances suggest
that they might be impaired. For purposes of this review, assets are grouped at
the operating company level, which is the lowest level for which there are
identifiable cash flows. If this review indicates that an asset's carrying value
will not be recoverable, as determined based on future expected, undiscounted
cash flows, the carrying value is reduced to fair market value. There are
neither facts nor circumstances that would lead management to believe that any
of our long-lived assets are impaired.
11
<PAGE> 12
RESULTS OF OPERATIONS
The following table sets forth our calculation of broadcast cash flow and
adjusted EBITDA along with a recap of our statement of cash flow data, for the
periods indicated:
ACME INTERMEDIATE AND ACME TELEVISION
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------- -------------------------------
1998 1999 1998 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Broadcast cash flow and adjusted EBITDA(1):
Operating loss $ (1,573) $(34,626) $ (2,786) $(48,323)
Add back:
Equity-based compensation -- 28,856 -- 39,556
Depreciation and amortization 3,534 4,847 7,715 13,006
Time brokerage fees -- -- 228 --
Amortization of program rights 1,597 2,310 3,792 5,560
Corporate expenses 667 3,897 1,861 5,380
Adjusted program payments (1) (1,447) (2,410) (3,599) (5,789)
-------- -------- -------- --------
Broadcast cash flow 2,778 2,874 7,211 9,390
Less:
Corporate expenses 667 3,897 1,861 5,380
-------- -------- -------- --------
Adjusted EBITDA 2,111 (1,023) 5,350 4,010
Broadcast cash flow margin (1) 23.5% 18.2% 23.2% 22.1%
Adjusted EBITDA margin (1) 17.9% -6.5% 17.2% 9.4%
Cash flows provided by (used in):
Operating activities (448) 1,237
Investing activities (16,549) (48,995)
Financing activities 9,465 47,561
</TABLE>
- ------------
(1) We define:
- broadcast cash flow as operating income, plus
equity-based compensation, depreciation and
amortization, time brokerage fees, amortization of
program rights, and corporate expenses, less program
payments -- the latter as adjusted to reflect
reductions for liabilities relating to expired rights
or rights which have been written-off in connection
with acquisitions;
- adjusted EBITDA as broadcast cash flow less corporate
expenses;
- broadcast cash flow margin as broadcast cash flow as
a percentage of net revenues; and
- adjusted EBITDA margin as adjusted EBITDA as a
percentage of net revenues.
We have included broadcast cash flow, broadcast cash flow
margin, adjusted EBITDA and adjusted EBITDA margin data
because management believes that these measures are useful to
an investor to evaluate our ability to service debt and to
assess the earning ability of our stations' operations.
However, you should not consider these items in isolation or
as substitutes for net income, cash flows from operating
activities and other statement ofoperations or cash flows data
prepared in accordance with generally accepted accounting
principles.These measures are not necessarily comparable to
similarly titled measures employed by other companies.
Net revenues increased 34% to $15.8 million for the third quarter and increased
36% to $42.4 million for the first nine months of 1999 compared to the same
periods a year ago. These gains reflect significant growth at our developmental
stations, above-market growth at our flagship station KPLR and revenue from the
three stations serving the Dayton, Green Bay and Champaign-Decatur-Springfield
markets that the Company began operating in June 1999. The revenue gains in
these markets have been driven by improved audience ratings and in-market
audience shares at these stations.
Station operating expenses increased 43% to $12.8 million for the third quarter
and increased 36% to $32.8 million for the first nine months of 1999 compared to
the same periods a year ago. These increases are primarily relate to increased
programming and staffing
12
<PAGE> 13
related costs at our developing stations in Portland, Oregon, Salt Lake City,
Albuquerque, Knoxville and Ft. Myers and to the station expenses at the newly
acquired Paxson stations.
Depreciation and amortization increased 37% to $4.8 million in the third quarter
and increased 69% to $13.0 million during the first nine months of 1999 compared
to the corresponding periods a year ago. The third quarter increase relates
primarily to the increased depreciation of property, plant and equipment
additions since September 1998 and to the amortization of intangibles related to
the acquired Paxson stations. The significant increase for the first nine months
primarily relates to the March 1998 acquisition of KPLR - St. Louis and the
resulting amortization of intangibles for that station along with the
amortization of intangibles relating to the acquired Paxson stations.
Corporate expenses for the quarter included a $3.0 million charge related to
bonuses awarded to certain executives and founders in connection with ACME
Parent's initial public offering. Excluding this charge, corporate expenses
increased 2%. On a nine-month basis, corporate expenses, excluding the $3.0
million charge, increased 15%. These increases in corporate overhead relate
primarily to increased staffing to support the growing operations of our station
group and the increase in the number of stations being managed.
Equity-based compensation expense during the quarter was $28.9 million and for
the first nine months of 1999 totaled $39.6 million. The third quarter expense
reflects the value of ACME Communications shares, based on the initial offering
price, exchanged by the Company's founding executives for Management Carry Units
issued to them in June 1997, less the amounts provided for during the first six
months of 1999. There was no corresponding expense in 1998.
ACME Intermediate's interest expense for the third quarter was $6.7 million, a
25% increase over the third quarter of 1998. For the nine months ended September
30, 1999, ACME Intermediate's interest expense was $19.1 million, an increase of
23% over the prior year. ACME Television's interest expense for the third
quarter was $5.2 million, a 28% increase over the third quarter of 1998. For the
nine months ended September 30, 1999, ACME Television's interest expense was
$14.8 million, an increase of 26% over the prior year. These increases relate
primarily to the continued amortization of the discounts on ACME Intermediate's
12% senior secured notes and ACME Television's 10 7/8% senior discount notes.
Also contributing to the increase was the interest accrued on the April and June
1999 borrowings on the Company's revolving credit facility that were made in
connection with the acquisition of the Paxson stations.
The Company recorded a net income tax benefit of $3.4 million during the third
quarter compared to a benefit of $402,000 in the corresponding quarter of 1998.
This increase in tax benefit relates to the reversal of a $3.0 million provision
booked in the first quarter of 1999 in connection with an inadvertent merger of
a C corporation subsidiary into it's LLC parent. During September 1999, the
Company obtained court approval to rescind this transaction and reversed the
provision.
ACME Intermediate had a net loss for the third quarter of $37.9 million compared
to a net loss for the third quarter of 1998 of $5.4 million. The $32.5 million
increase in net loss is primarily attributable to the non-recurring equity-based
compensation charge of $28.9 million, the $3.0 million IPO related bonus charge,
$2.2 million in increased interest expense and $1.3 million in increased
amortization, net of improved station operating results (exclusive of
amortization and depreciation). For the first nine months, the net loss was
$66.1 million compared to a net loss of $16.3 million in the prior year period.
This increased loss was primarily attributable to the $39.6 million equity-based
compensation charge for the first nine months of 1999, the IPO bonuses of $3.0
million, increased amortization relating to the March 1998 acquisition of KPLR
and the June 1999 acquisitions of the Paxson stations and increased interest
expense, net of improved station operating results (exclusive of depreciation
and amortization).
ACME Television had a net loss for the third quarter of $36.4 million compared
to a net loss for the third quarter of 1998 of $4.1 million. The $32.3 million
increase in net loss is primarily attributable to the non-recurring equity-based
compensation charge of $28.9 million, the $3.0 million IPO related bonus charge,
$2.2 million in increased interest expense and $1.3 million in increased
amortization, net of improved station operating results (exclusive of
amortization and depreciation). For the first nine months, the net loss was
$61.7 million compared to a net loss of $12.5 million in the prior year period.
This increased loss was primarily attributable to the $39.6 million equity-based
compensation charge for the first nine months of 1999, the IPO bonuses of $3.0
million, increased amortization relating to the March 1998 acquisition of KPLR
and the June 1999 acquisitions of the Paxson stations and increased interest
expense, net of improved station operating results (exclusive of depreciation
and amortization).
Broadcast cash flow for the third quarter increased 3% to $2.9 million and for
the first nine months increased 30% to $9.4 million. The increases during the
third quarter was adversely affected by losses from the three stations acquired
from Paxson and from start-up losses at the Company's Albuquerque WB Network
affiliate - KWBQ - which was launched in March 1999. For the five stations that
the Company operated in both the third quarter of 1999 and 1998 (i.e. St. Louis,
Portland, Salt Lade City, Knoxville and Ft. Myers/Naples) broadcast cash flow
increased 39%. The nine month increase was also adversely affected, although
less so, by the start-up losses at the three former Paxson stations and KWBQ.
13
<PAGE> 14
Adjusted EBITDA was ($1.0) million during the third quarter; a $3.1 million
decrease from the $2.1 million adjusted EBITDA for the third quarter of 1998.
This decrease relates to the $3.0 million IPO bonuses and start-up losses at the
Paxson stations and at KWBQ. Adjusted EBITDA for the nine months decreased 25%,
but when calculated excluding the $3.0 million IPO related charge, increased
31%, despite the adverse impact of the start-up losses at the Paxson stations
and KWBQ.
Liquidity and Capital Resources
Cash flow provided by operating activities was $1.2 million for the nine months
ended September 30 1999 compared to cash flow used by operating activities of
$448,000 for the first nine months of 1998. This increase is related primarily
to the Company's improved broadcast cash flow.
Cash flow used in investing activities during the first nine months of 1999 was
$47.4 million compared to $14.8 million used for investing activities during the
first nine months of 1998. This increase relates primarily to the acquisition of
the Paxson Stations as described in note 4.
Cash flow provided by financing activities of $46.0 million for the first nine
months of 1999 related primarily to increased borrowings in connection with the
second quarter 1999 acquisition of the Paxson Stations.
At September 30 1999, ACME Television's existing credit agreement allows for
revolving credit borrowings of up to a maximum of $40 million, dependent upon
its meeting certain financial ratio tests as set forth in the credit agreement.
The revolving credit facility can be used to fund future acquisitions of
broadcast stations and for general corporate purposes. At September 30 1999, the
entire $40 million was outstanding under the facility. The effective average
annual interest rate on this outstanding principal amount was 8.46% at September
30 1999. On October 5, 1999, the entire revolving credit facility balance was
repaid from the proceeds of the Company's initial public stock offering.
ACME Intermediate's 12% senior secured discount notes were issued in September
1997 and mature in September 2005. Cash interest begins accruing on October 1,
2002, with the first semi-annual payment of interest due on March 31, 2003. ACME
Television's 10 7/8% senior discount notes were issued in September 1997 and
mature in September 2004. Cash interest begins accruing on October 1, 2000, with
the first semi-annual payment of interest due on March 31, 2001.
The Company believes that internally generated funds from operations and
borrowings under its credit agreement, if necessary, will be sufficient to
satisfy the Company's cash requirements for its existing operations for at least
the next twelve months. The Company expects that any future acquisitions of
television stations would be financed through funds generated from operations,
through borrowings under the existing credit agreement and through additional
debt and equity financings. However there is no guarantee that such additional
debt and/or equity financing will be available or available at rates acceptable
to the Company.
Year 2000
Year 2000 issues are a result of computer software applications using a
two-digit format, as opposed to a four-digit format, to indicate the year. Some
computer software applications might be unable to distinguish dates beyond the
year 1999, which could cause system failures, or miscalculations at our
broadcast and corporate locations that could cause disruption of operations,
including a temporary inability to produce broadcast signals or engage in normal
business activities.
ACME Television is in the process of evaluating potential year 2000 issues for
both its information technology and non-informarion technology systems such as
telephone systems, fax machines, editing equipment, cameras, microphones, etc.
All of our internal software and hardware is purchased, leased or licensed from
third party vendors. Most of our station facilities are new or have been
recently upgraded and we have polled all of our significant software vendors and
has been advised by them that their software is year 2000 compliant.
We have completed the assessment, planning and testing phases, and have
commenced the final phase of our year 2000 project. During this phase, the
Company will fix, retest and implement critical applications that were
discovered to be year 2000 deficient during the preceding phases.
14
<PAGE> 15
At this point in time, the Company is not aware of any additional significant
upgrades or changes that will need to be made to its internal software and
hardware to become year 2000 ready, nor is it aware of any material supplier
with year 2000 readiness problem, but this is subject to change. We expect to be
able to implement the systems and programming changes necessary to address year
2000 information technology and non-information technology readiness issues and,
based on preliminary estimates, we do not believe that the costs of doing so
will have a material effect on our results of operations or financial condition.
As we obtain the results of compliance testing, there might be a delay in, or
increased costs associated with the implementation of such changes. As of
September 30, 1999, we have spent less than $100,000 on year 2000 activities and
our budgeted expenditures for the remainder of 1999 are less than $75,000 in
total.
Adoption of Accounting Standard
The FASB (Financial Accounting Standards Board) has issued FASB statement No.
133 "Accounting for Derivative Instruments and Hedging Activities" which the
Company will be required to adopt for the year ended December 31, 2000. This
pronouncement establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, (collectively referred to as derivatives) and for hedging activities.
It requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. This pronouncement is not expected to have a significant impact
on the Company's financial statements since the Company currently has no
derivative instruments.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ACME Television's revolving credit facility has a variable interest rate.
Accordingly, the Company's interest expense can be materially affected by future
fluctuations in the applicable interest rate. Based on our September 30, 1999
loan balance under the facility, a 100 basis point increase in the underlying
rates would result in additional interest expense of $400,000 on an annualized
basis.
PART II - OTHER INFORMATION
ITEM 1. - LEGAL PROCEEDINGS
The Company currently and from time to time is involved in litigation incidental
to the conduct of its business. The Company maintains comprehensive general
liability and other insurance, which it believes to be adequate for the purpose.
The Company is not currently a party to any lawsuit or proceeding that
management believes would have a material adverse affect on its financial
condition or results of operations.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
------ -------------------
<C> <S>
27.1* Financial Data Schedule for ACME Intermediate Holdings, LLC, available in electronic format as filed by the
Registrant.
27.2* Financial Data Schedule for ACME Television, LLC, available in electronic format as filed by the
Registrant.
</TABLE>
- ------------
* Filed herewith
(b) REPORTS ON FORM 8-K
The Company has not filed a Current Report on Form 8-K within the three-month
period ended September 30, 1999.
15
<PAGE> 16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ACME TELEVISION, LLC.
Date: November 15, 1999 By: /s/ Doug Gealy
-----------------------------
Doug Gealy, President
Date: November 15, 1999 By: /s/ Thomas D. Allen
-----------------------------
Thomas D. Allen
Executive Vice President/CFO
(Principal financial officer)
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ACME INTERMEDIATE HOLDINGS, LLC.
Date: November 15, 1999 By: /s/ Doug Gealy
-----------------------------
Doug Gealy, President
Date: November 15, 1999 By: /s/ Thomas D. Allen
-----------------------------
Thomas D. Allen
Executive Vice President/CFO
(Principal financial officer)
16
<PAGE> 17
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
------ -------------------
<C> <S>
27.1* Financial Data Schedule for ACME Intermediate Holdings, LLC, available in electronic format as filed by the
Registrant.
27.2* Financial Data Schedule for ACME Television, LLC, available in electronic format as filed by the
Registrant.
</TABLE>
- ------------
* Filed herewith
17
<TABLE> <S> <C>
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<CURRENT-ASSETS> 26,492
<PP&E> 29,847
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